CMC Materials, Inc.
Q1 2015 Earnings Call Transcript

Published: 30 Apr 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Cabot Microelectronics’ Second Quarter Fiscal 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today’s call is being recorded. I would now like to turn the conference over to Trisha Tuntland, Director of Investor Relations. Ma’am, you may begin.

[Trisha Tuntland:]

Good morning. With me today are David Li, President and CEO; and Bill Johnson, Executive Vice President and CFO. This morning, we reported results for our second quarter of fiscal year 2015, which ended March 31. A copy of our earnings release is available in the Investor Relations section of our website, cabotcmp.com, or by calling our Investor Relations office at [phone]. A webcast of today’s conference call and a script of this morning’s formal comments will also be available on our website. 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 these forward-looking statements. These risk factors are discussed in our SEC filings, including our report filed on Form 10-K for the fiscal year ended September 30, 2014. We assume no obligation to update any of this forward-looking information. I will now turn the call over to David Li.

[David Li:]

Thanks, Trisha. Good morning, everyone, and thanks for joining us. This morning we announced strong financial results for our second quarter of fiscal 2015 which continues the positive momentum we experienced during our first fiscal quarter. During the quarter, we achieved revenue of $104.9 million, 5% higher than the same quarter last year. We recorded a gross profit margin of 52.1% of revenue, representing a 530 basis point improvement year over year and earnings per share of $0.55, an increase of over 35% compared to the prior year. The March quarter traditionally has been a seasonally weak quarter for us and we are pleased with these strong financial results. Bill Johnson will provide more detail on our financial results later in the call. Let me start this morning with our perspective on the global semiconductor industry environment. Over the past three years, the semiconductor industry has demonstrated seasonal trends in demand, likely attributable to the increasing consumer orientation of end products, seasonal strength during the June and September quarters around the back to school and holiday seasons and weaker demand during the December and March quarters. For us that has translated into weaker demand for our CMP consumables products during the first half of our fiscal year, followed by stronger demand in the second half. However, looking back on our first fiscal quarter, we may have seen some changes from normal seasonality and various recent industry reports and comments made by some of our strategic customers suggest that we could see a further departure from this historical trend during the June quarter. Certain reports indicate that softer than expected demand for some mobile electronic devices and the continued slowing PC demand coupled with the challenging macroeconomic conditions may have led to higher than normal seasonal inventories for some IC devices during the March quarter. Based on this, we believe some IC manufacturers began to lower their utilization rates in March. And it appears that currently overall capacity utilization for IC devices has fallen to around 90%, with utilization higher for legacy nodes and lower for advanced nodes. Certain customers are now calling for continued inventory adjustments into the June quarter and therefore softer near-term demand conditions within the semiconductor industry, particularly at leading-edge technologies. And through the first month of our third fiscal quarter, we've also seen some softness in demand for our CMP consumables product. Reports suggest that inventory should return to more normal levels towards the end of June as IC manufacturers align overall capacity utilization with demand. Despite potential softness in the June quarter, expectations for overall demand for ICs in 2015 remain healthy. Certain industry analysts our forecasting low double-digit growth for smartphones and for the automotive and industrial markets and mid-single digit growth for the enterprise and IT markets, driven by cloud computing and demand for data centers. While these projections appear modest compared to historical growth rates, we believe demand for greater connectivity and functionality should continue to drive semiconductor growth and in turn CMP consumables demand over the long term. With in this environment, we see highly engineered materials and highly formulated products like RCMP solutions playing an increasingly important role in the continued growth, development and advancement of the semiconductor industry as technology continues to advance and device architectures become more complex. Now, let me turn to our core IC CMP consumables business. During the quarter, we achieved double-digit year over year revenue growth in our tungsten and