CMC Materials, Inc. (CCMP) 2019 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cabot Microelectronics' First 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 call, Ms. Colleen Mumford, Investor Relations Director. Ms. Mumford, you may begin.

Thank you, Cheri. Good morning, everyone. With me today are David Li, President and CEO, who is participating from Asia; and Scott Beamer, Vice President and CFO.

Last night, we reported results for our first quarter of fiscal 2019, which ended December 31, 2018. Whether you're joining us online or over the phone, we encourage you to review the investor slide presentation that we've made available under the Quarterly Results section of the Investor Relations center on our website, cabotcmp.com.

A webcast of today's conference call and the script of this morning's prepared comments will also be available on our website shortly after this live conference call. You may request any of the information by calling our Investor Relations office at (630) 499-2600.

Please remember that our discussions today may include forward-looking statements that involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from these forward-looking statements. These risk factors are discussed in our SEC filings, including our Form 10-K for the fiscal year ended September 30, 2018 and our Form 10-Q for the quarter ended December 31, 2018, which will be available by February 11, 2019.

We assume no obligation to update any of this forward-looking information.

Also, our remarks this morning reference non-GAAP financial measures. Our earnings release and slide presentation include a reconciliation of GAAP to non-GAAP financial measures. Additionally, data is represented by rounded values throughout this discussion and in the slide presentation.

Please save the date for our Investor Day event, which will be held on June 18 at NASDAQ MarketSite in New York City. Further details and formal invitations will be sent out in the coming weeks.

I will now turn the call over to Dave.

Thanks, Colleen. Good morning, everyone, and thanks for joining us.

I'm excited to announce strong results for our first quarter especially since this is the first time we are reporting performance for our combined company following the acquisition of KMG, which closed in mid-November. As a reminder, our first quarter of this fiscal year 2019 includes approximately 6 weeks of KMG results and a full quarter of CMC results.

We are also introducing a new reporting structure, which includes 2 segments; Electronic Materials and Performance Materials. Electronic Materials includes products and solutions for the semiconductor industry and is comprised of CMC's legacy CMP slurries and polishing pads businesses as well as the recently acquired KMG Electronic Chemicals business. Performance Materials consists of KMG's pipeline performance, wood treatment and CMC's legacy QED business.

Our first quarter revenue increased 58% compared to the same period last year. This is a new record level for the company, driven by the KMG acquisition and solid organic growth in our legacy CMC businesses. Revenues in both our new segments, Electronic Materials and Performance Materials, grew year-over-year on a pro forma basis.

Total adjusted EBITDA for the company was $77 million, which excludes acquisition and integration-related expenses of $38 million. Our total adjusted EBITDA nearly doubled compared to the adjusted EBITDA reported in the same quarter last year, primarily as a result of the KMG acquisition. We believe that our strong results this quarter are an early indicator of the earnings power of our new combined company.

Let me now turn to additional specifics on our results and some thoughts on industry outlook by segment. Starting with the Electronic Materials segment, which continues to be the large majority of our business, this quarter, we delivered record growth in both CMP slurries and pads as well as strong growth in the KMG Electronic Chemicals business. Our IC CMP consumables revenue increased 3% sequentially, another record, and is in line with our previous guidance. We also achieved record revenue in tungsten slurries and pads, which demonstrates the continued successful execution of our product strategies as well as the strength of our technology and solutions in these important product areas.

Looking ahead, recent reports from customers and industry analysts suggests that the semiconductor industry should return to a more traditional, seasonal pattern this year with predicted weaker demand in the first half particularly in the foundry segments, balanced by expectations for stronger growth in the second half of calendar 2019. Consistent with this, our revenues are expected to decline slightly sequentially in the second quarter versus this record quarter as Scott will cover later in the call.

Despite this potential for near-term industry softness, we feel that we are well positioned for continued success due to the strength of our consumable-based business as well as our strong participation in the highest growth parts of the industry, particularly memory.

Within memory, we continue to see benefits from our customers converting from 2D to 3D NAND, which doubles the number of CMP steps and in turn, significantly increases the need for advanced semiconductor solutions, including tungsten slurries. Longer term, we remain optimistic about industry growth potential with continued strong demand for both memory and logic devices driven by new applications such as the Internet of Things, autonomous driving, industrial automation, cloud and high-performance computing, virtual reality and 5G. With all these emerging technologies, customers demand for quality, innovation and operations and supply chain excellence are expected to become even more extreme, which we believe play into our unique strengths as a partner for our customers.

