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Cabot Microelectronics Corp  (NASDAQ:CCMP)
Q4 2018 Earnings Conference Call
Oct. 25, 2018, 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 Fourth Quarter Fiscal 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a remainder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Ms. Colleen Mumford, Director of Investor Relations. Please go ahead.

Colleen Mumford -- Director of Investor Relations

Thank you. Good morning. With me today are David Li, President and CEO; and Scott Beamer, Vice President and CFO. Last night, we reported results for our fourth quarter and fiscal year 2018, which ended September 30, 2018. Whether you are 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, 2017. 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 non-GAAP financial measures.

Additionally, data is represented by rounded values throughout this discussion and in the supporting materials. I would also like to inform you that Cabot Microelectronics has filed a Form S-4 registration statement with the SEC that includes a proxy statement-prospectus regarding the KMG transaction. You are urged to read the proxy statement-prospectus and other documents related to the transaction because they will contain important information about the transaction.

In addition, Cabot Microelectronics and KMG and their Directors and Officers may be deemed to be participating in its solicitation of proxies in favor of the proposed transaction. You can find information about the Cabot Microelectronics and KMG Directors and Executive Officers in each company's proxy statement filed with the SEC. You may obtain a copy of these documents through the SEC's website, the Cabot Microelectronics and KMG websites or by requesting a copy from either company's Investor Relations department.

I will now turn the call over to Dave.

David Li -- President and Chief Executive Officer

Thanks, Colleen. Good morning, everyone, and thanks for joining us. Last night, we announced record quarterly and annual results for revenue, gross margin, net income and earnings per share for our fourth quarter and full fiscal year 2018. Fourth quarter revenue increased 15% while adjusted earnings per share were up 38% as compared to the same period last year. This is the sixth consecutive quarter of record revenue for the company.

Our full-year revenue was up 16% over fiscal 2017, which we believe reflects growth, well above that of the semiconductor industry. Our profitability has also improved significantly with record gross margins contributing to record net income and earnings per share in fiscal 2018. This is our fourth consecutive year of record earnings per share and second consecutive year of record revenue.

We believe that achieving record financial performance in fiscal years 2015 through 2018 is evidence of the strength of our consumable-based business model, our continued technology leadership and a strong industry demand environment. We are proud of our sustained performance, which we believe is the result of successful execution of our strategic initiatives. This has allowed us to achieve our stated corporate objectives to expand profitability and grow revenue faster than the industry. Scott will provide additional details about our financial results later in the call.

I will now turn to our view of the global semiconductor industry environments. On the memory side, some recent reports have indicated softening memory chip prices have caused certain customers to delay capital equipment purchases related to future capacity expansions. Further on the logic side, several major logic and foundry customers have noted delays or difficulties in achieving further shrinks to smaller technology nodes. Within this environment, it is important to remember that our customers continue to operate their factories at nearly full utilization, which supports our consumables-based business model.

As Scott will discuss, we are seeing increases in demand for our products in our current quarter coming off the sixth record quarter. We currently expect solid demand for our products to continue as we consider our outlook for fiscal 2019. We remain optimistic about long-term industry growth potential with higher demand for both memory and logic applications. Our product support increasing storage and processing power requirements to enable existing and emerging applications such as Internet of Things, autonomous driving, industrial automation, cloud and high-performance computing, virtual reality and 5G.

In addition to these favorable industry trends, we continue to benefit from the 2D to 3D NAND memory conversion, which requires approximately twice the number of CMP steps. We believe the transition is still approximately 50% to 60% complete, which should provide a continued revenue tailwind in the next few years. We also expect to benefit from customer transitions to advanced logic architecture and the next generation of 3D memory, which also requires additional CMP steps and should remain a demand driver for our slurry solutions for the foreseeable future.

Now let me provide some details around our key product area performance in the quarter and full fiscal year. We reported record results for the fourth quarter and full year in all three key product areas; tungsten slurries, dielectric slurries and CMP pads. Our tungsten slurry revenue increased 10% versus the same quarter last year and was up 14% for the full year. This growth was primarily driven by winning solutions for 3D NAND applications at leading memory customers, as well as advanced logic applications. In dielectric slurries, revenues increased 12% versus the same quarter last year and was up 16% in fiscal 2018 versus the prior year. In addition to benefiting from higher overall demand for memory customers, advanced dielectric slurries grew as a result of the successful adoption of our colloidal silica and ceria-based solutions for advanced applications, as well as several notable competitive displacements that we have previously discussed. These are higher-performance, higher-margin products that provide lower total cost of ownership to our customers. We expect the transition from legacy to advanced dielectrics products to continue into fiscal 2019, adding to our revenue growth and margin improvement.

