Q3 2023 MKS Instruments Inc Earnings Call
Okay.
Good day, and thank you for standing by and welcome to the MKS instruments third quarter 2023 earnings Conference call.
At this time all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session. Please.
Please be advised that today's conference is being recorded I would now like to hand, the conference over to your first speaker today, David Ryzik.
Yeah.
Good morning, everyone I am David Ritchie, 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 third quarter of 2023, which are posted to our investor website at Investor <unk> MTS 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 architect limited, which MKS acquired on August 17th 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 and combined company revenues by end market and division. Please visit.
Our Investor website, now I will turn the call over to John.
Thanks, David Good morning, everyone and thank you for joining us today.
Before I discuss our third quarter results and key business trends I'd like to touch on the devastating violence that occurred in the middle east over the past month.
There is simply no words that can describe the events that have unfolded in our primary concern is the health and safety of our employees and their families in the region.
So you May know MKS has three facilities in Israel. They manufacture some of our controls optics and photonics solutions, which all remain operational.
The dedication and resilience of our Israeli team is unmatched and we hopefully return to peace quickly.
Turning to our third quarter results MKS delivered strong profitability. Despite continued softness in end market demand.
We reported revenue of $932 million, adjusted EBITDA of $235 million and.
Net earnings per diluted share of $1 46.
Revenue from our semiconductor market was in line with our expectations as the cyclical downturn in industry memory spending continued.
As expected demand for our critical vacuum subsystems for deposition and etch remained muted.
However, demand for our photonics solutions for the <unk> metrology and inspection continues to be resilient.
Looking to the fourth quarter, we expect revenue from our semiconductor market to decline sequentially due to the continued weakness in industry memory spending, particularly for NAND, which is at a historically low level and where leading edge tools contain relatively more MKS content.
We also expect continued inventory work downs at key customers as they adjust to current demand.
The semi market will have its cycles for the secular growth drivers are the over the long term are quite clear the connected world will need more semiconductors with enhanced capabilities.
Creating the need for miniaturization and increased complexity.
And cast is actively engaged with customers across a broad range of technology inflections.
<unk> include next generation power solutions for advanced etch applications.
Optical subsystems for lithography metrology and inspection and.
In precision motion prevents bonding processes to enable applications such as high bandwidth memory.
We pride ourselves on investing during the downturn to position us to be even stronger in the next upturn.
That is the exact playbook, we have deployed over the past six plus years, enabling us to become a foundational supplier to the semiconductor industry with number one or number two segments share across more categories of critical subsystems.
One else in the industry.
Turning to our electronics and packaging market revenue grew sequentially and slightly better than expected due to normal seasonality associated with the consumer electronics market as well as slightly higher PCB and packaged substrate production. It has the Golden week holidays in Asia in the beginning of the fourth quarter.
I'm pleased to announce that we also shipped a number of HDI laser systems to the low Earth orbit or Leo satellite communications space.
We are the process tool of record for multiple customers, serving the aerospace due to the unique capabilities of our proprietary HDI via drilling technology, which enables increased productivity for one of the industry's fast emerging applications.
This is a validation of our technology leadership, and our unique ability to solve the hardest problems, establishing us as a key supplier to the leading PCB manufacturers.
In addition, we also deliver our proprietary chemistry and cleaning equipment to this market, which highlights opportunities for an integrated approach.
Looking to the fourth quarter, we expect revenue from our electronics packaging market to be down sequentially, primarily due to seasonally softer chemistry utilization as well as the lumpy nature of our equipment sales.
We are seeing some signs of stabilization in the PC and smartphone markets within the server market. There is continued strength in the packaged substrate market for AI applications, but this was more than offset by broader softness in non AI server applications.
Turning to our specialty industrial market revenue was slightly below our expectations overall, the business was stable across our markets, but we saw some modest weakness in solar and led applications.
We leverage our expertise and R&D investments in our semiconductor and electronics and packaging markets to drive opportunities in our specialty industrial market.
An example is the investment we have made in laser technology for advanced micro machining applications.
Where we see portability specialty industrial applications, such as solar and life and Health Sciences.
Looking to the fourth quarter, we expect revenue from our specialty industrial market to be slightly down compared to third quarter levels.
While demand across our end markets remains cyclically muted we are.
