Q3 2021 CMC Materials Inc Earnings Call

Yeah.

Good morning, ladies and gentlemen, this is the conferencing operator todays conference call is scheduled to begin momentarily until then your lines will again remain on music hold and thank you for your patience.

[music].

Yeah.

Good day, and thank you for spending by welcome to the CMT materials third quarter fiscal 2021 earnings conference call.

At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded if you require no. Further assistance. Please press star Zero I would now like to hand, the conference over to your speed.

A day Colleen Mumford, Vice President Communications and marketing. Thank you. Please go ahead.

Thank you Kevin and good morning, with me today are David Li President and CEO, and Scott Beamer, Vice President and CFO.

Last night, we reported results for our third quarter fiscal year 2021, which ended June 32021.

We encourage you to review the slides and remarks document we've made available in the quarterly results section of the Investor Relations Center on our website CMC materials Dot com.

A webcast of today's conference call and the script of this morning's remarks and question and answer session will be available on our website. Shortly after this live conference call.

You may request any of the information by calling our Investor Relations office at 630499260.

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 32020, and our form 10-Q for the quarter ended June 32021, which we expect to file by August 9.2021.

We assume no obligation to update any of this forward looking information.

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

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

Additionally, data reflects rounded values throughout this discussion and in the accompanying slides and remarks Scott.

I will now turn the call over to day for opening comments, followed by a question and answer session.

Thanks, Kelly and good morning, everyone.

As announced last night, we reported results for the third quarter of fiscal 2021, representing the third quarter of consecutive record revenue.

Top line growth of 13% was driven by broad based strength across our electronic materials segment, which we believe continues our track record of outpacing growth in the sectors in which we participate and improvement in our performance materials segment, which is beginning.

To recover from the impacts of the pandemic.

Despite robust year over year sales growth profitability was lower than expected we have revised our full year adjusted EBITDA guidance to $355 million to $365 million, primarily due to 2 main drivers first higher costs for raw materials and freight and logistics.

<unk> are impacting margins for both our segments.

In response, we are addressing these challenges in executing with plans underway to help mitigate these headwinds.

Second although total revenue from China increased 46% year over year in the quarter variable order patterns from certain Chinese customers has led to lower than expected revenue from our CMP slurry business and.

That is negatively impacting total profitability.

We believe these order patterns will normalize by the end of the fiscal year 2021.

And forecast that China will remain a strong growth opportunity in fiscal 2022.

In our core business electronic materials, we expect sustained semiconductor industry health.

As the overall demand for our product offerings remained strong.

We see strong demand from memory foundry and logic customers with many fabs running at full utilization.

In addition, we are encouraged by significant announced investments by our customers to increase capacity, which will drive further growth and opportunities for our consumable based business. We continue to strengthen our participation rates and all electronic materials businesses.

By investing in innovation and quality and supply chain excellence.

Despite some near term profitability pressures, we remain excited about the strategic direction of our business. We are actively managing the challenging raw material in tight supply chain environment and mitigating the impact on our profitability.

Our growth outlook remains attractive.

As we've continued to strengthen our core electronic materials businesses through organic and inorganic investments.

Furthermore, as application nodes advance at increasing device complexity, resulting in greater challenges for customers. The demand for our consumables solutions is expected to become even more pronounced with our unique portfolio scale business systems and talented team we are excited.

About the future growth of our business.

With that I'll turn the call over to the operator as we prepare to take your questions.

Ladies and gentlemen, as a reminder to ask a question you will need to press star 1 on your telephone.

Your question press the pound key.

Please stand by while we compile the Q&A roster.

And your first question comes from the line of.

As CEO Hari with Goldman Sachs.

Good morning, Ms. Yes.

Hi, Good morning, Thank you for taking my questions.

2 if I may.

David.

The variable order patterns in China as it pertains to your slurry business just wanted to follow up on that point.

<unk>.

I guess did you consider this to be true.

<unk>, an issue or could it be something a little bit more structural could it be share loss.

