Cabot Microelectronics (CCMP) Q4 2019 Earnings Call Transcript

Cabot Microelectronics (CCMP)
Q4 2019 Earnings Call
Nov 18, 2019, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Cabot Microelectronics fourth-quarter fiscal 2019 earnings conference call. [Operator instructions] I would now like to introduce your host for today's conference call Ms. Colleen Mumford, vice president of corporate communications and marketing at Cabot Microelectronics. You may begin, ma'am.

Colleen Mumford -- Vice President of Corporate Communications and Marketing

Great. Thank you. 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 fourth-quarter and full fiscal year 2019, which ended September 30th, 2019. Whether you're joining us online or over the phone, we encourage you to review the investor slide presentation that we've made available under the quarterly results section of our investor relations center on our website cabotcmp.com. A webcast of today's conference call and the script of this morning's prepared comments will also 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 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 30th, 2018, and our Form 10-Q for the quarter ended June 30th, 2019. we assume no obligation to update any of these forward-looking information. Also, our remarks this morning reference certain non-GAAP financial measures, including adjusted pro forma results.

Our earnings release and slide presentation include a reconciliation of each non-GAAP financial measure to the nearest comparable GAAP financial measure. We also provided supplemental pro forma information in this quarterly release, which compares current results as if Cabot Microelectronics owned KMG Chemicals during the comparable period last year. Additionally, data reflects rounded values throughout this discussion and in the accompanying slide presentation. I will now turn the call over to Dave.

Dave Li -- President and Chief Executive Officer

Thanks, Colleen. Last night, we announced results for our fourth-quarter and full-year fiscal 2019. We set another record for quarterly revenue achieving $279 million, which is 78% higher, compared to the same period last year and up 2% sequentially. Fourth-quarter revenue exceeded our previously provided guidance, driven by stabilization in semiconductor demand and continued strong growth in pipeline performance.

For the full year, our revenue increased by 76%, primarily due to the acquisition of KMG, which closed approximately one year ago. This acquisition was the largest in our company's history and has significantly broadened our portfolio of solutions and industry participation, nearly doubled our size and has provided us with greater geographic balance. This is the fourth consecutive year that we have delivered sequential annual growth, which we believe demonstrates the strength and resiliency of our business model, as well as, our continued strong operational execution. On a segment level, fourth-quarter revenue in electronic materials was down 4% year over year, as lower sales in CMP slurries was partially offset by growth in CMP pads and electronic chemicals.

Sequentially, however, electronic materials revenue was up 3%, which was above our guidance of approximately flat. This was a result of continued stabilization in the operating environment and a sequential improvement in demand for our CMP slurries from logic, foundry, and memory customers during the quarter. Revenue in Performance Materials increased 15% year over year to a new record level and was up 2% sequentially, also better than the previous guidance, primarily driven by continued strong demand for our drag-reducing agents from our pipeline customers. Total adjusted pro forma EBITDA was $85 million or 30.6% of sales in the quarter.

For the full year, we reported EBITDA of $333 million, which was at the higher end of our guidance range. Overall, we are proud of the results we delivered in fiscal 2019. Our pro forma revenue increased 3% and adjusted pro forma EBITDA was $345 million, up $34 million year over year. We believe this demonstrates the strength of our portfolio, which continues to benefit from the acquired KMG businesses.

Also contributing to our record revenue was our CMP pads business, which grew 14% to $95 million, despite challenging industry conditions. We remain focused on delivering value to our customers through robust product solutions and superior attention to quality, which we believe continues to position us, as the premier supplier of critical materials across the industries we serve. Now, let me turn to some thoughts on industry outlook. Starting with electronic materials, stabilization in demand from memory customers has continued.

It appears that the decline in both DRAM and NAND chip prices seen in the semiconductor industry over the past few quarters, has moderated, and our customers' chip inventories are normalizing. Advanced logic and foundry demand appears to remain strong as customers continue to transition to smaller nodes to support new consumer devices. Overall, while the industry seems to have stabilized, and we are seeing some encouraging signals from our customers, the timing of a strong overall recovery remains uncertain, particularly from the memory segment. As we think about long-term demand for electronic materials, we continue to be excited about the additional logic and memory requirements needed to support emerging applications, such as Internet of Things, autonomous driving, virtual reality, and high-performance computing.

We are also seeing increased investments in 5G networks, which we believe will be a catalyst for many of these future applications. Additionally, we expect that continued growth in demand for our products as customers move to seven nanometers and five nanometers in logic and 100-plus layers in 3D NAND, which require additional manufacturing steps. We believe all of these advanced technologies and applications will require greater intensity for new and advanced materials, which should position us well for growth above the industry. We also remain confident about the long-term growth potential in our performance materials segment, primarily driven by our pipeline performance business with higher demand for our drag-reducing agents, which enable pipeline customers to optimize the efficiency and throughput of oil transport globally.

We are already seeing significant demand from international customers, which we believe will supplement our strong positions in the U.S. With these factors in mind, we now expect our revenue in the first quarter of fiscal 2020 to be approximately flat, which reflects anticipated continued stabilization in electronic materials and continued strong demand in performance materials. Longer-term, we continue to expect to grow our business faster than the industries in which we participate, as well as, build upon our best-in-class profitability. As we just discussed at our Investor Day, fiscal 2020 will be a year of investment to support the future growth of our company.