pads product areas. In addition, on a year-to-date basis, our IC CMP consumables business has grown by approximately 7% compared to last year. Within our CMP consumables business, I would like to provide an update on three specific areas. First, we continue to undertake a relatively broad transformation within our dielectrics slurry product area. We have discussed in the past the revenue headwind we are facing in dielectrics due to lost business for some lower performing 200 millimeter applications. We first talked about this during our first fiscal quarter call of 2014 and again during subsequent calls. But as we absorb business loss in this lower performance dielectrics application, we are encouraged by business opportunities and traction that we are seeing with our new family of much higher performing dielectrics products, which we think will have very broad applicability and can be a key growth driver for us in the future. We believe these solutions offer our customers a compelling value proposition, including better performance and lower cost of ownership achieved through high dilatability and significantly improved these activity. We first introduced these products last summer and we are pleased with the positive customer feedback on performance across multiple tool platforms as well as different nodes and wafer sizes. We believe this transition from lower to higher performance dielectrics products should also improve overall profitability for our company. Second, as we have discussed in the past, we have seen our customers increasingly emphasize development and production of advanced technologies as the industry continues scaling semiconductor devices with smaller geometries and more complex architectures. We were an early leader in 2011 with our CMP solution for aluminum high-K metal gate for 28 nanometer and then 20 nanometer nodes and experienced strong growth in this product area with the ramp of these technologies. More recently, we have been working with our strategic customers to support their transition to 3D NAND memory and FinFET for advanced logic IC devices at 16 and 14 nanometer. These technology node progressions and emerging applications generally require additional CMP steps, mainly in tungsten and dielectrics, and we believe this can drive growth for our CMP solutions. During this transitions and in preparation for advancements to even smaller technology nodes, including 10 and 7 nanometers, we continue to collaborate closely with our technology leading customers to provide higher performing and lower cost solutions. We believe we are unique in our ability to offer a combination of innovation, quality systems and local expertise to enable our customers integration schemes and meet their demanding surface modification, quality and consistency requirements. We believe we have been very successful with this close customer collaboration and we are proud of our recognition as one of only 11 companies out of thousands of suppliers to Intel to receive its prestigious supplier continuous quality improvement award for our performance in 2014. This now marks the third consecutive year we have earned Intel's highest honor for its suppliers. We have earned awards from a wide range of customers over the years, which we believe is broader evidence of our ongoing ability to deliver high quality, high performing and reliable CMP products and solutions. The third area within our CMP consumables business that I would like to address is CMP polishing pads. We achieved double-digit year over year revenue growth for the quarter and year to date. As we have discussed over the years, pad evaluations and qualifications take time and this is a highly competitive CMP application area. Nevertheless, we continue to leverage our existing product platforms to win more business and we remain focused on growing this product area. We are working to add new pad products to our portfolio and continued to develop integrated slurry and pad consumables sets such as for [dairy] applications. We believe our pipeline of opportunities for pad products in various stages of evaluation or qualification remains strong and we look forward to continuing to convert this customer evaluations into customer adoptions in the future. In summary, we believe our CMP consumables business is well positioned to be successful over a range of demand environments. Looking ahead, we expect to continue to capitalize on evolving technology trends by innovating, developing and commercializing superior leading edge CMP solutions in collaboration with our technology leading customers, while leveraging our global infrastructure. We believe that through the ongoing implementation of our core strategies of technology leadership, collaborating with customers and operations and quality excellence, we will continue to profitably grow our business over the long term. And with that, I would turn the call over to Bill Johnson for more detail on our financial results.

[William Johnson:]

