Q2 2020 Earnings Call

Good morning, My name is Susan and I'll be your conference operator today.

This time I would like to welcome everyone to the Cabot Microelectronics second quarter fiscal 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, and what your question and answer.

If he would like I ask the questions. During this time simply press Star then the number one on your telephone keypad. If he would like to withdraw your question. Please press the pound <unk>. Thank you Holly monthly Vice President Communications and Lucky you may begin or something.

Thanks Suzanne.

Okay.

Me today, our David Lee, President and CEO, and Scott Beamer, Vice President and CEO.

Last night, we reported results first second quarter fiscal 2020, which ended March 31st 2020.

Whether you're joining us online or over the phone. We encourage you to review the investors My presentation that we've made available under the quarterly result section of the Investor Relations Center on our website you haven't CMP dot com.

A webcast of today's conference call in the script of this morning's prepared comments, we'll also be available on our website. Shortly after this last conference call.

You may require any of the information by calling our Investor Relations officer, 630, or nine nine to six year on year.

Please remember that our discussions today may include forward looking statements that involve risks uncertainties and other factors that could cause actual results to differ materially from these forward looking statement.

These risk factors are discussed in our FCC filings, including our form 10-K for this fiscal year ended December Thirtyth 2019, and our form 10-Q for the quarter ended March 31st 2020 to be filed by May 11 2020.

We assume no obligation to update on hand, this forward looking information.

Also our remarks this morning reference certain non-GAAP financial measures.

Our earnings release I presentation include a reconciliation of each non-GAAP financial measure to the nearest comparable GAAP financial measure.

Additionally, data reflects rounded out used throughout this discussion and in the accompanying slide presentation.

I will now turn the call over to date.

Thanks, calling good morning, everyone first I want to extend positive wishes to our investor community and I Hope that you and your families are staying healthy.

Our thoughts are with all families and communities around the world impacted by the co grid my team pandemic.

As well as front line teams, who are critical to responding to the crisis and delivering essential services.

I also want to take this opportunity to think our global team members for their dedication and tireless efforts to maintain the safety of our employee base and our operations during this challenging time.

All of our businesses, whether serving the semiconductor industry and other technology sectors or the energy industry are deemed essential.

And as such have continued in full operation.

We continue to work around the clock to ensure an uninterrupted supply of critical materials to our customers.

Today, we have not seen and meaningful impact from a pandemic on our ability to manufacture and deliver products to our customers and we continue to reserve review and refine our global business continuity plans to help mitigate any potential impact on our supply chain in the future.

Within this dynamic environment, the health and wellbeing of our employees continues to be our highest priority.

We have taken proactive steps to develop and implement protocols over the past several months and all of our locations even in advance of government guidelines and regulations.

Well that's contained the spread of cold at 19.

And to deploy our robust business continuity plans.

As part of this we're operating under work from home and split shifts schedules and have enhanced social distancing and hygiene practices and all of our facilities such as contact racing and self isolation requirements.

Temperature screenings and use of additional personal protective equipment.

Within these protocols now well established we have turned our focus to planning for a measured in phase returned to work implementation.

Which we expect rollout across our facilities in the near future.

During these challenging times, we've also made efforts to get back and help the communities in which we operate.

Our sites have donated personal protective equipment, including and 95 respirators and surgical masks to local hospitals and first responders.

In addition, we partner with local businesses by donating ice appropriate alcohol to aid in the production of hand, sanitizer, we're thankful to have the opportunity to support our employees and our communities and we'll look for more opportunities like these in the future.

Turning to our second quarter results, we set another record for quarterly revenue, which increased 7% compared to the same period last year.

The increase was driven by strong growth in CMP, slurries and drag reducing agents or de our age.

Second quarter revenue was up slightly compared to the prior quarter and was generally consistent with our previously provided guidance.

We are proud of our record revenue this quarter, which was driven by continued strong execution. Despite the challenges that our company employees customers and suppliers are facing due to the pandemic.

Now, let me provide some additional thoughts on industry conditions and outlook.

Starting with electronic materials semiconductor industry conditions remain stable this quarter driven by the additional devices.

And bandwidth needed by many to transition into work from home environments.

As well as the continued overall industry recovery.

Coming off a softer demand environment in calendar 2019.

Demand for our solutions was driven by strength in foundry and logic and continued improvement in memory.

We also were encouraged by some recent CMP pad and slurry consumables that wins as art unique capability to provide a total CMP solution.

Continues to be validated by our customers.

At present, we see stable demand in the current third fiscal quarter and expect revenue for electronic materials to be approximately flat with this quarter's results.

Although due to the pandemic potential for economic volatility remains.

Visibility beyond our third fiscal quarter is limited as many others in the industry. It also reported but we are optimistic and our ability to navigate this uncertainty as we have done in prior industry and economic cycles and crises.

We remain encouraged about the long term growth opportunities for electronic materials, driven by emerging demand from new technologies, such as Fiveg Aiotv autonomous driving.

