CMC Materials, Inc. (CCMP) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2009 Cabot Microelectronics conference call. My name is Dan and I'll be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions).

I would now like to turn the call 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 first quarter of fiscal year 2009 which ended December 31st, 2008. A copy of our press release is available in the Investor Relations 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 also be available there. 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 30th, 2008. We assume no obligation to update any of this forward-looking information. I will now turn the call over to Bill Noglows.

Thanks, Amy. Good morning, everyone, and thanks for joining us. This morning we announced financial results for our first quarter of fiscal 2009, which we believe reflect a continuation and acceleration of softening demand for our products driven by the global economic downturn. As a result of sharply lower demand for our products, we reported a 30% decline in sequential quarterly revenue, and approximately breakeven net income performance for the first fiscal quarter. The largest reduction in demand for our products came from the foundry segment, which represents a significant portion of our business. We also experienced substantial declines in demands for memory and logic device producers. As we have discussed in the past, our revenue has historically tracked closely with the revenues reported by the largest foundries and this quarter was no exception. In general, we believe the decline in our revenues was consistent with the decrease in overall industry demand.

While we cannot change the economic environment in which we operate, we have taken actions to improve and optimize our operating effectiveness during the current downturn. In order to ensure alignment between production of our products and our customers' demand, we have shortened work schedules in our CMP consumables manufacturing operations globally. By adjusting work schedules, we retain the flexibility to ramp our production up or down to meet customer demand while managing our production costs. Other actions taken to improve our operating effectiveness include a global hiring freeze, mandatory time off for employees, lower annual merit salary increases, restricted travel, and the elimination of certain discretionary expenses. Our core CMP consumables business is not capital intensive, but it is intellectually intensive. So our initial cost management actions have been directed at minimizing expenses without incurring extensive layoffs. However, we are prepared to take more severe actions as appropriate.

Notwithstanding our increased intention on reducing costs, we continue to invest in our business and execute on our two pronged growth strategy of strengthening and growing our core CMP consumables business and expanding into new areas through our engineered surface finishes or ESF business, so we can emerge from the soft economic environment a stronger and even more successful company. We believe this challenging business climate presents opportunities for strong companies with strong balance sheets and we fully intend to take advantage of potential opportunities as they arise.

A clear example of our continued investment in the company and execution of our strategy to strengthen and grow our core CMP consumables business is our pending acquisition of Epoch Material Company, which we announced in December and expect to close in the quarter ending March 31st, 2009 subject to regulatory approvals and customary closing conditions. Epoch is a Taiwan based company specializing in the development, manufacture, and sale of copper CMP slurries and CMP cleaning solutions to the semiconductor industry and color filter slurries to the LCD industry. With this acquisition, we expect to capitalize on Epoch's strong presence in Taiwan, the largest geographic region for CMP slurry demand, by leveraging Epoch's solid customer relationships and world class facilities, which can be easily expanded for future growth. Additionally, we intend to utilize our global resources and infrastructure to expand the sales of Epoch branded products to the global semiconductor industry outside of Taiwan. We also expect to realize synergies from this transaction, which we anticipate will improve our overall cost structure and allow us to support our customers more efficiently. This deal also enables us to continue to build and shift capabilities to the Asia-Pacific region, closer to many of our customers.

Another example of the successful execution of our strategy to strengthen and grow our core CMP consumables business, even during the downturn, is the progress we continue to make in our CMP pad business. Although the current environment is generally resulting in fewer customer resources available to evaluate and qualify new products, we gained three new pad customers during the quarter. In addition, four other CMP slurry suppliers are now buying our pads for use in their slurry development activities. Use of our pads by our slurry competitors has the potential to accelerate the market acceptance of our pads and reinforces the credibility and performance of our product.

Another sign of progress in our pad business is our ongoing installation of on-site pad finishing capability within TSMC's facility in Taiwan, which continues on schedule. Construction and equipment installation is complete, product qualification is in process, and we expect to begin high volume production by the end of March. In recognition of this innovative supply chain solution and our high performing low cost of ownership products, we were honored with a supplier award by TSMC during its annual Supplier Day last November. Out of thousands of suppliers, TSMC granted awards to only six companies, and we are very pleased and proud of this special recognition.

