Q3 2019 Earnings Call

Our actions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero on your Touchtone telephone as a reminder, this conference is being recorded I would now like to introduce your host for today's conference call lead Mumford you may begin.

Thank you and good morning.

With me today are David Li President and CEO .

Scott Beamer, Vice President and CFO .

Last night, we reported results for our third quarter of fiscal 2018, which ended June Thirtyth 2018.

Whether you're joining us online or over the phone. We encourage you to review the Investor Slide presentation that Weve made available under the quarterly results section of the Investor relation center on our website Cabot CMP dotcom.

The webcast of today's conference call and a script of this mornings prepared comments will also be available on our website.

Short lead after this conference call.

You may request any of the information by calling our Investor Relations office 630, or nine nine to 6.00.

Please remember that our discussions today.

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.

Our Form 10-Q for the quarter ended March 31st 2019.

In our Form 10-Q for the quarter ended June 32019, which we expect to file my honest Green 2018.

We assume no obligation to update this forward looking information.

Also our remarks this morning reference certain non-GAAP financial measures, including adjusted pro forma results.

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

We also provided supplemental show form information in this release, which compares current results and the Cabot microelectronics onto KMG chemicals during the comparable period last year.

Additionally, eat every flex rounded value throughout this discussion and the accompanying slide presentation.

I will now turn the call over to me.

Thanks, Colleen last night, we announced results for our third quarter of fiscal 2019.

We set another record for revenue achieving $272 million this quarter, which is up 2% sequentially and in line with our previously provided guidance.

We believe our results this quarter demonstrate our continued strong execution.

As well as the benefits of having a broader portfolio of solutions that enable performance in multiple industries with greater worldwide geographic balance.

Following our successful acquisition of KMG last year.

On a segment level and as expected revenue and electronic materials was essentially flat sequentially.

Within the backdrop of an ongoing soft semiconductor industry environment.

We believe these results are reflective of the resilience of our business.

As well as the breadth of our product offerings as we saw increased demand from advanced logic customers.

As well as stabilization in the foundry segment, which helped balance weakness from memory customers.

Revenue in performance materials was a record and increased significantly sequentially, primarily driven by our pipeline performance business with higher demand for our drag reducing agents for D.R. race, which enable pipeline operators to optimize optimize the efficiency and throughput of oil transport and both U.S.

And international oil production.

As we have discussed we continue to see a bright future and strong growth potential for our performance materials segment, driven by our critical solutions that enable performance for pipeline operations and energy industries.

Total adjusted pro forma EBITDA was $86 million or 31.5% of sales consistent with the guidance. We provided during our recent investor day.

This is $6 million higher compared with the adjusted pro forma EBITDA in the prior year.

This continues our track record of delivering best in class profitability for specialty materials companies and as we've discussed previously we have the expectation to further expand profitability in the future.

Now, let me turn to additional specifics on our results and some thoughts on industry outlook by segments.

Starting with electronic materials. Despite continued semiconductor industry uncertainty in the near term we have seen signs of stabilization in demand for memory customers and expect recovery to continue over the next several quarters as channel inventories are reduced and demand from multiple end markets improves.

CMP pads in electronic chemicals showed growth over the same quarter last year.

Lower CMP slurries revenue due to the softer industry conditions, especially in the memory sector led to electronic materials pro forma revenue decreasing 5% compared to the same quarter last year as previously discussed our CMP slurries have a high participation in memory and were adversely impacted by DRAM and NAND production cuts at our customers this year.

And logic applications that transition to advanced nodes by many of our top customers is driving increased demand for materials, particularly electronic chemicals, we remain optimistic about the long term opportunities. This creates for our company as increasing device complexity should translate into additional manufacturing steps and higher demand for our broad portfolio of products.

Lastly in the foundry segment. We also expect continued stabilization in demand as customers migrate to advanced technology nodes, where we are well positioned with our next generation CMP slurry and pad solutions.