To what extent you have visibility into what exactly is happening there and I ask the question because I think many of your peers.

Continued to report pretty robust activity in China, and if anything a lot of companies are worried about pull forward or pull in given the strength. So.

Just wanted to get additional color there.

And then as my follow up on the cost side.

Maybe.

Yeah in terms of costs I guess, what exactly is happening which items are are driving the increasing costs you talked about mitigation efforts, but what are these mitigation efforts that you're talking about and at what point could these efforts start to show up in the form of improved margins. Thank you.

Thanks to share so I'll take the first.

Question around China.

China, we have seen really strong growth I think.

Stronger than all of our peers were almost were up almost 50% year over year.

And we've continued to build on our position. So there is definitely no position loss and in fact, we've increased our participation rate.

It is 1 of the few geographies, where we don't sell directly and so what we saw this quarter with some inventory drawdowns by a few of the domestic Chinese customers that we think may persist into this current fourth quarter, but overall, we expect really strong growth from China. It should be 1 of our strong.

It's growing geographies.

Next fiscal year, and we're really excited about the growth we've seen so far and it's really across the board both for slurry and pads. So I think this quarter, we might have just taken a step back from the growth just from an inventory drawdown standpoint, but.

Mid mid long term very very strong growth from China, and we're excited about it.

And then to share. This is Scott from inflationary items perspective last quarter. We mentioned 1 in particular that there was 1 particular raw material in the Perm business that was causing inflationary pressures. We also have more of a petroleum based input system on the electronic chemicals side.

So we are experiencing pressure on both of those items on the raws and then we've also experienced some freight logistics and overall supply chain increases increasing fuel cost driver availability, we've had to use some alternative routes to.

For shipping purposes et cetera.

And we've been able to do all of that as we said from the beginning of the pandemic to deliver every shipment to every customer on time in full despite all of these challenge, but we recognize the effects of those costs that are in our system. They became a bit more pronounced as the quarter evolved and then we have mitigating actions, which is a top priority.

For our company, we're not going to be too specific about any of those but as you would expect David likely to be include pricing actions procurement action other types of optimization activities, some of which are underway and.

We're optimistic about our ability to recapture the impact, but we recognize that theres also going to likely be some sort of delay in the financial impact of that.

Okay, and sorry, as a quick follow up.

For both.

David Scott So in terms of timing.

The Chinese customers.

Or the purchasing coming back in China is it fair to assume kind of a snapback in December or is it more calendar 'twenty 2 and then Scott on your last point, maybe you don't want to be too specific here, but.

The mitigation efforts again, showing up just more of a December dynamic or do we need to wait until next calendar year for the efforts to just show up weather, whether it be things youre doing on the pricing side of the procurement side.

Yes, and just on the China follow up yes, we see this as a near term challenge.

And we expect to be back on the growth track. There is strong underlying growth in demand in China as I mentioned we've.

Actually increased our participation there we've actually increased our participation in all of the product areas of electronic materials. So we see it as a more near term.

Issue, what we've guided to is kind of through our fourth quarter, which would be through.

September so end of the year, we expect to be back in a more normal order pattern for China, obviously, it's a bit dynamic because we don't sell directly there, but thats, what the forecast and visibility we have so far.

And then I think youre right to share, we're probably not going to be too specific and this is.

Evolving, but some of the activities as I mentioned are underway and already being implemented. So it is a current state type of.

Type of perspective.

Yeah.

We're being pretty front footed in terms of the expectation for Q4 in this full year and we're expecting.

Not obviously captured entirely because we're bringing it on our mid point and I think that's going to evolve a bit over time.

I would just add to that.

This is.

We've been through a lot of different cycles as a team.

Right now we're seeing.

Yes.

Okay.

Inflationary cycle, where everything's going up the cost of beef logistics energy everything.

But we feel confident in our ability to navigate and grow our revenue grow our profitability.

This team has seen a lot of different cycles. So so we're really confident as Scott said it may take some time to see those mitigating actions.

Impact the financials in a positive way, but actions are already underway and we've already executed a few.