Our planned spending is focused on high-growth, high-margin businesses, such as pipeline performance, which continues to deliver strong results. With this strategy in mind, we have made a decision to cease future investment in our wood treatment business, including the previously planned construction of a new production plant to replace our operations in Tuscaloosa, Alabama, and Matamoros, Mexico. Although the wood treatment business has been solid and profitable, it remains a very small part of our company from a revenue perspective, and we do not believe it fits with our core strategies. We currently expect to operate this business until around the end of calendar 2021, and are working closely with our customers on the transition.

Finally, I'd like to sincerely thank our teams around the world for their hard work, dedication, and execution. Without your efforts, we would not have been able to deliver the strong differentiated results that we did this year. We remain excited about our future and look forward to delivering another year of strong financial performance, as well as, returning significant value to our stakeholders as we continue our journey toward profitably growing our company. With that, I'll turn the call over to Scott to provide more details on our financial results.

Scott Beamer -- Vice President and Chief Financial Officer

Thanks, Dave, and hello, everyone. My comments will generally follow the related slide presentation we posted on our website last night along with our press release. We are presenting the results as both reported and as adjusted on a pro forma basis. Pro forma results are presented using SEC guidelines and are shown as if we had owned KMG from the beginning of fiscal 2018.

We, of course, always give greater prominence to reported GAAP results but will defer to adjusted pro forma figures in order to provide meaningful comparisons. You can find a summary of adjustments in the press release. Revenue for the fourth quarter of fiscal 2019 was $279 million, which is a record for our company and $122 million or 78%, higher-than-reported revenue in the same quarter last year. Pro forma revenue was essentially flat year over year as growth in CMP pads, electronic chemicals, and DRAs was offset by lower CMP slurries and QED revenue.

Our reported net loss was $20 million or $0.70 per share in the quarter. Adjusted pro forma net income was $50 million, which was slightly lower compared with the adjusted pro forma net income in the fourth quarter last year. This quarter's adjustments include amortization on acquired production-related assets from the KMG acquisition, charges related to additional cleanup activities at the Tuscaloosa wood treatment facility, which was impacted by a warehouse fire we reported last quarter, as well as, impairment and restructuring charges related to our wood treatment business. Adjusted pro forma EPS was $1.68 per diluted share, which was $0.05 lower than last year.

Adjusted pro forma EBITDA was $85 million or 30.6% of revenue, which is 50 basis points lower than last year. Revenue for the full fiscal year was $1,038 million, which is also a record for our company and was $448 million or 76% higher than reported revenue in the prior year. This increase was primarily driven by the KMG acquisition, which closed in November of last year. Pro forma revenue was $1.1 billion, which was $36 million or 3% higher than last year.

The increase was due to growth in CMP pads, electronic chemicals, and DRAs, which more than offset CMP slurries revenue. Full-year adjusted pro forma net income was $198 million, which was 9% higher, compared with the adjusted pro forma net income in the prior year. Adjusted pro forma EPS was $6.72 per diluted share, which is $0.57 higher than last year. Full-year adjusted EBITDA was $333 million at the higher end of the guidance we previously provided.

Adjusted pro forma EBITDA, which assumes we owned KMG for the full fiscal year, was $345 million or 31.4% of revenue. Now, please refer to Slide 5, which provides some higher-level quarterly P&L comparisons for both reported and adjusted pro forma results. Our reported gross margin was 40.6% this quarter, compared to 53.8% reported in the same quarter last year. As a reminder, this year's metric is negatively impacted by a reclass of some costs, which moved from operating expenses into cost of goods sold following our KMG acquisition, charges related to additional cleanup activities related to the Tuscaloosa fire and acquisition-related amortization.

Importantly, on an adjusted pro forma basis, gross margin was 44.2%, which was down, compared to 45.7% in the same quarter last year. Gross margin was negatively impacted by lower CMP slurries volume, increased expenses associated with our wood treatment business and less favorable product mix in the electronic chemicals business this quarter. Excluding acquisition-related amortization and impairment charges, our adjusted pro forma operating expenses declined approximately $2 million year over year. Synergies reduced opex by approximately $5 million but were partially offset by higher professional fees and typical inflationary items.

Our adjusted pro forma net income of $50 million declined $1 million or 2% compared to last year. Our adjusted pro forma EBITDA was $85 million or 30.6% of revenue and $1 million lower than the comparable metric in the prior year, as lower gross margin was only partially offset by the reduced operating expenses. Now, let's discuss revenue results by segment and business, which are shown on Slide 6. Electronic materials, which contributed 78% of our quarterly revenue, reported an $8 million or approximately 4% decline in pro forma revenue year over year.

CMP slurries revenue declined approximately 8% year over year, primarily driven by weakness in demand from memory customers. CMP pads reported around a 2% increase in revenue from last year due to continued customer adoption of our NexPlanar product line, which was partially offset by softer industry demand. Electronic chemicals revenue grew approximately 1% on a pro forma basis versus the same period last year, driven by our customers' continued transition to advanced technology nodes. Moving to performance materials.

Pro forma revenue increased approximately $8 million or 15% over the prior year to a record level in the quarter. The increase was driven primarily by growing demand for DRAs, both domestically and internationally, but was partially offset by difficult comparisons in our QED business. Slide 7 shows revenue and adjusted EBITDA by segment. Electronic materials delivered around $74 million of EBITDA, which was 34% of segment revenue, while performance materials EBITDA was approximately $28 million, which was 46% of segment revenue.