They are an AI, which will require new and more complex memory and logic technology.

Turning to performance materials. This quarter, we saw continued strong growth.

Driven by solid DRA sales as well the benefits of price increases in our wood treatment business.

Going forward, we're closely monitoring the oil and gas sector, which is seeing an unprecedented drop in demand due to the pandemics effect on transportation and travel.

We expect this decline in global oil demand also affect our pipeline performance business and are working closely with our customers in this dynamic environment.

[noise] most forecast calls for a major global economies, especially the U.S. to begin gradually opening back up over the next several months and assuming this is the case expectations would be for oil demand to also recover and stabilize over.

Her time.

How this may translate to production and especially transportation of oil is not yet certain.

As we have discussed in the past demand for D.R. raises not correlated with oil price, but is correlated with oil demand and transport. So we would expect our business to similarly stabilized and regained its growth trajectory over time.

There are variety of factors that may affect the timing of this recovery, including the growing inventory of oil globally.

As such we currently expect about a 25% decline in D.R. rage. This quarter, followed by a gradual recovery, assuming oil demand and transport stabilizes.

As major economies open back up.

We also continue to focus on new opportunity capture in our pipeline business, which may partially offset any interim softness for DRA use and should also help build a stronger business foundation to support future growth.

In this regard we are encouraged by some significant recent recent customer wins that we expect to continue to drive growth and PR raise overtime.

Since we acquired the DRA business. It has outperformed growing over 40%, which gives us conviction about its strong fundamentals and future growth prospects.

In addition revenue in the performance materials segments should benefit from the price increases we have implemented in our wood treatment business, which we expect to last until the end of calendar year 2021, as we continue to work closely with our customers on the exit of this.

Business that we previously announced.

Looking ahead, we expect our performance materials segment to experience a sequential revenue decline of 10% to 15% in the third fiscal quarter as softness in our pipeline performance in Q. We de businesses is expected to be only partially offset by the full quarter.

The effect of the previously implemented price increases in wood treatment.

In summary, we are proud of our results and strong execution in this uncertain environment.

Our track record shows that we have built a robust company over many years.

Which has allowed us to weather diverse and challenging industry and economic environments in the past.

We believe this will enable us to emerge from the current challenging economic environment, and even stronger and more resilient company.

With that I'll turn the call over to Scott to provide more details on our financial results.

Thanks, Dave and Hello, everyone.

We began our presentation by providing some information about how our company has been handling the cobot 19 pandemic and Dave mentioned, a number of key points previously.

Importantly, all of our businesses have been deemed to be essential. So we continue to operate all of our facilities to provide critical enabling products to our customers.

While the short term outlook is less certain we continue to be optimistic about the long term prospects for the industries in which we operate.

During this environment, we continue to focus on our financial results by actively managing our cost driving positive cash flow executing on our capital deployment priorities and assessing various financial scenarios for the future.

Fundamentally we believe that our businesses have not been disrupted over the long term and our strong balance sheet and liquidity should enable us to weather short term challenges and emerge well position to deliver future growth and margin expansion.

Now, let me speak about our quarterly results and my comments will continue to generally follow the slide presentation. We posted on our website last night, along with our press release.

Slide four provides a higher level summary of the second quarter financial performance highlighting our strong results this quarter.

Specifically adjusted net income and adjusted EPS were higher than prior year, even in this challenging environment.

Slide five goes a bit deeper and provide some quarterly PNM comparisons for both reported and adjusted results.

Second quarter revenue of $284 million was a record for our company and increased 7% compared with the same quarter last year.

Driven by growth in both the electronic materials and performance materials segment.

Adjusted gross margin declined versus the prior year, primarily due to the reversal of the favorable impact of certain manufacturing cost recorded in Q1.

Adjusted EBITDA was essentially flat with the prior year as higher sales were offset by lower gross margin and higher operating expenses, primarily from increased accruals for short term incentive compensation.

Adjusted EBITDA was $86 million, there were 30.2% of revenue.

However, excluding the impact of the timing of certain manufacturing costs adjusted EBITDA margin would've been approximately 32% for the quarter.

Our reported net income was $33 million adjusted net income was $52 million up 14% compared with adjusted net income in the second quarter last year.

Overall, our adjusted net income benefited from lower interest an income tax expenses.

Partially offset by the timing of certain manufacturing cost and Inc. increased operating expenses.

Our tax rate benefited from an increased quantity of stock options exercised during this quarter.

Diluted EPS was $1.11.

Adjusted EPS was a $1.75, which was 13% higher than adjusted diluted EPS in the same quarter last year.

Now, let's discuss revenue results by segment and business, which are shown on slide six.

Electronic materials, which contributed 77% of our quarterly revenue reported a 6 million dollar or approximately 3% increase in revenue compared to last year.

CMP Slurries revenue increased 9%, primarily driven by demand from foundry and logic customers and stabilize demand from memory customers.