Turning to CMP pads, revenue increased 26% year-over-year, to a new record level in the quarter. Pads revenue increased 21% to $83 million for the full year, maintaining the trajectory to reach our goal of at least $100 million in annual revenue by the end of fiscal 2019. We expect customer adoption of our NexPlanar product line to remain strong in the fiscal 2019 and we are happy to report a new win with a major memory manufacturer, which we expect will benefit revenue growth in fiscal 2019.

Looking ahead, we are excited about the continued strength of our core businesses. Our tungsten slurries, dielectrics slurries and CMP pads continue to benefit from our technology leadership, our refreshed product offerings and the transition to advanced customer applications.

Lastly, I wanted to provide an update on our pending acquisition of KMG Chemicals. We continue to be enthusiastic about the transaction as we prepare to welcome KMG's global employees to our team, as well as add their products and technologies to our portfolio. We believe the addition of KMG's Electronic Chemicals business will position us as the premier electronic materials supplier to the industry, providing enabling materials to nearly every critical process step in the fab, which will allow us to better address customers' challenges, as well as in former own future development and commercial efforts. In addition KMG's Performance Materials business is expected to provide additional opportunities to expand our addressable market with several highly attractive, highly profitable leading specialty materials. In particular, KMG's Pipeline Performance business provides critical materials that enable enhanced customer efficiency and throughput in the fast-growing oil pipeline industry. The KMG's shareholder meeting to approve the transaction is scheduled for November 13th. Assuming KMG's shareholder approval and the satisfaction of remaining closing conditions, we expect to close the acquisition around November 16th. The combination of these two world-class companies represents vast opportunities and we believe that our customers, employees and shareholders will benefit from this acquisition. And 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 good morning, everyone. My comments will generally follow the related slide presentation we posted on our website last night along with our press release. Let's start with an overview of our financial performance this quarter, which is provided on Slide 3.

Revenue for the fourth quarter of fiscal 2018 was a record $157 million, which is $20 million or 15% higher than the same quarter last year. As Dave mentioned, the increase was driven by continued strong semiconductor industry demand and the focus on our three key product areas. Sequentially, total revenue increased $6 million or 4% with IC CMP consumables revenue up 2%. While solid overall fourth quarter revenue was negatively impacted by a typhoon in Japan in September and the timing of some customer shipments that shifted from the September quarter into the December quarter.

Our net income was $48 million -- $48 million was also a record and represented an increase of $22 million or 82% over the same quarter last year. This was driven by higher revenues, increased gross margin and a tax benefit, partially offset by an increase in operating expenses primarily related to the KMG acquisition. Excluding acquisition- related expenses, NexPlanar amortization and tax adjustments, non-GAAP net income was $39 million, up 41% over the same quarter last year. Our full-year revenue of $590 million was a record and an increase of 16%, while IC CMP consumables revenue was up 15%, well above industry growth. Full-year non-GAAP net income increased 50%, to $137 million, driven by strong revenue growth, improved gross margins and strong operating leverage.

Now let's drill into revenue, which is shown on Slide 4. As previously stated, we defined tungsten slurries, dielectric slurries and polishing pads as three key product areas that are strategically important to us. During the quarter, these accounted for approximately 80% of total revenue, and I'll mention each in order. Tungsten revenue was a record $65 million, an increase of 10%, compared to the same quarter last year. Dielectric slurries also delivered record revenue of $37 million, up 12% from the same quarter a year ago. Sales of polishing pads were a record $22 million, up 26%, compared to the same quarter last year. Sales of slurries for polishing metals other than tungsten, including copper, aluminum and barrier represented $18 million, an increase of 10% from the same quarter last year. Finally, revenue from our Engineered Surface Finishes products, which includes QED, data storage and electronic substrates, was $14 million, a record and up approximately 40% from the same quarter last year.

Now, please refer to Slide 5, which provides some higher level P&L comparisons. Gross margin for the quarter was a record 53.8% compared to 51.2% in the same quarter a year ago. Excluding $1.3 million of amortization expense related to the NexPlanar acquisition, gross margin was 54.7%. Gross margin benefited from leverage on higher volumes across all product lines, increased selling prices and mix improvement primarily in tungsten and dielectric slurries. For the full year 2018, gross margin was 53.2% compared to 50.1% last year. This includes an adverse impact of $5.2 million related to NexPlanar amortization expense. Gross margin came in slightly above our full-year guidance of 52% to 53%. Our gross margin improvement was primarily driven by leverage on higher volumes and mix improvement in tungsten and dielectric product areas, partially offset by higher cost to support the growth.

