Cabot Microelectronics' Management Discusses Q1 2014 Results - Earnings Call Transcript

| About: Cabot Microelectronics (CCMP)

Cabot Microelectronics Corporation (NASDAQ:CCMP)

Q1 2014 Earnings Conference Call

January 23, 2014 10:00 AM ET

Executives

Trisha Tuntland - Manager of IR

Bill Noglows - Chairman and CEO

Bill Johnson - EVP and CFO

Analysts

Avinash Kant - D. A. Davidson & Company

Edwin Mok - Needham & Company

Jason Ursaner - CJ Securities

Dmitry Silversteyn - Longbow Research

Jairam Nathan - Sidoti & Company, LLC

Chris Kapsch - Topeka Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to First Quarter 2014 Cabot Microelectronics' earnings conference call, my name is Britney and I will the operator for today’s conference. At this time all participants are in a listen only mode, later we will conduct a question and answer session. (Operator Instructions) at this time I would now like to turn the presentation over to your host for today Manager of Investor Relations, Ms. Trisha Tuntland. Please proceed ma’am.

Trisha Tuntland

Good morning. With me today are Bill Noglows, Chairman and CEO; and Bill Johnson, Executive Vice President and CFO. This morning, we reported results for our first quarter of fiscal year 2014, which ended December 31st. A copy of our earnings release is available in the Investor Relations section of our website, cabotcmp.com or by calling our Investor Relations office at 630-499-2600. A webcast of today's conference call and a script of this morning's formal comments will also be available on our website.

Please remember that our discussions today may include forward-looking statements that involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from these forward-looking statements. These risk factors are discussed in our SEC filings, including our report filed on Form 10-K for the fiscal year ended September 30, 2013. We assume no obligation to update any of this forward-looking information.

I will now turn the call over to Bill Noglows.

Bill Noglows

Thanks, Trisha. Good morning, everyone, and thanks for joining us. This morning we announced solid financial results for our first fiscal quarter of 2014. Our results reflect soft industry conditions including traditional seasonal weakness that we referenced last October when we reported results for our previous fiscal quarter. Even within this environment, however, our gross margins improved on lower revenue when compared to the same quarter last year and when combined with lower operating cost help to mitigate the impact of soft demand conditions on our earnings.

During the quarter we achieved revenue of $100.5 million, gross profit margin of 47.5% of revenue a 50 basis point improvement year-over-year and earnings per share of $0.45. Bill Johnson will provide more detail on our financial results later in the call. Let me start this morning with our views on the semi conductor industry. Industry reports generally indicate that the holiday sales of technology products were solid driven primarily by demand for smartphones and tablets. Gartner announced the demand for PCs continued to be weak during the fourth quarter of 2013 and worldwide PC shipments declined for the seventh -- sixth (Ph) consecutive quarter, registering a decrease of approximately 7% year-over-year.

However, on a positive note some recent industry reports suggest that a variety of new form factors such as thinner and lighter hybrid notebooks may encourage PC replacement and certain industry analysts are forecasting modest growth for the PC market in 2014. This would represent an important shift from the contraction that has beset (Ph) the PC market over the past two years and an incremental positive benefit to our industry.

Due to the level of semi-conductor sales relative to semi-conductor device production analysts believe that most IC inventories decreased during the December quarter and return to more normal levels. Earlier this month the semi-conductor industry association reported that worldwide sales of semi-conductors in November increased for the ninth consecutive month. The report indicated solid momentum across all geographic regions and most product categories and suggested that the industry is well positioned headed into the New Year.

In addition, some IC manufacturers are now reportedly seeing a pulling (Ph) of orders from chip customers for delivery during the March quarter and as a result fab utilization rates now appear to be improving. Last week several of our executives attended SEMIs Industry Strategy Symposium or ISS conference in California. This is an annual event hosted by SEMI early in the calendar year and represents a great opportunity to network and compare views with other industry participants.

The theme of the conference this year was pervasive computing, highlighting the future opportunities of greater mobility, connectivity and what is being called the Internet of things. Our participants came away from the event energized about the long-term future opportunities for our company given emerging technologies such as FinFET and 3D NAND and the increasing role that highly engineered materials like our CMP solutions and formulated products are likely to play in the continued growth development and advancement of the semiconductor industry.

Looking forward based on these recent reports from a number of industry analysts and public statements from some of our strategic customers as well as historical trends within similar seasonal demand patterns we expect strengthening in overall semiconductor industry demand during the fiscal year. Having successfully navigated periods of both strong and soft industry demand environments we believe these industry trends coupled with a continued successful execution of our strategic initiatives positions us well as we work to deliver another year of solid business performance in fiscal 2014.

Let me now turn to our core IC CMP consumables business. During the quarter we continue to pursue our long-term strategic business initiatives related to technology leadership collaborating with customers and supply chain excellence. We continue to focus our R&D efforts on innovating for leading-edge applications for technology leading customers. We are encouraged by some early indications from our new product development focus and R&D alignment and expect accelerating new product introductions in business wins in the future.

Our business and technical teams around the world are collaborating with customers on a wide range of new business opportunities and during the quarter we want new business with CMP products for tungsten, copper, aluminum, TSV and pads applications.

