CMC Materials, Inc.
Q2 2019 Earnings Call Transcript

Published: 10 May 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to the Cabot Microelectronics' Second Quarter Fiscal 2019 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions for how to participate will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Colleen Mumford, Corporate Relations Director. Ma'am, you may begin.

[Colleen Mumford:]

Thanks. Good morning. With me today are David Li, President and CEO, who is participating from Asia; and Scott Beamer, Vice President and CFO. Last night, we reported results for our second quarter of fiscal 2019, which ended March 31, 2019. Whether you're joining us online or over the phone, we encourage you to review the investor slide presentation that we made available under the Quarterly Results section of the Investor Relations center on our website, cabotcmp.com. A webcast of today's conference call and the script of this morning's prepared comments 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 materially from those forward-looking statements. These risk factors are discussed in our SEC filings, including our Form 10-K for the fiscal year ended September 30, 2018 and our Form 10-Q for the quarter ended December 31, 2018. We assume no obligation to update any of this forward-looking information. Also, our remarks this morning reference certain non-GAAP financial measures, including adjusted pro forma results. Our earnings release and slide presentation include a reconciliation of each non-GAAP financial measures to the nearest comparable GAAP financial measure. We also provided supplemental pro forma information in this quarterly release, which compares current results as if Cabot Microelectronics owned KMG during the comparable period of last year. Additionally, data reflects rounded values throughout this discussion and in the slide presentation. As a reminder, we will be holding our Investor Day on June 18th at NASDAQ market site in New York City. Please RSVP to the e-mail invitation by May 18 or contact me directly if you have not received an invitation and you're interested in attending. I will now turn the call over to Dave.

[David H. Li:]

Thanks, Colleen. Good morning, everyone and thanks for joining us. Last night we announced results for our second quarter of fiscal 2019, which includes a full quarter of CMC and KMG results. Record revenue of $265 million was up 86% compared to the same period last year, primarily benefiting from the KMG acquisition. Pro forma revenue was up 2% year-over-year, driven by growth in CMP pads, electronic chemicals, and pipeline performance products. Revenue on a pro forma basis was down 6.5% sequentially, which is at the low end of the updated guidance that we have provided during our annual meeting in March. Revenue in both of our segments, Electronic Materials and Performance Materials, grew year-over-year on a pro forma basis. Total adjusted EBITDA for the company was $86 million, or 32% of sales and $11 million higher compared with the pro forma EBITDA in the prior year, driven primarily by higher gross profit and lower selling and general expenses, which reflects the strength and resilience of our business model, our ability to deliver on synergies related to the KMG acquisition, as well as a continued focus on cost discipline particularly during this softer semiconductor demand environments. Now let me turn to additional specifics on our results and some thoughts on industry outlook by segment. Starting with our Electronic Materials segment, revenue was up 1% year-over-year on a pro forma basis. After delivering record results for seven consecutive quarters, our CMP slurries revenue declined this quarter due almost entirely to softer market conditions, particularly in memory but also in foundry. As previously discussed, our CMP slurries play a critical role in enabling DRAM and NAND production and this quarter our business was adversely impacted as our customers reduced utilization rates to address higher chip inventories and falling memory prices. Most industry analysts expect this softness in semiconductor demand to recover in the second half of this calendar year and we remain excited about the long-term future growth of the semiconductor industry to support and enable future technologies. In CMP pads, we delivered another quarter of solid results. We are proud of our ongoing achievements in this business, growing from slightly above $30 million in revenue in fiscal 2015 to nearly $100 million in revenue on a run-rate basis in the first quarter of fiscal 2019. One item that we wanted to mention is that, similar to CMP slurries, our pads business is very connected with wafer starts so the overall market softness we are experiencing may impact our ability to meet our articulated goal of $100 million in revenue for full fiscal year 2019. We remain confident that CMP pads will be a significant growth driver for our company and are optimistic about the long-term growth prospects of this product area. In electronic chemicals, we saw stable demand this quarter and we believe there is opportunity for future growth driven by the continued expected strength in advanced logic. Our high purity process chemicals have a high participation in logic applications so as our customers continue the transition to advanced nodes with increased device complexity, the demand for these products is expected to increase significantly. Looking ahead, recent reports from customers and industry analysts suggest there is still some level of uncertainty in overall semiconductor industry demand given the weakness in certain end markets, but most believe there will be some level of recovery in the second half of calendar 2019. Consistent with that outlook, we saw results for our Electronic Materials segment stabilize in April and expect results to be approximately flat next quarter with continued strengthening expected in the second half of the calendar year. Longer-term, we remain excited about the future demand for global semiconductor materials. We believe we will continue to benefit from increased device complexity and growing computing power and storage requirements, which translate to additional demand for consumable materials. Our high-quality products, innovative solutions, best-in-class service, and global R&D infrastructure position us as the premier materials supplier to the semiconductor industry. Turning to Performance Materials, we saw an 8% increase in revenue year-over-year on a pro forma basis. The growth in this segment continues to be driven by strong results in our pipeline performance business, which delivered double-digit year-over-year growth. Our drag-reducing agents, or DRA’s, enable pipeline operators to optimize the efficiency and throughput of oil transport, which support the growing needs of the industry. With continued growth expected in the U.S. oil production, primarily in the Permian basin as well expansion internationally, we continue to experience extremely strong demand for our DRA solutions and anticipate a strong future for this business. We are now nearly six months post the close of our KMG acquisition, and we are pleased with the integration progress to date. Customer feedback continues to be positive, and we believe we are well positioned to meet or exceed our synergy target of $25 million on a run-rate basis within the first two years of the acquisition. We are also happy with the performance of the acquired businesses to date, which we believe offer many future growth opportunities as well as significantly expands our total addressable market. We generated cash flow from operations of approximately $54 million through the second quarter and have already prepaid $100 million of debt borrowed to finance the KMG acquisition. Looking ahead, we hope to see many of you at our Investor Day in New York on June 18th where we will share our vision and future strategies for the company. With that, I will turn the call over to Scott to provide more details on our financial results.

