CMC Materials, Inc. (CCMP) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the fourth quarter 2008 Cabot Microelectronics earnings conference call.

My name is Stacy, and I will be your conference moderator for today. At this time all participants are in a listen only mode. We will be facilitating a question and answer session toward the end of the conference.

(OPERATOR INSTRUCTIONS)

I will now like to turn the presentation over to your host for today's call, Ms. Amy Ford, Director of Investor Relations. Please proceed.

Good morning.

With me today are Bill Noglows, Chairman and CEO and Bill Johnson, Chief Financial Officer.

This morning we reported results for our fourth quarter and full fiscal year 2008 which ended September 30. A copy of our press release is available in the investor relation section of our website, cabotcmp.com, or by calling our investor relations office at 630-499-2600. Today's conference call is being recorded and will be archived for four weeks on our website. The script of this morning's formal comments will be available there.

Please remember that our discussions today may include forward-looking statements that involve a number of risks and 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 under 10Q for the third quarter of fiscal 2008 ended June 30, and Form 10-K for the fiscal year ended September 30, 2007. We assume no obligation to update any of this forward-looking information.

I will turn the call over to Bill Noglows.

Thanks Amy. Good morning, everyone and thank you for joining us.

We are pleased with our performance in fiscal 2008 having achieved 11% revenue growth and 15% EPS growth. Over the course of the year, we also made steady progress in our strategic initiatives and hit significant milestones in each of our business areas.

As an example, we made inroads with our slurries for barrier and advanced dielectric applications, while sales of our slurry for tungsten applications grew an impressive 19% this year. In addition, the hard work, dedication and persistence of our pads team resulted in over $15 million of pad revenue this year, signifying a breakout year for this growth business, which is highly complementary to our CMP slurry business. Last, we are leveraging our expertise for our CMP consumables business to continue to make headway in new ESF applications, which are gaining traction and contributed to overall Company performance this year.

We are very proud of our strong results in the significant progress we made toward strengthening our Company in fiscal 2008, and we believe we were well positioned for what lies ahead. While we recognize that the macro-economic environment and the semiconductor industry, specifically, are expected to be soft in the near term, we are experienced with and accustomed to successfully navigating through soft, cyclical demand environments.

For example, we have weathered three semiconductor industry downturns since becoming a public company in 2000. During each of the down cycles we continued to generate positive cash flow from operations, were profitable, and continue to invest in our future.

In our view, challenging times like these weed out the marginal players from the strong ones and create opportunities for the stronger companies to strengthen and grow, while others might be struggling to survive. We are confident that our significant infrastructure and scale associated with our leadership position and CMP slurries, combined with our low capital intensity and solid balance sheet, make one of the stronger players in our industry.

Recent press and analyst reports have forecasted protracted semiconductor industry softness, due in part to the current economic situation and the overall decrease in consumer confidence. Certain analysts have predicted the worst wafer start environment since 2001, a year which the semiconductor industry contracted by more than 30%.

Not only are the foundries expected to reduce their utilization rates by 20% to 30%, a number of memory manufacturers have announced that they have begun reducing production as well. This is uncharacteristic of the memory segment which is known for running its fabs at full utilization in order to drive down unit costs. Since the primary driver of revenue for our CMP consumable business is wafer starts, the downturn we are experiencing is expected to adversely affect our Company in the near-term. However, we expect any impact on our Company will be partially offset by continued new wins in pads, as well as other growth opportunities such as ESF and slurry products for advanced dielectric and barrier applications.

In our business we began to see a reduction in demand for our CMP consumables products in August, and based on industry forecast, we expect this softening of demand to persist well into calendar 2009. It is somewhat ironic, but a soft industry environment sometimes presents more opportunities for customer engagement and growth. As our customers lower their utilization rates they have more engineering resources and available tool time to evaluate and qualify new CMP slurry and pad products.

We believe that over the past several years we have made the necessary investments in technology leadership and continued strengthening our customer relationships, which has positioned us well for capturing evaluation opportunities that may arise during a downturn.

