CMC Materials, Inc. (CCMP) 2003 Q1 法說會逐字稿

Good morning. My name is Mandy. I will be your facilitator today. I would like to welcome everyone to the Cabot Microelectronics Corporation 2003 first fiscal quarter conference call. All lines are placed on mute to prevent background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you.

Dr. Matthew Neville, you may begin your conference.

Thank you, Mandy. Good morning. This is Matthew Neville, Chairman and CEO of Cabot Microelectronics Corporation. With me today is Dan Wobby, our Corporate Controller and Acting CFO. Dan and I are pleased to host our fiscal 2003 first quarter earnings conference call. Dan and I will need about 20 minutes for our comments. After that, we will open up to questions for about 30 minutes.

This morning, we reported our fiscal 2003 first quarter results. A copy of our press release can be obtained through our website, or by calling our investor relations office at area code 630-499-2600.

Today's conference call is being recorded. Access will be available for two weeks via telephone playback. The playback number is 1-800-642-1687. You will need access code 743 5387. Webcasting playback is also available through our website at www.cabotcmp.com

Before we begin, I would like to remind all of you our that conversations today may include statements that constitute forward-looking statements. Such statements involve a number of risks, uncertainties, and other factors that could cause actual results to differ materially from those forward-looking statements. These risk factors are discussed in our S.E.C. filings, including our report filed on form 10-K for the fiscal year ended September 30th, 2002. I would like to again remind you that we assume no obligation to update any of this forward-looking information.

With that said, Dan will review our financial performance, and I will provide a progress report on our accomplishments in the business. Afterwards, we will take your questions.

Thank you, Matthew.

Total revenue for the first fiscal quarter ended December 31, 2002, was $57.3 million. Up 12.3% from the first quarter a year ago. On a sequential basis, revenue was down 12.2% from the fourth quarter. Our overall average selling prices were unchanged. The majority of the revenue decreased from the prior quarter was due to a decline in wafer starts, which appeared to be compounded by a few of our customers drawing down their slurry inventories and several December orders that were delayed due to logistics until January.

On a year-over-year basis, for the first quarter, copper product revenue was 48.4%. Though revenue from sales of our copper products was down sequentially from last quarter's high, copper revenue still represented 22% of our total mix for the quarter. We continue to be optimistic about our ability to maintain a leadership position in the emerging market for copper CMP.

Tungsten and dielectric product revenues on a combined basis were down 11.6% sequentially, and our data storage product revenues on a sequential basis, were essentially flat. Matthew will comment on these factors in a few moments.

Despite the lower revenues this quarter, gross margins improved slightly, to 51.7%, compared to 51.1% for the fourth quarter. The higher margins were mainly the result of two items offsetting the effect of lower quarterly sales volumes. The items positively affecting this trend were lower manufacturing operating costs at our plants around the world, and the absence of the ripply [ph] royalty payment. As we stated last quarter, we made the final royalty payment in the fourth quarter and have no further obligations under this contract.

Operating expenses of $15.7 million consisting of research and development, selling, marketing, and general and administrative, were lower than we had previously anticipated this quarter. These operating expenses were down $900,000 from the $16.6 million in the first quarter. The sequential decrease is mainly due to lower spending on research and development supplies, as well as other reduced discretionary spending. On a year-over-year basis, operating expenses increased $2.4 million, primarily due to increases in research and development investments, which is consistent with our strategy of investing to maintain our technology leadership. Though we are managing our costs closely, we will continue to invest in this important area where we see opportunities to advance the technology.

Our first quarter effective income tax rate was 33.5%. Net income for the first quarter was $9.3 million. Or 38 cents per diluted share. Compared to the year-ago first quarter, net income and diluted earnings per share were both up about 3%. On a sequential basis, that income was down due to the higher sales level in the fourth quarter. In the fourth quarter of fiscal 2002, net income was $11.5 million, or 47 cents per diluted share.

Actual shares outstanding at the end of this quarter were 24.3 million. While weighted average diluted shares outstanding during the quarter were 24.6 million. Capital expenditures for the first quarter were $2.3 million. Primarily for manufacturing equipment for the production of new products. Depreciation and amortization for the first quarter was $3.7 million. We currently expect our total capital spending for the fiscal year to be about $24 million. And depreciation and amortization to be around $16 million. At December 31, 2002, our cash and equivalents had increased to $77 million, while total debt, including capital leases, was $13.6 million.

