CMC Materials, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the CMC materials first quarter fiscal 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your first speaker today, Colleen Mumford, Vice President of Communications and Marketing. Please go ahead, Ms. Mumford.

Thank you, Carol. Good morning, everyone. With me today are David Lee, President and CEO, and Scott Beamer, Vice President and CFO. Last night, we reported results for our first quarter of fiscal year 2021, which ended December 31st, 2020. We encourage you to review the slides and remarks document made available under our quarterly results section of the Investor Relations Center on our website, cmcmaterials.com. A webcast of today's conference call and the script of this morning's remarks and question and answer session will also be available on our website shortly after this live conference call. You may request any of the information by calling our Investor Relations Office at 630-499-2600. Please remember that our discussions today may include forward-looking statements that involve a number of risks, uncertainties, and other factors that could cause actual results to differ maturely from these forward-looking statements. These risk factors are discussed in our SEC filings, including our Form 10-K for the fiscal year ended September 30, 2020, and our Form 10-Q for the quarter ended December 31, 2020, and which we expect to file by February 9, 2021. We assume no obligation to update any of this forward-looking information. Also, our remarks this morning reference certain non-GAAP financial measures. Our earnings release and slide presentation include a reconciliation of each non-GAAP financial measure to the nearest comparable GAAP financial measure. Additionally, data reflects rounded values throughout the discussion and in the accompanying slide presentation. As you can see, we are using a new format to convey our earnings results to allow for more questions and conversation. We hope that everyone finds this useful and we look forward to receiving your feedback. I will now turn the call over to Dave.

Thanks, Colleen. Good morning, everyone. As Colleen mentioned, this is a new approach to convey our results this quarter. So my remarks will be brief, and then we look forward to taking the questions. As announced last night, we achieved record revenue for our first quarter of fiscal year 2021, driven primarily by strength in our electronic materials business. We are proud of our performance, which we believe demonstrates the strength of our innovation, execution, and close customer partnerships. To date, we have not seen a meaningful impact from the COVID-19 pandemic on our supply chain. And I would like to take this opportunity to again express my gratitude and appreciation to our teams globally for their efforts to keep our employees safe and to manufacture and deliver solutions to our global customers without interruption. In terms of outlook, as announced, we are really encouraged by the continued strength and demand we are seeing for our solutions, particularly CNP slurries, given our technology leadership and advantage positions in the logic, memory, and foundry segments. Looking ahead, we see continued growth above this record quarter, driven again by strength in our electronic materials segment. We are also encouraged by the continued signs of stabilization we are seeing for our performance materials solutions, particularly for our pipeline and industrial materials products. I'd also like to highlight that we have also raised our guidance for full fiscal year 2021 adjusted EBITDA to be between $367 million and $387 million, demonstrating our confidence in our growth prospects and strong profitability. Our robust results demonstrate the quality of our portfolio and leadership positions of our respective businesses. They also reflect our ability to execute against an uncertain macroeconomic backdrop. We are optimistic about the trends we are seeing in the semiconductor industry and are confident in our ability to capitalize on these trends given our advantage positioning across logic, foundry, and memory. With that, I'll turn the call over to the operator as we prepare to take your questions.

Thank you. Just a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, please press the pound or hash key. We also ask that you limit yourself to one question and one follow-up and re-queue for any additional questions. Our first question this morning comes from Toshia Hari from Goldman Sachs. Please go ahead.

Good morning, Toshia.

Hi. Good morning, Colleen and Dave and the team. Thank you so much for taking the question and congrats on the very strong results. Dave, just to follow up on your CNP slurry business, as you noted in your prepared remarks, obviously very strong growth in the quarter. If you can provide maybe a little bit more context in terms of what drove the 12% sequential growth in the slurry business. That would be super helpful. And if you can provide sort of an outlook for March and perhaps June for the slurry business as well, that would be great. And then I've got a quick follow-up. Thank you.