[Scott D. Beamer:]

Thanks, Dave, and hello everyone. My comments will generally follow the related slide presentation we posted on our website last night, along with our press release. We are presenting the results as both reported and adjusted on a pro forma basis. Pro forma results are presented following SEC guidelines and are shown as if we owned KMG from the beginning of fiscal 2018. This not only allows us to meet our reporting obligations but also enables us to provide our financial results on a basis that shows meaningful comparisons. We will of course give greater prominence to reported GAAP results but will often refer to adjusted pro forma figures to communicate our performance and the drivers of the underlying businesses. Our team has worked diligently to provide information that allows us to analyze our financial results on a comparable basis so we can have meaningful discussions. While there are many supplementary tables included in our second quarter press release, I would like to point investors and analysts to slide number 12 in the earnings presentation which summarizes the most relevant pieces building up to our adjusted pro forma numbers. When viewing slide 12, please let me direct your attention to the last column which contains the total adjusted pro forma figures that I will typically reference throughout my prepared comments. Slide 13 performs the same process for the comparable period, which was our second quarter of fiscal 2018. To arrive at the adjusted pro forma results, we have excluded the same types of items as we have in the past, for example, amortization expenses and certain non-recurring acquisition and integration-related charges. Supplementary data tables are provided in the exhibits of the press release and the slide presentation. Now, let’s start with an overview of our financial performance this quarter, which is provided on slide 3. Revenue for the second quarter of fiscal 2019 came in at $265 million, which is $122 million, or 86%, higher than the same quarter last year. Pro forma revenue which assumes that we owned KMG in the prior year increased $6 million or 2%. We are pleased with positive growth from the prior year despite softer industry conditions. Results in both segments improved on a year-over-year basis with growth in CMP pads, electronic chemicals and pipeline performance products more than offsetting lower revenue in CMP slurries. Our net income was $27 million, and diluted EPS was $0.92 in the quarter. Adjusted pro forma net income was $86 million, which was $5 million, or 13%, higher compared with the adjusted pro forma net income in the second quarter last year. Adjusted pro forma EPS was $1.55, which was $0.17, or 12%, higher than last year. So, just stepping back for a moment, we grew pro forma revenue by $6 million despite softer industry conditions, while growing adjusted pro forma net income by $5 million. Adjusted EBITDA was 32% of revenue, showing what we believe to be the significant earnings and cash flow power of the company. Now please refer to slide 4, which provides some higher-level P&L comparisons for both reported and adjusted pro forma results. Our reported gross margin was 43.3% this quarter but was 46.3% on an adjusted pro-forma basis. As shown on slide 12, we are adding back $8 million to gross profit as we remove the effects of inventory write-up and amortization on acquired production-related assets. This compares to 44.4% last year, an increase of 190 basis points, primarily due to continued mix improvement in tungsten and dielectrics slurries as well as positive growth in performance materials. Also, on slide 12, we are deducting $16 million from operating expense, of which $13 million is amortization on acquired intangibles and $3 million is for integration and acquisition-related expenses incurred during this quarter. The result is adjusted pro-forma net income of about $46 million which is referenced throughout our materials. Our adjusted pro forma EBITDA was $86 million, or 32% of revenue, which was $11 million higher than the comparable metric last year. This was driven primarily by higher gross profit and lower selling and general expenses. Now let’s discuss revenue results by segment and business, which are shown on slide 5. As you know, we are presenting our results in two reportable segments