Electronic chemicals revenue was flat compared with the same period last year.

As a result of lower demand from legacy logic applications, primarily in Europe, which was offset by growth in advanced logic.

CMP pads reported a revenue decrease of approximately 14% from last year due to lower demand from certain memory customers as well as the phasing out of legacy pads at certain foundry customers that we discussed last quarter.

CMP pads revenue was flat sequentially and Dave already mentioned some recent business wins that we expect will support a return to revenue growth in the future.

Sequentially electronic Rep, <unk> electronic materials revenue was down 1%.

Moving to performance materials revenue increased approximately $13 million or 24% over the prior year to a record level in the quarter. The increase was driven primarily by strong demand for DRA and higher selling prices and wood treatment, but was partially.

The offset by lower revenue in our Q, we de business.

Sequentially performance materials revenue was up 5%.

Slide seven shows revenue and adjusted EBITDA by segment.

Electronic materials delivered around $70 million of adjusted EBITDA, which was 32% of segment revenue declined versus 35% reported last year, primarily due to changes in the allocation of corporate costs.

And the unfavorable impact of the timing of certain manufacturing costs.

Both items were discussed last quarter.

Performance materials, adjusted EBITDA was approximately $30 million, which was 46% of segment revenue an increase from the prior year.

Now please refer to slide eight which provide some balance sheet and cash flow highlights.

We ended the quarter with $341 million of cash on hand, and $1.075 billion of total gross debt.

Both include the 150 million dollar draw down from our 200 million dollar revolving credit facility that we executed in mid March.

The entire 150 million currently remains on our balance sheet.

We drew down these funds out on an abundance of caution, although we have no present or expected intention or need to do so to the extent necessary. We would use the funds for general corporate purposes.

Our liquidity remains solid and we continue to generate strong cash flow.

Year to date, we generated cash flow from operations of $112 million and our capital expenditures were 59 million.

As a result, our free cash flow was $53 million.

Overall, we continue to deploy cash consistent with our stated capital deployment priorities.

And currently still expect to meet all meet our objectives for the fiscal year.

Year to date in addition to the 59 million investment in Capex, we pay 25 million and dividends. We also prepaid 18 million on our outstanding debt and repurchased 20 million worth of stock at an average cost basis of approximately $104 per share.

For context, we generated positive free cash flow during the prior severe market downturns and expect to do so again in fiscal 2020.

But typically in our March quarter, we generated $32 million in free cash flow.

As a reminder, we increased our quarterly dividend in March by approximately 5% to 44 cents per share or $1.76 on an annualized basis.

Our net debt is currently at 2.1 times, EBITDA, which is us centrally up the targets set for the end of our fiscal year.

Our leverage metrics remain well within the allowed levels for our covenants under our credit facility and our term loan does not mature until 2025.

Additionally, we did not and do not intend to take any loans are grants pursuant to the cares act or any other U.S. pandemic related legislation.

Finally on slide nine we provide some forward looking expectations.

For the third quarter fiscal 2020, we expect total company revenue to be approximately flat to down low single digits compared with the second fiscal quarter.

While our third quarter guidance has considered the potential impact from covert 19 at least to the degree that we can estimate it today, we would caution that our guidance is based on current estimate estimations and the ongoing volatile nature of coven 19, and its impact on the economy and.

Industries, we serve.

In particular, the uncertainty in the oil and gas sector could cause different outcomes.

Within the electronic materials segment, the expectation is approximately flat versus our second fiscal quarter as we forecast the stable demand as Dave mentioned in his prepared remarks versus a typical seasonal improvement in the third quarter.

We expect revenue in the performance materials segment to decline, 10% to 15% sequentially in the third quarter, which has driven by lower demand expectations for D.R. A's and lower revenue in the queue we de business.

The decline NDR Ace is consistent with expected lower demand for oil, especially in the U.S.

As already stated the segment's revenue should benefit from a full quarter of price increases that were previously implemented in the wood treatment business.

Given the ongoing uncertainty with respect to the covert 19 pandemic, we're withdrawing our full year fiscal 2020 adjusted EBIT the guidance.

Let's continue though with some other expectations for our full year PML. We now expect our full year interest expense to be between 43 and $44 million.

As a reminder, we refinanced our term loan in the December quarter, and drew down 150 million on our revolver during the March quarter naturally the cost associated with maintaining these funds on our balance sheet are included in our interest expense guidance.

Although we are likely facing declining demand for our DRA case, which may continue through the rest of the fiscal year. We're managing this business for the long term and remain excited about growth and long term opportunities and pipeline performance.

Related to this we are continuing our investment plans and still expect to spend between 100, and 130 million and capital expenditures. This year intentionally keeping a wider range as certain activities could be postponed or delayed.

In closing, while we face an unprecedented operating and macroeconomic environment. We continue to operate effectively as we deliver critical enabling products to our customers.

We are controlling what we can manage while assessing various scenarios for the future.

