Good day, and thank you for standing by. Welcome to the CMC Materials Third Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Colleen Mumford, Vice President, Communications and Marketing. Thank you. Please go ahead.

Thank you, Teva, and good morning. With me today are David Li, President and CEO; and Scott Beamer, Vice President and CFO. Last night, we reported results for our third quarter of fiscal year 2021, which ended June 30, 2021. We encourage you to review the slides and remarks document we've made available in the Quarterly Results section of the Investor Relations center on our website, cmcmaterials.com. A webcast of today's conference call and the script of this morning's remarks and question-and-answer session will be available on our website shortly after this live conference call. You may request any of the information by calling our Investor Relations office at (630) 499-2600. Please remember that our discussions today may include forward-looking statements that involve a number of risks, uncertainties and other factors that could cause the actual results to differ materially from these forward-looking statements. These risk factors are discussed in our SEC filings, including our Form 10-K for the fiscal year ended September 30, 2020, and our Form 10-Q for the quarter ended June 30, 2021, which we expect to file by August 9, 2021. We assume no obligation to update any of this forward-looking information. Also, our remarks this morning reference certain non-GAAP financial measures. Our earnings release and slide presentation include a reconciliation of each non-GAAP financial measure to the nearest comparable GAAP financial measure. Additionally, data reflects rounded values throughout this discussion and in the accompanying slides and remarks document. I will now turn the call over to Dave for opening comments, followed by a question-and-answer session.

Thanks, Colleen. Good morning, everyone. As announced last night, we reported results for the third quarter of fiscal 2021, representing the third quarter of consecutive record revenue. Top line growth of 13% was driven by broad-based strength across our Electronic Materials segments, which we believe continues our track record of outpacing growth in the sectors in which we participate, and improvement in our Performance Materials segment, which is beginning to recover from the impacts of the pandemic. Despite robust year-over-year sales growth, profitability was lower than expected. We revised our full year adjusted EBITDA guidance to $355 million to $365 million, primarily due to 2 main drivers: First, higher costs for raw materials and freight and logistics are impacting margins for both our segments. In response, we are addressing these challenges and executing with plans underway to help mitigate these headwinds. Second, although total revenue from China increased 46% year-over-year in the quarter, variable order patterns from certain Chinese customers have led to lower-than-expected revenue from our CMP slurries business and is negatively impacting total profitability. We believe these order patterns will normalize by the end of the fiscal year 2021 and forecast that China will remain a strong growth opportunity in fiscal 2022. In our core business, Electronic Materials, we expect sustained semiconductor industry health as the overall demand for our product offerings remains strong. We see strong demand from memory, foundry and logic customers, with many fabs running at full utilization. In addition, we are encouraged by significant announced investments by our customers to increase capacity, which will drive further growth and opportunities for our consumable-based business. We continue to strengthen our participation rates in all Electronic Materials businesses by investing in innovation and quality and supply chain excellence. Despite some near-term profitability pressures, we remain excited about the strategic direction of our business. We are actively managing the challenging raw material and tight supply chain environments and mitigating the impact on our profitability. Our growth outlook remains attractive as we continue to strengthen our core Electronic Materials businesses through organic and inorganic investments. Furthermore, as application nodes advance and increasing device complexity results in greater challenges for customers, the demand for our consumables solutions is expected to become even more pronounced. With our unique portfolio, scale, business systems and talented team, we are excited about the future growth of our business. With that, I'll turn the call over to the operator as we prepare to take your questions.

And your first question comes from the line of Toshiya Hari with Goldman Sachs.

I have two questions, if I may. Dave, regarding the variable order patterns in China related to your slurries business, I wanted to follow up on that. Do you see this as a temporary issue, or could it potentially indicate a more structural problem perhaps related to market share loss? How much visibility do you have into the situation? Many of your peers are still reporting strong activity in China, and some companies are even concerned about pulling demand forward due to that strength, so I would appreciate more insight there. For my second question about costs, could you clarify what is driving the increase in costs? You mentioned mitigation efforts; what specifically are those efforts, and when might we start to see improvements in margins as a result?

Thank you, Toshiya. I will address the first question regarding China. We've observed remarkable growth in China, surpassing our competitors with nearly a 50% year-over-year increase. Our position in the market has strengthened, with no loss in our standing and even an improvement in our participation rate. It's important to note that we do not sell directly in this region. This quarter, we experienced some inventory reductions from a few domestic customers, which may continue into the current fourth quarter. However, we anticipate robust growth from China moving forward. It is poised to be one of our fastest-growing regions in the next fiscal year, and we're very enthusiastic about the progress we've made so far. This growth is evident across both slurries and pads. This quarter, any slowdown we experienced can be attributed to inventory drawdowns, but we remain optimistic about the strong long-term growth prospects in China.

