Cabot Microelectronics (CCMP) Q1 2020 Earnings Call Transcript

Cabot Microelectronics (CCMP)
Q1 2020 Earnings Call
Feb 06, 2020, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Cabot Microelectronics first-quarter fiscal 2020 earnings conference call. [Operator instructions] I would now like to hand the conference over to your speaker, Ms. Colleen Mumford, vice president of communications and marketing. Please go ahead, ma'am.

Colleen Mumford -- Vice President of Communications and Marketing

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 first quarter of fiscal 2020, which ended December 31st, 2019. Whether you're joining us online or over the phone, we encourage you to review the investor slide presentation that we've made available under the quarterly results section of 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 reflect any of the information by calling our investor relations office at 630 4992600. Please remember that our discussions today may include forward-looking statements that involve a number of risks uncertainties and other factors that could cause actual results to differ materially from these forward-looking statements. These risk factors are discussed in our SEC filings, including our Form 10-K for the fiscal year ended September 30th, 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 and 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 Cabot Microelectronics owned KMG Chemicals during the comparable period last year.

Additionally, data reflects rounded values throughout this discussion and in the accompanying slide presentation. I will now turn the call over to Dave, who is joining us from Asia.

David Li -- President and Chief Executive Officer

Thanks, Colleen. Last night, we announced results for our first quarter of fiscal 2020. We set another record for quarterly revenue, achieving $283 million, which is 28% higher compared to the same period last year. First-quarter revenue, which increased by 2% sequentially and exceeded our previously provided guidance was driven by a strong increase in sales of CMP slurries and drag-reducing agents, or DRAS.

We believe our results reflect continued recovery in the semiconductor industry as we saw stabilization in demand in the memory sector and ongoing improved demand from our foundry and logic customers. In our pipeline performance products, higher DRA sales were broad-based and came from both U.S. and international customers. We also continued our track record of delivering best-in-class profitability, as well as strong free cash flow, which we believe is a reflection of the strength of our business model, as well as our continued operational discipline and execution.

Now let me provide some additional thoughts on industry conditions and outlook. Starting with electronic materials. As stated, we have seen continued stabilization in demand from our memory customers. Growing demand for memory has resulted in lower chip inventories and should lead to increased utilization, which, in turn, should drive higher demand for our products.

In addition, recent indications of improved DRAM and NAND memory chip pricing has given us additional optimism of continued recovery. We also saw strength in demand from foundry and logic customers this quarter, and we would expect this trend to continue through fiscal 2020 as these customers ramp up their production of advanced technology nodes to support new consumer devices, as well as emerging trends such as 5G technology. Lastly, we are also seeing encouraging forecasts from legacy logic customers in U.S. and Europe, driven by higher demand expectations from infrastructure IoT and automotive markets.

Looking ahead, while our fiscal second quarter is historically seasonally soft, based on what we saw in our first quarter and the positive signals we had been seeing prior to the Lunar New Year from a number of our customers and industry analysts, we expect electronic materials revenue for the second quarter to be approximately flat to up low single digits compared with our strong first-fiscal quarter results. In the performance materials segment, we are seeing continued oil production increases in the U.S. primarily in the Permian region and expect for this trend to continue through 2021 and beyond. Our North American customers are building additional pipeline infrastructure to improve takeaway capacity, and we see increasing adoption of DRAs internationally, which should translate into additional demand for our products.

Our targeted investment to add significant capacity to our DRA business is already under way and will be an important addition to support future growth for this exciting business. Looking forward, we expect revenue from our performance materials segment to be up low single digits sequentially in the second quarter, driven by continued strength in DRA demand. Lastly, I would note that we are closely following the situation related to the novel coronavirus and are working closely with our teams and customers around the world to ensure we are in the best position to support them given this uncertain and challenging environment. We are proud of our record results this quarter, which we believe were driven by continued strong execution, participation in the most challenging and leading-edge technologies and an improving semiconductor demand environment.

Looking forward, we expect to build upon our strong results for this quarter and continue driving best-in-class performance and profitability from our businesses in 2020. 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 slide presentation we posted on our website last night along with our press release. I will start on Slide 4, which provides some higher-level quarterly P&L comparisons for both reported and adjusted results. First-quarter revenue of $283 million was a record for our company and increased 28% compared with the same quarter last year.