We believe that are underlying businesses should remain stable to growing over the long term and our strong balance sheet and access to liquidity should enable us to emerge stronger and even better position to thrive in the future.

Now I'll turn the call back to the operator as we prepare to take your questions.

Thank you just a reminder, in order to ask a question simply press Star then the number one on your telephone keypad.

So just a Mt Logan pilots you anymore.

Your first question comes like Yahoo Goldman Sachs.

Good morning.

Hey, Good morning can you hear me okay.

We can't thank you.

Great. Good morning, good evening, thanks for taking the question.

Dave you talked about significant customer wins in both your slurry business as well as your pads business.

Can you kind of speak to the significance of the wins and how how fast we should expect.

The ones to materialize in your and your piano.

It's a fairly gradual.

Dynamic or could this show up.

Unfold over the next couple of quarters that I've got a follow up.

Yeah. Thanks, this year and hope, you're saying a safe and healthy.

I think what we mentioned in the prepared comments and what we're really encouraged by is we recorded several wins in this quarter and he then coming into this quarter.

Of consumable sets, meaning pads wins of customers that were either existing or new users of our slurry and we're really really encouraged by that because we've been working on it for some time.

We think that were unique in our ability to.

To customize these types of solutions and really provide something different from a performance standpoint, because we can kind of toggle different degrees of freedom on the slurry and on the pad side and we saw some success.

In fact, I think all of our wins this quarter and pads, where with with our slurry. So it validates that sort of unique capability we have.

These wins, we expect to ramp up over time, so theyre not going to be sort of an immediate.

Change in trajectory, but it's really encouraging to see that validation in the market and sometimes.

Coming out of the softer 2019 environment allowed us to work closely with customers that may have had a little bit of downtime people are pretty much running at full capacity now so pleased with the progress it will take several quarters to ramp up.

Got it I'm very helpful and then as a quick follow up.

Question on the DRTV business, you spoke to potential 25% sequential decline in the June quarter.

I'm, just curious what kind of trends you're seeing in the domestic U.S. market versus your international markets and I guess more importantly, how much visibility do you have.

Over the next one or two quarters I think you talked about a potential decline throughout the fiscal year as well, but how how close is a communication with your customers. How confident are you in that 25% number for June and I guess, what are your thoughts into into September. Thanks, So much.

Yeah, Thanks, and obviously, we're watching that sector, a very closely it's pretty extraordinary times, what's happening both with the production side and the pricing side I think that.

If I back out just a little bit I think the DRA business and why we're so excited about it.

He is a bit misunderstood it it's a critical material and it's really correlated with production and transportation.

And not oil price right. So we really don't see a scenario where oil is not going to be moving around and transported somewhere around the world and RDR Ace art need it.

And so while we will see an effect and we talked about that.

Try to quantify it for the current quarter I.

I think long term the businesses performed really well since we've owned it it's actually outperformed all of our sort of.

Internal estimates and models. So we feel really excited about it.

What I can comment too is through the quarter and obviously, we're only a month or so on the quarter. What we've seen from a production order standpoint is consistent with that forecast beyond the quarter I think we're really watching the macro trends right. So the expectation is that most major economies are going to.

Open back up and especially places like the U.S., where people are going to start opening up and begin driving again, that's going to bring back demand and.

That should bring back oil transport and production. So we're watching all those trends carefully I think we feel.

Relatively confident for this current quarter and we're going to continue watching the macro trends for the kind of outer quarters. That's one of the reasons why actually we decided to withdraw the EBITDA guidance because of this kind of just unprecedented.

Macro environments.

But again long term, we're really excited about the future growth of the business Scott mentioned about our investment back into DRA is where we're investing in both capacity and efficiency and so we're definitely very.

Very positive on the business long term, we also talked about some significant wins that we've been capturing.

Throughout the last several quarters those are pretty significant there for new pipelines, both in the U.S. and internationally and give us a lot of confidence that the business is going to stabilize and regain its current trajectory in the future.

Thank you.

Thanks, So she yeah.

Your next question comes the line.

Mike Harrison.

Your line.

Hey, good morning, Mike.

Hi, good morning, calling and everyone.

Hope you're all while I was wondering if you could talk broadly David about the.

The semiconductor market and what you're seeing in term customers looking to move forward with new product launches with more advanced nodes have you seen any delays or heard customers talking about the leasing.

They're roadmaps at all.

Yes, Thanks, Mike.

Actually we have not the outlook is stable through this quarter and I think our our guide guidance reflects that obviously for everyone in the world visibility in the second half of the calendar year is pretty uncertain.

I would just say anecdotally customers that we've talked to pretty significant customers.

Our committed to running at full capacity and continuing to invest in and ramp up new technologies. So we haven't seen a real.

Different dynamic in that sense.

But I I again, I think beyond this quarter and a one of the reasons why we chose to withdraw the guidance is just the macro environment and if there is this sort of prolong stay at home and the prospect of a global recession that may have an impact on some key end markets right, so things like consumer spending.

