CMC Materials, Inc. (CCMP) 2010 Q4 法說會逐字稿

Good day, and welcome to the fourth quarter 2010 Cabot Microelectronics earnings conference call. My name is Candice, and I'll be your coordinator for today. At this time all participants are in listen-only mode. We will conduct a Q&A session after Management's remarks.

(Operator Instructions)

I will now turn the presentation over to your host for today's conference, Chief Financial Officer, Mr. Bill Johnson. Sir, you may proceed.

This morning we reported results for our fourth quarter of Fiscal Year 2010, which ended September 30. A copy of our Press Release is available in the Investor Relations section of our website www.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 discussions today may include forward-looking statements that involve a number of risks, uncertainties, and other factors that could cause actual results to differ materially from these forward-looking statements. These Risk Factors are discussed in our SEC filings, including our report filed on Form 10-Q for the third quarter of Fiscal 2010 ended June 30, and Form 10-K for the Fiscal Year ended September 30, 2009. We assume no obligation to update any of this forward-looking information.

I'll now turn the call over to Bill Noglows.

Thanks, Bill. Good morning, everyone and thanks for joining us.

This morning we announced record financial results for our fourth quarter and full Fiscal Year 2010. We are delighted to close this terrific fiscal year with a particularly strong fourth quarter, during which we achieved revenue of $110.3 million, which represents our fourth consecutive quarter of record revenue. Gross profit margin of 48.7% of revenue and earnings per share of $0.66.

Fiscal 2010 marks our tenth year as a public company and it is very rewarding to report record annual revenue of $408.2 million. Gross profit margin of 49.9% of revenue, which is our highest annual level since 2003, and record earnings per share of $2.13 for the fiscal year.

You will recall that during the downturn of 2009, the global semiconductor industry was in flux. There were mixed signals as to the pace and timing of a recovery, particularly with the US economy, and there was limited visibility into global semiconductor demand.

Despite the uncertain environment, we were able to leverage our business model to manage costs while retaining our intellectual capital, maintain flexibility in our operations, and continue to execute against our growth strategies and key initiatives. These actions positioned our Company to respond quickly to improving trends and to accelerate out of the downturn.

Our record results for Fiscal 2010 demonstrate that we were prepared for the upturn in the industry. We were able to successfully respond to sustained increased demand for our products, and we grew our total revenue by 40% during the year, which we believe exceeds the semiconductor market growth rate projections of about 30% for calendar year 2010.

2010 has been a banner year for the industry relative to last year, and we continue to see a number of positive signs indicating this favorable environment is likely to continue in the near-term. Fab utilization is at an all-time high and end device inventory levels appear to be appropriate. Indications from our customers suggest the current strength in demand that the industry is seeing will continue through the next couple of quarters, subject to normal seasonal softness the industry typically experiences in the December and March quarters.

As I said last quarter, the main factor limiting growth is the capacity constraints of our customers; however, we are starting to see new capacity additions come on-line with certain customers, and we expect this trend will continue through 2011.

We believe that the strong results we achieved this fiscal year reflect a consistent focus on our primary strategy to strengthen and grow our core CMP consumables business through the execution of our three strategic initiatives; technology leadership, operations excellence, and connecting with customers. I would now like to review the progress we made in these three areas during 2010.

Starting with our technology leadership initiative, we believe that our robust new product pipeline contains high-value improved products that will provide customers with enabling solutions in all major CMP application areas.

During the year we achieved strong revenue growth in our advanced copper and barrier products, which are designed for low cost and high throughput. We also made meaningful progress within our pad business with continued revenue growth, as well as by advancing our next generation tunable D200 pad platform to alpha-testing with selected customers.

In addition, we recently launched three new CMP polishing pads from our D100 platform that are intended to address customer specific needs by polishing application. Each of the three new D100 pad products provide an enhanced defect performance, and either shorter break in time or longer pad life for advanced copper, tungsten, and shallow trench isolation applications.

Next , I would like to discuss our achievements through our Operations Excellence initiative contributed to our solid performance this year.