When we include the six weeks of the KMG business that we did not own in the prior-year's results, revenue was essentially flat as growth in the performance materials segment offset declines in the electronic materials segment. Adjusted gross margin was up slightly versus the prior year due to a favorable impact of certain manufacturing costs, which was mostly offset by unfavorable product mix as slurries volume was lower. These manufacturing costs are likely to reverse out throughout the remaining quarters and will have a net zero impact for the full fiscal year. Even with the flat revenue, adjusted EBITDA improved by approximately $6 million mostly from lower SG&A expenses, primarily incremental synergies delivered to the P&L.

Overall, our adjusted operating expenses declined approximately $4 million year over year. Synergies reduced operating expenses by approximately 5 million and were partially offset by higher professional fees. Adjusted EBITDA was $95 million or 33.6% of revenue. However, excluding the impact of the timing of certain manufacturing costs, adjusted EBITDA margin would have been closer to the full-year fiscal 2019 EBITDA margin of 31.4%.

I would like to remind everyone that we believe that our fiscal 2019 EBITDA margin continues to be an appropriate short-term expectation, while our long-term estimate continues to be 35%. Also, our second fiscal quarter is typically lower in terms of our EBITDA margin compared to our first quarter due to additional costs such as merit increases. Our reported net income was $39 million or $1.30 per diluted share in the quarter. Adjusted net income was $57 million, flat compared with the adjusted pro forma net income in the first quarter last year.

Overall, net income benefited from the lower SG&A expenses, the timing of certain manufacturing costs and lower interest expense. These items were offset by unfavorable product mix and our tax rate returning to a normalized level after being abnormally low in the prior year. The prior-year tax rate benefited from a higher level of acquisition-related expenses and an increased quantity of stock options exercised during that period. Diluted EPS was $1.3 per share.

Adjusted diluted EPS was $1.92, 1.5% lower than adjusted pro forma EPS in the same quarter last year primarily due to a higher number of shares outstanding. 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 4% decline in revenue compared to the pro forma revenue last year. CMP slurries revenue declined 3%, primarily driven by difficult year-over-year comparisons and a softer demand from memory customers.

Electronic chemicals revenue also declined 3% versus pro forma revenue in the same period last year as a result of lower demand from legacy logic applications in the U.S. and Europe. After several years of robust growth, CMP pads recorded a revenue decrease of approximately 15% from last year due to lower demand from certain memory customers, as well as the phasing out of legacy pads at certain foundry customers. Looking ahead, we believe that we have a strong pipeline of opportunities to continue to gain business with customer adoption of our NexPlanar product line in both legacy and emerging applications.

Moving to performance materials. Revenue increased approximately $9 million or 18% over the pro forma revenue in the prior year to a record level in the quarter. The increase was driven primarily by growing demand for DRAs both domestically and internationally, but was partially offset by difficult comparisons in our QED business. Slide 6 shows revenue and adjusted EBITDA by segment.

As a reminder, we updated our methodology for assigning corporate allocations by adding some more of the corporate costs directly into the segments to better reflect the true cost within the businesses. As a result, corporate unallocated costs declined, while corporate costs allocated to the segments increased during the quarter. Electronic materials delivered around $81 million of adjusted EBITDA and was 37% of segment revenue, a decline versus 39% reported last year that is due to the change in the allocations, the additional six weeks of electronic chemicals revenue and lower CMP slurries revenue. Performance materials adjusted EBITDA was approximately $27 million which was 44% of segment revenue, an increase from 42% in the prior year due to the additional six weeks of pipeline performance revenue partially offset by the change in allocations.

Now please refer to Slide 7, which provides some balance sheet and cash flow highlights. We ended the quarter with $194 million of cash on hand and $97 million of total debt. We generated cash flow from operations of $48 million, and our capital expenditures were $26 million in the quarter. As a result, our free cash flow was $22 million.

Finally, on Slide 8, we provide some forward-looking expectations. For the second quarter of fiscal 2020, we currently expect total company revenue to be approximately flat to low single digits compared to our first fiscal quarter. We expect revenue in electronic materials to be approximately flat to up low single digits and revenue and performance materials to be up low single digits. Within the electronic materials segment, the expectation is approximately flat to up low single digits even though our second quarter is typically softer on total revenue as there are for shipping days than our first quarter because of the Lunar New Year and February being a shorter month.