[Operator:]

[Operator Instructions]. Our first question comes from Dmitry Silversteyn with Buckingham Research. Your line is now open.

[Dmitry Silversteyn:]

Good morning, do you hear me okay? Okay great, thank you for taking my question. I jumped on the call a little bit late, so you may have addressed this in your opening remarks, but can you talk about what your market performance was in the first quarter, in other words what were wafer starts down in the quarter?

[David H. Li:]

Hi Dmitry, it's Dave. Thanks for your question. Right, so as we mentioned specifically what we saw this quarter was really almost completely based on wafer starts. So in our mind the growth thesis for the company continues to remain the same, and we're confident about our ability to grow with the market. What we saw this quarter was from both the memory and foundry side, a reduction from our customers in wafer starts. And of course, as you know, as they reduce wafer starts that affects their consumables demand. And that was really the primary driver of the demand softness that we saw this quarter.

[Dmitry Silversteyn:]

I understand that, David, but you mentioned that you guys were outperforming the market, so I'm just wondering in the context of your 4% decline in the slurry business, what was the decline in the wafer starts, how much more -- how much worse than your performance versus the market performance, I guess?

[David H. Li:]

Yes. I think if you look at it that way first, I think as you know being around the industry for a long time, the wafer start information is probably not as readily available. And I think that's some of the reasons why some folks would use our company as a proxy for how the industry is doing, particularly at those advanced technologies. And so what we saw was, as I mentioned, some reduction in wafer starts on the memory side which is a bit unusual. We think that was to offset some inventory as well as some of the pressure on memory pricing. I think -- as we've been benefiting from the transitions in advanced NAND for our slurries and pads, as they take those wafer starts down that's going to affect us, right? And then also on the foundry side, there's been some softness in foundry. So as they take wafer starts down we're going to be affected by that. But I think as a counter to that, we continue to feel that we are well positioned to grow both in the pads and slurry side, and we also mentioned the continued strong growth in Performance. So if you take that, in total, we think we're well positioned and continue to outpace the market. The wafer start data is not going to be as readily available as you know.

[Dmitry Silversteyn:]

Okay, that's fine. In terms of -- you made a comment that industry sources believe this is a one to two quarter event and we should be getting to more normalized levels in the second half of calendar 2019. Coming -- assuming that's true when you come out of this inventory correction cycle in a couple of quarters, given continuing concerns about sort of macro environment and trade wars and consumer confidence and all that stuff, is the growth coming out of that correction going to be similar to what we saw before we went into it or do you expect the market to actually slow -- grow a little bit slower once we come out of this correction?