We continue to believe that our global supply chain management and quality systems are unmatched within the industry. This capability gives our customers the confidence to trust that the high performing and reliable solutions we provide for them will have the consistency and lack of variability that they demand in their fab operations.

As our customers quality requirements continue to tighten now, we are able to respond quickly and effectively by leveraging our entire supply chain and integrating our strategic supplies in the process to consistently meet or exceed our customers’ requirements.

One specific example of our success in combining our capabilities and technology leadership collaborating with customers and supply chain excellence is our earning Western Digital Media Supplier of the year award. This award recognizes our performance in quality, product development and business support in fiscal 2013.

Similar to many other customer awards we have earned, we believe this recognition demonstrates our commitment to being a long-term trusted partner delivering high performing, high quality and reliable products and solutions.

Concluding my remarks today with the continuation of positive trends in mobile connectivity and some recovery with in the PC market, we expect long-term growth and demand for our CMP consumer’s products. We believe our global footprint and our depths and breadth (Ph) of product offerings differentiate us from our competitors and in particular our supply chain capabilities and quality systems represented competitive advantage for us.

We continue to pursue our business objective of being a leading CMP solutions provider to the overall semiconductor industry. And with that I’ll turn the call over to Bill.

Bill Johnson

Thanks Bill and good morning everyone. Revenue for the first quarter of fiscal 2014 was $100.5 million which was down by 5.6% from the first quarter of last year and down by 13.5% for the record revenue we achieved in the prior quarter.

We believe the decrease in revenue compared to the same quarter last year primarily reflects softer demand due to lower utilization at same fabs and continued soft demand for PCs. Compared to the previous quarter, we believe the decrease in revenue primarily reflects soft demand within the global semiconductor industry including traditional seasonal weakness that we began to experience late last fiscal year and reference last October when we reported results for our previous fiscal quarter.

Revenues were also adversely impacted by customer fluctuations in our QED business primarily capital equipment oriented which also achieved record revenue in the prior quarter excluding QED revenue, our CMP consumables revenue decreased by 9% sequentially.

Drilling down into revenue by business area, tungsten slurries contributed 37.2% of our total quarterly revenue with revenue down 8.2% from the same quarter a year ago and down 6% sequentially. We believe lower utilization at some fabs and the continued soft demand for PCs primarily accounts for our lower tungsten business revenue this quarter.

Dielectric slurries provided 29.8% of our revenue this quarter with sales down 1.4% from the same quarter a year ago and down 7.9% sequentially. Sales of slurries for polishing metals, other than tungsten including copper, barrier and aluminum represented 17.7% of our total revenue and decreased 1% from the same quarter last year and 16.1%, sequentially. Recall we achieved our record revenue level for our aluminum slurry products in the prior quarter.

Sales of our polishing pads represented 7.4% of our total revenue for the quarter and decreased 12.4% from the same quarter last year and 14.6%, sequentially. Compared to the same quarter last year, we believe the revenue decrease is partially due to the competitive pricing pressure as well as customer efficiency gains in use of our pads which we’ve discussed in the past and lower utilization at some fabs. We believe the sequential revenue decrease is primarily due to soft industry conditions particularly at certain foundries.

Data storage products represented 5% of our quarterly revenue. This revenue was down 1.6% from the same quarter last year and up 1.1%, sequentially. Finally, revenue from our Engineered Surface Finishes business which includes QED generated 3% of our total sales and was down 24% from the same quarter last year and down 67%, sequentially.

Recall that our QED business achieved record revenue in the prior quarter and volatility in our QED revenues expected given that it’s primarily a capital equipment oriented business. I would point out that similar to the first fiscal quarter of 2014, our QED business enters the second quarter for the very limited equipment order backlog.

Our gross profit this quarter represented 47.5% of revenue, this is up from 47% in the same quarter a year ago and down from 50.9% in the prior quarter. Compared to the year-ago quarter, gross profit percentage increased primarily due to benefits associated with weaker Japanese yen versus the U.S. dollar, and higher manufacturing yields partially offset by the lower sales volume and higher variable manufacturing cost including higher raw material cost.

The decrease in gross profit percentage versus the previous quarter was primarily due to the lower sales volume and a higher variable manufacturing cost, including higher raw material cost, partially offset by lower fixed manufacturing cost including incentive compensation. Our full fiscal year 2014 guidance range of 48% to 50% of revenue remains unchanged.

Now, I’ll turn to operating expenses, which include research, development and technical, selling and marketing and general and administrative cost. Operating expenses this quarter were $32 million or $1.4 million less than the $33.4 million reported in the same quarter a year ago, primarily due to lower clean room materials expense and depreciation expense. Operating expenses were $3.5 million lower than the $35.5 million reported in the previous quarter, primarily due to lower staffing related cost, including incentive compensation.

Recall that there is typically a noticeable increase in our operating expenses in the March quarter due to certain annual factors such as merit salary increases, higher payroll taxes beginning with the new calendar year and cost around our annual meeting in March. We continue to expect our operating expenses for full fiscal year 2014 to be in the range of $131 million to $135 million.

