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. [Operator Instructions]. Please be advised that today's conference is being recorded.

[Operator Instructions]. 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..

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 result 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..

[Operator Instructions]. And your first question comes from the line of Toshiya Hari with Goldman Sachs..

I've got 2, if I may. Dave, the variable order patterns in China as it pertains to your slurries business, I just wanted to follow up on that point.

I guess, do you consider this to be a transient issue? Or could it be something a little bit more structural? Could it be share loss? To what extent do you have visibility into what exactly is happening there? And I ask the question because I think many of your peers continue to report pretty robust activity in China.

And if anything, a lot of companies are worried about pull forward or pull in given the strength? So just wanted to get additional color there. And then as my follow-up on the cost side and maybe -- yes, in terms of costs, I guess what exactly is happening? Which items are driving the increase in costs? You talked about mitigation efforts.

But what are the mitigation efforts that you're talking about? And at what point could these efforts start to show up in the form of improved margins?.

Thanks, Toshiya. So I'll take the first question around China. China, we have seen really strong growth. I think stronger than all of our peers. We're almost -- we're up almost 50% year-over-year. And we've continued to build on our position. So there's definitely no position loss. In fact, we've increased our participation rate.

It is one of the few geographies where we don't sell directly. And so what we saw this quarter was some inventory drawdowns by a few of the domestic Chinese customers that we think may persist into this current fourth quarter. But overall, we expect really strong growth from China.

It should be one of our strongest-growing geographies into next fiscal year, and we're really excited about the growth we've seen so far. And it's really across the board, both for slurries and pads. So I think this quarter, we might have just taken a step back from the growth just from an inventory drawdown standpoint.

But mid, long term, very, very strong growth from China, and we're excited about it..

And then Toshiya, this is Scott. From an inflationary items perspective, last quarter, we mentioned one particular -- that there was one particular raw material in the PIM business that was causing inflationary pressures. We also have more of a petroleum-based input system on the electronic chemicals side.

So we're experiencing pressure on both of those items on the raws. And then we've also experienced some freight, logistics and overall supply chain increases, increasing fuel cost driver availability. We've had to use some alternative routes to -- for shipping purposes, et cetera.

And we've been able to do all of that, as we said, from the beginning of the pandemic to deliver every shipment to every customer on time in full despite all of these challenge. But we recognize the effects of those costs that are in our system. They became a bit more pronounced as the quarter evolved.

And then we have mitigating actions, which is a top priority for our company. We're not going to be too specific about any of those. But as you would expect, they would likely to be -- include pricing actions, procurement action, other types of optimization activity, some of which are underway.

And we're optimistic about our ability to recapture the impact, but we recognize that there's also going to likely be some sort of delay in the financial impact of that..

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..

And then I think you're right, Toshiya, we're probably not going to be too specific, and this is evolving. But some of the activities, as I mentioned, are underway and already being implemented. So it's a current-state type of perspective.

And I -- we're being pretty front-footed in terms of the expectation for Q4 in this full year, and we're expecting to not obviously capture it entirely because we're bringing it down our midpoint. And I think that's going to evolve a bit over time..

I would just add, Toshiya, this is -- we've been through a lot of different cycles as a team. Right now, we're seeing an inflationary cycle where everything is going up. The cost of beef, logistics, energy, everything. But we feel confident in our ability to navigate and grow our revenue, grow our profitability.

And this team has seen a lot of different cycles. So we're really confident. As Scott said, it may take some time to see those mitigating actions impact the financials in a positive way. But actions are already underway, and we've already executed a few..

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 to 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 cost 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 the -- 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 would say generally, yes, Mike. And so I think your math, the way you're thinking about it, is the right way to think about it. And just to maybe reference with a couple of data points for everybody, sequentially, our revenue, our EBITDA as a percent of revenue increased from about 40% to 44% this quarter.

We had strong revenue growth in each of the businesses, and that was despite the higher raw material costs that we experienced. Versus prior year, we were down because of those additional expenses. And we've been pretty clear. We were building the plant. We were nearly complete with the plant last March when the pandemic, in particular, hit our shores.

