Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Cabot Microelectronics Second Quarter of Fiscal 2017 Earnings Call. At this time, all participants are in a listen-only mode to prevent background noise. [Operator Instructions] We will have a question-and-answer session later and the instructions will be given at that time. Now I would like to welcome and turn the call to Ms. Trisha Tuntland, Director of Investor Relations. You may begin.

Good morning. With me today are David Li, President and CEO, and Bill Johnson, Executive Vice President and CFO. This morning we reported results for our second quarter of fiscal 2017, which ended March 31, 2017. A copy of our earnings release is available in the Investor Relations section of our Web-site, cabotcmp.com, or by calling our Investor Relations office at 630-499-2600. A Webcast of today's conference call and the script of this morning's formal comments will also be available on our Web-site. Please remember that our discussion 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, 2016. We assume no obligation to update any of this forward-looking information. Also, our prepared remarks this morning reference non-GAAP financial measures. Our earnings release includes a reconciliation of GAAP to non-GAAP financial measures. I will now turn the call over to David.

Thanks, Trisha. Good morning everyone and thanks for joining us. This morning we announced strong results for our second quarter of fiscal 2017, reflecting continued robust semiconductor industry demand and successful execution of our strategic initiatives. In particular, we believe our results in the first half of this fiscal year reflect the continued momentum we have established in three key product areas, CMP tungsten slurries, dielectrics slurries and CMP pads, and we believe these will be drivers for continued profitable growth for the Company over the next several years. During the quarter, we achieved revenue of $119.2 million, approximately 20% higher than in the same quarter last year. Our gross profit margin was 50.4% of revenue, the highest level since fiscal 2015, and we achieved diluted earnings per share of $0.71, which represents an increase of approximately 92% compared to last year. In addition, we continued our strong cash flow generation trend with cash from operations of $32.8 million. Bill will provide more detail on our financial results later in the call. To provide some context for our second quarter results, let me first offer some perspectives on the global semiconductor industry environment. General industry sentiment suggests a continued robust memory market, primarily driven by the demand for more storage in a wide range of end-use products as well as in data centers. As a result, reports indicate that memory device inventories are lean due to continued strong demand and tight production capacity. Conversely, certain industry participants that are more closely tied to smartphones have reported softer demand conditions due to mobile products seasonality. For the full year, industry analysts continue to hold a strong outlook for the semiconductor industry, driven by expectations for a continued strong memory market and semiconductor demand in China and a pickup in smartphone demand…

Thanks, Dave, and good morning everyone. Revenue for the second quarter of fiscal 2017 was $119.2 million, which represented 20.1% increase from the same quarter last year. The increase reflects continued strong global semiconductor industry demand that we began to see during the third quarter of fiscal 2016. Year-to-date, revenue of $242.4 million represents a 21.5% increase from last year. Drilling down into revenue by product area, tungsten slurries contributed 43.5% of total quarterly revenue, with revenue up 18.1% impaired to the same quarter last year. We continue to see strong demand for our tungsten slurries for advanced applications, including 3D memory and FinFET, and as Dave mentioned earlier, this is a key product area that we expect will drive future profitable growth. Dielectrics slurries represented another key product area, provided 23.4% of our revenue this quarter, with sales up 17.6% from the same quarter a year ago. Our dielectrics growth was primarily driven by strong demand for our colloidal silica and ceria-based solutions. We look forward to winning more business in this area with our higher-performing, lower-cost and higher-profitability products. Sales of our polishing pads, our third key product area, represented 14.4% of our total revenue for the quarter and increased 43.5% compared to the same quarter last year. Our pads product area achieved record revenue for the sixth consecutive quarter. Sales of slurries for polishing metals other than tungsten, including copper, aluminum and barrier, represented 12.3% of our total revenue and increased 3.5% from the same quarter last year. Finally, revenue from our engineered surface finishes area and data storage products represented 5.1% and 1.4% respectively of our quarterly revenue. Gross profit for the quarter was 50.4% of revenue, compared to 47.3% of revenue we reported in the same quarter a year ago. This includes $1.2 million of…

[Operator Instructions] Our first question is from the line of Edwin Mok with Needham & Company. Your line is now open.

This is actually Arthur on for Edwin. Bill, you just talked about how demand for IC consumables in the June quarter was expected to be up 3% quarter-to-quarter, and I think as David mentioned, one of your largest customers has talked about smartphone related inventory adjustment in their second quarter guidance. Are CMP consumables up for you guys mostly due to greater 3D NAND and has it factored in this inventory adjustment at your largest customer?

