Good day, ladies and gentlemen, and welcome to the Cabot Microelectronics Second Quarter 2018 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 follow at that time. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to turn the conference over to Ms. Colleen Mumford, Investor Relations Director. Ma'am, you may begin.

Good morning. My name is Colleen Mumford and I'm Cabot Microelectronics' new Investor Relations Director. I've worked at CMC for over 20 years in various roles including R&D, quality and Human Resources. I'm excited to be in this role as we report our second quarter results and I look forward to working with you in the future. With me today are David Li, President and CEO and Scott Beamer, Vice President and CFO. This morning we reported results for our second quarter of fiscal 2018, which ended March 31, 2018. Whether you are joining us online or over the phone, we encourage you to review the investor presentation that we've made available under the Investor Relations section of our website, cabotcmp.com. We made these slides available at approximately the same time as the issuance of our earnings release this morning. 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 also 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 these forward-looking statements. These risk factors are discussed in our SEC filings, including our Form 10-K for the fiscal year ended September 30, 2017. We assume no obligation to update any of this forward-looking information. Also, our remarks this morning reference non-GAAP financial measures. Our earnings release includes a reconciliation of our GAAP to non-GAAP financial measures. I will now turn the call over to Dave.

Thanks, Colleen. Good morning everyone and thanks for joining us. This morning we announced another quarter of very strong financial performance including record quarterly revenue, net income and earnings per share. This is the fourth consecutive quarter, in which we have reported record revenue, which we believe demonstrates the continued strong execution of our strategic initiative, complemented by robust industry demand. Scott will provide additional details about our financial results later on the call. Let me start by providing some details on the current operating environments, and our view of global semiconductor industry demand. During the March quarter, industry demand remained strong, particularly in the memory segment, where our customers continued their migration to 3D NAND. We currently estimate that approximately 50% of 2D to 3D NAND wafer capacity conversion has occurred with the remainder expected to be completed over the next several years. We've also seen continued capacity expansions in 3D NAND underway, primarily in Korea and China, which along with the expected tight supply of DRAM memory should provide growth opportunities for us in the future. In the advanced logic and foundry segments, we have seen our customers growth moderating a bit as they get past their traditional stronger periods associated with new smartphone launches. However, we continue to work closely with our customers to help the advance the smaller feature sizes and believe that new applications in mobile, artificial intelligence, autonomous vehicles and blockchain should continue to drive demand for advanced logic semiconductors in the future. Finally, we continue to see a robust demand environment in the legacy logic and foundry segment driven by automotive, Internet of Things and industrial automation. We expect this demand environment to persist, given the increasing connectivity requirements needed in these important applications. Now let me turn to company-related matters. This quarter…

Thanks Dave and good morning everyone. My comments will generally follow the related slide presentation we posted on our website this morning. 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 2018 was a record $143 million, which is approximately $24 million or 20% higher than the same quarter last year. This increase reflects continued strong global semiconductor industry demand and our focus on our three key product areas. Sequentially, revenue increased $3 million, or approximately 2%, which is in line with the expectations shared on our previous conference call in January and at our Annual Meeting in March. This is notable since the March quarter has traditionally been a seasonally softer quarter for us. Our net income of $29.7 million was also a record, and represented an increase of $11.5 million, or approximately 63%, over the same quarter last year driven by higher revenues and increased gross margin. Non-GAAP net income was $31.3 million. Dave mentioned our previously announced capital deployment program and research collaboration with Fujimi. Later, I will elaborate on the capital deployment program. Now let's drill down into revenue, which is shown on Slide 4. As previously stated, we defined tungsten slurries, dielectric slurries and polishing pads as three key product areas that are strategically important to us. During the quarter, these accounted for approximately 80% of total revenue, and I'll mention each in order. Tungsten revenue was $60 million, an increase of approximately 17% compared to the same quarter last year. Dielectrics slurries delivered record revenue of $35 million, up approximately 24% from the same quarter a year ago. Sales of polishing pads delivered record revenue of $21 million, up approximately 23% compared to the same quarter last year. Sales…

[Operator Instructions] And our first question will come from the line of Amanda Scarnati with Citi. Your line is now open.

Hi good morning. Just a question on China demand, seen some recent articles that one of the Mainland Chinese manufacturers started receiving orders for 3D NAND. Have you started to see any revenue from these new upcoming Mainland Chinese manufacturers, or do you expect that revenue to start to fill up in the second half of the year as they start ramping still their volume production versus perhaps maybe just private line production at this point?

