MKS Instruments Inc. Q1 2023 Earnings Call
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Good day and thank you for standing by welcome to the MKS instruments first quarter 2023 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session.
To ask a question. During this session you will need to press star one one on your telephone you will then hear an automated message advising your hand is raised to withdraw your question. Please press star one again, please be advised that today's conference is being recorded.
Now I'd like to hand, the conference over to your Speaker today, David Rochette, Vice President of Investor Relations. Please go ahead.
Good morning, everyone I am David Richard Vice President of Investor Relations and I'm joined this morning by John Lee, President and Chief Executive Officer, and Seth Bagshaw, Executive Vice President and Chief Financial Officer.
Yesterday after market close we released our financial results for the first quarter of 2023, which were posted to our investor website at Investor Dot MKS Dot com.
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 our annual report on Form 10-K for the year ended December 31 2022.
These statements represent the companys expectations only as of today and should not be relied upon as representing the company's estimates or views as of any date subsequent to today and the company disclaims any obligation to update these statements.
During the call we will be discussing various financial measures unless otherwise noted all references to combined company financial measures reflect the combined results of MKS and auto Tech limited.
MKS acquired on August 17, 2022.
Also unless otherwise noted all income statement related financial measures will be non-GAAP other than revenue.
Please refer to our press release and the presentation materials posted to our Investor website for information regarding our combined company results non-GAAP financial results.
And a reconciliation of our GAAP and non-GAAP financial measures.
For a detailed breakout of reported revenues by end market as well as out of Tech and combined company revenues by end market.
Please visit our Investor website.
Now I will turn the call over to John .
David Good morning, everyone and thank you for joining us today I'm very pleased to report that we have restored our global operations. Following the ransomware incident, we identified in early February .
We are on track to meet our commitment to substantially recover revenue by the end of the second quarter.
I can't say enough about how proud I am of the entire MKS family.
Thanks to the dedication hard work and ingenuity of our 10000 plus employees, we are a stronger and more resilient company today than we have ever been.
I also want to take a moment to thank our customers and suppliers for their support and cooperation throughout this process. So that we continue to deliver as a critical enabler to the industries we serve.
With that I'll review, our operating environment, including our first quarter results and the trends we are seeing in the second quarter.
We delivered first quarter revenue of $794 million adjusted EBITDA of $142 million.
Net earnings per diluted share of <unk> 48.
We estimate the ransomware incident had a negative impact on revenue of approximately $160 million fourth quarter.
Our central detailed revenue for the quarter, excluding the impact of the ransomware incident was a little lower than we anticipated the difference reflected softer demand that developed in the latter part of the quarter, which was relatively more pronounced in our electronics and packaging market.
In our semiconductor market business levels continued to soften in the first quarter consistent with the well publicized decline in industry wide WSI spending in 2023.
We remain very engaged with our customers across the spectrum of opportunities and deposition etch lithography metrology and inspection.
And our ability to invest through the cycles has been a key reason, we have outperformed WSI and.
And the critical subsystems market over the long term.
In fact as reported by <unk> sites, our share of the overall critical subsystems market grew in 2022 on top of the gains we made in 2021.
Our performance in 2022, exemplified our technical leadership and the breadth of our surround the wafer portfolio, where we gained share in a number of categories, including remote plasma sources.
Microwave power.
Liquid ozone FTE.
FTIR gas analysis.
<unk> motion subsystems and optical fiber thermometry.
Our broad portfolio positions us well for when <unk> spending recovers now more than ever we are reminded of how important semiconductors are to our daily lives and we firmly believe they will become even more important over time.
This reliance on semiconductors will require not just more equipment, but also solutions addressing increased miniaturization and complexity in semiconductor design and manufacturing and.
<unk> is uniquely positioned as the broadest critical subsystem solutions provider in the industry <unk>.
Enabling more process steps in the fab that anyone else in the world today.
As we look into the second quarter, we anticipate demand for semiconductor capital equipment to remain muted consistent with expectations for a decline in <unk> spending in 2023.