Those conclude my financial remarks. I would like to now turn the call over to Matthew.

Thank you, Dan.

I now will provide some highlights of the quarter that show our progress and accomplishments in weathering the ongoing industry and global economic challenges. We have delivered positive overall results in an environment that has been difficult for our industry, our customers, and their customers over the last two years. After strong sales in the June and September quarters of last year, our sales declined this quarter, but showed solid improvement from the year-ago quarter. Our commitment to staying focused on our mission critical objectives has enabled this performance, and has positioned us well going into fiscal 2003. These mission critical objectives have been primarily geared towards advancing our product technologies along our customer's technology requirements, and supporting these initiatives with the necessary operating and capital investments while otherwise stringently managing our other costs. Despite lower sales, our cost management has helped maintain solid earnings for the quarter.

However, national and international economic conditions remain challenging, which we believe is reflected in the lack of improvement in our customer's end market demand over the last 12 to 18 months. This was evident in the apparent lack of back-to-school and corporate spending and restrained growth in the holiday sales. The PC segment, which is the largest end use for semi-conductor devices has had flat to less than 1% growth year-over-year. The telecommunications segment has experienced little investment due to the continued weak state of that industry. The cellphone segment has not experienced unit growth overall, but has seen technology upgrades in certain regions such as Japan. The consumer electronics segment saw some growth over the year, but represents only about 11 to 13% of the end market for semi-conductor chips.

With the reduced weight reduction in wafer starts over the last two years, we have seen a significant reduction in the overall inventory of IC devices in the channel. In addition, there appears to have been a significant shift in where the bulk of the IC inventory is now being held. Most of the IC inventory appears to be held by the semi-conductor manufacturers, while the rest of the channel seems extremely lean. By the end of our March, 2002 quarter, overall inventories of IC devices had declined to a low enough threshold that semi-conductor manufacturers began increasing wafer starts to better match end market demand. As a result, we saw a 35% growth in our sales from the previous five quarters. We now believe that some of our customers were not just matching their production rates with end-market demands, but were also beginning to build some IC device inventory for anticipated economic and industry pickup on the basis of the U.S.'s formal emergence from an economic recession.

By August and early September, sentiments had changed with a lack of back-to-school pickup, and lack of change in end-market demand. As a result, some semi-conductor manufacturers began planning to reduce capital budgets, initiate aggressive cost savings programs, reduce wafer starts, and shut down some plants during the holiday season. We started to see an impact in our sales in September and October as we discussed in our October 24th earnings call. Sales continued to decline through November. Around this time, some of the foundaries began communicating an improvement in orders from their customers, which appeared to drive an increase in wafer starts and capacity utilization. However, the new rates were still well below the peak of the late spring and summer time periods. We then saw what we believed to be a resulting improvement in December orders over November. Because some of our finished product was not shipped before the close of December due to logistics, approximately 1 million of December orders were delayed until January.

Now, let me discuss our progress in a number of key business areas. As we have said before, we have dedicated substantial resources to copper in both R & D and manufacturing to support our customers' requirements around this very challenging technology. Many of you have visited us and seen some of these investments. We continue to dedicate R & D resources to each of the 130, 90 and 65 nanometer copper technology nodes. The bulk of the commercial copper device production is occurring at the 130 nanometer feature size. Our early dedication in developing leading-edge copper CMP slurries enabled us to earn the leading market position in copper that we believe we have today.

We have continued to work closely with our customers on continuously improving the performance of our commercial products and the copper CMP process. However, we have seen a sequential decline in copper slurry sales for the first time as a result of a decline in wafer starts in leading-edge technology in a few customers, delayed shipments due to logistics issues previously discussed, and some process efficiency improvements implemented by some of our copper customers that have resulted in reduced usage of some of our products.

During the remainder of 2003, we do anticipate growth in copper due to the continued ramp of copper CMP at existing customers, as they fill out their capacity, the introduction of copper CMP into manufacturing by customers not presently using copper wiring, and the move to 90 nanometer devices by the technology leaders. As an example, we have a new customer who will be bringing our copper CMP slurry into production at the 130 nanometer node early this year. Next generation copper IC devices are expected to be at the 90 nanometer node. With commercial production of these devices by some of our customers expected to begin in late 2003, or early 2004.