Hi Amanda, it's Dave. You know for China, obviously I spent a lot of time there and you know we follow same things you do. There are a lot of newer domestic players that are in various stages of startup and we have a very strong position in China with both the domestic customers as well as the international players. So, we're really excited about the future growth there in China. You know specific to your question about a memory customer starting up in China, we've seen a lot of activity there. I would just generally say most are still in pilot production at this time, except the established players like the SMICs and Huaweis. But we're supporting and watching closely.

Then one of your largest customers, you know commented during the earnings calls last week that there is significant weakness in smartphones in the second quarter. If there is a shift from CSMC, Intel starts to win incremental modem revenue, how does that impact Cabot's business? I.e., do you have more content better exposure at CSMC than you do at Intel or is it sort of relatively balanced between the two?

As you know Amanda, we sell – our products are used in pretty much every fab that makes semiconductors today. And so, we also follow the CSMC announcement and more broadly kind of a concern around weakness in handsets. And obviously, you know smartphones drive a lot of demand in semiconductors, but there is a lot of other sectors that are also pulling demand, things like automotive, industrial, high-performance computing, blockchain, all those are really becoming more and more important for semiconductor demand. So, lot more than just mobility. And I would say also for a customer like CSMC, they also have a wide range of different applications besides smartphone. For us, we really see a continued strong demand environment especially in memory, but also in those legacy logic and foundry segments. So, for us, you know whether business shifts back and forth between customers, that doesn't affect us as much, but obviously we're watching the handset demand as well as the other sectors.

Then the last question I have is just kind of following up on that. In memory specifically, does it necessarily matter to you if its DRAM, if it's NAND that's really producing. I would assume that there is better content on 3D NANDs than there would be on DRAM. But how – you know how much of a difference is there for you?

Yeah, we have strong positions in both NAND and DRAM as you know. Samsung is our number one customer and they just reported overnight a continued strong outlook that they talked about for memory. And just in terms of between NAND and DRAM, just because of the current transition that's happening from 2D to 3D in the NAND space, where there is a doubling of CMP steps when you go to 3D NAND. That presents a strong growth opportunity for us than the continued technology migration and DRAM. We mentioned that we think about 50% of 2D has been converted to 3D. So, there is still lot of runway for that conversion going on, and we're really excited about the growth opportunities, especially in NAND.

Next question will come from Edwin Mok with Needham & Company. Your line is now open.

First question is just to follow-up on Amanda's question. I guess two parts; first is on the memory side. Do you think you can pass the 3% of your sales this year given the growth in memory? And then on the trialing edge versus leading edge, is there a way to kind of think about your mix of trailing edge versus leading edge exposure for your foundry logic?

Yeah. Edwin, I missed the first part of your question around memory. Could you repeat?

Yeah, the first part speaks to just – I think last year, last fiscal year, you guys report 46% of your sales come from memory customers, right? Just curious with the growth in memory, do you expect that to surpass a few percent, or is that growing even faster than the overall company?

Yeah. And that's something we will update at the end of the year. We did talk about around 45%, 46% from memory and we also commented that memory was growing the fastest. So, just based on that trajectory, you can make you assumptions there. And then in terms of split between advanced and legacy, you know what we're seeing is, there is continued strong demand in sort of the legacy. What I can call like 35, 28, 20-nanometer technology and Scott actually commented about our non-function metal business being up. One of the drivers was that more legacy aspect pulling products like aluminum into the mix. But as you know we have a really good exposure across all of different technology nodes, both advanced and legacy. The one comment I'd make around advanced is especially on the logic and foundry side, you know with 10 and 7-nanometers still in ramp. That's a FinFET structure that uses a tungsten gate. So, that's a really important product for us and working closely with those customers and obviously that's still in fairly early stage ramp. So, we fell like we've got a really good amount of exposure to both advanced and legacy. We just see a stronger demand environment in the near-term for the legacy logic and foundry.

Okay, great. Actually that very valuable color and a good segue for my next question, I guess next two questions. So, first as I noticed that your tungsten revenue while up year-over-year is actually down sequentially. Is that just seasonal, and then I have a follow-up question on tungsten too?

Yeah. Sure, for tungsten, we are up year-over-year about 17%, down slightly sequentially and we see that as basically fluctuations in order demand. Nothing has changed from our perspective in the competitive environment. So, really just order fluctuation, and obviously we see a really strong growth – strong future for tungsten especially given 3D NAND and FinFET.