Turning to our electronics and packaging market revenue was below our expectations are consistent with softness in demand for global electronics, such as Pcs servers and smartphones.
Customers scale back production, which impacted our chemistry sales as well as delayed delivery of cleaning equipment for PCB and substrate applications.
That said, we expect demand to improve sequentially in the second quarter due to additional working days in the quarter and delivery of equipment pushed from the first quarter.
We are pleased with the progress of the integration of AMETEK, both on a cost perspective and in establishing the value proposition of our combined proprietary chemistry, and laser solutions, which positions us at the forefront of what we call optimized interconnects.
This is the next frontier in the integration of semi and PCB design for advanced electronics.
Okay.
On our last earnings call I noted that we had received our first HDI laser drilling order from a longtime AMETEK customer.
Since then we received our second HDI order from another added tech customer.
These wins were a result of the combination of ametek's long standing relationships in the HDI market and the reference wins that our Geos laser drilling tool had already achieved in an emerging market application.
It's early in the game, but we are very pleased with customer interest in our combined capabilities as it provides initial validation of the potential for revenue synergy.
At our analyst day in December we discussed how packaged substrates are a critical building block for electronic devices and in particular high performance computing architectures.
Pleased to announce that we recently held an expansion ceremony at our Yokohama Tech Center in Japan.
Each included the introduction of two new significant products.
The first is an extension of our ESI Geo drilling platform, which is geared towards next generation packaged substrate applications, such as ABF buildup laminate processing.
Our proprietary via drilling technology enables the highest throughput and lowest cost per part for advanced flip chip ball grid array packaging, which is critical for high performance computing applications.
The second new product is our <unk> G plate vertical <unk> and electrical this copper plating tool for next generation packaged substrates. This new tool will support customers in their yield optimization and next generation process development for advanced packaging applications with lines of spaces below five microns.
These product announcements further extend our capabilities as a foundational solutions provider for advanced PCB and substrate applications. As we are the industry's only integrated provider of advanced laser drilling proprietary chemistry, and horizontal and vertical plating solutions.
As the defining trends of munitions Asian, and complexity dominate advanced PCB and substrate manufacturing the way they did in the semi industry, we are well positioned to become the industry's go to technology enabler.
Turning to our specialty industrial market business levels softened slightly on a sequential basis in the quarter. However, <unk> MF business held up well.
Looking out to the second quarter, and we expect demand to remain fairly steady.
In summary, while the year got off to an unexpected start we have rebounded well operationally and are delivering affected shipments to customers.
So building early momentum with customers for our optimized the interconnect offering.
Overall business levels have softened entering the second quarter, but we remain optimistic about the quarters to come.
We expect and cast as total revenue in the second half of 2023 to be slightly higher in the first half levels.
By a modest improvement across each of our three end markets.
We will continue to keep a close eye on near term macro and industry specific conditions.
Longer term, we are as bullish as ever on a secular tailwind and attractive growth opportunities across our markets and we intend to seize them now.
Now I'd like to turn the call over to Seth.
Thank you John I will cover our first quarter results and provide details on our outlook for the second quarter of 2023.
Starting with our first quarter revenue of $794 million.
As John mentioned, our global team executed well during a challenging period for the company.
As we work to restore operations following the ransomware incident.
We estimate the negative impact to revenue was approximately $160 million for the quarter.
Our team worked diligently to restore production relative to our initial expectation of at least $200 million impact we report our fourth quarter results.
While the recovery has gone well, we've seen a softening of business levels relative to our prior outlook, mainly in electronics and packaging market.
As a result, excluding the impact of the ransomware incident, we estimate first quarter revenue would have been lower than our original expectations.
Has the outlook indicates we expect softness in overall business levels will continue in the second quarter. However, we see a slight improvement in the second half of the year.
Turning to our end markets for the first quarter as a reminder, the ransomware incident only impacted our vacuum photonics solutions divisions.
Therefore, we mostly felt an impact on our semiconductor and specialty industrial markets and to a lesser extent electronics and packaging market.
We expect to recover approximately 95% of this revenue the remaining 5% largely tied to a transactional catalog business and our specialty industrial market.