Turning to performance materials on a pro forma basis, we had another record quarter. The robust growth. We continue to see in demand for our D.R.A.S drove an 18% increase in revenue year over year, and a 14% increase sequentially, which exceeded our expectations and continues to demonstrate a key aspect of our investment thesis for acquisition of KMG.

Similar to our investment in the CMP space over the years, we're prepared to make investments in our pipeline business to increase capacity and to improve the quality and technology of our offerings as we continue to further differentiate ourselves from other providers.

Finally as to our ongoing integration of KMG. We are now almost nine months post the close of the acquisition and we continue to be pleased by our progress.

Customer and employee reaction continues to be very positive and we are delighted with the growth and health of the acquired businesses as Scott will discuss we have now taken actions to achieve almost our entire announced synergy target of $25 million, which is ahead of schedule.

Overall, we are proud of the results we delivered in the quarter, which we believe demonstrate the resiliency of our core CMP business as well as the strength of our acquired KMG businesses.

Looking forward, we believe we are well positioned to deliver another strong quarter of results to finish our fiscal year.

From our perspective, our future growth prospects remain bright, which along with our expectation for continued best in class profitability position us as the premier specialty materials provider globally.

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

Thanks, Dave and Hello, everyone.

My comments will generally follow the related slide presentation, we posted on our website last night, along with our press release.

We are presenting the results in both reported and as adjusted on a pro forma basis pro forma results are presented following SCC guidelines and are shown as if we had owned KMG from the beginning of fiscal 2018.

We of course always give greater prominence to reported GAAP results, but will refer to adjusted pro forma figures in order to provide meaningful comparisons.

You can find a summary of adjustments in the press release and on slides 11, and 12 of the slide presentation.

Revenue for the third quarter of fiscal 2019 was $272 million, which is a record for our company and $121 million or 81% higher than reported revenue in the same quarter last year.

Pro forma revenue was essentially flat year over year as growth in CMP pads electronic chemicals, and DRA is was offset by lower CMP slurries volumes.

Our reported net income was $19 million and diluted EPS was 64 cents in the quarter.

Adjusted Pro forma net income was $47 million, which was essentially flat.

Compared with the adjusted pro forma net income in the third quarter last year.

Adjusted pro forma EPS was $1.59, which was two cents higher than last year.

Adjusted pro forma EBITDA was $86 million or 31.5% of revenue.

In line with expectations provided at our Investor day, and 210 basis points higher than last year.

Now please refer to slide four which provide some higher level PML comparisons for both reported and adjusted pro forma results.

Our reported gross margin was 42.4% this quarter compared to 53.6% reported in the same quarter last year.

When comparing to the prior year on a pro forma basis I'd like to remind everyone that this year's metric is negatively impacted by a reclass of distribution expenses related to the KMG acquisition, which moved from operating expenses into cost of goods sold.

On an adjusted pro forma basis gross margin was 40, 45.3%, which was essentially flat compared to 45.4% in the same quarter last year.

This quarter's adjustments include a $3.5 million or amortization on acquired production related assets from the KMG acquisition, and a 4.2 million dollar impact from a warehouse fire and result, having cleanup activities at our Tuscaloosa wood treatment facility.

As described at the time of the incident Fortunately no one was injured.

The fire, which affected only the warehouse was extinguished quickly and production remained on target.

Also we had some amortization and acquisition related charges impacting our operating expenses in the quarter.

Excluding these charges pro forma operating expenses declined approximately $7 million year over year.

Synergies reduced opex by approximately 4 million and the remainder was mostly due to a lower accrual for performance based compensation.

Our adjusted pro forma net income was $47 million was essentially flat compared to last year as improvement in operating expenses was offset by higher taxes.

Our adjusted pro forma EBITDA was $86 million or 31.5% of revenue and $6 million higher than the comparable metric in the prior year.

This improvement was driven primarily by lower selling and general administrative expenses, which demonstrates our continued cost discipline, particularly during a softer semiconductor demand environment.