Then, I guess I'll call it a longer-term question, probably not to-date, but you know I noticed that there is more talk about tungsten flux or some of the tungsten process being replaced by cobalt. Just wondering how that could affect your business? Well, does that have any effect on your business and where do you guys stand in terms of providing slurry for polishing cobalt?

Yeah. And obviously we work really closely with those advanced customers that are considering new and different materials at different stages. Cobalt is one material that's of interest. But you know for us, the more challenging the application, I think the better it is for us, because that's obviously where we excel. We're the only one that has a focused business on CMP, so those materials challenges should really play into our strength. We haven't seen on the roadmap, a very strong adoption of cobalt. Right now, it's just one of the materials being considered, but it's something that we're working closely with our customers as they look at material solutions.

Thank you. And the next question comes from the line of Dmitry Silversteyn with Longbow Research. Your line is now open.

Good morning. Thanks for taking my call, couple of questions if I may. First of all, on the Fujimi collaboration you announced. Is that what the – basically their slurry business, are you looking to develop something between your slurry operations or are there other parts of Fujimi technology that you are looking to access with this collaboration. And as a follow-up to that, you know is this a first step in a much closer relationship over time for you guys?

Hi Dmitry, so we are excited and encouraged by the collaboration, but obviously just in the beginning stages, just to clarify again, the collaboration at this stage is really based on collaborating on IC CMP applications on the slurry side. And just you know really what we look at is leveraging our respective competencies in areas that we really don't participate in today, either company. So, you know an example of that would be some of the emerging materials that are being contemplated for 7-nanometer and below for advanced logic. So, really niche applications, but I do think we have the opportunity to leverage both company's expertise in this area. They're obviously leader in the field. We're a leader in the field. So I think this will be good for our customers, but obviously just beginning and our focus right now is making that collaboration successful.

And then just looking at your capital deployment, obviously returning cash to shareholders either through dividends or share purchases is commendable. But can you update us on what's going on with your M&A effort sort of how full is the cuts hopper, where you are in kind of the funnel process of getting something across the finish line? And what can we expect from you in terms of direction you are looking at for M&A deals?

Dmitry, this is Scott. If we have a lot of efforts, a lot of activity going on in terms of building up that pipeline in continuing to build a robust pipeline. Yeah. There is nothing for us to speak about here today, but from a deployment perspective and an action ability perspective, we are going to make sure that we have the dry powder necessary. And we view our situation today and obtain paying down the term loan and moving to zero debt as the right thing to do right now. But we hope that will step along the path and certainly we'd like to use our strong balance sheet to enable future M&A going forward.

And just to echo Scott's comments, Dmitry, the type of opportunity we are looking for has not changed. We look for something in the material space in a closely related area. And as Scott mentioned, even with our new capital deployment plan, we feel like we have plenty of flexibility to go after different opportunities in the M&A space.

If I can sort of follow-up at your – the inability to close the deal since the planer solutions deal – sorry, not the planer solutions, the NexPlanar deal. Is that a function of properties not being for sale? Is it a function of difficulty finding acquisition candidates or is it disagreement on the valuation that they may want? And also sort of what are the sizes of the deals are you looking at? Are you looking at tons of millions of dollars in acquisitions, hundreds of millions, a billion plus. Can you just give us an idea of how broadly you're net is being cast?

Right. So, just in terms of that you mentioned the NexPlanar acquisition, that's one we're really pleased. What that was an example of more of a bolt-on where we saw a technology in sort of a start-up type of company where we took that technology, enhance the quality, supply chain, and then leveraged our commercial channel for proliferate pads and that's done really, really well. As we mentioned another record quarter for pads and we are seeing a really strong pipeline behind that. In terms of just different opportunities, the list is limited because we always been very disciplined around acquisitions and we want to find something in the material space that's also financially compatible with us. So the list is not long. We would like and we look at all different types of sizes as well, depending on what it can add to our business. If it was more of a bolt-on, you think that'd be more in the CMP space something like NexPlanar, if it was a larger acquisition that would be something that would have to leverage our capabilities, but also as mentioned in the material space and a closely related area and financially compatible with us.

David, Thank you.

Thanks.

Thank you. And the next question will come from the line of Chris Kapsch with Loop Capital Markets. Your line is now open.