And then Toshiya, this is Scott. Last quarter, we mentioned that one specific raw material in the PIM business was driving inflationary pressures. Additionally, on the electronic chemicals side, we're facing pressures related to petroleum-based inputs. We have also seen increases in freight, logistics, and overall supply chain costs, particularly due to rising fuel prices affecting availability. Consequently, we've had to explore alternative shipping routes. Despite these challenges, we have successfully delivered every shipment to our customers on time and in full since the beginning of the pandemic. However, we are aware of the cost impacts on our system, which have become more noticeable as the quarter progressed. We have implemented mitigating actions, which are a top priority for our company. While we won’t go into specifics, these actions will likely involve pricing strategies, procurement initiatives, and other optimization efforts, some of which are currently in progress. We are hopeful about our ability to recover from these impacts, but we acknowledge that there will likely be a delay in seeing the financial results of those efforts.

Okay. And sorry, as a quick follow-up for both Dave and Scott. So in terms of timing, with the Chinese customers or the purchasing coming back in China, is it fair to assume kind of a snapback in December? Or is it more calendar '22? And then, Scott, on your last point, maybe you don't want to be too specific here, but the mitigation efforts, again, showing up. Is this more of a December dynamic? Or do we need to wait until next calendar year for the efforts to show up, whether it be things that you're doing on the pricing side or the procurement side?

Yes. And just on the China follow-up, yes, we see this as a near-term challenge, and we expect to be back on the growth track. There's strong underlying growth in demand in China. As I mentioned, we've actually increased our participation there. We've actually increased our participation in all of the product areas of Electronic Materials. So we see it as a more near-term issue. What we've guided to is kind of through our fourth quarter, which would be through kind of September. So end of the year, we expect to be back in a more normal order pattern for China. Obviously, it's a bit dynamic because we don't sell directly there. But that's what the forecast and visibility we have so far.

I think you're right, Toshiya. We probably won't be too specific, and this is evolving. Some of the activities I mentioned are already underway and being implemented. This is a current-state perspective. We're being proactive regarding our expectations for Q4 and the full year, but we don't expect to capture it entirely as we're adjusting our midpoint. I believe this will continue to evolve over time.

I would just add that we've experienced many different cycles as a team. Currently, we're in an inflationary period with rising costs across the board, including beef, logistics, and energy. However, we are confident in our ability to manage through this and grow our revenue and profitability. Our team has navigated various cycles before, which gives us a strong sense of assurance. As mentioned, it might take some time for our mitigation efforts to show positive effects on the financials, but we have already begun implementing some actions.

Your next question is from the line of Mike Harrison with Seaport Research.

It looks like you guys saw record revenue in the pads and Electronic Chemicals businesses. Are you feeling better about the momentum that you're seeing in those businesses? I know you mentioned in the prepared remarks, that you had a consumable set win from a memory customer. Did you have some similar wins in electronic chemicals that you believe are sustainable?

Yes. Thanks, Mike. From the pads perspective, we feel like this quarter's result, which was a record for us, is kind of just this narrative that we've been discussing for several quarters where we've been achieving wins and then having them ramp up over time. And so we're really excited about the growth trajectory of pads. It was a record quarter for us. And we're seeing broad-based interest and demand. This quarter, I think what we saw is some of the wins that we talked about in the previous few quarters ramping up, and we expect them to continue ramping up ahead. You mentioned the consumable set. That's something else that we're very excited about. We think we're unique in our ability to provide a slurry and pad together that are optimized. We wanted to call out that memory win just because it was our ability to tune the pad and slurry together to solve a technical challenge for that customer. And so we feel really good about that capability, and we expect to see more of those types of wins ahead. So really exciting time in pads. EC also was a record this quarter, and I think that's a combination. One, there were some new business wins there. But also, we've talked about that business as being a little bit more transient, and what we saw this quarter was just very strong demand. Obviously, we predominantly operate in U.S. and Europe. And we've just seen really strong demand from those customers for our products. And the other thing that we mentioned is we're actually investing back into the business. So our customers have asked us to invest ahead of their demand. And obviously, there's been a lot of announced capacity additions by our customers. So we're excited to invest back into the business. We're investing in our largest EC plant in North America to increase capacity, but also to improve our quality and to just further differentiate ourselves. So in both product areas, really strong performance, and we feel good about the growth trajectory.