Now, please refer to Slide 8, which provides some balance sheet and cash flow highlights. We had $188 million cash on hand and $942 million of total debt at the end of the quarter. Year-to-date, we prepaid $100 million of debt and remain on track to reach our goal of 2 times net debt-to-EBITDA by the end of fiscal 2020. On a year-to-date basis, we generated cash flow from operations of $177 million and our capital expenditures were $58 million.

As a result, our free cash flow was $119 million despite additional cash costs related to the KMG acquisition. We're very pleased with our strong cash flow generation this year, some of which we have used to fund investments back into the business and for KMG acquisition-related costs. We continue to prioritize organic investment on high-growth opportunities in both performance materials and electronic materials. Our additional capital deployment priorities remain paying ongoing and increasing dividends over time, deleveraging, executing M&A, and repurchasing our shares.

As Dave mentioned, we've made a decision to focus our capital investments on high-growth opportunities closer to our core, and we will cease further investment in our wood treatment business, which accounts for approximately 3% of our company's revenue. This is a slower growth business that we view as noncore to the company. While we are exploring options for this business, including a potential sale, we will not invest in the construction of a new U.S. manufacturing facility or in the relocation of our production facilities in Tuscaloosa, Alabama, and Matamoros, Mexico.

As a reminder, due to Mexico's participation in the Stockholm convention, Penta no longer can be manufactured in Mexico after calendar 2021. After a careful review of our long-term strategy and capital allocation plans, we concluded that we will focus on opportunities that have higher potential for future growth and shareholder value creation that are aligned with our core competencies, and that likely would generate higher returns over time. This business decision has caused an asset impairment of $67 million or $50 million after tax, which is a non-cash charge that impacted reported results. We have shown this item separately on the face of the P&L, and it represents approximately 70% of the original value of the business.

It is preliminary and subject to final analysis and control procedures. On Slide 10, we provide some forward-looking expectations. For the first quarter of fiscal 2020, we currently expect total company revenue to be approximately flat compared to our fourth quarter -- our fourth fiscal quarter. While the semiconductor industry continues to stabilize, as Dave mentioned, there is continued uncertainty about the timing of the recovery in industry demand.

Therefore, we expect revenue in our electronic materials segment to be approximately flat sequentially in the fiscal first quarter. Performance materials revenue should be approximately flat to up low-single-digits sequentially, as a result of continued growth in DRAs partially offset by expected softer performance in QED as it faces another quarter of strong comparisons versus the prior year. For the full-year fiscal 2020, we expect adjusted EBITDA to be in the range of $350 million to $380 million. We will likely narrow this range as we move through the year and get more clarity on the timing of the semiconductor industry recovery.

Our fiscal 2020 EBITDA guidance implies approximately 6% growth at midpoint, despite continued uncertainty in the semiconductor industry and increased investment in growth opportunities for our businesses. Consistent with our long-term objectives, we continue to expect our profitability will increase to 35% EBITDA margin in the future. This is unlikely to be a linear increase as we'll be making some strategic investments in both capex and opex in fiscal 2020 and fiscal '21. As a result, we expect our fiscal 2020 EBITDA margin to remain at or slightly better than the EBITDA margin delivered in fiscal '19.

In addition, starting in fiscal 2020, we'll be updating our methodology for assigning corporate allocations by pushing some more cost of -- some more of the corporate costs directly into the segments. As a result, corporate unallocated costs should decline, while corporate costs allocated to the segment should increase. Depreciation and amortization is expected to be between $40 million and $45 million, which excludes approximately $90 million in acquisition-related amortization. We currently expect our full-year interest expense to be between $45 million and $48 million, with approximately $12 million expected in the first quarter.

Our effective tax rate for the full fiscal year is likely to be in the range of 22% to 25%. Our current capital spending expectation for the full fiscal year is between $100 million and $130 million, primarily to support growth in our pipeline performance and CMP pads businesses. We continue to expect approximately $200 million in total capital spending over the next two years to support our future growth as a company. I will now provide some closing remarks on Slide 11.

We are proud of our strong performance in the fourth fiscal quarter and full fiscal year of 2019. Despite some industry headwinds that impacted our demand for CMP slurries, solid performance in our CMP pads and the acquired KMG businesses more than offset these headwinds. With the strength of our acquired businesses and resiliency of our legacy CMP businesses, we delivered 3% growth in revenue, and we're able to grow our EBITDA by 11%, delivering operating leverage with continued focus on gross margin expansion and prudent management of SG&A expenses, which benefited from synergies and control of operating expenses. We also delivered on synergies and accretion ahead of our original expectations.

As you may remember, we committed to $25 million in synergies within the first two years after we announced the KMG acquisition. We ended the year at a $26 million run rate and delivered $5 million in synergies to the P&L in the fourth quarter, some of which we invested back into the business. Accretion from the KMG acquisition added approximately $0.60 to EPS this quarter and approximately $1.60 per diluted share since the acquisition closed, also ahead of our initial expectations. We continue to be delighted with our growth prospects, as well as, the earnings and cash flow power of the combined company.

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

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Toshiya Hari with Goldman Sachs.