Got it thanks, so much guys.

And your next question.

Your next question is from the line of Mike Harrison with Seaport Research.

Good morning, Mike.

Hi, good morning, everyone.

It looks like you guys saw record revenue in the pads and electronic chemicals businesses are you feeling better about the momentum that youre seeing in those businesses I know you mentioned in the prepared remarks that you.

<unk> had a consumable sets win from a memory customer did you have some similar wins in electronic chemicals that you believe are sustainable.

Yes, Thanks, Mike.

From the pads perspective, we feel like this quarter's result, which was a record for US is kind of just this narrative that we've been discussing for several quarters, where we've been.

Achieving wins, and then having them ramp up over time and so we're really excited about the growth trajectory of pads. It was a record quarter for us and.

We're seeing broad based interest in demand this quarter I think what we saw is some of that the wins that we've talked about in the previous few quarters ramping up and we expect them to continue ramping up ahead, you mentioned the consumable set that's something also that we're very excited about we think we're unique in our ability to.

Provide a slurry and pad together that are optimized that we wanted to callout that memory win just because it was our ability to tune the pad and slurry together to solve a technical.

Challenge for that customer and so we feel really good about that capability and we expect to see more of those types of wins ahead. So so really.

Writing time in pads EC also was a record this quarter and I think thats a combination 1 there were some new business wins, there but also.

We've talked about that business as being a little bit more transient and what we saw this quarter was just very strong demand. Obviously, we we predominantly operate in U S and Europe, and we've seen really strong demand from those customers.

For our products and the other thing that we mentioned is we're actually investing back into the business. So our customers have asked us to invest ahead of their demand and obviously theres been a lot of announced capacity additions by our customers. So we're excited to invest back into the business we're investing in our.

Our largest EC.

Plant in North America to increase capacity, but also to improve our quality and to just to further differentiate ourselves. So.

In both product areas really strong performance and we feel good about the growth trajectory.

Sure.

Can you talk a little bit about what the ITC patent infringement decision.

Means you guys issued a press release from that but Didnt really talk much about how much revenue might be affected by those specific products.

And beyond that.

The patent infringement.

Case or that situations that a signal that youre going to be.

Pretty vigorous in defending your IP.

2.

Yes. Thanks.

Yes, it's significant and obviously, we're still in active litigation. So we can't share a lot of details at the moment, but we're definitely encouraged.

I'd say, we're working with our customers globally to transition them in a way that minimizes the disruption on their operations, which is obviously.

Obviously the stakes are high so we feel confident that we have the products and capacity to support their transitions.

But obviously, it's an ongoing active litigation.

Just say to your second comment we have.

Always invested a lot in technology and innovation.

And when we feel that others have misappropriated.

We have to defend right. That's just because of how important our technology is to our growth.

And in this case, we feel very confident that.

That we will win the case on the merits.

And also our intellectual property.

Alright, and then last question from me you referenced some underutilized manufacturing cost and the DRA business. Obviously, you guys built out some capacity.

We're still in recovery mode in that business, where there is some costs that kicked in during Q3 that were not in prior quarters and I wanted to maybe try to ask the question again about what EBITDA margin it looks like in the performance materials business as.

We try to model.

That business without the wood contribution if I do a little bit of back of the envelope math for this quarter I come up with something like 38% EBITDA margin versus the 44% you reported including the wood business.

Is that in the right ballpark as we think about trying to model the future without wood.

Yes, I would say generally yes, Mike and so.

I think your math the way Youre thinking about it is the right way to think about it and just maybe referenced with a couple of data points for everybody sequentially. Our revenue our EBITDA as a percentage of revenue increased from about 40% of <unk> 44. This quarter, we had strong revenue growth in each of the businesses and that was despite the.

Higher raw material cost that we that we experienced versus prior year, we were down because of those additional expenses and we've been pretty clear we were building. The plant we were nearly complete with the plant last March.