Notwithstanding the difficult economic and industry environment, these copper technology advancements appears to be continuing. We have made investments in our manufacturing capability to support next generation copper product technology. Sampling and qualification activities are well under way, and we are getting good feedback on our technology from a number of customers, including those who have selected us as their process of record. We continue to expect other customers to make final supplier decisions for these next generation processes soon. We are optimistic about our position in these qualifications.

Tungsten and dielectric combined product revenues were down sequentially from the fourth quarter of 2002, as we experienced the impact of wafer starts slowdown by some of our customers this quarter from the previously higher levels of the June and September quarters of 2002. We continue to follow our business model of continuous product innovation for our tungsten and oxide product lines to meet the emerging needs of our customer.

In oxide, we have been developing new products for critical front-end application known as shallow trench isolation. And I will refer to this as direct STI. Direct STI represents a tremendous challenge for CMP and a significant value add opportunity for our customers. Construction of shallow trenches around the transistors is accomplished through a multistep manufacturing process utilizing both photo lithography and etched processes. Direct STI CMP has the potential to eliminate the need for most of the conventional processing steps used today.

We have been working closely with a particularly targeted customers in the development and optimization of our direct STI product over the last six to 12 months. We have made significant progress towards meeting their stringent performance requirements. Because of our progress, we have recently expanded our work with additional customers from whom we are already receiving encouraging feedback from their initial evaluations of our new direct STI product. We are encouraged with our progress in direct STI, and the opportunity to create additional value for our customers and our business.

We continue to make sure we have a strong presence in all regions where our customers have manufacturing presence. Such as China. Which is an emerging market for future semi-conductor manufacturing. For example, four new IC fab manufacturing facilities are under construction there today. We presently serve several customers in China, and expect to see growth going forward from future investments by us and our customers. As a result, we recently have established an office in Shanghai, and have begun building an organization to support the emerging business in China.

Let me now move to our data storage business. Data storage product revenues were flat-to-slightly up this quarter. The industry has experienced a very difficult operating environment, as the number of platters were disc drive has decreased due to the dramatic advancement made in aerial density. As well as by the soft PC market. Despite these difficult conditions, the hard disc drive industry has continued to rapidly advance disc drive technology. The industry is ramping the 80 gigabyte technology in commercial production today, and we are pleased with our position in this technology node with a recent win at an important customer. The industry is now transitioning to 120 gigabyte drive technology.

We feel good about our position in the data storage CMP market. We have developed an innovative first-step technology and are working hard on a second step product for the 120 gigabyte technology platform. We are presently working with a number of customers and have received encouraging feedback from all of them. With process of record being secured at one. The 120 gigabyte technology is expected to move into commercial production later this year. In mag heads we have recently been qualified at our first Japanese customer.

We have begun to make progress with our pad program. Our strategy is multifaceted, and as we later discussed last quarter, we reached a significant milestone in one facet by entering into a distribution agreement with an existing supplier of pads to the industry. Several customers are evaluating these pads, and we expect to see revenues from this program in fiscal 2003. In addition, as another aspect of our strategy, we are continuing to work on developing our own pad technology to bring to the emerging market area.

Before concluding my formal remarks, I would like to assess where we are and where we may be heading. 2002 was another tough year for the semi-conductor industry. What neither our customers nor we experienced was any improvement in demand driven by the end markets. Forecasting visibility for our customers and for us remains low and caution remains high. We are not able to predict when the economic activity and the important end market for IC devices will improve.

However, we believe we are well-positioned in the marketplace, because we have maintained our dedicated focus to meeting the technology requirements of our customers and have supported those initiatives with what we believe are the appropriate investments in a number of key areas.

Despite the current difficulty in the semi-conductor sector, we believe the market for CMP consumables remains a very attractive business, as shown by the increased competition in our market, which we expect to continue to be a factor in our business. There are four growth drivers that we believe collectively point to a strong, long-term outlook for the CMP market. The first is the expected further penetration of CMP into the IC manufacturing base. Second, we expect to see further shrinks in future sizes which should constitute more wiring layers and more polishing steps. Third, we anticipate new materials to be introduced in the semi-conductor manufacturing process that requires CMP. Finally, new manufacturing processes that can only be enabled through the option of CMP are also expected to drive the growth of the CMP market. For these reasons, we remain encouraged about the long-term outlook for these markets.