It's Dave. As you mentioned, we have been following closely some of the recent industry communications around CSMC. Particularly they talked about some softness related to some near-term smartphone inventory. But overall, they continue to hold a strong outlook for the year. But as you mentioned, we feel really confident about our ability to grow because of how well we are positioned in two areas of the market that are poised to grow strongly. One is memory and the other is China. So we've talked about the transition from 2D to 3D NAND. That's still underway and going on strongly. It looks from the memory industry environment that that looks like it's going to be tight capacity and constrained for a while. And then also China, there's a lot of additional capacity. We talked about our growth in China in the prepared comments. So, those are two areas where we're positioned well and the industry is positioned well to grow as well.

Then another area where we expect to grow would be pads, and we mentioned that we've grown our pad revenue by 44% year-over-year for the quarter, and I just want to point out that that's on a comparable – the two quarters are on a comparable basis now. Both the second quarter of last year and this second quarter, both contain, they include the NexPlanar acquisition. So, clearly a strong growth in pads, and so we expect that to continue in the second half.

Perfect, thanks for that color. And maybe staying on the topic of pads, can you provide a little bit more color on what drove the strong performance from NexPlanar? Was it, was the growth due to increased sales efficiency or is it due to better traction of pad consumable sets among your customers? And should we think about this as sort of an inflection point where we start getting towards that $80 million to $90 million fiscal year 2018 target?

Right, so what we talked about is, what we believe is our ability to grow our [indiscernible], so our pads revenue to $80 million to $90 million in fiscal 2018 and then over $100 million in fiscal 2019, so really strong trajectory of growth for pads. And as Bill talked about, this was our sixth consecutive quarter of record revenue for pads, so clearly a lot of demand, primarily driven by the NexPlanar product line. And what we have talked about before still holds true. We think this product is providing customers with a lot of performance benefit. So it is lower defectivity versus the industry standard. Also what we're continuing to find is that the qualification times are much shorter because it's closer to a drop-in versus the industry standard while it's providing better performance. We also talked about further proliferation with some of our existing customers. So what happens when you bring a pad into a customer is that if they find good performance, they'll bring it onto a different application or a different fab and continue to proliferate through their system, and that's what we saw this quarter. So, strong pipeline and additional proliferation with existing customers is what we've seen and what we expect to continue to see in the future.

Thanks for that color. It was very helpful. Last question from me, can you talk a little bit about the slurry competitive landscape and whether you're seeing or if you're anticipating any increased competition, particularly with regard to tungsten slurries?

So tungsten obviously is an area that we are focused on quite a bit. You can see from our long track record of profitability. We also increased our gross margin guidance that we expect continued profitability. From the competitive environment for slurry, we don't see a lot of new entrants in the area and we obviously continue to feel like we are the clear leader in tungsten but also in dielectrics and other CMP areas. I think we're the only supplier that can provide the whole portfolio of CMP slurries and now with pads. So we feel really good about our tungsten position and I would say the competitive dynamics are more or less similar to what they've been in the past.

Thanks and a great quarter.

Our next question is from Amanda Scarnati with Citi. Your line is now open.

Kind of continuing on with the China discussion, the collaboration with KFMI and you're seeing, starting to sample in the June quarter with first out in 2018. Is there anything in the contract that would prevent you from continuing with sales in China outside of the collaboration, or is it you can still continue with organic growth plus the collaboration at above and top of what you are able to do?

So what you've mentioned is our collaboration with a company called KFMI. We're early in that collaboration but what we talked about is the early interest from customers locally in China has been strong. And so we see that as significant upside for us in China to grow our pads business by offering a local alternative. But as you know, in China there are both domestic and international customers. So we would continue our efforts in China alongside KFMI. We think they are very complementary to us, and we think, as we mentioned we're early in the collaboration, we expect first revenue in our fiscal 2018.

Okay. And then on the dielectrics product line, the transformation of those product lines from historically weaker margins to now better, are you seeing significantly more demand now at this point from the newer product line versus the older, or is there still some kind of runway of those older product lines going forward?

So for dielectrics, we're really excited because we continue to see momentum. As you know, it takes time for new products to be qualified and ramped up. But for both colloidal and ceria product families, we've seen significant progress in the adoption. And even in our prepared comments, we talked about progress with qualification and ramp-up of our colloidal family of dielectrics with two memory customers. Those were actually displacements. And so, what we've seen is this continued transformation of our dielectrics product line as you mentioned from a lower profitability to a product line that we can see some growth in and higher profitability in the future. So we're seeing a lot of qualifications underway and we're encouraged by what we see both on the colloidal and ceria side.