We have now completed the sixth year of our Six Sigma process, which is our vehicle for improving productivity in driving out variation in our products and throughout our supply chain. Once again, in Fiscal 2010, we achieved improvements in manufacturing yields for our Slurry products and further optimized our manufacturing capacity. With the benefit of strong demand and high production levels, we achieved a record level of productivity improvement in Fiscal 2010. Additionally, over the past six years, we have reduced product variation by more than 90%.

Our customers continue to recognize our strong performance and support by way of supplier awards. Over the past year, we have received a number of prestigious and highly selective awards, of which we are extremely proud. Our most recent accomplishment was receiving the Best in Value Supplier Appreciation Award from Samsung Electronics, in August, in recognition of our standing support and contributions. Cabot Microelectronics was one of only four suppliers to receive this award from Samsung.

This award, along with other noteworthy awards we received this year, such as the Supplier Award from TSMC; UMC's Outstanding Supplier Award; and Intel's Preferred Quality Supplier Award, reflect both our efforts to strive for excellence, as well as the strong partnerships we have with our customers. We believe that we are the only CMP consumables supplier to have received awards from all four of these leading semiconductor companies during the year.

Finally, we continue to make progress on our third key initiative, Connecting with Customers. As the leading CMP slurry provider with extensive breadth and depth of CMP knowledge, our goal is to be the trusted partner and value-added resource for our customers with respect to their CMP processes.

We are using our global technical support capabilities and product offerings to become a more solution-centric rather than product-centric supplier to our customers. As a result, we are actively engaged this year with our customers to provide solutions that meet their specific needs. We not only participated in a number of joint Six Sigma projects with our customers in an effort to help them reduce variation in their processes, we also work closely with customers to develop and evaluate customized new products that could optimize their performance.

In addition, as we mentioned last quarter, we are utilizing our Cleanroom facilities across the world to enable our customers to test and evaluate our new products on their wafers, while the production capacity is constrained. We view our ability to provide this service to our customers as a distinct advantage that differentiates us from many of our competitors within the CMP space.

We also continued to expand our infrastructure in the Asia Pacific region during 2010. We completed the scheduled second closing of the two-step acquisition of Epoch Material Company in August, and now own 100% of the company.

In addition, in late September, we entered into a non-binding memorandum of understanding, or MOU, with the Gyeonggi Province of South Korea, to establish manufacturing and research and development capabilities there. The MOU reflects a potential aggregate investment by the Company of approximately $10 million in the province. We have long had a strong sales presence in South Korea, but this MOU represents a first step toward building expanded capabilities to better serve the needs of our advanced memory customers there.

Concluding my remarks today, we are very pleased with the progress we have made on our strategies in key initiatives, which we believe has resulted in our strong financial performance this fiscal year, and positioned us well for the future. We are optimistic about the near-term outlook of the semiconductor industry, and we look forward to continuing to partner with our customers to pursue new opportunities that will strengthen our competitive standing and grow our Company.

We plan to continue to execute on our primary strategy of strengthening and growing our core CMP consumables business in Fiscal 2011. We are committed to developing and providing high-quality, value-driven CMP consumable products and solutions to our customers. We also intend to continue to evaluate acquisitions that exhibit a high degree of strategic fit with our Company, leverage our existing global infrastructure, and enhance our product offerings to our customers. And with that, I'll turn the call over to

Thanks, Bill.

Revenue for the fourth quarter of Fiscal 2010 was a record $110.3 million, which was up by 14.3% from the fourth quarter of Fiscal 2009, and up 8.5% from the prior quarter. The increase in revenue from the same quarter last year primarily reflects improved economic and industry conditions.

Compared to the prior quarter, sales increased in all of our business areas and across all geographies on continued strong demand for our products and typical seasonal strength. Total revenue for the full fiscal year was $408.2 million, which represents a 40.1% increase from Fiscal Year 2009, and a record level for our Company.

Drilling down into revenue by business area, tungsten slurries contributed 36.6% of total quarterly revenue, with revenue up 20.7% from the same quarter a year ago, and up 12.2% sequentially; for the full year, tungsten slurry revenue increased by 32.7%.