Operating expenses, which include research, development and technical, as well as selling and marketing, and general and administrative costs, were $40 million this quarter, an increase of $3 million over the same quarter a year ago. This primarily reflects acquisition-related expenses, and excluding those operating expenses were $36 million, actually a decrease of $1 million versus prior year. Full-year operating expenses were $154 million, which was within our guidance and an increase of $12 million primarily due to executive officer transitions and costs related to the pending KMG acquisition. As a percent of revenue, our full-year operating expenses declined to 26% compared to 28% last year, excluding the $4 million in acquisition-related costs, our full-year operating expenses would have been $150 million, which would have been at the lower end of our range.

Our operating margin was 28.1% in the quarter, an increase of 390 basis points from the same quarter last year. Excluding NexPlanar amortization and KMG acquisition-related expenses, operating margin expanded 630 basis points, so 31.7%. This increase was driven by higher gross margins and prudent control of core operating expenses. We recorded a tax benefit in the quarter as we adjusted our previously recorded reserves related to US tax reform. But excluding the adjustments, the effective tax rate was 23.3%, which was within our expectation of between 21% and 24%. Diluted EPS was $1.84 this quarter, which was also a record and represents an increase of 79% over the prior year quarter. Diluted EPS on a non-GAAP basis was $1.48, also a record and an increase of 38% over the prior year. This was primarily driven by higher revenue higher gross margins and prudent cost control. Full-year adjusted EPS was $5.22, a 47% increase over the same period last year.

Now, please refer to Slide 6, which provides some balance sheet and cash flow information. We generated cash flow from operations of $65 million, we ended the quarter with a cash balance of $353 million on hand and no debt outstanding. We have discussed the pending acquisition of KMG Chemicals and we'll partially finance the transaction through Term Loan B debt of approximately $1.1 billon. Capital spending for the quarter was $6 million, bringing our year-to-date total to $21 million. During the quarter, we continued to invest in our pads operations to improve automation, throughput and efficiency, so support continued increase in customer demand. Accordingly, our free cash flow was $59 million for the quarter and $148 million for the full fiscal year. As previously communicated, our intention has been to return at least 50% of prior year free cash flow to shareholders by way of dividends and share repurchases. During fiscal 2018, we returned $72 million or 60% of prior year's free cash flow, so we have exceeded that target.

Now, please refer to Slide 7 for a list of important milestones for the pending KMG acquisition. We are pleased with the progress and anticipate closing around November 16. We have earned public debt ratings of BB plus on our upcoming Term Loan B from S&P and a rating of Ba2 from Moody's. We are currently in the marketing period for our debt.

We provided some closing remarks on Slide 8 and fiscal first quarter and full-year 2019 financial guidance on Slide 9. From a financial perspective, we achieved very strong performance this quarter and this fiscal year, including record revenue, net income and EPS, and I would like to highlight the operating leverage we continue to see on our revenue growth. In the fourth quarter, revenue increased $22 million from the prior year while operating expenses decreased and operating income increased $15 million excluding acquisition-related expenses. This implies that approximately three-fourth our incremental revenue dropped directly to operating income. Year-to-date our sales increased $83 million while operating income excluding acquisition-related expenses increased $52 million, implying a full-year operating leverage rate of 63%.

For expectations, I'll address our current business only and these will not represent expectations for total results once we close the KMG acquisition. Moving forward, we expect to report results for at least two reporting segments like KMG structure today. We will provide further information at the appropriate time after closing. At the highest level, we remain confident in our ability to grow revenue faster than the semiconductor industry and continue to improve margins during fiscal 2019. For the first quarter of fiscal 2019, we expect our IC CMP consumables business to show a low-to-mid single digit increase sequentially compared to our record fourth quarter 2018 results. Given mixed commentary about operating conditions by some players in the industry, we would like to emphasize the resilience of our consumables-based business. As we think about the full year fiscal 2019, we expect solid demand conditions for our products. At the same time, we will continue to focus on operating expenses and further improve the profitability of our business. We currently expect full fiscal year gross margins to be between 53% and 55% on a GAAP basis compared to 53.2% reported in fiscal 2018. This guidance includes $5.2 million of NexPlanar amortization expense. We also expect operating expenses for the full fiscal year to be between $154 million and $158 million, compared to $150 million reported in fiscal 2018 excluding acquisition-related expenses. Again, this guidance does not include any potential KMG acquisition-related expenses. We expect our effective tax rate to be in the range of 21% to 24%, while our capital spending expectation for the full fiscal year is between $23 million and $26 million, an increase from the prior year as we continue to invest in organic growth for our company.