Thanks, David, and good morning, everyone. Revenue for the second quarter of fiscal 2015 was $104.9 million, which represents a 5.4% increase from the same quarter last year. Year-to-date revenue of $216.8 million represents an 8.4% increase from the prior year. Foreign exchange rate changes, primarily the weaker Japanese yen versus US dollar reduced year over year revenue by $1.4 million for the quarter and $2.5 million for the first half. Drilling down into revenue by product area, tungsten slurries contributed 41.6% of total quarterly revenue, with revenue up 16.2% from the same quarter a year ago. This represents the fifth consecutive quarter of year over year revenue growth in tungsten. Dielectric slurries provided 22.8% of our revenue this quarter, with overall sales down 18% from the same quarter a year ago. The revenue decrease reflects the loss of the lower performing 200 millimeter dielectrics business we have discussed. As Dave mentioned earlier, we continue to make progress on the commercialization of our new family of much higher performing dielectrics slurry products. Sales of slurries for polishing metals other than tungsten including copper, aluminum and barrier represented 17.5% of our total revenue, and increased 5.7% from the same quarter last year. Sales of polishing pads represented 8.4% of our total revenue for the quarter, and increased 13.9% compared from the same quarter last year. We have now grown our pad revenue year-over-year for five consecutive quarters. As Dave emphasized earlier, this continues to be a higher competitive area. Data storage products represented 3.8% of our quarterly revenue. Our data storage revenue was down 12.3% from the same quarter last year on continued soft PC demand and some business loss that we first mentioned several quarters ago. Finally, revenue from our Engineered Surface Finishes or ESF area, which includes QED, generated 5.9% of our total quarterly sales. Our ESF revenue was up around 95% from the same quarter last year. Volatility in our QED revenue is common, since it’s primarily a capital equipment oriented business. Our gross profit this quarter represented 52.1% of revenue. This is up 530 basis points from 46.8% in the same quarter a year ago. Compared to the year ago quarter, our gross margin benefited for a richer product mix, with relatively more tungsten and less legacy dielectrics. Other factors affecting our gross margin were the absence of an asset impairment charge recorded during the same quarter last year and benefits associated with foreign exchange rate changes, partially offset by higher accruals for incentive compensation. Year to date, gross profit was 51.5% of revenue, which represents a 440 basis points improvement over the first half of fiscal 2014. Taking into account our results in the first half of the fiscal year and in light of the prospect of softer near term demand, we currently expect our gross profit for the full fiscal year to be around the upper end of our guidance range of 48% to 50% of revenue. Now, I’ll turn to operating expenses, which include research, development and technical, selling and marketing and general and administrative cost. Operating expenses this quarter of $35.2 million were $3.3 million higher than in the second quarter of fiscal 2014. The increase was primarily due to higher accruals for incentive compensation and costs associated with our CEO transition which we announced last December and discussed in our call last quarter. Year-to-date, total operating expenses were $69.6 million, which is 8.9% higher than last year, primarily due to higher accruals for incentive compensation, costs associated with the previously announced departure of three executive officers recorded in the first fiscal quarter and the CEO transition. We currently expect operating expenses for the full fiscal year including costs associated with all of the executive officer changes to be toward the upper end of our guidance range of $132 million to $137 million. Diluted earnings per share were $0.55 this quarter, which represents an increase of 37.5% compared to the $0.40 reported in the second quarter of fiscal 2014. Last year's results included the $0.06 adverse impact from an asset impairment charge. Year-to-date, diluted earnings per share were $1.36, which represents an increase of 58.1% compared to $0.86 last year, which included the asset impairment charge. Our effective income tax rate for the second fiscal quarter was 23.6% and 17.3% year to date. We continue to expect our effective tax rate for full fiscal year 2015 to be within the range of 16% to 18%. Turning now to cash and balance sheet related items, capital investments for the quarter were $2.8 million, bringing our year to date capital spending to $5.3 million. For the full fiscal year, we continue to expect capital spending to be within the range of $10 million to $15 million. Depreciation and amortization expense for the quarter was $4.6 million. In addition, we purchased $10 million of our stock during the quarter and we have approximately $100 million of authorization remaining. In addition to share repurchases, our Board considers on an ongoing basis a range of capital deployment alternatives, including funding organic growth opportunities, acquisition opportunities and closely related areas as well as various other means of distributing capital to our shareholders through additional share repurchase programs and dividends. We generated cash flow from operations of $27 million and we ended the quarter with a cash balance net of debt outstanding of $165.2 million. I’ll conclude my remarks with a few comments on recent sales and order patterns. During the second fiscal quarter, we saw a 7% decrease in revenue from our CMP consumables products, compared to the first quarter of fiscal 2015. Through the first month of our third fiscal quarter, we’ve seen some softness in demand for our CMP consumables products, consistent with some industry reports and statements from some of our strategic customers. Orders for our CMP consumables products received in April are trending approximately 5% lower than the average rate in our second fiscal quarter. However, I would caution as I always do, that several weeks of CMP related orders out of a quarter represent only a limited window on full quarter results. Now, I’ll turn the call back to the operator as we prepare to take your questions.