When the pandemic in particular hit our shores and so we said at the time, we were investing ahead of what we continue to believe is going to be a strong overall demand environment, we couldnt see around the corner to the pandemic and so we have a plant that's underutilized today and that impacts the cost structure, but we continue to be.

Very optimistic about this business is highly profitable we grew.

That business in the double digits this quarter sequentially and this was the first time in over a year that we have actually done that and even at that period.

We've had for the last 6 months, which we for the last 12 months, which we've been talking has been stable that we were in the mid 'twenty 'twenty 4 'twenty 5 ish type of percentage.

Type of dollars per quarter that was higher than any period of time prior to us owning that business. So we're pleased with how we've grown that business. We're pleased with how we're offer had continue to operate it recognizing that we have an underutilized facility right now and the lower demand environment demand.

Up this quarter after the period of stabilization. So we continue to be very optimistic about that business and it continues to be among the most highly profitable of all of our businesses going forward, but I think the way youre thinking about.

Again, we've been pretty I think front foot at about the impact of wood for next year and the $35 million of if you take this year's midpoint and deduct $35 million. That's 1 starting point for next year's earnings, but we said, we're going to offset that because of growth in all of our other businesses, including slurry.

Back to growth.

And some growth in the DRA business. So we continue to excuse me. We continue to believe that we've got the right. The right structure long term for the business and that we're optimistic about growing all of our businesses next year to help offset the wood, but the way youre thinking about that segment and the profitability I think is the.

Right way to think about it.

Alright, thanks for the additional color.

Thanks, Mike.

And your next question is from the line of Josh Silverstein with Wolfe Research.

Good morning, Josh.

Hey, good morning, guys.

You're just going to follow up on the.

The $35 million just to clarify the starting point for next year. I guess, then is $325 million for what your EBITDA Guide would be is the idea that you were able to offset all of that from from growth from the from the other businesses so that.

Fiscal 2022 would kind of look similar to what this year would be.

Yes, yes, so we're going to end this year, our midpoint for what we expect to end. This year is about 360 and were saying despite wood coming out we're expecting around $3.60, or so the same value for next year.

Got it okay. So Josh I would just add onto that that we expect continued really strong growth across the different businesses. So we expect to at least offset that exit of wood from a profitability, obviously that means a pretty healthy growth in revenue, which we've.

Experienced over the last several quarters. This is our third consecutive quarter of record revenue and we see really strong demand in <unk>.

Both <unk> and recovering demand in pm.

Thanks for the clarification there.

And then just curious on Ics I know you have this new segment was the $5 million for material technologies. There was that all Ics and I guess, how were revenues trending for for that into.

And for the fiscal fourth quarter and what are the what would be the expectations for next year.

Yes, so for Ics that is pretty much that whole segment, we're excited about adding them to our portfolio.

They have a really unique technology and obviously it increases our participation in some areas. We haven't participated heavily in the past, which is in the packaging and test area that I would say that the overall addressable market for that business, we put it around 100.

<unk> million dollars, we see a really healthy growth rate of about 20% given the.

Criticality of packaging and so we feel like there's a really strong growth thesis for this business. Obviously, we're just finishing up with integration, but really pleased with the performance.

Okay.

You guys think this could get to 100 million I guess since the ultimate path.

You wanted to get to.

Yes, I would say that if.

If you think about CMP slurry and pads together, we'd say, it's something less than $2 billion. This is obviously a smaller.

Area, we'd say, it's around $100 billion, our ability to capture and ramp opportunities.

But that's sort of the size sizing just in terms of scale.

Okay got it and then just lastly on the Capex for me. This is the second quarter in a row, where you've cut the capex guidance again, what's happening here relative to what you guys were thinking 6 months ago in terms of the budget.

Yes, Josh we intentionally constrained some spending this year given the uneven demand environment initially and now the cost environment that we're experiencing so we're going to continue to be very thoughtful about how we deploy capex while that is still our number 1 priority for how we think about spending our cash.

We averaged about 10 million a quarter through 9 months and you are.