You may recall that we previously mentioned that 31% as a reasonable near term expectation for adjusted EBITDA as a percent of sales.

This is lower than the 32.2% EBITDA margin reported in the second fiscal quarter, primarily due to lower slurries volumes.

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

Electronic materials, which contributed 78% of our quarterly revenue reported a $10 million or approximately 5% decline year over year.

CMP Slurries revenue declined 12% year over year as strong demand from advanced logic customers was offset by weakness in memory and foundry.

CMP pads reported a 12% increase in revenues from last year due to continued customer adoption of our Nexplanar product line.

Our electronic chemicals revenue grew 2% on a pro forma basis versus the same period last year driven by our customers continued transition to advanced technology nodes.

Moving to performance materials pro forma revenue increased $10 million or 18%.

Over the prior year to a record level in the quarter.

As mentioned this increase was driven primarily by strong demand for D.R. A's from both domestic and international markets.

Slide six shows revenue and adjusted EBITDA by segment.

Electronic materials delivered $71 million of EBITDA, which was 33% of segment revenue while performance materials EBITDA was $27 million, which was 46% of segment revenue.

Now please refer to slide seven which provides some balance sheet and cash flow highlights.

We ended the quarter with a $169 million of cash on hand.

We prepaid $55 million of debt in April , which reduced our total debt to 944 million at the end of the quarter.

Year to date, we prepaid $100 million of our debt and remain on track to reach our goal of two times net debt to EBITDA by the end of fiscal 2020.

On a year to date basis, we generated cash flow from operations of $117 million and our capital expenditures were $33 million as a result, our free cash flow was $84 million.

Overall, we're very pleased with the strong cash flow generation ability.

We intend to continue to be prudent stewards of the significant cash we generate.

In particular, our stated capital deployment priorities remain investing in our existing businesses to support organic growth.

Paying ongoing and increasing dividends over time.

De leveraging and executing M&A and finally repurchasing shares.

I will now provide some closing remarks on slide eight.

From a financial perspective, we are encouraged to see continued strength in our newly acquired businesses as well as the resilience of our heritage businesses.

Despite a challenging semiconductor industry operating environment adjusted pro forma gross margin and net income was essentially flat compared to last year and EBITDA grew.

Benefiting from synergies and continued overall control of operating expenses.

Specifically, we delivered $4 million of synergies to Opex in the third quarter fiscal PNM and have implemented actions that should contribute to $24 million and synergies on a run rate basis.

We're pleased with our progress to achieve nearly 25 million in run rate synergies ahead of our previously communicated schedule.

As we have done over time, we'll continue to look for additional opportunities to drive improvements in operating expenses for the company.

Accretion from the KMG acquisition added approximately 49 cents to EPS this quarter.

And approximately a one dollar per share since the acquisition closed.

We delivered on accretion ahead of our original schedule are ahead of our original expectations and are delivering synergies faster than originally planned.

We continue to be delighted with our growth prospects as well as the earnings and cash flow power of the combined company.

On slide nine we provide some forward looking expectations.

For the fourth quarter of fiscal 2019, we currently expect total company revenue to be approximately flat compared to our third fiscal quarter as semiconductor industry continues to stabilize.

Electronic materials and performance materials revenue is expected to be approximately flat sequentially.

Consistent with Dave's comments, we're expecting further stabilization in our electronic materials revenue in the fourth quarter, but the timing of the semiconductor industry recovery remains uncertain.

In performance materials, we're forecasting continued strong growth in DRA pace. However for the fourth quarter, there may be some timing impacts.

For orders from businesses other businesses within the segment.

With one quarter remaining in our fiscal year, we are narrowing our full year guidance. We now expect full year adjusted EBITDA to be in the range of $325 million to $335 million compared to the prior estimated range of 325 to 345.

We currently expect our full year interest expense to be between 45, and 46 million with approximately 13 million expected in the fourth quarter.