[Operator:]

[Operator Instructions] Our first question is from Dmitry Silversteyn of Longbow Research.

[Dmitry Silversteyn:]

A couple of questions, if I may. I thought David’s outline of what’s going on in the semiconductor industry was pretty interesting, specifically since some of the newer trends there developing and the expectations for inventory correction and so on and so forth, if you look past the inventory correction in June and look at some of the things that you pointed out as puts and takes, net-net, would you say that the environment for your products, for CMP consumables, pads and slurries, is improving with these changes that are coming to the industry or is it more a case of improving in one place, but rolling in the other, so net-net basically the market is going to look the same two years from now as it look today?

[David Li:]

If I understand your question, it’s really not about the seasonality, but about the longer term demand or outlook for CMP consumables, is that right?

[Dmitry Silversteyn:]

Correct, exactly. You’re moving down in nodes, you’re introducing some new products, you got the 3D, NAND and some of these other thinner devices that you mentioned, but you also have some headwinds in the older dielectrics and a few other places. So I am just wondering if the opportunity is front of you, will allow you to grow that you have in the past relative to the industry performance or is it going to be pretty much the same?

[David Li:]

We believe we have opportunities to grow within the industry. Just from the industry standpoint, first of all, the newer technologies, some of those that you mentioned like 3D NAND, 16, 14 nanometer thin fab, those all require more CMP steps, typically more tungsten and dielectrics. So that should be good for us. And then within our business, we talked about pads and also a new family of dielectrics, those should offer opportunities for displacement that would allow us to also grow.

[Dmitry Silversteyn:]

But as far as trends of diluting your slurries by customers or figuring out a way to use it more efficiently or some of the other headwinds that the industry, I’m talking about the CMP industry, has been facing over the last years that really didn’t allow it to grow, I would say, over the cycle as rapidly as the end market IC industry. Are these trends you’re mentioning, should you be able to mirror the growth of your end market a little bit closer?

[David Li:]

We think so. I think it’s a fair comment and there will always be efficiencies, customers will always try to find efficiencies in the way they use CMP solutions, whether it’s a pad or slurry, and sometimes that’s some of the value that we can provide in terms of cost of ownership. The longer term, I think the outlook and our expectation would be to grow.

[Dmitry Silversteyn:]

And then one question on pads, if I may. As you mentioned, you’ve delivered fifth quarter in a row of pad growth on year over year basis, historically these types of growth were followed by periods of consolidation, if I will, until you get the new customers signed up. Is that the pattern that we should expect over the next several quarters or has the pad business gotten to a point and your customer evaluations have gotten to a point where there is some more of a steady state growth trends that’s likely to be established in that business over the next year or year and a half?

[David Li:]

So what we saw this quarter, Dmitry, was we saw a strong demand from foundry and memory and kind of ramping up some of the business events that we talked about a few quarters ago. But it’s still highly competitive, but longer term we still are very committed to the business and think it can be a long-term growth driver for us. But it is very competitive.

[Operator:]

Our next question is from the line of Jairam Nathan of Sidoti.

[Jairam Nathan:]

David, you talked about dielectrics and slurries in detail and I just wanted to understand the potential of the higher performance slurries market pricing, how was the price premium and what’s the difference in the competitive intensity between the legacy and the newer dielectrics?

