Good day, ladies and gentleman and welcome to the Cabot Microelectronics Second Quarter and Fiscal 2016 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 will be given at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference over Trisha Tuntland, Director of Investor Relations. Please go ahead.

Good morning. With me today are David Li, President and CEO, who is participating in our call from our office in Shanghai, and Bill Johnson, Executive Vice President and CFO. This morning we reported results for our second quarter of fiscal year 2016, which ended March 31st. A copy of our earnings release is available in the Investor Relations section of our Web site, cabotcmp.com, or by calling our Investor Relations office at 630-499-2600. A webcast of today’s conference call and the script of this morning’s formal comments will also be available on our Web site. 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, 2015. We assume no obligation to update any of this forward-looking information. Also, our prepared remarks this morning reference non-GAAP financial measures. Our earnings release includes a reconciliation of non-GAAP financial measures. I will now turn the call over to David.

Thanks, Trisha. Good morning, everyone, and thanks for joining us. During our second quarter of fiscal 2016 we made significant progress on a number of strategic initiatives, notably in pads, dielectrics slurries, and slurry and pad consumable sets, although our financial results reflect continued soft semiconductor industry demand conditions. This is consistent with our comments last January when we reported results for our first quarter, and also during our Annual Meeting of Stockholders on March 8th. As we mentioned in our press release, we continue to expect stronger demand in the second half of our fiscal year, and through the first month of our third fiscal quarter, orders for our CMP consumables products have notably strengthened. Later, Bill will provide more detail on our orders to date in April. During the quarter, we reported revenue of $99.2 million, a gross profit margin of 47.3% of revenue, and diluted earnings per share of $0.37. Excluding amortization expense related to the NexPlanar acquisition, our non-GAAP gross profit margin was 48.4% of revenue, and non-GAAP earnings per share were $0.41. We generated strong cash flow from operations of $25.4 million and paid our first quarterly cash dividend on April 15th. To provide some context for our second quarter results, let me first offer some perspectives on the global semiconductor industry environment. Early signs in 2016 indicate that the PC market has still not stabilized. For the first quarter of the calendar year, Gartner reported that worldwide PC shipments declined nearly ten percent from the first quarter of 2015, representing the sixth consecutive quarter of PC shipment declines. Exiting the March quarter, some reports suggest that NAND and PC DRAM device inventories appear to still be in moderate oversupply due to this soft PC demand. Despite the continued soft outlook for PC demand, there…

Thanks, Dave, and good morning everyone. Revenue for the second quarter of fiscal 2016 was $99.2 million, which represents a 5.4% decrease from the same quarter last year. Our second quarter revenue reflects continued softness in demand within the global semiconductor industry, continued soft demand for PCs, and competitive dynamics within data storage applications, all of which we have previously discussed. Year-to-date, revenue of $199.6 million represents a 7.9% decrease from the prior year. The decrease reflects similar factors as in the second fiscal quarter, as well as competitive dynamics in certain dielectrics applications that we have previously discussed. Foreign exchange rate changes reduced year-over-year revenue by $1.1 million in the quarter, mainly due to the weaker Korean won versus the U.S. dollar, and by $2.5 million in the first half, primarily due to both the weaker won and Japanese yen. Drilling down into revenue by product area, tungsten slurries contributed 44.2% of total quarterly revenue, with revenue up 0.5% from the same quarter a year ago. We continue to see strong demand for our tungsten slurries for advanced applications, including 3D memory and FinFET, and as Dave mentioned earlier we expect this to be a strong driver for future profitable growth. Dielectrics slurries provided 23.9% of our revenue this quarter, with overall sales down 0.9 % from the same quarter a year ago. During the quarter, we saw the impact of soft foundry demand mostly offset by revenue growth from some of our new, high-performing colloidal silica-based dielectrics slurry products, in conjunction with our transformation of this product area, and also the advanced ceria-based products, that Dave discussed. Sales of slurries for polishing metals other than Tungsten, including copper, aluminum and barrier, represented 14.3% of our total revenue, and decreased 22.6% from the same quarter last year. We believe…

Thank you. [Operator Instructions] And our first quarter comes from the line of Edwin Mok of Needham & Company. Your line is now open.