Colleen Mumford -- Vice President of Corporate Communications and Marketing

Good morning, Toshiya.

Toshiya Hari -- Goldman Sachs -- Analyst

Hey, good morning. Thanks very much for taking the questions. My first one is on your full-year guidance. Obviously, the EBITDA guidance is helpful.

But I was hoping you can speak to some of the industry growth assumptions that you might be making implicitly in terms of wafer starts on the semiconductor side and for your performance materials business as well. And kind of related to that, how are you guys thinking about full-year opex, especially given some of the synergies that you've met so far? And then, I have a quick follow-up. Thank you.

Dave Li -- President and Chief Executive Officer

Yeah, thanks, Toshiya. So in terms of the full year, obviously, we don't guide for revenue, but I can give you some color, especially on the semiconductor side, what you're seeing right now is some signs of definitely stabilization. There are signs of some recovery, especially on the foundry side. We think that's driven by new consumer devices and some of the investments in 5G.

What we haven't seen is a clear sign of recovery on the memory side. So, the recovery right now, I would say, is uneven, which is consistent with some recent comments from the big equipment makers. They're starting to see recovery. Obviously, we'd see strength as a follow on to that.

So, if we think -- as we think about our fiscal year '20, we have not comprehended a strong recovery in those results. So, it's really sort of still an uneven recovery with uncertain timing. As you know, of course, we have very strong positions in the memory segment, and that's the one that seems to be lagging from the recovery standpoint. For performance materials, especially DRA, we see a really bright future.

We continue to be receiving a lot of new orders, new customers. We have a strong pipeline of new opportunities for pipeline, and we are working hard to fulfill those orders. So, good demand from domestic and strong demand overseas as well. So, continued strong demand baked into that sort of full-year look into our performance.

Scott Beamer -- Vice President and Chief Financial Officer

I think, Toshiya, as far as your second point about opex, I would think about our opex for FY '20 to be similar structurally to where it was in FY '19. And I'm referring to not only the synergies aspect, which we said we're delivering directly into the P&L, but we're also choosing to invest some of those funds back into the businesses. And that's our comment about a similar EBITDA return, compared to revenue in FY '20 as we had in FY '19. We're still on that medium-term to longer-term trajectory of 35%, but that 31% EBITDA return in the short term, again, for FY '20 is, I think would help capture the expectations on opex going forward.

Toshiya Hari -- Goldman Sachs -- Analyst

Great. That's helpful. And then, as a quick follow-up, I had a question on your electronic chemicals business. I think in the September quarter, your business was up low-single-digits on a year-over-year basis.

Your biggest customer in this business, I think, has pretty aggressive plans from a wafer capacity build perspective into 2020. They're also aggressively transitioning to 10 nanometer. So, I guess the question is, how robust is your near-term outlook in this business? And perhaps, more importantly, have you been able to identify any revenue synergies now that it's been about a year since the acquisition? Thank you.

Dave Li -- President and Chief Executive Officer

Yeah, we're really excited about the electronic chemicals side, Toshiya. Obviously, it's a more regional business. So, we are very strong in North America, Europe, and parts of Asia, mostly Southeast Asia. Longer-term, we feel really good about the growth prospects, especially as some of our major logic customers progress to lower-node sizes, and there's more intensity of their usage when they get to more advanced nodes.

I think in the near-term, again, it's just kind of this uneven recovery. The timing is not certain, but longer-term, obviously, we feel really good about the business. In terms of synergies, I think we've come a long way in this first year, with still a lot of opportunity to go. We've optimized in terms of our commercial teams.

We have basically one commercial team supporting all of the products going into electronic materials. I think the customers have benefited from that, and I think, there's still a lot of opportunity going forward if you look at just the way we market and sell our products. We've just really begun to identify those opportunities. So, those are still ahead of us.

Toshiya Hari -- Goldman Sachs -- Analyst

Thank you.

Colleen Mumford -- Vice President of Corporate Communications and Marketing

Thanks, Toshiya.

Operator

Our next question comes from Mike Harrison with Seaport Global.

Colleen Mumford -- Vice President of Corporate Communications and Marketing

Good morning, Mike.

Mike Harrison -- Seaport Global Securities -- Analyst

Hi, good morning. You had suggested the capex -- previously suggested capex would be around $100 million in FY '20 and '21. Today, you're guiding to $100 million to $130 million for fiscal '20. So, a couple of questions on that.

First of all, how much capex savings would be associated with the decision not to invest in that Penta business over the next two years? And then second, what additional investments are you taking during -- making, I should say, during fiscal '20 that take that number higher? Because it sounds like over the next two years, you're still expecting $200 million in total. It's just going to be a little bit more weighted into fiscal '20.

Scott Beamer -- Vice President and Chief Financial Officer

That's right, Mike. In terms of the savings from not investing in the wood over that two-year period, we said at Investor Day, and we'll remind here, that that was an insignificant piece of the $200 million. So, there's some savings, but not a material piece. So, we're going to invest that piece back into the core businesses in addition to phasing up some of the spending from '21 into '20.

So, you get to that range that you described, that's slightly front-end loaded into FY '20, but we still have the full $200 million of spending over the two-year period. One example I'll give you of the additional investment is expanding our capacity on the DRA business. We continue to be more excited about the growth prospects of that business, our position in the market, as well as, the growing market overall, and we're making investments in capital to make sure that we're participating appropriately in the growth of that business.