Sales of copper products represented 19.1% of our total revenue, which increased 14.8% from the same quarter last year, and increased 8.4% sequentially. For the full year, our copper product revenue increased by 53.9%, including a full-year impact of our Epoch acquisition in Fiscal Year 2010, versus only seven months in the prior year. Included in our copper business is our barrier removal product-line, revenue from which increased by 46.3% in Fiscal 2010 compared to Fiscal 2009.

Dielectric slurries provided 28.7% of our revenue this quarter, with sales up 12.2% from the same quarter a year ago, and up 3.8% sequentially. For the full year, dielectric slurry revenue increased by 37%.

Sales of polishing pads represented 7.5% of our total revenue for the quarter, and increased 26.5% from the same quarter last year, and 5.4% sequentially. For the full year, polishing pad revenue was up by 68.9% as volume from past wins continued to ramp, and we achieved additional applications wins with new and existing customers.

Data storage products represented 4.4% of our quarterly revenue. This revenue was down 10.6% from the same quarter last year, and up 2.2% sequentially. For the full year, revenue for data storage slurries increased by 34%.

Finally, revenue from our engineered surface finishes or ESF business, which includes QED, generated 3.7% of our total sales. Our ESF revenue was down 9.1% from the same quarter last year, and up 31.1% sequentially. For the full year, ESF revenue increased by 39.5%.

Our gross profit this quarter represented 48.7% of revenue, compared to 48.4% in the same quarter last year, and 49.1% in the previous quarter. Compared to the year-ago quarter, gross profit percentage increased primarily due to a higher-valued product mix and increased utilization of our manufacturing capacity on higher demand, partially offset by higher fixed costs and unfavorable foreign exchange effects. The decrease in gross profit percentage versus the previous quarter was primarily due to the timing of unfavorable production-related variances and unfavorable foreign exchange effects.

This decrease was largely offset by benefits of increased utilization of our manufacturing capacity and a higher valued product mix. We've mentioned in the past that a shift in our product mix can move our gross profit margin by a percentage point or so.

For the full fiscal year, gross profit represents 49.9% of revenue, which was up from 44.1% last year, primarily due to significantly higher sales volume and benefits of higher utilization of our manufacturing capacity, partially offset by higher fixed costs and unfavorable foreign exchange effects. Our 49.9% gross profit margin represents the highest full-year gross profit level we have achieved since Fiscal 2003, and is near the upper-end of our full-year guidance range of 46% to 50% of revenue.

For Fiscal 2011, we expect our gross profit to be within the range of 48% and 50% of revenue for the full fiscal year.

Now I'll turn to operating expenses which include research, development, and technical, selling and marketing, and general and administrative costs.

Operating expenses this quarter of $32.7 million were $4.7 million higher than the $28 million reported in the same quarter a year ago. This increase was primarily driven by higher variable incentive compensation expense, travel expenses, and professional fees, including costs to enforce our intellectual property. Operating expenses were $1.8 million lower than the $34.5 million reported in the previous quarter, mostly due to lower professional fees, including costs to enforce our intellectual property, and lower staffing-related costs partially offset by higher travel expense.

For the full fiscal year, total operating expenses were $129.5 million, which was $17.1 million higher than the $112.4 million in Fiscal Year 2009, primarily due to higher expenses associated with variable incentive compensation, professional fees, including costs to enforce our intellectual property, and travel expenses. Looking forward, we expect our operating expenses for full Fiscal Year 2011 to be in the range of $125 million to $130 million. This reduction versus Fiscal 2010 represents expected lower IP litigation costs and lower variable incentive compensation expense.

Diluted earnings per share were $0.66 this quarter including approximately $0.09 associated with a significantly lower effective tax rate for the fourth fiscal quarter. The lower tax rate this quarter and for the fiscal year is associated with the Company's assertion of a permanent investment of earnings from some of our foreign operations outside the US, rather than repatriating the earnings to the US.

Our earnings per share this quarter were up from $0.52 in the fourth quarter of 2009, and up from $0.43 reported in the previous quarter. Diluted earnings per share for the full year were $2.13, which is up from $0.48 in Fiscal 2009. Our earnings per share this year represent a record for the Company and are approximately 13% higher than the previous record in Fiscal 2004.