In the Performance Materials segment, we also recorded strong revenue. This segment is primarily comprised of our solutions for the oil pipeline industry, and we saw record revenue for those pipeline solutions driven by increased demand for our industry leading drag-reducing agents or DRAs. As we have previously discussed, DRAs are essential to performance and safety of pipelines and help reduce operating costs by significantly increasing throughput of oil and reducing energy requirements. With continued growth in oil production in the U.S., primarily in the Permian Basin, we anticipate strong future growth for this exciting business.

We are now almost 3 months into our integration of KMG, and I'm pleased with our progress. We believe we are well on our way to meeting or exceeding our synergy target of $25 million on a run-rate basis within the first 2 years of the acquisition as we identify best practices, talent and technology around the company globally.

Looking ahead, we are excited about our continued growth potential. We believe these strong first quarter results along with the progress we've made on integration and the positive feedback we've heard from our customers, gives us continued confidence and encouragement towards our goal of building the premier provider of critical materials.

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.

Let me start with an overview of our financial performance this quarter, which is provided on Slide 3. Revenue for the first quarter of fiscal 2019 was a record $222 million, which is $82 million or 58% higher than the same quarter last year. As Dave mentioned, we're excited about the performance of both our CMC legacy businesses and the recently acquired KMG businesses. Revenue from our CMC legacy businesses was up $20 million or 14% compared to prior year and revenue from our IC CMP consumables was up 3% sequentially, which was in line with our expectations. Specifically, in the CMP area, slurries and pads each delivered record revenues. Additionally, the KMG acquisition added $62 million to revenue for the quarter for the approximately 6 weeks that we owned the business during the December quarter.

Our net income of $13 million in the quarter improved compared to a $3 million loss reported in the prior year. This quarter's net income was negatively impacted by acquisition and integration-related expenses and an inventory step-up charge on acquired inventory that was sold, while last year's net income was adversely impacted by the U.S. Tax Cut and Jobs Act.

Excluding these items, non-GAAP net income was $53 million, an increase of $22 million or 70% over the same quarter last year. Our EPS was $0.48 per diluted share in the quarter. Non-GAAP EPS was $1.90 per diluted share.

Now please refer to Slide 4, which provides some higher level P&L comparisons. I would remind everyone that first quarter results include a partial quarter or about 6 weeks of KMG results and naturally, a full quarter of CMC results. As mentioned, we reported record revenue in the quarter. Although most of the increase was driven by the KMG acquisition, we're proud that even if the KMG results were excluded, we still would have reported our seventh consecutive record quarter of record revenue.

Adjusted EBITDA was $77 million or 34.7% of revenue, an increase from $43 million. As mentioned earlier, we're now presenting our results in 2 reportable segments: Electronic Materials, which represents approximately 85% of our revenue; and Performance Materials. Please refer to Slide 5 for the additional information about businesses included within each segment.

Now let's drill into revenue results by segment and business, which are shown on Slide 6. We're presenting the results as both reported revenues and pro forma revenues. The pro forma revenues represents CMC and KMG combined results as if we had owned KMG for the full first quarter of both fiscal years 2018 and 2019. We believe it's important to refer to these figures so you may understand how the performance of the business on a comparable basis.

On this basis, revenue in our Electronic Materials segment grew by $24 million or 11%. Our CMP slurries revenue increased 10% year-over-year with strong results in our tungsten and dielectrics products. CMP pads reported a 30% increase in revenue from last year due to continued customer adoption of our NexPlanar products. Our Electronic Chemicals business also grew by 6% -- $6 million or 8% on a comparable basis versus prior year. Similarly, revenue in Performance Materials increased $8 million or 17%. This increase was driven by growth across each business area.

Slide 7 shows revenue and adjusted EBITDA by segment. And as you can see, both segments have a strong profitability profile. We are now providing pro forma reconciliations of prior year's adjusted EBITDA by segment due to timing differences.

