Cabot Microelectronics (CCMP) Q3 2019 Earnings Call Transcript

Cabot Microelectronics (CCMP)
Q3 2019 Earnings Call
Aug 08, 2019, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Cabot Microelectronics third-quarter fiscal 2019 earnings conference call. [Operator instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Colleen Mumford. You may begin.

Colleen Mumford -- Corporate Relations Director

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 third quarter of fiscal 2019, which ended June 30, 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 on the investor relations center on our website, cabotcmp.com. A webcast of today's conference call and a 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 30, 2018, our Form 10-Q for the quarter ended March 31, 2019, and our form 10-Q for the quarter ended June 30, 2019, which we expect to file by August 9, 2019. We assume no obligation to update any of this 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 Chemical during the comparable period last year. Additionally, data reflects rounded values throughout this discussion and the accompanying slide presentation. I will now turn the call over to David.

David Li -- President and Chief Executive Officer

Thanks, Colleen. Last night, we announced results for our third quarter of fiscal 2019. We set another record for revenue, achieving $272 million this quarter, which is up 2% sequentially and in line with our previously provided guidance. We believe our results this quarter demonstrate our continued strong execution, as well as the benefits of having a broader portfolio of solutions that enabled performance in multiple industries with greater worldwide geographic balance, following our successful acquisition of KMG last year.

On a segment level and as expected, revenue in electronic materials was essentially flat sequentially. Within the backdrop of an ongoing soft semiconductor industry environment, we believe these results are reflective of the resilience of our business, as well as the breadth of our product offerings as we saw increased demand from advanced logic customers, as well as stabilization in the foundry segment, which helped balance weakness from memory customers. Revenue in performance materials was a record, and increased significantly sequentially, primarily driven by our pipeline performance business with higher demand for our drag-reducing agents, or DRAs, which enable pipeline operators to optimize the efficiency and throughput of oil transport in both U.S. and international oil production.

As we have discussed, we continue to see a bright future and strong growth potential for our performance materials segment, driven by our critical solutions that enable performance for pipeline operations and energy industries. Total adjusted pro forma EBITDA was $86 million, or 31.5% of sales, consistent with the guidance we provided during our recent investor day. This is $6 million higher, compared with the adjusted pro forma EBITDA in the prior year. This continues our track record of delivering best in class profitability for specialty materials companies, and as we've discussed previously, we have the expectation to further expand profitability in the future.

Now let me turn to additional specifics on our results and some thoughts on industry outlook by segments. Starting with electronic materials. Despite continued semiconductor industry uncertainty in the near term, we have seen signs of stabilization in demand from memory customers and expect recovery to continue over the next several quarters as channel inventories are reduced and demand from multiple end markets improves. CMP pads and electronic chemicals showed growth over the same quarter last year. Lower CMP slurries revenue due to the softer industry conditions, especially in the memory sector, led to electronic materials pro forma revenue decreasing 5%, compared to the same quarter last year.

As previously discussed, our CMP slurries have a high participation in memory and were adversely impacted by DRAM and NAND production cuts at our customers this year. In logic applications, the transition to advanced nodes by many of our top customers is driving increased demand for materials, particularly electronic chemicals. We remain optimistic about the long-term opportunities this creates for our company, as increasing device complexity should translate into additional manufacturing steps and higher demand for our broad portfolio of products. Lastly, in the foundry segment, we also expect continued stabilization in demand as customers migrate to advanced technology nodes, where we are well-positioned with our next generation CMP slurry and pad solutions.

Turning to performance materials. On a pro forma basis, we had another record quarter. The robust growth we continue to see in demand for our DRAs drove an 18% increase in revenue year over year, and a 14% increase sequentially, which exceeded our expectations and continues to demonstrate a key aspect of our investment thesis for our acquisition of KMG. Similar to our investment in the CMP space over the years, we are prepared to make investments in our pipeline business to increase capacity and to improve the quality and technology of our offerings as we continue to further differentiate ourselves from other providers.