And so we said at the time, we were investing ahead of what we continue to believe is going to be a strong overall demand environment. We couldn't see around the corner to the pandemic. And so we have a plant that's underutilized today, and that impacts the cost structure. So we continue to be very optimistic about this business. It's highly profitable.

We grew this business in the double digits this quarter sequentially, and this was the first time in over a year that we have actually done that.

And even at that period that we've had for the last 6 months, which we -- or the last 12 months, which we've been talking has been stable, that we were in the mid-20s, 24, 25-ish type of percent -- type of dollars per quarter. That was higher than any period of time prior to us owning that business. So we're pleased with how we've grown that business.

We're pleased with how we're -- continue to operate it, recognizing that we have an underutilized facility right now in the lower demand environment. Demand picked up this quarter after the period of stabilization.

So we continue to be very optimistic about that business, and it continues to be among the most highly profitable of all of our businesses going forward. But again, I think the way you're thinking about -- again, we've been pretty, I think, front-footed about the impact of wood for next year.

And the $35 million of -- if you take this year's midpoint and deduct $35 million, that's one starting point for next year's earnings. But we said we're going to offset that because of growth in all of our other businesses, including slurries getting back to growth and some growth in the DRA business.

So we continue to believe that we've got the right structure long term for the business, and that we're optimistic about growing all of our businesses next year to help offset the wood. But the way you're thinking about that segment and the profitability, I think, is the right way to think about it..

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. I'd say that the -- if you think about CMP slurries and pads together, we'd say something less than $2 billion. This is obviously a smaller area. We'd say it's around $100 million, our ability to capture and ramp opportunities. But that's sort of the sizing just in terms of scale..

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, and we mentioned in our prepared remarks, we are making investments and planning investments just to support our EM business. And as you know, our focus is really to grow that. That segment is already over 80% of our business.

But we're getting -- we're partnering with our customers, a lot of them are increasing their capacity, and they've asked us if we can similarly increase our capacity. So we're doing that ahead of demand. As Scott mentioned, we're also being disciplined about how we spend and where we deploy. But we're excited to invest back into the business.

We see really strong growth prospects 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 ex China?.

Yes. So if I understand your question, Amanda, is just trying to get a size of the China market.

Is that right?.

And 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.

So -- 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 to 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. I think, Amanda, we talked about the incremental or sequential revenue growth that we had in the PIM business this quarter. I think what we're seeing is -- just look, there's more -- DRAs are more effective when the pipelines are fuller or more full. And we're not quite to that point yet.

We all have experienced some level of economic activity improving, but we're not back to kind of the input rate that we had prepandemic. So the business grew again from the mid-20s, up closer to $30 million in the quarterly basis. And I would say that the inputs per usage is still not up to prepandemic levels.

When the pipeline -- if and when the pipelines continue to get more full, I would expect those inputs to continue to improve..

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..

So I had a couple of questions. I mean I think the first one, I kind of would like to just maybe clarify something regarding the slurry trends -- slurry sales trends, excuse me. But this was a quarter where your pad business grew nicely sequentially and hit a record level overall.

But the slurry is kind of, on a sequential basis, went in a different direction. And I'm just wondering how you -- whether that makes sense to you overall. In other words, I know with EC, there's certainly a geography difference. I could imagine there might be logic versus memory differences and whatnot.

But maybe can you square the circle here just a little bit? Why did you see the order variability in -- on the slurry side but maybe not on the pad side?.

Right. So Dave, I think when you think of those 2 product segments, they're -- although they're obviously part of the same process step, our participation in both those segment areas is very different, right? We are the clear leader in CMP slurries. We're #2 in CMP pads.

But we're a distant #2, right? So there's a lot more participation gain to be had in pads, and so you'd expect the growth rates to be a bit different. What I think we saw is we saw a very strong growth, kind of mid-teens growth from slurry for the last -- year-over-year for the last several quarters.