Yeah, thanks, Toshia. We're really encouraged. And obviously it starts with the industry conditions. For our slurry business, we saw growth in both the advanced and legacy nodes and across all segments, I think most encouraging. And something we've been talking about for a few quarters is the expected kind of recovery in memory. And we started to see that this quarter. DRAM, as you probably know, is running at almost full utilization today. and NAND had increased utilization throughout the quarter, as well as some announcements of capacity expansions. You know, given the really what we believe are advantage positions, especially in slurry for those advanced memory nodes, those advanced logic nodes and those advanced foundry nodes. When those start really picking up, we get the benefits of that growth. So we're continuing to build on our leadership positions for Solari, and we saw that strength this quarter. We also talked about in our prepared remarks that China was very strong. You would expect Korea to be strong with stronger memory backdrop. We also talked about growth in China. which is mostly logic foundry and what we consider legacy. We have very strong positions in China, and we see continued growth ahead in the next several quarters. And, of course, China is a very important geography for the semiconductor industry, including us.

Got it. Super helpful. Thank you. And then as a quick follow-up, On the electronic chemicals business, I was a little surprised by how muted growth was in the segment. Your biggest customer in North America, they've got great momentum across, I guess, primarily the PC business and potentially in servers going forward. You've spoken to weakness and lagging edge on prior calls as a headwind. And if anything, the lagging edge seems to be recovering pretty nicely across the automotive and industrial markets. So curious what the puts and takes were in the electronic chemicals business in December. And I guess more importantly, what's the outlook into March and June? Thank you.

Yeah, thanks, Toshi. I think you've got a good handle on that business. Obviously, the dynamics are a bit different than slurries and pads where we sell to a number of different customers. This is a solid, profitable business, but it's very regional and our participation, the customer concentration and where we participate is much more concentrated. So it's U.S., Europe, Southeast Asia. So on a quarterly basis, there will be more puts and takes just by the order patterns of specific customers. Also, just by where we participate, we're not going to get as much lift from a memory sort of strength or increase in utilization. I think longer term, we continue to make improvements in the business that we think are going to differentiate ourselves, further differentiate ourselves from our competitors, from a quality and supply chain perspective. And we do expect Although we don't give specific guidance for the next quarter, you know, we would expect it to grow year over year. So it's got some different dynamics quarter by quarter. It's going to have some puts and takes, but it's really much more concentrated, much more regional. But we think it's going to grow year over year.

Thanks, Dave. Congrats again. Thanks.

Our next question comes from Mike Harrison from Seaport Global Securities. Please go ahead.

Good morning, Mike.

Hi. Good morning, everyone. I was wondering if you can give some additional details on the new business wins that you referred to in the CMT pads business. Is this more of an expansion of positions with existing customers, or are you winning new customers? Maybe just give us some thoughts there.

Yeah, thanks, Mike. And again, this is kind of a continuation of the narrative we've been talking about for a while, which is, you know, we're really excited about this business and we continue to see wins. We talked about in the prepared remarks, customer wins in leading foundry and leading memory applications. And so what we saw this quarter and what we see going forward is the ramp up of those wins. Sometimes they take time, especially if they're at the leading edge. But when we think about and we look at the pipeline of opportunities, it's really exciting because we're seeing strength and really, really compelling interest from customers across different segments. So I think the recent wins are with confidence. you know customers that are both in foundry and memory therefore leading edge nodes uh and and we're really excited about those and we continue to believe we have a really compelling offering in the pad area and it's going to be a strong growth business for us going forward

All right. And then over on the DRA business, maybe just an updated outlook on the pace of recovery. Is this happening maybe more quickly than you expected? And can you maybe also talk about, you know, we've got a new administration in the United States that may be a little bit less friendly toward new pipeline construction. So how does that affect your view on future growth?

Yeah, thanks, Mike. And I'm glad you asked the question. Obviously, it's something we're watching carefully. And the new administration definitely seems to have prioritized climate change and sustainability, which obviously we think is positive. And our goal is to support all of our customers' efforts to be more sustainable. Kind of in an ironic way, having fewer new pipelines puts even more capacity constraint on existing pipelines, which, as you know, in the U.S., the infrastructure is pretty aged. DRAs become an essential way for pipeline operators to transport oil while reducing energy and operating costs. Also, there's a safety element. And so DRAs could become even more compelling in this kind of environment. with the new administration. And as you know, from our company's background, and we just put out our first CSR report, which we're really proud of, it's really part of our company's culture. So we look forward to supporting our customers in a way that helps them be more sustainable. You asked kind of a more near-term outlook. I think we're watching the dynamics carefully. I think in Scott's remarks, he talked about the outlook that we think about for DRAs. We were encouraged to see December, for example, being a very strong month. um but really i think it's going to be dependent on opening up of economic activity there's more optimism around vaccinations and things that might allow people to resume moving around and so we're watching those dynamics i think you know what we what we're trying to do is control what we can in the business so you know whether it's obviously new business wins and we've had some significant new business wins that we think are going to ramp up or just cost control. You know, the cost structure of the business is highly variable. It's still a very profitable business. So even in this lower demand environment, we're making improvements to the business so that we're positioned once things really start to ramp up.