Acquisition and integration-related expenses were significant this quarter at $38 million. Of the $38 million, about 1/3 of these impacted cost of goods sold. Excluding these, adjusted EBITDA was $77 million and adjusted EBITDA margin was 34.7% in the quarter compared to $43 million and 31% last year.

Now please refer to Slide 8, which provides balance sheet and cash flow information. We ended the quarter with $209 million cash on hand and about $1.1 billion in debt outstanding. As a reminder, we assumed approximately $1.1 billion of debt to finance our acquisition of KMG. This week, we entered into an agreement to swap approximately 70% of our debt from variable to fixed rates. We continue to expect our leverage to decline from currently close to 3x EBITDA to close to 2x EBITDA in 2 years.

We generated cash flow from operations of approximately $14 million. This is typically a seasonally low quarter for operating cash flow due to typical payouts of compensation-related accruals, and this was further impacted by acquisition and integration-related expenses. Our capital expenses -- expenditures were $8 million and, accordingly, our free cash flow was $6 million in the quarter.

I'll now provide some closing comments on Slide 9. From a financial perspective, we achieved new milestones in terms of revenue and non-GAAP net income this quarter. We had 6 weeks of KMG results in our December quarter, and the acquisition added about $62 million in revenue to the quarter. We're also very pleased with the performance of our CMC legacy businesses, which contribute -- continued to deliver strong results.

Our primary areas of focus right now are the KMG acquisition, integration and realizing the associated synergies while continuing to deliver the world-class solutions and deliveries that our customers have come to expect. Although first quarter P&L impact from synergies was minimal, as expected, we continue to expect to deliver $25 million on a run-rate basis within the first 2 years and have already executed on actions that would deliver $13 million in synergies annually.

Please move to Slide 10 where we provide some expectations. We're providing revenue guidance for the second quarter of fiscal '19 based on currently projected sequential changes compared to our pro forma revenue in the first quarter of fiscal '19, which is shown on Slide 6 of the presentation.

For the second quarter of fiscal '19, we currently expect total revenue to be down low single digits on a percentage basis with Electronic Materials revenue expected to be down low single digits and Performance Materials revenue expected to be up low single digits on a percentage basis. Consistent with industry outlook, we expect to see some level of recovery in the second half of the year. Interest expense for our second quarter is expected to be between $13 million and $14 million.

As we think about the full year of fiscal 2019, we expect adjusted EBITDA to be between $325 million and $355 million. Depreciation and amortization is expected to be between $35 million and $45 million, which excludes approximately $60 million in acquisition-related amortization. We expect interest expense to be between $47 million and $50 million this year. At present, we expect our effective tax rate for the full fiscal year to be in the range of 23% to 26%, which is higher than reported this quarter due to a favorable impact of stock-based compensation on our first quarter and expected changes in geographic mix on our taxable income.

For example, as we continue to grow our business in Korea, our tax rate will increase due to higher corporate tax rate in that country.

Our current capital spending expectation for the full fiscal year is between $60 million and $70 million as we make some strategic investments in the newly acquired KMG businesses.

As we think about our business for the remainder of the year, we continue to be very excited about the earnings power of our combined company. When we announced the KMG acquisition in August, we referenced pro forma information that showed a path to achieving 31% EBITDA for the combined company, and we believe this continues to be a reasonable near-term expectation with improvement anticipated longer term as we drive even stronger results for the combined company.

There are several reasons why Q1 performed better in this regard. First, we had only a partial quarter of the KMG businesses, and we delivered record revenues in our slurry business. Additionally, the first fiscal quarter is historically the lowest from a cost-based perspective of any quarters since our salary and merit increases begin typically on January 1.

At the highest level, non-GAAP EPS grew from $1.19 to $1.90 per diluted share driven by growth in both the underlying CMC businesses and the accretion from KMG. We discussed in August that we expected accretion from the KMG acquisition to be about $1 per share for the first year, excluding cost for acquisition and integration-related items. And in this partial quarter, we delivered about $0.15 per diluted share, which is in line towards achieving this target.

In summary, we're very pleased with our strong financial performance in the first quarter, and we believe we remain on track for effectively integrating KMG. We believe the results show the strength of our consumables-based business model and the attractiveness of the various industries in which we participate. For fiscal '19, we remain confident in our ability to drive revenue growth as we provide innovative, high-quality solutions that solve our customers' most demanding challenges.