Right to indicate that our expectation is to spend about 20 in this coming quarter. So a step up but off of a small base.

So in addition to us constraining our cost on the cost side. There's also been some constraints on availability of resources as well and implementation of project, but it's important for us to continue to invest in our businesses. We will continue to have the capital light model that once we worked through some of the inflationary items and get them.

Revenue growth the operating leverage can be very compelling but.

We're thoughtful about how to deploy that capital we're able to meet all of our capital deployment priorities today, and we expect to continue to be able to do that so we're pleased with that in terms of dividends and paying down debt and then ultimate also executing M&A when that's available so.

We're just being thoughtful about that and I think next quarter would be a time, where we will communicate a little bit more about future expectations of capex, but for now you're right to identify a little bit of a step up of about $10 million from recent run rate in Q4.

Going forward and we mentioned in our prepared remarks, we are making investments in planning investments just to support our <unk> business and as you know our focus is really to grow that that.

That segment is already over 80% of our business, but we're getting.

We're partnering with our customers a lot of them are increasing their capacity and they have asked us if we can.

<unk> increased our capacity. So we're doing that ahead of demand as Scott mentioned, we're also being disciplined about how we spend and where we deploy but we're excited too to invest back into the business, we see really strong growth prospects ahead.

Alright, thanks, guys.

Thanks, Josh.

And the next question is from the line of Amanda <unk> with Citi.

Good morning.

Hi, good morning.

A follow up question on the China slurry business can you size.

That business I know you mentioned that about 50%.

For a year, but how large is that compared to say your memory business.

Logic and foundry business ex China.

Yes, so if I understand your question Amanda is just trying to get a size of the China market is that right.

Wrapping up our revenues about 35 a quarter.

Yeah, I'd say first you have to distinguish between the domestic and the multinational we've seen strong growth from both.

Scott mentioned, we're running around 35, a quarter $35 million a quarter there so it's a pretty significant.

Geography for us that's split about half and half between domestic and multinational this quarter. What we saw is kind of.

Inventory drawdown by some of the domestic customers.

And all of that business is and then sorry does that sort of across the board that $35 million in China.

Yes, it's predominantly salaries, we have a growing pads business, we've talked about it for several quarters, we have a partnership with a really great local partner there and we're starting to see some of the benefits. We did record a few pad wins, we talked about I think last quarter and we're seeing those pad wins also ramp up so but it's predominantly <unk>.

Sorry, there is some pad business there as well.

And then the other question I have is on the DRA side of the business as we're starting to see.

Pipelines ramp back up with entity consumption ramp back up.

Domestically are you seeing pipeline, using a greater or lesser percentage of DRA.

As expected.

Is this sort of in line with.

Pipeline pre.

Pre pandemic.

Yes, I think Amanda we talked about the incremental sequential revenue growth that we had in the Perm business. This quarter I think what we're seeing is.

Look theres more DRA are more effective when the pipelines are full or more full and we're not quite to that point, yet we all have experienced some level of economic activity, improving but we're not back to kind of the input rates that we had pre pandemic.

The business grew again from the mid Twenty's up closer to $30 million in the quarterly basis and.

I would say that the inputs per usage is.

Still not up to pre pandemic levels when the pipelines if and when the pipelines continue to get more full I would expect those inputs to continue to improve yes, I'd just add on Amanda that 1 of the things that we've been doing since we've owned the business 1 is we.

We have secured some new business wins some of them are pretty significant and we're seeing those ramp up. The other is we're investing back into the technology to improve our current product offerings as well as give us some new products that might allow us to participate in the areas of that segment that we don't.

Currently participate in so we're excited about the innovation, we're bringing the quality supply chain and as Scott mentioned, we're encouraged by the recovery, but not quite back where we were pre pandemic.

Great. Thank you.

Thanks Amanda.

And your next question is from the line of David Silver with CL King.

Hey, David Good morning.

Yeah, Hey, good morning, Thank you.

So I think I had a couple of questions I mean, I think the first 1 I kind of would like to just maybe clarify something.