So that's what that's what our customers are watching and we're working closely with with them. This quarter, we saw strength across pretty much all the segments, particularly in foundry and continued recovery in memory. You know I think the thing and I know you know this about our business is that it's very resilient.

And so.

Even through a lot of different types of cycles in crises.

The use of consumables is probably one of the most predictable things.

That you can count on during these different and uncertain time. So it gives us a lot of confidence about our business. So we havent seen a real slow down in new technology ramp up.

Yes.

Alright, Great and then was also wondering if you can talk a little bit about any pre buying that you may have seen during the march quarter, whether that's happening.

Obviously, you have you have several businesses, but I'm curious what you're seeing in electronics materials from from a pre buying standpoint customers looking to make sure they have security of supply.

Did that happen it all in VR AIDS and it's a happening at all in the penta business with with that product being discontinued.

In the coming quarters.

Yeah I say.

And this is.

Even in these uncertain times I think the way the supply chain is working as is similar to what we've seen in the past and so if anything I think we may have seen some pre buying at the last quarter that was ending the calendar year kind of going into the lunar new year with China was down this quarter obviously.

Theres a lot of factors that go into that.

But I think there there's there's usually a little bit of pre buying but really for electronic materials customers are ordering.

With.

There's not really.

Strong ability to pre buy.

These materials and we usually have a pretty good view on the inventory I don't think we've seen anything unusual there and same for DRA and also thanks for asking about would treat so obviously, we're continuing with our plans to exit the business. We will we intend to operate it until the end of 2021.

And we were pleased to received commitments for the remainder of that inventory. So that inventory is really spoken for.

Ractically all of it through the end of our operating period, so really not an inventory concern with that business as well.

Alright, and then on the DRA business was wondering if you could talk about the margin impact of a 25% decline just just help us think about typically I would consider that to have a pretty low fixed cost structure, but any thoughts on part of that.

Incremental margin.

In that.

In that performance materials business.

Yeah, I think Mike. This is Scott I think if you're thinking of that in terms of the total EBITDA for the segment that would be a reasonable expectation for that and.

Net 50% type of timeframe or type of type of range and I think it's helpful and weaken.

You know unpack the guidance a bit and as we've said historically D.R. ace or about two thirds of the revenue in the segment. We know the segment was 65 million. This quarter. So you're in the neighborhood of DRA is being about 40 million of revenue in the recent quarter and Dave mentioned.

A decline of about 25% figure you're yes.

Order of magnitude, it's DRA going from a 40, so about a 30 of revenue in our guidance for next quarter that 10 million here that you take your E. Rafi EBITDA percent of that for your for an earnings drop down and that that you have an impact there.

All right Thats very helpful. Thank you.

Thanks, Mike.

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

Good morning, and then.

Good morning, I asked a question on that.

I'm, sorry, and I think we last year.

Hello can you hear me now.

We can hear you yes.

Its kind of question on the new licensing requirements for China that was put into place by the Commerce Department last week do you think that there's going to be any impact potentially to your business, where do you think from your interpretation, but now that there, but you are sort of outside the part of Europe, what those regulations are.

Yeah. Thanks Amanda.

We are obviously monitoring the situation very carefully and it's a bit fluid, there's new regulations and restrictions being discussed all the time at present, we don't see immaterial impact to our business. It's really right now it seems to be more focused on the supply of ICR.

That meant so those with.

Semi cap equipment or equipment exposure, maybe a bit more affected for us we don't manufacturer in China, obviously, although we have strong positions there and.

It's it's a strong business for US we don't think were affected at this time.

Okay.

And then on the semiconductor business can you just talk a little bit about what you saw in terms of demand between the ban split between leading edge and lagging ads in the.

March quarter, and what your expectations are kind of moving forward into the June quarter on throughout the year.

Yes. Thanks.

There were really excited I mean, we have.

Key positions in advanced logic foundry and new memory technologies. So we're really looking forward to.

Seeing those ramp up some of the strength. We saw this quarter was with a particular foundry customers.

Helping them ramp up new technologies, So you know.

We are we are seeing more contribution from advanced technologies, both on the logic foundry side and then on the memory side. The memory side is obviously still in the state of recovery coming out of the last calendar year, but we're seeing now it's been a few quarters of solid growth and and our customers were working close.

The with them to ramp up those new memory technologies as well so as you'd expect that plays into our strength, we we expect to win those new positions.

Especially in CMP and throughout our electronic materials portfolio and when those ramp up that's a source of.

Additional growth for us. So we started to see that this quarter I assume that continues through the year.

And then the the pad and the consumables that business that you and gaming is that more on new technology nodes coming through or is this sort of replacement of older technology.

[music].

Production properties.

They are both are actually both and so.

What we've seen in the pipeline is promising.

And again, all the patterns that we recorded.

For this past quarter, we're using our slurry as well so and across the board from in terms of new technologies as well as legacy.

Okay. Thank you.