This guidance does not include any potential impact on our demand for products due to the coronavirus. For the full-year fiscal 2020, we continue to expect EBITDA to be in the range of $350 million to $380 million. We expect our fiscal 2020 EBITDA margin to remain at or slightly better than the 31.4% EBITDA margin we delivered in fiscal 2019. After successfully refinancing our debt at the end of last quarter, we now expect our full-year interest expense to be between 45 and $46 million, reducing the top end of our range by $2 million.

To support future growth opportunities and businesses, particularly in our pipeline products business, we plan to invest between 130 million -- between 100 and 130 million in capital expenditures this year. We believe that the spending is likely to be at the upper end of that range, and we remain committed to meeting all of the stated objectives in our capital deployment program. We continue to expect to meet our deleveraging target of two times net debt-to-EBITDA by the end of our fiscal 2020. In closing, we believe our performance this quarter shows the strength of both our legacy CMC businesses and the acquired KMG businesses.

We delivered strong earnings in an uneven demand environment and, consistent with our track record, continued to convert those earnings into positive free cash flow. We then deployed the cash according to our stated priorities and believe we are making the appropriate investments to support the future growth and sustainability of our businesses. Now I'll turn the call back to the operator as we prepare to take your questions.

Questions & Answers:

Operator

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

Toshiya Hari -- Goldman Sachs -- Analyst

Hi, guys. Congrats on the strong results. I guess, my first one is on your full-year EBITDA guide. I appreciate you just reported your first fiscal quarter and the uncertainty around coronavirus and all that.

But, Dave, I was trying to reconcile some of the positive comments you made on the demand signals from your customers, both on the memory side, as well as the logic and foundry side, with the fact that you're maintaining the full-year guidance. If you can speak to that that would be helpful. And then I have a quick follow-up.

Scott Beamer -- Vice President and Chief Financial Officer

I think, Toshiya, this is Scott. From the -- we're optimistic, as Dave said. And I think that as we think about our guide for the second quarter, which is the revenue piece that we provide, we feel like that's a front-footed, optimistic, but yet realistic expectation of the flat to low single digits as a company. We're just reminding everyone that that second quarter is seasonally lower in terms of EBITDA margin to the first quarter.

And as we think about that first-quarter performance, I think it's helpful to just frame in for everybody. We've reported that adjusted EBITDA of 95 million. That is a higher metric in a way that that's artificially higher, so to speak, because of these other manufacturing costs that I can provide more details on later. But the 90 million, if we go back to the metric that we were running at previously, this first quarter delivered that.

And we're saying the second quarter is going to be slightly lower than that metric of the 31.5%. And then we expect a stronger second half of the year. So we feel optimistic. I think the revenue in Q2 is, I think that's a positive guidance.

You're right. We're providing a pretty wide range on full-year EBITDA right now. And I think that we've decided to maintain that right now. We think that's really consistent with some optimism.

David Li -- President and Chief Executive Officer

Yes. Toshiya, I would just add on to what Scott mentioned. What we've done traditionally is we put a range out there for EBITDA and then as we get through the year, we'll narrow that a bit. Obviously, with the reported results, the first quarter was very strong.

There was some sort of one-time manufacturing-related items that we think will unwind itself. But from the industry perspective, you're right. We're feeling confident and optimistic from what we're seeing from our customers, and that was reflected in our guide, which is being flat to up sequentially.

Toshiya Hari -- Goldman Sachs -- Analyst

Got it. And then as a quick follow-up on my first question, the manufacturing cost tailwind in the first quarter. And, Scott, I'm sorry if I missed it, but did you guys quantify that? And the headwind that we should assume in Q2 or the remainder of the year, would that be mostly in the second quarter? Would that be kind of spread across the remaining three quarters?

Scott Beamer -- Vice President and Chief Financial Officer

Yes. But the way we quantified it to a degree in the prepared comments, Toshiya, and we'll just provide a number here. It's about $5 million of a pickup to this first quarter. And that's really, for background, it's an accounting nuance and it's related to us, I would say, continuing to evolve our costing and transparency around cost.

All of the costs are within margin so there's no geography issue across the P&L. They're all within margin. But the -- what we -- as we provide more transparency around our cost, there's a group of the costs that are more related to the units produced as opposed to the passing of time or period cost. So when they're related to units produced, it actually impacts your inventory.