Regarding the slurry trends slurry sales trends excuse me, but this was a quarter, where your pad business grew nicely sequentially and hit a record level overall.

But the slurry is kind of on a sequential basis.

When in a different direction and I am just wondering how you whether that makes sense to you.

Overall in other words I know with EC.

Certainly a geography difference.

I can imagine there might be.

Logic versus memory differences and whatnot, but maybe can you just square the square the circle here just a little bit why why did you see the order variability in.

On the slurry side, but maybe not on the pet side. Thank you.

Right. So David I think when you think of those 2 products segments.

Yes.

Although they are obviously part of the same process step or participation in both of those segment areas is very different right. We are the clear leader in CMP slurry is we're number 2 in CMP pads, but we're a distant number 2 right. So there's a lot more participation.

<unk> to be had and pads and so you would expect the growth rates to be a bit different what I think we saw as we saw very strong growth kind of mid teens growth from slurry for the last year.

Year over year for the last several quarters part of that was really strong China growth, but also increasing our participation increasing.

Industry utilization and so we took a step back this quarter with some inventory drawdown in China. So we thought we've talked about that specific channel.

Challenge, which we think will will persist through our fiscal fourth quarter. So through September.

And then on the pad side, we're seeing the ramp up of wins so from.

From our perspective, the 2 growth trajectories.

Wouldn't necessarily be correlated.

Yes, and if I, if I may David I think it speaks actually to the power of our portfolio within electronic materials. The fact that <unk> would be down.

A couple of percentage points 3 percentage points sequentially, but the whole segment was up 4%. So.

The growth in pads the growth in EC. We think is a nice supplement to what has typically been the growth engine for the company and Dave mentioned still nearly grew 50% in China. So we're talking about order patterns in China, but we want to keep the perspective of that.

That 50% growth versus prior year and total slurry is even even despite everything we're talking about total <unk> grew 16% versus prior year. So.

Lamented on the sequential basis by the growth in pads in <unk> and I think that speaks to our broad portfolio of consumables sold to the semiconductor industry.

Yes, I just wanted to make sure we're clear on the CMP slurry side.

Although the.

The revenue from that segment declined a bit just because of the China inventory issue overall, we feel really good about how we're doing we're introducing new products. We actually think we've increased our participation through a lot of new wins and so we feel really good about our position.

CMP slurry going forward.

Okay, No that's great. Thanks for all the color.

I wanted to next question would be.

Zooming in are zeroing in on kind of the cost issues that you are facing as a company.

And in particular.

In the press release and in your remarks.

You highlighted cost mitigation.

The other the other side of the coin would be price increases.

Increases or price price movement.

And I know that the contracts are written.

In a particular way.

Kind of locks in a particular price since my understanding on a lot of the consumer growth, but just from a portfolio perspective, so not non an individual customer and individual products, but on a portfolio basis, what type of flexibility might you have to implement.

To implement.

Nice increases to offset some of the raw material and logistics.

Issues that you are currently facing.

Yes, sure David Yes, when we talk about the mitigating factors are the mitigating actions, we're talking about the entire toolbox of what those items would be from pricing against the procurement to other type of.

Utilization activity. So we're talking about all of the above our teams have very good clarity about the contracts that are in place any ability to change price or not depending on that contract and so we have good bit a clearer.

Sure.

Our visibility on that and I think that we provide we have got some flexibility to do that although we recognize the lag and we've already started a number of activities. So it was a.

It was a quarter, where we saw the inflationary items become more pronounced as the as the period went on and we've already taken some pricing actions and.

Its something thats in process underway seeing an impact and it's a high priority for our team and as Dave mentioned, we've got an experienced team that has managed through a number of different types of cycles, and we're confident to to deliver our results versus this type of environment as well.

Okay apologies, if I misinterpreted that.

Term cost mitigation.

Thank you for clarifying that.

Final topic I wanted to ask you about I want I did want to go back to the.

Patent infringement case.

And the Itc's ruling.

And not a lawyer here.

And but I was just wondering.