We also continue to make progress on improving yields within our pad manufacturing operations. Even with significantly lower pad revenue this quarter, we achieved approximately breakeven gross profit margin within our pad business. In parallel with our efforts in our core CMP consumables business, we are continuing to execute on our strategy to expand into new areas with our ESF business. Our focused efforts in Research and Development within QED has led to the introduction of a number of new products over the past year, including the recently released ASI Metrology system for use with steeply aspherical optics. We believe this is an important enabling technology, since the use of aspheres in optical systems design generally reduces the number of optics required, which in turn reduces the weight and size of an optical system, which is a key driver for many applications.

In summary, we are operating in challenging economic times which are unprecedented for our industry and our company. We are taking actions to respond to this recessionary environment while continuing to invest in our business for the long-term, and while attempting to minimize what we hope is a short-term dislocation. We have a seasoned and experienced management team that has successfully navigated businesses through difficult demand environments in the past. Ultimately, we believe our strong balance sheet with no debt, our solid cash flow, and the limited capital intensity required to run our core CMP business afford us the flexibility to successfully sustain our business, maintain our CMP slurry leadership, and grow in new business areas. And with that, I'll turn the call over to Bill Johnson. Bill?

Thanks, Bill, and good morning everyone. Revenue for the first quarter of fiscal 2009 was $63 million, which was down by 32.5% from the first quarter of fiscal 2008, and down 30.1% from the previous quarter. Our reported revenue is consistent with the revenue outlook we provided on January 7th. We believe the decrease versus both comparator periods reflects a substantial and precipitous downturn in the semiconductor industry driven by the current recessionary environment. Revenue declined in all of our major business areas, geographic regions, and market segments. Despite the sharp reduction in our revenue, the average selling price for our slurries has remained relatively stable and even increased from last quarter.

Drilling down into revenue by business area, tungsten slurries contributed 41.4% of total quarterly revenue, with revenue down 32.6% from the same quarter a year ago and down 29.5% sequentially. Sales of copper slurries represented 14.1% of our total revenue, and decreased 37.6% from the same quarter last year and 29.3% sequentially. Although sales of copper slurries in total were down compared to last year, sales of copper slurries for barrier removal increased by 36.7% from the same quarter a year ago. Dielectric slurries provided 31.1% of our revenue this quarter with sales down 35.7% from the same quarter a year ago, and down 31.7% sequentially. Included in this business is our advanced dielectrics product line, revenue from which was up nearly 40% from the same quarter last year.

Data storage products represented 3.9% of our quarterly revenue. This revenue was down almost 50% from the same quarter last year, and down 14.3% sequentially. We recently achieved an important new customer win for this business, but the additional demand generated by this new win did not offset the overall decrease in orders resulting from the challenging economic environment. Sales of polishing pads represented 5.5% of our total revenue for the quarter and increased 94.6% from the same quarter last year. We achieved several new customer wins this quarter as Bill discussed. However, the total decrease in wafer starts by our existing pad customers was significant enough that we experienced a sequential revenue decrease of 36.9%.

Finally, revenue from our ESF business, which includes QED, generated 4.1% of our total sales, and our ESF revenue was down 24% from the same quarter last year and down 28.1% sequentially. As primarily a machine oriented business, our QED business is subject to capital equipment cycles, and the current cycle has significantly adversely affected revenue in this area.

Our gross profit this quarter represented 45.6% of revenue, which was down from the 47.9% in the same quarter last year and 46.6% in the previous quarter. Compared to both of these previous periods, the decrease in gross profit percentage this quarter was primarily due to lower utilization of our manufacturing capacity on the significantly lower level of sales, which was partially offset by higher manufacturing yields for both slurry and pads. Excluding our pad business, which operated at approximately breakeven gross profit this quarter, total gross profit for the company as a percentage of revenue would have been 2.7 percentage points higher.

