Q3 2019 Earnings Call

October 24, 2019

I would I like to end the conference over to your Speaker today, Mr., David Music Vice President.

Thank you good morning, everyone I'm, David Rudnick, Vice President Investor Relations and I'm joined this morning by Jerry Colella, Our Chief Executive Officer, John Lee, Our President and Seth Bagshaw, Our senior Vice President and Chief Financial Officer.

Yesterday after market close we released our financial results for the third quarter of 29 team our financial results and a schedule of revenue by market I've been posted to our website www Dot MKS I N S T dotcom.

As a reminder, various remarks about future expectations plans and prospects for MKS comprise forward looking statements actual results may differ materially as a result of various important factors, including those discussed in yesterday's press release and in the most recent annual report on Form 10-K for the company.

These statements represent the company's expectations only as of today and should not be relied upon as representing the companys estimates or views as of any date subsequent to today and the company disclaims any obligation to update these statements.

Supplementary one additional information not financial results.

Lastly, I'll provide more remarks before we open the call few questions.

This outperformance was driven by stronger demand with an eye semiconductor market as well its continued operational and financial execution.

Well time minimal full market recovery remains uncertain.

Seeing improving conditions complemented by strong execution and product differentiation.

It is by recent design wins.

More importantly for the Das brought opportunity we see ahead.

Explosion, and David Brooks, which drives demand for memory and foundry capacity, we are key solution provider.

Complex technology transitions across memory, and foundry, which can drive higher content front, yes, given our market, leading differentiation and product expertise.

The impact of Fiveg on the commercial sector, which is expected to stimulate growth even further.

As well as other advanced markets, including solar.

Science Research defense and additive manufacturing for MKS is well positioned to drive secular adoption of lasers offer components and laser based systems.

It remains well positioned to benefit from secular trends across our semiconductor and advanced markets given our run product portfolio, our uncompromising focus on innovation.

As we mentioned last quarter ozone is proving to be an excellent mean alternative chemicals to use clean semiconductor and display manufacturing.

MKS has been a leader in this area and our dissolved ozone systems continue to gain traction with key customers.

In addition, our newest refreshing grading product lead qualification that a large analytical instrument customer.

And would we see multiple orders from other life and health Sciences customers.

Refreshing grains are used to precisely separate light into to sink wavelengths, commonly used in many optical instruments.

A couple TCB high density interconnect PCB production, but we expect our optics <unk> photonics lasers and laser systems to be key beneficiaries.

On a prior earnings calls we highlighted the shipment of beta systems for our new high density interconnect via drilling solution to our regional applications centers in Taiwan, Japan and China.

Hi opportunity represents a significant expansion and addressable market for us and we cannot be more pleased to announce today that we have received a first H.T.I. purchase order.

In addition, we have already shipped beta systems to to other customers.

Market interest in our offering continues to grow and we remain excited about the long term growth opportunities, both the flexible and H.T.I.P. Morgan's.

I'm honored to have been chosen to Super Bowl CEO starting January 1st.

You will be missed by everyone here at MKS, Luckily not going too far news I used to work with you new role as channel.

Thank you John I'll cover our Q3 2019 countries I'll discuss our Q4 2019 guides.

Sales in third quarter, when $62 million at the high with the guidance range, a decrease of 2% sequentially compared to the second quarter.

Sales to semiconductor customers in 2020 $3 million increase of 4% sequentially.

Sales to life Health Sciences in recession defense markets remain steady third quarter.

$2.1 million, an acquisition integration costs.

$1.5 million restructuring costs, and $600000 and transaction fees, so see repricing of our terminal.

non-GAAP net expense was $10.5 million.

Our GAAP tax rate was 14.4% and our non-GAAP tax rate was 15.6%.

GAAP net income was $47 million.80 per diluted share.

We are on schedule to realize the $15 million, an ounce home annualized cost synergies within the next 12 18 months.

In the third quarter revenue for the equipment solutions Division was $49 million, which was also within our expectations.

Now turning to balance sheet.

In September successfully reprice our.