How they engage with customers and believe we are well positioned for the upturn in.
I am proud of how our team continues to execute and deliver timely solutions for our customers, while pursuing operational efficiency through tight management of discretionary costs.
A long history of prudent cost control and financial stewardship of our business throughout various market conditions and today is no exception.
Many of you on the call are familiar with a multi decade secular growth story of the semiconductor market, we have been and will continue to be foundational to that market.
However, electronic devices are today in the future, we'll need more than just semiconductor transistor scaling as we move into an era of multi chip packaging or system scaling.
MKS is uniquely positioned to enable this new era of scaling with the broadest portfolio of critical technologies across equipment chemistry and services.
Now I'd like to turn the call over to Seth. Thank.
Thank you John before I cover our third quarter results provide details of our outlook for the fourth quarter I want to Echo John's comments regarding our concern for the health and welfare of our employees in Israel.
We are amazed at the dedication and fortitude of our Israeli team as they operate in extremely difficult circumstances.
This is a point of reference revenue from our manufacturing operations in Israel last 12 months represented approximately 7% of our total revenue.
Turning to our third quarter results, we delivered revenue of $932 million just above the midpoint of our guidance.
As expected recovered substantially all of the remaining revenue impacted by the <unk> in the first quarter, which.
Which we estimated approximately $30 million.
So it's going to impact the ransomware incident recovery for the second and third quarters, our revenue grew slightly on a sequential basis.
Turning to our semiconductor market revenues $367 million in third quarter.
Absolutely impact the ransomware incident recovery from the second and third quarters are semiconductor revenue was relatively flat on a sequential basis.
Revenue from electronic packaging market was $243 million, an increase of 8% sequentially.
Excluding the impact of foreign exchange played in pass through third quarter revenue declined 9% on a year over year basis with Q3 2022.
It represented combined company results.
Moving to our specialty industrial market revenue in the third quarter was $322 million declined 5% sequentially.
However, excluding the impact of ranch with incident second and third quarters.
Especially industrial revenue was relatively stable on a sequential basis.
With that especially industrial market sales of our general metal, finishing solutions to the automotive industry were flat on a sequential basis.
On a year over year basis, especially industrial revenue was relatively flat excluding the impact of the ransomware incident foreign exchange in plate and pass through with Q3 2022, representing combined company results.
In the third quarter overall consumable and services revenue was also consistent on a year over year combined company basis.
Excluding the impact of foreign exchange and played in pass through and comprise 42% of our total revenue.
We expect consumables and services revenue to remain resilient source of revenue and profitability going forward.
Okay.
Turning to our margins third quarter gross margin was 47, 1%.
Sequential increase of two of 20 basis points exceeding the high end of our guidance.
In fact utilization disciplined cost management and favorable product mix contributed outperformance.
Third quarter operating expenses between $36 million sequential decrease of $7 million and below low end of our guidance, reflecting continued disciplined cost management.
Third quarter operating margin was 21, 8%.
And adjusted EBITDA margin was 25, 2%, both exceeding our expectations, reflecting the strength in our operating model.
Our integration of <unk> is progressing very well remain on track to achieve our cost synergy target of $55 million within 18 to 36 months post close.
We exited third quarter, achieving annualized synergies of nearly $45 million.
Net <unk> expense, the third quarter was $84 million.
Relatively in line with our expectations.
Our tax rate the third quarter was 14%.
Favorable to expectations and reflective of the success of certain tax planning initiatives. Following the closing of the <unk> acquisition.
As a result of these efforts we now expect full year 2023 tax rate to be 19%.
Looking beyond the fourth quarter, we believe a low 20% tax rate is the right way to think about it at this time.
We expect to provide a more formal update to our long term tax rate in our fourth quarter earnings call.
Net earnings for the third quarter with $98 million or $1 46 per diluted share.
Turning to the balance sheet and cash flow, we exited third quarter with more than one $3 billion of liquidity, including cash and short term investments of $860 million.
An undrawn revolving credit facility of $500 million.
Our cash position and represent an increase of $758 million at the end of the second quarter.
Free cash flow in the quarter $142 million primarily.
Primarily result of strong cash strong cost control is sequential improvement in working capital.
We exited third quarter with gross debt of $5 billion.