Our gross profit percentage guidance for full fiscal year 2009 remains unchanged at 46% to 48% of revenue. As a reminder, this guidance is for the full fiscal year, and quarter-to-quarter our gross profit percentage may be above or below this range, such as we experienced this quarter. 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. Consistent with our usual practice, we will re-evaluate our guidance on a quarterly basis and make updates as necessary.

Now I'll turn to operating expenses, which include research, development, and technical; selling and marketing; and general and administrative costs. Operating expenses of $29.4 million this quarter were higher than the $28.5 million reported in the year-ago quarter, primarily due to increased costs for cleanroom materials and higher professional fees, partially offset by lower staffing related costs. Compared to the prior quarter, operating expenses were $2.3 million lower, mostly due to decreased staffing related costs. Previously, we estimated full year operating expenses to be in the range of $120 million to $125 million for fiscal 2009, which represented a flat to slightly lower outlook from fiscal 2008. As Bill mentioned earlier, we are currently taking a number of actions to reduce costs and improve our operating effectiveness during the current economic recession. Based on these actions, we now expect operating expenses to be lower and in the range of $110 million to $115 million for full fiscal year 2009, excluding the effects of our pending acquisition of Epoch Material Company. Diluted earnings per share were $0.01 this quarter, down from $0.51 reported in the first quarter of fiscal 2008 and $0.36 last quarter, primarily as a result of lower demand for our products resulting from the global economic downturn.

Turning now cash and balance sheet related items, capital additions for the quarter were $2.5 million, which includes costs associated with the installation of pad finishing capacity on-site at TSMC. Depreciation and amortization expense was $6.2 million in the first quarter, and share-based compensation expense was $4.2 million. We ended the quarter with $223.1 million in cash and short-term investments, and no debt outstanding. Even upon closing of our pending acquisition of Epoch, which is being funded from our existing cash balance, we will still have a very strong cash position. Additionally, last October we renewed our revolving credit facilities with attractive terms, despite the tight credit market, providing us with additional funding in this challenging economic environment.

I'll conclude my remarks with a few comments on our general outlook. Examining order patterns during the three months of the first fiscal quarter, we saw a rapid softening in demand for our CMP consumables products as we recorded double-digit monthly sequential declines in each of the three months of the quarter. As we observe orders for our CMP consumables products received to date in January, though we expect to ship by the end of the month, we see January results trending significantly lower than the December level. We believe this reflects a further slowdown in orders as a number of our customers in Asia are planning extended production shutdowns around the lunar New Year. However, I would caution, as I always do, that several weeks of CMP related orders out of the quarter represent only a limited window on full quarter results. I'll now turn the call back to our operator as we prepare to take your questions.

(Operator Instructions). Your first question comes from the line of Steve O'Rourke from Deutsche Bank. Please proceed.

Thank you. Good morning. I think about a month ago you had talked about Epoch potentially being EPS neutral in fiscal '09. How are you looking at this business as you integrate it into the overall fold here in the present environment when you look out through '09?

Steve, good morning, this is Bill Noglows. We think Epoch is just a terrific strategic acquisition for our company. As you're well aware, Epoch operates in Taiwan, which is today the world's largest single global market for CMP slurries. For many years we've had -- in our long range planning, we always felt we needed a manufacturing facility somewhere in that Taiwan, China mainland area. Epoch gives us the opportunity to quickly move into Taiwan and get that footprint on the ground and get people there that are very well connected to the semiconductor industry as well as the LCD industry and more broadly the electronics industry. So we continue to think it's just a terrific strategic acquisition. The market today and the global economic situation that we're all faced with clearly came into play as we were working with Epoch to put this deal together, and we think we ended up in a great place. We think we made what we believe is a very smart acquisition to strengthen and grow our business when we come out of this downturn. Until we close, we expect to close this quarter -- until we close the deal we're operating as two separate independent companies. But we're putting our plans in place as we speak to as quickly as we can begin to integrate the two companies and strive to get those synergies as quickly as we can, with a focus on making sure that we're staying in front of our customers and doing all we can to support our customers in Taiwan and around the world.

Will Epoch help you in positioning pad business and pads with customers?