Definitely are repricing of our term loan reduce the interest rate spread on the two existing traci is from LIBOR, plus 2% and LIBOR, plus 2.5%, respectively. The LIBOR plus 1.75% and combine the two tranches into white French maturity date.

In addition made a $50 million voluntary prepayment of principal on our term loan in essence habits are you now see anything else you had a $95 million.

The repricing voluntary prepayment reduces our annualized non interest costs by almost $6 million based on current interest rates.

What did they dolls incremental borrowing capacity under an asset base line of credit.

The modest wall, but net net leverage ratio under one time.

Free cash flow water was $44 million.

We do demonstrate a balanced approach to capital deployment and water, we paid cash dividends of $10.9 million were 20 cents per share.

Inventory turns were 2.2 times since the second floor.

We expect the gross margins slightly lower in the fourth quarter, both Sealy lower volumes next equipment solutions Division.

We expect our gross margins you try to normalized levels by the first quarter of next year.

Q4, non-GAAP operating expenses ranged from $121 billion on $29 million.

R&D expenses could range from $40.5 million $43.5 million and asked you need expenses could range from $8.5 million $85.5 million.

non-GAAP interest expense is expected to be approximately $8.9 million and our non-GAAP tax rate is expected to be approximately 21%.

Given these assumptions fourth quarter non-GAAP net earnings range $47 million $66 million.

In the fourth quarter acquisition intangible assets expected to be approximately $17.1 million.

Integration related costs are expected to be approximately $1.9 billion.

In GAAP interest expense estimate to be approximately $9.1 million.

Yeah, and income spectra range $32 million to $50 million or 58 cents 91 cents per diluted share.

Let's now turn the call back to Jerry for his final thought would move una.

Thank you so before I turn the call over to accumulate wanted to share. Some final thoughts as this would be my last earnings call. When I stepped down from CEO role effective January 2020 January 1st 2020, and then if some role as chairman of the board in May of 2020.

As you all know junk, placing yes, you know I grew up not asked for more qualified leads to succeed me.

John it's been with them cast for over 10 years and has played a significant role not success.

Needless to say I'm very excited about mtis future.

The company's accomplishment <unk> past six years has been astounding and I'm honored triplett had the opportunity to lead such an extraordinary team through this transformation.

Over this time, we've tripled our revenue and market cap.

Live in a greater than 700% increase in non-GAAP EPS.

Raised the dividend multiple times.

Our workforce.

And acquired four companies, while aggressively delevering, our balance sheet, forming following each major acquisition.

That's not enough for the third year in Rome, MTS was named to Fortune magazine's 100 fastest growing companies.

I'm also proud to announce the to the three weren't as of the 2019 no price in physics use up her time proprietary greetings to discover the first planet opening a start up in the Sun.

Gives new meaning to the term reach for the size and I cannot wait to see John take this company to new Heights.

This concludes our prepared remarks, we'd like to turn the call back to the operator secure night.

Ladies and gentlemen, I sound Monetizes question, you want me to press. The Star then one key on your touched on telephone.

Your question please press the pound.

[noise] [noise] and I'll first question coming from the line.

From Deutsche Bank. Your line is open.

Great. Thanks, Jerry it's been very nice working with use a de definitely will be miss.

My first question is and I look at the Fourq you guide what is the relative growth rate by segment bake in your guidance I think I can get directionally, but just wanted to get a sense about the magnitude and a win that there's more downside in the advanced market.

Yes in its John So we are looking at high single digits.

And you know it could be higher than that but that's what we see right now.

And actually for advanced markets or it is down about 10 million, but all of that is due to the seasonality.

Yes Division.

So their Q4 is usually the seasonal low.

Because of the cyclicality of that market, but the other part of the visits Allied motion business advanced markets actually steady quarter over quarter and were actually pretty happy with that given all the uncertainty.

The no tower floors, and the macro economic kind of issues. So hopefully that gives you a little color on how we look at the advanced markets.

He aside with the aside incentive.