Depreciation and amortization is now expected to be between 35, and $40 million, which excludes approximately $60 million in acquisition related amortization.

Our current capital spending expectation for the full fiscal year is between 55 and $60 million as we expect to initiate some organic growth projects in the fourth quarter.

We now are we expect our effective tax rate for the full fiscal year to be in the range of 24% to 25%.

As we step back our third quarter fiscal results confirm the following themes.

The resiliency of our CMC heritage businesses.

The strength of our acquired businesses.

Our continued focus on managing cost and ultimately the cash generating power of the combined company along with appropriate capital deployment execution.

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

Ladies and gentlemen at this time if you have a question. Please press. The Star then the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key to prevent any background noise. We ask that you. Please place your line on mute. Once your question has been stated.

And our first question is from Toshiya Hari from Goldman Sachs. Your line is now open.

Good morning.

Hey, good morning. Thanks, Thanks, so much for taking the questions and.

Congrats on solid results.

Dave I was hoping you could talk a little bit about.

Little bit more about.

As seen in the memory space.

Clearly from a from a cyclical standpoint.

Third there are headwinds just from a demand standpoint, given how much inventory. They are in the system, but at the same time you did speak to I think signs of stabilization. So I guess, what did you see in the quarter.

And then what sort of the near term outlook. When you think about your memory, primarily slurry business, then I have a follow up.

Yeah. Thanks, this year and obviously, we've seen many different cycles of the industry. This is not.

Kind of been the epic downturn like we saw in 2008 2009, it's been more moderate but it has lingered and I think some of the macro issues like either us China, South Korea, Japan have.

Have kind of muted maybe the strength and speed of the recovery. So what we've seen in the memory area is the dynamics seem to be improving.

We follow the same things that you do whether it's.

Microns recent announcement or Samsung or high mix things haven't recovered yet, but there are some signs of stabilization. So some things I'd point to our DRAM pricing has stabilized some of the inventory has worked been worked down.

There was actually a production.

In terms of Toshiba had some production downtime this quarter that may have in the mid term actually helped to the channel inventories be worked down a bit. So we see that kind of dynamics of the memory sector, improving and of course, that's a it's a we strongly participate in that area. The market. We see are the other areas of the industry.

A little farther ahead in terms of recovery advanced logic and foundry.

Great and then my follow up I had a question on your CMP pad business.

Your business grew year over year I suspect the market was down year over year given.

Given the challenges.

And the industries. So I guess the question is.

In which applications do you continue to gain share and the CMP pad business and if you can remind us what sort of the.

Medium term market your aspirations are for Cabot.

Thank you, yes, so for pads, it's a really exciting business for us that along with DRA is are really going to be.

Two of the primary growth engines for the company and we see it really wide open in terms of the pad area because.

Obviously, we're number two in the in the industry, but we're far away from the number one are the incumbent and so we have opportunities that we are advancing in just about every segment, whether it's memory foundry or logic and we're really pleased with what customers are in terms of feedback we're getting from customers. So we see pretty broad adoption.

I think though it would be fair to say that it's relatively similar to our slurry participations, so strong and foundry strong in memory.

I think we're really pleased with the progress and the pipeline that we see so far we've talked about we don't talk about the specifics but were around we achieved that 100 million run rate several quarters ago. We estimate the total market to be about $800 million. So thats gives you a rough estimate of where we are from a share perspective.

Thank you.

Thank you.

And our next question is from Dimitri Silverstein from Buckingham Research. Your line is now open.

Hi, good morning.

Hi, guys.

Good thank you for taking the call and.

Congrats on a good quarter.

Are you going to I mean, I know you have guided for it but I mean, if you as we think about it sort of I think is there a little bit of a surprise that your electronic chemicals business is outperforming your slurry business.

Given that the general perception as that slows a little bit more defensible market lets say that then then electronic chemicals or is it just strictly a question about you being over concentrated in the areas that are going through the worst of the of the inventory correction.