Diluted earnings per share were $0.45 this quarter. This is up from $0.41 reported in the first quarter of fiscal 2013 and down from $0.69 reported in the previous quarter. Compared to the same quarter last year, earnings per share increased primarily due to lower tax expense on our foreign earnings resulting from our election to permanently reinvest the earnings from certain foreign subsidiaries. The first fiscal quarter of fiscal 2013 also included an adverse foreign tax adjustment that reduced our EPS by approximately $0.07. Compared to the prior quarter, earnings per share decreased mainly due to lower revenue and lower gross profit margin, partially offset by lower operating expenses.

Turning now to cash and balance sheet related items. Capital investments for the quarter were $3.7 million and depreciation and amortization expense was $5 million. In addition, we purchased $8 million of our stock during the quarter under our share repurchase program leaving approximately $82 million remaining in share repurchase authorization. We ended the quarter with a cash balance of $246.5 million and have $159.7 million of debt outstanding.

I’ll conclude my remarks with a few comments on recent sales and order patterns. During the first fiscal quarter, we saw a decrease in demand for our CMP consumables products of approximately 9% compared to the prior quarter, generally consistent with what we’re seeing in the first few weeks of October when we last spoke to you. As we observe orders for our CMP consumables products received to-date in January that we expect to ship by the end of the month, we see January results trending approximately 5% lower than the average rate in our first fiscal quarter.

Recall as we approach the lunar New Year, which begins on January 31st that we typically experience some order fluctuation around this holiday period. I would caution, as I always do, that several weeks of CMP related orders out of a quarter, represent only a limited window on full quarter results.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And your first question comes from Avinash Kant representing Davidson & Company. Please proceed.

Trisha Tuntland

Good morning Avinash.

Avinash Kant - D. A. Davidson & Company

Good morning everyone and thanks for taking my question. The first one is that last quarter you guys had significant benefit from Japanese yen. Could you give us some idea about what was the impact from the yen on a sequential basis?

Bill Noglows

On a sequential basis it was relatively limited. We evaluate this based on an average exchange rate over the three months of the quarter. And if you look at the fourth quarter versus the first fiscal quarter, not any real significant change there was a more material change year-over-year but even though you’ve seen the yen weaken further to around JPY104 to $1 recently when you look at averages across the quarters not much of a change.

Avinash Kant - D. A. Davidson & Company

Okay. And also on the tax rate, tax rate seems to be trending a little bit lower than what we have been modeling, we’ve been modeling roughly 30%. You seem to be having around 26%-27%. Is that what we should be thinking of going forward?

Bill Noglows

Yes, if you think about the full fiscal year 2014 we’re thinking more around 30% now and the big factor here is sort of a mix between earnings and subject to the U.S. tax rate of around of 35% versus earnings in some of our foreign subsidiaries that are subject to lower tax rates. And that’s the biggest driver of the lower tax rate that we are seeing now.

Avinash Kant - D. A. Davidson & Company

Now this 30% number that we are taking about does it include, if there were to be any R&D tax credits or not?

Bill Johnson

No, we are assuming, until we see that happen, we wouldn’t put that into our tax rate, so that’s assuming no renewal of the R&D tax credit.

Avinash Kant - D.A. Davidson & Company

And if it were to happen, what’s the extent of impact that we typically see?

Bill Johnson

I am speaking from memory but I think it was something less than a $1 million effect on an annual basis and we have gotten a quarter of that in the December quarter.

Avinash Kant - D.A. Davidson & Company

Okay. And now talking about the units and the pads business more importantly pads clearly seem to have lot of volatility around it. Is the downside coming primarily from the one key customer that you have or is there something else that you see?

Bill Johnson

We think the sequential weakness was weakness in the foundry business Avinash. We spoken before about the sort of longer term we have seen, as we have discussed we have seen price competition and we have seen our customers really pushing our value proposition and really extending the pad life of our technology which is a good thing for us and it sort of validates what we run into the market with and it give us additional power in sales pitch. But the sequential change we believe is related to a weakness or softness in the benefits.

Avinash Kant - D.A. Davidson & Company

My final question is that if the other customers are able to extend the pad life to the extent that they are doing, shouldn’t that be an incentive for other customers to adopt it quickly.

Bill Johnson

We think so Avinash. I think what we have said before is that just to give you some numbers we have some 30 customers that are buying our pads today and we have some other 40 to 50 activities ongoing today with either those existing customers or new customers evaluating our pad or have it in trial. So, we are excited about the level of activity and we continue to be bullish about the pad opportunity as one of our biggest single incremental growth opportunities for the company.

Avinash Kant - D.A. Davidson & Company

I agree. Thanks very much, I will comeback in the line with more later. Thanks.

Trisha Tuntland

Thanks, Avinash. We will take our next question please.

Operator

And your next question comes from the line of Edwin Mok representing Needham. Please proceed.

Edwin Mok - Needham & Company

Good morning, thanks for taking my question. So, since with probably pad, so I guess I have two questions around that. Of the 40 to 50 customer that is or a project going on now on the evaluation basis, how many of those do you think can turn into actual revenue customer? And I think previously you have talked about qualification can take a long time for pad; you have any idea or give your some sense around what is the qualification cycle time now? [Technical Difficulty]

Operator

Your next question comes from the line of Jason representing CJ Securities. Please proceed.

Jason Ursaner - CJ Securities

Good morning and can you hear me?

Bill Noglows

Sorry everybody we had a little technical problem. Edwin if you don’t mind, could you repeat the question you are about to ask when you got cut off? Edwin?