So first question I have on gross margin. I think Bill you’re comparing margins to stay even lower volume was a big driver for that. But can you maybe give us a little more color, did you see any top pricing pressure as a result that lower volume or any kind of mix change I think your patenting that we have seized register a year ago and I think last year every quarter including the fiscal first quarter you had over 50% gross margin. I was just trying to understand what drove the big changing gross margin that total compared what we’ve seen in the last six quarters?

Right, sure. And so first from a year-over-year standpoint, there are two significant factors, the largest was higher fixed costs and that was largely related to the addition of NexPlanar. In the year ago quarter, we didn’t have NexPlanar, so we had a full quarter, in the second fiscal quarter compared to the prior year of NexPlanar costs. Then the other the second largest factor year-over-year was lower volume just on 7.9% lower revenue capacity utilization effects caused volume effects to reduce gross margin as next the largest factor. We had some other factors kind of pluses or minuses, but nothing else real significant those where the two largest factors by far. If you think about sequentially, we were down sequentially and we had several factors there. There is an element of seasonality that you look in the last, the history of our company in the last 10 or 11 years, I think every year, but fiscal ’13 and ’15, we’ve had a sequential reduction in gross margin in the March quarter, so historically seasonally weak in terms of gross margin. We also had a full quarter of NexPlanar costs recall that we closed the NexPlanar acquisition in late-October. So we had a full, this is the first quarter fourth quarter of NexPlanar staffing costs. There is another factor that goes into fixed manufacturing costs and it’s a phenomenon, we’ve seen before and our second fiscal quarter which is the first quarter of a new calendar year and in the U.S. that since to bring higher staffing costs for us and some of this is transient. But we have about half of our workforce in the United States and so in a fresh calendar year we restart payroll taxes, social security, unemployment tax, vacation accrual things like that. Such that we see a pretty significant increase in fringe related costs in the first quarter, in the first calendar quarter that typically then doesn’t persist. And we saw that here, that was the higher fixed cost around the order of 1% on gross profit margin erosion, so that was another factor. We had some other factors mix was a small adverse effect as you saw the higher pads percentage of our business tungsten held up some left in mills other than tungsten and higher dielectrics. So there is a mix effect and then we had several smaller effects pricing was a small effect, foreign exchange was a small effect. You had some pluses or minuses there, but sequentially and year-over-year, sequentially the biggest factors where the fixed costs and then this product mix effect.

Okay. Yes, go ahead.

Yes. I haven’t said that though so I want to remind that we’ve reconfirmed guidance for the full fiscal year at 49% to 51% of revenue with the expectation of stronger than in the second half of fiscal year we would expect to have stronger gross margin to accompany that.

And second question I have particularly regarding NexPlanar, so it sounds like you guys have good traction growth of NexPlanar saw the product right and I think Dave mentioned given that it probably have taken our civil set procedure for customer to transition there. And I know you can’t give us some income mix or view in terms of how much your pad business is now NexPlanar versus Cabot's got thermoset kind of your traditional thermoset product and are you seeing come closer growth coming from the thermoset product or is this thermal plastic product stable declining any kind of color you can provide on that?

Yes, Edwin. First it's been a really exciting few quarters since the acquisition and you've seen the growth in our results and we can definitely feel the increase in customer pull for the technology and it is primarily coming from the NexPlanar technology and as we mentioned this quarter we also felt more comfortable talking about some of the wins we've been able to achieve with some really important customers in the Korean memory and Asian foundry areas and one of the things that has been a real paradigm shift for us which is this faster qualification time along with the performance benefits the customers are seeing we’re seeing qualifications evaluations that are completed in less than six months so that's very different than what we've seen before and we attribute that to the closeness of the thermoset technology, customers are able to drop it in much more quickly. There is also an aspect of NexPlanar that allows faster iterations so just the overall customer experience the customer qualification time has been really good and overall we are really pleased, we are preparing for significant growth in the pads area and obviously we will continue to update our progress. I think we mentioned the split of pad revenue too right Bill you might provide?