So again, an accounting nuance that has us with an income pickup this quarter, but it will be sold. And I would say it's based a little more -- it's based more toward Q2 and Q3 and less in Q4 as it rolls off throughout the rest of the year. So no impact to the geography on the full year P&L, no impact in total for the full year. But yes, this phasing, so to speak, between a Q1 positive than a headwind in Q2 and three and less of a headwind in Q4.

David Li -- President and Chief Executive Officer

And then Q2 for us, Toshiya, just to remind, I think Scott mentioned in his prepared remarks, too, is historically a little lower because that's when merit increases kick in. So it's it just happens to be based on the time of the year.

Toshiya Hari -- Goldman Sachs -- Analyst

OK, that's helpful. And then quickly, my second question. On your electronic chemicals business, it was relatively flat in the quarter, maybe down a little bit on a pro forma basis. You guys are disproportionately exposed to a large North American manufacturer in this business.

And I think that customer has talked about potentially growing wafer capacity by 25% this year to support high single-digit growth for their client business. Should we expect a significant acceleration in this business for you in calendar 2020? Or are there kind of offsets to that?

David Li -- President and Chief Executive Officer

Yes, thanks. We are really excited about electronic chemicals. As you mentioned, we're strong in North America. We're also strong in Europe, and we also have a strong position in Southeast Asia as well.

So it's not just North America. Obviously, we're also seeing those kind of bullish comments and forecast from that particular North American customer. I think we're also optimistic about Europe as well because we see some things that are picking up there from more of the legacy applications. But overall, I'd say the long-term growth trajectory of this business we're really positive about.

It might not be a really, really strong growth quarter-to-quarter. But longer term, we're really optimistic and confident about the growth of the business.

Toshiya Hari -- Goldman Sachs -- Analyst

Great. Thank you, guys.

Operator

Our next question comes from Amanda Scarnati with Citi.

Amanda Scarnati -- Citi -- Analyst

I guess the first question I have is on the pads business. Scott, I believe you mentioned that part of the weakness in the current quarter was due to a loss of legacy products at foundries. Can you just talk about if those products are going to be replaced by new Cabot product, and we should expect to see sort of a revenue lift in the next couple of quarters off of that or if this was a complete loss of business to the incumbent in the space?

David Li -- President and Chief Executive Officer

Yes, thanks, Amanda. So what Scott mentioned was we have a situation with some foundry customers where we're phasing out legacy pads. We expect to replace those with our NexPlanar products. But we also saw a kind of unique phenomenon this quarter, which was lower demand from a memory customer where we also saw lower demand for slurry this quarter.

And we think that was a combination of productivity improvements, as well as just lower overall demand. They haven't fully recovered, and they're not running at full utilization. So that effect would have been not just us, but the entire slurry and pad supply chain, and that was the primary reason why pads was down this quarter. Scott also mentioned, we continue to be optimistic about the future growth trajectory of pads.

We had a number of wins this quarter, and we see a strong pipeline of opportunities going forward. So this is going to continue to be a growth engine for our company.

Amanda Scarnati -- Citi -- Analyst

And then on the DRA side of the business, we've been hearing that oil prices are declining in part due to the coronavirus effect. How does that impact the DRA business? Does that business do well or better when there's increasing oil prices? Or does volatility generally help the DRA business?

David Li -- President and Chief Executive Officer

Yes. So what we've seen is, again, we are strong and very -- we're participating very strongly in the growth in the U.S., primarily, that's the Permian. And what we've seen through a variety of different oil pricing environments is that DRA demand continues to grow. So we'd say it's agnostic of sort of the oil pricing environment.

And I think it's much more of a function of the build-out of the infrastructure that's going on in the U.S., as well as internationally. So we think, again, there's some uncertainty with the virus and overall oil output. But in terms of transportation of oil, we see that there's going to continue to be strong growth in DRAs. We're also winning business from existing customers.

So we're really excited about our DRA business and see continued growth in the future.

Amanda Scarnati -- Citi -- Analyst

Great. Thank you.

David Li -- President and Chief Executive Officer

Thanks Amanda.

Operator

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

Chris Kapsch -- Loop Capital Markets -- Analyst

Yeah, good morning. So I had a question about the commentary about less favorable product mix on a year-over-year basis in the December quarter on an adjusted basis. So the -- if you look at your -- the quarter you had, the DRA business, the growth rate was very strong and higher than electronic materials. And given the EBITDA margins of that segment, I'm assuming that the gross margins are above corporate average.

