Q4 2019 Earnings Call
At this time all participants are in listen only mode. After the speakers presentation. There will be a question answer session. So that's a question. There is certainly the press star one your telephone if you require further assistance. Please first carbons here.
I'd now like to be smelters purpose columns call, we must call, we Mumford Vice president corporate communication and marketing the Cabot Microelectronics you may begin ma'am.
Great. Thank you the morning with me today, our David Lee, President and CEO , and Scott Beamer, Vice President and CFO .
Last night, we reported results for our fourth quarter in full fiscal year 2019, which ended September Thirtyth 2019.
What are your joining us online or over the phone. We encourage you to review the investors my presentation that we made available under the quality where are the result section of our Investor relations manager or what type Cabot CMP Dot com.
Yeah webcast of today's conference call in the script or this morning's prepared comments well also be available on our website. Shortly after this conference call.
You may require any of the information by calling our Investor Relations Officer, 16 year old or nine nine to say your Jeremy.
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 to see.
These risk factors are discussing or FTC filings, including our Form 10-K for the fiscal year ended September Thirtyth 2018, and our Form 10-Q .
At June Thirtyth 2019.
We assumed debt obligation to update any of these forward looking information.
Also our framework this morning reference certain non-GAAP financial measures, including adjusted pro forma results.
Our earnings release, a slide presentation include a reconciliation of each non-GAAP financial measure to than yours comparable GAAP financial measure.
We also provided supplemental pro forma information and that's what I really wish compared to current results and this cabot microelectronics older KMG chemicals during the comparable periods last year.
Additionally, data reflects rounded value throughout this discussion and then in the accompanying slide presentation I will now turn the call over to date.
Thanks, Colleen last night, we announced results for 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 and semiconductor demand and continued strong growth in pipeline performance.
For the full year, our revenue increased by 76%.
Primarily due to the acquisition of Cam G.
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%.
She was above our guidance of approximately flat.
This was the result of continued stabilization in the operating environment.
On 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 at 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 trends 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're also seeing increased investments in Fiveg networks, which we believe will be a catalyst for many of these future applications.
Additionally, we expect continued growth in demand for our products as customers move to seven nanometers and five nanometers in logic.
And 100, plus layers in Threed, NAND, which require additional manufacturing steps.
We believe all of these advanced technologies and applications or acquire 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 segments, 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're already seeing significant demand from international customers, which we believe will supplement our strong positions in the U.S.
With these factors enough in mind, we now expect our revenue in the first quarter 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 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.
Replace our operations and 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 towards profitably growing our company.
With that I'll turn the call over to Scott to provide more details on our financial results.
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 FCC 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 we'll refer 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 I'm 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 DRA is was offset by lower CMP Slurries and Q, we the revenue.
Our reported net loss was $20 million or 70 cents 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 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 five cents lower than last year.
Adjusted pro forma EBITDA was $85 million or 30.6% of revenue, we're just 50 basis points lower than last year.
Revenue for the full fiscal year was $1.038 billion, 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.
A form of 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 deal raise 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 57 cents 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 owns KMG for the full fiscal year was 345 million or 31.4% of revenue.
Now please refer to slide five which provide some higher level quarterly PNM 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 has negatively impacted by reclass of some costs.
It's 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 worth 30.6% of revenue and 1 million lower than the comparable metric in the prior year has 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 six.
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 the 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 advance 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 DRA is both domestically and internationally, but was partially offset by difficult comparisons in our Q reedy business.
Slide seven shows revenue and adjusted EBITDA by segment.
Tektronix 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 eight which provide 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 two times net debt to EBITDA by the end of fiscal 2020.
On a year to date basis, we generated cash flow from operations up $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 in both performance materials and electronic materials.
Our additional capital deployment priorities remain paying on 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 inventor and investments on high growth opportunities closer to our core and we will cease further investments.
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 non core 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 us manufacturing facility or in the relocation of our production facilities and Tuscaloosa, Alabama and matter Morris 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 were $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 PML 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 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 and 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 DRA.
Partially offset by expected softer performance in Q weedy 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 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 well make 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 cost allocated to the segments should increase.