Although we believe the current economic situation has begun to negatively impact orders for our CMP consumables products, it has not impair our ability to run our operations. We have over $220 million in cash in untapped $80 million credit facility, and no debt. In addition, we have a solid track record of generating strong cash flow.

For example, during fiscal 2008 we generated over $70 million of cash from operating activities, but used less than $20 million for capital additions. The current environment has not changed our Company strategy, and we feel we are well positioned to emerge from this industry downturn even stronger. Having said this, we will continue to be disciplined with our uses of cash and our placing increased attention on managing costs.

During the year, we continued our emphasis on technology leadership, which has led to increased revenue from a variety of new innovative products. These products are targeted to achieve high performance while providing a low cost of ownership for our customers. Evidence of our success in this area can be seen in our new product vitality metric, which measures the portion of our sales that are driven by products commercialized within the last three years. This metric has increased by more than 50% from last year, and has more than doubled over the last three years.

Historically, our CMP products have enjoyed long life cycles. In fact, some of our high quality branded products that we introduced in the late 1990s are still in use today, and we work to keep them vibrant by continually improving them to meet the ever increasing performance requirements of our customers. By achieving new product wins today, we aim to secure a solid revenue stream far into the future.

Executing on our operations excellence initiative has also contributed to our strong financial performance. Our continued high level of product quality and consistency is a key competitive advantage and has led to our achievement of a number of supplier awards during the fiscal year just completed. Furthermore, our strong focus on cost control and manufacturing operations has earned us a 5% productivity improvement in fiscal 2008, which builds on the 18% cumulative productivity gains over the prior three years.

Excluding the adverse effect on our overall gross profit margin of our emerging pads operations, this year's productivity achievement, when combined with continued pricing discipline, resulted in our second consecutive year -- second sequential year of gross profit margin improvement.

One reason we are able to earn an attractive gross profit margin is the value we bring to our customers in terms of service and support through connecting with our customer's initiative. This past year we improved our ability to collaborate more effectively with our Asia/Pacific customers by expanding our technology center in Japan to include a state of the art 300-millimeter polishing tool and related the metrology.

In addition, we were working toward strengthening our relations with IBM and other strategic customers by working on various joint development programs. As we enter fiscal 2009, we expect to take advantage of the new opportunities that may arise to strengthen our customer relationships, and win more business. We also plan to continue our discipline focus on managing operating expenses while maintaining our world class customer service and technical support.

I would like to turn our pads business.

In fiscal 2008 our pads business grew to $15 million in revenue from less than $1 million in fiscal 2007. In addition, we nearly doubled our pad customer base, finishing the year with 15 customers for over 20 distinct polishing applications and tens of thousands of pads sold. I'm pleased with the progress we made in tuning and optimizing our pad production process which, combined with higher sales volume, resulted in our second sequential quarter of positive gross profit for our pads business.

We believe that the growth opportunity is significant in our pads business, and that we have demonstrated that a win with one customer application has the potential to rapidly translate into multiple application wins. For example, about a year ago, we discussed an important win at a leading edge customers by 300mm pads for a 65-nanometer copper process. Last quarter, we reported that this customer had back integrated our pads into its older 90 and 130-nanometer copper processes. We were pleased that the same customer has now begun to utilize our pads for certain tungsten processes.

Given the significant demand from this customer, we have entered into an agreement to establish on-site finishing capability at one of its wafer fabrication facilities. Construction began this quarter and is expected to be completed in the first calendar quarter of 2009. This type of customer engagement exemplifies the confidence we are building with our customers for our pad offering and for our operations excellence initiative.

Turning now to our engineered surface finishes business, we remain optimistic about the potential in this area despite the lower revenue this year.

In fiscal 2008 our QED business strategy focused more on expanding its customer base and increasing sales of standard machines and less on custom machine and research and development contracts. QED was successful in increasing its standard machine sales by more than 20% this year, even in this challenging capital equipment market, but it was not enough to offset a reduction in revenue from custom machines and research and development contracts. As we enter into fiscal 2009, we intend to continue our focus on standard machine orders, which we believe is the foundation of sustainable long-term growth.