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

(Operator Instructions) Our first question comes from Chris Kapsch with Loop Capital Markets.

The question -- first question is on the EBITDA guidance range, which I guess is generally consistent with what you had conveyed in the S4. Just curious what sort of levers might push that towards the lower end of the current guidance range? And what sort of factors may provide outside towards the higher end of that range?

Yes, a good question, Chris, and we're trying to provide I think a fair bit of visibility around our assumptions building up to that. I think as you think about things that could impact us towards the lower end of the range and think about the revenue, we give this -- our guidance for the upcoming quarter in Q2. We said we expect some level of growth to continue in the second half of the year consistent with the other industry messages that are out there. If that were to plane out and flatten out or even decline, I think that would push us towards the lower end of the range. And so I think that you guys will look at all the different pieces, and we don't see a lot of variability in our raw materials, for example. Just the nature of our raw materials are not very volatile quarter-to-quarter, so we wouldn't see a lot of exposure there. But I think the revenue is something that could -- if we saw further declines, I think we would -- that could push us towards the lower end of the range. This is a transitional quarter. We're trying to -- we only owned the business for 6 weeks during the quarter, so we're trying to make sure that we're providing the visibility and the clarity to all of you to understand our expectations. We're going to continue to refine that over time, but this is our best belief now. Hopefully, our history as a company has shown that we provide clarity and transparency and we're shooting straight in terms of our expectations, and we believe that to be the case at this time as well.

Scott, if I'm trying to get at a free cash flow number for '19 based on your guidance and several metrics that you provided, just look at the middle of that EBITDA range -- sorry, the EBITDA range, the interest expense, a reasonable assumption for cash taxes, for the CapEx that you provided. Can you plug in that equation like what your expectations are for either cash out for restructuring and working capital? And if I do that math, it looks like I get to something below $150 million. So I'm just wondering, that seems like Cabot standalone was doing more than $150 million or close to $150 million in free cash flow. And so I'm wondering what the -- what made to driving that, is there more CapEx spending? If you could walk through that, that would be helpful.

Absolutely, Chris. Those are good questions as well. And if you -- just as you've described in your process work from our EBITDA range, we've given the interest expense, we've given an expectation on capital, we would also pay dividends, and I think that is an important part of the equation here as well. We're proud of the dividends that we paid. Last year at this time, we doubled our quarterly dividend, and we have said that we expect to pay continuing and increasing dividends over time. At $1.60 a share currently times 30 million shares, you get to about $50 million on that metric. And then, of course, we have to pay taxes. I think that if you -- so if you strip out all those pieces, yes, it's probably something less than $50 million but more than $100 million, and that's free cash flow then that we could apply towards deleveraging. And if you think about us from a net debt perspective today, the $1.1 billion of gross minus $200 million of cash on hand, that's $900 million. If we were to use, say, $100 million in each of the 2 upcoming years, that moves that metric to $0.7 billion. And at that point, EBITDA just has to get to $350 million to be at 2x. So I'm glad you asked, because I think understanding the pieces and modeling them out and making sure we're all comfortable with how that reconciles 2 or 3x going to 2x going forward I think is relevant for everyone and important to understand. So we feel very good about the cash flow opportunities for our company and our power going forward.

I would also, as you suggested, I think in your question, our capital spending, yes, that is a little bit higher than the 2 companies had spent historically when we talk about the $60 million to $70 million this year from an expectation. And we see opportunity to make some strategic investments as we commented in the prepared comments more on the KMG business beside. And I again, I think that we've been careful stewards. We've always said that organically growing our business is our number 1 priority for cash. Hopefully, we've shown to be good stewards of that. We've shown the ability to acquire a business such as NexPlanar and to grow that and to invest appropriately on capital to support the growth in that business, and we see some opportunities going forward on the KMG side as well. So yes, the capital spending has ticked up a bit. Q1 was impacted. You would be probably underwhelmed in our net cash flow number for the quarter. But as we said, that's a seasonally low number and that it was impacted by cash out items to help us reach that synergies number. But we feel most of that is behind that, most of the charges going forward now are on a noncash basis in terms of acquisition and integration-related expenses.