Maybe, Steve. I think we're out there with pads. I mean, there's some -- there's a silver lining in the cloud today about our business. It's the pad business. In my comments, I mentioned we gained three new customers this quarter, taking us from 15 to 18. I think equally important is our number of applications with those 18 customers has grown from 20 to 30, which is a great example of once we get in at a customer and one application, the customer quickly looks for ways to extend our pad across their factories, which I think -- it's another validation of our value proposition. Also in the quarter we had our fastest qualification ever. We did a three month qual with a customer from start to finish to get into a factory which is a record time for us. And again, I think that speaks to the credibility of our offering and the value we're bringing to these customers. As far as Epoch, we intend to utilize the Epoch platform to support our pad business in Taiwan in particular. I think the opposite is true with Epoch. We intend to use our sales and support infrastructure around the world to drive the Epoch branded products into customers that we support outside of Taiwan. So I think there's synergies on both sides that are clearly going to benefit us going forward.

Fair enough. And one last question. Could you comment briefly on inventories, both on your balance sheet and also what you're seeing at your customers as far as slurry inventory is concerned?

Steve, hi, it's Bill Johnson. On our inventories, you noticed were up for the quarter but it was primarily particle inventory, raw material inventory, as opposed to finished goods. We purchased some of our raw materials in our abrasive particle in particular under long-term supply contracts based on six month forecasts, and we're committed to purchase a certain percentage of that forecast. So the market turned down the last several months faster than we could turn down orders for raw materials. So we increased inventory of raw material significantly. We'll try to work that down over time. Our inventory of finished goods, CMP slurries and pads, is roughly in line with where we've had it in the past. We're a make to order business. So we don't have a lot of finished goods inventory. Likewise, as we look into the channel, we don't believe that our customers hold a lot of inventory of our products either. So there's not a long supply chain and this is different from in the past. You recall when we sold through a distributor in Taiwan, there were times where we would have inventory adjustments in our results because we had an intermediate step between us and our customer. Now that we sell direct to most everywhere, we've taken that out and I think we have better visibility into our customers' inventories of our products.

Fair enough. Thank you.

Thanks, Steve. We'll go ahead and take our next caller, please.

Next question comes from the line of Jay Deahna from JPMorgan. Please proceed.

Thanks very much and good morning. Two questions. The first one is in light of the fact that you're seeing some incremental weakness in revenues in the first quarter, apparently, at least to get the ball rolling, you maintained your gross margin guidance. So I'm wondering, are you seeing some sort of a mix shift which should make that favorable or is it more on the cost cutting side? Why are gross margins looking like they're going to stay reasonably well in a weak demand environment I guess is the question, and then I've got a follow-up.

Good morning, Jay. Bill Noglows again. I'm sure Bill will follow me on this question. We reported what we believe were relatively strong gross margins this quarter at 45.6%. In Bill's comments, I believe he mentioned that if we were to net out the pad business, the pads accounted for a negative drag of 2.7%. Our activities -- I've stopped talking about this because I got bored talking about it, but we have a robust and strong Six Sigma approach to how we go after variability reduction and yield improvement and quality improvement, and we think that's taking hold on the cost side. We've had significant productivity gains over the last several years.

On the other side of the equation, you know, if you look at our ASPs over time, we were up this quarter in ASPs. So we have worked very hard on the discipline of cost reduction as well as the discipline of pricing, and I think it's beginning to really help us on the gross margin side. I'm sure I'll get a question sometime later in this presentation about pricing, and where that's headed and I might as well just tackle that now. We are seeing significant pressure on pricing and terms and we're doing all we can to maintain our pricing and hold our terms.

Our approach with our customers is not to reduce price. It's to look for ways to help them to reduce costs. And many of the new products we have introduced over the last year or two years are specifically targeted at reducing the cost of use of CMP slurries and CMP consumables. I think our pad is the best example of a case where if a customer uses our pad, he utilizes our pad -- they can quickly see a reduction in their total pad spend of upwards of 25%. So as long as we can continue to maintain our discipline on pricing and continue to find productivity advancements in the cost side of our business, we feel fairly comfortable with our guidance right now on gross margin. But I would caution you it's hard to tell what the rest of this year is going to look like. And if we need to come back to you and revise that guidance, we will. But we sit here today with the same guidance.