Finally, as to our ongoing integration of KMG, we are now almost nine months post the close of the acquisition and we continue to be pleased by our progress. Customer and employee reaction continues to be very positive, and we are delighted by the growth and health of the acquired businesses. As Scott will discuss, we have now taken actions to achieve almost our entire announced synergy target of $25 million, which is ahead of schedule. Overall, we are proud of the results we delivered in the quarter, which we believe demonstrate the resiliency of our core CMP business, as well as the strength of our acquired KMG businesses.

Looking forward, we believe we are well-positioned to deliver another strong quarter of results to finish our fiscal year. From our perspective, our future growth prospects remain bright, which along with our expectation for continued best in class profitability position us as the premiere specialty materials provider globally. 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 in both reported and as adjusted on a pro forma basis. Pro forma results are presented following 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 we'll refer to adjusted pro forma figures in order to provide meaningful comparisons. You can find the summary of adjustments in the press release and on Slides 11 and 12 of the slide presentation. Revenue for the third quarter of fiscal 2019 was $272 million, which is a record for our company, and 121 million, or 81% 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 volumes.

Our reported net income was $19 million, and diluted EPS was $0.64 in the quarter. Adjusted pro forma net income was $47 million, which was essentially flat, compared with the adjusted pro forma net income in the third quarter last year. Adjusted pro forma EPS was $1.59, which was $0.02 higher than last year. Adjusted pro forma EBITDA was $86 million, or 31.5% of revenue, in line with expectations provided at our investor day, and 210 basis points higher than last year.

Now please refer to Slide 4, which provides some higher-level P&L comparisons for both reported and adjusted pro forma results. Our reported gross margin was 42.4% this quarter, compared to 53.6% reported in the same quarter last year. When comparing to the prior year on a pro forma basis, I'd like to remind everyone that this year's metric is negatively impacted by a reclass of distribution expenses related to the KMG acquisition, which moved from operating expenses into cost of goods sold. On an adjusted pro forma basis, gross margin was 45.3%, which was essentially flat, compared to 45.4% in the same quarter last year.

This quarter's adjustments include a $3.5 million amortization on acquired production-related assets from the KMG acquisition, and a $4.2 million impact from a warehouse fire and resulting cleanup activities at our Tuscaloosa wood treatment facility. As described at the time of the incident, fortunately, no one was injured. The fire, which affected only the warehouse, was extinguished quickly, and production remained on target. Also, we had some amortization and acquisition-related charges impacting our operating expenses in the quarter.

Excluding these charges, pro forma operating expenses declined approximately $7 million year over year. Synergies reduced opex by approximately $4 million, and the remainder was mostly due to a lower accrual for performance-based compensation. Our adjusted pro forma net income of $47 million was essentially flat, compared to last year as improvement in operating expenses was offset by higher taxes. Our adjusted pro forma EBITDA was $86 million, or 31.5% of revenue, and $6 million higher than the comparable metric in the prior year.

This improvement was driven primarily by lower selling and general administrative expenses, which demonstrates our continued cost discipline, particularly during a softer semiconductor demand environment. You may recall that we previously mentioned that 31% is a reasonable near-term expectation for adjusted EBITDA as a percent of sales. This is lower than the 32.2% EBITDA margin reported in the second fiscal quarter, primarily due to lower slurries volumes. Now let's discuss revenue results by segment and business, which are shown on Slide 5.

Electronic materials, which contributed 78% of our quarterly revenue, reported a $10 million, or approximately 5%, decline year over year. CMP slurries revenue declined 12% year over year as strong demands from advanced logic customers was offset by weakness in memory and foundry. CMP pads reported a 12% increase in revenues from last year due to continued customer adoption of our NexPlanar product line. Our electronic chemicals revenue grew 2% 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 $10 million, or 18%, over the prior year to a record level in the quarter. As mentioned, this increase was driven primarily by strong demand for DRAs from both domestic and international markets. Slide 6 shows revenue and adjusted EBITDA by segment.