Part of that was really strong China growth, but also increasing our participation, increasing industry utilization. And so we took a step back this quarter with some inventory drawdown in China. So we've talked about specific challenge, which we think will persist through our fiscal fourth quarter, so through September.

And then on the pad side, we're seeing the ramp-up of wins. So from our perspective, the 2 growth trajectories wouldn't necessarily be correlated..

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..

Okay. No, that's great. I wanted to -- next question would be zooming in or zeroing in on kind of the cost issues that you're facing as a company. And in particular, in the press release and in your remarks, you highlighted cost mitigation. The other side of the coin would be price increases or price movement.

And I know that the contracts are written in a particular way that kind of locks in a particular price, is my understanding on a lot of the consumables. But just from a portfolio perspective -- so not an individual customer or an individual product.

But -- on a portfolio basis, what type of flexibility might you have to implement price increases to offset some of the raw material and logistics issues that you're currently facing?.

Yes. Sure, David. Yes. When we talk about the mitigating factors or the mitigating actions, we're talking about the entire toolbox of what those items would be, from pricing again to procurement to other type of utilization activity. So we're talking about all of the above.

Our teams have very good clarity about the contracts that are in place, any ability to change price or not depending on that contract. And so we have a good bit of visibility on that. And I think that we provide -- we've got some flexibility to do that, although we recognize the lag. And we've already started a number of activities.

So it was a quarter where we saw the inflationary items become more pronounced as the period went on, and we've already taken some pricing actions. And it's something that's in process, underway, seeing an impact, and it's a high priority for our team.

And as Dave mentioned, we've got an experienced team that has managed through a number of different types of cycles, and we're confident to deliver our results versus this type of environment as well..

Okay. Apologies if I misinterpreted the term cost mitigation. A final topic I wanted to ask you about. I did want to go back to the patent infringement case and the ITC's ruling. And not a lawyer here, and -- but I was just wondering, the ITC still has work to do, right, beyond their initial determination.

And in the event that somewhere down the line, a few months or whatnot, the ITC rules in a particular way and the response from the defendant here does not provide you with the relief that you had hoped for. In other words, if they keep infringing, let's say, or dance around.

Anyway, if they don't abide by the ITC's ruling completely, I mean what are the, maybe, the next steps? I mean can the ITC -- what kind of penalties can the ITC impose? What remedies are there to correct the infringing behavior by the defendant in that case?.

Yes. So I'm also not an attorney, Dave. So -- but I'll do my best here. I think my understanding is, obviously, we're still in active litigation. We do feel confident that the final decision will support the preliminary findings universally in our favor, so we feel really confident.

When that final determination comes out, and assuming it's in our favor, which we feel confident about, that would result in a pretty immediate issuance of an exclusion order or some type of cease and desist order prohibiting that supplier from providing those products that are infringing or marketing or selling those products. So it's pretty clear.

And as I mentioned in my comments, it's significant, and we're already working with customers to transition..

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

One quick follow-up on China and then also one bigger topic. Just on China, you mentioned that you thought some of the downdraft in order patterns was domestic, I guess, producers via distribution relationship.

Can you -- is there any way you can delineate whether they're memory customers or legacy node, logic, foundry customers or across the board?.

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..

And then maybe I'll just try to address the proverbial elephant in the room that hasn't been discussed, I guess, either in the formal remarks or in the Q&A session. And -- so look, there's quite a bit of frustration from shareholders and other constituents. And I'm not just talking about the stock being down 10% today in an up market.

You have basically in the semiconductor space, you have an end market backlog that -- where demand tailwinds are found some might say super cycle. And yet, there's been -- at your company, there's been a couple of consecutive quarters of disappointing results.

And there -- so there's disappointment, I guess, not just in the earnings trajectory, but it's reflected in the valuation multiple. It's reflected in the lagging stock price performance.

And frankly, there's -- it seems based on my engagement, it seems like there are some institutions that are trying to get their head around whether or not this is nearly sort of a transient kind of dynamic, or some are expressing concern about if there's something structurally wrong here. And so I'm just wondering what your thoughts are about this.