Okay. So when you said in your opening remarks that the gross margin on the quarterly basis could oscillate on either side of your full year guidance, is that -- should we read into that that if demand is weak for the first couple of quarters of the year but improves later, that that would be the primary determinant of being above or below? Or is it more of a mix issue and cost reduction issue that could cause that to happen either way, regardless of where your customers' utilization rates are?

No, we think, again -- Bill will probably qualify the statement, but we believe that most of the variability would be around utilization and capacity utilization which is driven by demand. So if we would expect based on what we hear people say and what we hear industry analysts say that the second half of the calendar year might certainly be better than the first half of the calendar year, we could expect stronger demand in the second half of the calendar year and hopefully see that utilization reduction increase a little bit.

This is Bill Johnson. I'll add a little more color to that. In a normal environment, we see three major factors that drive some fluctuation in our quarter-to-quarter gross margin, and that's product mix first because we have a number of different product areas with different price and gross margin dynamics. Then it's productivity -- capacity utilization as Bill mentioned. And then the other factor is yield, and we mentioned in our prepared comments that we had improved yields this quarter in both our slurry and pad business. And if you look at the history of the company, there are a number of times where a change in yield quarter-to-quarter drives quite a bit of change in gross margin. So we had lower capacity utilization this period, but that was pretty significantly offset by improved yields in pads and slurries. So going forward, productivity -- or sorry, capacity utilization will be a key factor, given just revenue levels. But mix and yield are also important determinants in that.

I see. Okay. So then finally, how much head room do you have on yield? And then secondly, if you look at the copper market, when the logic world moved to copper, that was a really big deal because you have eight to 12 or more layers of interconnect using copper. And now that memory is getting ready to accelerate the move to copper, it's only or maybe two layers. But then again, the growth in wafer starts in memory is clearly growing at a faster rate than logic in the now timeframe. So can you indicate how meaningful the memory copper transition will be for you, or is it more of a adding Epoch and whatnot to just expand your footprint within logic that's more important?

No, they're both very important. We see the introduction of copper in memory as a really great growth opportunity for the company and we're focused on it. I think the challenge has been for us is that anticipated introduction of copper into memory has been around now for, I don't know, 1.5 years, and it's been very slow. Copper incorporation in memory devices has been very slow to happen, and it's only happened with a couple of -- let's call them leading edge memory suppliers. On the other side, your question's a good one and it's one we try to understand. The incorporation of copper in a memory device, it might result in four or five or six CMP passes for copper CMP, which is terrific. And clearly the number of wafer starts in memory we expect to accelerate and be more important to us than the number of wafer starts in the logic side. But we're looking at it. We work with all the leading edge memory providers. We think Epoch will help us. There's a significant amount of DRAM customers in Taiwan. Epoch already has an established relationship with those customers and we think it can only help to have the relationship with Epoch in Taiwan to drive our sales for copper in memory.

And the yield in production, have you -- do you have a lot of head room on that in the next couple of quarters?

We have more head room on the pad business. You know, we've talked before about our work in pads and our work to quickly increase our yields there. We had -- I think we had a great quarter, the quarter we just finished and we continue to have plans in place to increase our yields in the pad business. Every year, we found opportunities to increase the productivity in our core CMP slurry business and we expect to do the same this year. We have internal goals and targets that we set that we don't share outside. We only talk about results when we finish a year and we continue to be optimistic that there's always opportunities to increase yield and increase productivity.

Thanks very much.

Thanks, Jay. We'll go ahead and take our next caller, please.

Your next question comes from the line of Suresh Balaraman from ThinkEquity. Please proceed.

Good morning, guys. Historically there has been a very good correlation between wafer start utilization rates and your revenues, and I know it's not a perfect correlation. Given the fact that [Epoch had a] 43% decline for Q1, I would estimate that your revenue should be down at least 25%, and given those kind of magnitude of [consumers], would these type of margin assumptions make sense, 46% to 47%?