All right. Thanks very much for all the color there. Thanks, Mike.

Our next question comes from Chris Couch from Loop Capital. Please go ahead.

Hey, good morning, Chris.

Hi, good morning. I'm just curious if you can get a little more granular just on the sequential trends during the quarter. I'm just wondering if, obviously, you made the formal comment about being encouraged by the memory and market recovering. Did that pick up as the quarter ensued? Any color on just the sequential demand trends in the electronic chemicals seems to be helpful.

Yeah, Chris, just to make sure I understand your question, just you're trying to ask for kind of momentum within the quarter. I think what we're starting to see is there's obviously a lot of pull. If you look at the end demand market, so you're seeing autos start picking up, industrial as well, and then as well as those sort of more traditional drivers that have been so important during the pandemic, things like PCs, bandwidth. And then you're seeing also this growth of 5G. And so there's just a lot of things pulling on the industry now. There's also some kind of geopolitical things like China really emphasizing semiconductor utilization in region. So there's a lot of positive momentum that's driving chip growth. manufacturing these days in the industry, and the industry environment overall appears to be really healthy. I'd say in our quarter, what we've talked about in the last couple quarters that we see some of the elements of recovering memory sector, and we started to see that come to fruition in this quarter. So I don't know if I have the granularity of inter-quarter, but obviously we've been talking about the kind of memory dynamics for a few quarters, and we started to see that more so in this quarter.

That's helpful. I appreciate that. And the follow-up would be about the margin profile. Given the sequential strength in your electronic chemicals, some might say that the sequential margin improvement could have been better. But I've seen over the years that I think it's based on your cost accounting, that some of the flow through when you have a soft quarter, it kind of affects the margin in the subsequent quarter. So that might portend further improvement in your margin performance. into the March and June quarters based on your preliminary outlook into calendar 20 to 21. So is that a fair characterization? Any comments you can make about sort of the margin profile as we proceed here over the next couple of quarters would be helpful. Thanks. Yeah, Chris, first off, you know, we have this item of comparability versus the prior year of the $5 million that was an income pickup last year that didn't reoccur this year. I would more or less set that aside in terms of our understanding of cost structure. That was an item that I think we explained at the time was an accounting nuance. with some costs that moved from one category to another. But as we sold those units in the second and the third quarters or the third and the fourth quarters, then that normalized throughout the full year. So as we think about the margins, and I think we provide a fair bit of information on page 11 of our materials where, you know, we think about Q1 and the 32% EBITDA that we had, adjusted EBITDA as a percent of revenue. Very pleased with that metric. And a couple of the data points that we gave is as you're thinking about Q2, we want to remind people, so the March quarter, we want to remind people that that's a period, that's a quarter where the inflationary items for us generally hit. Our merits go into effect on January 1. The benefits generally get reset. In addition, we have some corporate activities related to intellectual property, for example, which is normal, not a structural change, but can be a little bit lumpier quarter to quarter. So we provided some information on that page 10 that said, hey, here's how we'd like you to be thinking about Q2. But then Q2, going beyond that then into Q3, 4, and so on, we always like to remind about the 31% to 32% being a reasonable expectation for the short to medium term. And we see, first off, those costs in Q2, they normalize a bit into Q3, and then we expect the slurry business to continue to perform well and to continue as that's one of our best earnings types of businesses that will enhance the margin. And then in the second half of the year, we expect some level of recovery. While stable now in DRAs, we expect some level of recovery for those future years. So that's how we're thinking about the margin profile quarter over quarter. So hopefully that helps everyone. I think we're giving a fair bit of transparency around that. Chris, are you still there? Yeah, I'm sorry. Thanks for that, Scott. And just as a quick follow-up to that, if I think about some of your higher margin product lines and key product lines, if you're talking about a pickup in memory and that which should benefit your tungsten slurry, you're pointed to recovery in DRA, pretty high margin business. So I get there's, you know, the incremental costs that come in on January 1, but it looks like at a minimum there should be mixed benefit on a sequential basis going into the March quarter. Is that fair? And thank you. Yeah, yeah, yeah. You're thinking about it right, Chris. I mean, the businesses that you mentioned are among our highest returning, and as they improve, there's this overall corporate mixed benefit that we would have, yes. Thank you.