In summary, we have delivered strong financial performance including record revenue, gross margin, net income and earnings per share for our fourth quarter and full fiscal 2018, which we believe demonstrates the continued focus on execution of our strategic initiatives. For fiscal 2019, we remain confident in our ability to drive continued revenue growth, improved gross margin performance and maintain discipline management of operating cost, which should result in net income growth. We look forward to building upon our success by combining Cabot Microelectronics with KMG to provide innovative, high-quality solutions that solve our customers' most demanding challenges. Now I could turn the call back to the operator, as we prepare to take your questions.

Questions and Answers:

Operator

Thank you. (Operator instruction) Our first question comes from Mike Harrison with Seaport Global Securities. Your line is now open.

Colleen Mumford -- Director of Investor Relations

Good morning, Mike, how are you?

Mike Harrison -- Seaport Global -- Analyst

Hi, good morning, congratulations.

Colleen Mumford -- Director of Investor Relations

Thanks.

Mike Harrison -- Seaport Global -- Analyst

I was wondering if you could talk a little bit about the G&A number for this quarter. It looks like it dropped to below 11% of sales; it was closer to 13% of sales last quarter. Was there something unusual driving the G&A number this quarter?

Scott Beamer -- Vice President and Chief Financial Officer

Not necessarily, Mike. The prior year quarter last year had a few additional cost in them, so the comparison prior year to this year looks favorable as those items did not recur. But as we think about operating expenses for the full -- you know, if you look at our operating income as a percent of sales for the full year on a non-GAAP basis, it's about 29% and as you're thinking about those expectations for next year and think about, you know, we give the revenue for one quarter, but we give our margin guidance, that's improving for next year. Operating expenses, we give you that number, so, as you are thinking about operating income and modeling things for the full year, I think, you can think about we've an expectation to continue to improve that and continue to control our operating expenses in line similarly to how we've done that this year.

Mike Harrison -- Seaport Global -- Analyst

Got it. The growth in tungsten and dielectrics is decelerating a little bit. I know that comps are getting more difficult here, but can you comment at all on whether you are seeing some slowing in the underlying growth rate of those businesses?

David Li -- President and Chief Executive Officer

Yeah. Thanks, Mike. And I think you hit it with your first -- the first part of your question, as it's a tough comp. So, we're really pleased with the results we saw tungsten, dielectrics and pads, all records this year, all up sequentially as well and, you know, if you look at where the industry has been operating and if you use us as proxy since we're really consumable-based and wafer-start base, this is our sixth consecutive record quarter we've got it up sequentially which would imply a seventh, and I think the -- it reflects an industry that's really running at fairly full capacity and so the ability to continue to grow, although we've continued to grow faster than the industry, I think it's somewhat constrained just by the industry utilization at this point.

Mike Harrison -- Seaport Global -- Analyst

Got it. And then, maybe the last question for you is just related to the new pads customer that you announced. What's the incremental revenue opportunity on an annual basis and we see any contribution from that customer in the fourth quarter results?

Scott Beamer -- Vice President and Chief Financial Officer

Yeah. And pads, again, this is an exciting area for us. We're up 26% year-over-year. We see a lot of runway to go as well, and continued great traction. And we just wanted to highlight one of wins that we had this past quarter. We did see some incremental sales and we expect that to ramp up really in this current year. We haven't really dimensionalized how much that would contribute in '19 other than to say that we're confident in our ability to really continue to grow this business and as you've seen over the last several years, we've grown it quite a bit. So, pleased with the performance in pads.

Mike Harrison -- Seaport Global -- Analyst

All right. Thanks very much.

Colleen Mumford -- Director of Investor Relations

Thanks, Mike.

David Li -- President and Chief Executive Officer

Thanks.

Operator

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

Colleen Mumford -- Director of Investor Relations

Good morning, Dmitry.

Operator

Dmitry, please check your mute button.

Dmitry Silverstein -- Buckingham Research -- Analyst

Can you hear me now?

We sure, can (ph). Good morning. How are you? I think we might have lost you again. Let's move on to the next caller.

Operator

Thank you. And our next question comes from Amanda Scarnati with Citi. Your line is now open.

Colleen Mumford -- Director of Investor Relations

Good morning, Amanda.

Amanda Scarnati -- Citi -- Analyst

Good morning. Just a question on the increase in demand that you saw for the CMP products, on both the memory side on the logic. Is this all sort of on the leading edge or are we seeing any sort of demand increases and improvements on the lagging edge? You know, there has been some news in the market recently that there has been some weakness in industrial and automotive. Trying to see what you're seeing out there in the market. Thanks.