It's Bill Johnson. First, with respect to revenue, let me given you a little bit more color into our monthly revenue within the December quarter. In the prepared comments, we said we had sequential double-digit declines, month to month to month from October to November to December. We actually ended the December quarter with December monthly revenue of around $16 million. And then our comments were that as we look at orders to date in January, revenues look to be down significantly in January from December. So we're continuing to see reductions in revenue, and you're right, historically there's been a strong correlation between our revenues and TSMC, UMC reported revenues, so it appears there's some more downside. At this revenue level, we're in unchartered territory, so we're going to do everything we can to hold margins, manage costs, through this environment. But it's really difficult to look at historical patterns and project those because this is really just an unusual environment. I think within the unusual environment, we're doing all the right things to manage costs within a challenging environment.

Okay. And in terms of pad, I understand it's -- at this point, do have you some market share gains or some additional penetration that could offset pads decline in line with the rest of the business, or in the near term, it's going to pretty much go with the rest of the revenues?

Gosh, I think last quarter we mentioned that we're watching, we were watching very closely to see how quickly the adoptions would go versus the decline in wafer starts. And the decline in wafer starts has just been so significant that I don't believe our pad revenue will be able to keep up with it. And we'll see similar declines in our pad business like we saw this quarter, into next quarter, just because of the economic situation that we're competing in. But within that context, we mentioned that we have have three new customers in the last quarter, and probably more importantly than that, we've gone from 20 to 30 application wins within the customers that we're selling to now. One of the premises that we had as we embarked on the pad business is once you established a supply position for an application with a customer, the subsequent applications would be more -- would come more easily. But after you've established some credibility with a customer at a particular fab on a particular application, you can be transferred into other applications more easily. And so we've added three new customers, but more importantly I think we've gone from 20 to 30 applications within the customers we're serving. So our expectation would be those within customer application wins would continue to come fast.

Okay. And just a bookkeeping question. In terms of ASPs up slightly, was there any major variation between the ASP trends of all the different segments in the tungsten, copper, dielectric?

The ASP increase from the sequential increase was mostly related to price. Our price was up a bit. There was a small increase related to mix and then there was a foreign exchange increase as well that was part of that resulting sequential increase in ASP.

But the firm prices were pretty much across the board.

Okay. Great. Thanks, guys.

Thanks, we'll go ahead and take our next caller, please.

Your next question comes from the line of Mr. John Roberts from Buckingham Research. Please proceed, sir.

Good morning, all.

Good morning, John.

Can you hear me?

Yes, good morning.

The slurries shipped relatively well and your operating rates in your facilities on average now are maybe approaching 50%. I know it's a batch process that can operate at relatively low rates, okay, but how long can you sustain these rates before you maybe consolidate some facilities temporarily, maybe idle a facility and [trans ship] product?

Well, I think in our prepared comments I mentioned, John, that we have already backed on off on our manufacturing production rates. We're working reduced shifts. We're working four day weeks at some of our facilities. I think as you know we have -- in the world today we have two large manufacturing facilities, one here in Aurora, Illinois and one in Geino, Japan. We closed our facility in Europe last year, our facility in Barry, Wales which consolidated some of our capacity. Today we don't have plans to idle a facility or shut one down. We're trying to manage as best we can and reduce the production rates as well as much as we can the production costs that go with those rates. So we're trying to get through this short-term problem without undermining our long-term growth objectives, and our way to do that is we can turn it on and off, not easily, but relatively straightforward, because it is not a true continuous process technology.

Also, in this business, John, we have limited flexibility in supplying a particular customer from a different plant. We qualify our products from a particular line, and to shift supply from, say, our plant in the Chicago area to Geino, Japan, that would represent a new qualification for a customer which would incur costs on the customer's side and ours. So the approach is to manage costs from the sites where we're producing products, and we're doing that by flexing production schedules and things like that.