Electronic materials delivered $71 million of EBITDA, which was 33% of segment revenue, while performance materials EBITDA was $27 million, which was 46% of segment revenue. Now please refer to Slide 7, which provides some balance sheet and cash flow highlights. We ended the quarter with $169 million of cash on hand. We prepaid 55 million of debt in April, which reduced our total debt to 944 million at the end of the quarter.

Year to date, we prepaid 100 million of our 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 of $117 million, and our capital expenditures were 33 million. As a result, our free cash flow was 84 million. Overall, we're very pleased with this strong cash flow generation ability.

We intend to continue to be prudent stewards of the significant cash we generate. In particular, our stated capital deployment priorities remain, investing in our existing businesses to support organic growth, paying ongoing and increasing dividends over time, deleveraging and executing M&A and finally repurchasing shares. I will now provide some closing remarks on Slide 8. From a financial perspective, we are encouraged to see continued strength in our newly acquired businesses, as well as the resilience of our heritage businesses.

Despite a challenging semiconductor industry operating environment, adjusted pro forma gross margin and net income was essentially flat, compared to last year, and EBITDA grew, benefiting from synergies and continued overall control of operating expenses. Specifically, we delivered 4 million of synergies to opex in the third-quarter fiscal P&L, and have implemented actions that should contribute to $24 million in synergies on a run rate basis. We're pleased with our progress to achieve nearly 25 million in run rate synergies ahead of our previously communicated schedule. As we have done over time, we'll continue to look for additional opportunities to drive improvements in operating expenses for the company.

Accretion from the KMG acquisition added approximately $0.49 to EPS this quarter, and approximately $1.00 per share since the acquisition closed. We delivered on accretion ahead of our original schedule -- or ahead of our original expectations and are delivering synergies faster than originally planned. We continue to be delighted with our growth prospects, as well as the earnings and cash flow power of the combined company. On Slide 9, we provide some forward-looking expectations.

For the fourth quarter of fiscal 2019, we currently expect total company revenue to be approximately flat. compared to our third fiscal quarter, as semiconductor industry continues to stabilize. Electronic materials and performance materials revenue is expected to be approximately flat sequentially. Consistent with Dave's comments, we're expecting further stabilization in our electronic materials revenue in the fourth quarter, but the timing of the semiconductor industry recovery remains uncertainly.

In performance materials, we're forecasting continued strong growth in DRAs. However, for the fourth quarter there may be some timing impacts for orders from other businesses within the segment. With one quarter remaining in our fiscal year, we are narrowing our full-year guidance. We now expect full-year adjusted EBITDA to be in the range of 325 to $335 million, compared to the prior estimated range of 325 to 345.

We currently expect our full-year interest expense to be between 45 and 46, which approximately 13 million expected in the fourth quarter. Depreciation and amortization is now expected to be between 35 and 40 million, which excludes approximately 60 million in acquisition-related amortization. Our current capital spending expectation for the full fiscal year is between 55 and $60 million as we expect to initiate some organic growth projects in the fourth quarter. We now expect our effective tax rate for the full fiscal year to be in the range of 24 to 25%.

As we step back, our third-quarter fiscal results confirm the following themes -- the resiliency of our CMC heritage businesses, the strength of our acquired businesses, our continued focus on managing cost and ultimately the cash generating power of the combined company along with appropriate capital deployment execution. Now I'll turn the call back to the operator as we prepare to take your questions.

Questions & Answers:

Operator

[Operator instructions] And our first question is from Toshiya Hari from Goldman Sachs. Your line is now open.

Toshiya Hari -- Goldman Sachs -- Analyst

Hey, good morning. Thanks so much for taking the questions and congrats on the solid results. Dave, I was hoping you could talk a little bit more about what you're seeing in the memory space. Clearly from a cyclical standpoint, there are headwinds just from the demand standpoint and given how much inventory there is in the system.

But at the same time, you did speak to, I think, signs of stabilization. So I guess, what did you see in the quarter? And then what's the near-term outlook when you think about your memory, primarily slurry business? Then I have a follow up.