Yes total pad revenue is around $12 million of which around 7 was from the legacy CMP pads the epic pads and five was NexPlanar. The legacy CMP pad revenue has been pretty constant the last three quarter and then we added NexPlanar of course starting in October.

Okay, great extremely helpful. Last question I have on the order trend can you remind us in your commentary directly you said that your orders in the month of April is upfront 6% compared to average for the second quarter but in the March you mentioned that you will have $36 million so if I look at the numbers it actually got flattish to March just trying to kind of reconcile that is it just a month to month lumpiness with that or should we read too much into it and as you look beyond what you have booked in April are you seeing comp further strengthening on your order as you get into May and June?

Yes, so the -- a lot of times when we talk about revenue we don’t give much color within a quarter because revenue is relatively flat tends to be relatively constant month-to-month. In this case we had around $32 million in each of January and February but then in March $36 million so we started to see some strengthening in March and so overall $99.2 million of revenue in the second fiscal quarter and then through four weeks of April we’re seeing orders for CMP consumables up about 6% versus the average of that first fiscal quarter sorry second fiscal quarter. But we’re mixing things a little bit we’re trying to give within the quarter visibility and that CMP consumables orders we are not talking about monthly revenue it’s revenue for the total company which also includes QED and some other smaller product lines. But I think it is important to note that yes March was much stronger than what we saw in January and February and in April orders for CMP consumables appear to maintain that kind of pace that we saw in March.

And Edwin just to add some color to that from the industry standpoint you are close to the industry obviously but PCs are still haven’t recovered so there is really we think there is some underlying demand from the other segments like automotive, Smartphones and just general inventory replenishment that's happening we mentioned the earthquakes especially in Taiwan there may have been some ketchup because some of the chip inventories may have been damaged so there might have been some ketchup in March and April timeframe and then from the leading edge standpoint 3D and FinFET were in great positions there but they are still very early in the ramp. So that's kind of from the industry standpoint from our vantage point.

Okay, great. Actually I am going to squeeze one in on the dielectrics win that you mentioned on the call you said you won the lead customers on a competitive strategy is that for call it a NAND product or it was something that is running at current it is the other way said but newer generation like 3D, NAND or whatever Linux DRAM they have not been production yet so I'm so I am trying to update if that is all between and it is going start with revenue contributing now or is it more like the ’17 timeframe and may be you can help disclose if that was what DRAM was in?

Sure. So you’re talking about the ceria dielectrics win that we discussed, right.

Yes.

So first, we haven’t talked a lot about ceria, but it’s a sizeable market opportunity as you know it’s primarily for memory. And it’s actually an area that we’ve been working on for a while and have had products in the market with commercial success. But we just wanted to provide some more color to some of our newer products and when you talked about where we displaced replace an alternative products with our ceria -- one of our newer ceria products and that the customer is ramping in two of their facilities. So we are really excited about that it, I wouldn’t want to comment too much more about the specifics, but we’re excited about both of our, both the colloidal and ceria we think we’ve got two growth engines there in dielectrics and really encouraged by what we’re seeing so far.

So is it something that is in production or it is not something that given their R&D lapped and the at least I am just trying to make sure I hopefully understand that?

That’s right. That’s right.

Okay. Great, that’s all I have. Thank you.

Thank you, Edwin. We’ll take our next question please.

Thank you. The next question comes from the line of Chris Kapsch of BB&T. Your line is now open.