Yes, Dimitri Thanks for your question and I think overall, what we'd say is we're proud of the execution and resiliency of the overall electronic materials business during a pretty soft industry environment for electronic chemicals in particular were more concentrated in North America, and Europe , and obviously you can see where those customers are a lot of the advanced logic and logic customers. They're a little further ahead in terms of recovery. So it's not surprising that we saw better performance relatively speaking from a slurry standpoint, perhaps were a little farther.

Not not as not as.

In terms of recovery as fast as electronic chemicals, that's obviously, because we're heavily participating the memory side. So I think it's really where we're participating rather than any of the dynamics within the segment.

Okay favorite thanks for that.

And then.

Just as a follow up you mentioned that part of your lower has Jeanette expense was lower accruals for for bonuses.

I mean, you guys did an acquisition the starts doing while the company is delivering on its goals. So why are you lowering your accruals.

We tend to said pretty.

Aggressive in challenging yet appropriate targets for ourselves Dimitri in terms of our.

Compensation program and.

At this point the lower accrual would indicate that we are tracking behind what we had said internally. We appreciate the support of a true, but you know as as Scott mentioned, our expectation we've been very public about it is to grow faster than the market.

This has been a kind of a dynamic year site that I do think we are outperforming if you look at our results versus for example, the few peers that we have I do think we're outperforming them, but in terms of as Scott mentioned, we set some pretty aggressive and ambitious goals for ourselves internally.

Okay, well, that's good to hear but thanks for clarifying that that's all the questions I have thank you.

Thank you for metering.

Thank you and our next question is from Mike Harrison from Seaport Global Securities. Your line is now open.

Good morning, Mike.

Hi, good morning.

Just to kind of.

Ron Delta last question, just wondering is the lower incentive comp accrual continuing into Q4, and then how do we think about incentive comp.

On kind of a year on year basis, as we think about.

2020.

Yes, Mike, Yes, we would.

The the continuing trend at the end of every quarter you look at where you expect to be for the full year. So what we adjusted in Q3 is also baked into our forecast for Q4.

And thats it thats within the the metrics that we put out there.

We are pleased with the fact that again, we've talked about the synergies you see the pro forma opex numbers in the tables in the back of the press release, and we will you see that opex come down $7 million. The biggest pieces synergies. So there is this accrual piece and when you think about next year.

That would be a potential headwind.

If we get back on track to achieving those aggressive targets that we set then there could be some additional costs coming.

As a as a headwind to next year I think would answer your question as you're thinking about halfway 19 into 20.

All right, that's what I say thank you.

Just wondering you mentioned the.

Reduction in Slurries sale sales, it's something that's impacting your margin and keeping the EBITDA margin a little bit lower than where you were in the first half should we think about CMP slurries is having some differences in margin between what you are selling into the memory market and what you are selling into foundry or advanced logic. Just wondering if those applications are pretty similar in terms of margin or the memory weaknesses accentuating.

The margin impact.

Yes, Mike I'd say that we sell a variety of different solutions, both slurries and pads across the different segments.

If you think about how a memory chip is made today, whether its NAND or DRAM there are.

Fewer layers and advanced logic or chip Thats being made a foundry and but most of those layers are die electric and tungsten or very strong.

But we still also sell those similar slurries to the foundry and logic segment. So I wouldn't say, there's a huge difference.

In profitability across those segments, perhaps there is a bit more tungsten concentration in the memory side.

And of course, that's of course, where we're very strong so.

Got it and then a couple of quick ones on performance materials first of all the wood treatment facility, where where you had a fire.

Should we expect that to have any operational impact on next quarter were fiscal 20.

And if it does will that be adjusted out or is there some impacts that could be.

Kind of absorbed by the business.

Yeah, Mike we will.

If there are additional impact either positive or negative we would adjust those out when we move to discussing the adjusted pro forma results with all of you.

The heavy lifting is really behind US there are some additional analysis left that we have to assess.

Any dan any damage to.