Thanks, Chris.

Our next question comes from Amanda Scarnati from Citi. Please go ahead.

Good morning, Amanda.

Good morning. I have a question on the slurry side of the business. There's been a lot of talk lately about Molybdenum replacing some tungsten layers in 3D NAND going forward. Can you talk a little bit about how you're positioned if that transition were to happen and if you have products to work in that piece of the market?

Yeah, thanks, Amanda. We feel like we continue to build on our advantage positions in advanced memory, whether it's NAND or DRAM. And so any new material that comes in, that's actually potentially an advantage for us because the number of companies that have the focus the knowledge and experience and the applications that we do surrounding these customers to support them is really limited. And I think whether it's a new material for 3D, which we have several research programs working on and we've actually recorded some early wins, or just kind of picking up existing volume as utilization picks up. We feel really good about our positioning, especially within the memory space. And so new materials are actually, you know, welcoming for us. Obviously, we have a strong position in tungsten, but we continue to innovate in all areas, especially related to CNP slurries and pads.

Great. And then on the past side of the business, I know we've talked in the past about seeing some share loss in Korea. This quarter, you talked about some share gains. Was any of that sort of a return in that business in Korea, or was it a little bit more broad-based?

Yeah, I think what we'd say is we obviously talked about some headwinds to the business in previous quarters. We've grown above and beyond those. There's only so many customers in the semiconductor universe that can really move the needle. And so it's not, you know, you obviously wouldn't be surprised to see that us winning back business or engaging with those same customers. Obviously, we're working with and partnering with the largest, semiconductor customers, and there's a lot of customer concentration to begin with. So, you know, for WINS to ramp and move the needle for our pad business, they have to be with significant customers. So I guess I'll leave it there.

Perfect. Thank you.

Thanks, Amanda.

As a reminder, it's star one on your telephone in order to ask a question. Our next question comes from David Silver from CL King. Please go ahead.

Good morning, Dave.

Yeah, hey, good morning. And let me start out by quoting Fiscal and Ebert. So two big thumbs up for the new reporting format and also the conference call format. I had a feeling. Yeah. No, I had a feeling. Go right ahead. Sorry.

I'm glad you mentioned that because, first off, we're, Pleased with our performance. We're proud of what we're doing here. The team has worked really hard on the materials. And if there's a way we can continue to evolve all the above to help convey the story, we're happy to do that. So we actually really do appreciate your feedback there. So thank you.

And I'll also just chime in and say I used the Chicago area reference to compliment you there. So I hope that gives me half of a brownie point on top. Anyway, I actually had several questions. Let me just see. First of all, I guess there's been a lot of talk up and down the electronics chain about both rising raw material costs and also costs and reliability of the logistics chain. I guess the first part would be maybe to characterize the direct effects that you're feeling in those areas, but then I was hoping maybe you could talk maybe indirectly further down the chain. signs of disruption or shortages that, you know, might feedback and kind of impact, you know, the reliability of your kind of near or medium-term forecast? In other words, with problems further down the chain, you know, how do you gauge that they might be affecting, you know, your demand or your operations over the next quarter or two? Thank you.

Yeah, sure, David. First, our teams have worked really hard. We like to make the statement we've made every shipment to every customer during these past 12 months. So whatever the global pandemic has presented in terms of challenges, our teams have risen up and have met those challenges. So we're very pleased and feel very fortunate to have that as a fundamental. That also means working throughout our supply chain and working closely with our suppliers. They're important partners to us with the technology that they bring and the delivery that they bring to us. So We're working across the entire supply chain, and we build our company based on having these critical enabling materials that help solve our customers' most important problems. And if you build a business based on that, then you need to make sure that you're delivering the products on time in full. So we spend a lot of time kind of managing all of the above. We probably won't go into too many details about that, but we spend a lot of time managing all the above to make sure that we can provide those advanced solutions to our customers.

Yeah, just to add on to Scott's comments, too, is, you know, we don't see any, you know, the pandemic was a stress test for everyone's supply chain. As Scott mentioned, we didn't miss a shipment. I think we don't see any significant pricing changes or certainly any supply challenges with our critical suppliers, so that's something we've really worked hard to strengthen and shore up and make sure we are really, really secure from a supply chain standpoint. And I also think within our company, You know, having a global operations network like we do with manufacturing in Korea, Taiwan, Japan, U.S., Singapore, and for EC in Europe and other locations, that really also gives us some flexibility in case there are, you know, any sort of business continuity concerns. And as Scott mentioned, we haven't missed a shipment so far. So we think this is something that is a strength of ours. see any sort of concerns in this area.