Turning now to cash and balance sheet related items, capital additions for the quarter were $3.5 million, bringing our full-year capital spending to $11.7 million. For Fiscal 2011, we expect capital spending to be around $25 million including our planned investment in South Korea to add local manufacturing and research and development capability.

Depreciation and amortization expense for the quarter was $6.2 million, and share-based compensation expense was $2.7 million. In addition, we purchased $15 million of our stock during the quarter. We ended the quarter with a cash balance of slightly over $254 million and have no debt outstanding.

I'll conclude my remarks with a few comments on recent sales and order patterns.

Examining revenue patterns within the three months of our fourth fiscal quarter, we saw a demand for our CMP consumables products remain relatively constant in July, August, and September, with a spike in revenue from our QED business in September. 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 roughly in-line with the rate we saw in the three months of our fourth fiscal quarter of 2010; 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.

Now, I'll turn the call back to the Operator, as we prepare to take your questions.

Thank you, sir.

(Operator Instructions)

Our first question will come from the line of Jay Harris of Goldsmith & Harris.

Good morning.

Good morning, Jay.

What percentage -- what percentage of your cash is outside the United States now?

I think we have around $50 million or so outside of the US.

And if you look at the year just ended, where was the majority of your cash generated?

Well, our largest revenue area is Taiwan and so that tends to generate quite a bit of the earnings.

Okay, and so as you go forward, more and more of your cash is going to be outside the US, right?

We'll generate cash but we also have capital expenditure needs overseas as well.

Okay. If I could ask another question, if you could take this $400 million Company and characterize it the following way, I'd like to hear a discussion. Revenues that are growing because of market penetration, revenues and the makeup of those revenues and revenues that are just sensitive to wafer starts, and then if there are sub segments of those categories I'd like to hear a little color on this.

Jay, that's a big question. I'll do my best to answer it in an expedient time.

We are and have been a wafer start driven Company, so we would expect to grow with the general wafer start pace of the industry, which again is driven by PC's, laptops, servers, all these consumer electronic devices that are out there.

Within that growth, we see incremental opportunities to grow above and beyond the normal wafer start growth and I would suggest our pad business is probably the best example of -- we're tapping into a market that we haven't played in. For instance in this year we saw our pad business grow 70%, up to around $30 million in revenue and we anticipate that incremental growth above and beyond the wafer start growth to continue.

That combined with the penetration that we see in some of our new products in the copper area, in the barrier area, in aluminum CMP, we would all expect to provide a disproportional growth rate for Cabot Microelectronics in a positive way.

And then some of our step-out opportunities like our data storage business, the work we're doing in semiconductor -- or I'm sorry, electronic substrates -- again would be incremental growth opportunities above and beyond the normal wafer starts in the semiconductor industry. So if you want to parse it out that way, you could do it.

I would add one more area. We feel really good about the acquisition we made of Epoch Material Company, which was clearly a growth driver for the Company in the last year and a half. We continue to look for opportunities like that that are really a great strategic fit for our Company and add to earnings and growth day one. So Jay, I hope I've answered your question.

Yes, I think you have. What should we say, 10%, 12%, 15% of revenues are in businesses where you're growing your market share? What kind of order of magnitude would you put on that?

It's hard to say. I think when we look at the general wafer start growth, we tend to think in numbers of like 9% to 11% wafer start growth. If you take out all of the big swings in the semiconductor cycle, you put on top of that our pad business, which is growing at a very high rate -- I said it was 70% this year and we expect and we think we have a great product, and we believe we're bringing new products into the pipeline that are clearly going to add value and will continue to grow our presence in the pad business. We're number two today and we're excited about it.

It's hard for me to put my finger on what we think the growth rate will be going forward, because it's all dependent on our success with our pad business and our continued success at bringing new products to the market and sort of winning opportunities, Jay.

Okay, thank you.

Thanks very much, Jay. Operator we'll take our next question.

Our next question will come from the line of Dmitry Silversteyn of Longbow Research. You may proceed.

Good morning gentlemen. Congratulations to a nice strong finish and finally breaking through the $2 in earnings barrier.