Thanks Amanda.

Next question.

Thanks.

So.

Good morning crash.

Hey, calling good morning, good morning, everyone. Thanks for taking my question I told them David when you look into the June quarter can you just tell us how the different utilization rate trends are between logic foundry nandan de them.

Hi, Chris Yes, so.

The June quarter is kind of.

But most customers are saying across the board is that they fully expect to run pretty much at full utilization as they continue to recover out of the softer environment in 2019, and that's you know from several different customer conversations and different.

Segments, whether its memory logic or foundry I think what everyone is watching I think they'll say that and then the next sort of comment will be a caveat, which is there. They are closely watching those end markets and the effects of.

How long does this to stay at home effect will trigger a global recession and will that start to provide some volatility in end use demand in key markets like consumer I think early on in this quarter and into this even in this current quarter, we've seen strong demand for things that are needed to.

Work from home or learning from home things like Pcs and data centers and.

I think that drove a lot of additional demand over this time I'd say beyond June in the June quarter, that's where I think theres still uncertainty out there and again I think that's another reason why we chose to withdraw the guidance I think the fundamentals are solid and again, even from our I commented on our DRA.

Business in the semiconductor business. Similarly, our orders so far in April our very consistent with our guidance. So it gives us confidence and the fundamentals, but I think beyond the next quarter visibility is is no one's going to go out there with the firm.

Forecast right now, which is probably what you're hearing as well from different customers and suppliers in the ecosystem.

Got it Thats very helpful. David and you know given the fact that.

No you're being in this industry for wise, how do you how do you think like.

The reaction typically is end demand slows down.

Do you foresee that capex cuts happened or do you foresee utilization rates drop and demand for slow these moderate before the capex cuts. So there's no real simple formula to that.

Yes. So we've been we certainly have been around a number of different cycles and crises and this one's a bit different but I would say in general.

The rule of thumb is that Capex gets cut quicker those are large expenditures and so customers may delay capex expansions, we've seen that in the past and that's why we feel.

We are really unique because almost 100% of our business is consumable based.

So very robust and even during the the when there was a lot of pressure.

In terms of the industry customers are reluctant to cut utilization and so really starts with Capex and then goes to utilization second that's why we feel so confident about our business fundamentals and we feel were somewhat unique in the space.

Terrific. Thanks, David Thank you.

Thank you crash.

Our next question Glens license.

Hi, this capitalmark.

Good morning, Good morning, Craig.

Hey, good morning. So a policy is if you addressed the David in your formal remarks difficulty getting on the call.

But I wanted was hoping you could provide some color elaborate on your comments about the the sequential look I think you said below seasonality flat that's.

No.

Less.

Strong I guess then a couple of your publicly traded appears in the space have talked about in terms of the sequential look and so you mentioned and then just reconciling that comment with the one you just mentioned in answer another question about you know the strength in the fab.

Utilization rates looking forward so.

It doesn't sound like it was a pre buy or no buffer safety stock being built in the March quarter. So is it something customer specific or IC device specific that you're seeing.

The below seasonal expectations. Thanks.

Yeah, Thanks, Chris I'm, sorry at a difficult time getting on the call. Yeah. I think again, if you look over the long term, we feel confident we've delivered stronger growth than probably any of our peers out there that being said I think in the current quarter and the next quarter.

It's really sort of a different environments. If you think about.

Seasonality typically this quarter that we just reported on would be a seasonally soft quarter. It was a record quarter for US right, partially that was driven by strength in performance, but also continued solid demand in electronic materials. So we really didn't see the same sort of fall off we've seen from a seasonality perspective.

In previous years, and we see that strength going on to.

Into this next quarter, so I'd say, it's a non atypical.

Year from a seasonality standpoint, I can't comment on what others are what's happening in their business, but we see a lot of positive signs in our business, but that means that customers are running full utilization and they're using our consumables and so we see steady demand going into the next quarter and that's that's kind of how we guided.

Got it and so there wasn't any any sort of.

Device maker.

Specificity, but do you have a sense for one area that obviously going to be week near term.

The automotive end market, you have a sense or what your exposure there isn't and what the sort of lag effect.

Might be in terms of timing.

So so when might that show up in softness in that particular market for you guys.

Yeah, and I think if there was one segment of the industry that is.

Showing some softness it is sort of that legacy logic as you might expect that goes into automotive.

And that's part of the that's really an end market kind of question I would say for us though.

We also have a pretty strong participation in memory and so when those new memory technologies like the 100 layer threed NAND or the new DRAM devices ramp up that's also we'll get an extra tailwind of growth.

From those new.

Devices ramping up that's expected sort of in the second half of calendar year, but obviously there is some uncertainty right now with that.

Scott I know, if we want to provide any more granularity on the customer segments or.

No I think that covers it pretty well.

Okay. Okay, I had a follow up on the the DRA business also the them.

The weakness that you're calling out in the June quarter.