[David Li:]

In the past when we talked about our dielectrics business, we’ve divided it between legacy and advanced and we are kind of moving away from that designation going forward. But when we talked about legacy dielectrics, we were typically referring to a family of older, mostly higher solid slurries for us that meant higher cost very low margin, in some cases single digit margin products for our company and more importantly for our customers, those products have only been in the industry at a limited extendibility to advanced nodes. Looking forward, we think I am talking about this new family of dielectrics products. Several quarters ago, we commercialized that last summer. This is a highly formulated low solids product that our customers are able to get great performance through, they are seeing significantly lower defects and getting really good cost of ownership because it’s a highly dilatable product and for us it’s at a much more acceptable level of profitability. So we’re really encouraged and excited about the future, we’re seeing a lot of traction and sampling right now. But I think it’s an example of continued innovation by our company in the area of dielectrics and we think it’s going to provide a lot of value for our customers both at legacy and leading-edge technology nodes.

[Jairam Nathan:]

What does the competition look like on the advanced side, is it much smaller than what you would see on the legacy side?

[David Li:]

I think the competitive intensity is always going to be there, whether it’s the advanced or legacy nodes. In fact, the advanced, the newer nodes tend to be where you have a good opportunity for design wins, but we think this product or this new family of dielectrics products can really provide a lot of value. So we are encouraged by what we see so far.

[Jairam Nathan:]

And lastly, Bill, with regard to the headwind regarding the legacy product, has it done now or would you see more impacts going forward?

[William Johnson:]

We, first, are talking about that in the third quarter of 2014 and remember in the first fiscal quarter, we talked about a loss of about $3 million of revenue year over year in our first fiscal quarter. The second fiscal quarter, that’s about $5 million, but we think that is essentially complete. And so on an annualized basis, we’re talking about significant revenue headwind, $20 million on an annualized basis, but we think we’ve seen that. So on a year over year basis, we will see that headwind at least in the third quarter and then part of that in the fourth quarter and then we should counter out of that. But it’s significant, but like Dave said, that’s lower margin, lower performing business. In conjunction with that, product mix change that actually improved our gross profit margin for the quarter by about $0.90 year over year. So we get a benefit on a gross margin basis, but it’s a revenue headwind.

[Jairam Nathan:]

I know you don’t want to talk about fiscal 2016 here too much, but just on OpEx, you had all these one-time costs in fiscal 2015, so should we expect that to go back down in fiscal 2016?

[William Johnson:]

Associated with all of the various CEO and executive officer transitions, we probably had an additional $3 million or $4 million of operating expenses that you wouldn’t expect to reoccur next year and in fact we’d expect some savings of a few million dollars after we get past the transitional costs.

[Operator:]

Our next question is from Kim Donovan of Needham & Company.

[Kimberly Donovan:]

I’m on for Edwin Mok. Just looking at what near-term trends or order trends are you seeing from customers beyond the commentary of publicly based customers, have you seen any order push outs or cancellations by customers?

[David Li:]

So just starting overall, what we’ve seen in the industry in the past several years is utilization being softer in our first half of the fiscal year and then picking up in the second half, probably to support the holiday demand for consumer electronics. This year we think we’ve seen some departure from this trend. Our business in the first half is up 7% year over year. So we believe we’ve started the year a little more strongly than usual. And then moving forward, we’ve heard the same thing that you have, which our industry analysts and customers talking about some softness in demand, higher than normal inventory levels for consumer electronics, PCs are off, so still pretty soft. And this seems to be more pronounced at the leading edge. So for example, TSMC announced their revenue for 20 nanometers was down quarter on quarter and in terms of outlook they are looking for 7% to 8% decline. So for us, getting your question, although a really limited window, we’ve seen about a 5% decline in demand when compared to the average rate of our second fiscal quarter, but it’s a really limited window.

[Operator:]

Our next question is from Amanda Scarnati of Citi.

[Amanda Scarnati:]

Just going back to gross margin, you had mentioned that it would be towards the upper end of the 48% to 50% range. Kind of looking where margins were in 1Q and this quarter, it’d be a pretty steep step down in the second half, if the second half should be growth in revenue relative to the first half, is that margin step down due to just lower margins in that dielectric product or the slurries related to 3D and FinFET growth or is there something else that we’re sort of missing here?