Maybe that's not a bad -- maybe that is not a good assumption but -- and then your -- the pad business, which is, I think, carries below average margins were down sharply. So I'm just trying to reconcile what's going on there with mix. Maybe it's just that the HPPC business was -- the growth there was pronounced perhaps in North America. Any details around that would be helpful.

Appreciate it.

Scott Beamer -- Vice President and Chief Financial Officer

Yes, Chris, I think that your -- first, you're right in your assessment that our performance materials segment growing faster and is more profitable. I think that within electronic materials, we have the dynamic of versus prior-year slurries was down, and we show that in our materials in the slides versus prior slurries was down, which has a pretty significant impact to our total company on a mix perspective. Sequentially, slurries was up. That's part of our optimism in terms of stabilization in memory, for example.

But as we're comparing to the prior year, the impact of slurries revenue being down, which we reflect in the slides, it was down from -- it was down about 3%. That has a negative impact on the total company earnings return.

Chris Kapsch -- Loop Capital Markets -- Analyst

OK. So then just extrapolating from that comment, it sounds like the down slurry is probably most pronounced in products addressing the memory market.

Scott Beamer -- Vice President and Chief Financial Officer

Correct. That's right.

Chris Kapsch -- Loop Capital Markets -- Analyst

Yes. And then the other question I had was, in your guidance, given the negative year-over-year growth in pads, what's your assumption for the pad business for the full year? Do you expect that with the down 15% in the first quarter, do you expect it to achieve flat year-over-year revenues for the full year?

David Li -- President and Chief Executive Officer

Yes. Thanks, Chris. We haven't provided guidance for pads specifically. It's obviously an important product line for us, and we see strong growth potential from it as we've grown that business for the last several years, and this is the first time we've seen a decline there.

What we -- I think pad is also subject to some of the same dynamics where we haven't seen a full recovery, especially in the memory area yet. And so when that happens, we'd expect demand to also pick up. It also takes some time for those new wins to ramp up as well in pads. So although we haven't provided an annual guidance for pads, I think it's one of those product lines that we're focused on to drive growth for our company in the future.

Chris Kapsch -- Loop Capital Markets -- Analyst

OK. Appreciate the comments.

Operator

Our next question comes from Mike Harrison with Seaport Global Security.

Mike Harrison -- Seaport Global Securities -- Analyst

Hi, good morning. You had mentioned last call that you expected some of your growth investments to be elevated during fiscal '20. I was wondering if you can give us an update on maybe the cadence or timing of some of those growth investments. Did we see any of that higher spending hit the P&L in Q1? Or is it maybe time such as it will hit later in the year?

Scott Beamer -- Vice President and Chief Financial Officer

No impact to the P&L, Mike. We provided that we spent 26 million in the quarter. And we mentioned that we're trending and expect to be at the high end of that range that we gave, which would be close to 130 million. So we're really excited about the businesses that we have.

Our No.1 priority for deploying our cash is in our existing businesses to grow organically. And we're pleased with the progress of all of our projects, and we're very optimistic. And a big project, as you know, is the expansion of capacity and the pipeline performance business and we're excited, and we're on track with that project. Things are progressing well, and we're excited about participating in what we believe is going to continue to be a growing and very profitable market for us.

Mike Harrison -- Seaport Global Securities -- Analyst

All right. And then I was wondering if you can talk about the competitive dynamics that you're seeing, particularly within tungsten slurries. You've had potentially some new entrants or people talking about entering that market. Any changes you've seen in tungsten slurries recently?

David Li -- President and Chief Executive Officer

Yes, Mike, it's Dave. Thanks for the question. Yes, nothing has really changed in the competitive environment. I think others that is not surprising that others have talked about trying to get into the segment given our success, but we continue to innovate, and we feel like there's really no changes to the competitive environment.

We feel really good of our position especially in the memory area. So we feel really good about our position in tungsten.

Mike Harrison -- Seaport Global Securities -- Analyst

And then the last question for me is if you can comment, any thoughts, on the potential sale of the DuPont Electronics & Imaging business. Maybe talk a little bit about how you view them as a competitor. And is it a concern that they could end up in the hands of new owners or maybe combined with another player out there?

David Li -- President and Chief Executive Officer

So obviously, we're following that closely, and we know that business well. It's not the first time that that business has changed hands, right? So the pad business started out in Rodel, went to Roman -- and then Dow and now DuPont. And I think they've obviously kept their focus on that business throughout those transitions. That's what I would expect going forward, if it changes.