In summary, we believe the continued execution of our two pronged growth strategy and related key initiatives were instrumental in driving our strong perform in fiscal 2008, and we remain committed to the implementation of the strategy. From our perspective, our units base business, strong balance sheet, and history of solid cash flow and earnings generation throughout industry cycles makes us well positioned for solid performance, even during periods of industry softness.

And with that I will turn the call over to Bill Johnson. Bill?

Thanks Bill, and good morning, everyone.

Our revenue for the fourth quarter of fiscal 2008 was $90.2 million, which was essentially even with the fourth quarter of fiscal 2007 and down 7.1% from the previous quarter. Quarterly revenue declined sequentially in all major business areas except sales of polishing pads. During the quarter we started to experience reduced demand for our CMP consumables products, which we believe reflects the industry softening Bill referred to earlier.

Total revenue for the full fiscal year was $375.1 million, which represents a 10.9% increase from last year. Revenue for our core CMP consumables products for semiconductor applications increased by 14.7%, while revenue for our data storage and ESF business declined.

Drilling down into revenue-buy business area, tungsten slurries contributed 41% of total quarterly revenue with revenue up 5.9% from the same quarter a year ago and down 5.4% sequentially. For the full year, tungsten slurry revenue increased by 19%, driven by strong demand from our memory customers, especially in Korea, where our annual sales were up nearly 50% from last year.

Sales of copper slurries represented 13.9% of our total revenue, and decreased 25.1% from the same quarter last year and 13.2% sequentially. For the full year, copper slurry revenue decreased by 9.5%, reflecting the loss of some copper slurry business from one particular customer, which we previously discussed during our second quarter earnings call. While sales of copper slurries for bulk and soft landing removal decreased in fiscal 2008, sales of copper slurries for barrier removal increased by more than 45% from last year.

Dielectric slurries provided 31.8% of revenue this quarter with sales down 1.8% from the same quarter a year ago, and down 7.5% sequentially. For the full year, dielectric slurry revenue increased by 9.6%. Included in this business is our rapidly growing advanced dielectrics product line, the revenue from which was up more than 125% from last year.

Data storage products represented 3.2% of our quarterly revenue. This revenue was down 43.2% from the same quarter last year, and down 2.9% sequentially. For the full year, revenue for data storage products decreased by 23.8%. This decrease was due in part to the merger of two significant players in the data storage industry, as well as a loss of some business. However, we recently won an important new position which we began ramping at the end of our fourth fiscal quarter.

Sales of polishing pads represented 6.1% of our total revenue for the quarter, and increased 21% sequentially. For the full year, revenue increased nearly $15 million. During the quarter, a significant customer completed its ramp of our product for its copper applications, which was an important contributor to our strong revenue growth in fiscal 2008.

Finally, revenue from our ESF business, which includes QED, generated 4% of our total sales, and our ESF revenue was down 14.3% from the same quarter last year, and down 28.2% sequentially. Remember, that our QED business is mainly capital equipment oriented, so quarter to quarter revenue fluctuations are common, and capital equipment spending was down this year in general. For the full year, ESF revenue decreased by 12.3%, driven by lower custom machine orders and research and development contracts in QED.

As a percentage of revenue, our gross profit was 46.6% this quarter which was down from 49.1% in the same quarter last year, and 46.8% in the previous quarter. Compared to the same quarter a year ago, our gross profit percentage decreased due to the effect of foreign exchange changes, increased logistics costs associated with higher energy processes, and higher fixed costs related to our pads business. These effects were partially offset by a higher valued product mix. Compared to the previous quarter, the slight gross profit decrease was mainly due to a lower valued product mix and higher logistics costs which were partially offset by lower manufacturing costs.