Dave Li -- President and Chief Executive Officer

Yeah, just a follow-on, Mike, to Scott's comments. We think of these next two years as years of investment. We're really excited about having some high-growth businesses that we can support and deploy our capital to. And Scott mentioned the prime example is DRA, right? So, we're seeing tremendous growth, tremendous demand, and so, we've pulled in some of those investments just so we have that capacity online to support that really high-growth business.

Mike Harrison -- Seaport Global Securities -- Analyst

All right. And then, on the DRA business, you mentioned that you're seeing growth opportunities on both the domestic side, as well as, internationally. As far as I'm aware, your capacity currently is domiciled in the U.S. Can you just talk about the international growth opportunity, and how you plan to serve that? Is it possible that part of your planned spending is for a plant somewhere overseas so that you can move production out of the U.S.?

Dave Li -- President and Chief Executive Officer

Yeah, currently, the plan just comprehends expansion of our existing facility in the U.S. We're really excited about the international growth possibilities and that's an area of the industry where DRA adoption is just beginning. And I think, the team is working hard about what's the most efficient way to deliver our solutions to our customers internationally. This is not new for us.

By the way, we have international customers already, but we've seen a ramp-up in demand. So, we're just thinking about different ways of how to optimize the logistics for that high-growth business. And so, that's the work in progress, but we don't have comprehended today an international production facility. We think we can support from our base facility in the U.S.

Mike Harrison -- Seaport Global Securities -- Analyst

All right. And then, last one for me is just regarding -- you mentioned that you exceeded the original synergy target related to the KMG acquisition. Have you increased that target? Or should we just view any future synergies as may be part of ongoing improvements or kind of continuous improvement in your profitability? Thanks.

Scott Beamer -- Vice President and Chief Financial Officer

Yeah, I would view the future -- so we continue to have internal targets, Mike, that are beyond what we have outlined here, but we're comfortable. We've delivered against those original targets, we're going to continue to stretch ourselves beyond that, but we also recognize -- and that will be part of the ongoing operations to your second point. But we also recognize the opportunity to invest in the underlying business as well to ensure that we're participating, and we're able to support the type of growth that we envision.

Dave Li -- President and Chief Executive Officer

Yeah, I think just to follow on to that, Mike, I feel like we feel really good about our progress toward achieving and exceeding the synergies that we put out there. Going forward, it's just about managing the company right. So, if you look at the performance we've been able to deliver from an EBITDA standpoint, from a revenue standpoint. We think we have best-in-class profitability.

Even despite this next couple of years of investment, we continue to expect EBITDA to be approximately similar to what we've delivered in the past, maybe even a little bit better. So, we're proud of our accomplishments going forward, but it's really, as Scott mentioned, just managing the business going forward.

Mike Harrison -- Seaport Global Securities -- Analyst

All right. Thanks very much.

Colleen Mumford -- Vice President of Corporate Communications and Marketing

Thanks, Mike.

Operator

Our next question comes from Amanda Scarnati with Citi.

Colleen Mumford -- Vice President of Corporate Communications and Marketing

Good morning, Amanda.

Amanda Scarnati -- Citi -- Analyst

Good morning. The first question is on the wood treatment business, how we should expect to see that business sort of fall off over the next few years? Is this going to continue to be in the performance materials? Or is it going to be something that is more like discontinued operation? And what should that revenue trail off feel like?

Scott Beamer -- Vice President and Chief Financial Officer

Yeah, Amanda, we -- at some point, there may be activities that trigger a move into discontinued operations or even held for sale. We haven't triggered any of those yet. So, it'd be -- that's something that could happen from a reporting perspective going forward. I think, as you're thinking about the dimensions of this business, just to remind everyone, comments that we've made historically, the total performance materials business on a full-year basis is in the neighborhood, it's slightly above $200 million.

And we have always said that the drag-reducing agents business and the valves and lubricants business is about two-thirds of that, the remaining one-third are split between the wood and the QED business. So, you can get back to the revenue there. And then from a returns perspective, you know what our segment EBITDA percent is, which was 45% for the full year of 2019. We have said that all of the businesses within that segment have a similar return profile.

So, you can get back to the calculation of the profitability in terms of EBITDA in the business. So, as you're modeling that in -- for FY '20, I would expect at least until you hear something different from us, I would expect that to continue to be in continuing operations, and I think, you can expect FY '20 to have a similar sort of profile to the returns of FY '19.

Amanda Scarnati -- Citi -- Analyst

Great. And then on the slurry side of the business -- on the pads still, I guess, what does it take to start to see a reacceleration in that business? You mentioned that 1Q '20, the revenue should be stable in that business. Do we need to see sort of a shift to double stacking in advance for there to be a significant step-up in revenue? Or is just that reacceleration utilization at memory makers enough for that business to start to grow again?

Dave Li -- President and Chief Executive Officer

Yeah, I think it's both of those dynamics, Amanda, plus for pads, I think, we have a unique opportunity because we are still -- although we're No. 2, we think in terms of our participation, we think there's a lot of runway for additional growth through share gain in that business. We're pleased with our progress. We grew 14% year over year even kind of in this uneven environment.