David Li -- President and Chief Executive Officer

Yeah. Thanks, Toshiya. And obviously, we've seen many different cycles of the industry. This has not been an epic downturn like we saw in 2008, 2009.

It's been more moderate, but it has lingered. And I think some of the macro issues, like either U.S., China, South Korea, Japan, have kind of muted, maybe, the strength and speed of the recovery. So what we've seen in the memory area is the dynamics seem to be improving. We follow the same things that you do, whether it's Micron's recent announcement, or Samsung, or Hynix.

Things haven't recovered yet, but there are some signs of stabilization. So some things I point to are DRAM pricing as stabilized, some of the inventory has been worked down. There was actually a production, in terms of Toshiba had some production downtime this quarter that may have in the midterm actually helped the channel inventories be worked down a bit. So we see the dynamics of the memory sector improving.

And of course, we strongly participate in that area of the market. We see the other areas of the industry a little farther ahead in terms of recovery, advanced logic and foundry.

Toshiya Hari -- Goldman Sachs -- Analyst

Great. And then as my follow up, I had a question on your CMP pad business. Your business grew year over year, and I suspect the market was down year over year given the challenges in the industry. So I guess the question is in which applications do you continue to gain share in the CMP pad business? And if you can remind us what the medium-term market share aspirations are for Cabot, that would be appreciated.

Thank you.

David Li -- President and Chief Executive Officer

Yeah. So for pads, it's a really exciting business for us. That along with DRAs are really going to be two of the primary growth engines for the company. And we see it really wide open in terms of the pad area because, obviously, we're No.

2 in the industry, but we're far away from the No. 1, or the incumbent. And so, we have opportunities that we are advancing in just about every segment, whether it's memory, foundry or logic. And we're really pleased with what customers -- or in terms of feedback we're getting from customers.

So we see pretty broad adoption. I think, though, it would be fair to say that it's relatively similar to our slurry participation, so strong in foundry, strong in memory. But I think we're really pleased with the progress in the pipeline that we see. So far, we've talked about -- we don't talk about the specifics, but we achieved that 100 million run rate several quarters ago.

We estimate the total market to be about $800 million, so that gives you a rough estimate of where we are from a share perspective.

Toshiya Hari -- Goldman Sachs -- Analyst

Thank you.

Operator

Thank you. And our next question is from Dmitry Silversteyn from Buckingham Research. Your line is now open.

Dmitry Silversteyn -- Buckingham Research -- Analyst

Good morning, guys. Thank you for taking the call and congrats on a good quarter. I mean, I know you've guided for it, but I mean, as we think about it, is there a little bit of a surprise that your electronic chemicals business is outperforming your slurry business, given that the general perception is that slurries are a little bit more defensible market, let's say, than electronic chemicals? Or is it just strictly a question of you being overconcentrated in the areas that are going through the worst of the inventory correction?

David Li -- President and Chief Executive Officer

Yeah. Dmitry, thanks for your question. And I think overall, what we'd say is we're proud of the execution and resiliency of the overall electronic materials business during a pretty soft industry environment. For electronic chemicals in particular, we're more concentrated in North America and Europe, and obviously you can see where those customers are, a lot of advanced logic and logic customers.

They're a little further ahead in terms of recovery, so it's not surprising that we saw better performance relatively speaking from a slurry standpoint. Perhaps we're a little farther, not in terms of recovery, as fast as electronic chemicals. That's obviously because we're heavily participating in the memory side. So I think it's really where we're participating rather than any of the dynamics within the segment.

Dmitry Silversteyn -- Buckingham Research -- Analyst

OK, David. Thanks for that. And then just as a follow up, you mentioned that part of your lower SG&A expense was the lower accruals for bonuses. I mean, you guys did an acquisition, the stock's doing well, the company's delivering on its goals.

So why are you lowering your accruals?

Scott Beamer -- Vice President and Chief Financial Officer

We tend to set pretty aggressive and challenging, yet appropriate targets for ourselves, Dmitry, in terms of our compensation program. And at this point, yes, lower accrual would indicate that we are tracking behind what we had said internally.