[David H. Li:]

Yes. I think that's the subject of a lot of speculation of folks that look at the industry, whether it's going to be more of a canoe-shaped recovery or a V-shaped recovery, right. I think right now what we're thinking about is the timing and the magnitude is still a bit uncertain. What we did mention is we saw our results in April stabilize, and that's -- and you can see that also in our guidance for Electronic Materials as well as a full company. Again, I think once we go out of this inventory and demand softness, those same growth metrics should apply. And so for our company, we expect to grow pads, we expect to grow with memory as they continue to transition from 2D to 3D. That entire growth thesis, I think, still remains. It's just a timing of recovery that's a bit uncertain. And I think the underlying demand, if you looked at those end users that are focused on building out data centers, especially those continue to be quite positive with a few exceptions, but mostly still positive. And I think the longer-term outlook for technologies, like 5G and auto continue to be very positive as well from a chip intensity standpoint. So I think, again, nothing changing from a longer-term growth thesis.

[Dmitry Silversteyn:]

Got you, and then just a last question on margins, your gross margin 46% and change was lowest we've seen in quite some time. Was this function mostly of your tungsten slurry sales being down year-over-year or were there some shorter-term headwinds or one-offs that caused the margins to be -- to get down into the mid-40s?

[Scott D. Beamer:]

Dmitry, this is Scott. Overall, the margins improved. They are at a slightly different level than where they were pre-acquisition as -- when slurry was a significant portion of the company, the margins were higher. Slurry is a little less of a portion of the total today. So with the KMG business coming in overall, we've articulated our plans about expanding the margin to get back to EBITDA margin, specifically as a combined company that are consistent with CMP historically. At the gross margin line, essentially with KMG coming in there is a little bit of a new baseline there, but we are highlighting the fact that on a comparable basis we've improved it 190 basis points year-over-year. That is primarily related to transitioning toward more advanced technologies within slurries. So that -- so within slurry we continue to improve our mix and continue to expand our margins and as we grow the Performance Materials business, that's also accretive to the gross margin line.

[David H. Li:]

Right, thank you. To do it apples-to-apples, as Scott mentioned, you really need to look at the pro forma last year, which was around 44 and change, and this quarter it was 46%, so an improvement in that area.

[Dmitry Silversteyn:]

Okay, thank you very much.

[Colleen Mumford:]

Thanks Dmitry.

[Operator:]

[Operator Instructions]. Our next question comes from Chris Kapsch with Loop Capital. Your line is now open.

[Colleen Mumford:]

Hey Chris, good morning.

[Christopher Kapsch:]

Good morning. I'll just follow-up on that margin discussion because on the pro forma basis we're up 190 basis points despite the fact that you did have weakness in what you called out in, I guess, tungsten and advanced dielectric slurries which I believe are known to be some of your highest margins, so could you just -- there must be something else that's contributing favorably there, like that dynamic, so could you elaborate?

[Scott D. Beamer:]

Yes. I'll try to elaborate a bit more, Chris. It's really mix within each of the components that are -- that is moving to more advanced technologies. So yes, tungsten slurry was down in total, but think -- and yes, that would pressure gross margins down, but we've -- if you looked at just margins within tungsten slurry, they're improved because we're moving to advanced technologies within that product line.

[Christopher Kapsch:]

Got it, okay.

[David H. Li:]

The other thing Chris is, as Scott mentioned in his prepared comments, we're seeing continued strong growth on the Performance Material side, which also is a very profitable business. It's currently around 20% of our total company revenue, but growing very quickly and also very profitable business.

[Christopher Kapsch:]

Okay, thanks for that. So notwithstanding your comments about, obviously, the soft wafer start environment there's some pretty important node transitions going on at a pretty major foundry and logic players that is 7 and 10 nanometers respectively. And typically those transitions are beneficial to your business. Can you just talk about how those are going, how they see -- how you see those transitions playing out in your order cadence and your revenue cadence for the balance of, I guess, this calendar year, maybe into 2020?