Can you talk a little bit about what the ITC patent infringement decision means? You guys issued a press release on that, but didn't really talk much about how much revenue might be affected by those specific products. And beyond that, is the PIM infringement case or that situation, is that a signal that you're going to be pretty vigorous in defending your IP where you need to?

Yes, thanks. Yes, it's significant. And obviously, we're still in active litigation. So we can't share a lot of details at the moment, but we're definitely encouraged. I'd say we're working with our customers globally to transition them in a way that minimizes the disruption on their operations, which is, obviously, the stakes are high. So we feel confident that we have the products and capacity to support their transitions but obviously, it's an ongoing active litigation. I'd just say to your second comment, we have always invested a lot in technology and innovation. And when we feel that others have misappropriated, we have to defend, right? That's just because of how important our technology is to our growth. And in this case, we feel very confident that we will win the case on the merits and also our intellectual property.

All right. And then last question for me. You referenced some underutilized manufacturing costs in the DRA business. Obviously, you guys built out some capacity, and we're still in recovery mode in that business. Were there some costs that kicked in during Q3 that were not in prior quarters? And I wanted to maybe try to ask the question again about what EBITDA margin looks like in the Performance Materials business as we try to model that business without the wood contribution. If I do a little bit of 'back of the envelope' math for this quarter, I come up with something like 38% EBITDA margin versus the 44% you reported, including the wood business. Is that in the right ballpark as we think about trying to model the future without wood?

Yes, I generally agree with you, Mike. Your reasoning is correct. To provide some context, our revenue and EBITDA as a percentage of revenue rose from approximately 40% to 44% this quarter. We saw significant revenue growth across all our businesses, even in the face of increased raw material costs. Compared to the previous year, we experienced a decrease due to those extra expenses. We have been clear about our investment in building a new plant, which was nearing completion last March when the pandemic struck. We were positioning ourselves for what we believe would be strong demand, but we couldn't anticipate the pandemic's impact. Currently, the plant is underutilized, affecting our cost structure. Nonetheless, we remain very optimistic about this business, which is highly profitable. We achieved double-digit growth in this business sequentially, marking the first time in over a year that we've accomplished that. Even during the last 12 months, which we've described as stable, we experienced revenue in the mid-20s per quarter, surpassing any previous periods prior to our ownership of the business. We are satisfied with our growth and operations in this business, despite the current lower demand. Demand has increased this quarter after a period of stabilization. We remain confident about the continued profitability of this business moving forward, and I believe your perspective on that segment and its profitability is spot on.

And the next question is from the line of Josh Silverstein with Wolfe Research.

I was actually just going to follow up on the $35 million. Just to clarify, the starting point for next year, I guess, that is $325 million for what your EBITDA guide would be. Is the idea that you were able to offset all of that from growth from the other businesses so that fiscal 2022 would kind of look similar to what this year would be?

Yes. Yes. So we're going to end this year, our midpoint for what we expect to end this year is about $360 million. And we're saying despite wood coming out, we're expecting around $360 million or so, the same value for next year.

Yes, Josh, I'll just add on to that. That we expect continued really strong growth across the different businesses. So we expect to at least offset that exit of wood from a profitability. Obviously, that means a pretty healthy growth in revenue, which we've experienced over the last several quarters. This is our third consecutive quarter of record revenue, and we see really strong demand in both EM and recovering demand in PM.

Just curious on ITS, I know you had this new segment. Was the $5 million for material technologies there, was that all ITS? And I guess how are revenues trending for that into the fiscal fourth quarter? And what would be the expectations for next year?

Yes. So for ITS, that is pretty much that whole segment. We're excited about adding them to our portfolio. They have a really unique technology. And obviously, it increases our participation in some areas we haven't participated heavily in the past, which is in the packaging and test area. That I'd say the overall addressable market for that business, we put it around $100 million. We see a really healthy growth rate of about 20% given the criticality of packaging. And so we feel like there's a really strong growth thesis for this business. Obviously, we're just finishing up with integration, but really pleased with the performance.

Yes. So you guys think this could get to $100 million? I guess that's the ultimate path of where you want it to get to I thinking.

Yes. If you consider CMP slurries and pads together, we estimate it to be less than $2 billion. This is a smaller segment, and we project our ability to capture and ramp opportunities around $100 million. That gives a sense of the scale involved.