And I don't I guess I get this is there's a subtle difference on that or do you have a sense for you mentioned weak demand is the weakness you're seeing more a function of.

Just week consumption in.

Refined products ultimately or is it more a function of.

That weakness, causing a shutdown in production and therefore less oil being pumped I know there a subtle difference but.

I'm just curious if you the I'm just wondering if if theres any sense that.

Pipeline operators because of that weak demand are using less because there just isn't as much urgency to get their flow rates to that that weaker demand or are you seeing the weakness because.

Some of your some of the areas, where you are supplying and enabling solutions are just Frank just be knocked out by low oil prices.

Yeah, I think it's probably a bit of both Chris and again, it's pretty extraordinary times.

Again, just to go back to some of the prepared comments you made caught or May have missed this business has performed really strongly through a number of different environments. It's growing 40% since we've owned it. So it's really outperformed but it's really extraordinary times as both on the demand side.

Especially in the U.S., we have a very strong presence in the U.S.

But I think again as I mentioned I think it's hard for us to see a scenario, where there's not going to be transporting oil somewhere around the world and we have a growing international presence as well. So it's really the macro factor that's affecting the business and it's taken this sort of unprecedented drop in demand and.

Transport to affect the trajectory the growth trajectory of our business, we think it's temporary and it's going to stabilize and recover.

But obviously, it's pretty unprecedented.

Right now in the oil environment.

Thanks to the color.

Thanks.

And your next question comes a lot of David Silver a C.L. king.

Hey, good morning, Dave.

Yeah, Hi, good morning.

So I have a couple of questions, maybe a little off the beaten track but.

First thing would be kind of.

Advance to technologies and your positioning in them. So if I could just focus on advanced memory for a second I mean industry discussion.

That I ran across a few months ago.

Kind of talked about.

No.

They are being kind of a limitation.

On a advancing memories development beyond 128 players in that.

The current materials and designs would be sufficient to get to let's say 128, but then to move beyond that there would have to be an introduction of new materials to kind of break through that that next barrier.

And I'm wondering if you know that is what you're seeing and if you're seeing that.

Could you maybe point to what that next generation of materials might be.

And then how you think your slurry and pad offerings, our position now were or might have to evolve to keep up with that industry development. Thank you.

Yes.

Thanks, and so we are working closely with the industry leaders like Samsung Hynek send micron.

On those new memory technologies. When you talk about 128, obviously, it's the NAND side of the business and there's a few different integration schemes that.

Customers are working on a few different approaches.

I would say from our side that plays into our strengths because they're going to need more and new sophisticated slurries pads and electronic chemicals, and I think we're unique and able to bring that sort of concert of of materials to bear and help them because it is sort of very difficult to get those structure.

Yours beyond sort of the 128, and there's a few different integration structures.

And it's early I don't think Theres, a predominant way to get it done.

But we are working closely with those customers some of those integration schemes require different CMP types of solutions. Some of them are very similar to what's being used on the hundred layer NAND devices today, but just require more CMP.

And so we think we're going to be a beneficiary of that in the future, but again it plays into our strength in terms of securing those advance positions and requiring more complex solutions and again. That's this is also an area, where we see being able to bring a CMP pad and slurry together for example.

Being a really big differentiator and able to to help them unlock that performance, but I don't think theres, a mainstream way to get there yet.

Okay. Thank you very much for that colors. So so the wins that your where.

Pointing out earlier do not do not relate to those kind of breakthroughs just yet so.

Okay. My next question, Scott, it's been pretty quiet so.

Scott I did want to ask maybe kind of it to get your broader perspective on this but I wanted to focus on the drove the decision to draw down.

$150 million from your revolver here, so so I wouldn't say I'm surprised about the.

The drawdown I mean, your your that's not unusual in this environment at all but.

The the absolute number is a big one in my opinion, especially related to your quarterly cash requirements and I. Just did a quick look in my model and other than when you acquire businesses I don't think theres been a single quarter for many years, where the company.

He hasn't been free cash flow positive.

So with that is kind of perspective.

I guess I'm, just wondering what might have been.

Thinking.

Not so much to do the drawdown, but the absolute level of the drawdown and I'm just throw out a couple of things but.

Your company is not suffering any operating disruptions, but is there a sense, where maybe some from key raw materials were strategic elements in the supply chains might see some disruption. So you're you you want to have the ability to stockpile strategic raw materials.

Or could there be an opportunity to use that additional funding may be too.

Facilitate a prepayment tool or refinancing of some of your current debt.

You know to take advantage of the current low level of rigs. So just some some additional color maybe if there if you can on the decision to draw down $150 million. This quarter. Thank you, yes, yes, sure David and as I think we mentioned we did this in middle of March So we were act.

Actually fairly early we were early in terms of the discussions that we were having with some of our banking partners and we had a fair bit of debate about whether to do it the draw down or not we decided again as with those terms. We've used out of an abundance of caution not because of any reasons of particular supply chain does.