So, we're really excited about the pads business. So, there's that kind of unique opportunity associated with that business. Broadly speaking for electronic materials, it's those two factors. There is -- what we've been working with our customers closely on is as there's been a little bit more kind of downtime in terms of the memory industry.

They're working on accelerating their advancements in new technologies, including 100-plus layers. There's a few different ways to get there. Our products are really critical for any of those pathways, so that would be an exciting opportunity once those accelerate. And then, of course, really, it's about wafer starts.

So, we are a consumable-based business, almost 100%. So, when the microns, the hynixs, all those important customers of ours begin to restart fully, and fully utilize their factories, of course, we'll see that in our business.

Amanda Scarnati -- Citi -- Analyst

Great. Thank you.

Colleen Mumford -- Vice President of Corporate Communications and Marketing

Thanks, Amanda.

Operator

Our next question comes from Chris Kapsch with Loop Capital Markets.

Colleen Mumford -- Vice President of Corporate Communications and Marketing

Good morning, Chris.

Chris Kapsch -- Loop Capital Markets -- Analyst

Yeah, good morning. Had a follow-up question on the sequential guidance for the December quarter. It sounds like there's sustained momentum in the DRA business and that you've indicated that segment would be flat to up sequentially. So, the flat -- flattish sequential revenues in electronic materials, given that the 10-nanometer node, let's call them the largest logic chipmaker, is happening and given the burgeoning ramp in Taiwan at five nanometers, it sort of implies that your sales serving memory producers will be down sequentially.

And that's not inconsistent with the broader narrative about uncertainty around the memory end market, but -- so wondering two things. One, is that the right way to think about this? And also that dynamic, if correct, presumably comes with adverse mix headwinds in the December quarter on a sequential basis? So, can you just sort of confirm that's the right way of thinking about it?

Dave Li -- President and Chief Executive Officer

Yeah, Chris, so let me start with on the performance materials side. So, we definitely -- that outlook definitely reflects continued strength in DRA, also, kind of a headwind to that would be the comp on QED. So, we're coming off of several strong years of performance of QED. So, perhaps some -- that business is the only equipment business we have, it tends to be lumpy.

So, that is a bit of a tailwind in terms of continued strength in performance materials. And then, switching to the electronic materials side. I think I mentioned earlier, the recovery is uneven. So, we did see broad strength this quarter sequentially quarter over quarter.

Most of that strength was in foundry. We did see a little bit of an improvement in memory. Going into the next quarter, we have a bit of data from October that looks pretty strong. But again, it's pretty uneven.

So, we're not sure, for example, the strength in foundry, is that related to new consumer devices and will that sustain? Or that -- will that kind of pressed and fall off as the build has completed? And I think the big one we're watching is memory. So, not as granular as perhaps you mentioned, but it's really more just reflective of an uneven recovery.

Chris Kapsch -- Loop Capital Markets -- Analyst

OK. Can I just follow-up on the DRA business, the commercial momentum? Is that mostly about just an expanding TAM in this niche market or on greater adoption of by pipeline operators? Or is there any evidence that you're also gaining a bit of share?

Dave Li -- President and Chief Executive Officer

Yeah, I think we see both, Chris. So, the opportunity funnel is very strong, both with ramping existing customers further. We talked about the international opportunities that we think are very bright. And then also, we do see a lot of opportunities or several significant opportunities, which would be indicative of share gains.

Chris Kapsch -- Loop Capital Markets -- Analyst

OK. And then finally, -- thank you for framing up some parameters around sizing up the contribution from the Penta business as a percentage of your overall portfolio. Do you have a sense on -- I mean it sounds like, and you can feel free to correct me, David, but it sounds like an outcome of this decision could be, obviously, selling the business. But you could also just shut it down, it sounds like.

I'm just wondering, what do you anticipate the timing around that ultimate disposition for the Penta business to be?

Dave Li -- President and Chief Executive Officer

Right. Chris, so, as we mentioned in the prepared comments, first, just to go back to the decision, the wood treat business, although it's been a solid business, a profitable business, it just doesn't fit with our core strategies. It's not a high-growth business and we strongly aspire to grow above the industries in which we participate. So, it didn't fit the criteria.

As soon as we made the decision not to fund the plant to replace our existing operations, we wanted to communicate that and begin working with our customers as quickly as possible. As Scott mentioned, that entails operations approximately until the end of calendar 2021. And then, we're looking at all options so it could be a sale of the business, it could be an orderly wind-down, all those are on the table. And obviously, because of that, the timing of disposition could be uncertain, but we're working carefully and closely with our customers.

Chris Kapsch -- Loop Capital Markets -- Analyst

OK. Fair enough. Thank you.

Colleen Mumford -- Vice President of Corporate Communications and Marketing

Thanks, Chris.

Operator

Our next question comes from Dmitry Silversteyn with Buckingham Research.

Colleen Mumford -- Vice President of Corporate Communications and Marketing

Good morning, Dmitry.

Dmitry Silversteyn -- Buckingham Research -- Analyst

Good morning. Thanks for taking my call. Most of my questions have been answered, so I just have a couple of follow-ups basically. One, I'd just like to understand a little bit better the comment that you made about reallocating expenses from corporate to business.

I guess two questions there. One, sort of what's the reason for it? And two, obviously, it's not going to change overall margin expectations for the businesses. But how does that change sort of specific business-related margin expectations versus the overall 35% EBITDA margin that you're going toward?