Thank you, Dmitry.

A couple of questions in the pad business. You mentioned you're getting new applications with existing customers as well as new customers. Can you give us an update on what has changed since the last time? You don't have to give us exact numbers, but just bracket for us in terms of new applications and new customers since the last time you updated us.

Well, we continue to be -- let me go at it a couple different ways.

Our D100 pad is our first offering into the market and that offering is currently being -- last time we updated you I think we said we had about 20 customers and over 30 applications, which is probably still accurate. And then in addition to that I think what we said is we have some 30 other opportunities in various stages of testing and qualification with the D100 pad.

We've, since that time, begun to innovate off that platform and that technology to bring offerings to the market that are focused on some very specific needs and I mentioned them in my prepared text this morning, around sort of a pad that's ready to go and some other areas that where we think we can improve defectivity performance and still provide the performance qualities that our D100 pad brings in terms of longer pad life.

That combined with our Next Generation technology, our D200 technology, which again we're very excited about. We've got it out at alpha testing with two customers and we think that pad technology will be successful going forward and we hope to report on that in the coming quarters.

So again, Dmitry, we finished what we think was a good year. We grew our business 70%. I don't think any of us -- although we're happy, we're not satisfied. We'd like to grow faster and penetrate faster, and a lot of what we do in our pad business is dependent on our customers and our customers' abilities to do qualifications. And in the current market when capacity is near 90% plus capacity, our customers really don't have the tool time to do pad qual. So we're utilizing our own CMP polishing tools to help our customers out and doing all we can to drive the incorporation of both our D100 and D200 pad technologies.

That's helpful, Bill. Thank you. On the D200, when it's commercialized is it likely to be cannibalizing D100 pads? Or maybe not existing business but opportunities for D100 that would have been going otherwise? Or are you looking at a brand new market that you cannot address with D100 right now?

The D200 pad gives us just an extended breadth of capabilities and it allows us to move more into what's called the 'soft pad market'. So we think there's opportunities to push the D200 pad into the barrier application and some other areas where the pad hardness of the D100 technology doesn't do the best job it can and we think the D200 pad gives extended capabilities to our customers.

We don't believe there'll be a lot of cannibalization. Once a pad is qualified it tends to stay in there. It's pretty sticky. And I think our D200 pads will show off kind of the next generation technologies, next nodes and in areas where our customers are clearly looking for some sort of performance enhancement, our D200 pad will show up there, Dmitry.

Got it, that's helpful. And just to make sure I understood what you said correctly, you talked about $70 million in revenues in pads in 2010, if I remember the size of the market.

Oh, no, no, no I said $30 million in revenue and 70% growth.

I'm sorry, because I was going to say that's a big chunk of the market. Thanks for clarification.

One more question, switching gears a little bit. You've been looking at both developing internally and perhaps through acquisitions, opportunities in polishing beyond the semiconductor space and we've talked about the ESF business, lens polishing. We're now hearing that other slurry companies, some of the smaller competitors that you're going up against in the semiconductor space have also begun to look at lens market and other applications for pads for polishing.

Have you begun to see other slurry competitors that you've been bumping up against in the semiconductor space now, moving over to optics and lenses and other polishing, where you may be looking? And how does that change, if it does at all, your strategy for addressing non-semiconductor growth?

Dmitry, it's actually kind of -- I would categorize it as the other way around. Many of our smaller CMP competitors have always been in the electronic substrate and sort of lapping -- what I would call industrial lapping business for lenses and mirrors and things like that.

What we see happening, let me provide an example of prime wafer polishing -- is an opportunity that we're currently exploring and optimistic about in that prime wafer polishing used to be what I would describe as a more conventional mechanical lapping process and it lended itself to what I would describe as lower technology, lower cost solutions.

As the semiconductor industry, in particular, and photovoltaic industry seeks wafers that have higher and higher surface performance and lower and lower sub-surface defects, they've begun to look for CMP-like solutions instead of the traditional lapping solutions to prepare their wafers. Which has attracted us because that's what we do and that's what we think we do really well. And it's brought us down into that market, which is a market we've looked at for several years and kind of shied away from because its tended to be a low margin market. But now we can add value with our technical solutions and provide performance in that industry that they haven't seen before, in either higher rates or better sub-surface performance or both.