What did but additional disposal cost would be so again as we think about the fire impacted a very small small warehouse. It was contained and extinguished I think within less than an hour.

It was immediately we began the remediation aspects in our production was not impacted so it was a it was an event we've accrued for that this quarter.

And Weve you know.

We've talked about that just the cleanup cost aspects of this and we're going to make sure that were.

The better stewards of of the.

Of all of the aspects of this but we continue to be very excited about this business as well we understand what happened we've taken the remediation week.

And there is a possibility not only for additional cost even though we said the heavy lifting is behind us as additional analysis is less so there is an opportunity for some additional cost, perhaps and that would be likely next quarter not beyond.

But I also want to say that we're working with our insurance partners to pursue possible benefits here as well. So typically how these things work is you're incurring costs, you're spending fees and then you have to work with your insurance partners and there is a possibility of working with them to have something of a more positive outcome. So it could be a cost and or a benefit to next quarter either way, we would adjust it out.

All right understood and then in the press release, you mentioned some impacts from the Q E D business in performance materials sounds like maybe some timing helped you.

In the third quarter and hurts you when it's going to hurt in the fourth quarter can you provide a little bit of color on what's going on there.

Yes for sure and actually I think it would be helpful to dimensionalize. This a bit so as we think about the performance materials segment.

It was 60 million the record result for the quarter and a strong quarter up from 50 than the previous quarter about two thirds of the segment is drag reducing agents in our valves lubricants business. So if you take two thirds on that 60, that's 40 million and we expect that to continue to grow.

Okay, and we said I think in my prepared comments I said, we expect some strong growth, let's call that high single digits you take some math on that 40 million for next quarter, you're at a growth rate of three $4 million. So that says well if youre approximately flat, there's something negative in the range of $234 million in the other businesses and that's the that's the order of magnitude and yes Q2. We de was had had a good theres a little more lumpiness of that business is as you know Mike QVC had a had a good quarter there was a little bit of a shift in.

Into the business into our results for Q3 and.

Q4, we see that business being down slightly and woods flat to down slightly just some directional sort of context.

Alright appreciate that thanks very much.

Yes, hi, Thanks, Mike.

Thank you and our next question is from Chris Kapsch from <unk> capital markets. Your line is now open.

Good morning, Craig.

Yes, good morning.

Two question on the pad business and.

In several quarters really outsized growth and I think it's a function of success there with.

Option NPR wins with.

Nexplanar so.

Based on the visibility and your PR wins, just any way you can characterize the anticipated sustainability of that growth rate as we look over sort of a.

Fiscal 2000, and your calendar 2000 time horizon.

Yeah, Chris we Havent dimensionalize the growth for pads other than to say that it is a key growth driver for our business and.

Earlier, I mentioned sort of our position. If you just went on a run rate basis from a couple of quarters go were around $100 million a year.

There is a lot of runway for us to grow either both with existing customers. I think we've made comments earlier that we're selling to just about all of the top semi producers so growth within those existing customers as well as new customer adoption and we're just really scratching the surface in terms of the potential and with the addition of the KMG electronic chemicals business I think we've got a broad portfolio of solutions that we're bringing to our customers. Their response has been very positive so putting that package altogether. We've just really started with those efforts. So long long answer, but we havent, we see a lot of promising continued growth for pads and we see it as a sustained long term growth driver for our company.

David just to follow up on that or the the bulk of the revenue and the growth and the pads as it is attending to be more for.

Advance nodes, new applications or or is wins that sort of legacy nodes also contributing to the growth there.

Yes, we have we see both so the.

In terms of customer reception has been very good of course for us.

We tend to them. The most open qualifications are with the new nodes, but if you can.

Secure a legacy technology or displacement you see a much more significant in faster ramp. So we have efforts in both areas and the pipeline is pretty full.

Okay, and then if I could just follow up on the discussion I think in answer to Mikes question about.

The margin trends a function of.

Your slurry business being down almost 12% year over year.