Scott Beamer -- Vice President and Chief Financial Officer

Yeah, I would say, Dmitry, the change that you're referring to is part of our evolution as a company and into the reporting structure that we adopted this year. So, the fundamental reason for doing that is more accuracy and giving our business leaders more clarity around all of the items that they are in charge of. And so, as we look through all of the items that were in corporate, we felt like some of them support the business units more directly. And so, we're just obliged and responsible to report them accurately.

And I think as we think about that we haven't given you a lot of information about how much we plan to reallocate from '19 to '20, so you're going to have to make some sort of assumption there, but we continue to reference the 31% total company. And I've mentioned, there really is no change in the structural -- the underlying structural cost of the total company. So, we'll have results in a quarter that will provide the updated information in terms of the segments, but we're not providing a lot of information now in terms of forecasting in your modeling for each segment. But the total company, you have some pretty good visibility around.

Dmitry Silversteyn -- Buckingham Research -- Analyst

Gotcha. OK. And then the second question, you finished the year with almost $190 million of cash on hand. You continue to be very cash generative.

So, I guess the question is why not accelerate the debt pay down even more and get to your 2 times EBITDA, maybe earlier in 2020 rather than toward the end of it. What is it -- I know the rainy day comment, but I mean is there anything specific that you're looking for over the next six to 12 months, as far as this cash use is concerned that would prevent you from a faster debt pay down?

Scott Beamer -- Vice President and Chief Financial Officer

No. We provide you with our capital priorities and dimensionalize those so that you know where our expectations are. So, we are not keeping cash on hand for a particular type of investment that we haven't communicated with you. Let's start with that.

The second piece then, Dmitry, is we operate around the world. We probably need closer to $100 million or so to just operate our businesses effectively, and you have to be thoughtful and planful about repatriating funds back to the U.S. So, it is more cost-efficient today to do that under the U.S. tax reform, but there are withholding taxes and complications in other countries.

So as we plan for this, we still generate more of our cash outside the U.S. and if there's a degree to which you might argue that there's more cash on our balance sheet than what we should be applying back toward debt repayment, we repatriate funds according to our plans and our schedules, and we try to be cost-efficient and effective about that. And it's just a little bit more complex than having a cash on hand balance that is maybe a minimum to run our business. So, I think you could expect debt paydowns in FY '20 in that similar magnitude we have this year, and we're going to continue to look when possible to prepay debt even sooner.

I appreciate the granularity, Scott. Thank you very much.

Sure. Thank you.

Colleen Mumford -- Vice President of Corporate Communications and Marketing

Thanks, Dmitry.

Operator

[Operator instructions] Our next question comes from David Silver with C.L. King.

Colleen Mumford -- Vice President of Corporate Communications and Marketing

Good morning, David.

David Silver -- C.L. King and Associates -- Analyst

Hello. Thank you. So I have, let's see, a couple of financial questions, and then, I would like to ask you about maybe the electronic chemicals side. So Scott, apologies if I missed it, but I did pick up a couple of elements that I'm going to ask you to integrate.

So, in terms of your guidance for full-year 2020 versus pro forma adjusted for 2019, the base is $345 million and the midpoint for 2020 is $365 million, so plus $20 million. And that number -- it just struck me, but that number coincidentally is very close to, I guess, your synergy performance where you said your run-rate exiting the fiscal 2019 is $26 million, and in the fourth quarter, we saw $5 million. So, the delta there is also right around $20 million. So, should I think that at this point, your 2020 results for, I don't know, price volume from your existing product mix is relatively flat, and the delta between the $345 million of adjusted EBITDA in 2019, up to the midpoint $365 million is all kind of cost savings generated? Can you just kind of relate those two, if you might? Thank you.

Scott Beamer -- Vice President and Chief Financial Officer

Absolutely, David, and you outlined things very well. I would say that of the synergies target, the one theme that we've woven into our discussions here a bit today is from the synergies aspect and what we're delivering, we see opportunities to grow our businesses and to invest in both capex and opex to grow our businesses more in the future than we have mentioned before. So of the $25 million, think of it as some portion of that being reinvested back into, in this case, opex, and so, it's not a direct drop down right now for FY '20. So, the additional EBITDA growth is coming from actual volume growth.

So, it's a mixture of the two and the synergies of the $25 million, we're actually redeploying some portion of that back into opex and into the businesses.

David Silver -- C.L. King and Associates -- Analyst

OK. So, that is kind of an apples-to-apples comparison. Thank you for clarifying that.

Scott Beamer -- Vice President and Chief Financial Officer

Yes, you outlined it well.

David Silver -- C.L. King and Associates -- Analyst

Well, I'm surprised, pleasantly surprised. Anyway, next question would be for net cash generation for fiscal 2020. So again, if I use 2019 as a base, you indicated about $119 million of free cash flow, it's going to ratchet up a little bit based on your earnings guidance. However -- so that's the pluses, but when I look at the minuses or the potential uses, I mean right off the bat, there's a higher capex budget.

I think you have some expense associated with the restructuring elements that you're undertaking. And I'd also say if the broader industry -- industries that you participate in, finally get an inflection point, your working capital needs should rise by the end of 2020 relative to where we are now. So, are we looking at year 2020 where basically you're not going to generate incremental cash flow for debt paydown, just from your operations? In other words, CFO minus capex should be pretty flat. Is that a realistic expectation?