The ITC still has work to do right beyond their initial determination.

In the event that somewhere down the line a few months or whatnot.

The ITC rules in a particular way and.

The response from the defendant here.

It does not provide you was.

The relief that you had hoped for in other words, if they keep infringing, let's say more dance around.

Anyway, if they don't if they don't abide by.

The ITC ruling completely.

What are the maybe the next steps I mean can the ITC imposed what kind of penalties can the ITC impose what what remedies are there too.

Correct.

Fringing behavior.

By the defendant in that case, thank you, yes. So.

I'm also not an attorney Dave So I'll group, but I'll do my best here I think my understanding is obviously, we're still in active litigation.

We do feel confident that the final decision, we will support the preliminary findings universally in our favor.

So we feel really confident.

When that final determination comes out and assuming it is in our favor, which we feel confident about that would.

<unk> in a pretty immediate issuance of an exclusion order or some type of cease and desist order.

Prohibiting that supplier from providing those products that are infringing or marketing or selling those products. So.

So it's pretty clear and as I mentioned in my comments it's.

It's significant and we're already working with customers to transition.

And your next question is from the line of Chris Capps with loop capital.

Hey, good morning, David Martin.

Thanks, 1 quick follow up on China, and then also 1 bigger topic just on China, you mentioned that you thought some of the downdraft in order patterns was domestic.

I guess producers.

Distribution relationship can you is there any way you can delineate.

Whether they are memory customers or.

Or legacy.

Road.

Logic foundry customers is across the board.

Yes, I mean, we did.

We didn't specify it Chris I would just say.

No the spectrum and landscape in China.

We did kind of characterize it is domestic.

And if you look at the domestic production of chips or production of chips by domestic customers. These days the largest volume it was coming from kind of logic foundry. There are a few domestic memory customers are important customers of ours, but not with any significant.

So perhaps that gives you some directional.

Clarity.

Thanks on that and then maybe maybe I'll just try to.

The proverbial elephant in the room that Hasnt been discussed they've got either in the formal remarks or in the Q&A session.

Look there's there's quite a bit of frustration from shareholders and other constituents and I'm not just talking about the stock being down 10% today in an upmarket them.

You have basically in the semiconductor space do you have an end market stature assets where demand.

<unk>.

Some might say super cycle, and yet there has been.

And your company Theres been a couple of consecutive quarters of disappointing results and.

So there is disappointment I guess not just in the earnings trajectory, but it's reflected in the valuation multiple it's reflected in the lagging stock price performance.

And frankly, there is it seems based on my engagement seems like Theres some institutions that are.

Trying to get their head around whether or not this is merely.

Sort of a transient kind of dynamic or some are expressing concern about if there is something structurally wrong here and so I'm just wondering what your thoughts are about this and what what you might do to address and show our confidence.

1 thing that has come up as the possibility of even though the DRA business isn't necessarily the cause of the 20 million implied cut to fourth quarter guidance.

Some are thinking that jettisoning that businesses might be a pathway to focusing on what many constituents think of as your core business. So just wondering what you and the board are thinking about this.

This elephant in the room. Thanks.

I appreciate the candor, Chris and obviously, we're focused on what we can control we feel like we're executing well I mean, we have grown faster than the segments. We participate in if you look at.

Our growth was almost 15% year over year, we've grown 3 consecutive record revenue quarters, and so we feel like we are in the areas that we can control 1 of which is not share price.

Have continue to grow our participation continue to introduce new innovative products in both segments and so from that standpoint, we think we're executing well obviously Scott has talked at length about the the cost challenges and what we plan to do from a mitigation standpoint.

We feel confident there.

And then finally from a portfolio perspective, you can be confident that the entire board, including myself is always looking at all options about what is the best way to utilize our capital.

And what is the best portfolio for us to to provide and where are we the best owner. So we're looking at we always look at all those options.

And we continue to do so.

Just 1 follow up on that because when this has come up in the past the idea that maybe.

Tray business as attractive as it is.