Okay. Thank you for that. Next question would be kind of more a general question on China. You rightly noted earlier on about changes in government policy in China towards the semiconductor industry there. And I wanted to kind of focus on one thing, but my sense is, and I've read about how Chinese chip production, which used to be concentrated or congregated around the 45 nanometer line width design, is moving down the curve maybe one step to 28 or maybe more than one step. And to me, I hope this is not too convoluted, but that's characterized as a node transition which generally favors companies like yourself. But I'd also say that it's not leading edge nodes that they're moving to. So I guess I'm just wondering if that changes the competitive balance there in China. In other words, your POR wins and, you know, just the tone of business. I mean, do you anticipate sustaining your current market share in PMP products in China moving forward? Or, you know, have you had greater success and greater POR wins that might translate to share gains? Or, you know, are there some risks to, you know, the current book of business there? Thank you.

Thanks. I think it's an interesting question. And so first, we have a lot of experience in China. It's a really important geography for us, and we have a very strong position. I think the first thing to think about is there's really two segments of customers. the multinationals that operate within China. So, for example, Samsung has a large facility in Xi'an, Hynix in Wuxi, TSMC. I think everyone that's a major semiconductor player has a facility, a manufacturing facility in China. And they're generally operating at maybe two generations behind the most leading edge. In the case of memory, they're operating quite close to the leading edge. We obviously have very strong relationships with the multinationals just by way of our relationship with the entire customer, whether it's based in Korea or U.S. or other places. So that is basically, those PORs are basically transported into China, and so we're able to build upon our position and get the volumes as those sites ramp up. If you're talking about the domestics, I think you have a good handle on it there. I think generally speaking for logic, the most prevalent node that's being produced right now is around 45. There's a lot of demand for 45 nanometer devices within China. And so whether it's 5G or sensors, and so there's a lot of demand being pulled from the local customers. We have really strong relationships there too, for a few reasons. One is we have a really fantastic local applications support team there that work really closely with the customers. But I think, secondly, the customers, the local customers, like the SMICs, the Wahungs, they really like to work with us because they're trying to catch up to the leading edge. One way they can do that is working with a technology leader like us that have worked with all the leading customers in the world to solve their challenges so that we can help them with solutions that are proven. We have the application support that they need. And so we see a strong future of growth in China. And, you know, we're starting to see that really pick up in the last couple couple years. And I think, obviously, as you mentioned, the new administration may have a different positioning towards China. It's too early to say. But no matter what, I think we'll continue with a strong presence there. And we think we're excited about China.

Okay, thank you for that.

Hey, Dave, do we have some other callers in the queue? So maybe one more question, and then we'll have you get back into the queue.

I was just about to say Colleen has to use her hook here, but I'm going to get back to you.

Thank you.

Our next question comes from Paratosh Misru from Berenberg. Please go ahead.

Good morning, Paratosh.

Good morning, Colleen, David, and Scott. Thanks for taking my question. I was just hoping to understand the key growth drivers of your slurries business a little bit better. How much of that is related to pricing? Does price increase versus more number of wafers being produced? And I guess your content per wafer is also rising. So how big a role is that playing? So any color you could provide on these drivers would be great.

I would generally say that what we try to do is maintain pricing and profitability of our slurries business either by innovating and introducing new products or winning new applications. and so generally speaking you would you would think that uh significant growth within slurries is coming from either a higher utilization so are strong positions ramping up within customers or new positions We haven't talked too much at the granular level of different customers and different applications. I would just say, you know, we think we have some really advanced positions, not just in tungsten, but in advanced dielectrics. Dielectrics actually is the largest application C&P application space, and we continue to innovate and introduce new solutions there, win new positions. And so that's an exciting growth area for us. We've also talked about the growth and recovery and memory. We obviously have a strong participation in that space. So that's going to help us grow in slurry as well. But generally speaking, and then you also mentioned another aspect, which is increased content. So you see that with more layers of 3D NAND, there's going to be incrementally more CMP needed for slurries and pads. So that's giving us that opportunity to grow even above the market. So in general, what we'd say is we're participating at, just about every node every customer um for slurry and and and pretty much the same at pads and so uh we're well positioned once new technologies ramp up and if there's a uh increase in utilization overall in the industry and we're seeing sort of both of those dynamics play out right now so that's why you sense the optimism uh we you see the the sequential guide uh above this current quarter, which was a record quarter for us. Second quarter, by the way, historically has been seasonally softer for us just because there's fewer shipment days. You have the Lunar New Year. So us raising our top line guide versus this quarter just shows our confidence in not only the industry strength, but our own positioning and ability to win new positions.