[David H. Li:]

Yes, right. So we won't comment on specific customer per se, but that migration from 10 to 7 on the advanced logic side is always going to be a positive thing for us. Many times that requires new solutions on the CMP slurry side as well as pads. And then also on the high-performance chemicals side, the intensity goes up, especially on the advanced logic as they progress to the lower feature sizes. So we're working closely with those customers to help them drive that reduction and advancement in technology. And we always think that will be a positive for us as the technology and innovation leader. So I think right now, again, without commenting on specific customers, you've seen all the same things we've seen in terms of progress. And most think of -- in terms of timing, that migration will still happen towards the second half of this year.

[Christopher Kapsch:]

Okay. And then if I could, just on -- you referenced, I guess, consultancies talking about the memory chip market rebounding in the second calendar half of 2019. I'm curious just based on -- do you subscribe to that based on your conversations or even order trends for products that you know that go into those advanced memory fabs, do you see an inflection in your fiscal fourth quarter and with that rebound could come, I guess, a transition to 96-layer architectures, do you see that happening as well, and what are the implications for your business?

[David H. Li:]

Right, so just in terms of where they are today, most advanced 3D players are already producing at some level at 90X layers. We're actually working with many on the higher 100XX layer architecture, and that's an exciting growth opportunity for us. Again, we've guided for -- we have provided some guidance for Electronic Materials for the third quarter to be generally approximately flat. That would indicate -- and we saw that based on our forecast as well as some stabilization we saw in April. I think the timing of -- the exact timing of when memory is going to bounce back is still a bit uncertain although, again from our results we've seen some stabilization. Definitely, what we feel is the long-term growth thesis is remaining intact. We're excited to participate in that continued conversion of 3D NAND and working with those players that are already producing in 3D NAND to get some more advanced layers.

[Christopher Kapsch:]

Thank you David.

[Colleen Mumford:]

Thanks Chris.

[Operator:]

Thank you and our next question comes from Mike Harrison with Seaport Global. Your line is now open.

[Colleen Mumford:]

Good morning Mike.

[Michael Harrison:]

Hi, good morning Colleen, David, Scott. I was wondering if you can go into a little more detail on why we saw differences in growth between the Electronic Chemicals kind of that acquired KMG high-purity process chemicals business and the CMP slurries business. Is it really just the difference in exposure to logic versus memory and kind of some differences in customer mix, or were there other factors leading HPPC to be higher than the slurries?

[David H. Li:]

Yes, you hit it Mike. It's really where we participate for HPPCs, that's a much narrower part of the market, tends to be focused on advanced logic. We're very strong in North America and Europe. And so those held up a little bit better from a demand environment. And where we really saw the softness from our customers in terms of reduction of wafer starts was in memory and foundry. And so we sell slurries to just about everyone that makes a chip. So just in terms of broader exposure, those two segments were a little bit softer this quarter and that's why there was a bit of an offset in the performance.

[Michael Harrison:]

And then can you give us a little bit of an update on the Electronic Chemicals opportunity in Asia. I know that KMG had some efforts to expand their capabilities there and kind of build on the NFC acquisition that they have done. Are those efforts about complete now and is there anything else that Cabot is doing to help accelerate the growth in Asia?

[David H. Li:]

Yes, I think it's something. So first, in terms of our overall business, we're very, very excited about the growth that we see in HPPCs, even with our current geography and where we participate, which is mostly North America and Europe. In terms of Asia, that would require a capital expansion on our part to participate in those markets. And we're trying to assess whether that's a better focus opportunity for us versus investing in some of the other faster-growing and potentially more profitable businesses just to begin with. So I think there is opportunity for us to bridge in Asia. We haven't made a decision in that area. We've actually been approached by certain customers asking us if we're interested to supply them with HPPCs in Asia. But for right now we're just focused on investing in and driving growth in those markets that we're strongly participating in now, which are North America and Europe.