Scott Beamer -- Vice President and Chief Financial Officer

Yeah, I think that's realistic, David. And I think the one piece, so, as you're thinking about things, we have mentioned we expect debt paydown in FY '20 to be pretty similar to '19 and there's two offsets that help one positive and one negative from '19 into '20. The first, as you know, is we're increasing our capex. As you said, it will impact the metric.

So, we're increasing our opex beyond what we had originally expected for FY '20. But the other piece to just remind is in FY '19, we had some significant cash costs related to the KMG acquisition that won't reoccur in FY '20.

David Silver -- C.L. King and Associates -- Analyst

Sure.

Scott Beamer -- Vice President and Chief Financial Officer

So, there's a netting effect of those two items. But I think, as you're thinking about, there's no change to the underlying structural cash flow generation for our businesses. You're right, as we grow our businesses, there will be some impact to working capital. But essentially, there's no structural change to our cash flow generation build.

David Silver -- C.L. King and Associates -- Analyst

OK. Great. And then the last question, and I apologize if this is a little unclear. But we've discussed on this call the diverging growth trends between pads -- CMP pads and CMP slurries where pads are gaining some share, etc.

But I was wondering if you could kind of just talk about the competitive landscape a little bit more for your electronic chemicals business. So, if I follow it correctly, I think this is a business that, within an environment of softer wafer starts and the memory overhang, I think revenues are up both sequentially and year over year if I have that right. And if that's the case, I was wondering if you could maybe just comment on why that is? Is it price or is it volume? I assume it's volume. And if it's volume, would that be -- would this be an example of you growing your share, in other words, gaining market share? Or is this more maybe just the case of growing with a certain cohort group of customers, that for whatever reason, might be outpacing the industry? Thanks very much.

Dave Li -- President and Chief Executive Officer

Yeah, thanks, David. Obviously, electronic chemicals is a business we feel good about. It is a more regional business. So, if you think about where we're strong, again, it's really North America, Europe, and Southeast Asia.

They have some different dynamics even within those geographies. For example, you could say, broadly speaking, Europe, the customers there have not been doing as well because they support -- one of the major segments they support is automotive. So, that segment hasn't been doing well. So, those customers in that geography haven't been doing as well.

North America, you could extrapolate who those large customers are. They're fairly healthy and they continue to progress in terms of advanced technologies and the intensity of electronic chemicals goes up as you go down in terms of new and more advanced nodes. So obviously, we're benefiting from that. And then, Southeast Asia is probably a little bit more stable.

So, there's a bit of different dynamics happening, and I think, quarter on quarter, those can bounce around a little bit. But obviously, long-term, we like our future and the trajectory of the business.

David Silver -- C.L. King and Associates -- Analyst

Thanks very much. Appreciate it.

Colleen Mumford -- Vice President of Corporate Communications and Marketing

Thanks, David.

Operator

Our next question comes from Mike Harrison with Seaport Global.

Colleen Mumford -- Vice President of Corporate Communications and Marketing

Hi, again, Mike.

Mike Harrison -- Seaport Global Securities -- Analyst

Just a quick follow-up. I believe you mentioned that the electronic chemicals business saw a weaker mix in the fourth quarter. Can you give any details on what exactly happened with that? And would you expect mix to normalize as we get into, I guess, the first quarter, at least?

Dave Li -- President and Chief Executive Officer

Yeah. I would say there's a number of different products that we support our customers within electronic chemicals. On a quarter-to-quarter basis, those could jump around a bit. There's different product mix in terms of value of the product mix, but I wouldn't say it's anything significant in terms of changes quarter over quarter.

Mike Harrison -- Seaport Global Securities -- Analyst

Is it possible that it had something to do with the geographic mix? You just mentioned that Europe maybe was a little bit weaker because of auto weakness. Is Europe a higher-margin area?

Dave Li -- President and Chief Executive Officer

Yeah, we haven't broken it out in terms of geography by electronic chemicals, but that is -- if you think about the different geographies, I think all the geographies were basically up except Europe this quarter.

Mike Harrison -- Seaport Global Securities -- Analyst

Sounds good. Thanks very much.

Dave Li -- President and Chief Executive Officer

Thanks, Mike.

Colleen Mumford -- Vice President of Corporate Communications and Marketing

Thanks, Mike.

Operator

I'm not showing any further questions at this time. I'd like to turn the call back over to Colleen.

Colleen Mumford -- Vice President of Corporate Communications and Marketing

Great. That is all the questions we have this morning. Thank you all for your time and your interest in Cabot Microelectronics. Have a great day.

Operator

[Operator sign-off]

Duration: 63 minutes

Call participants:

Colleen Mumford -- Vice President of Corporate Communications and Marketing

Dave Li -- President and Chief Executive Officer

Scott Beamer -- Vice President and Chief Financial Officer

Toshiya Hari -- Goldman Sachs -- Analyst

Mike Harrison -- Seaport Global Securities -- Analyst

Amanda Scarnati -- Citi -- Analyst

Chris Kapsch -- Loop Capital Markets -- Analyst

Dmitry Silversteyn -- Buckingham Research -- Analyst

David Silver -- C.L. King and Associates -- Analyst

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