thank you for all the detailed color and my uh follow-up is on your dra business so i guess two related questions first i believe you made some investment in the dra business in a recent past to increase your capacity any sense you could give us as to how big that expansion was you know like 10 20 percent or maybe was it bigger and then as far as your customers are concerned the dr customers

any sense as to what their utilization rate was in the last quarter and how it evolved in january thank you yeah sure a couple of data points that we provided and i think would be helpful uh a bit here is you know we said that a significant piece of our capex last year in our fy20 was related to the plant expansion and i would say that in terms of the let's call it a significant increase to our capacity there. And as we think about that business, we talked about June being the low point, and we said that at the time of our June quarter earnings, and that has continued to be the case throughout the rest of this year. And then recently we mentioned December was our highest month that we had since April of this year. So, you know, we see this as being a period of stabilization for the DRA business. Now, you've noticed, no doubt, again, in page 11 of the guidance that we have in the materials, you've noticed that, you know, we're expecting the performance materials segment to be up high single digits, and we expect that – and part of that is the DRA recovery. Additionally, our products help with process optimization at the customer lines. I'm going to be reluctant to say too much about the customer capacity utilization, but oil consumption is down. Let's face it, it's been down. I think our business trends pretty heavily to that, but we, you know, our materials will continue to be key enablers for one of the reasons is because it addresses the energy spending at the customer level. So improving throughput is important, but improving the customer cost structure is also important. And that's something that they're looking at now as much as they ever have because they're being constrained a bit economically. In addition, then, we continue to invest in some R&D in this business and making sure that We're using the plant that's up and running to be able to secure some new business, get some approvals, and continue to manage, as Dave said, manage what we can control to make sure that we're well positioned in all commercial opportunities going forward.

Great. Thanks so much.

Our next question comes from Chris Katch from Loop Capital. Please go ahead.

Welcome back, Greg.

Yeah. The question was, and I know you maybe want to shy away from customer-specific commentary, but in your 10K, it's clear that Intel's the single largest customer, and their yield issues at the 10-nanometer node have been well publicized. But my question is that in their most recent quarter in their public commentary, they talked about ramping their Ice Lake 10-nanometer-based CPU unit And they talked about that volume, higher volume production ramping in the March quarter. So I'm just wondering if that influenced your business either, you know, while they were having the yield issues and or during the quarter as it looks like they may have resolved those issues temporarily. And then is there any color you can share on in terms of, you know, their decision ultimately, maybe not so much 7 but 5 nanometer, Are you indifferent, ultimately, if they decide to outsource that manufacturing, or would that be incremental? Where do you stand on that, if you can comment on it? Thank you.

Chris, this is a good question. And obviously, as you can see from our filings and you follow us for years, Intel is a very important customer to us. And we continue to work closely with them on existing and new technologies that they're ramping up. They're obviously playing catch up these days with TSMC, seeming to make some progress on 10 nanometers. You know, Just kind of the dynamics that would be at play. In terms of EC, obviously we're participating mostly in North America, so you'd think that as they advance technology, that could be good for us from an intensity of use standpoint. For CMP slurries and pads, we're a little bit more on the agnostic side there. We just want the technology to continue to advance. and ramp and therefore for there to be strong and market demand drivers for those leading edge chips. So Intel deciding to outsource manufacturing that would most likely go to foundry partners of ours. And so, you know, we've got great positions at leading edge at the foundry space as well. So from the CMP standpoint, that would be, you know, would be a bit more indifferent there.

That's helpful. And then just maybe a little more granularly on the quarter, in the December quarter, did their, you know, they're resolving their issues at this production node. Was it noticeable in your business trends? Did it help contribute in the quarter? Do you expect it will in the March quarter as they've talked about higher volume production there? Thanks.