That's good that's great. My follow up question is I think last quarter, you guys have alluded to some positive discussions with your semi customers, which seems doesn't materialize can you give us a little sense about when when you started to see that kinda inflection of demand how broad based that the man uptake was and then finally family it's.

Well I guess when revenue started coming down a few quarters ago, you were negatively impacted by your customers cutting inventory do you expect them to start building inventory gain at the business starts coming back.

Yes, it's John again, I think certainly when our customers see a ramp or they will start building inventory. That's that's normal that's a part of that the nature of the semi industry.

We started seeing the uptick in orders probably in the middle that quarter Mill Q3.

This is not sure I'd like to Austin I'll go back to amplify the commentary about the advanced market. So I can.

Bringing people back to our historical performance, which to me is an indication of the future.

In 17, and 18, we saw about a 14% growth rate.

So we have no we are still a abide by our model of two times they growth rate of those markets and we believe that some part of this issue is also it's like China trade issue, we have customers coming to us, saying, it's not a matter of Ah if it's a matter when.

Perhaps some of their orders or if it a muted compared and what they normally would.

The approaching us with order so besides sort of seasonality, we do think there's some impact and with the good news coming out of hopefully I'll just geopolitical issue will abate over time, we expect to see our growth rate to go back to normalized numbers. So just for a little context and advanced package. So as we don't put a paul over that business.

Wonderful.

Last question like could it at Sep he got to keep those margin being 40 shouldn't have to 44 in half in Q in Q4, and you said things will kind of get back to normal levels. In Q1, just <unk> and I look at 2020, how should we think about the gross margin progression.

Yeah, Yeah, So city, what I'd say is again to take the the midpoint of guys in the fourth oil I really don't revenue again, I think normalized heavy at least the point north of we're currently at midpoint I think that's a good jumping off point.

Wildcard, which would be it's hard to quantify but it's actually helpful. On the upside is right now all our factories running a relatively lower levels based on historical activity. So what happens in business comes back into side, you know generating more throughput through the factories gets booked and gets better as well that would be additive to some level.

Just gave for model as my expectations going forward.

You know and then on top of that a topic that as you know I six years ago. We started the team called a property Cas recovery team, which has led to the.

Increase in the E. Yes that we talked about earlier those teams still exist. They meet every month to join we beat them. There's more work that they continue to do to pursue a high profitability to the company is also still a blogs segment of our business and we're moving to a low cost region, which over time will improve the profitability of the business. So.

We haven't taken our foot off the table of improving the profitability of the company going forward and John lease been leading that charge that you will continue to push forward on things like more cross country migration supply chain.

Great. Thanks very much.

And our next question coming from the line of Amanda Scarnati with Citi. Your line is open.

They've come down a little bit how much of the revenue.

Today are you seeing already from five key I mean, how should that kind of track going forward.

Yeah Man, it's John So, yes, I will probably end the year pro forma around the 200 million and as I think we've talked about in the past 2019 was a low year because of the overcapacity overbuy of two of the primary markets meeting flex and the MLC season 2018.

So going forward I think we would expect that to be a bit higher it all depends on I think a little bit about how much more inventory burn off there is and flex.

But we're excited about the fact that our new flex tool Capstone is continues to receive.

Oh right favorable results from our customers are HD I'd business, we as I mentioned on the call. We have some very positive results today, and we expect that to add be additive since we have no market share in that business.

With respect to your question on Fiveg I think you know some of the phone makers.

And then we'll see season Fiveg is significantly higher and so we expect that to continue to grow I think.

There is a tailwind I think everybody's a bit surprised that fiveg looks like it's going to be adopted at a faster pace in 2020 for sure then industry I thought maybe even just 90 days ago. So I think that's in a nice tailwind for us going forward, we expect that to continue to be more adopted by our customers for your site.

Right.

And then on the semiconductor side of business can you just remind us what your percentages.

Revenue to the memory side of the business now did DRAM versus logic and foundry, if you've broken that out in the past and just sort of what you were seeing in terms of quarters this quarter.

He's done from nice revenue in the semiconductor business I was that mostly tied to that sort of foundry.