Okay. Got it. And then just lastly on the CapEx for me. This is the second quarter in a row where you've now cut the CapEx guidance again. What's happening here relative to what you guys were thinking 6 months ago in terms of the budget?

Yes, Josh, we intentionally constrained some spending this year given the uneven demand environment initially, and now the cost environment that we're experiencing. So we're going to continue to be very thoughtful about how we deploy CapEx, while that's still our #1 priority for how we think about spending our cash. We averaged about $10 million a quarter through 9 months. And you're right to indicate that our expectation is to spend about $20 million in this coming quarter. So a step-up but off of a small base. So in addition to us constraining our on the cost side, there's also been some constraints on availability of resources as well and implementation of project. But it's important for us to continue to invest in our businesses. We'll continue to have the capital-light model that once we work through some of the inflationary items and get some revenue growth, the operating leverage can be very compelling. But we're thoughtful about how to deploy that capital. We're able to meet all of our capital deployment priorities today, and we expect to continue to be able to do that. So we're pleased with that in terms of dividends and paying down debt and then ultimately also executing M&A when that's available. So we're just being thoughtful about that. And I think next quarter would be a time where we'll communicate a little bit more about future expectations of CapEx. But for now, you're right to identify a little bit of a step-up of about $10 million from recent run rate in Q4.

Going forward, we are making and planning investments to support our emerging market business, which is a key focus for growth. This segment already represents over 80% of our business. We are collaborating with our customers, many of whom are expanding their capacity and have requested that we also increase ours, so we are proactively doing that. As Scott mentioned, we are being disciplined about our spending and deployment of resources, but we are enthusiastic about reinvesting in the business as we anticipate strong growth opportunities ahead.

And the next question is from the line of Amanda Scarnati with Citi.

I just have a follow-up question on the China slurry business. Can you size that business? I know you mentioned that it's about 50% year-over-year. But how large is that compared to, say, your memory business or your logic and foundry business excluding China?

Yes. So if I understand your question, Amanda, is just trying to get a size of the China market. Is that right? Our revenue is about $35 a quarter in China.

Yes. I'd say, first, you have to distinguish between the domestic and the multinational. We've seen strong growth from both. Scott mentioned, we're running around $35 a quarter, $35 million a quarter there. So it's a pretty significant geography for us. That's split about half and half between domestic and multinational. This quarter, what we saw is kind of an inventory drawdown by some of the domestic customers.

And all of that business is in slurries? Or is that sort of across the board, that $35 million in China?

Yes, it's predominantly slurries. We have a growing pads business. We've talked about it for several quarters. We have a partnership with a really great local partner there, and we're starting to see some of the benefits. We did record a few pad wins we talked about I think last quarter, and we're seeing those pad wins also ramp up. But it's predominantly slurry. There is some pad business there as well.

Then the other question I have is on the DRA side of the business. As we're starting to see pipeline ramp back up, we're starting to see consumption ramp back up domestically, are you seeing pipelines using a greater or a lesser percentage of DRAs than what you would have expected? Or is this sort of in line with how pipelines behave prepandemic?

Yes. Amanda, we discussed the sequential revenue growth we experienced in the PIM business this quarter. The effectiveness of DRAs tends to increase when the pipelines are fuller, and we haven't reached that point yet. Although there's been some improvement in economic activity, we're still not back to the pre-pandemic input rates. The business has grown from the mid-20s to nearly $30 million on a quarterly basis. However, the inputs per usage are still below pre-pandemic levels. If the pipelines continue to fill up, I expect those inputs to improve further.

Yes. I'd just add on, Amanda, that one of the things that we've been doing since we've owned the business, one is we have secured some new business wins. Some of them are pretty significant, and we're seeing those ramp up. The other is we're investing back into the technology to improve our current product offerings as well as give us some new products that might allow us to participate in areas of that segment that we don't currently participate in. So we're excited about the innovation we're bringing, the quality of the supply chain. And as Scott mentioned, we're encouraged by the recovery, but not quite back where we were prepandemic.

And your next question is from the line of David Silver with CL King.

I have a couple of questions. First, I would like to clarify something about the slurry sales trends. This quarter, your pad business saw significant sequential growth and reached a record overall. However, slurry sales took a different turn sequentially. I'm curious if you could explain that. I understand there are geographic differences with EC, and there might be distinctions between logic and memory. Can you help me understand why there was variability in slurry orders while the pad side remained stable?