So I had a follow-up on just I guess the mix both in the quarter and maybe what you’ve seen so far into the June quarter. So everybody knew that there is a soft industry conditions obviously. But from what I’ve gleaned it seems as though, that weakness has been buffered by maybe demand and you pointed out David and maybe in automotive and perhaps maybe more on a smartphone, maybe there are dumber smartphone, some of the less sophisticated smartphone. So I’m just wondering if that showed up in your product mix. In other words demand for products that are used at older more mature legacy nodes, vis-à-vis the most advance nodes. Is there any way for you to discern I guess in fact what you saw as the mix of the demand being skewed more towards, more mature technology nodes?

I’ll just make a general comment what we’ve seen is. We have seen continued strength from what I’d call the lagging edge technologies and I think a lot of that is Internet of Things, Automotive. Those that don’t require very-very advanced CMP solutions, but we’re supporting those as well. But also from the leading edge, I’d split it put into two areas. For the logic side, ’16, ’14 since that, I still think those ramps are going slowly. For 3D right now, we’re in really early stages with only one real producer in high volume and that’s Samsung and Xian. But if you look at, what’s happening on the equipment side of it, you see a significant intake of equipment that is geared towards 3D. So we look at that as sort of, I look at that as a second half of the calendar year and beyond ramp, but not so much of an impact so far.

Okay. So the order that you’ve seen thus far in April are consistent with the kind of product mix or technology node mix that you’ve seen maybe in the first half for the fiscal year is that a fair way in other words the 3D NAND adoption not moving to needle yet?

Yes. I think through April, we wouldn’t have a specific visibility on that just two to four weeks until we get through the end of the month. But I don’t think, we’ve seen any significantly different trend than what we would have seen coming out of the second fiscal quarter.

Chris one of the things we mentioned last time or it was we have a pretty significant portion of our tungsten revenue from those advanced technologies both FinFET and 3D, I think we mentioned 13% in fiscal ’15. And from the industry side of things, it’s really still that one major player out there in high volume so far, but with the others in various stages of ramping up, so still very early in that technology.

And then I had a couple of follow-ups on the pad business too. So I think if a parse those numbers that you provided with NexPlanar’s, the addition NexPlanar. So it looks as though your, the legacy pad business might have been down year-over-year like 20%. So I’m just wondering is -- and I understand the enthusiasm over the NexPlanar adoption and the cadence of wins there. But is the legacy pad businesses that looks like it’s a number that worse than perhaps the industry. So I’m just wondering if have we taken a step back in terms of the relevance or applications for those pads or is it really just the industry weakness that’s affecting, the revenues of those the D100 to D200 pads?

So our organic pads of D100, D200 they continue to be a really important part of our portfolio in fact on the consumable set side there was -- we made some progress including with D100, D200 this quarter so the pipeline continues to be strong for those products, what I would say is as you know those products are primarily they are very strong in the foundry side foundry was very soft and then there was also some additional efficiencies where customers continue to extend the pad life as well so those were we believe the most significant aspects of why the organic pads were down versus previous.

Okay. And then you mentioned the six month qualification time and how that's accelerated versus your experience with the alternative technology. Just wondering if that six month timeframe is that accelerated vis-à-vis what NexPlanar was experiencing on their own in other words is there some accelerated top line synergy here for Cabot Micro to -- for NexPlanar to be part of a Cabot Micro and with in other words with the company that had bring in more resources into the CMP tools and kind of that?

We expect so Chris as you know we've talked about this as a $79 million to $90 million business by 2018 but from the qualification time aspect there is a technology piece which is their thermoset technology is easier to qualify. And so they are also able to do faster iteration I think what we are adding is the operational and quality excellence we mentioned we've got the Intel award again this year and also just leveraging our global sales channel they were very focused on a very limited set of customers so having the ability to leverage our sales channel has also been very helpful not only to speed the qualification time but to also expand where we’re trying to win positions with the technology.

Okay. And then just finally the -- sometimes when the chip industry conditions are soft there is a silver lining in that it tends to free up total time for qualifications just wondering if this Malays for the industry have you seen any discernible pick up in the number of qualification opportunities that may translate into commercial wins later down the road? Thanks.