So Amanda, within dielectrics, the overall product area grew by 18% year-over-year. The higher growth is obviously from those new higher performing products, but there's still strong demand for the legacy products. And as we talk about this transformation, this is something we expect to play out over the next several years. So there is still quite a bit of runway ahead of us.

And then the last question I have just on the three additional wins in the pads business, are those new pads customers or are those existing pads customers that are taking on new product lines, if you can give that modelled information?

So the three we talked about are existing customers and it's really that dynamic that I mentioned earlier, which is customers taking in our pad, being very pleased with the performance and then proliferating it beyond the initial application or the initial facility that they had planned, and we saw that this quarter and that contributed to the continued growth. So those were three existing customers that just broadened their usage of our pads.

Great. Thank you.

And our next question is from the line of Chris Kapsch with Aegis Capital. Your line is open.

I just had a follow-up on the dielectrics product line and transformation, as you referred to it, when this product was introduced, you did anticipate both gaining market share as well as cannibalizing your own business. And then just based on the comment that Bill just had, it sounds like you have obviously strong growth in the new colloidal and ceria-based products but also growth in your legacy products. So I'm just wondering, to the extent that you are getting traction in new process of record wins with the new product, is that all basically new nodes or new applications or market share gains vis-a-vis say cannibalizing your own business, or have you also been doing – it has a little bit of cannibalization having taken place as well?

Chris, it's probably a combination of all those. If you look at the progress we've made so far in colloidal and ceria, the three that we talked about or two that we talked about this quarter just happen to be displacements in memory where we were displacing competition with our product. But we've also seen cases where we've cannibalized our own business. In both cases, one, we're improving our profitability, other, we're doing both, we're gaining positions and also gaining revenue and profitability. So it's a combination of both. As you know, it takes time to displace, but we're pleased with our progress and our pipeline.

So if you were to strip out the growth of the new product introductions in that dielectrics line, your legacy dielectrics slurries sales are actually showing growth in spite of cannibalization? And that would to me speak to strength of the overall industry across technology nodes. That's kind of what I'm curious about as well.

I can't recall exactly the performance of the legacy to ILD area, but we've had continued strong demand. I don't know if it maybe went up slightly or down slightly, but it has held pretty firm. So I think that underscores the overall strength of the industry.

As Bill mentioned, this is going to play out over not just quarters but over several years. The legacy business tends to be very sticky and customers are very pleased with the products that they are using, so they continue using them, but we feel over time they will migrate to this higher-performing, lower-cost product family and it will play out over time. If you look at how tungsten and dielectrics performed this quarter, they kind of moved together, which represents a bit of how the industry moved as well over the last several months.

Okay. And then I had a question about the upward revision in gross margin guidance. For the full year, obviously part of that is just having the first half under your belt with the solid margin performance that you've had, but just wondering if you could parse out the contributors also for the full year? Clearly you get mix benefit from the strength in tungsten. I think also it sounds like dielectrics, the new products have nice margin. But the highest growth business right now is the pad business. And when you guys acquired NexPlanar, if I recall correctly, the gross margins of that business were below your corporate average. So your highest growth business with below-average gross margins, you could say that maybe dragged down gross margin. So I'm just wondering, has that business structurally gotten enough scale where you've improved the margin profile so that the growth there is accretive to margins, or not quite yet? And then separately, is there anything going on in FX? I think the dollar have been strong post the Trump election. Now it's kind of taken a breather here. So maybe that reversal is also contributing to the upward guide as well. So a few questions in there, but just parsing out the gross margin trends for the balance of the year. Thank you.

Sure. So first of all, foreign exchange really had a very minor impact. So that's not really a factor. So if you look at the full-year FY 2016, we had 48.8% gross margin and we're at slightly over 50% year-to-date, and a lot of that is stronger sales volume, so greater capacity utilization which helps margin, and also product mix, and then partially offset by some higher fixed cost, mainly related to higher incentive compensation expense. So if you think about the three big areas that we talk about as growth initiatives, tungsten growth with 3D NAND should be accretive to gross margin, the dielectrics transformation should be accretive to gross margin. The pads area will be dilutive to gross margin. Margins in pads are below the Company average and our expectation is that that will remain below the Company average. But given the significant growth opportunity in revenue, even if that's slightly dilutive to gross margin percentage, there are a lot more gross margin dollars and then EPS that should come with that.

Right, okay. So you're able to up your – you increased your gross margin guidance in spite of sort of the dilutive effect of margins from the growth in pads. It's a good problem to have.

That's right. Two out of three of those initiatives are going to be accretive to gross margin, and the pads growth would be a headwind to gross margin percentage, but should add gross margin dollars.

Okay. Thank you very much.