But I think we feel really strongly, I think we've demonstrated our ability to grow our pad business through the last several, several years. So it's something we're watching closely. I think it's just a continued sort of the consolidation and acquisitions that have been going on in the space. But again, we don't really see that changing the competitive dynamic, especially since that specific business within DuPont the past businesses has changed in several times.

Mike Harrison -- Seaport Global Securities -- Analyst

All right. Thanks very much.

Amanda Scarnati -- Citi -- Analyst

Thanks, Mike.

Operator

Our next question comes from David Silver with CL King.

Amanda Scarnati -- Citi -- Analyst

Hi, David. Good morning.

David Silver -- CL King -- Analyst

Yeah, good morning. So I have a few questions. The first one, I admit upfront, is going to be a little odd. But in comparing my model, modeling of your -- my income statement to the actual, there were a couple of disparities, and Scott talked about one on the cost of goods sold line.

But just more broadly, I'm kind of scratching my head. I know in the fourth quarter, you took a big asset impairment charge for the wood treatment business. And I guess, that business is still operating. And I'm just wondering from my perspective, I mean, I'm just wondering if there are some changes.

Or what was the effect of the fourth-quarter 2019 writedown of the wood treatment business on your first-quarter fiscal '20 results? In other words, were there some fixed costs that were in there in the past quarters but have been removed or SG&A or some other things? Is there any way for you to qualitatively maybe discuss that?

Scott Beamer -- Vice President and Chief Financial Officer

Yes, sure, David. First, yes, the charge that we took last quarter was a writedown of intangible assets, not tangible, not fixed assets. So there's a certain valuation that was initially put on the books when we expected to run the business indefinitely. Once we announced our plans to take a strategic action on the business, and we would exit that business as one of the potential scenarios by the end of fiscal or by the end of calendar '21.

That reduces the value that's on our books at the time. So that was a one-time noncash charge last quarter not related to any fixed assets, so there's no structural change to that business in the first quarter or anything in the financials going forward after that.

David Silver -- CL King -- Analyst

OK. So you're just saying I can't -- I'm no good at modeling your income statement.

Scott Beamer -- Vice President and Chief Financial Officer

No, no, no. I'm going to raise it. Now listen, I mean, if I'm adding anything further to the comment, I would just say, yes, right. The wood business today, we have said in previous -- we've given some dimensions about that business, previously it's within the performance materials business.

It's a slower growth area than something like DRA. The profitability is consistent with the rest of the segment, and it continues -- we continue to run it. We're going to optimize the business. Our priority is working with our customers to ensure supply and to make sure that we continue to work with our customers to get to the best outcome possible.

But in the meantime, we're running the business. The business is in our -- is within our ongoing operations, and it's contributing and it's contributing earnings and cash flow to the company.

David Silver -- CL King -- Analyst

OK. Just wondering about it last night and this morning. Second question would be about the pads business, and there's been many good questions about it. But I'm picking up on David's comment about on two things.

One is the end of some legacy pad business that you highlighted, but then David's comments about some new wins. And I'm just wondering if there are some takeaways from our perspective about the competitive nature of that business. In other words, are the wins indicative of a shift in industry preference for pad sets, right? And then I'd also be interested if the wins that you've had would, in any way, be indicative of a shift in the industry toward the polishing of newer materials, different deposition materials or whatnot or different metals. So qualitatively, how would you characterize pairing the loss of some legacy business with some wins and the addition of some new business.

What might be the one or two key trends at this point in the development of your pads business we might take away?

David Li -- President and Chief Executive Officer

Yes. Thanks, David. So for pads and the wins without going to each one in detail, we saw a really broad-based. We saw wins in memory, logic and foundry and legacy nodes and advanced nodes, so real broad-based.

And I think it just validates our value proposition of pads and that customers are finding benefits from our solutions. You also asked about the kind of slurry and pad together. We are getting more advanced and have more introductions where we're bringing that consumable set to customers and are proving out that there is a unique performance with both -- if you use the slurry and pad together because they've been developed together. But I still think that's in the early stages.

But yes, the wins we've seen are really across the board, both advanced technology and more legacy nodes.