We have Chris but I'm not sure if it's the industry low utilization or we’re going out there to market with some really different products in dielectrics we also have advanced products in tungsten and then we have the addition of NexPlanar so we are -- there is a lot of exciting opportunities in the pipeline and I think the -- if there is lower utilization that's always helpful but we’re seeing a lot of opportunities in our pipeline for those new products.

Thank you.

Thank you, Chris. We will take our next question please?

Our next question comes from the line of Amanda Scarnati from Citi. Your line is now open.

First on China and the opportunity that Cabot has in China. China is expecting to grow its semiconductor business considerably and with these out in China I think tapped it very well position there. Are you seeing any competitive pressure from internal China, Chinese companies developing slurries and pads or is there a really strong opportunity for Cabot to pick a significant market share as China expands its manufacturing capabilities?

Right, so I am calling in from Shanghai and we are excited about what's happening in China. China is in an area where we have a very strong position already and I think that's because the domestic customers in China are trying to accelerate up the experience curve and catch up with leading edge technology players and they know our products are used in just about every advanced technology node so they are really interested to work with us so we have had really good relationships with those customers and strong positions for a long time and I expect that to continue. And then the other aspect of China which is there is a lot of inbound investment Samsung putting a fab in TSMC, UMC and in than those customers we also have very strong relationships and sometimes their technology is directly transferred from Taiwan or South Korea or the U.S. so there we also have a very strong position so China is one we continue to watch very closely but we feel we are really well positioned to grow with China in the future as they grow as well.

And then just another question on kind of growth trajectory of 3D NAND it has been touched on a little bit but is the expectation more of calendar to have ’16 where we should start to really see that ramp in 3D NAND growth or is it more towards calendar ’17 where those anticipations now versus where they had been previously?

I probably -- this is just my own perspective on things I see the same things you do as well, which are equipment sales going into 3D are pretty strong and that’s usually a free courser to they’re ramping up and material sales happening as well. So I look at it as second half of calendar ’16, we’ll start to see more players ramping up in the high volume manufacturing and definitely into 2017 calendar.

And then the NexPlanar pads as they are well positioned for 3D NAND expansion. Is that correct?

Yes. We’d say that there are pads and their pad technology can be use across different segments, across different technologies including in memory, we talked about a win this quarter we had in memory. And there are some unique requirements around 3D. I think that plays to our strength. So when there is more difficult technical challenges, we like that. So whether it’s tungsten, dielectrics or pads, we feel like we’re very well positioned to grow with 3D.

Great, thank you.

Thank you, Amanda.

Thank you. [Operator Instructions] Our next question comes from the line of Dmitry Silversteyn of Longbow Research. Your line is now open.

A couple of follow-up questions if I may, first of all the 6% of increase you’re seeing in April orders versus the average that you saw in the three months of the March quarter. How does it compare to typical seasonality, is this a stronger recovery that you may be typically see between March and June quarters or is this more or less normal or still a little bit subdued versus the typical seasonality?

I think if you, in the last several years, we’ve seen sort of abnormal seasonality, right. Historically in the industry, the March quarter was the weakest, we strengthened in June. September was the strongest and then weakened in December. I think in ’13, ’14 and ’15, we saw a departure from that historical trend. But if you look back the last several years, I think on average we’ve grown around 4% or 5% from March to June.

Okay so it…

I think from the industry standpoint I think there is a few things happening here. One is there are some new product launches that are planned for the fall, that I think there is build happening now. And then there is also some kind of event driven activity around the earthquakes where there had to be some -- there was some more catch-up because of the damage in the inventory. So it may not be true seasonality, as Bill mentioned we’ve seen a departure from that the last few years, but it just happens to be kind of in the second half of our fiscal year this year.