Right. So Dave, when considering those two product segments, while they are technically part of the same process step, our involvement in both areas is quite different. We clearly lead in CMP slurries and are second in CMP pads, but we are a distant second. This indicates that there is significant potential for growth in pads, and therefore, you might expect the growth rates to differ. We've experienced strong growth in slurry, around the mid-teens percentage year-over-year for the past several quarters. This growth was driven by robust performance in China and an increase in our market participation and industry utilization. However, this quarter we experienced a slowdown due to some inventory reduction in China. We anticipate this challenge will continue into our fiscal fourth quarter, extending through September. On the pad side, we are seeing an increase in our successes. From our viewpoint, the growth paths of the two segments do not necessarily align.

Yes. And if I may, David, I think it speaks actually to the power of our portfolio within Electronic Materials. The fact that slurries will be down a couple of percentage points, 3 percentage points sequentially, but the whole segment was up 4%. So the growth impact, the growth in EC, we think is a nice supplement to what has typically been the growth engine for the company. And Dave mentioned, still nearly grew 50% in China. So we're talking about order patterns in China, but we want to keep the perspective of that 50% growth versus prior year. And total slurries, even despite everything, we're talking about total slurries grew 16% versus prior year. So supplemented on the sequential basis by the growth in pads and EC, and I think that speaks to our broad portfolio of consumables sold to the semiconductor industry.

Yes. I just want to make sure we're clear on the CMP slurry side. Although the revenue from that segment declined a bit just because of the China inventory issue, overall, we feel really good about how we're doing. We're introducing new products. We actually think we've increased our participation through a lot of new wins. And so we feel really good about our position in CMP slurry going forward.

I wanted to focus on the cost issues that you're facing as a company. In your press release and remarks, you mentioned cost mitigation. On the other hand, there are price increases or price movements to consider. I understand that the contracts are structured in a way that locks in specific prices for many of the consumables. But from a portfolio perspective, not looking at individual customers or products, what kind of flexibility do you have to implement price increases to help offset some of the raw material and logistics challenges you are currently dealing with?

Yes, certainly, David. When we discuss the mitigating factors or actions, we are referring to the complete range of options available, which includes pricing, procurement, and various utilization strategies. Our teams have a clear understanding of the contracts in place and the potential for pricing adjustments based on those contracts. We have a good level of visibility on this matter and some flexibility to make changes, though we are aware of the timing involved. We have already initiated several efforts in this regard. This past quarter, we noticed inflationary pressures becoming more significant as time went on, and we've taken steps to adjust pricing accordingly. This process is ongoing, showing effects, and it remains a top priority for our team. As Dave mentioned, we have an experienced group that has navigated various cycles, and we are confident in our ability to deliver results in this environment as well.

Okay. I apologize if I misunderstood the term cost mitigation. There is one last topic I wanted to discuss. I would like to revisit the patent infringement case and the ITC's ruling. I'm not a lawyer, but I was curious if the ITC still has additional work to complete following their initial determination. If, in the coming months, the ITC decides in a certain way and the response from the defendant does not provide the relief you were hoping for, meaning if they continue to infringe or find ways around it, what might the next steps be? Specifically, what kind of penalties can the ITC impose? What remedies are available to address the infringing behavior by the defendant in that scenario?

Yes, I'm not an attorney, but I'll do my best here. My understanding is that we are still in active litigation. We feel confident that the final decision will support the preliminary findings in our favor. When the final determination comes out, assuming it is in our favor, we expect an immediate issuance of an exclusion order or a cease and desist order to prevent that supplier from providing or selling the infringing products. It is quite clear, and as I mentioned, it is significant, and we are already working with customers to transition.

And your next question is from the line of Chris Kapsch with Loop Capital.

I have a quick follow-up regarding China and then a larger topic. You mentioned that some of the decline in order patterns was due to domestic producers through distribution relationships. Can you clarify whether these are memory customers, legacy node customers, logic customers, foundry customers, or a mix of all?

Yes. I mean we didn't specify it, Chris. I would just say, you know the spectrum and landscape in China, we did kind of characterize it as domestic. And if you look at the domestic production of chips or production of chips by domestic customers these days, the largest volume is coming from kind of logic, foundry. There are a few domestic memory customers that are important customers of ours, but not with any significant volume. So perhaps that gives you some directional clarity.