So I think it's a little different. Some of those competitors have always been there. They're not just sort of just showing up, Dmitry.

Okay, that's helpful. Thanks for the color.

Finally, the traditional question on cash use. You did purchase about $15 million worth of shares in the quarter. You mentioned that you're looking for acquisitions now kind of beyond the pad and slurry business, and maybe even going into some other electronic materials related product lines or markets. Can you update us on how that search is going and whether or not any thought has been given to either a dividend payment or perhaps a little bit faster share repurchase program execution?

Well, let me, a whole bunch of questions there.

We generate cash. We have a very profitable business model and cash is certainly a subject that we discuss regularly here at Cabot Microelectronics. Our first priority for that cash is to utilize that cash to grow the Company and we would very much like to put that cash to work.

As I said earlier, we're delighted with our success with our Epoch acquisition. We would sure like to kind more acquisitions like that that fit right into our infrastructure and our cost structure. And beyond that we are clearly interested extending our reach in terms of electronic materials and leveraging our supply chain quality systems as well as our global infrastructure around the world.

I think -- let's step up a little. The M&A world has been a little stagnant for the last several quarters. There's a lot of noise right now and a lot of chatter about deals getting done and it looks like some deals will get done. I think the environment is warming up a little now as people are getting more comfortable with the valuations in the market post the recession. So we'll see.

We have been active and are active. We have, like any other company, we have a list of companies that we would be very interested combining with or acquiring or whatever it might need to look like to help us grow and serve our customers better. So that's how we think about it.

We're at the end, as you said we spent $15 million in the quarter just finished, we have $25 million left in the current plan. We, as always, whenever we meet with our board we talk about cash and the best use of that cash and we'll continue to do that and we'll report back when we have an answer.

Thank you guys.

Thank you, Dmitry. We'll take the next question please?

Our next question will come from the line of Chris Kapsch of BDR Research Group. You may proceed.

Yes, hi. I have a couple questions focused on gross margin trends both in the quarter and then sort of bigger picture.

First, given the strengthen in the top line and favorable mix, which I think you mentioned, it wouldn't have been surprising if you did even better on the gross margin sequentially. So I'm just wondering if you could provide a little bit more color about what was the source of the adverse sort of manufacturing variance on the gross margin line in the quarter?

Sure, Chris. It's Bill Johnson. Thanks.

A phenomenon we've seen in the past is something we call internally capitalized variance. When we have a report cost of goods sold, those aren't cost of goods produced, they're cost of goods sold. And what we are selling in the current quarter sometimes are products we produced in the prior quarter and our level of production was higher in our fourth fiscal quarter than in our third fiscal quarter. So we sold through in the fourth quarter some products that were produced in the third fiscal quarter where we had somewhat lower production levels so they are higher cost products. And so that was the adverse production variance and the timing effect that we mentioned in the press release. But it's sort of an arcane, accounting type issue.

Aside from that sort of a factor, we had mix effects, a little bit of foreign exchange, higher capacity utilization. So some puts and takes and overall around 0.4% change, which relates to what, $400,000 on $110 million of revenue. So relatively modest in total but that's the production variance that we mentioned in the press release.

Okay, that's helpful. And then a little bit bigger picture further out, if you look at further 2011 and maybe even beyond, if you think about in the context of the sustainability of your Six Sigma efforts and their positive effect on productivity and manufacturing, then maybe looking at potentially positive and conversely -- I guess as your mix of product becomes more customized versus made to stock, I don't know if that could be an adverse, have an adverse effect on manufacturing?

But in the context of those two things and then maybe also a third being diminished drag from the growth in your pads business, I'm just wondering is there a scenario where you can do better than the 46% to 50% gross margin range that you've put out for fiscal 2011?

All the things you describe are sort of tailwind kind of things, continued productivity improvements, higher valued products -- things like that. There is a headwind that we face and our customers always want lower costs and they want significantly lower costs. And our approach is to try to offer them higher valued, higher performing products, not necessarily lower prices but there is pressure on price kind of all the time. So that's sort of the headwind.