Depreciation and amortization is expected to be between 40, and $45 million, which excludes approximately 90 million and acquisition related amortization.
We currently expect our full year interest expense to be between 45 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 20% to 25%.
Our current capital spending expectation for the full fiscal year is between 101 hundred $30 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 in 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 were able to grow our EBITDA by 11% delivering operating leverage with continued focus on gross margin expansion and prudent management of.
GNS 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 and synergies within the first two years after we announced the KMG acquisition.
We ended the year at a 26 million dollar run rate and delivered $5 million in synergies to the PML in the fourth quarter, some of which we invested back into the business.
Accretion from the KMG acquisition added approximately 60 cents to EPS this quarter and approximately a $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.
Ladies and gentlemen, if you have a question or comment at this time. Please press Star then one key on your Touchtone telephone.
Your question disconnects reduced to slow from the Q. Please press the pound key.
Our first question comes from Toshiya Hari with Goldman Sachs.
Right.
Hey, good morning, Thanks, 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.
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 your opex.
Especially given some of the synergies that you've you've.
You've met so far that I have a quick follow up thank you.
Thanks to ship.
So for 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 definitely stabilization.
There are signs of of some recovery, especially on the foundry side.
We think thats driven by new consumer devices, and some of the investments in Fiveg.
What we haven't seen is a clear signs 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 in as 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 Thats. The one that seems to be lagging from the recovery staff.
Endpoints.
Our 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 Doug.
Stick and strong demand overseas as well so continued.
Strong demand baked into that sort of full year look into our performance.
Hi, Thanks, so she as far as your second point about Opex I would think about our opex for F. Why 20.
To be similar structurally to where it was and Thats why 19 and I'm referring to.
Not only the synergies aspect, which where you said were delivering directly into the PNM now. 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 NAFTA.
Slide 20, as we had enough why 19, we're still on that medium term to longer term trajectory of 35%, but thats, 31% EBITDA return in the short term again for ask why 20 is.
I think would help capture or the expectations on opex going forward.
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 from a wafer capacity build perspective into 2020.
There are also aggressively transitioning to 10 nanometer. So I guess the question is.
How robust is your near term outlook in this business and then perhaps more importantly have you been able to identify any revenue synergies.
But it's been about a year since since the acquisition. Thank you.
Yes, we're really excited about the electronic chemicals side too 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 progressed to lower.
Node sizes, and there is 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.
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 was still a lot of opportunity to go weve.
Optimize 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 who have benefited from that and I think theres still lot of opportunity going forward. If you look at just the way we.
Market and sell our products, we've just really.
We got into to identify those opportunities. So those are still ahead of us.
Thank you.
Thanks.
Our next question comes from Mike There seems to be pools.
Good morning mine.
Hi, good morning.
Just as the Capex previously suggested capex would be around $100 million announced why 20 and 21.
You're guiding to 100 million do 130 million for fiscal Twentys. So a couple of questions on that first of all how much capex savings would be associated with the decision not to invest in med penta business over the next two years.
And then second what additional investments or are you taking during.
Making I should say during fiscal 2000.
Thats.
The that number higher.
It sounds like over the over the next two years, you're still expecting 200 million total, it's just going to be a little bit more weighted.
20.
Thats right Mike.
In terms of the savings from not investing in the would over that two year period, We said at Investor day, and will remind tier that weve. That's it that was in significant piece of the 200 million. So there are some savings, but not a material piece so were going to invest that piece back into.
The core businesses. In addition to facing up some of the spending from 21 into 20. So you get to that range that you described that's slightly front end loaded in depth why 20, but we still have the full 200 million of spending over the two year period wanting one exists.
Sample I'll give you up 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 were.
Participating appropriately in the growth of that business.
Just a follow on Mike to to Scott's comments, we think of these next two years his years of investments, we're really excited about having some high growth businesses that we can support and deploy our capital too 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.
Alright, and then on the DRA business, you mentioned that you're seeing growth opportunities on both the domestic side as well as internationally.
As I am aware your capacity currently.