Very helpful. If I could just squeeze one more on the -- just on the strength in the pad business, up 30%. That's above what that business has been trending. So curious what -- if it's a function of just latent demand from POR that have been in place over the last couple of years finally ramping up? Or is there some other dynamic that's driving a much more pronounced year-over-year growth trend in the pads business?

Yes, thanks, Chris, and we're excited about our growth in pads. We -- it was a record for us this quarter. We're at $100 million from a run-rate basis, and it was really kind of strength all around, existing customers ramping up, a few new customer wins as well. But I think just looking at the long-term growth potential of this business, we're really excited and pleased with our execution. And, of course, the solutions that we're providing out there especially with the NexPlanar platform are really being received well from our customers and we see a lot of runway ahead. So it's really a more broad-based demand in the pads business. Going forward, I think our expectation is for us to continue to replace our legacy business with NexPlanar. And as Scott mentioned in his comments, we're entering a little bit seasonally soft period, but overall, we're really excited for growth for pads.

Our next question comes from Amanda Scarnati with Citi.

Just a couple of kind of follow-up questions. I know you spoke a little bit about utilizations at customers, as we're seeing utilizations coming down, somewhat hard for you this quarter and into next quarter with wafer starts and MSI's expected to be significantly lower than we initially thought. Is kind of no transitions and that continuing transition over to 3D enough to sort of sustain some level of growth in the Electronic Materials business this year? Or could we expect to see some sort of decline year-over-year?

Yes, thanks Amanda. And I think it's fair to say we are entering a period of moderating growth. I think that's the right way to think about it is after 2 really strong years of industry growth, I think that rate of growth is moderating, but we still expect growth in MSI year-over-year this year. And I think memory has a big part in that. We are entering what I kind of relate back to as more of a traditional seasonality for the industry. So first half, a little softer. Second half, stronger. And that's most pronounced in the foundry area as you probably have followed. So things like smartphones slowing down have an impact to that. But we see so far, and as we guided for our second quarter, is that Electronic Materials would be down slightly. And I think that just speaks to the resilience and the robustness of our consumable-based business, and we expect to continue to participate in the parts of the market that are growing the fastest. So we see some softness in Q2 as we talked about, but expectations for stronger second half.

And then how should we look at kind of growth in the Performance Materials business on sort of a normalized basis? Is this quarter -- how we should look at that kind of seasonality going forward? Would it be offsetting the Electronics Materials business on a normalized basis? Or is there more kind of puts and takes in that business where you wouldn't have a traditional kind of seasonality?

Yes, the seasonality is actually -- so for the Performance Materials business, this is -- obviously, we're introducing these 2 new segments. And for Performance Materials, that's primarily comprised of the DRA business, the drag-reducing agents business. And the interesting thing about that is there is some seasonality and we are entering traditionally what's been a seasonally stronger period. And if you just think about it fundamentally, these are increasing the throughput through pipelines. And in the winter months, our customers tend to use more DRAs as viscosity tends to be more of an issue in the colder season. It's not a huge part of our business, right? The Performance Materials makes up something right around 20% of our business or less, but we do expect that to be entering a stronger seasonal period. And I think there's a lot of exciting growth in DRAs overall as a business as well. We've talked about that business as just really at the early stages of adoption. So it's not fully adopted worldwide. Our business is really focused, so far, mostly in North America, mostly in the Permian, and we see a lot of runway there. So we do see a lot of strength in that business going forward.

Then just one more kind of housekeeping question, if I can sneak it in. In the Electronics Materials business, would you expect to continue to break out slurries and pads, just so we know how to kind of rebuilt that in our models? Or would you just do Electronic Materials and Performance Materials individually?

A good question too, Amanda. And I think this -- and I'll refer to the slide, because we find them to be, hopefully, helpful for everyone. On Slide 6, I think you can expect us to continue to generally show slurries, pads and Electronic Chemicals and then Performance Materials in total. I think those will be meaningful. We won't plan to give a lot. Occasionally, we'll talk about the layers in which we are polishing potentially in slurries, but we aren't going to provide financial information about those. We'll talk about business drivers and market-related items associated with those. And then we're also going to continue to focus on EBITDA. We think EBITDA is the right metric going forward as many do in our industry. And so we're also in addition to the segments and some of the businesses underneath, we're also going to continue to focus on EBITDA because we just think that's the right metric going forward and allow people to compare our performance in a meaningful way compared to our peers.