If you look at our guidance for fiscal year 2011, 48% to 50% with a midpoint of 49%, our prior guidance before the recession was 46% to 48% so a midpoint of 47%. And then we suspended our guidance during the global recession when demand fell off; and when we reinstituted it, it was back at 46% to 50% so midpoint of 48%, given a lot of uncertainty around the future economy.

Now looking at fiscal 2011 and a relatively strong outlook during the period of time that our customers have visibility, we raised the midpoint and tightened the range, given some greater certainty. So I think going forward our focus is going to be maintaining margins.

If you look back at the history of the Company, in our early history we had margins in excess of 50%. We don't think a whole lot about going back to the good old days of 50% plus margins. Our -- sometimes customers just don't let you have margins like that. But we're trying to balance sort of the headwinds and tailwinds. We put out higher guidance for fiscal 2011 and we'll continue to work on productivity improvements going forward.

Okay. Could I just follow-up on that? Just on the notion that some of newer products and more advanced products tend to be more customized. Are those products, do they tend to pose more of a challenge from a manufacturing standpoint, or do they tend to be higher margin? Just because they are sort of priced per specific value-added features?

No, they're not challenging from a manufacturing standpoint. But our process technology is -- I'm going to kind of use my own words here -- it's kind of continuous batch process where we can whip up a new blend or a new recipe pretty easily and it doesn't add cost to the manufacturing of the product. I think -- does that answer your question, Chris?

Yes, that's helpful. And then Six Sigma has been part of the fabric of the Company since you, Bill Noglows, brought it on six year ago so I imagine it's a way of life. But do you feel like there's sustainability to the benefits there, at least in the manufacturing part?

Yes, I do. Every year the people that run our facilities and manage our supply chains around the world, they sit down and come up with what they call a productivity deck, which is kind of a list of prioritized projects to reduce costs. And every year they come up with a pretty significant list of meaningful projects to do that reduce costs.

You'd think at some point we'd hit a sort of point of diminishing returns, but they're pretty creative and innovative about what they find and look for ways to do things differently to drive out costs and we haven't seen the bottom of that curve yet. We may some day, but we haven't seen it yet and I think the men and women that manage that part of our business do a very good job of it and we hope it continues.

Thank you for the context.

Thanks, Chris. We'll take the next call.

Our next question will come from the line of Avinash Kant of D.A. Davidson & Company. You may proceed.

Good morning and thank you for taking my call and questions.

A few questions, Bill. First of all, you talked about the capacity expansion plans in South Korea. It looks like you're going to be spending, almost investing $10 million in there. Now the question I had was is the investment also in collaboration with some of the customers, or it's just your own investment at this point?

No, Avinash, I would describe it as a continuation of our strategy and our long range plan to get closer to our customers. We made a similar investment in Taiwan starting about five years ago and now we have a significant infrastructure on the island of Taiwan to support our customers there.

We believe that now is the time for us to make a similar investment and establish kind of a beach head and a footprint in South Korea. South Korea today is the second largest CMP consumables market in the world. We've always had what I would describe as a very strong sales presence there.

We've been staffing up that sales presence and now we're in the process of beginning to staff up our capability to do research and development and much more responsive technical support of our two leading memory customers there. So I would describe it as kind of a continued evolution of Cabot Microelectronics part of our plan. An exciting part of our plan to increase our infrastructure, our capability and our response time to our two large customers in South Korea.

Okay and you talked about the current quarter; up until now you have seen current things pretty much at the similar level of what you saw in the September quarter. Given what you hear from your customers in terms of their build plans or their wafer starts projections, do you have any planning purposes or what are you using for wafer starts for the next year, calendar year I'm talking?

Not much. Avinash, we don't really talk about wafer starts and we certainly, next year -- let me back up a little bit.

I think for the next quarter, we're delighted. Bill said, as of this month, where we are in October we're relatively flat with three months of the last quarter. Which if you listen to people you probably wouldn't have expected.