Good morning guys. Couple of follow-ups. One, on this up trapped in sales for, like I see the other metals business if you will, the aluminum, copper and maybe even STI up 15%. Can you characterize that the outlook there is stronger near term? I am just wondering, obviously that's partly tied to this whole internet of things phenomenon, but just wondering also if there is any sense that you are gaining share in those legacy nodes, or is there any change in the competitive dynamics as those older nodes see a little bit broader strength from the macro trends?

Yeah. Chris. So, we've obviously in the background of a very healthy demand environment. We saw a pretty healthy increase in our non-constant metals. I commented earlier that some of that was driven by demand for our aluminum solutions, which as you know are used in the 28 and 20 nanometer node. And we also saw some increases in barrier and copper as well. I feel like in terms of competitive landscape, we feel like if there is an opportunity out there, we should be winning them in the CMP space. So, you know really no change there, but overall healthy demand, and as I mentioned earlier also the legacy foundry and logic has so much showing some consistent strength and we see that continuing to be strong going forward.

Okay. Just to follow-up on the CMP pad business, obviously the pieces behind buying NexPlanar was that they had a better performing for your customers and I think that's proving out. But it seems like given your formal comments about the adoption of the leading edge that your conviction around that out performances is more definitive, which is a good thing obviously. What I am curious about is though, given just how powerful this sort of lower deep activity in yield benefit that your customers derive using these pads. Are you seeing or why aren't you seeing more adoption that even legacy, particularly given the strength that we just talked about it some of those nodes. And as semiconductor customers want to swept those older fab assets, I would think that this is a pretty capital efficient way for them to get more output from those fab just to adopt a pad technology that results in greater yield. So just wondering, just about the overall trends in your process of record wins in most concentrated in the advanced node that you talk about or is it really broad based?

Right, Chris. So, as you know that the new nodes and advanced nodes are – there is a window there where if you win that, there is clearly an opening, where the displacement might take a little bit to uptime. When we talked about in the prepared comments is we are really pleased about some increased proliferation with some memory customers at the advanced nodes. But our pipeline for pad opportunities, span the whole gamut between displacement and new technology nodes as well. You mentioned sort of the legacy foundry and logic, we do see that as a really big opportunity, not only just for pads, but also for consumable sets to bring both the pad and slurry together to those customers. So, I think you'll see us be even more active in that area in the future.

Okay. And then if I can just follow-up one more on Korea. I think you said 65% higher sales growth year-over-year, and obviously that's tied the memory. But just wondering if there is something that's driving sort of the outside sales gain, is it just the transition of a fab or too? Or is it market share gains? Is it adoption of the pads that you just mentioned in the memory application or all the above?

Yeah. I think it's a bit of all the above and just this past week, both Samsung and SK Hynix announced. And although there was some concern over memory pricing, their demand outlook for memory was very robust and continues that way. And so, obviously they're heavily concentrated in Korea. They also have facilities in China, but mostly in Korea, and I think that's primarily what drove the growth was just healthy demand in the memory market. I think for our company as a consumables wafer-based start – wafer start based company, our positions in memory I think are really differentiated. And so, when those key customers are doing well that will definitely have a positive impact on our results.

Okay. Thanks for the color guys.

Thanks.

Thank you. [Operator Instructions] And our next question will come from the line of Mike Harrison with Seaport Global Securities. Your line is now open.

Good morning. This is Jacob on for Mike. Congrats on the good quarter. I have a couple of questions on pads. First KFMI, how much did that contribute to the strong pad growth in the quarter?

Right. Jacob, so for pads, again we announced a record quarter. The KFMI collaboration is something that we are focused on to bring more business in the China market longer term. We did mention we saw first revenue already, but it's very early. So I would say, not a significant driver of our pads revenue yet.

Okay. And then I saw press release, your competitor in the pad space had a ribbon cutting ceremony for manufacturing expansion in Taiwan with some new – they were highlighting new capabilities for advanced pad. So is this just business as usual from a growing and evolving market in that space? Or are they trying to sort of catch up to where you guys are in the pads front?

I think we are going to be focused on what we can control. There obviously, the incumbent really still throughout the industry, and so we are seeing a lot of good success with our pad products. And so, I would say that's more business as usual.

Okay, great. Thank you, guys.

Thanks.

Thank you. And I am showing no further questions at this time. I would now like to turn the conference back over to Ms. Colleen Mumford for any closing remarks.

Great. Thank you. That is all the questions that we have 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 your program. You may all disconnect. Everyone have a great day.