[William Johnson:]

The gross margin guidance, we are maintaining the range of 48% to 50% of revenue, but really pointing you to the top end of that. So we’ve achieved 51.5% for the first half and Dave mentioned that we’re seeing soft order in the first month of our third fiscal quarter. So if that persisted, that’d be a revenue decrease in the third fiscal quarter and we don’t really have visibility to the fourth. So yeah, it does reflect the outlook that we have sitting here in the third fiscal quarter, but again we pointed to the top end of the range. It’s mainly that uncertain demand environment that would be driving that continued outlook for gross margin.

[Amanda Scarnati:]

In regards to the 3D product transitions that are expected in two half, are you starting to see any orders building up ahead of the potential 3D NAND build out or is that still yet to come with shorter lead times?

[David Li:]

So for 3D NAND, we look at more tungsten and more dielectrics consumable use when that technology ramps up. Right now, Samsung, we believe continues to be the leader in 3D NAND, they have a facility in China that is focused on ramping that up, but it’s still early for the industry, there are all the other leading memory players that are working hard to ramp that up and we’re working closely with them. But I think so far, we’d say, it’s still early for 3D.

[William Johnson:]

Also, we don’t get much visibility to orders. Customers place orders and we fill orders in a really short cycle, so it’s not like they would have to pre-order or we wouldn’t see order cancellations or push outs, things like that, it’s a pretty quick order to fill cycle.

[Amanda Scarnati:]

And then one final question, if I can, how should we think about share buybacks going forward? The first two quarters was a good buyback, should we continue around that level for the rest of the year or it is just kind of opportunistically at this point?

[William Johnson:]

If you look historically, in fiscal 2012, we bought $33 million worth of our stock; in 2013, $40 million; 2014, $53 million; and then through the first half of the year, $25 million of our stock. We have $100 million of authorization remaining, we haven’t talked about any different approach share repurchases going forward, when we’ve been in the market we’ve been relatively steady. And I think our practice would be we’ll continue to report actual share repurchases quarter by quarter, but we do have quite a bit of runway in our authorization program and then significant net cash balance.

[Operator:]

[Operator Instructions] Our next question comes from Jason Ursaner of CJS Securities.

[Jason Ursaner:]

I just wanted to follow up on some of the questions about seasonal softness and the comment before on long term growth versus the industry. My understanding was historically CMP as a process has always outpaced production growth until maybe some of the more recent years. I mean, even if I look at the specific slurry categories that you break out, tungsten was up 15% year to year, the other metals were up 6%, dielectric obviously have some company-specific issues with the legacy products, but the newer [Idial] product sounds like it’s doing very well. So I just want to make sure I understand, when you talk about long-term growth and the need for CMP, would you not expect it to at least match growth in wafer starts or wafer area, maybe even exceed that going forward?

[David Li:]

We definitely should correlate with wafer starts and then to zero in on that correlation you have to factor in the efficiencies, pricing environment, that kind of thing. But we do believe CMP consumables demand should correlate with wafer starts in the future. And then also we’ve talked about some of those newer technologies having more CMP steps, 3D NANDs and we think we’re well positioned.

[Jason Ursaner:]

And so the seasonal softness, two quarters of sequential decline and the lower order rates through April, just maybe how do you balance, internally any concerns on seasonality versus cyclicality and just where we are in the semiconductor cycle overall and what you see, you mentioned PC softness and mobile devices puts and takes, but just what you see moving the industry forward in the cycle from here?

[David Li:]

So we’re not industry prognostic carriers, but what we would think is in the past, we’ve seen this, our second half would be a period of becoming stronger in demand. And just based on what we’ve heard in the industry in the first few weeks of April, it looks like this is going to be an abnormal year. If you look at our first half, we did have some company issues as you mentioned in dielectrics, this lower performing dielectrics loss that we’ve talked about, but actually the first half was up 7% year over year. So we probably started the year a little more strongly than usual, but then going forward it’s your question whether what the demand environment going to be and you mentioned some of those factors, PCs continue to be soft and that could be some inventory buildup in the smartphone or consumer electronics area, I think we have limited visibility of that, but that’s what we’re hearing now.