David Silver -- CL King -- Analyst

OK. Thanks for that. And then just maybe the last co -- maybe just last question would be to ask for commentary or color on your expectations for the new business, 5G that you talked about, automobiles, IIoT, I think, for the slurry business. So once again, they are somewhat analogous. But would the new business that you're anticipating in terms of metals and dielectric versus other materials, I mean, would you say, again, your book of business mimic or is representative of your current book? Or would you say that, again, there might be a tilt toward newer materials or within your mix, other areas are than your traditional strength in tungsten are starting to emerge?

David Li -- President and Chief Executive Officer

Yes. I think just starting with 5G, there's obviously a lot of excitement and activity with the 5G build-out. I think most of that is base stations today, and that's not requiring necessarily the most advanced chips. We have a very strong position in the legacy technologies.

Obviously, with that technology, technologies like 5G enable, our new types of devices, new consumer devices, I think sooner or later, everyone is going to have a new handset that is 5G-enabled and that's going to take more advanced memory, advanced logic. And I think we're very confident and excited about our positions in those advanced technologies. And in fact, that's what drove some of the growth this quarter was growth in advanced technologies in logic and foundry. Logic and Foundry was strong last quarter.

It was strong this quarter as well and really driven by that push into advanced technologies. As you would expect, as the technology leader we like it when the technology continues to advance, and we feel really good about our position there. So equal contribution from sort of legacy and advanced technology, and 5G actually covers the spectrum of those nodes.

David Silver -- CL King -- Analyst

No, right, yeah. Thank you for taking my question. The wording of my question was imprecise and in effect those asking you to connect the couple of dots for me. But thank you for that I appreciate it.

David Li -- President and Chief Executive Officer

Thanks David.

Operator

Our next question comes from Rosemarie Morbelli with G. research.

Rosemarie Morbelli -- G. research -- Analyst

Thank you, good morning. Good morning everyone. I was just wondering if you could talk little bit of -- a little bit more about the performance material. And you have mentioned DRAs, and I can see the growth in the new pipeline growth also as all pipelines are beginning to use DRAs, but you didn't mention anything about the specialty lubricants.

So could you talk a little bit about that segment?

David Li -- President and Chief Executive Officer

Yes, sure, Rosemarie. So obviously, we consider that also critical to the solutions that we're providing to the pipeline operators. It's actually a much smaller piece of the business versus the DRA portion, and the DRA portion is really what's sort of been growing the strongest. But yes, we are providing critical sealants and services around those valves.

That business tends to be a little bit more -- there's a portion of it that's more stable, and there's a portion of it that's sort of more episodic where we get called out into the field when there's an issue where there needs to be an upgrade. So that's not -- we think we have a very strong position there. We feel really good about our solutions. But we don't feel like that's necessarily going to drive the growth like DRAs are going to drive as they have been.

Rosemarie Morbelli -- G. research -- Analyst

And following up on that, are you also selling those lubricants or making progress in selling it industrial applications? And are there any -- if you could touch on the M&A potential regarding that particular segment or any other segments of the companies.

David Li -- President and Chief Executive Officer

Yes, that's an interesting question. And we're always looking at opportunities to strengthen the portfolio. Obviously, we're newer into this pipeline solutions area, but we do think there are opportunities to strengthen through acquisitions. So we've been pleased that being able to widen the aperture, and we're looking at those opportunities as we would with any others.

I think just in terms of the company, what we think about in terms of the opportunity pipeline is there's a number of opportunities that we're always assessing and there a range from kind of small bolt-ons to larger ones. And we're going to be focused on the ones that can strengthen our position, strengthen our technology and, of course, provide the best value to our stakeholders. So we're always assessing M&A opportunities and the pipeline. It looks pretty good at this point.

Rosemarie Morbelli -- G. research -- Analyst

And when you mentioned looking at large ones as well. Would large ones being mostly in the electronic material category?

David Li -- President and Chief Executive Officer

Yes. What we said is our preference because, obviously, 80% of our business is in electronic materials. That's where we've really spent a lot of time and energy building out resources in the channel. That would be our preference.

You could find something in that space, we know it very well. And I think our customers are always asking us for more and different products that we can support. So that would be the natural -- if it's outside of that space, then it has to be something that's very complementary to our core competencies and probably growing at an even faster rate to compensate for the additional risk. But yes, electronic materials would be our primary focus.

Rosemarie Morbelli -- G. research -- Analyst

And going back to Penta, can you at as to where you stand in terms of either walking out of the business or selling it? If my memory serves me right, it has a very strong margin profile and also generates large quantities of cash flow, which will hit your balance sheet once you do something with it. Can you address that?