For the full year, gross profit as a percentage of revenue was 46.5%, which was down from 47.3% in fiscal 2007. The decrease was primarily attributable to higher fixed manufacturing costs and lower manufacturing yields associated with our polishing pads business that we have discussed throughout the year. Also contributing to the decrease was the effect of foreign exchange rate changes. As Bill mentioned earlier, excluding the impact of our merging pads business, gross profit percentage would have been slightly higher in fiscal 2008 than in fiscal 2007.

Now I will turn to operating expenses which include research, development and technical, selling and marketing, and general and administrative costs. Operating expenses of $31.7 million this quarter were higher than the $30.3 million reported in the year ago quarter, primarily due to increased expenses for clean room materials and higher professional fees, including legal fees related to intellectual property enforcement. Compared to the prior quarter, operating expenses were $800,000 lower, mostly due to decreased travel expenses and professional fees.

The decline in professional fees was primarily driven by lower costs to enforce our intellectual property, but was partially offset by higher professional fees in our corporate development area.

For the full year, operating expenses of $125 million were 9.5% higher than fiscal 2007. Nearly half of this increase was driven by cost related to our intellectual property enforcement. In addition, higher staffing related costs and travel expenses were partially offset by lower clean room materials cost.

Diluted earnings per share were $0.36 this quarter, down from $0.43 reported in both the fourth quarter of fiscal 2007 and last quarter. Diluted EPS for the full year was $1.64, which is up 15.3% from $1.42 reported in fiscal 2007.

Turning now to cash and balance sheet related items, capital additions for the quarter were $2.6 million, bringing our full year capital additions to $19.2 million. This includes cost associated with the addition of 300mm polishing and metrology capability to our Asia/Pacific technology center, as well as the expansion of our pad manufacturing capacity.

Depreciation and amortization expense was $6.3 million in the fourth quarter, and share base compensation expense was $3.7 million. In addition, we repurchased $5 million of our stock during the quarter bringing our total share repurchases to $39 million in fiscal 2008.

For the full year, cash flow from operations was $70.8 million, a record for the Company. We ended the fiscal year with $226.4 million in cash and short-term investments, which is $13.9 million higher than last year. We believe that our strong cash flow and solid balance sheet position us well for continued success through industry cycles and will allow us to capitalize on certain M&A opportunities that may arise in the future.

I will conclude my remarks with a few comments on our general outlook.

Examining order patterns with the three months of the fourth fiscal quarter, we began to see softening in demand for our CMP consumables products in August. As we observe orders for our CMP consumables products received to date in October, that we expect to ship by the end of the month, we see October results trending significantly lower than August and September levels. However, 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.

As we've discussed in the past, we believe that our CMP consumables business for the semiconductor industry is driven by overall wafer starts. Based on recent public announcements from several players in the semiconductor space regarding production levels, we expect fiscal 2009 to be a challenging year for our Company from a demand perspective.

Despite the expected challenging demand environment, and given the limited capital intensity and relatively low fixed costs associated with our core CMP consumables business, our gross profit percentage guidance for fiscal 2009 remains unchanged at 46% to 48% of revenue. This guidance is for the full fiscal year, and quarter to quarter our gross profit percentage may be above or below this range. Current uncertainty in economic conditions makes it particularly difficult to predict full year results, and makes it more likely that actual results could differ from expectations.

From an operating expense standpoint we continue to manage costs, especially given the anticipated soft demand environment. For fiscal 2009, we expect our full year operating expenses to be in the range of $120 million to $125 million, which represents a flat to slightly lower outlook from fiscal 2008.

Our full year tax rate is expected to be expected to be approximately 32%, compared to over 30% in fiscal 2008.

Capital spending should be around $13 million, a small portion of which is allocated to the construction of pad finishing capability at our customer facility, which Bill discussed earlier. Depreciation and amortization for fiscal 2009 is expected to be approximately $22 million, which is down from $26 million in fiscal 2008. Should any of these variables impacting our guidance change going forward, we will update the provided guidance accordingly.