Trisha Tuntland

Hi, Dmitry. Good morning.

Dmitry Silversteyn - Longbow Research

Good morning, I wasn’t really [indiscernible] to ask question but I will happily do that. Good morning everybody. And can you hear me okay?

Trisha Tuntland

We can.

Dmitry Silversteyn - Longbow Research

Couple of questions if I may, you know you talked about little bit of a pricing competition in pads and it sounds like pricing is not really a driver in the slurry side of the business, can you talk a little bit about sort of the overall environment, you know we’ve had a couple of years now of fairly strict or stiff increases in technical requirements for the slurry business and I’m assuming you’re competing against the smaller number of capable competitors, so if you talk about sort of the consolidation versus fragmentation trends in the industry, the increased complexity of the slurry development business and then perhaps talk about pricing as a possible lever going forward.

Bill Noglows

That’s a big question, Dmitry, I’ll try to cover all of that if I can. Let me start with the industry and the certain macro issues that we’re looking at, you know consolidation has of course been a big deal for everybody in this industry as our customers have consolidated very quickly, we’ve seen the semi cap equipment guys consolidate just as quickly, the most recent one was a Mac Intel (Ph), which was a big one, we have not seen that kind of consolidation on the material side of the business yet, although we’ve seen a couple of transactions recently, the Merc AV (Ph) transaction and so I think consolidation is here, it’s real, in the CMP space as you mentioned we have fewer competitors certainly than we had in 2003, or let’s call them claim competitors and we’re down to a smaller group that supports and supplies CMP solutions to the industry. As the technology advances, the customers, our customers continue to look and find new materials to put into their integration tubes and the challenges of these smaller and smaller feature (Ph) sizes and the integrations seems they are putting together. You know we believe it’s really good for our business and our technology and the solutions we offer, you know we’ve said this before, we like it when it gets harder, we think we’re well suited and kind of uniquely positioned to take advantage of some of the technical challenges that our customers are faced with.

On the pricing side I think you are aware, our ASP said that relatively flat for I guess the last four years and in that environment we’ve been able to increase our gross margins you know through disciplined pricing and very aggressive and effective cost management at the gross margin level and we think we can continue that trend, you know we raised our gross margin guidance this year to 48% and 50% and you know we think we continue to value price and we talk about value pricing as our strategy you know, we work very hard and spend a lot of money to bring these CMP solutions to the market place and we validate them and then we back them with the supply chain and the quality systems that we talk a lot about and we think that brings a lot of value to our customers as well as getting those support we have in the field and the people we have around who have been support these products and customers and that’s kind of the brand at Cabot Microelectronics so as long as we can continue to charge for that value that we bring to the marketplace and we continue to look for ways to become more efficient we feel pretty good about our ability to keep our CMP slurry prices where they’ve been and protect our gross margins.

Dmitry Silversteyn - Longbow Research

That’s very helpful, Bill, thank you. Just a follow up on a couple of comments that you made about and then just looking at sort of the performance of revenue line over the last two-three years, the acquisitions that you’ve made that brought capacity in South Korea and Taiwan, you know kind of the evolution of PC versus the mobile market. Have you taken a look at your asset footprint as far as manufacturing of slurries is concerned between the two large plants and at least two-three smaller plants, is there any rationalization or other you know capacity rightsizing that’s possible to increase your utilization rates and perhaps lower your costs a little bit.

Bill Noglows

Sure, you asked a great question, we have four manufacturing really five, manufacturing facilities in the world today. We have one in North America, we have one in Japan, we have one in Gaoshan, Taiwan and we have another one in South Korea which we built, just to be clear we built that facility three years ago, we didn’t acquire it, we acquired the one in Taiwan. You know we made the investment in Taiwan a fairly long time ago, back in ’08-’09 and we made that investment just in recognition of the foundry business and the importance and growing importance at that time of the foundry business, you know the same approach was, we used the same approach in considering and ultimately investing in South Korea as we were watching the importance of memory devices as they go into things like tablets and smartphones and all these gizmos that people carry around with them, so you know, I think we’ve really got a great global footprint around the world now and as the market moves to Asia and it’s been steadily moving to Asia, we’ve been sort of backing of our US facility, when the yen was 74-75 to the dollar we were moving as quickly as we could to shift products out of our manufacturing facility in Geino, Japan to our other two facilities in South Korea and Taiwan, so we have a team of men and women that manage this every day and they’re aggressive about looking for opportunities to source our products from the lowest possible cost manufacturing facility. You know that’s somewhat gated or governed by our customers’ willingness to re-qualify plants and products. It can take up to a year or 1.5 years to get to that qualification process, actually move CMP slurry from one plant to another. But we do that and we do it as aggressively as we can.

I think overtime long term I believe that our footprint that we have in the world today is enough, I don’t see another big capital, for us a big capital investment will be a building somewhere in the world. We don’t see that in the horizon over the next three or four five years. So I think the footprint we have on the ground today is more than sufficient and we will rationalize it as time goes by.

Dmitry Silversteyn - Longbow Research

Thank you very much, I will let somebody else ask questions now.

Trisha Tuntland

Thank you Dmitry, we’ll take our next question please.

Operator

And your next question comes from the line of Edwin Mok representing Needham & Company. Please proceed.