That concludes my prepared remarks. At this point, I would like to open it up to questions.

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number 1 on your telephone keypad. We will pause for a moment to compile the Q&A roster.

Your first question comes from Sharish Alaramen with Bank Equities.

Good morning, guys. In terms of the sequential decline, how much do you think was a result of the inventory being drawn down and how much do you think would be due to plant shutdowns? At the end of first quarter, do you see some of those customers starting to replenish inventories from the depleted levels? Thanks.

Good morning. We think part of the decline -- that the inventory drawdowns that we experienced, primarily in one area of the -- one region of the world amounted to about $1 million, and I don't know that they are going to replenish that inventory. I think our feeling was it got a little bit high at the end of last quarter. And so I think I would leave it there. Matthew, do you want to -- okay. Does that answer your question?

Yes. In terms of -- you talked about people being more efficient in terms of using the slurries, and it used to be you needed 200 or 300 milliliters of wafer per pass. Do you see a long-term trend toward that number getting lower or do you think we are kind of bottomed at those levels?

Usually the flow rates are more closer to 150 to 200. Some of the efficiencies we are talking about, as you know, copper technology has been a very challenging technology, and we have been working with our customers, and they have been working on their processes, manufacturing process as well, and so there have been some yield improvements, and therefore that's caused a drop in the utilization of slurries as they improve their yields. Some customers have done that over the last quarter.

Okay. And the last question, can you comment on how big Freudenberg was in terms of revenues in this quarter? At least qualitatively?

We were in transition with Freudenberg in the last quarter, we did have very small sales, and we will see that grow going forward.

Was the APS material in terms of the impact?

No, it was not material.

Thank you, then.

Thanks.

Your next question comes from Jeff Cianci with UBS Warburg.

Hey, guys. I am puzzled here on the margin, if you could explain further, the 51 and change percent. You had the royalty go away. You still had a hangover last quarter. You were doing 51% when you had the royalty in there, if I recall, it was like a 2.5% swing.

Right.

So explain that further. Was it just sales driven by that amount of sequential drive drop or was it very much mix driven? It sounds like your copper did better than your tungsten, which, you know, should I presume help the margin. Explain what is going on.

Okay. I think to begin with, let me take you back to the fourth quarter, and then build from there. Do you remember last quarter what we had -- we had some inventory adjustments that were higher than what we normally experience, as well as the final ripply [ph] payment. Those added together, added about 260 bases points to our costs last quarter. So if you removed those items, our margin would have been 53.7. Remember, we reported the 51.1.

Right.

And so if you compare this quarter, which this quarter our gross margin was 51.7, you compare that to the 53.7, it is -- you know, I think it makes more sense sequentially, and it was in line with our revenue change.

Mix did not have as much of an impact on this quarter, as I think as you are implying. What we said is the volume decreased, it was mainly the factor of our margin going on a comparable basis what you would say is 53.7 down to the 51.7 range.

You know, going forward, we also said this quarter, we have had some lower manufacturing operating costs this quarter, and so I would probably just explain it that way.

Well, you go back, I don't remember these margins ever being below 50%, and at that time, you had the royalty payment in there.

That's right.

And now without the royalty payment, you know, basically this -- you know, it would appear to be a trough margin adjusting for that, going back two years. Is that about right? X the royalty?

I think you also need to factor over the last two years, you know, our requirements and our customers' requirements evolves around quality and the manufacturing process. We have been making investments in requiring more stringent controls, putting in better systems, more capability. So you need to factor that in that I think we have been very clear about our gross margin target of staying between, you know, in the low 50s, because of -- we always need to make investments. We keep needing to always raise the bar. We always need to put some reinvest in, not just R & D, which is the one we talked the most about, but at the same time we need to do the same thing in our manufacturing base.

So there has been, over the last two years, slight increases in our cost structure, and that's because of the needs of our customers keeps increasing, which is a good thing for our business.

Okay, thanks. Finally, operating leverage. What about the operating margin which appears to now hit a low through the cycle? It has been as high as over 30%, do those same expense constraints hurt you below the line in, you know, do you see R & D ramping up from this quarter's level? Do you see selling expense ramping up from this quarter level?