Speaking of earthquakes you mentioned a little bit of disruption to inventory levels and to productions in some of the, for some of the players in, out in China, I’m sorry in Japan. Three of your larger competitors if you need capacity and I think weekly sales are also Japanese based anything going on there that will meet our culture, and help you in some of the selling into the next couple of quarters if they deal with the aftermath of the earthquake?

Right. So of course, we wouldn’t comment on competitors, but we’re trying to do everything we can to help our customers that were affected. Our facilities were thankfully not affected by the events in Japan and Taiwan. But I think it’s one of those things where you just look as a leader of the industry what can you do to help and we’ve had some more rush orders come in, we’re just trying to do what we can to help the industry in that context.

And if you think more broadly, we have a global infrastructure we have manufacturing facilities in the U.S., Japan, Taiwan, Korea and Singapore none of our competitors have that kind of a worldwide reach. So from a supply insurance standpoint, business continuity planning that we think we’re very well positioned and our customers respect that.

Following up on NexPlanar acquisition, you’ve talk about the kind of the sort of the benefits that it brings to the company, with the global distribution and customer relationship. Anything, you’re learning from the folks at NexPlanar as far as getting to market and getting products separate as you mentioned obviously the adoption timeline is much shorter for their products versus the legacy product. But is there anything else that the NexPlanar team is bringing that causes you to either revaluate or tweak how you go to market with your pad offering?

Definitely Dmitry, so we talked about this global pads team that we have put together and it’s truly made up of elements from our original pad organization and also the NexPlanar organization. So it’s a combination of those kinds of the best of both teams and we’re certainly benefiting from their experience on how we approach customers. And they are the experts I think where we can add in is our operations and quality systems infrastructure and knowhow and we’re in progress of doing that and then you mentioned the global sales channel. For me, I think this -- the thing that we’re really encouraged about is, we knew the technology was easier to qualify, but having it in our company and seeing those qualifications that are able to be completed in less than six months that's really something that we've been really excited about and seeing from their technology in there that's what we thought going into the acquisition and we’re very pleased with what we have seen so far.

And one last question and we haven’t talked about this for a while but can you update us what's going on with the average selling prices there is a lot of mix movements right now in new product launches and you know versus legacy businesses and older products but if you sort of look on the apples-to-apples basis is this still sort of a steady to slightly up the average selling price market for you?

Yes, we haven’t seen any particular departure from historical trends. Over multiple years average selling price has maintained relatively at constant levels and that's across all products so within a product there could be a product roadmap that would offer some customers savings in exchange for long-term commitment or things like that but overall across the business ASPs average selling price has been relatively steady.

And Dmitry just from the competitive intensity standpoint we feel like it's, we don’t see any changes in the competitive intensity as Bill mentioned we reaffirmed our gross margin guidance so that should be also some indication, but the other thing about ASP is as we move into more concentrated products we’re selling a customer a product that can be diluted many more times ASP is really dependent on what is the product as well but overall pretty much normal historical.

And then just one final question on the gross margin you have given the yen million dollar exchange rate you are benefitting to by about a 47 on your margin from the exchange rates or has that declined a little bit as the yen has strengthened?

Well we have really kind of calendarized on that if you look at the average yen last year and this quarter is ¥119 to the dollar and the current quarter that we just completed is ¥118 to the dollar the yen is strengthened recently but it's if you take an average over the quarter not really much of an effect year-over-year.

Okay, but if it continues to strengthen that would be a little bit of $100 in terms of margin I mean obviously we are still reiterating the range but is it likely that we are going to be towards the bottom of that range if we get the yen continuing to in place get close to $100 starting to contract to $1?

Well I think it was about 109 today it is something like that and so a stronger yen would yes it's adverse us from a gross margin standpoint but yes we are comfortable with our range and really wouldn’t mind if it takes a spot within that range because there are other things besides foreign exchange product mix capacity utilization that have an impact on gross margin so we just want to maintain the range that we've given.

Fair enough. Thank you, Bill.

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

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.