Yeah, I think, again, they're an important customer of ours, Chris. If they're doing well, we're going to be happy and we're going to be doing well as well. I don't think the correlation can be direct as well because sometimes when they talk about dynamics in their business, they could be offset from where the C&P process is or where the where electronic chemicals are being used. So there might be a bit of an offset from what they discuss in terms of their results and their performance versus what consumables are being sold into their different processes. And I'm sure that you're fully – you've been following the company for so long, you know the kind of process steps in there.

Fair enough. Could I do one follow-up on the CMP pad business? Because it was encouraging to see the growth in this quarter year over year after some quarters of negative growth. And one of the drags on that business had been, my understanding is, some efficiencies that a key customer had made with their process where they maybe didn't change out the pad as frequently, and that resulted in perhaps an inventory drawdown. I'm just wondering, has that worked its way through in your demand profile for the pad business, setting aside the process of record wins that you've mentioned and that are going to contribute to future growth? Thanks.

Yeah, I think what you're talking about is just increased efficiency and using consumables, which is something that we know a lot about. And in many cases, we're helping customers use consumables more efficiently so that they can reduce costs and just be more efficient with how they use materials. In the pads business, I think we talked about some headwinds in the past. Obviously, we've grown past those. And again, I think what we think about for this business is there's so much opportunity for us to gain just because the difference between our position as we believe we're the number two supplier and the number one is so great that there is a tremendous opportunity for us to grow our participation, especially given our ability to offer both slurries and pads at the same time in a consumable set that we've talked about as well. So we're really excited about the business. We saw new winds ramp up, and this is something of a continuation of the narrative that we've talked about for a few quarters, which is, you know, again, a few headwinds growing beyond those, and we think of this as a strong growth business for us going forward. Fair enough. Thank you.

Thanks, Chris.

Our next question comes from David Silver from CL King. Please go ahead.

Welcome back, Dave. And I think we'll have time for maybe one more question. We're nearing the top of the hour.

Okay. Okay, that's great. I have one more. Okay. And this one would be for Scott. And just to give you a heads up, I'm kind of trying to work out the cash flow in the first quarter and, in particular, the working capital. Per the slide, you don't include a full cash flow statement with your release. I'm trying to manufacture it or recreate it from what's available. $54 million was the OCF. If I take net income, DD&A, and the $7 million intangible write-down, I'm left with a working capital usage that's much lower than what I've seen in your typical December quarters for the past few years. I'm at around $17 million, and last year was minus $31 million, the year before minus $25 million or so. And given the bright outlook for industry demand, as mentioned or as presented by the chipmakers, I was kind of scratching my head, and I'm just wondering, I would have expected a bigger than normal working capital buildup for inventory and whatnot. Could you just maybe kind of talk about that and whether you are kind of ramping up in accordance with the demand levels that you see, or is there something, I'm sure there's something I'm missing, but I'm just wondering why there wasn't

at least from a you know top down view a bigger working capital usage in the first quarter yeah thank you david there's a few points we'll probably take offline as they're pretty detailed here but as you think about our q1 I think when you compare our Q1 cash flow to last year's Q1 cash flow kind of as a percent of the total year last year and some expectation for this year, I think you find a pretty similar metric. And our December quarter, our Q1, There is a little more activity on the accrual side that you're mentioning. One particular item is the payout of our short-term bonus. So those are items that are accrued during the year, a buildup of working capital. So that's an inflow of cash when that happens. But in the December quarter, they're paid out. So that's an outflow of cash. and in addition you know with the growing business that we have we have some increase in both receivables and in payables which i think would be reasonable with the expectations that you would have so i would just think about the cash flow as being you know no significant structural change over time q1 is typically different than the other quarters and you see less cash flow from operations in Q1 than you see in other quarters. But I would think of it as no significant change. We appreciate the capital-like model that we have. We talk about the the capital spending priorities or the capital deployment priorities that we have and so we you know we pay attention to that and managing cash flow is an important thing but it's not i will we'll take some of those details offline with you to make sure that we're we're clear on all those but that would be um that would be the summary of my message right now okay thanks very much so uh yes uh maybe we'll follow up offline appreciate it okay great thank you dan

This concludes the Q&A portion of our call, and I would like to turn it back to Colleen Mumford for final comments.

Thanks, Carol. That is all the questions we have this morning. Thank you for your time and your interest in CMC material.

Ladies and gentlemen, this does conclude today's conference call. Thank you once more for participating. You may now disconnect.