In terms of structure margins and so forth.

Maybe it's maybe youre not the rightful owner 1 thing you said in the past is that.

Even if we were to consider something strategically with that business that wouldn't be the time, because it was coming through this kind of COVID-19 impacted.

Cyclical downturn, but now at least with the volumes recovering.

Does that remove is that removing impediments or thinking about that more seriously I appreciate it. Thanks.

Yeah, and I think that obviously.

Covered.

This is 1 of the first quarter as we've seen that sort of significant recovery double digit growth. So that's encouraging.

Obviously any significant moves with the portfolio, we wouldn't be able to provide more detail on timing or thoughts behind that but.

Directionally, obviously more positive.

We're excited about the business we've invested back into the business. We think it has a lot of characteristics that are very similar to the consumables business on the electronic materials side.

No doubt it is a really attractive assets.

Whether it's in our portfolio or someone else's. So we're just encourage it and focusing on what we can do to continue to drive growth and performance in that in that segment.

Thanks, Scott Thank you.

Once again, ladies and gentlemen, if you like to ask a question. Please press Star then the number 1 on your telephone keypad.

Again that is star 1.

Next question is from the line of paradox.

Meanwhile, with Marin Barrick.

Good morning, Thank you.

Hey, good morning, everyone.

So just going back to the price increase comments earlier.

A way to offset cost pressures.

So in your electronics business, where do you have the greatest flexibility in terms of pricing adjustment is that much higher than the clarice.

What's the same electronic chemicals, so it's pretty.

Pretty even and also are you now looking at price hikes, and the DRA business as well or not really.

I would say, it's pretty even first within within electronic materials and it depends as we talked about depending on the contractual obligations that we have with our customers certainly the slurry business. There is a higher degree of differentiation and over time, we have shown the ability through our technology.

<unk> and through our continued innovation to be able to continue to expand margins and capture more value there and we expect to continue to be able to do that but.

I wouldn't start to delineate 1 business versus the other in terms of potential impact of these mitigation plans and then.

I think from a DRA perspective, that's of course, something that we're looking very closely at and following the processes that we've discussed here a bit but we recognize that that is a competitive environment as well and so.

More so in some cases so the competition is.

Continues to be significant in that business and so our ability to get price there may be maybe less than what it is in some other businesses, but we're not going to probably get into too. Many other details in terms of comparing the businesses, but I think thats a good way for you to think about it.

Got it fair enough and then just going back to the earlier question on <unk>.

Change in guidance is there maybe you could talk about which of the items were really incremental.

Relative to your earnings view 3 months ago, because it looks like you expected inflation in the performance materials back then so I would think it probably played out as expected maybe.

Even better prepared.

So is that some specific raw materials or is that the China destocking issue.

What's the biggest delta here 3 months ago.

You asked I think.

Relevant point and 1 that we should discuss so our midpoint last time, we met in this environment was was $3.80, and it's now 360. So we'll use the mid points on some round numbers, that's about $20 million of a change and that split roughly half and half.

This lower slurry trajectory so at our mid year, we expected slurry is to continue to grow we expect it to be a little more stable to down slightly sequentially and we've talked about the reasons why and it's directly in the China business that we've talked about and then the other half is the increased costs from.

The inflationary perspective, again inflation became a little more pronounced for us during the during the June during the June quarter as each month evolved and we recognize the impact that thats likely to have on our fourth quarter and the mitigation factors that will have some lagging effect, so think of that delta mid <unk>.

$3.80 to $3.60, roughly split in half between those 2 items and then as we think about if you are also carving that out kind of Q3 versus Q4, I would say about a third of the impact was really from Q3 coming in lower than our expectations and about 2 thirds related to the fourth quarter.

Got it got it thanks, guys. That's all I had.

Thank you very much.

And there are no further questions I will now turn the call back over to Colleen Mumford.

Thank you that is all the questions. We have this morning. Thank you for your time.

The same day material.

This concludes today's conference call. Thank you for participating you may now disconnect.

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David.

Good day.

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