His 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.
Plan somewhere overseas. So that you can move production out of the U.S.
It currently that plan just comprehends expansion of our existing facility in the US 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.
How to optimize the logistics for that high growth business and so that's a work in progress, but we don't have comprehended today, a and international production facility. We think we can support from our based facility in the us.
All right and then last one for me is just regarding the you mentioned that you exceeded the original synergy target related to the KMG.
Acquisition have you increase that target or should we just view any future synergies is maybe part of ongoing.
Improvements are kind of continuous improvement in your profitability. Thanks.
Yes, I would view the future. So we continue to have internal targets might that are beyond what we have outlined here, but we're comfortable we've delivered against those original targets were and continue to stretch ourselves beyond that but we also recognized and then it will be part of the.
Going operations to your second point.
But we also recognize the opportunity to invest in the underlying business as well.
Ensure that we're participating we're able to support the type of growth that we envision.
I think just to follow onto that.
Like I feel like we felt we feel really good about our progress towards achieving and exceeding the synergies that we put out there going forward. It's just about managing the company right. So we look at that 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.
All right thanks very much.
Thanks.
Our next question comes from amendments or TV with Citi.
Good morning Amanda.
Good morning.
First question.
This is how we should expect Steve this is sort of fall off conference.
Just going to continue to be.
Material systems or something.
Discontinued operation.
With that revenue trail off.
Yes, Amanda we.
At some point there may be activities that trigger a move into discontinued operations or even held for sale, we havent triggered any of those yet so it be.
Thats 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 as in the neighborhood, it's slightly above 200 million and we have always said that the drag reducing agents business and and the valves and lubricants business about two thirds of that the remaining one thirds are split between the wood and the Q EDI business. So you can get back to the revenue there and then from a.
Returns perspective, you know, what our segment EBITDA percentage, which was.
45% for the full year 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 of in terms of EBITDA in the business, so as you're modeling that and App for F.
20, I would expect at least until you hear something different from US I would expect that they continue to be in continuing operations and I think you can expect F wide 20 to have a similar sort of profile to the returns of that why 19.
Great and then on the clarity side of the business.
Hi, guys what does it take the.
Celleration business, you mentioned Q2 wanting the revenue should be stable in that business, we need to be sort of a shift Douglas docking and Dan further.
Significant step up in revenue.
Jeff Reacceleration utilization summary, bakery and for that business to start to grow again.
Yes, I think it's both of those dynamics Amanda plus you know for pads I think we have an unique opportunity because we're still although we're number two we think in terms of.
In terms of our participation, we think theres 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 is that.
Kind of unique opportunity associated with that business broadly speaking for electronic materials. It's those two factors there is.
What we've we've been working with our customers closely on his as there's been a little bit more.
And 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 are 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 base business almost a 100% so when the microns. The high next is all those important customers of ours begin to two restarts fully and fully utilize their their factories of course, we'll see that in our business.
Yes.
Great. Thank you.
Thanks and Anna.
Our next question comes from Chris Kapsch Lucas Mark.
Hi, guys.
Yes, good morning.
A follow up question on the.
Sequential guidance for the December quarter, it sounds like there's sustained momentum in the DRA business in that you've indicated that segment would be.
Flat up sequentially. So the flat flattish sequential revenues in electronic materials, given that the 10 nanometer node, let's call them the largest logic chip maker is happening and given the burgeoning ramp in Taiwan at five nanometers sort of implies that.
Your sales serving memory producers will be down sequentially.
And thats not inconsistent with the broader narrative about uncertainty around the memory end market, but sort of wondering two things one is that the right way to think about this and also that dynamic that's correct, presumably comes with adverse mix headwinds in the design in the December quarter on a sequential basis. So can you just sort of confirm.
From that's the right way you're thinking about.
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.
Headwind to that would be that but.
So we're coming off of several strong years of performance of Q EDI, So perhaps some.
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 electronic materials side I think what I mentioned earlier the recoveries on even so we did see broad strength this quarter.