I would like to address a significant concern that hasn’t been mentioned in either the formal remarks or the Q&A. There is considerable frustration among shareholders and other stakeholders. This frustration isn’t solely about the stock declining 10% today in a rising market. In the semiconductor sector, there is a backlog in end-market demand, often referred to as a super cycle. However, your company has experienced several consecutive quarters of unsatisfactory results. This disappointment is evident not only in the earnings trajectory but also in the valuation multiple and the underperforming stock price. Based on my interactions, it appears that some institutions are trying to understand whether this situation is merely temporary or if there are deeper structural issues at play. I’m curious about your thoughts on this and what steps you might take to restore confidence. One point that has been raised is the idea that, although the DRA business may not directly cause the projected $20 million reduction in fourth-quarter guidance, divesting that business could allow a greater focus on what many see as your core operations. I’m interested in what you and the Board are considering regarding this matter.

No, I appreciate the candor, Chris. We're focused on what we can control and feel like we're executing well. We've grown faster than the segments we participate in, with our growth in emerging markets reaching almost 15% year-over-year. We’ve achieved three consecutive record revenue quarters. In the areas that we can control, excluding share price, we have continued to expand our participation and introduce new, innovative products across both segments. We believe we're executing well. Scott has discussed the cost challenges and our plans for mitigation, and we feel confident about that. Additionally, from a portfolio perspective, the entire Board, including myself, is always considering the best ways to utilize our capital and determine the optimal portfolio for us, where we can be the best owner. We continually evaluate all these options.

Just one follow-up on that because when this has come up in the past, the idea that maybe the DRA business, as attractive as it is in terms of structure and margins and so forth, that maybe you're not the rightful owner. One thing you've said in the past is that even if we were to consider something strategically with that business, now wouldn't be the time because it was coming through this kind of COVID-impacted cyclical downturn. But now at least with the volumes recovering, does that remove an impediment to thinking about that more seriously? I appreciate it.

Yes. I believe this quarter shows a significant recovery with double-digit growth, which is encouraging. While we can't provide specific details on the timing of any significant portfolio moves, the overall direction is positive. We are excited about the business and have reinvested in it. We see many characteristics similar to the consumables business in Electronic Materials. It is undoubtedly an attractive asset, whether it remains with us or goes to another owner. We are focused on driving growth and performance in that segment.

Your next question is from Paretosh Misra with Berenberg.

So just going back to the price increase comments earlier as a way to offset cost pressures. So in your electronics business, where do you have the greatest flexibility in terms of pricing adjustment? Is that much higher in the slurries or versus, say, Electronic Chemicals or it's pretty even? And also, are you now looking at price hikes in the DRA business as well or not really?

I would say it's pretty even within Electronic Materials, and it depends on the contractual obligations we have with our customers. In the slurry business, there's a higher degree of differentiation. Over time, we have demonstrated our ability through technology and continued innovation to expand margins and capture more value there, and we expect to keep doing that. However, I wouldn't distinguish one business from another regarding the potential impact of these mitigation plans. From a DRA perspective, that is something we are closely monitoring and following the processes we've discussed. We realize that it is a competitive environment, with competition being significant in that business. Therefore, our ability to increase prices there may be less than in some other businesses, but we won't delve too much into comparing the businesses. This is a good way to think about it.

Got it. Fair enough. Could you elaborate on the items that have changed in your earnings outlook compared to three months ago? It seems you anticipated inflation in the Performance Materials sector back then, so it might have unfolded as you expected. Were there specific raw materials involved, or was it due to the China destocking issue? What was the most significant change compared to three months ago?

I'm glad you asked that. It's a relevant point that we should discuss. Our midpoint last time was $380 million, and it's now $360 million, which reflects about a $20 million change. This is split roughly evenly between the lower slurries trajectory and the increased costs due to inflation. At midyear, we expected slurries to continue to grow, but now we anticipate it to be slightly more stable or even decrease a bit sequentially, particularly due to issues related to our business in China. Additionally, inflation became more pronounced for us during the June quarter, and we recognize the impact that this is likely to have on our fourth quarter, with some lagging effects from our mitigation measures. Therefore, the change from $380 million to $360 million can be roughly divided between those two items. Regarding the impact of Q3 versus Q4, I would estimate that about one-third of the decrease is due to Q3 falling short of our expectations, while around two-thirds relates to the fourth quarter.

And there are no further questions. I will now turn the call back over to Colleen Mumford.

Thank you. That is all the questions we have this morning. Thank you for your time and your interest in CMC Materials.

This concludes today's conference call. Thank you for participating. You may now disconnect.