David Li -- President and Chief Executive Officer

Yeah. We appreciate the support, Dmitry. But yes, as Scott mentioned, our expectation, and we've been very public about it, is to grow faster than the market. This has been kind of a dynamic year, so I do think we are outperforming.

If you look at our results versus, for example, the few peers that we have, I do think we're outperforming them. But in terms of, as Scott mentioned, we set some pretty aggressive and ambitious goals for ourselves internally.

Dmitry Silversteyn -- Buckingham Research -- Analyst

That's good to hear. Thanks for clarifying that. That's all the questions I have. Thank you

Operator

Thank you. And our next question is from Mike Harrison from Seaport Global Securities. Your line is now open.

Mike Harrison -- Seaport Global Securities, LLC -- Analyst

Good morning. Just to kind of round out that last question. Just wondering, is the lower incentives comp accrual continuing into Q4? And then, how do we think about it on kind of a year on year basis as we think about 2020?

Scott Beamer -- Vice President and Chief Financial Officer

Yeah. Mike, it's the continuing trend. At the end of every quarter, you look at where you expect to be for the full year. So what we adjusted in Q3 is also baked into our forecast for Q4, and that's within the metrics that we put out there.

We are pleased with the fact that, again, we talked about the synergies, you see the pro forma opex numbers in the tables in the back of the press release. And when you see that opex come down $7 million, the biggest piece is synergies, so there is this accrual piece. And when you think about next year, that would be a potential headwind. If we get back on track to achieving those aggressive targets that we set, then there could be some additional costs coming as a headwind to next year, I think would answer your question as you're thinking about FY '19 into '20.

Mike Harrison -- Seaport Global Securities, LLC -- Analyst

All right. That's what I figured. Thank you. Just wondering, you mentioned the reduction in slurry sales is something that's impacting your margin and keeping the EBITDA margin a little bit lower than where you were in the first half.

Should we think about CMP slurries as having some differences in margin between what you're selling into the memory market and what you're selling into foundry or advanced logic? Just wondering if those applications are pretty similar in terms of margin or if the memory weakness is accentuating the margin impact.

David Li -- President and Chief Executive Officer

Yeah. Mike, I'd say that we sell a variety of different solutions, both slurries and pads, across the different segments. If you think about how a memory chip is made today, whether it's NAND or DRAM, there are fewer layers than in advanced logic, or a chip that's being made in a foundry. But most of those layers are dielectric and tungsten, where we're very strong.

But we still also sell those similar slurries to the foundry and logic segment. So I wouldn't say there's a huge difference in profitability across those segments. Perhaps there's a bit more tungsten concentration in the memory side. And, of course, that's, of course, where we're very strong.

Mike Harrison -- Seaport Global Securities, LLC -- Analyst

Got it. And then a couple quick ones on performance materials. First of all, the wood treatment facility where you had a fire. Should we expect that to have any operational impact on next quarter or fiscal '20? And if it does, will that be adjusted out? Or is there some impact that could be absorbed by the business?

Scott Beamer -- Vice President and Chief Financial Officer

Yeah. Mike, we will -- if there are additional impacts, either positive or negative, we would adjust those out when we move to discussing the adjusted pro forma results with all of you. The heavy lifting is really behind us. There's some additional analysis left that we have to assess any damage to what additional disposal costs would be.

So again, as we think about the fire, it impacted a small warehouse. It was contained and extinguished, I think, within less than an hour. Immediately, we began the remediation aspects, and our production was not impacted. So it was an event.

We've accrued for that this quarter, and we've talked about the cleanup cost aspects of this. And we're going to make sure that we're stewards of all of the aspects of this, but we continue to be very excited about this business as well. We understand what happened, we take in the remediation, and there's a possibility not only for additional cost, even though we said the heavy lifting's behind us, there's additional analysis left. So there's an opportunity for some additional cost perhaps, and that would be likely next quarter, not beyond.