I think what we would say was this quarter was -- we did have lower expenses, particularly around materials, and when you think of materials that we want you to think mostly around wafers. Wafers are extremely expensive. We have a -- a pretty extensive applications facility. We invest a lot in wafers. We have been doing a lot of work with customers over the last quarter, so we haven't been spending as much on our wafers. You might think of it in that way. We have been doing a lot of demos, a lot of calls, a lot of final work with customers. That has helped our expense structure. I think, I would look at it as a -- you know, it was low. It was lower than we had originally anticipated. We do expect it to come back up to the level of the third and fourth quarter.

We will continue to make investments as we see the need to do some strategic things in there. We are also going to be making further investments in our sales area as we go direct in Europe, and southeast Asia. We are in the final phases of that in Japan. So you -- I would look at these as low on the cost side, both operating and expense.

All right. We will talk more later, thanks.

Your next question comes from Christopher Crooks with Commerce Capital Markets.

Good morning.

Good morning.

I was wondering if you could address in any quantitative fashion growth from some of the new customers you are talking about and some of the new wins that you had.

Let me just -- I can talk about ones that we referred to both this quarter and last quarter. And they usually -- what the process is, when we get a win, it isn't an automatic step change, particularly if it's a new technology, you will see a gradual ramp. And so I think we talk about a win in tungsten last quarter for a new customer, and that is slowly beginning its ramp. We talked about a new win in the data storage, and as that ramps, their older technology declines. And so there is little growth there, but you have to be thinking, there is some cannibalization happening in the data storage. And the other win we talk about was in the magnetic heads, and what that win was was a qualification. And they are starting that ramp process, but it will occur over time. And then we talked about being PORed a couple of companies on the 90 nanometer copper. As I said, most of that won't go into commercial impact until the late 2003, early 2004.

Okay. And the logistics issue at the end of the quarter, is that just a timing issue? Is there something more there?

I will give you one example. We have a customer that has -- prefers that we use one carrier, a very specific carrier, and during the last week of December, they got very busy, and it was difficult to schedule in the shipment. So it was a timing issue. And so it is those kinds of things, nothing that anyone should be concerned about. But during that time of year, it was a holiday season, these things are going to happen. We do have plenty of stock at our customers' sites that these type of events are nonevents but it did shift some revenue from December month into January. And that's the only significance of raising it.

Okay, great, thank you.

Your next question comes from Susan Crossly with Wells Fargo Securities.

Good morning.

Good morning.

A couple of questions. First, Matthew, you mentioned in passing, direct STIs, new market for you, maybe you could give us some feel for the size of the slurry market, you know, historically what is the annual size of the slurries for STI? And what do you think the direct STI market slurries for direct STI could be in terms of the overall market, not necessarily your sales?

Okay. I would be happy to do that. Direct STI, you should be thinking of is the first step in the polishing of an oxide. And so when you think about what the size of the market is, if you have a chip set that has six metal layers, you would be doing six oxide polishing. One of them would be for the older technology, which is, we call indirect-direct STI. And so the market opportunity, as they transition to direct STI, and we believe that will start happening at the 90 nanometer and fill out at the 65 nanometer nodes, every first step of all chips could potentially use direct STI. So you just think of it as the first polishing step of every wafer start. That's the potential.

It represents a pretty high value to our customers. Today, they use a multistep process which is a photo lithography and etch and both of those have multiple steps within them in curing and cleaning. There is an oxide polish step that occurs as well. And so there will be a little cannibalization. It is a much higher value. Photo lithography is probably the most expensive process step in the fab. So it has huge value to our customer. And simplifying that and eliminating those steps, a great opportunity for value for our customer and for us. So it has some really good potential. It is a difficult technology. It is one that the industry has been interested in using, has not really had much success with, and we are getting some very encouraging results, and we are hoping to see some commercial sales this year, but it still has some hurdles to go through.

Okay. If you could talk about this -- you -- new business that you have, your agreement with Dow Elanco [ph] and services revenues, did services revenues from that agreement enter to any degree your revenue number for the December quarter, or is it yet to come?

It is yet to come.

Okay.