(Operator Instructions) Our next question comes from Mike Harrison with Seaport Global Securities.

This is actually Jacob on for Mike. It's been a while since we've gotten an update on KMG's Performance Materials segment. I wanted to ask you a couple of questions on that. So in the wood treatment business, I know California is an important market. So with the wildfires that came in 2018 likely destroying the number of the utility poles, just wanted to get an update sort of how the demand environment is looking there, sort of what your expectations are for that business?

Sure. Again, this is part of a very highly profitable segment for us, so we're pleased with all the businesses that are part of that portfolio. The wood business traditionally has been on more of a low single-digit sort of growth, so less growth profile typically than some of our other businesses. And you are correct in that when there are natural disasters or disasters of some sort, generally, that would be favorable to that business as utility poles need to be replaced out there. That -- any sort of impact to that, Jacob, is included, for example, in our second quarter revenue guidance for the Performance Materials segment.

And I'd just point out, Jacob, it's a great business for us. We think we'll be good stewards for the business but it is a relatively small portion of our overall business, I think it's 5% or less. Those kind of event-driven things that could drive slightly higher demand, but overall, it's a pretty small part of our business.

And then you mentioned the drag-reducing agent business with strong international growth opportunity. Last time we heard from KMG, I think they're working on trying to win a number of new business accounts. Any update on sort of that front?

Yes, I think we inherited that really rich pipeline of international opportunities from KMG, and obviously we're working hard to close those out. And you're right in that the DRA adoption is really at its early stages. So we see not only strong continued growth and opportunity in the U.S. as infrastructure is added and upgraded, but there's a significant international opportunity that we're really excited about to supply DRAs to those customers internationally, and I'd say the opportunity is very large. I think the overall, market, just to calibrate on the market size, we think the DRA total industry is around $500 million today. And obviously, we're one of the leading suppliers. So exciting growth potential for this business.

And we do have a follow-up question from Chris Kapsch with Loop Capital Markets.

I understand the new reporting -- well, sort of obscure some of the metric that you used to provide in legacy reporting for CCMP. But just curious if you could just provide a little insight into how the margins for the slurry business looked during the quarter, and maybe the pads business, the gross margins? And then how do you see that based on your EBITDA guide, looking forward, how do you see margins for those businesses in '19 given that -- it sounds like the mix is still skewed towards tungsten, so tungsten growth being the strongest, so should be good, right?

Yes, we're excited about -- obviously, as Scott mentioned, it's our intention to still provide color but perhaps not as much quantitative information around the businesses in slurry and pads. But the same sort of movement and mix still hold. Slurry is obviously above corporate gross margin. And we had record slurries sales, particularly in tungsten. We continue to see a great runway in tungsten especially with the strong memory adoption. We still think the 2D to 3D conversion has a long way to go. It's still probably only 50% or 60% converted. So a lot more runway on tungsten and, of course, that's a really important technology and set of solutions for us. On the pad side, I think it would be fair to say that, that product line is below corporate gross margin but we're working hard on productivity improvements to improve that overall. But I think the same sort of mix applies as you followed in the past, Chris.

And our next question comes from Dmitry Silverstein with Buckingham Research.

Dmitry, I think we're having a hard time hearing you.

Hello? Could you hear me okay now?

We can hear you.

A couple of questions. First of all, you sort of partially answered the question previously on what would drive the guidance towards the lower end of your expected results to the lower end of your guidance. That's revenue-related, obviously. What about the higher end? Do we need to see maybe a bit less of a seasonal slowdown in terms of market performance? Are there leverage that you guys are pulling internally that can get you to the higher end of guidance?

Good question as well, Dmitry. I think that, again, we shoot pretty straight in terms of the expectations that we have. Pushing us towards the higher end, the first point I would direct us to would be that further recovery maybe in revenue than we had expected. We have the stated objective of improving our corporate margins through product mix, through other actions on the top line as well as controlling our costs in a prudent way. And so we're going to continue to do that. So I wouldn't expect there to be a lot of upside from those because we feel like we're doing that and are aggressive in doing that and that's part of our modeling already. So if revenue recovers more, that's probably the primary place that I would look. We don't get the variability on the raws, so we don't expect that to be a big indicator and we feel like we're controlling our cost well and carefully managing our investment and spending as well.