And then I flowing through the Oems, it's been difficult for us to figure out how much is memory, how much is as logic, because we're sending tens of thousands of of all kinds of parts to the Oems are then.

But we also as I said I see that V NAND or at least some initial buys are being in could also be a will be upside to to the capex spend.

With them surging into the number two the number one spot would give you a good indication of the position MKS has in memory. When it comes back to accept to see acceleration through the foundry work and then once memory continues to accelerate that should be good positive effect from gas over time.

I just wanted to clarify John one thing that you said that NAND and could be upside in the December quarter, if you're not sort of building not in intoxication at this point, but any sort of it's kinda back.

No we have built in.

So that we already have built into the upside and Dan yes.

Thank you.

Well.

To congratulate you generate for a the work that MKS for many years, but particularly the last.

Five plus years at CEO I think the company has really transformed itself and obviously as the leader the company you should get a lot of credit for that.

[laughter] somebody else in job.

[laughter], let me start first on the on the suddenly side of things some of the share gains that you talked about on the call a particular on the power solutions, but other areas I think I've seen in press releases in the mass flow controllers side of things are these applicable to tools that are being delivered in volume today is up.

And what we said today was that some of those initial design wins are now turning into a volume orders.

If we ran whereas some of our conductor etch design wins that we've talked about over the last six quarters are turning into volume and we expect that the other design wins have not turned to volume will eventually perhaps the next cycle or this cycle, but so this is the first quarter, we're seeing those volume motors for conductor etch design wins in the past.

In that business in the market you serve relative to the broader industrial market, where there's clearly weakness you know, saying the fiber laser market in terms of being did the industrial segment can you just again give remind investors about I guess, the diversification and somewhat different marketplaces.

Yeah sure Patrick So we've talked about in past when we talk about industrial lasers, we talk a micro processing so the powers.

But just because the power as lower doesn't mean, it's easier to do it's actually more difficult because we're actually pulsing.

And so a this is the kind of ness manufacturing that is allowing people to for instance, make next generation of flexible pcvs for iPhone or.

To use these lasers to get another 1% efficiency and solar cells or to cut OLED displays displays and so this is the kind of broad based micro processing industrial laser micro processing market that we address and so the other part of it was the high power.

Patrick also I think the other thing I'd like to add to that is more the thesis and strategy between a Newport light and motion and Ah. Yes side is that we're excited about the technical collaboration between some of the best laser development mines and people who use them in the system side of the business.

And the fact that we can understand the applications in the system side. The aside we can develop lasers that will help them differentiate themselves as well they can provide technical feedback back to the light and motion laser equipment group and the people develop those lasers to create more tactical operation differentiation.

Great. That's helpful. Maybe that's the final follow question.

For John I know earlier this year.

After the tonics Wes you talked about some of the introduction of new.

Yeah, I think one of the biggest gas we had in completing around the world Peace strategy was our laser portfolio. So while we've seen a lot of success in our laser group, we still did not address or the Pico second segment of lasers, and so we've talked about two releases of the picosecond laser to this year.

And ladies and gentlemen, after am I know that's a question you wanted to press. The Star then one key on your touched on telephone.

Our next question comes from the line of Krish Sankar with Cowen and company. Your line is open.

Thank you.

I had three questions all key and multichannel and either for JBT ought to John because you guys spoke about how the symbol quartile said means is gonna be up sequence really quite single digits.

How much of that is driven by the conductor etch monkey children is it'll be just Sigmund did but seeing we thought that renewed being flat to down is there any color on that.

Going up and power is going up so it's not a driven all by one particular segment.

Got it got it and then just to be your customers do dawned on me all the you know recent down cycle.

Yeah, well you know the history says krish than it was filled up in or a fast.

And to your point, we believe that will happen in Q4 and Q1 because of some of the end user announcements of what they expect to spend capex and that's pretty much all the visibility. We can have now of course, some folks think that Oh first half will continue a into the second half, but as you know.

Wunderlich two people isn't.