I will just elaborate a little on it. One of the things that our customers, you know, want from suppliers is to help them with all parts of the CMP process. And one of the things that is important, both from an environmental concern, as well as a cost structure, is as these weigh streams become more complicated, having the ability to manage and deal with them represents an opportunity. We recognize that we did not have a core competency in designing waste treatment, but we know an an awful lot about the materials going into the CMP process, and therefore -- and have a lot of understanding about the fab designs and how these systems need to work and operate. And so it was a good merge between a company who has a very strong competency around waste treatment and one that has a good understanding of the materials and we work together in this process, and we have three proposals out with three customers we are preparing six more proposals. We are encouraged about the progress. The pull from the customer is strong. They see a lot of value. They are delighted that we are actively engaged in helping them. So it has multiple benefits to our business.

Okay. That's helpful. In your gross margin discussion, I know that some people asked a question about it, and the way I tend to look at it is the margin will become more and more opaque, especially with Freudenberg entering the picture with your agreement. So I tend to think that, you said Freudenberg was not material in terms of results of the quarter, probably not material in terms or earnings, but I've got to think it doesn't help the average gross margin, if the operating margin, it doesn't [ poor audio ] Is that a factor or not?

It is not a factor in this last quarter's results that we are reporting.

Okay. That's it for me, thank you.

Your next question comes from [poor audio) CIBC World Markets Corp..

Good morning, gentlemen. Since no one has already, I thought I would congratulate you for having your level of profitability, I think best in class. And from so far all -- better than all the chipmakers as well.

Matthew, I had a couple questions for you. I was hoping you could extrapolate on the December trends into January. You mentioned the uptick in December and your customers following the trend on the inventories and being lean. Could you give us a sense on what's happened in the last 20 days and if I understand correctly, clarification seems that the whole drop in the margins and the business is volume driven with ASP flat, it appears all of it is a volume factor in the quarter and I have a couple follow-up questions.

I will answer the easy one first. You are correct, the lower gross margin is totally due to volume, and that's the way you should be thinking about it. That's how we tried to respond earlier. What are we seeing going forward? And what I would say is, is that January, which usually is a particularly weak month, we are seeing -- you have to remember, it is only the first three weeks, so it is a limited view into the next quarter. But it is on par with the average of what we have been doing over the last quarter. It is above the low, which we said was in November. And comparable to the December and October.

So kind of a flat month over month at least in the first 20 days? That's the direction.

That's the way you should be thinking about it.

Great.

We don't see -- what we don't want to leave the impression is we don't see a decline. We at the same time don't see an uplift.

I would think with the inventories being lean and the channel [indiscernible] for slurries, the typical seasonal, you know, slowness in slurry demand would at least this year be moderated I guess is the right word, month-to-month.

Yes.

You talked about the STI opportunity for the oxide business. You know, the other thought that comes about in terms of the mix migrations is the low K business. Well talk a lot about the copper. There are a number of low K films going on out there, I was hoping you would give us an update as to how you are working with the different suppliers and whether that too is an opportunity for value-add?

We have programs with most of the major low K and ultralow K suppliers, so we are in a very good position. I think it is a great point to raise. You know, one of the critical things in developing solutions for our customers is making sure you understand how your material -- how our material is going to perform with the multiple different options that are being integrated. You look at what is happening with low K today, there are probably four different types of films that will be integrated at the 90 nanometer, and we have access to all of them and have done a fair amount of work in optimizing and tailoring. So, what it's going to do is to drive to more specialization. We see the same thing happening with ultralow K. So that we have relationships with the material suppliers, and have access to all of them. And I think it is an opportunity to bring real value to the -- to our customers, because then they have confidence that they have more ability to pick and select and optimize the best low K for their chipsets and know that we will be there with a solution.

Beyond the lower hardness of most of the films out there that makes it tougher to polish, if I understand correctly, uniformly -- uniformity is a big issue to prevent the delamination in the next couple steps. Is that something you faced? Is there a specific CMP slurry requirements to avoid that problem?

Yes, there is. I think, you know, if we went back a year, there was a lot of concern that, you know, CMP was going to hit some obstacles in dealing with what we call "ultralow K materials."

Just because of the porosity?

Because of the porosity. And so that what the concern was, was partially delamination, but also just the structural integrity. It wasn't just CMP that was concerned. When you cut the dye, the material was undergoing a lot of destruction. And so what we have been doing is -- has required us in our technology effort to think about the mechanism in a different way, and so it has required us to incorporate a real good understanding about how to control friction and fiction which leads to a force. And you need to be able to remove material without having fiction or requiring high amounts of friction and so we have had to design that into our product.