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

Thank you. (OPERATOR INSTRUCTIONS) Your first question comes from the line of Suresh Balaraman of Bank Equity Partners. Please proceed.

Thank you. Bill, regarding the pads, have you seen the significant slowdown that you are witnessing with slurries? Are you seeing an option mostly overcoming the softness in the markets?

No. We have continued to grow Suresh. We grew 21% in this fourth quarter that we just completed, and as we continue to win customers, we continue to see growth in our pads business.

Going into 2009, we would expect growth in our pads base to outpace wafer starts as we expect to win more business and ramp more customers. Just to caution us all, we've clearly demonstrated that it's hard to predict when a customer will adopt and ramp our product, but as we continue to gain more customer wins we would expect to grow, and grow with disproportionately in the pad business.

I guess the drag on us would be if wafer starts contract faster than we ramp new business. We could see a quarter to quarter decline in our pads revenue growth. We will have to watch that very carefully going into what we would describe as very uncertain times.

So far we have been unable to grow every quarter since our early introduction in the first quarter of the fiscal year, and we're delighted with the traction of our pad business we had.

Is the softening completely corollated to the drop on utilization rates of chip makers, or is the cut back more severe than the drop in wafer starts because some of them may be starting lower inventory of slurries in the factories?

I think -- what I think and what I read Suresh, is every one of our customers has pulled in inventories and working hard to manage their working capital. When the foundries, and we have described ourselves we asked people -- pointed people to the foundries as a good predictor of what our future might be or look like, the foundries are talking about a 20% to 30% utilization reduction in the fourth calendar quarter.

I think that's real and I think that will happen, we are bracing ourselves for it. In terms of the supply chain, we think there is not a great deal of slurry inventory in the supply chain.

If you recall a number of years ago, we sold in Taiwan through distributor, and now we sell direct. So the inventory and the supply chain is quite a bit less than it was a few years ago. We don't think an inventory drawdown is a big part of the downturn we saw this quarter.

Also do you talk about the ASP change sequentially?

It was modest. I think ASPs, on average, were down about a half percent, so really not much to talk about. It was a combination of pricing effects, mix effects, and foreign exchange effects.

So really, not much activity from a pricing standpoint.

Great. Thanks, guys.

Thanks Suresh. We'll take our next question please.

Your next question comes from the line of Steve O'Rourke with Deutsche Bank. Please proceed.

Thank you, good morning. Just a quick follow up to the last question. How do you see ASPs trending going forward in this type of an environment.

Steve, this is Bill Noglows.

I think we have seen -- when we described we seen as a bit of stability over the last, certainly four to six quarters in ASPs. I think it's difficult to predict what pricing is going to do in the next two or three or four quarters. I think we're entering an environment where, in my prepared comments this morning, I suggested that this is a time when the strong get stronger and the marginal get marginalized. And depending how some of those marginal players behave in a downturn, that could have an impact on some pricing in some parts of the world. We will just have to wait and see.

We have talked about a renewed pricing discipline for, certainly in our business, for the last four to six quarters and we see the impact on that in our ASPs stabilizing in time. We hope to continue with that same discipline in our business, but we have to react to competitive situations around the world, and we will react competitive situations around the world.

Fair enough.

Bill Johnson. Just a couple other comments.

We are always subject to pricing pressure from customers. They want lower costs. And the challenge for us, given all of the technology and investment in technology, is to convince the customer that we can deliver them lower cost of ownership through means other than just lowering the price.

We can do that through yield improvements and things like that. We're particularly showing that on the pad side of the business. That's where the biggest leverage for our customers to reduce cost is in cost of ownership, not necessarily pricing. And that's the story we take to the customers.

And in discussions with your memory customers, we have seen memory capacity idle or shut down. Any thoughts on quantifying how much has been shut down among your memory customers, and what their outlook is going over the next couple of quarters with respect to that?