And since that was more a function of weakness in the memory end market.

I can infer that.

Tungsten sales were weaker is that accurate and in any way to dimensionalize the drag on the margin from that.

And then one follow up on on how that May play out looking forward.

Yes, maybe I'll start and Scott can chime in I would say in general Slurries that we've commented our kind of above company gross margin today.

That drag on memory, certainly would have an effect on for example, tungsten.

But again, we feel like this is a.

You know a temporary dynamic Chris and when that when the market recovers the growth thesis for memory is still very much intact. So.

In terms of I'm not sure how to best Dimensionalize, It, but I would just point out even at our 31.5%.

Adjusted EBITDA I'd say Thats really we're really proud of that performance in terms of profitability I'm not sure. If there's another company out there with similar profitability as that and we've demonstrated that over a long period, Scott and I'd like to add I think the overall theme Chris as you know we have shown over time, both from a CMC heritage Anna KMG perspective, both.

Historically have improved margins over time and the overall theme within the slurry is were always working to innovate at the next node and deliver the next solution to the customer.

Across all of memory foundry and logic, so it's more difficult to pin one area of of mix or greater margin across any of those were working to improve margin across all of the above yes, I just I guess I would just add teresina youre at our Investor day, and we talked about our longer term expectations for expanding profitability say, we're in that 32% ZIP code today getting up to 35 or even more and Thats exactly what Scott said, we have a great performance materials business, which is very profitable and in the electronic materials.

We have really worked hard to innovate new solutions in every area. So it's not just tungsten that's very profitable die electrics, we've improved the profitability there.

Some of our advanced gate.

Solutions are also very critical for our customers and we're working hard to innovate there. So it's really.

Again, it's not a huge distinction between the different segments.

Got it and then one last follow up there just as you anticipate at some point the memory demand will recover.

And when that happens, presumably it's going to be more pronounced.

With chips with architectures of.

More or less 64, more 96, 128 or more players and I'm just curious about.

Your your content sort of come to mobile content per wafer or your your competitive position your PEO or wins on those advanced architectures visit.

As good or better than where you are with the sort of the current.

Advanced node call it 64 layer Threed NAND.

Yes, I'd say, we're pleased with our positions at the advanced memory.

Nodes.

What we've seen when we talked a lot about it beat the transition between two to three d. that was sort of more exponential step change from CMP consumable usage as you get from 60 to 90, it's more incremental but I would say, we're really pleased with our positions in those advanced technologies and working closely with our customers.

Okay. Thanks.

Thanks, Greg.

Thank you as a reminder, ladies and gentlemen, if you have a question. Please press. The Star then the number one key on your Touchtone telephone and our next question is from David Silver from C.L. King. Your line is now open.

Good morning Dana.

Yeah, Hey, thanks, So I'm going to apologize in advance I had to step out for a couple of minutes.

So apologies if it make you repeat yourself.

I noticed during the prepared remarks, there were a number of references to advanced logic and I just want to clarify.

That I'm understanding it but I was assuming that you're referring to the.

The new startup of key chips by a couple of two of the big three.

Chip makers.

That are more visible or alternatively I was wondering if.

It relates to company specific demand may be for a more customized chip or a more customized.

Customer project.

So so just the nature of that euphemism advanced logic. Thank you.

Yes, David So advanced logic is that that segment of customers that are producing high end.

Logic chips Intel would be an example, they're very big customer of ours as opposed to sort of more legacy logic, which are also really important customers of ours, but those would be those folks producing for like automotive and things like that lot of concentration in Europe . So that's just segmentation that weve used and I think the interesting part about following.

A company or a customer that's producing advanced logic as as they progress to new nodes like they're they're ramping up seven for example, we see additional intensity for Slurries pads and also electronic chemicals. So there is that benefit for us for more intensity of material usage as they as they ramp new nodes.

Okay, so you're indicating that this next generation.

Of the next node or technology transition in your participating to an incrementally greater extent.