David Li -- President and Chief Executive Officer

Yeah. Thanks, Amanda. And just to kind of reaffirm what we mentioned in our prepared comments. Scott mentioned that we're seeing -- we expect this quarter to be up low- to mid-single digits, and that would be another record quarter for us, so really broad based. We have seen some increases more recently in advanced logic, which I think would be expected. But I think if you just call up and look fundamentally at our business, it really speaks to the strength of the consumable-based business model versus kind of the CapEx. There has been a lot of noise recently about equipment push-outs and I think customers are quick to push our capital expenses but really reluctant to take down utilization. I think that's what we're seeing. So we've talked about that for a while around the strength of our business model. We expect that to continue to be resilient and feel like we're well positioned to perform well and thrive in a variety of different environments.

Amanda Scarnati -- Citi -- Analyst

And can you quantify the amount -- the percentage of sales that's in that leading edge project and memory versus trialing edge at this point.

David Li -- President and Chief Executive Officer

Yeah. I would just say one indicator could be our sales of advanced tungsten. We've talked about that at the end of fiscal 2017. That was 28%. We did see a significant increase this year. That supports both memory and advanced logic, and so I think by the end of FY18, it was around 36% or so. That should give you some indication of the strength of the advanced technologies for both advanced logic and memory.

Amanda Scarnati -- Citi -- Analyst

Great. And then the last question I have is, just a little bit more broadly speaking in terms of demand increases versus ASP increases. How are you tracking along that? I know it's the dielectric product is sort of a cannibalization, if you would, of older products; you're seeing some ASP boost there. But if you can quantify in any way the strength that you're seeing and how that relates to that ASP versus broad demand?

Scott Beamer -- Vice President and Chief Financial Officer

Yeah, thanks. Amanda. When we think -- we haven't quantified the price impact for the quarter. It was a contributor to our revenue growth and we feel as being leaders in the marketplace where good stewards of price in the marketplace and we're able to price on high level of value that our products provide to our customers. In terms of quantifying it any further, I think that's a contributing factor to the improved gross margin guidance that we're giving for next year coming out of this year. Price is not the only piece of that, but it's a contributor to the improved basis points that we're indicating our margin.

David Li -- President and Chief Executive Officer

Yeah, and just to add some color to Scott's comments, especially on the dielectric side, we're really pleased there as well, up 16% year-over-year and we've been talking about this transition for a while with our new family of colloidal and ceria-based products. And so, it's both cannibalization as well as displacements and we've kind of noted a few significant competitive displacements throughout the year, and we expect this to continue to grow and gain momentum into fiscal '19. Dielectric CMP is actually the largest segment for CMP, and so while we have a very strong participation and leadership position there, we also see continued runway for us to displace others with that with our new products.

Amanda Scarnati -- Citi -- Analyst

Great, thank you.

Colleen Mumford -- Director of Investor Relations

Thanks, Amanda.

Operator

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

Colleen Mumford -- Director of Investor Relations

Thanks, Dmitry. Okay, it sounds like --

Operator

Dmitry, please check you mute button.

Dmitry Silverstein -- Buckingham Research -- Analyst

Do you guys hear me now?

David Li -- President and Chief Executive Officer

Yeah, we got you, Dmitry.

Colleen Mumford -- Director of Investor Relations

Yeah.

Dmitry Silverstein -- Buckingham Research -- Analyst

All right, great. Thank you.

Colleen Mumford -- Director of Investor Relations

Good morning.

Dmitry Silverstein -- Buckingham Research -- Analyst

So, I will try to figure out this phone system here, but thanks for taking my call. Congratulations.

David Li -- President and Chief Executive Officer

Thanks.

Dmitry Silverstein -- Buckingham Research -- Analyst

Couple of questions. You mentioned that you're about 50% to 60% into the transition from -- to 3D NAND from 2D NAND. Can you remind us how long it took you to get to this level? I seem to remember we were something like six, seven quarters maybe, if I counted this correctly? And then you kind of talk about the pace of adoption or transition as it accelerating as it slowing down as we get north of 60%. I'm just trying to understand how many more years this is going to be a driver for your tungsten business?