But I also want to say that we're working with our insurance partners to pursue possible benefits here as well. So typically, how these things work is you're incurring costs, you're spending fees, and then you have to work with your insurance partners. And there's a possibility of working with them to have something of a more positive outcome. So it could be a cost and/or a benefit to next quarter.

Either way, we would adjust it out.

Mike Harrison -- Seaport Global Securities, LLC -- Analyst

All right. Understood. And then, in the press release you mentioned some impacts from the QED business in performance materials. Sounds like maybe some timing helped you in the third quarter and is going to hurt in the fourth quarter.

Can you provide a little bit of color on what's going on there?

Scott Beamer -- Vice President and Chief Financial Officer

Yeah. For sure. And actually, I think it would be helpful to dimensionalize this a bit. So as we think about the portals materials segment, it was 60 million, the record result for the quarter, and a strong quarter up from 50 in the previous quarter.

About two-thirds of the of the segment is drag reducing agents in our valves lubricants business. So if you take two-thirds on that 60, that's $40 million. And we expect that to continue to grow. And we said, I think in my prepared comments, I said we expect some strong growth.

Let's call that high single digits. You take some math on that 40 million for next quarter, you're at a growth rate of 3, 4 million. So that says, well, if you're approximately flat, there's something negative in the range of two, three, four million in the other businesses. And that's the order of magnitude.

And yes, QED had a good -- there's a little more lumpiness to that business, as you know, Mike. QED had a good quarter. There was a little bit of a shift into our results for Q3, and Q4 we see that business being down slightly, and woods flat to down slightly. Just some directional context.

Mike Harrison -- Seaport Global Securities, LLC -- Analyst

All right. Appreciate that. Thanks very much.

Operator

Thank you. And our next question is from Chris Kapsch from Loop Capital Markets. Your line is now open.

Chris Kapsch -- Loop Capital Markets -- Analyst

Good morning, thanks. So question on the pad business. And it's been several quarters, really, outsized growth, and I think it's a function of success there with adoption and POR winds with the NexPlanar. So based on the visibility and your POR winds, just any way you can characterize the anticipated sustainability of that growth rate as we look over a fiscal '20 or calendar '20 time horizon?

David Li -- President and Chief Executive Officer

Yeah. Chris, we haven't dimensionalized the growth for pads other than, say, that it is a key growth driver for our business. Earlier I mentioned our position. If you just went on a run rate basis from a couple quarters ago, we were around $100 million a year.

There's a lot of runway for us to grow, either both with existing customers. I think we made comments earlier that we're selling to just about all of the top semi producers, so growth within those existing customers, as well as new customer adoption. And we're just really scratching the surface in terms of the potential. And with the addition of the KMG electronic chemicals business, I think we've got a broad portfolio of solutions that we're bringing to our customers.

Their response has been very positive. So putting that package all together, we've just really started with those efforts. So long answer, but we haven't -- we see a lot of promising continued growth for pads, and we see it as a sustained long-term growth driver for our company.

Chris Kapsch -- Loop Capital Markets -- Analyst

Dave, just a follow up on that. The bulk of the revenue and the growth in the pads, is it tending to be more for advanced node new applications, or is winds at legacy nodes also contributing to the growth there?

David Li -- President and Chief Executive Officer

Yeah. We see both. So in terms of customer reception, it's been very good. Of course, for us, we tend to -- the most open qualifications are with the new nodes, but if you can secure a legacy technology or displacement, you see a much more significant and faster ramp.

So we have efforts in both areas, and the pipeline is pretty full.

Chris Kapsch -- Loop Capital Markets -- Analyst

OK. And then if I could just follow up on the discussion, I think in answer to Mike's question about the margin trends, a function of your slurry business being down almost 12% year over year. And since that was more a function of weakness in the memory market, I can infer that tungsten sales were weaker. Is that accurate? And any way to dimensionalize the drag on the margin from that? And then one follows up on how that may play out looking forward.

David Li -- President and Chief Executive Officer

Yeah. Maybe I'll start and Scott can chime in. I'd say in general, slurries, we've commented, are above company gross margin today. That drag on memory certainly would have an effect on, for example, tungsten.