Dmitry, just as a follow-up, as Scott mentioned earlier, it's a transition quarter for us. We're really excited and encouraged by what we've seen with the KMG businesses and the integrations going well. And I think this quarter is an indication of the earnings potential and the earnings power of the combined company. This quarter was a little higher than what we're projecting for the overall year. But I think longer term, we've demonstrated the ability to drive performance and grow profitability. That's going to be our continued goal. But I think as Scott mentioned, in the near term, it's really around how much softness in -- do we see in the utilization, particularly in foundry that could put us towards the middle or higher or lower end of the guidance.

Got you. And then just to get a little bit more granular on the guidance on the electronic portion of the business, you're looking forward to be down low single-digits sequentially in the March quarter versus the December quarter. Just kind of looking through the Cabot Micro's legacy businesses, the last 2 years, you didn't have a sequential decline. You have to go back to kind of the 2015, 2014 period, the last time you had sequential declines in your quarters for your legacy business between December and March. So I'm trying to understand if there is a difference in your expectations between the KMG business and your legacy business in terms of the sequential guidance in the Electronic Materials?

No. I think it's really -- those move roughly together. There are -- and I think that's part of the strength of our business model. It's really based on wafer starts. And so the previous 2 years, we had really strong utilization, and we've been participating very strongly in the parts of the market that have grown the fastest, particularly memory. I think that's still going to be a good tailwind for us. But the headwind that we're heading into is this sort of softness, particularly in foundry. And if they turn down utilization, that's just reduce consumables use. Longer term, I think the same growth thesis definitely applies. And even if you think about the Electronic Chemicals business for KMG, one of the things we've been really encouraged to see is the intensity of the process chemicals particularly on the logic side goes up significantly as our customers go to lower and smaller feature sizes like 10 and 7-nanometers. So we'll see some tailwinds from that as those ramps continue to happen.

Okay. That's helpful. And then if I can just follow up with the last comment that actually you kind of led into, David. I'm fairly comfortable with sort of the legacy Cabot Microelectronics business and the tailwinds that you have from 3D NAND and FinFET and this new technology that could cushion whatever headwinds you may see from end markets. But what about the KMG's process or looking at chemicals business? Does it have -- beside this move to thinner line with some that increases the process chemicals intensity, are there any other tailwinds to KMG's business that would give us some comfort that if the semiconductor industry goes through a couple of quarters of inventory correction cycle or something like that, that you guys can still grow through that?

Yes, I think there's a lot of potential for growth just beyond wafer starts, Dmitry. And if you looked at what we've done so far and what we've demonstrated in the past is the ability to drive growth above the market. Right now, if you just look at the Electronic Chemicals business from KMG, they do have a tailwind because they're focused on advanced logic primarily in North America. You can guess who those customers are. And as those customers go through ramps of new technologies, there is an intensity -- a greater intensity of those process chemicals as we get to smaller feature sizes. So that's definitely a tailwind. But if you pull up, I really think the opportunity is for our company and this combined company is we're providing materials to just about every process step in the fab. And so although we're very early on as we've only owned the business for 6 weeks through this quarter, I think the potential is for us to have better visibility into our customers processes throughout that position, etching and, of course, planarization, understanding what challenges they have and how can we best meet and solve those challenges through our material solutions and are we capturing all of that value that we should be?

So that visibility that we've not had in the past, we now have with the addition of the KMG businesses. We also mentioned in some of our earlier conference calls, part of that KMG business is actually managing the sub-fab inventories. So now we're gaining tremendous visibility throughout our customers fab, where they're having kind of pain points, where they need innovation and where they're having quality challenges? And I can tell you, the customer reception post-acquisition has been very positive. So I see a lot of growth potential just in the way we go-to-market to our customers in the future.

Ladies and gentlemen, that is our final question. Thank you for participating in today's question-and-answer session. I would now like to turn the call back over to management for any closing remarks.

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

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect, and have a wonderful day.