[Michael Harrison:]

Alright, and then I wanted to ask a question on the DRA business. I'm just wondering what you're seeing so far this year with the additional competitor, Innospec, in the DRA space? Is it a case where there's enough growth out there for everyone or are you seeing some additional pressure related to competition for new business opportunities?

[David H. Li:]

Yes. I think we've seen some changes in the supply landscape. There's actually one supplier that is not in the market anymore, one that, as you mentioned, is coming in, in a different way. They're not new to that area. What we've seen is very strong growth of our materials. We have very, very strong demand and very strong demand forecasted. Right now, we're focused on investing in capacity, supply chain, quality, technology. The customer response has been fantastic and this is really just based on growth in the Permian. For right now, we also have a lot of international opportunities in the pipeline. So we definitely think there's significant runway for future growth and we think our product is differentiated versus others out there in the market. We think we've got the best customer support, the best technology and we're of course helping to bolster that through further investments. So we see a lot of runway for future growth in the DRA market. It's an exciting time to be in that segment.

[Michael Harrison:]

Okay. And then if I can sneak one in for Scott, just wondering if you can walk through free cash flow expectations for the year. Historically, both Cabot and KMG have done a really good job generating cash flow but if I took the $335 million midpoint of your EBITDA guidance, can you walk us through some of the puts and takes around free cash flow for the year?

[Scott D. Beamer:]

Sure, Mike. And we are very excited about our ability to drive earnings and cash flow from the combined entity. And if we mentioned EBITDA at the beginning, I just want to also come back in my prepared comments, I may have said a number for pro forma net income that's obviously $46 million. The pro forma -- the adjusted pro forma EBITDA for the quarter was $86 million. So those numbers are in the slides, they're in all the materials. I may have transposed the number when I said that. But if you start with the $335 million, so let's take midpoint for a couple of these, Mike, as I know we need a number, so let's use midpoint for a couple of these. If the EBITDA is $335 million, and we always like to state our cash priorities, the first priority is to organically grow our business. The midpoint of that's $50 million from our CAPEX perspective. Our second priority is paying dividends that's going to be about $50 million, just doing the math on our dividend rate per share times the number of shares. Then obviously, we have to pay our interest and taxes combined. You know the interest from the midpoint that we've given, that's $46 million and taxes would be in the neighborhood of about $50 million. So if you walk all of those down, you get to a number of about $140 million, just doing the math on each of those. And then you allow maybe for some portion of share repurchases, you're getting in the neighborhood of that $100 million-or-so available to delever. So I'm walking EBITDA, counting for all of our commitments, and then saying what's left and which to delever. So it'd be about $100 million, which we said that we've paid during the first half of this year. We have accelerated what we can. As a company, we generate significant portion of our earnings overseas with U.S. tax reform, that's beneficial to us. In terms of having greater cost efficiency and effectiveness in moving money back to the U.S., we were able to accelerate that to a high degree. So we paid the most significant portion of our debt pay down this year, we paid it in the first half of this year. So we essentially deployed that $100 million or so. And you saw cash come down on our balance sheet as well. But that's how I would walk from EBITDA down to, what I would call, cash flow after our commitments.

[Michael Harrison:]

Alright, thanks very much.

[Colleen Mumford:]

Thanks Mike.

[Operator:]

Thank you. [Operator Instructions]. Our next question is a follow-up from Chris Kapsch with Loop Capital. Your line is now open.

[Colleen Mumford:]

Go ahead Chris.

[Christopher Kapsch:]

Yes, just a question on the full year guidance. Do you have a wafer start assumption that's embedded in that guidance expectation and then maybe you could just talk about what sort of factor you think might push that to one end or the other, low or high? Thank you.