Corruptions or anything like that that money is on our balance sheet. As you know at the end of the quarter. It continues to be as we sit here today as well. So as we said we don't have an intention to use the funds, but if we would it be for general corporate purposes in terms of the absolute value you're right.

And we showed that in one of our charge, where as a new company with KMG.

We feel like we need between 100, and 200 million to run our company because of the different jurisdictions, where we operate in.

Working capital requirements. There so you're right. The asked the question. If between 100 200 has the right kind of normal level why would you need to draw down 150 to basically be at Threeforty at the end of this quarter and I would say the order of magnitude. We just we just we.

Decided to do most of the revolver.

There wasn't a magic calculation as to taking a particular amount, but we felt like drilling drawing down most of the revolver was the most prudent thing to do at the time at where when we decided to just keep the cash and to take that little bit of uncertainty, even though we were always there was some degree of common.

Since we could always get that money, but as we all probably remember in that early mid March timeframe, the world seem to be changing more and more on a daily basis. So with that particular uncertainty at the time, we decided to take this piece off in terms of the uncertainty that we were.

That we were facing and 150 out of the 200 was a meaningful amount for us and so we felt comfortable with with that decision.

Thank you very much appreciate it.

Okay.

Your next question Rosemarie Morbelli its yet.

Good morning, everyone.

Morning.

Most of my question testing and said that I said I would.

Go for lead them or classification.

Details could you talk about the strength of the recovery in China in Oh Love your operations.

Well they decline.

Yeah. Thanks, Rosemary so we don't manufacturer in China, but obviously, we're supplying CMP solutions, both pads and slurries to customers there.

Actually you know, China, we saw a pretty stable demand.

Environments somewhat surprisingly I guess throughout this whole.

Pandemic there was some.

Pretty typical seasonal pre buying ahead of lunar new year, and then this quarter it and customers continue to run pretty strongly even kind of during the most intense times of cold in China, obviously, they're kind of hoping that that's behind them.

Now.

And so you know semiconductor customers continue to operate pretty pretty full capacity.

And so we saw continued solid demand from them and we continue to see that so I'd say from.

And overall standpoint also China is an important end market.

For our customers. They are continuing to go ahead with new technologies like Fiveg, and so that could drive additional semiconductor content demand and so that that's a positive thing for demand, but overall for our semiconductor customers. We we saw some softness this quarter versus last but we think thats pretty.

The normal base coming off of the lunar new year, perhaps a bit more accentuated because of the decoded situation.

So now as.

Economies.

Reopening.

But many consumers obviously out of the job.

Does that continuing demand depends on how much we aren't going to be buying a in the months Oh quota is coming on and therefore is there a substantial inventory being built currently and then we could see substantial decline towards the back half of it yeah.

Yes, it's a really excellent question, we obviously try to monitor the inventory levels of our customers. So kind of the chip inventories just as a reminder, we're coming into this calendar year a bit leaner from a chip inventory standpoint.

Because 2019 was a softer.

Demand environment and inventories were work down so that is a positive.

Kind of signal going into this year.

I haven't seen significant levels of chip inventories being built up over the last several months inventories can seem to be at a healthy pace, but the question you asked or is there is an excellent and it's really.

Bid on known because if there is a global recession and consumers really rain in spending that is going to over time have an impact to semiconductors again, we feel like within the semiconductor supply chain that we're a bit more insulated because were 100% nearly 100% consumable.

Yes, and customers are customers really would much prefer to continue running their factories at near full utilization rather than two to go forward with capex. So so we feel like we're a bit more insulated if with that were to happen, but again one of the reasons why we chose to withdraw.

The.

Full year EBITDA guidance is because the uncertainty of the second half of the calendar year. Some of those dynamics just as you mentioned are a bit.

They are they're out of scope for us there really a more macro uncertainty.

Alright, Thank you and if I could ask a question regarding gateways.

So if I understand it properly.

Refinery KLAX oil and then that oil is being transported to into the pipeline.

So there is going to be maybe less.

Lets cracking are going on but you'll have all of that inventory sitting on.

No I mean in I don't know containers on ships a acts situation isn't that even if there is less cracking.

Isn't that well ill go into eventually make kits to one particular location, where it is going to needed to be transported to the and the uses.

Yeah, I mean, there is absolutely transport that's happening of oil real really regardless of the environment, which gives us confidence of.

You know the underlying fundamentals of the business. So again, yeah, the timing of ultimate recovery of when the major demand drivers for Gary will come back is as we mentioned really relying on those macro factors getting healthier U.S. opening backup people starting to drive it's now.

Not correlated to oil price, but you're right that there is going to to be transport of oil in the U.S. and around the world and they're going to need DRA.

Alright, thank you.

Thanks Ryan.

And that concludes today's <unk> session I'll now turn the call that monthly. Please go ahead.

Great. Thanks that another question we have this morning. Thank you for your time interest in Canada.

Great. Thanks.

And this concludes today's conference.

HM.