At the same time, the low K material -- ultralow K material manufacturers have also recognized the need to improve the structural integrity. And as a result, we no longer see the kind of barriers, we have had success in polishing and getting good results in the early development that we are in now with ultralow K. So we no longer see it as a barrier. We see it as an opportunity for enablement, and so we are working with a couple of the lead technology companies on a multiple subspace.

I know this is a long dream in the making, but on the pad side I guess the hope initially was you could see some kind of process sequence integration advantage, I know it has just been a short while, but are you seeing any benefit in integrating, you know, the pads that your partner is supplying at existing customers with your slurries for these new applications?

There is one application where we are seeing synergies, the combination of that pad and one of our new slurries are seeing the best activity they have seen in that application.

That's good news.

What our long-term ambitions are that we think -- if you notice the slurry side of the technology, it is very tailored and optimized around each application, whereas the pad side it has really been one technology. And we think there is a great opportunity to really leverage and bring more specialized pad technology to each of the applications and optimize them with a slurry. We don't -- that's our long-term goal. That's where we think the value is. We have a lot of work to do to get it there.

Great. Thank you very much.

Your next question comes from John Roberts with Buckingham Research.

Good morning.

Good morning, John.

Would we expect the average selling price to remain roughly flat over the next quarter as, you know, copper is sort of plateauing out maybe here with the overall business?

Well, John, our average selling price is a function of the mix. We haven't seen a -- any change in the mix in the first three weeks, but I wouldn't -- I wouldn't be able to tell you what would be the effect of the average selling price going out in the whole quarter.

You know at least what customers are ramping and whether or not there are actually any new copper lines coming up. Do you know of any ramp that would be occurring during the remainder of the quarter that would cause the average selling price to go up?

I wouldn't provide any guidance.

I mean, we have -- you know, John, as we have always done, we have -- you know, we have the two to four-week cycle, we are make-to-order. We don't have visibility beyond -- and because of that we tend to not want to speculate exactly what will happen on this kind of microlevel.

As I have said in the copper, we have some customers that are still going to ramp their capacity. We are hoping that the next wave of manufacturers start bringing copper in. We have one account where that is going to happen. I think that that transition will be impacted by, you know, people's confidence level and they are willing to invest. And we probably won't see much of the 90 nanometer until the end of the year. So right now, we are not going to speculate just because of the order cycle. We will talk about it at the next earnings call.

Okay. Secondly, a couple of quarters ago, Matthew, there had been a -- I don't know what the right word is, but whether it was bundling of price or there was at least some grouping of pricing or discounting on dielectric slurries in order I think to lock in share of some of the higher-margin products. Is there any more of that activity going on or planned in the near term?

What I will say is, you know, as we have said in our call, our average selling price has remained this quarter, and so you can draw your own sets of conclusions on that. You know, with the current environment, we are seeing a lot more focus of our customers on cost reductions. And I think with the duration of the present economic environment, we are going to continue to see those kinds of pressures. As we have said in the past, our business model really has been to work with our customers to find ways to reduce their costs. But much more focused on trying to make process and product improvements. And that's really been our business model. We have been very successful in the past, and we will continue to do that.

I think you have cited a couple of examples where strategically, in the past, we have done some price reductions. And that's usually for strategic reasons, business reasons. We see an opportunity for them to become a very big customer. And those kind of things do happen and have happened over the years and they will continue to happen. And I am not going to get into any more detail than that.

Lastly, I know we have got Dan on the call, so I don't want to give him a promotion on the call. You have the title acting chief financial officer, is this sort of a steady state arrangement here now? Or could you update in where the search is that you had at least initiated right after we had the CFO change?

I would like to just start off by saying Dan and the financial team are doing a great job and I am very impressed and pleased. We do have a solid team in place here, so we are very confident with the financials and the management of that part of our business. As we said in the last call, we have a very active recruiting process under way for a CFO. We do plan to hire a new CFO. We are pleased and impressed by the quality and capability of the candidates. We have been seeing. And so we are moving forward. I think because we have got the strength, the bench strength in place, and we are pretty straightforward financial, we are trying to make sure we get the right candidate that will be a really good fit with the business and complement our needs with complementing, you know, what their expectations are. So that we assume over the next quarter, we will make an offer and have a CFO on board. But I think here again, what is important is to make sure we have got a good fit for the long term.