But again, we feel like this is a temporary dynamic, Chris. And when the market recovers, the growth thesis for memory is still very much intact. I'm not sure how to best dimensionalize it, but I would just point out, even at our 31.5% adjusted EBITDA, I'd say that's really -- we're really proud of that performance in terms of profitability. I'm not sure if there's another company out there with similar profitability as that, and we've demonstrated that over a long period.

Scott, I don't know it you want to add.

Scott Beamer -- Vice President and Chief Financial Officer

That's good. I think the overall theme, Chris, is that we have shown over time, both from a CMC heritage and a KMG perspective, both historically have improved margins over time. And the overall theme within the slurry is we're always working to innovate at the next node and deliver the next solution to the customer across all of memory, foundry and logic. So it's more difficult to pin one area of mix or greater margin across any of those.

We're working to improve margin across all of the above.

David Li -- President and Chief Executive Officer

Yeah. I guess I would just add, Chris, you were at our investor day, and we talked about our longer-term expectations for expanding profitability. Say we're in that 32% ZIP code today, getting up to 35% or even more. And that's exactly was Scott said.

We have a great performance materials business, which is very profitable. And in electronic materials, we have really worked hard to innovate new solutions in every area, so it's not just tungsten that's very profitable, dielectrics, we've improved the profitability there. Some of our advanced gate solutions are also very critical for our customers, and we're working hard to innovate there. Again, it's not a huge distinction between the different segments.

Chris Kapsch -- Loop Capital Markets -- Analyst

Got it. And then one last follow up there. Just as you anticipate at some point, the memory demand will recover. And when that happens, presumably it's going to be more pronounced that with chips with architectures of less of 64, more 96, 128 or more layers.

And I'm just curious about your content, consumable content per wafer, or your competitive position, your POR winds on those advanced architectures. Is it as good or better than when you are with the current advanced node, let's call it, 64-layer 3D NAND?

David Li -- President and Chief Executive Officer

Yeah. I'd say we are pleased with our positions at the advanced memory nodes. When we talk a lot about it, the transition between 2D to 3D, that was sort of a more exponential step change from CMP consumable usage. As you get from 60 to 90, it's more incremental.

But I would say we're really pleased with our positions in those advanced technologies and working closely with our customers.

Chris Kapsch -- Loop Capital Markets -- Analyst

OK, thanks.

Operator

Thank you. [Operator instructions] And our next question is from David Silver from C.L. King. Your line is now open.

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

Good morning. Thanks. So I'm going to apologize in advance. I had to step out for a couple of minutes, so apologies if I make you repeat yourself.

I noticed during the prepared remarks there were a number of references to advanced logic, and I just want to clarify that I'm understanding it. But I was assuming that you're referring to the new start-ups of key chips by two of the big three chip makers that are more visible. Or alternatively, I was wondering if it relates to company-specific demand, maybe, for a more customized chip or a more customized customer project. So just the nature of that euphemism, advanced logic.

Thank you.

David Li -- President and Chief Executive Officer

Yeah. David, so advanced logic, that's that segment of customers that are producing high-end logic chips. Intel would be an example. They're a very big customer of ours, as opposed to more legacy logic, which are also really important customers are ours.

But those would be those folks producing for automotive and things like that, a lot of concentration in Europe. So it's just a segmentation that we've used. And I think the interesting part about following a customer that's producing advanced logic is as they progress to new nodes, they're ramping up seven, for example, we see additional intensity for slurries, pads and also electronic chemicals, so there is that benefit for us for more intensity of material uses as they ramp new nodes.

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

OK. So you're indicating that this next iteration of the next node or technology transition, you're participating to an incrementally greater extent?

David Li -- President and Chief Executive Officer

Yeah. And the same dynamic actually holds really across the board. But the most similar comparator is also foundry. They're also producing logic chips as well, they're just producing them on behalf of someone else.

But same dynamic holds there. They're ramping up seven, or in some cases even beyond that, and there's more layers. There's more sophisticated solutions that are acquired. And so all of that should be a tailwind for a company like us that's almost completely materials-based and based on wafer start.