David Li -- President and Chief Executive Officer

Yeah. So Dmitry, what we commented on -- just to confirm that is, 50% to 60% conversion that's with our -- at our customers' those are -- that are currently producing 2D, we think 50% or 60% have converted to 3D and it's been somewhat lumpy. I think it has occurred over the last several years. So obviously, Samsung, was the first one out there. And really I think the only thing we would say is, as it continues to transition and you know the memory business, you have to continue to progress if you want to be competitive now, not only from a technology but also a pricing standpoint, from a customer's viewpoint. So we'd expect full conversion and we saw some of the remarks overnight from Hynix. They are continuing to spend money on equipment and continue to convert over as well. So I'd say there's still a long runway ahead. How quickly customers convert really depends on who the customer is, how confident they are in their yield, but we're working with all the major memory manufacturers and I think, one thing that we're confident in is that they will convert over time. And I think, really -- since you brought the subject, there has been a lot of discussion around memory pricing and I want to just remind that that is really not a good correlation with how our business would correspond with the memory, because especially for those memory customers, they really want to continue to fully utilize their fabs. So they continue running at full utilization. I think they're just trying to balance supply demand with the pricing environment for memory right now.

Dmitry Silverstein -- Buckingham Research -- Analyst

Okay. Okay. David, thank you. So in other words, you really have not seen a slowing in the adoption rate? You can maybe not be able to speak to the acceleration, but at least it's maintaining the lumpy phase it had before, is what you say.

David Li -- President and Chief Executive Officer

Yeah. I think things continue to progress there. And the interesting thing is there have been some prognosticators and have actually said that if the NAND price stays low, it could accelerate the cannibalization from hard disk drives to solid-state because the price becomes even closer to that of hard disk drives. So it's an interesting dynamic for us. Obviously, we just continue to work with -- closely with those customers and we're pleased with our strong growth in memory this year.

Dmitry Silverstein -- Buckingham Research -- Analyst

Sounds good. Just a follow-up on the last question. The dielectric growth that you guys are seeing, is there any way you can sort of parse out for much of that was kind of a mix improvement from self-cannibalization of the older slurries with the new colloidals and silica-based slurries and ceria-based slurries, and how much of that was sort of pure share gain, you know, kind of above and beyond the market growth level?

David Li -- President and Chief Executive Officer

Yeah. I don't think we've dimensionalized that. I just think we would -- we've said before and continues to be true that the ceria products -- the growth there is stronger than the colloidal right now. Ceria is really more focused and preferred by memory customers. So you could infer there's been more gains and more position wins with the memory customers in our new ceria products, but we haven't dimensionalized the advanced dielectrics from more of the legacy, but we've seen strength pretty much all around the portfolio.

Dmitry Silverstein -- Buckingham Research -- Analyst

Okay, got it. You mentioned several times the high utilization rates at your customers and their fabs. Where are your utilization rates lie right now between, I guess, it's three plants that you have maybe a little bit more now, on the slurry side of the business. You're making investments into the pad side in terms of CapEx, but I'm assuming there's also CapEx going into expanding production of your slurry business. So can you talk about kind of where you are in terms of utilization rates, if there is a such a metric that you follow?

David Li -- President and Chief Executive Officer

For us, Dmitry, as the leader of the industry, our philosophy for slurry has always been, we can never run shorter even tight capacity and so we run our plants with a target of not very -- we're not talking 90s% It's more like 60s% and 70% utilization, and we like that just because in case there is a surge of demand, we're ready to accommodate that, and that's been our philosophy for many years. Also, as you know, for us, CapEx is not a significant part of our business. So, if we wanted to build a new slurry facility, it's not a significant capital expense for us as well. Our most recent slurry expansion was in Korea. We've expanded that facility several times, which is just an indication of our strength in that region.

Dmitry Silverstein -- Buckingham Research -- Analyst

Okay. Thank you. And then final question, raw materials obviously not a huge part of your cost of goods sold when you look at your gross margin, but it is a part. Everybody in this industry seems to be complaining, and I'm talking about materials industry seems to be complaining about raw material costs. Your margins -- your gross margins don't indicate like you're seeing any pressure, but can you comment on sort of what's going on with your input costs and how do you look at 2019?

David Li -- President and Chief Executive Officer

Yeah. Our raw materials, Dmitry, generally have been pretty stable. We have long-term contracts. It's silica -- it's items that are drilled out of the ground essentially. So they're not petroleum based. They're not, you know, impacted by swings in oil prices and things of a more volatile nature. So we've seen some stability out of our COGS. Our raw materials are about 50% and that's been relatively -- that's been stable as I mentioned. And again, with our turning over of our product line, moving our customers to more advanced types of technologies and then also the stewardship aspect of price in the marketplace, that's helped us to be able to contribute and to expand gross margins over time.