I think some of that is the result of the way we're positioned. We have a very strong position at the foundries. I think during our Investor Day in New York, we said we are about 50% foundry. And if you listen to what people are saying the laptop and desktop market is a little soft and the panel market is a little soft; however the tablet market is roaring and certain smartphones are really roaring along. Which benefits the foundries and the memory suppliers.

So with that being said, we hear and think that we'll see some pretty strong demand from our foundry and memory customers going through the Christmas holiday season.

I think the industry has been pretty hot for a while. We might see a little bit of a downturn in the first calendar quarter of 2011. But again, I don't like to forecast but I think we're looking at a pretty strong period for the semiconductor industry.

A few questions for the longer term. There's always debate about slurry usage and how much slurry is going to be used for each step. Any trends that you see out there that could somehow impact the consumption of slurries in your business as people move to these smaller geometries, either positive or negative?

We actually see the trending of an increasing slurry utilization as the technology becomes more complex.

There are headwinds. Let me be clear. So we think more and more slurry will be used as the technology goes to smaller nodes. We see the same trend in the memory side of the business. However, there are sort of counteracting trends in the form of dilution. Customers are always trying to find ways to use less and less slurry on each CMP polishing pass. But in general, we think we'll see higher utilization of the CMP process, higher intensity of the CMP process and more use of CMP slurries [and bits].

And one final question I had was there's been a lot of chatter lately about rare earth metals and how the prices have been going up and clearly it looks like some of them are actually used in the polishing process also. Have you seen any impact from that yet?

Well there's a family of slurries that utilizes cerium oxide, actually, as an abrasive particle and the slurries tend to be used in advanced dielectric slurries and some oxide slurries. And yes, the industry has seen an increase in price in those particles. We're clearly watching it very carefully to see what may or may not happen. But it's affecting all of us essentially the same and all of our customers are being affected the same.

Our response to it is to do all we can to secure supply of cerium oxide and we've done that. We are also revisiting our efforts to see if we can provide a solution to our customers that doesn't involve a cerium oxide particle and uses a more conventional lower-cost particle going forward. But it's something the industry is paying attention to and we're watching very carefully.

So with your competitors, if they got this material within China, they may have it cheaper, right, because it looks like there is some cutback in exports of this one, that's right?

I'm not sure I understand your question, Avinash. If someone could preferentially buy it?

Could buy this in China. Because it looks like the embargo or the cutbacks have been in the export of this material outside of China. So is it that there's a price differential between somebody buying it within China and of course outside?

I'm not sure any cerium oxide slurries are provided within China. But I don't really, I don't think I have the data or facts to answer your question.

But in terms of the impact, how severe could the impact be if you were to try to understand that, prices have gone up how much and how much of an impact it is in your bill of materials at this point?

Well, we understand that the Chinese government has reduced export quotas for these rare earth elements by about 70%. And China controls about 95% of the worldwide ore production and the purification process. So there's really no other sources outside of China. For us, this is a relatively -- it's something we need to manage, but it's a relatively small part of our business. Some of our competitors have significantly larger exposure to this.

And why is that? Because of dielectric?

Because they would have a larger position in advanced dielectrics based on cerium.

I think we've expressed before, we've had a push in shallow trench isolation slurries, which is part of the advanced dielectric category of products we talk about. It's an area where Cabot Microelectronics has probably been underrepresented for many years and some of our competitors have had a significant share of that market.

Most of those applications are served by cerium oxide slurries. So what Bill is saying is that our exposure on cerium oxide is relatively very small compared to some of our competitors.

Got it. Perfect. Thank you so much.

Thank you, Avinash. Well there are no more questions in the queue, but let me offer one housekeeping item and a clarification for modeling purposes.

We talked about a lower tax rate that we experienced this quarter and overall the tax rate for the full year was about 32%. On the first three quarters of the year, we had a tax rate of around 35%. But based on this new assertion that we made in the fourth quarter, our expectation for tax rate in fiscal 2011 would be within the range of 31% to 33%. So, if you'd been modeling us at the 35% rate for the first three quarters, you may adjust your models for FY11.

With that thank you for your time this morning and your interest in Cabot Microelectronics.

Thank you, sir and thank you for your participation in today's conference. You may now disconnect. Have a great day.