With that as a backdrop semiconductor revenue was $309 million in the first quarter declined 38% sequentially and 37% year over year Pri.
Primarily due to negative impact of the ransomware incident, as well as lower industry demand for semiconductor capital equipment.
We estimate the ransomware incident impacted our semiconductor revenue by approximately $110 million in the first quarter.
Excluding the impact of the ransomware incident, we estimate semiconductor revenue was down approximately 17% sequentially and 14% year over year.
We expect to make up approximately 75% of that delayed revenue in the second quarter.
All of the remaining balance made up in the third quarter.
While the first quarter was challenging we have deep relationships with our customers who work closely with them to restore shipments as quickly as possible.
Turning to electronics and packaging market revenue was $222 million, a decrease of 17% sequentially and 24% year over year with Q1 2022, representing a combined company results.
Excluding the impact of foreign exchange and plaguing pass through first quarter revenue declined 20% on a year over year basis compared to combined company results.
We estimate the ransomware incident has only nominally impacted our trucks and packaging revenue and we expect this to be substantially recovered in the second quarter.
As John mentioned, our chemistry and plant equipment sales were negatively impacted by the industry slowdown in global <unk> demand.
Our chemistry revenue declined 13% year over year, when excluding the impact of foreign exchange and played and pass through.
Reflecting the widely publicized slowdown in unit production volumes across PC smartphone and server applications.
To add some context going to Gardner overall, PC shipments declined 30% year over year in the first quarter.
Catalysts smartphone shipments declined 12% year over year.
Because theyre more factory working days in the second quarter due to the Chinese new year holiday in the first quarter, we expect electronics and packaging revenue to improve sequentially in the second quarter.
In addition, we expect revenue to grow in the second half compared to first half levels.
Moving to our specialty industrial market, rather than the first quarter was $263 million.
Mining, 17% sequentially and 18% year over year with Q1 2022, representing a combined company results.
We estimate the ransomware incident impacted our specialty industrial revenue by approximately $45 million in the first quarter in.
And which we expect to recover approximately $20 million in the second quarter and most of the remainder in the second half of the year.
Excluding the impact of the ransomware incident in foreign exchange and played in pass through first.
First quarter revenue declined approximately 2% year over year on a combined company basis.
We do not expect to recover a nominal amount of revenue in this part of our business due to the transactional book in turn nature of orders that we generate through our catalog business.
In the first quarter consumables and service revenue across our three end markets comprise 43% of our total revenue.
Turning to our margins reported first quarter gross margin of 42, 2%.
Sequential decline of 370 basis points.
Primarily due to the Underutilization of factory associated with the ransomware incident.
First quarter operating expenses were $240 million, a sequential decline of $2 million due.
Due to lower variable compensation associated with the reduced revenue levels in the first quarter as well as prudent cost control.
First quarter operating margin was 12, 1% adjusted EBITDA margin was 17, 8% both.
Both negatively impacted by lower revenue volumes as well as factory Underutilization associated.
Associated with the ransomware incident.
Our integration of <unk> progressing well, we remain on track to achieve our cost synergy target of $55 million within 18 to 36 months post close.
We exited the first quarter, achieving annualized synergies of $25 million.
<unk> expense for the first quarter was $76 million slightly lower than we anticipated due to favorable interest income.
Our tax rate for the first quarter was a benefit of 47% driven by the geographic mix of earnings in the quarter.
Net earnings for the first quarter with $32 million or <unk> 48 per diluted share.
Turning to our balance sheet and cash flow. Despite the usual challenges we face we exited the quarter, meaning maintaining strong liquidity with cash and short term investments of $880 million.
Our revolving credit facility of $500 million.
We exited the quarter with gross debt of $5 1 billion.
Our net leverage ratio exiting the first quarter, which is calculated on a combined company basis was four <unk> times based on trailing 12 months adjusted EBITDA.
For the first quarter operating cash flow was $37 million and free cash flow was $20 million both negatively impacted by the ransomware incident.