Edwin Mok - Needham & Company

So thanks for taking my question, I guess go back to the first question I had which was regarding pad. Just kind of want to understand how many of those 40 to 50 ongoing evaluations do you think you can turn into actual customer this year and give us an update in terms of qualification timeline.

Bill Noglows

Well I hope we turn them all Edwin, but I know that’s not realistic but our approach in the way we’re thinking about the pad business is to be as quickly as we can become a very meaningful second supplier to the industry. But it’s hard for us and just to be straight up with you we won’t predict when we’re going to turn these opportunities because we just don’t know and I just don’t think of responsible for us to call it given the process that we engage in with our customers. Depending on the customer and the customers’ end use application and their qualification and their change management process. These qualifications can take a very long time.

I think what we look to and we’re excited by is the level of activity and the number of engagements we have around the world with our pad technology and that keeps us optimistic and excited about the opportunity.

Edwin Mok - Needham & Company

Just in regard to get a better sense Bill when you say very long time is it five years or is it five quarters or five days?

Bill Noglows

We have seen as short as I want to say a year, 1.5 years and as long as two or three years, I mean it just depends again on the customer and their appetite for change and their appetite to go into their customers with a change management process.

Edwin Mok - Needham & Company

That’s fair thanks. And then if I looked at obviously you guys don’t give quality guidance, but at least for the month of January was trending down around 5% this last quarter. If I just used as kind of baseline for the fiscal second quarter, I have two question around that. One is fiscal second quarter given the Chinese typically more backend loaded or is it more linear for the quarter, this is my first question. And second question is why -- that 5% down on the second quarter. You have to grow business double digit in 3 and 4Q to make this year growing year. Am I thinking it the right way?

Bill Noglows

Yeah, that’s right. If you look at kind of typical seasonality September quarters are strongest quarter, there is weakness in the December quarter, the weakest is typically the March quarter strengthens in June, strengthens again at September. If you look at March quarter historically 10 of the last 14 years we have been sequentially down in the March quarter. As to your question about within the quarter what sort of trends do we see in revenue? I don’t think there is anything that’s normal Lunar New Year moves around a bit and depending upon how heavy demand is sometimes the customers produce right through that. So I don’t think there is any intra period or quarter trend that I can point to. But now this is the third year that we’re seeing pretty pronounced seasonality softness in the first half and then strength in the second half. And so I think what we believe is the industry is becoming less cyclical more seasonal and here is the third year we’re seeing this kind of pronounced seasonality. So not a big surprise as we have been watching the last couple of years.

Edwin Mok - Needham & Company

I see great that’s very helpful commentary. And then I guess given the seasonality impact on your top line I would imagine your growth might have been also trend in the similar trend just because of volume, is that the way you think about that?

Bill Noglows

That’s right. The sales level or production level is an important element of our gross margin but also product mix because we have a range of different products that have kind of different pricing and margin dynamics. But capacity utilization is a big factor as has been product mix in the past.

Edwin Mok - Needham & Company

I see, one last question I’ll let someone else ask. So on the new position that you won Bill that you mentioned, in noticed that you didn’t mention anything on events. Am I reading too much into that?

Bill Noglows

You may be reading too much into that, I did not mention that, in the quarter we talked about the wins we had, we just didn’t talk about AD but it doesn’t mean we’re any less excited about opportunities to get our AD products into the marketplace.

Bill Johnson

And in fact, Bill mentioned with this refocused R&D effort that we’re getting some interesting early indications on some new product development and there is a family of products around advance side electrics that seems pretty interesting but, yes, no specific wins this quarter.

Edwin Mok - Needham & Company

Great, that’s all I have. Thank you.

Trisha Tuntland

Thanks Edwin. We’ll take our next question, please.

Operator

And your next question comes from the line of Jairam Nathan representing Sidoti. Please proceed.

Trisha Tuntland

Good morning.

Jairam Nathan - Sidoti & Company, LLC

Hi, good morning. Thanks for taking my question. Just following up on Dmitry’s question on the manufacturing footprint. Given your presence in Japan, does it make sense to move manufacturing around given the yen depreciation? And the other follow up question is would you use the increase in the gross margins, their benefit to gain share? How should we think about that?

Bill Noglows

Well, we wouldn’t use the low cost, we would never use low cost to gain share, Jairam that’s just not the way we run our company. We’re about value, and we're about value pricing and so you know that idea wouldn’t work.

Let me give you a little back, the plant in Japan has historically, let’s say over the last five years has been our largest plant by volume. I’m not sure standing here today, I think it is still our largest plant by volume.

It’s an important plant because not only does it supply the Japanese market which remains an important market to us and one more we have a significant position. And there are some customers there that we remain highly engaged with. But we use that historically to export products to Southeast Asia, Korea and Taiwan. And we continue to do that, I mean I said it earlier our ability to move products out of gain and get them re-qualified in places like South Korea and Taiwan, is highly gated by our customers desire and willingness to help us do that and we like I think I’ve said, we don’t do at a discount, we don’t offer discounts to do it. If it suits them and if it suits us, we work together to try to get it re-qual.

So, our plant in Japan is still highly loaded and still our largest plant and we’ve slowed down, I mean when -- it wasn’t so long ago, I mean it was a year ago the yen was at 76 - 75. And now it's at a 104. So, what we were doing a year ago is different than what we’re doing today.