David Li -- President and Chief Executive Officer

Yes, Rosemarie. I know you know that business very well, following it for many years. That is a business that is profitable. As Scott mentioned, it doesn't have the growth dynamics that we're looking for.

It's more of a kind of a slow grower. And in terms of just the transition that's needed to sustain the business, we talked about last quarter was just our decision to not build the plant that would be required to sustain it beyond the end of 2021. So we wanted to get that communication out there so that we can have -- give our customers plenty of time to work with us on the transition. As Scott mentioned, the business continues to operate normally right now, and we're still working through that transition.

And of course, we'll update everyone if there's any sort of material change to the business as we continue to wind it down.

Rosemarie Morbelli -- G. research -- Analyst

And lastly –

Colleen Mumford -- Vice President of Communications and Marketing

And, Rosemarie, OK. Yes, we actually have some more questions on the line, and we have about five more minutes left in the call. So would it be OK if we put you back in queue and as we had time?

Rosemarie Morbelli -- G. research -- Analyst

Absolutely.

Colleen Mumford -- Vice President of Communications and Marketing

OK, great. Thank you.

Operator

[Operator instructions] Our next question comes from Krish Sankar with Cowen.

Unknown speaker

Thanks, good morning. Thanks for taking my question. I just had a quick one for David. One of your memory customers, then they move to 128 layer NAND.

They're going to go from floating gate to replacement gate. And it looks like the oxide nitride Polystar might be replaced with tungsten. So I'm kind of curious, David, from your vantage point, would that be incremental, a neutral opportunity? Or would it be a detriment for Cabot?

David Li -- President and Chief Executive Officer

Yes, I think that an exciting technology. There's a variety of different ways. Our customers are planning to get above the kind of 100x layer technology, and we're working closely with them. I say it in just about every integration scheme that I've seen, that incremental CMP or integration scheme is beneficial to us because we're very strong.

Of course, in tungsten, we also have a very strong position in dielectrics. And in some cases, we're working really, really closely with those customers to ensure that they're able to achieve the tolerances that they're trying to get done within CMP. So we see that as definitely a positive impact to our strength.

Unknown speaker

Thanks Dave.

Operator

We do have our follow-up from Rosemarie Morbelli with G Research.

Rosemarie Morbelli -- G. research -- Analyst

Thank you. First, I apologize for holding the phone for long. This is just a quick question regarding the coronavirus. If I probably -- you are not taking into consideration any impact.

So my understanding is that usually the shutdown during the Lunar New Year is about four to five days. This year, it is -- there is an extra week, and potentially an extra two weeks. What is in your numbers? Do you have that extra week and you are waiting to see what else develop?

David Li -- President and Chief Executive Officer

Yes. Thanks, Rosemary. And obviously, I think it's something that's on everyone's mind. And China is certainly an important region for us, and it's going to continue to be a growth region for us in the future.

In terms of virus, it's a developing situation. As you might imagine, first and foremost, we're focused on the health and safety of our teams around the world, but especially in China, where we have a really great, dedicated customer service and sales team. We don't manufacture in China. So fortunately, we're not affected in that way, but we're trying to do everything we can to support our customer.

Interestingly, as we monitor the situation, and it's obviously still developing, what we've heard is that customers in China are continuing to produce even as they come out of the Lunar New Year. So again, I don't want to go out there and make any predictions. It's a dynamic situation, but it seems like the customers continue to operate even under this sort of challenging environment.

Rosemarie Morbelli -- G. research -- Analyst

All right, thank you. Thanks for sharing.

Operator

Speakers, I'm showing no further questions in the queue at this time. I would now like to turn the call back over to management for any closing remarks.

Colleen Mumford -- Vice President of Communications and Marketing

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

Operator

[Operator signoff]

Duration: 55 minutes

Call participants:

Colleen Mumford -- Vice President of Communications and Marketing

David Li -- President and Chief Executive Officer

Scott Beamer -- Vice President and Chief Financial Officer

Toshiya Hari -- Goldman Sachs -- Analyst

Amanda Scarnati -- Citi -- Analyst

Chris Kapsch -- Loop Capital Markets -- Analyst

Mike Harrison -- Seaport Global Securities -- Analyst

David Silver -- CL King -- Analyst

Rosemarie Morbelli -- G. research -- Analyst

Unknown speaker

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