Yes, and then the same dynamic actually holds.

Really across the board, but.

Most similar compare tours also foundry there are also producing logic chips as well. They are just producer him on behalf of someone else, but same dynamic holds there they're ramping up seven or in some cases, even beyond that and there's more layers. There's more sophisticated solutions that are required and so all of that should be a tailwind for a company like the us that's almost completely materials based and based on wafer starts. So that's something that we watch and of course work with our customers closely on.

Okay. No. Thank you for that and then just a couple of clarifications I guess from Scott If you wouldn't mind.

Again, I had a step outs I apologize but.

The.

For the full year EBITDA guidance of 325 to 335, I just want to make sure I have the right starting point, but I'm.

Assuming.

June core June to date.

I should be thinking about the 248 number in the EBITDA reconciliation, yes is that the correct starting point, okay. Thanks for that and.

Yep.

I phone, maybe help clarify some of this here, Dave because it's a really important point actually so you have your 248 through nine months and Weve given the approximately flat revenue from Q3 into Q4, and we have reminded about 31% EBITDA being an upfront price an appropriate near term expectation for our company. So if you're doing that math and following that logic, if you're getting to a EBITDA for the full year results that's closer to the upper end of our range right now the 325 to 335, if you're doing all that math and logic and getting closer to the upper end of the range I would not disagree with that logic and in fact that that would be closer to the midpoint, which we had as our previous expectation when the range was 325 to 345.

There you go thanks.

Thanks, a lot I was just trying to.

Reconcile that led Tonight, and then last question.

Capex of 55 to 60 and.

I'm, assuming about half of that is sustaining.

Capex and the other half is discretionary spending so can you just remind me on the discretionary half.

Where where that portion of your.

Capex budget has been directed thank you, yes, yes for sure David I know, we were all in the room together recently and I think there was a number I think that we broke a record in terms of the number of questions about the ramp up of Capex. So it was a there was a robust discussion just to remind everybody. The run rate of the two companies individually. If you run rate those and add those together is closer to 50 million. When we were together at Investor Day, We said Hey, the next two years of 20 and 21, we expect the ramp up closer to about about 100 million on a run rate basis, and essentially that ramp up is to support the growth that we also articulated as part of that day, when we think about electronic materials growing 5% to 7% performance materials, we expect to grow eight to 10 seer at the total company growing 6% to 8% on average indicative.

Really over a five year period, it's going to take some that's going to take some growth investment because fundamentally we provide critical enabling materials to our customers. So you got to make sure that your continue to be best in class supplier and Youre supplying those on time in full and and we have also mentioned in terms of the caught about half of the spending will go to electronic materials and a little bit less than half will go to performance materials performance materials today, 20% of the company so performance materials getting little bit more than their normal per portion of capex. That's because of the growth aspects are higher in terms of our projections and the profitability is higher and when we think about Q4, you look at we've done 33, so far to get to the midpoint of our range. We're going to have to all we're going to have to ramp that up in the neighborhood of low twentys.

In terms of spending in Q4 that ramp up in Q4 is really the beginning of that step up for nine are up for our fiscal 20 and 21 moving from that 50 to 100. So I think it ties together in terms of if were moving from 50 to 100 for two years, we're going to have a ramp up in Q4, and we have projects that are underway that that support that and but it's essentially to fund growth in our businesses.

The the maintenance Capex typically has been in that range of lower than 50 million I would say I would call all of the incremental capex that we're projecting in Q4 I would call all that to be growth projects with return on capital in excess of our weighted average cost of capital.

Thanks for that I remember the discussion.

During the Investor day, very well, but in my defense I was kind of drinking from a fire hose that so.

No. Thank for thank you.

Thank you for going through that.

Now it's important so im glad we I'm glad we could do that.

Very good thanks for the insight.

Thanks, David.

Thank you at this time I am showing no further questions I would like to turn the call back over to Colleen for closing remarks.

Thank you.

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

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program you may now disconnect.