Jairam Nathan - Sidoti & Company, LLC

Okay. And my other question is on pads, this kind of -- I mean looking at it from a different angle. Given the share gain can you give us an idea of what you’re -- by how much you outperformed the market in the pad market in fiscal 2013 and how should we think about that outperformance in fiscal 2014?

Bill Johnson

Actually our revenue in pads was relatively flat, fiscal 2012 to 2013 and that’s one of the things we’ve talked about it that we’ve been disappointed, we made a strong start in pads from fiscal year 2007 to 2011, we had really nice growth but the growth has been -- the business has been relatively flat since then.

We continue to view this, like Bill talked about earlier, a significant opportunity it’s a great adjacency, it’s a big market right next to our CMP slurries business and we utilized lot of the same capabilities. So, it continues to be a high priority and given the pipeline of new opportunities we hope that that can become another get back on the growth trajectory. But we actually did not grow from fiscal year 2012 to 2013, unfortunately.

Jairam Nathan - Sidoti & Company, LLC

Okay. And last question is on your capital allocation, we saw a more significant increase in your share count and did that require a more aggressive share repurchase plant going forward? You guys have regularly repurchased around $8 million to $10 million, does that need to go up and -- yes.

Bill Noglows

Capital allocation is something, it's a topic that we discussed actively within the company with the Board of directors on ongoing basis and you can understand that given with the strong cash generating capability of the company and our strong balance sheet.

So, this quarter we did see an increase in shares kind of driven by some option exercises of the couple award cycles that were near expiration. But, also our share price has moved up nicely. So, the same driver that might cause options to be exercised, might mean that you wouldn’t necessarily want to be aggressive purchaser at that time.

When we’ve been in the market in the past we’ve been a relatively consistent buyer and we recorded today $8 million of share repurchases and on average we’ve been around 10 or so when we’ve been in the market. But it's not something that we’ve ever communicated any plans forward, we think it represents a part of an overall capital allocation strategy along with M&A internal investment, with potential dividends, things like that. So, I wouldn’t want to guide towards kind of future activity but I could comment on like I have done in the past.

Jairam Nathan - Sidoti & Company, LLC

Okay. Thank you.

Trisha Tuntland

Thank you, Jairam.

Operator

(Operator Instructions). And your next question comes from the line of Chris Kapsch representing Topeka Capital Markets. Please proceed.

Trisha Tuntland

Good morning Chris.

Chris Kapsch - Topeka Capital Markets

Good morning. Just a follow up on the sequential trends that you talked about thus far into the fiscal second quarter, on average the order patterns in January being 5% down sequentially. You also mentioned though in your prepared release about the notion that there is some signs of improving utilization rates at the foundry. So I’m just wondering if that’s something that you see is happening just hasn’t factored its way into your order patterns yet and therefore you expect to see that sort of for the balance of January into February and March or just want to reconcile those sort of opposite kind of trends.

Bill Noglows

Yes, hi good morning Chris. Those comments this morning were our visibility to-date into the next quarter down 5% it always cautions that the limited window doesn’t sort of indicate performance for the full quarter. We’ve talked a lot about seasonality and this is our second fiscal quarter and we’re in our second fiscal quarter and we’re always looking for indications of strengthening because that’s what we believe will happen because it’s happening for the last two years that we’ll just kind of slow start to our fiscal year and the second half will be strong.

We look at all the same things you look at probably and read all the same and always reports it seems like things are firming a little but will I predict what it means this quarter I certainly can’t do that we just don’t have the visibility to do that with any kind of accuracy. That’s what I would say. We’ve seen TSMC come out with 10% up for the year. TSMC is 20% of our overall revenue so you’d expect that to have an impact on our future ability to grow in the second half. So that’s all we can probably say about what we see through the rest of the year.

Chris Kapsch - Topeka Capital Markets

Okay. Just want to get a little more granular on some of the product lines like you mentioned that I guess the aluminum and -- copper and aluminum product line collectively was down I think 16% sequentially. Now my understanding is that’s where products like the newer high-k metal gate product line would be included there, which is revenues been driven by adoption at sort of leading edge technology. So just wondering why the sequential sales for that particular line was more pronounced in terms of weakness versus say that rest of the year products is it a function of just the copper side of that product line or was there curtailment in some of the production ramping at the leading edge or some of your advanced customers?

Bill Noglows

Yes, so when we aggregate slurries for policy and other metals that includes copper, aluminum and barrier. And so the turn downs, the sequential turndown was really across both aluminum and copper. And a couple of things that work there; one, just the seasonality caused some of that; then with respect to aluminum, one of the things we’re starting to see are some efficiencies in usage by some of our customers and this is consistent with what we’ve seen in past years when a new process or new product is adopted as the customer gains more experience than the opportunities for efficiency gains and we’re seeing a little bit of that in aluminum.

With respect to copper, our strategy is to replace our old legacy products with newer more highly concentrated products that are high gross margin but can shrink the market a little bit, and that’s something we’ve talked about over the past year or so. So with respect to the slurries for policy and these other metals it is kind of combination of seasonality some efficiencies in aluminum and then just the implementation of our strategy on copper.