Dmitry Silverstein -- Buckingham Research -- Analyst

I mean I get the fact that your mineral-based raw materials and your particles that you make out of them probably haven't moved in much, but your products have gone to more and more chemistry and less and less abrasive, so I thought maybe some (inaudible) products may have started to move on you, so that's why I was asking.

David Li -- President and Chief Executive Officer

Yeah. And I think, Dmitry, we have a really great team and our supplier management function that really spends a lot of time not only working on commercial, but also the quality arrangements we have with our key suppliers. It is true we've gone away from high particle loading and more toward chemistry, but if you look at the contribution of even the chemistries into our products, it's pretty minimal. So I think we've done a good job maintaining and even offsetting some -- any increases we may have seen in the market.

Dmitry Silverstein -- Buckingham Research -- Analyst

Okay, perfect. Thank you, guys.

Colleen Mumford -- Director of Investor Relations

Thanks, Dmitry.

Operator

Thank you. (Operator Instructions) Our next question comes from Chris Kapsch with Loop Capital Markets. Your line is now open.

Colleen Mumford -- Director of Investor Relations

Good morning, Chris.

Chris Kapsch -- Loop Capital Markets -- Analyst

Yeah, good morning. So one follow-up, just to clarify on this transition to 3D NAND. You said 50% to 60% of that transition has happened. But just -- did you say, I'm assuming it's 50% of the -- 50% to 60% of the installed capacity, because I think you said, 50% to 60% of the customers; I know it's a subtle nuance, but if your biggest customers obviously have a disproportionate amount of the installed capacity. So just trying to make sure I understand that.

David Li -- President and Chief Executive Officer

Yeah. It is related to capacity, not customers, Chris. Thanks.

Chris Kapsch -- Loop Capital Markets -- Analyst

Yeah, OK. And then just on -- if you -- is there a way to think about the transition to the advanced dielectrics, is there a way to think about that transition and in that context as well in terms of -- I don't know that you would expect like 100% of all dielectric applications to eventually transition to these advanced dielectric slurries. I mean that would be amazing if you did, I guess, but is there a way to think about how far along the transition is in terms of the adoption of the advanced colloidal and advanced ceria-based dielectric slurries?

David Li -- President and Chief Executive Officer

Yeah. We haven't quantified it, but I'd say there still a lot of runway, because -- and the reason for that is, one, as I mentioned earlier, the dielectrics TAM is the largest of all the CMP areas. So obviously, it's just a lot of room for us to either displace others or replace our own products. The other thing is, some of those products are being specked into the most advanced applications for memory and logic. So forth the latest 3D NAND or DRAM or advanced logic, they also have a lot of dielectric polishing and obviously they need new solutions for that. So that's part of where those advanced dielectrics solutions go. And then the other part, which is probably where you're more focused is, how are we doing displacing others displacing ourselves with the legacy area, and I think there is also still a lot of runway and it's really up for customers to decide whether they're using an existing product, whether it's CMC or otherwise. We think these new products can provide them lower cost of ownership, better performance, and obviously, they're better in terms of manufacturability, profitability for us better as well. So that's an ongoing conversation. We think that there is a couple -- several years still to go with that conversion and we're both -- we're excited both on the legacy side as well as continue to work with customers on their new technologies.

Chris Kapsch -- Loop Capital Markets -- Analyst

David, just to follow up on that, you encouraged customers to make that analysis a little bit more closely by introducing a price increase from these legacy dielectric products, I believe, I know that four, five months ago. So just wondering if you're seeing evidence that's actually accelerated the transition in terms of qualifications or adoption of the advanced dielectric or customers that just don't want to change their process of record, maybe don't have the tool time to do it or they just be gradually taking the price increase in some of the legacy products; any change in the dynamic based on that introduction of a price increase?

David Li -- President and Chief Executive Officer

Yeah. I think it's helped with conversations and every customer is different. So some customer -- and I think, overall, I would say, it just emphasizes the stickiness of the consumables once they're being used in high volume manufacturing. But I do think it allowed us to have conversations at different levels of the customers. We have also used that -- leveraged that opportunity to talk about consumable sets, so not only introducing new slurries but also pads along with that. So we're pleased so far with that effort. It's early, but it's just -- that was just one aspect of the price increase that we talked about.

Chris Kapsch -- Loop Capital Markets -- Analyst

Can I ask a question about the full-year guidance for '19 on the gross margin line, looking pretty amazing -- sustained improvement there. I don't know that you want to parse out the drivers of that, but is it simply a function of your -- of the highest growth coming from your highest margin products or is there something else above and beyond that that's contributing here?