Yeah, Chris So it was a it was probably under 2% how's that for market share of H.T.I.. So we kind of look a zero because they had an older tool addressing aged yeah. That's been obsoleted, a while ago. Many years ago. So it was really legacy stuff. This is a neutral dressing the 500 million dollar market.

And we have two of those customers. So there's two separate individual customers in Asia.

But there's other customer quite quite unique I'll give you a little more color. So they they give us P I will be shipping them and tool soon.

The their materials developer, meaning they're developing materials for next generation H.T.I. TCV.

And for US, that's very strategic because if and when they're successful when other customers say, okay. Let's use your material they've been asked how do you how do you process, how do you drill holes.

Well, obviously, they will have a recipe and prove with our tool that point.

Next question coming from the line of Tom Diffely with.

And your line is open.

I guess, it's not going to be a hands off rule [laughter] well go to ask this team that's why when Johnson I'll be missed that you're probably by some people will not by a lot others I don't see [laughter] yeah.

Additionally, though as you get into developing recipes you know, we're starting to see there could be other advantages to as to how we drilled a hole so but the primary differentiator is you know a 23% improvement in throughput. So that's that's a huge cost of ownership for that for our customers.

And then over time, it seems like a will be developing new recipes with flexibility that we have and how we've designed to laser and that should allow us perhaps other advantages going forward and and it's as you know you can imagine we're not stopping there there are other.

More accuracy and what's already out there today.

The pointed to add to that to Tom They are competing tool on a each cie is about 8% lighter heating tool.

We have lots operation in China, and you don't really get to expand horizontally you have to expand vertically and having a tool and significantly lighter in weight means that you don't have to have just going to first floor install you know talking about second and third floor of manufacturing operations, which is believed and not be deal in turn.

So the square footage that's allowed in China.

Okay, and what are the buying cycles like in that space. I mean is yet to wafer capacity needs to open up or is it a technology driven how what do your customers become right for you the haven't insertion point.

It's how I think it's a it's a similar by cycle is flex TCV because you can imagine a lot of consumer products use both right and so we look at it as the first half a year is usually when the a and users the I phone maker. The you know Oh the smartphone makers.

Sort awarding contracts to the Subcons and that's when the Subcons know how much capacity, they're going to need and that's when they start ordering so usually we see order is you know kind of a end of Q1, then through Q2 and then the so certainly some follow on Q3.

For you know any extra capacity and that's the kind of cyclicality and then Q4 as we talked about is you know the PCB cyclical low and that's why we talked about that earlier.

Okay. One more question on the flip side no. We've heard from other suppliers that he wants to big drivers move into the most advanced technologies, which increases complexity, but it's also because of the tale of the older foods moving to the more advanced funds that upgrade cycle, even though they got new technologies, it's higher used to the taken.

Allergies and so that's also a pretty good driver curious on your flex side over the next couple of years do you see that second point, it's been a nice driver of capacity for you.

Using some of the older tools or that they had been using for advanced smartphones for instance, now maybe two or three years from now there will be using it for the older phones, and then but that does open up capacity for more advanced flex Pcbs for the newest so so we haven't really thought about that as as precisely as youth.

Got about Tom so that can be a tailwind, but so we haven't we haven't analyzed quantitatively yet.

Okay and then finally just on the R&D side, you guys going forward is the gap that R&D based on something like beta sites are tools going out the door, what's the $3 million difference there.

Just a it could be just normal fluctuations in R&D spending time, it's nothing that's uniquely tied to any particular product or R&D effort. They can bounce around a little bit is a pretty money R&D spending is immaterial base, which kind of comes in lumpy fashion.

So that's probably is driving.

It's sometimes Tom we will be building a lot of a new units, let's say for our power or that would be materials charged R&D.

You ship it and then of course, then they kind of rolls into cause that can be very lumpy.

Okay that makes sense I well, thanks for your time and congratulations Gerry.

[noise].

And I'm not showing any for his question.

I have enjoyed working with many of you as CEO I look forward watching the company reached New Heights, Chairman, we look for an update and you're not progress report on fourth quarter 2019 financial results. Thank you.

[laughter].

Q3 2019 Earnings Call

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