Chris Kapsch - Topeka Capital Markets

Okay, thanks for the color there. And then just curious about like the commentary about the possibility that after a couple of years of sort of cannibalization of the PC market at the expanse of handhelds and smartphones and so forth and just curious like if there was given the dimension of prognostications about PC sales recovering or maybe even just not declining. If they were happened to recover, just wondering how that would affect your mix and presumably would it drive copper revenues and how might that flow through in your mix looking at the balance of 2014?

Bill Noglows

It probably drive almost all of our product lines Chris. It definitely drive our tungsten line, our copper line and our pad business will grow as a result overall will drive incremental more wafer starts that semiconductor content of the laptop and PC is about twice as much as a tablet rule of thumb. So to get PCs and laptops back and then upswing even if it’s modest it helps the entire industry in terms of more wafer starts. So I think it would be good for almost all of our product lines if we will see growth come back to the PC segment.

Chris Kapsch - Topeka Capital Markets

Okay, thanks. And then just one quick one, the -- what was the bottom line EPS impact from the disruption around the commentary around QED?

Bill Johnson

I don’t think I could be that precise. I think that our Engineered Surface Finishes revenue was down by 67%, so around what’s $6 million or so. In QED that’s a high margin business, when sales are up it’s like the rest of our business. There is a lot of technology in that and so it tends to be relatively high margin, so we probably did see some of that in EPS but I don’t know what that exactly was.

Trisha Tuntland

Thanks, Chris. We will take our next question please.

Operator

And your next question comes from the line of Jason Ursaner representing CJ Securities.

Bill Noglows

Good morning.

Trisha Tuntland

Good morning, Jason.

Jason Ursaner - CJ Securities

Good morning. I just want to make sure I understand all the questions and commentary on the month-to-month trend. You mentioned that January trending 5% lower that’s relative to the month of December or that’s the average over Q1?

Bill Noglows

That was relative to the average across Q1.

Jason Ursaner - CJ Securities

Okay. So, at a high level, it sounds like right now we are balancing the current slower pace of business with expectations for this improvement in vapor starts during your fiscal second half and that’s getting you to flat for the full year or are you still expect to be seeing growth?

Bill Johnson

We don’t give revenue guidance and we don’t give EPS guidance for the full year. What we said and continue to say is we expect the year to startup relatively soft for the first half and then strengthen in the second half that we are seeing for the last two years.

Jason Ursaner - CJ Securities

Okay. And besides the improvement in foundry, stabilization in PC, can you maybe talk about some, are there any key factors you are looking at that are still providing confidence in a more optimistic outlook for the second half ultimately materializing or is there really just more sentiment at this point?

Bill Johnson

Like I said earlier we read and look at what everybody else read and looks at. Morris Chang recently said he expects TSMC to be 10% this year which wouldn’t be any consistent with what we have seen TSMC do for the last two years. They started out soft and they get stronger now second half of our fiscal year. So, that’s all we can do, we just watch and pay attention to what our customer say and the way our customers order and that’s our indication. But as we said before we have very limited visibility at that it’s a month. We are made-to-order and we were reluctant and we don’t provide any kind of forward guidance because we just don’t have the visibility.

Bill Noglows

Then if you look past sort of the fiscal year and you think about industry trends, one of the things we mentioned was new leading technologies like FinSET and 3D NAND that will become more important over time not necessarily this fiscal or calendar year. But things like that higher technology demands more of the consumable materials and it also had CMP polish steps. So, to the extent that those new applications are adopted, we expect to be part of that that can be another driver. Longer term we expect to continue to grow our pad business that’s a great adjacency and it’s a high priority for the company.

And so that’s what we think about when we think about sort of longer term, beyond just sort of the constraints of the fiscal year.

Jason Ursaner - CJ Securities

Okay. I guess just the business you are seeing right now is it the slurry formulations that are more newer ones you are talking more advanced nodes or is it some of the older slurry formulations that tend to go into more legacy applications and how did those performed in the quarter?

Bill Johnson

I think it’s all of those. We have a very large position in what you might describe as legacy business and we have an equally large position in emerging technologies and new business. So, much I can specifically quantify and answer to your question, we are engaged in all of it and we are highly engaged in leading edge technologies with a raft of new products in all of our product areas. So, it just goes across our business.

Jason Ursaner - CJ Securities

Okay. And then just last question from me, free cash flow was very strong during the quarter, can you maybe just talk a little bit about timing of CapEx or working capital and what drove that relative to net income and would you continue to expect to see that kind of GAAP relative to reported income as the year progresses?

Bill Noglows

We will file the Q here shortly. One of the things you will see in the cash flow is actually symmetry of things from a working capital standpoint. You can see that in our balance sheet, we had a reduction in payables because in December we paid our annual cash bonus and so that was the reduction of payables so the use of cash. And in addition there is an increase in I think other current assets which is a tax receivable and that is related to some of the options, stock option exercises. So, actually from a cash from operation standpoint it was relatively modest this quarter but that was really driven by couple of unusual items.

We have a history and expectation for future strong cash flow. We have demonstrated solid growth, strong profitability, limited capital intensity and so we have been the strong cash generator and although cash from operations was somewhat limited this specific quarter. In terms of CapEx for the year, we’re guiding to about 15 million and we spent a little less than 4 million in the first quarter so we’re on pace to achieve that through the first quarter, but yes, we expect continue to be a strong cash generator going forward.