I'm not sure we have that granular data Steve. I know that many of them have publicly stated that they're managing their businesses for profitability now, and not necessarily market share. And so what we believe, or what I believe, is many of them are trying to manage capacity in such a way to drive up their pricing, but they've been unsuccessful, certainly this year, and going into a slowdown I think it's going to be difficult, a very difficult business environment for our memory customers.

Fair enough, thank you.

Thanks Steve. We'll move on to our next caller, please.

Your next question comes from the line of Dmitry Silversteyn with Longbow Research. Please proceed.

Good morning. Couple of questions.

First of all, we were seeing your pad sales grow robustly, sequentially, but the pace of growth has been slowing down every quarter since you started reporting. Is that a question of more difficult to grow in a larger revenue base? Or are you seeing some sort of a slowdown at the rate of adoption, or perhaps the market slowing down overall?

No. I think it's a combination of things.

I think it's as the revenue grows, it gets difficult to turn in the kind of growth rates we saw, certainly in Q1 and Q2, we grew 84%. If we were growing 84% each quarter that would be astronomical growth rate.

We're quite happy with the growth rate we saw going Q3/Q4 of 21%. And we continue.

The way we grow the business, Dmitry, is we win customers, and win applications of customers, and they are sequential in nature and they are step changes in revenue as we go forward. And as you know there are big customers and little customers. So you don't -- the little customers don't have that much of an impact on the overall revenue and revenue growth, but they're important as we grow business, and they give us confidence, and they give the industry confidence in both our offering and our supply chain and the value we bring in this particular part of our business.

We would expect to continue to grow. I won't make any procrastinations about how much we will grow Q on Q going forward, but I would hope to grow faster than wafer starts as we continue to commercialize and grow revenue for our pads business.

Dmitry, one additional thought on that.

As Bill said, all customers aren't created equal. There are bigger ones and smaller ones. One of the things we've talked about is a ramp of a 65-nanometer application that was then back integrated to 90 and 130. We seen about the full extent of that ramp.

Going forward, that application would move with wafer starts, and then significant growth beyond that is going to depend on additional customer adoptions. We are working with over 30 applications right now in various stages of valuation and qualification. It's strong pipeline.

Thank you.

And a follow-up question. Roman Haas reported results yesterday in their CMP related business, they saw pricing being down fairly significantly. Is that part of their competitive response to your greater penetration of the pad market? Or are these two unrelated events? Or a different way of asking -- have you seen the competitive response from Roman Haas to your penetration of the pad market.

We have certainly seen competitive responses, not just from Roman Haas but from other potential CMP pad competitors in the marketplace. Again, we don't feel like we are competing on price, we are competing on value and performance here. We clearly have demonstrated longer pad life from our pad offering, and continue to gather information and data from customers that they are seeing significantly lower defects, which result in higher yields.

I think what we have here is a performance gap, or a performance differential, that we are able to sell and we are able to capitalize in, and we will continue to do that. We were currently working on our next generation technology, and we will do what Cabot Microelectronics has always done, and get in the market and then continue to be in the market with innovative, new, high-performance products.

I don't necessarily think about the pricing as much as the value we're selling and the performance we sell with the pad Dmitry.

Fair enough Bill. One final question if I may.

Share repurchases. You talked about completing about $39 million worth of share repurchases in '08. Can you remind us how much you have left under your -- I believe it's $150 million authorization.

And then, I guess a strategic question. How come you weren't a little bit more aggressive with share repurchases given the price of the stock, and will you be more aggressive with share repurchases in fiscal '09 given your cash position, the fact that you expect to remain free cash positive through this downturn?

Dmitry, we're actually working under a $75 million program right now. And through the fourth quarter we purchased $25 million under that program, and have $50 million remaining. We did a total of $39 million for the full fiscal year.

As we look at our share repurchase program in 2009, it's sort of a balance of, apparently attractive stock price given low valuations currently, against sort of the uncertainty of what the future is going to be. I think you're hearing on all of these calls there is just no visibility into what the business environment is going to be in 2009. I think we're cautious to balance current valuations with sort of an unknown environment going forward.