One of the longer term synergistic benefits of the Epoch acquisition is it may provide us some flexibility to rationalize some of our product that we ship into Taiwan today from North America and Japan. We fully believe there's some synergies there and some cost reductions related to that opportunity. But like Bill said, we just can't do that overnight. That takes -- that will take some time because of the qualification process that is involved with our customers.

And then on pricing, you said rather than lowering price, the approach has always been of course try to lower the customer cost and use. You used the example of the pad efficiency, but you're not linking slurry pricing to pads in any way or bundling, are you? I assume that customer wants the better pad efficiency and lower price on slurry. Are you trying to connect them somehow now?

No. We do the same thing with our slurries. The slurries we offer today are intended to provide our customers with lower cost of use, either in the form of dilution or lower particles or some other means -- higher yields that give our customers a truly lower cost of use. I wouldn't use the bundling word, John, but what we're trying to do is engineer solutions where our pads and our slurries work more effectively together to provide value to our customers. And that's an exciting area for us where we believe that over time, we can engineer the pads and the materials in the pads and some of the particles in the pads to work more efficiently and effectively with some of the chemicals and catalysts and abrasives in our slurries to do very unique things on the surface of a wafer. And that's been our approach, and it continues to be our approach, and we think there's opportunities there.

Thank you. I'll get back in queue.

Thanks, John. We'll go ahead and take our next caller, please.

Your next question comes from the line of Avinash Kant from D.A. Davidson and Company. Please proceed.

Good morning. Quick question on the expectation of revenue and profitability in the March quarter. Given what we have talked about here, TSMC numbers or if there were to be a correlation, the cost cutting effort that you have taken, do you think that will keep you EPS positive in the March quarter?

I think it will be a challenge. Just give you a little more color, as you all know, the March quarter is seasonally a weak quarter for us. Our customers are -- particularly in the Asia-Pacific region, our customers, if they haven't already shut down, they're going to shut down and many of them are taking extended shutdowns for the lunar New Year. You saw -- I think you probably saw TSMC's release this morning about their expectations for next quarter, which were significantly reduced. I hope you heard in my comments this morning that it's very difficult for this company to have -- what other companies are doing, these large reductions in force. We hire some of the best scientists and engineers in the world today. We spend a lot of money and time training people to manage our company to the quality standards we expect and the operating standards we expect. So we're doing all we can to try to prevent ourselves from having a layoff of significant size, with the hope of coming out of this downturn as a very strong company. That all being said, and our expectations of what the next quarter will look like, I think it will be very difficult for us to come out EPS neutral or positive EPS. I'll let Bill comment to that one. But I just want to set the expectation.

I think that's appropriate. We operate essentially at a breakeven in the current quarter and we're seeing revenue falling further in January. We have fixed costs and variable costs and we're working to run down our costs. But a significant reduction, percentage reduction in revenue, it's hard to match that dollar for dollar on a comparable reduction in cost. So I think it would be a challenge for the next quarter.

Okay. And then --

That being said, our plans are to watch very carefully and see how the next quarter develops and pay very careful attention to when we think we'll see the start of some recovery in demand. And we will take appropriate actions as we think are necessary, depending on what we see going forward.

Okay. And a question on the pads business -- of course I totally understand the decline in revenues there, but I was a little bit surprised to see that the decline in the pads business was actually more than the overall decline in business. Could you comment on that?

It's really based on -- predominantly on the customer and market segment mix there. You are aware that we have won a supplier award from TSMC in respect to our pad offering, so they're an important customer in our pad business. The foundries you've seen have turned down harder than the IDMs or the memory -- the logic or the memory producers. It's a function of the customer mix in the case for us for the last quarter.

One final question, I believe, and I may have missed it, but I believe you had some almost $50 million left in your share buyback plan. Have you used it or -- ?

We do have $50 million left in our share repurchase program. I guess in this last quarter we put a higher premium on the liquidity of holding the significant cash balance as opposed to purchasing stocks, so we did not purchase stock in the last quarter. And I think we'll watch. We have flexibility in implementing that program going forward and we'll make decisions on that on a quarter by quarter basis.

Do you still have the $50 million left in the buyback plan?