[David H. Li:]

Yes, I'll just make a general comment, Chris. What we've talked about before is the expectation from most, if all, the industry is that over time wafer starts to grow 4% to 6%. I think that may not be the case this year. It might grow at a slower rate. And so -- but what we're really basing our guidance on is really not just a wafer start model, but what we've seen so far through half of our fiscal year, also a month of sales and then our internal forecasts. That's really what it's based on. And we think based on that, we will end up growing faster than wafer starts, but it's not with an inherent wafer start model built into the rest of the year.

[Christopher Kapsch:]

And any influences that could -- you think would push it to one end of the guidance range or the other?

[David H. Li:]

Yes, I mean, I think, there's a number of factors. Right now, I think we're trying to do our best in terms of providing the most guidance and transparency to our business with the understanding that it's still a bit uncertain out there. We're encouraged to see some stabilization in our demand for Electronic Materials in April. But as we hear the announcements and public disclosures from some of our larger customers, it's clear, it's still kind of uncertain from a demand standpoint from what even what they're saying. And so I think in terms of what could push one end of the range or another is, is there a bounce back in wafer starts for memory, is foundry recovering. You followed this industry for many years. You know typically the second half of our fiscal year is stronger than the first half, and this quarter, we just reported, tends to be traditionally seasonally softer as well. So all of that kind of goes into our thoughts of how to model the rest of the year but of course, we're in a period of relative uncertainty in the near term.

[Christopher Kapsch:]

And if I could David, I guess, you guys closed on the KMG deal about six months ago. And so just wondering if with -- in hindsight now, any particular surprises positive or negative, now that you've owned the business that long and any thoughts also on how the synergy progression or extraction is progressing and I guess, you kind of commented on you're still evaluating a potential investment in HPPC in Asia, but is there other sources of potential top line synergy notwithstanding your impending, I guess decision on that potential investment?

[David H. Li:]

Yes, right, thanks. So we've been very pleased with the integration progress. We've also received very positive feedback from our customers. And if you look at the businesses that we acquired from KMG, they actually held up a bit better in this soft period for semiconductor than our slurries and pads business did. In fact, we've commented a number of times on the growth in DRAs, but also the high-purity process chemicals were much more stable in this environment. So all of that's very encouraging for us. In terms of where we go next, I just want to make sure I was clear, we are not prioritizing an investment in HPPCs in Asia. I think that's something we really have to consider because it takes a lot of capital and the return is not well known right now because that market is being served already. So that's something we just have to weigh against the other opportunities to deploy our capital. But I would say another thing that we're pleased with very early on is that we're now selling materials throughout all of the different processes for our customers, so in etch and depth and of course, planarization. And I think those types of insights are going to help us down the road whether it's where to focus innovation or where to refine our commercial efforts. So we're really pleased with the progress so far. The businesses are what we thought they were. And I'll let Scott comment on the synergies.

[Scott D. Beamer:]

Yes. We commented here that in the December quarter there was a minimal impact as we only owned the business for six weeks, but that a portion over 50% of our synergies where day one or day 30 type of activities. And so we were able to execute those. We saw that in our P&L, as I mentioned about $3.5 million of OPEX decline, actual real dollars coming out of our OPEX, and you see that right on our pro forma financials when you compare the OPEX line. So we're pleased with the execution on the synergy side. We mentioned also then on a run rate basis, we've taken actions to equal $20 million out of the $25 million so far. There's a little bit of a tail to some of the other activities to get us to $25 million, that's why the $25 million is over a 2-year period. But the actions that we've taken were according to our plan. And we feel good about our ability to drive not only those cost out, but also to drive the top line in the business. And I think we see that in some of the results so far.

[Christopher Kapsch:]

Okay, thanks so much.

[David H. Li:]

Thanks Chris.

[Operator:]

Thank you. And I am showing no further questions in the queue at this time. I'd like to turn the call back to Colleen Mumford for any closing remarks.

[Colleen Mumford:]

That is all the questions we have this morning. Thank you for your time and your interest in Cabot Microelectronics.

[Operator:]

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program, and you may all disconnect. Everyone, have a great day.