Her sequentially quarter over quarter, most of that strength was in foundry, we did see a little bit of 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 foundries that related to new consumer devices, and we will that sustain or that will that kind of breast and fall off as the build has has completed and I think that big one we're watching as memory, so not as great.
Annular as perhaps you mentioned, but it's really more just reflective of an uneven recovery.
Okay can I just follow up on the on the DRA business. The commercial momentum is that mostly about just is expanding Tam and this niche market were on greater adoption of UBS.
Pipeline operators or is there any evidence that you're also gaining a bit share.
Yes, I think we see both Chris so the opportunity funnel.
Is very strong both with.
Wrapping 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.
Okay and then finally, thank you for framing up some parameters around.
No sizing up the the contribution from the Penta business.
As a percentage of your overall portfolio do you have a sense on it sounds like.
You can feel free to correct me, David but it sounds like an outcome of this decision could be obviously selling the business that you could also just shut it down.
It sounds like Im just wondering.
What do you anticipate the timing around that ultimate.
Disposition for the penta business to be.
Right, Chris So as we mentioned in the prepared comments first just to go back to that decision the would 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 that it didnt.
Fit the criteria as soon as we made the decision not to fund the plants to replace our existing operations.
I wanted to communicate that and begin working with our customers is as quickly as possible.
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 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.
Okay fair enough. Thank you.
Thanks, Chris.
Our next question comes from to me.
Research.
Good morning.
Good morning, Thanks all.
Most of my questions have been answered so I just have a couple of follow ups basically.
One.
I, just like to understand a little bit better the comment that you made about re allocating expenses from corporate to business I.
I guess two questions there one sort of what's the reason for it to.
Obviously, it's not going to change overall.
Margin expectations for the business.
But how does that change sort of specific.
Business related margin expectations versus the overall, 35% EBITDA margin, but true that you're going towards.
Yes, I would say Dimitri the change that you're referring to as part of our evolution as as a company and into the reporting structure that we adopted this year. So.
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 off and so as we look through all of the items that were in corporate we felt like some of them.
Some of them support the business units more directly and so were just obliged and responsible to report them accurately and I think as we think about yes. They did we haven't given you a lot of information about how much we plan to reallocate from 19 to 20 so.
So youre going to have to make some sort of assumption there, but we continue to reference the 31% total company and I've mentioned that really is no change in the structural the underlying structural cost of the total company. So.
We'll we'll we'll have results in a 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 and your modeling for each segment, but the total company you have some pretty good visibility around.
Okay and then second question you finished the year with almost $190 million of cash on hand.
And your continued to be very cash generative. So I guess the question is why not accelerate.
Pay down even more and you are two times EBITDA, maybe earlier in 2020, rather than towards the end of it.
What is it I know the rainy day.
Comments, but I mean is there anything specific that looking for over the next six to 12 months as far as gas users concern.
Would prevent you from a faster debt pay down.
No. We 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 have been communicated with you let's start with that the second piece that Dimitri as we operate.
Around the world, we probably need closer to 100 million or so to just to operate our businesses effectively and you have to be thoughtful and planful about about repatriating funds back to the U.S. So it is more cost efficient today to do that under the U.S. tax reform.
Warm, but there are withholding taxes and complications in other countries. So as we plan for for this we still generate more of our cash outside the us and if theres a degree to which you might argue that theres more cash on our balance sheet than what we should be applying back towards 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 than having a cash on hand balance that is that as maybe a minimum to run our business. So I think you could expect debt pay downs in F. Why 20 in that similar magnitude. We have this year and we're going to continue to look when when possible to prepay debt even events.
Uh huh.
I appreciate the granularity Scott Thank you very much.
Sure. Thank you Anthony Thanks.
Again, ladies and gentlemen, if you have a question or comment at this time. Please press Star then one key on your touched on telephone.
Our next question comes from David cylinder with CL King.
Good morning, David.
Hello, Thank you.
Let's see 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.
Picked up a couple elements that I'm going to ask you to integrate so.
In terms of your guidance for full year 2020 versus the pro forma adjusted for 2019.
The base, two or 345 and the midpoint for 2020 is 365, so plus 20.