Yes, we do. We have $50 million. We acquired a total of $90 million over various plans in the last several years and have $50 million remaining under the current plan -- that's correct.

Thank you so much.

Thank you. We have time for one last question, please.

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

Good morning. As usual, getting in under the wire, but thanks for taking my call. Couple of questions. First of all, you talked about the January results being below December. I think when it comes to slurry sales, or was that comment equally valid for the pad business and the ESF business?

I wasn't specific about that. I really -- my comment was around total company sales.

Okay. So even though you're getting customers and more business within the existing customers, until the TSMC finishing plant wraps up at the end of March I think you said, your pad business is going to reflect pretty much what's going on in the industry?

We won't expect a big jump tick from the completion in sale of pads from our TSMC facility today, because we're already supplying those pads from our other facilities around the world.

It would be more of a less shipping or something like that. Not much on the top line?

That's correct.

Okay. I was very encouraged to see your gross margin hold up as well as it did given the tremendous declines you've had in revenues here, which speaks to the good variable cost structure that you have on your manufacturing operations. However, we didn't notice as much of a decline in the SG&A costs. So can you give us an idea of how fixed your SG&A costs are versus variable, and what opportunities you will have beyond the $10 million that you already committed to to lower your SG&A costs?

Our SG&A costs and let's include Research and Development -- we think in terms of operating expenses in total, which would be research, development, technical, selling and marketing, and G&A. If you look at that in total, it's heavily people oriented. So relatively fixed. We have initiated a number of actions. We've instituted a global hiring freeze. We're mandating time off from work for employees. We implemented a reduced merit based salary increase. We've imposed travel restrictions except on customer facing travel. We've reduced a range of discretionary costs. We've additionally reduced our capital spending outlook for the year from $13 million to $10 million. Most of our steps though have been around managing headcount by attrition, and then looking for other areas where we can reduce costs, because as Bill mentioned, we're a highly intellectual intensive business and the people and number of areas are very, very valuable to our business. So our initial efforts have been more around trimming costs where we can without significant layoffs. Now, as we look at the future environment and as the year unfolds, we're going to continue to look at other opportunities and potential initiatives, but so far that's the approach we've taken.

Okay.

But it is -- in direct answer to your question, it's a pretty fixed operating expense base.

Okay. When -- I know that a large part or some part of the R&D budgets or R&D spending is for wafers and equipment time with customers which tend to be fairly pricey. You did mention that the customer activity on the research side is slowing down as well. Is there a possibility for the R&D spending to maybe go down closer to $10 million a quarter or maybe even below that, just even for the short-term if you postpone some trials or some wafer processing activities?

Even in R&D, our cost base is pretty fixed oriented. One of the variable areas is wafers and laboratory supplies and that's volatile. You've seen that move around some in the past. If you look at our efforts in Six Sigma over the past several years, one of the big areas that we've captured savings has been in wafers. That's a multimillion dollar cost item for us, and I think we've done a great job at reducing spend on wafers. So there could be a little bit there, but I think most of our costs are fixed, and so there's limited ability in the near term to just turn that off absent a layoff type situation, and that's not been our approach up to now.

Okay. Okay. Thanks. And then final question, in your revenue numbers, how big of a role did foreign exchange play and did it have any impact on profitability, and what's your outlook on foreign exchange going forward assuming it's a material part of your P&L?

We have -- most of our foreign exchange exposure is Japanese yen. I think around 13% of our revenue is yen-based. But you're aware, we have our largest CMP slurry plant is in Japan and so a good portion of our manufacturing costs are yen-based. We have a pretty significant -- we have an R&D center as well as a sales organization in Japan. Again, yen-based. So there's a pretty natural hedge. So we had some modest impact on revenue, far less than $1 million, around $0.5 million, I think. But even less than that on an operating profit basis. Less of an impact on operating profit.

Okay. So the dollar's move really doesn't play a role in your performance to any appreciable extent?

Not at the bottom line because of this natural hedge on yen.

Okay. Thank you very much.

Thank you.

Thanks. And thank you for your time this morning and your 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 concludes the presentation. You may now disconnect. Good day.