Thank you. Your next question comes from Gill Yang with Salomon Smith Barney.

Good morning.

Good morning.

Could you comment, average selling price were flat sequentially. How about year-on-year?

I will ask Dan to answer that question. I don't have the data in front of me. It is a good question.

Yeah, year-on-year the average sell price was up slightly. Probably about 5%.

Could you tell us what the contribution of foreign exchange was in the quarter?

Foreign exchange did not play a big factor in this quarter. It was, you know, our revenue was slightly pushed down by the foreign exchange, but overall the income was immaterial.

Okay, so a slight negative?

Slight negative on the foreign exchange. You know, we are mostly -- exposure is in the yen. It didn't have much movement quarter over quarter.

Matthew, you mentioned a couple times that you have -- it sounds like you have become the process of record for copper for 90 nanometers at a couple of customers. Could you comment on whether or not that copper 1 or copper 2 or both? And are these large customers or small customers or whatever? Could you characterize that?

Yeah, I will not get into too much detail on that just because our -- you know, as you know, and as we have talked many times in the past, our customers don't like us to get into specifics. They don't want us telegraphing what they are doing and where they are in their process. What I would leave you with is if you look at who is doing copper today, it is really the technology leaders, they tend to be fairly large manufacturers. They tend to be the leaders in the industry so that those that are moving to 90 nanometer will be the technology leaders and I think you can guess who most of them would be in that category. So they are substantive. It would represent substantive business.

You did seem to imply two to me. How many others of the technology leaders are you working with currently?

We are working with all the technology leaders that are moving to 90 nanometer. We have active programs with all of them.

How many people would that be?

Let's say, you know, I am -- it is a rough number. A dozen or less.

Okay. And regarding copper for '03, you said there is -- you are sort of anticipating there will be a next wave of adoption from sort of the second tier adopters, I guess. Would you characterize that the second tier adoption would be as large as the first wave or would it be smaller?

I can speak about, you know, my experience from the last technology process, when we first got into the introduction of the tungsten, the technology leaders moved in early and ramped their business. And then the second tier, and the continued growth, it was a pretty big impact. I think what you need to factor in today is, is that, two things. Only about half of the wafer starts are going to use copper for the next couple of years, and the reason is, is that copper wiring is not going to go into the memory sector right away. So you have got a little bit of a dampening factor, even though we are working on copper CMP with all of the major memory manufacturers, and they are doing technology work on it, the bulk of memory won't be going to copper wiring. The first segment of that is probably going to be the flash sector. And so you can either take that into one part of the effect.

The other thing that you need to take into account given the economic environment for companies, the next wave to get into copper CMP and switch to wiring, they will need to make some investments. And I think the real question is going to be when are they going to make those investments given the economic environment? So it is very hard to predict howl big it will be, how quick it will be, and how spread out it will be.

Okay. And one final question, as I was looking on the weather dot-com site this morning, it is like minus 3 in Chicago, I understand, minus 10 in New York. In the past -- not minus, it's 10 degrees in the New York. There has been discussion about the impact of weather in shipping slurries because they are water-based, is that going to be a problem if this weather continues?

Not at all. You know, we have been serving this industry from this part of the country, and we have broader-based manufacturing now in all regions by different plants. We have got a well-managed process. Just in the summer, things don't get too hot. In the winter we keep things from getting too cold. We have heated shipping. It is all incorporated. We have 20 years' experience working in this environment. I will indicate the windchill factor makes it down to minus 30 today just to give you a little better feeling that it might be nicer to be in New York than Chicago. But we are used to working in this environment. We have never had problems before, and we don't anticipate problems around this issue.

Might there be a cost issue with having to do more heated shipping?

Nothing that -- you know, every year, we have -- we deal with that, and so we have got it well managed. It is part of our operating costs, and you really don't -- it doesn't really show up.

Okay. All right, thank you very much.

Thank you. With that, Mandy, we will end the conference call.

Thank you, sir. Thank you for participating in today's Cabot Microelectronics Corporation 2003 first fiscal quarter conference call. This call will be available for replay beginning at 11:30 a.m. Eastern time today, through 11:59 p.m. Eastern time on February the 6, 2003. The conference ID number for the replay is 7435387. Again, the conference ID number for the replay is 7435387. The number to dial for the replay is 1-800-642-1687 or 706-645-9291.