And that number would just struck me, but that number coincidently 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 five so the Delta. There is also right around 20 million.
So.
Should I said I think that.
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 adjusted EBITDA in 2019.
Up to the mid point 365 is all kind of cost savings generated can you just kind of really relate those too if you might thank you.
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.
Yes in both Capex and Opex to grow our businesses more in the future. Then we have mentioned before so of the 25 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 it for.
Jeff why 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, we're actually read deploying some portion of that.
Back into the bit back into opex in the into the businesses.
Okay. So that is kind of an apples to apples comparison. Thank you for clarity on your yet you outlined that well.
No.
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 know you indicated about 119 million of free cash flow.
Got a ratcheted up a little bit based on your earnings guidance. However, so thats the pluses, but when I look at the but the the minuses or the potential uses.
I mean right off the bat Theres, a higher Capex budget I think you have some expenses associated with the restructuring elements that you're undertaking and I'd also say if you know if the broader industry that industries that you participate and finally hit an inflection point you're working cap.
But on the should rise.
By the end to 2020 relative to where we are now so are we looking at a year 2020, where basically.
You're not going to generate incremental cash flow.
Toward debt pay down just from your operations in other words CFO minus capex.
It should be should be pretty flat.
That is that a realistic expectation.
Yes, I think thats realistic David and I think the one piece so as you're thinking about things. We have mentioned, we expect a debt pay down and Thats why 20 to be pretty similar to 19 and theres 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.
Well well impact the metric so we're increasing our our opex.
Beyond what we had originally expected for at why 20, but the other piece to just remind as Nf why 19, we had some significant cash costs related to the KMG acquisition that wall should occur in that wide 20. So those are there that netting effect of those two items, but I think as you're thinking.
About theres no change so the underlying structural cash flow generation for the for our businesses you're right as we grow our business is there'll be some impact to working capital, but essentially there is no structural change to our to our cash flow generation below.
Okay, Great and then the last question and I apologize.
There's a little unclear but.
You know we've discussed on this call the diverging growth trends between Pat CMP pads, CMP Slurries square pads are gaining some share.
Et cetera, 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 in the memory overhang.
I think you know revenues are up both sequentially and year over year, if I have the right.
And if that's the case there was wondering if you could maybe just comment on why that is it price or is it volume I assume its volume and if its volume would that be and 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 grow.
Going with a certain cohort group of customers that for whatever reason might might be.
Outpacing the industry, thanks very much.
Yes, Thanks, David.
Lastly, electronic chemicals the business, we feel good about it is more regional business. So if you think about where were strong again, it's really North America Europe in southeast Asia. They have some different dynamics, even within those those those geographies. For example, you could say broadly speaking Europe .
Customers there have not.
I've 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, havent been doing as well North America, you can extrapolate who those large customers are they're fairly healthy on there continue to progress in terms of advanced technology and Dean.
Hence city of electronic chemicals goes up as you go down in terms of new and more snow. So obviously, we're benefiting from that and in southeast Asia is probably a little bit more stable, so theres a bit of 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.
Thanks very much appreciate it.
Thanks, David.
Our next question comes from Mike Harrison with Seaport Global.
Hi, Mike.
Just a quick follow ups I believe you mentioned that the electronic chemicals business saw a weaker mix.
The fourth quarter can you give any details on on what what exactly happened with that and would you expect mix to normalize as we get into I guess first quarter at least.
Yeah, I would say, there's a theres 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.
Theres 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.
Is it possible that it had something to do with the geographic mix you just mentioned that Europe , maybe with a little bit weaker because of auto weakness.
Is Europe , a higher margin area.
Yes, we haven't broken it out in terms of geography by electronic chemical but that is.
If you think about the different geographies I think all the geographies were basically up except Europe . This this quarter.
Sounds good thanks very much.
Thanks, Mike.
I'm not showing any further questions at this time or turned the corner recalling.
Okay and in other questions. We have this morning. Thank you all for your time and your interest in Canada minorities and everything.
Ladies and gentlemen. This concludes todays presentation you may now disconnect and have a wonderful day.