[Jason Ursaner:]

And Bill, apologize if you did addressed this before, I jumped on a little late. But the benefit from foreign currency in gross margin, did you quantify? I think last quarter you’d given what it would be in percent terms, I don’t know if you gave that on this call.

[William Johnson:]

That’s right. I didn’t, but it was about 100 basis points on foreign exchange benefit year over year.

[Jason Ursaner:]

And that’s relatively comparable to what it was last quarter, I think?

[William Johnson:]

Yeah, the yen continues to weaken and it’s the weakness of the yen versus dollar that gives us a tailwind on gross margins, but it was a similar amount on 100 basis points I recall.

[Jason Ursaner:]

And on the selling and marketing expense, it was the lowest level I think for a quarter since fiscal year 2019, just wondering what drove that lower and whether is that a sustainable level or maybe some of those costs have been reclassified somewhere else?

[William Johnson:]

If you look sequentially, it was quite a bit lower due to the absence of this time of some termination costs associated with executives. No real change in our approach in selling and marketing, so it could be vagaries are on that. So no different strategy over the long term.

[Jason Ursaner:]

And for G&A, I know that Q2 is – when you typically have wage increases flow through the numbers, you said there was $3 million to $4 million in that number, that’s more atypical with the executive shifts or did not get that right?

[William Johnson:]

If you look – several things happened in overall operating expenses around recent executive transition, the CEO transition and then the departure of three executive officers in total across the fiscal year, we would expect around incremental $4 million of costs associated with that. Once we get past that into fiscal year 2016, then we’d have those transition costs pretty well behind us and so you’d expect a savings of overall operating expenses on the order of $3 million in fiscal 2016.

[Operator:]

Our next question is from Chris Kapsch of BB&T Capital Markets.

[Chris Kapsch:]

And I apologize if this was been touched upon as I was been toggling back and forth some calls this morning, some other companies reporting. But the follow up is on, David, your comments about being well positioned for 3D NAND and FinFET applications, just want to understand a little bit more, obviously I felt that you guys have the products for these leading edge applications, I just want to understand when you say well positioned, what does that mean? Do you have processor record for all of the key chip makers that are migrating to this architecture? And then more specifically, do you have visibility as to when some of these key customers are ramping these 14 nanometer, 16 nanometer advance nodes and do you anticipate benefiting from that in terms of your margin profile?

[David Li:]

In terms of timing what we’ve heard is that the second half of this year, those customers that are leading the 16 nanometer FinFET, customers like TSMC and Samsung, they expect to ramp up in the second half. And then 3D continues to be driven by Samsung and the other leading memory makers, but Samsung is definitely in the market first. I wouldn’t comment about our specific processes of records, but I would just say that those types of really demanding leading edge technologies I think play into our company’s strength. So if you think about what it takes to support 14 nanometer, 16 nanometer ramp, I think we’re pretty unique in our ability to innovate and provide high-quality robust solution. So with think we are well positioned, but we don’t want to comment on specific customer positions.

[Chris Kapsch:]

And then just a follow-up on that, is it fair to think of these applications as still having and are more CMP intensive in that there’s more CMP steps, can you put an order of magnitude to that, I think I’ve heard just anecdotally that these may have something between five and eight additional CMP process steps? And then obviously if I understand not talking about specific customers, but the products that you sell into these applications, can you just talk about the margin profile for the company associated with these products assuming you successfully commercialize and ramp some revenues in these advanced nodes?

[David Li:]

So for FinFET, we think there is two to three additional CMP steps and one of the important transitions that go from when customers are moving from 20 to 14, 16 material, we believe it’s shifting from aluminum to tungsten. We’re well positioned in aluminum, where we have a very strong position in tungsten. So that should be good for us. In terms of 3D NAND, you’re right. We think there are approximately five to eight additional CMP steps, mostly advanced dielectrics and tungsten CMP. So again, playing into some of our areas of strength.

[Trisha Tuntland:]

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

[Operator:]

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. Have a wonderful day.