And what you might do to address and ensure confidence? One thing that has come up is the possibility of -- even though the DRA business isn't necessarily the cause of the $20 million implied cuts to fourth quarter guidance, some are thinking that jettisoning that business might be a pathway to focusing on what many constituents think of as your core business.

So just wondering what you and the Board are thinking about this elephant in the room..

No, I appreciate the candor, Chris. And obviously, we're focused on what we can control. We feel like we're executing well. I mean we have grown faster than the segments we participate in. If you look at EM, our growth was almost 15% year-over-year. We've grown 3 consecutive record revenue quarters.

And so we feel like we're -- in the areas that we can control, one of which is not share price, we have continued to grow our participation, continued to introduce new, innovative products in both segments. And so from that standpoint, we think we're executing well.

Obviously, Scott has talked at length about the cost challenges and what we plan to do from a mitigation standpoint, and we feel confident there.

And then finally, from a portfolio perspective, you can be confident that the entire Board, including myself, is always looking at all options about what is the best way to utilize our capital, and what is the best portfolio for us to provide, and where are we the best owner.

So we're looking at -- we always look at all those options, and we continue to do so..

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. And I think that, obviously, a recovery -- this is the -- one of the first quarters we've seen that sort of significant recovery, double-digit growth. So that's encouraging. Obviously, any significant moves with the portfolio, we wouldn't be able to provide more detail on timing or thought on that. But directionally, obviously, more positive.

And we're excited about the business. We've invested back into the business. We think it has a lot of characteristics that are very similar to the consumables business on the Electronic Materials side. No doubt, it is a really attractive asset, whether it's in our portfolio or someone else's.

So we're just encouraged and focusing on what we can do to continue to drive growth and performance in that segment..

[Operator Instructions]. Your next question is from the line of 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, first, within Electronic Materials. And it depends, as we talked about, depending on the contractual obligations that we have with our customers. Certainly, the slurry business, there's a higher degree of differentiation.

And over time, we have shown the ability through our technology and through our continued innovation, to be able to continue to expand margins and capture more value there, and we expect to continue to be able to do that. But I wouldn't start to delineate one business versus the other in terms of potential impact of these mitigation plans.

And then I think from a DRA perspective, that's, of course, something that we're looking very closely at and following the processes that we've discussed here a bit. But we recognize that, that is a competitive environment as well, and so -- more so in some cases. So the competition has -- continues to be significant in that business.

And so our ability to get price there may be less than what it is in some other businesses, but we're not going to probably get into too many other details in terms of comparing the businesses. But I think that's a good way for you to think about it..

Got it. Fair enough. And then just going back to the earlier question on change in guidance.

So is there -- maybe you could talk about which of the items were really incremental relative to your earnings view 3 months ago? Because it looks like you expected inflation in the Performance Materials back then, so I would think it probably played out as expected. Maybe you were even better prepared.

So is that some specific raw materials? Or is that the China destocking issue? Like which -- what was the biggest delta here versus 3 months ago?.

Yes. I'm glad you asked that. I think it's a relevant point and one that we should discuss. So our midpoint last time we met in this environment was $380 million, and it's now $360 million. So we'll use midpoints and some round numbers. That's about $20 million of the change.

And that's split roughly half and half between this lower slurries trajectory -- so at our midyear, we expected slurries to continue to grow. We expect it to be a little more stable to down slightly sequentially, and we've talked about the reasons why. And it's directly in the China business that we've talked about.

And then the other half is the increased cost from the inflationary perspective. Again, inflation became a little more pronounced for us during the June quarter as each month evolved, and we recognize the impact that that's likely to have on our fourth quarter. And the mitigation factors will have some lagging effect.

So think of that delta midpoint $380 million to $360 million roughly split in half between those 2 items. And then as we think about, if you're also carving that out kind of Q3 versus Q4, I would say about 1/3 of the impact was really from Q3 coming in lower than our expectations and about 2/3 related 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..