So that's something that we watch and of course work with our customers closely on.

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

OK. No, thank you for that. And then just a couple of clarifications, I guess, from Scott, if you wouldn't mind. Again, I had to step out, so I apologize.

But the full-year EBITDA guidance of 325 to 335, I just want to make sure I have the right starting point. But I'm assuming June to date, I should be thinking about the 248 number in the EBITDA reconciliation. Is that the correct starting --

Scott Beamer -- Vice President and Chief Financial Officer

Yes.

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

-- point? OK. Thank you for that.

Scott Beamer -- Vice President and Chief Financial Officer

Yeah. I could maybe help clarify some of this here, Dave, because it's a really important point, actually. So you have your 248 through nine months, and we've given the approximately flat revenue from Q3 into Q4, and we have reminded about 31% EBITDA being an appropriate near-term expectation for our company. So if you're doing that math and following that logic, if you're getting to a EBITDA for the full-year results, that's closer to the upper end of our range right now, the 325 to 335.

If you're doing all that math and logic and you're getting closer to the upper end of the range, I would not disagree with that logic. And in fact, that would be closer to the midpoint which we had as our previous expectation when the range was 325 to 345.

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

There you go. No, thanks a lot, I was just trying to reconcile that last night. And then last question. capex of 55 to 60.

And I'm assuming about half of that is sustaining capex and the other half is discretionary spending. So could you just remind me on the discretionary half, where that portion of your capex budget has been directed? Thank you.

Scott Beamer -- Vice President and Chief Financial Officer

Yeah. Yeah, for sure, David. I know we were all in the room together recently, and I think there was a number -- I think that we broke a record in terms of the number of questions about the ramp up of capex, so there was a robust discussion. Just to remind everybody, the run rate of the two companies individually, if you run rate those and add those together, it's closer to 50 million.

When we were together on investor day, we said, hey, the next two years of '20 and '21, we expect a ramp up closer to about $100 million on a run rate basis. And essentially, that ramp up is to support the growth that we also articulated as part of that day. When we think about electronic materials growing five to 7%, performance materials we expect to grow eight to 10%, so you're at the total company growing six to 8% on average indicatively over a five-year period. That's going to take some growth investment because fundamentally, we provide critical enabling materials to our customers.

So you got to make sure that you continue to be investing class supplier and you're supplying those on time in full. And we have also mentioned in terms of the cut, about half of the spending will go to electronic materials, and a little bit less than half will go to performance materials. Performance material's today 20% of the company, so Performance Material's getting a little bit more than their normal proportion of capex. That's because of the growth aspects are higher in terms of our projections and the profitability is higher.

And when we think about Q4, you look at we've done 33 so far. To get to a midpoint of our range, we're going to have to ramp that up in the neighborhood of low 20s in terms of spending in Q4. That ramp up in Q4 is really the beginning of that step up for fiscal '20 and '21 moving from that 50 to 100. So I think it ties together in terms of if we're moving from 50 to 100 for two years, we're going to have a ramp up in Q4.

And we have projects that are under way that support that. But it's essentially to fund growth in our businesses. The maintenance capex typically has been in that range of lower than 50 million. I would call all of the incremental capex that we're projecting in Q4, I would call all that to be growth projects with return on capital in excess of our weighted average cost of capital.

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

Very good. Thanks for the insight.

Operator

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Colleen for closing remarks.

Colleen Mumford -- Corporate Relations Director

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

Operator

[Operator signoff]

Duration: 51 minutes

Call participants:

Colleen Mumford -- Corporate Relations Director

David Li -- President and Chief Executive Officer

Scott Beamer -- Vice President and Chief Financial Officer

Toshiya Hari -- Goldman Sachs -- Analyst

Dmitry Silversteyn -- Buckingham Research -- Analyst

Mike Harrison -- Seaport Global Securities, LLC -- Analyst

Chris Kapsch -- Loop Capital Markets -- Analyst

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

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