Jason Ursaner - CJ Securities

Okay, great, appreciate the content.

Trisha Tuntland

Thank you Jason, we’ll take our next question, please.

Operator

And we have a follow-up question from the line of Edwin Mok representing Needham and Company, please proceed.

Edwin Mok- Needham and Company

Hi, thanks for taking my follow-up, so first question I have is on, you guys mentioned 3D NAND that’s one of potential driver for your business, how much of, how much do you think that can incrementally benefit your business this year, is it still going to be a small percentage of its loop sales and what type of CMP slurry, is it dielectric mostly or do you some in tungsten or other materials as well.

Bill Noglows

Edwin thanks for the question, we think this 3D NAND could be important to us, we don’t as Bill said earlier, we’re not certain we’ll see it this year or next year. But we think it’ll be a combination of dielectrics and tungsten CMP slurries and it might equate to that 2 to 5 additional CMP step so we think of it as a pretty good opportunity to some of our slurry sales growth for both our advanced dielectrics and tungsten applications, but I would describe it as small this time, it’s hard to predict growth as we go forward.

Edwin Mok- Needham and Company

Okay that’s fair and then just going back to your engineering surface finish business right, if I look at last three years you have been running somewhere around $24 million per year per fiscal year revenue and quite lumpy right. Do you expect similar lumpy business this fiscal year and is it going to be in similar level opposite of first quarter, plus only at 3 million much lower than that repo rate so, how you do think about that.

Bill Noglows

Most of our engineered surface finish business is QED which is largely capital equipment oriented and so depending upon the number of business, machines we ship in a particular quarter, that would drive revenue and it has been volatile or lumpy in the past and so to the extent that that continues to be capital equipment oriented we would expect that to be lumpy in the future. One of the things we pointed out in the October call is that we, what was a little different for a QED business is we didn’t have much of an equipment order backlog as we reported in October, and so that was sort of, and that was borne out with the relatively low QED or ESF revenue this quarter and we also don’t see much of a backlog now, in other data point.

Edwin Mok- Needham and Company

Okay, great, that’s all I have, thank you.

Trisha Tuntland

Thank you, then we’ll take our last question, please.

Operator

And your last question comes from the line of Avinash Kant representing Davidson and Company.

Avinash Kant - Davidson and Company

Thanks for taking the follow-up, one or two questions here Trisha, the first one I had for Bill was, you know, if we think of the next quarter and of course you’re not giving any guidance, but if you think of some sequential down tick in the March quarter, was there anything, of course it looks like the ESF business impacts your margins negatively, but if it were to be down sequentially, is there anything on the OpEx that you could do to bring it down further or would there be an outside margin impact because of some mix issue in March quarter.

Bill Johnson

Well, let me answer that first question about OpEx, we are and as you’ve seen in the past we’ve been very responsive and aggressive with our OpEx when things get soft and this is, we would do the same in this situation if we saw deeper decline in the current quarter than we are expecting, or that we’re seeing in January, we would certainly act on it, I mean that’s, like I say we have a track record of doing that and we do it, you know, we have as you know, we have a significant investment in R&D and research and development, and innovation into our development and customer support and that’s an area that we think is for our company is competitive advantage and it’s not an area that we would look to trim down in a quarterly down turn or that sort of that stuff, we would look at that longer term and think hard about it. I’ve forgotten the second part of your question, which was what [indiscernible].

Avinash Kant - Davidson and Company

Margin wise did you see something different this quarter, what I’m saying is that if revenues were to be down next quarter would margins be down too, or was there anything special this quarter that may not lead to a decline next quarter.

Bill Johnson

No, the variances we talked about in gross margin sequentially was kind of a lower level of sales, some manufacturing cost fluctuations but the bigger driver was the lower sales, so there wasn’t anything unusual, but one of the things with respect to operating expense that we pointed out in the prepared comments and I would just remind you. There is a little bit of seasonality operating expense when we, operating expenses is largely people and we have a January 1st cycle for salary merit adjustments to the extent that we grant those, that would be a new cost for us as of January 1st, also a new calendar year brings new payroll taxes and things like that, we also have an annual meeting and so if you look at historically we have seen an increase in operating expenses generally in the March quarter compared to the December quarter. And well -- talks about since most of our operating expenses its people and so there is a not a lot that we’re going to do sort of to trend that.

Avinash Kant - Davidson & Company

Then one final question the reconciliation, if I look at the numbers in the current quarter and the previous quarter if I punch in the numbers that we have reported in the press release I get $0.46 for the current quarter and $0.70 for the previous quarter. Is there something else going on there that’s leading to that penny or so difference.

Bill Noglows

Right, not with respect to this quarter could just be rounding, you may recall that we reported our fourth fiscal quarter results initially as $0.70 and then as we issued the 10-k and we issued an 8-k in conjunction with that adjusted the calculation of EPS such the fourth quarter result went from 70 to 69 and the full year result went from 216 to 214. And so we issued an 8-k about that in conjunction with our 10-k but there should be nothing like that, could just be rounding with respect to the current quarter.

Trisha Tuntland

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

Operator

Ladies and gentleman that concludes the presentation for today’s conference. You may now all disconnect and have a wonderful day.

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