Scott Beamer -- Vice President and Chief Financial Officer

Yeah. You're right, Chris. We're going to be reluctant to dimensionalize to precisely here, but price is a contributor, a mix improvement, particularly in tungsten and dielectrics as we move to more advanced technologies as a contributor. And then there's also a volume leverage aspect to that as plants are running hard; Dave mentioned where we are from a capacity utilization perspective, very comfortable with that. But as volumes continue to grow, you get a volume leverage aspect in your manufacturing operations that helps contribute to that to.

David Li -- President and Chief Executive Officer

Yeah. And then just lastly, Chris, I'd just add to Scott's comments that, I think we're executing well, whether it's being leaders in terms of taking pricing one actions when we should be or -- and improving and refreshing our product portfolio, that's also another aspect. So I think there is a -- if you look just generally, you have tungsten, which is, we've talked about is higher than corporate gross margin, dielectrics which we have that transition going on and so that also could be a tailwind for gross margin. And then pads, which is incremental gross margin dollars positive, but not as high as the corporate gross margin. So there also some moving parts on mix, on top of that I think there's just been some really good execution from the commercial teams and the supplier management teams in operations.

Chris Kapsch -- Loop Capital Markets -- Analyst

Okay. Last question and truly off-topic, but as you're approaching this -- the approval and closure date for the KMG acquisition, are you guys contemplating changing the name of the company? I mean, just I am asking -- I am not really tongue-in-cheek, but you're diversifying into some completely industrial businesses, and so I just don't know -- I was just curious is that something you're contemplating because or will those businesses simply be part of sort of Cabot Microelectronics portfolio but operate in a brand under the existing brands in those markets? Thanks.

David Li -- President and Chief Executive Officer

Right. So on the KMG acquisition, we're really excited about it. Since you brought the topic, let me just mention a few things. We're really excited about taking two world-class materials businesses and putting them together, and I think the resulting combination, one is, it gives a significant size, scale and presence in electronic materials. And we're going to be supplying materials to just about every critical process step. And then, also as we talked about -- and you mentioned participation in new markets like pipeline that been growing strongly, we're really excited about that. And we anticipate the close to be approximately around November 16. As far as the name change goes, stay tuned but, obviously, something that we have thought about over time. We also recognize the Cabot Microelectronics brand has obviously recognition and value from our customer standpoint, so something that we'll consider in its entirety as we get beyond the close of the acquisition.

Chris Kapsch -- Loop Capital Markets -- Analyst

Okay. Thank you.

Colleen Mumford -- Director of Investor Relations

Thanks, Chris.

Operator

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

Colleen Mumford -- Director of Investor Relations

Hi again, Mike.

Mike Harrison -- Seaport Global -- Analyst

Hi again. I just had quick one, we don't usually talk much about the Engineering Surface Finishes, business but 20% growth this quarter, 33% growth for the full year. Can you talk about some of the drivers there and maybe touch on the sustainability of that growth rate if it flattens out when might we expect that to happen?

Scott Beamer -- Vice President and Chief Financial Officer

Yeah, Mike. The biggest part of that business is the QED business, which is a small portion. It's about 6% of our total revenue. It's actually equipment-based products whereas the rest of our 94% or so of our company is consumables base. So there's a little more volatility in that sub-segment than we have in the rest of our consumables base business, and QED had a -- did have a strong quarter. We sell that equipment into a range of different industries, general, optics, semi, of course, and also some other like defense. So, there's some more volatility in that sub-segment that's driving that number, and it's a small portion of our total business, non-consumables base. So it becomes a little bit more difficult to predict going forward.

David Li -- President and Chief Executive Officer

That said, I'd just say that the team at QED has done a great job continuing to drive performance of that that business. We see a healthy backlog, but as Scott mentioned, it's volatile and lumpy because it's an equipment base business; it's the only equipment base business that we have in our portfolio.

Mike Harrison -- Seaport Global -- Analyst

Got it. All right. Thanks very much.

Colleen Mumford -- Director of Investor Relations

Thanks, Mike.

Operator

Thank you. Ladies and gentlemen, this concludes our question-and-answer session for today's call. I would now like to turn the call back over to Colleen Mumford for any further remarks.

Colleen Mumford -- Director of Investor Relations

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

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a wonderful day.

Duration: 55 minutes

Call participants:

Colleen Mumford -- Director of Investor Relations

David Li -- President and Chief Executive Officer

Scott Beamer -- Vice President and Chief Financial Officer

Mike Harrison -- Seaport Global -- Analyst

Dmitry Silverstein -- Buckingham Research -- Analyst

Amanda Scarnati -- Citi -- Analyst

Chris Kapsch -- Loop Capital Markets -- Analyst

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