Consistent with prior quarters made dividend payments of $15 million or <unk> 22 per share.
I'll now turn to our second quarter outlook.
We expect second quarter revenue of $980 million, plus or minus $50 million.
While we normally do not provide specific guidance by end market given the different moving pieces such as recovery of rents, we have revenue and underlying business levels.
We leave a little more granularity would be helpful.
With that in the second quarter, we expect revenue from our semiconductor market the approximately $400 million.
Plus or minus $20 million.
River from electronics packaging market to be approximately $240 million plus or minus $10 million.
And retro from especially industrial market to be approximately $340 million plus or minus $20 million.
Excluding the impact of the ransomware incident from the first and second quarters, we estimate second quarter revenue of approximately $870 million.
Which would represent a sequential decline from the first quarter.
We expect this to be.
Primarily a result of softer revenue from our semiconductor market, reflecting declines in wafer fab equipment spending partially offset by modest improvements in revenue electronics in packaging and specialty industrial markets.
Based on anticipated product mix and revenue levels, we estimate second quarter gross margin of 45% plus or minus one percentage point.
We expect operating expenses of $255 million, plus or minus $6 million.
The sequential increase in the first quarter levels is due to higher revenue volumes.
Timing of annual merit increases and variable compensation.
Normalization of product spending following the ransomware incident.
For the second quarter, we estimate adjusted EBITDA of approximately $223 million plus.
Plus or minus $27 million.
The second quarter net as expense expected to be approximately $82 million, reflecting slightly higher interest rates compared to the first quarter.
And our tax rate expected to be approximately 27% for the second quarter.
Given the tax benefit recorded in the first quarter, along with our guidance for the second quarter, we expect our tax rate to be higher in the second half to arrive at an estimated full year rate of 27%.
Within our long term model range.
Give me the.
<unk>, we expect second quarter net earnings of $1 13 per diluted share plus or minus <unk> 29.
In summary, despite unusual challenges, we executed well on driving profitability in the first quarter.
Moving forward, we are focused on resuming strong free cash flow generation, realizing acquisition synergies and executing our disciplined strategy of deleveraging our balance sheet.
With that I'll turn it that the operator for Q&A.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again please.
Please limit yourself to one question and one follow up please standby.
Standby, while we compile the Q&A roster.
Our first question comes from the line of Steve Barger of Keybanc capital markets. Your line is open Steve.
Hey, Thanks, good morning.
Great to hear about that second system order from an ATC customer are you surprised by the timing of that given how tough the cycle has been and can you talk about customer engagement around the combined advanced packaging applications versus what you expected given current conditions.
Hi, Steve its Jon Thanks for the question.
As I said last time last quarter.
Bit of a bluebird a little sooner than we would expect for these but I think it does validate.
The thesis for the acquisition the synergy and combined capabilities have added SEC.
Chemistry solutions, and chemistry equipment as well as laser drilling.
Youre right the industry is a little more muted at this point, but at these times design win continue and design work continues and that kind of interaction we have with our customers.
Continues to be very strong as we mentioned in the prepared remarks.
<unk> had a ceremony at Yokohama Tech Center.
Many customers are invited and we had great participation, we got to give them a tour of two brand new capital equipment laser tool.
And what clean tool a vertical wet cleaning tools. So that engagement remains very strong and we're really happy to see that.
And for the electronics Chemistries and plating business can you remind us is it basically a one to one relationship between volume and fab utilization rates, meaning as the cycle turns you see an immediate increase in volume.
I think thats, how we look at it, especially the chemistry part obviously that is very much utilization dependent and so I think the latter half of Q1, we started seeing some of that.
Going down and that's what caused.
Write down in Q1.
And as we talk to customers as we talk to and read about the industry and plans by our customers. That's why we think Thats number one Q2 will be a little better more working days, mostly that is the assumption and then the second half we think will be slightly better because we see the markets.
Improving slightly in terms of utilization rates.
Great. Thank you.
Thanks, Steve.
Okay.
Thank you.
One moment please.
Our next question comes from the line of Krish Shankar with TV Cowen. Your line is now open.