But we have a very strong financial model. We generate quite a bit of cash because we are profitable, and have limited capital intensity, and I think it's that strong balance sheet that gives us quite a bit of confidence heading into a soft business environment.

But we'll report repurchases on a quarterly basis. I don't think I could give you much more color on what the pace of those might be.

Did I understand your answer correctly Bill, is that you think that given that the cloudy outlook for 2009, there is a possibility that the current valuation may be revised downward, depending on business conditions, so you aren't in a hurry to purchase business shares at this price?

No. What I'm saying is the stock will value our Company, and it does so every day. The market will do that.

And it's a balance between what do we want to use our cash for between several alternatives. Repurchase of stock, investment in our business, potential M&A activity that could become available given soft environment. So it's always balancing those things, and that's how we treated our share repurchase in the past, and that's how we will treat it going forward.

Fair enough. Thank you.

Thanks Dmitry. We will take one last caller, please.

Your next question comes from the line of Jenny Yung with JP Morgan. Please proceed.

Hi, good morning.

Do you have a forecast for what your pads revenues could be in fiscal '09?

We have internal goals and targets and objectives that we haven't communicated or shared with the outside, and we won't. I think that's the way I'd answer the question Jenny. We don't give guidance, but we have what we would describe as fairly aggressive targets inside the Company for both pad revenue, as well as yield improvement and cost reductions.

We will see where we end up at the end of the year. At this point in time, we are certainly not going to put out guidance on revenue for our pad business.

But having said that, it is the largest growth opportunity for the Company. When we think about big growth opportunities, aside from just changes in wafer starts, pads opportunity is probably first, and then we also have interesting growth opportunities in the ESF business, as well as some more specialized CMP slurry applications, like advanced dielectrics and barrier.

Several growth opportunities for the Company, but pads is probably front and center.

But from your qualitative answers earlier, it sounds like you think it's, at least directionally, going to go up?

We would certainly hope it would go up, and we expect it to go up.

I think as Bill said, we were fortunate earlier as a Company that we were able to grow through downturns because of the rapid incorporation of CMP technology, and offset the decreases that we are seeing from wafer start contraction. Going forward, we looked to things like that.

Bill talked about pads and advanced dielectrics, and barrier CMP slurries and some other areas our business did to partially, or maybe totally offset, any decline or retraction of wafer starts. But the pads business is our single largest opportunity for growth. It's one where we think we have a significant offering that is clearly demonstrating its value in the marketplace.

I just want to reinforce, in my prepared comments this morning, that I mentioned we had come to an agreement with one of our customers to install an onside grooving facility at their fab. We think this is just a terrific opportunity for our Company.

It gives us an opportunity to leverage cost with this particular customer, and look for opportunities to reduce costs in things like packaging and quality and transportation. It also, I think it's an indication of our technology and the flexibility of our technology where we can move these low cost, somewhat modular grooving facilities into a customer's fab and custom groove for those customers. We think it's the next step in the evolution of our pad business, and just reconfirms the confidence that some of our customers have seen in our pad offering and their willingness to commit at that kind of level.

We see this as a very significant growth opportunity for our Company.

Okay. I think maybe you indicated in the past that your pad products would reach corporate average gross margin once they reached particular volume production level.

That's correct.

Is it at that level now, or do you still have a ways to go?

No. This was the second sequential quarter we had of positive gross margin for our pads business, and for the full fiscal year we were break even at that gross profit level.

As we continue to win business and grow volume, we expect our gross margins to grow up and be approaching -- we would hope to start to approach the kind of gross margins that we enjoy in our CMP slurry business by the end of this fiscal year and maybe beyond, depending on our volume gross over the year.

Great. That's helpful. Thank you very much.

Thank you, Jenny. And thank you for your time this morning and interest in Cabot Microelectronics. We look forward to the next opportunity to speak with you.

Good-bye.

Thank you for your participation in today's conference. This does conclude your presentation.

You may now disconnect, and have a great day.