In October we had a voluntary debt prepayment of $100 million, which consistent with our strategy of deleveraging our balance sheet.
Also in the current quarter, we successfully completed a repricing by $3 6 billion.
Secured tranche B term loan.
The repricing reduced the spread on our term loan from sopra, plus 275 basis points to silver plus 250 basis points and also eliminated the credit spread adjustment respect to our term loan which was 10 basis points at the time the repricing.
This repricing completed despite challenging market conditions is consistent with our long term practice of proactively managing our leverage and demonstrate the confidence lenders have in our operating model.
At current rates, we estimate the combination of the repricing in prepayment will reduce our annualized interest expense by approximately $19 million.
Our net leverage ratio exiting the third quarter was four six times based on trailing 12 month adjusted EBITDA.
Our net leverage as defined in our credit agreement includes several other adjustments. It was four two times exiting third quarter.
Yeah.
Consistent with the prior quarter, we made a dividend payment of $15 million or 22 per share.
I'll now turn to our fourth quarter outlook.
We expect fourth quarter revenue $840 million, plus or minus $40 million.
By end market outlook is as follows.
Revenue from our semiconductor market of $320 million to $320 million, plus or minus $15 million.
Revenue from electronics, and packaging market of $205 million, plus or minus $10 million.
Revenue from our specialty industrial market of $315 million, plus or minus $15 million.
Based on the midpoint of our guidance. We now expect revenue second half of 2023 to be slightly lower in the first half compared to a private compared to our prior expectation that it would be slightly higher than the first half.
This is primarily due to our expectation of short term customer inventory work downs in our semiconductor market.
Based on anticipated product mix and revenue levels, we estimate fourth quarter gross margin of 45, 5% plus or minus one percentage point.
We expect operating expenses of $235 million, plus or minus $5 million realm.
Relatively consistent with third quarter levels.
For the fourth quarter, we estimate adjusted EBITDA of $185 million, plus or minus $20 million.
Mmm a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced will now conduct a question and answer session. If you'd like to withdraw. Your question is anytime. Please press star one one again, please stand by while we compile the <unk>.
Are you in a roster.
The first question comes from Chris Carr at T. D Cowan, Chris Your line is live.
Hi, Thanks for taking my question to John on the first one you know I understand you send me revenue.
W. A favorite childhood dream, a cyclical downturn local trolley looks like <unk>.
Lower than some of your bill some curious is it purely.
Because you're depressed explosion or is it something else going on on the market your funds in the amount of follow up.
Thanks for the question I think it's a pretty simple we are enabler for vertical man.
We've talked about that in the in the past and as I think we've heard.
Heard from many of our customers.
As a as one of the W. A few segments, that's really particularly down.
And so our exposure there and therefore are enable them there is really what's causing us to be slightly worse than maybe some of our peers.
Want to remind everybody, we love being an enabler for being an an industry with our our a power solutions and of course I don't think anybody would say V name won't come back is certainly in a cyclical downturn, but when it comes back will be enjoying that that market leadership again.
Got it got it thanks for it I don't know I just wanted to follow up on some of the advanced packaging may you have highlighted auto exposure that.
But it looks like as big as opposed to revenue that's really kind of been this low 30% range for the last couple of quarters.
Oh, you're not seeing any other benefits from advanced packaging or is it too early for that.
Yeah, I think it's early days traditionally I think one of the things we talk about as package substrates. This is the advanced packaging that we've talked about lots of interests lots of acceleration there, especially in high performance computing and so we're seeing a lot of that interest, but that's still a relatively small percentage, but we expect that to continue to grow.
As a percentage of advanced packaging and packing overall.
Got it thank God.
Next question.
As a reminder to ask a question.
<unk>.
<unk> one on your telephone and wait for your name to be announced.
So if he could limit to one question and one follow up that would be appreciated.
And the next question.
Okay.
Next question comes from John Jo cut rookie at Wells Fargo, Chile. Your line is open.
Yeah. Thanks for taking our questions. It looks like a chemical as revenue was up nicely sequentially and a quarter wondering how much of that is just normal seasonality or or maybe some pastor of the closing costs.
Yeah, Joe Uhm.
I only part of it was seasonality, but it was a little better than we expected even taking into account seasonality now.
And are prepared remarks, there was a little bit of pull in because of the holiday week in the first quarter Q for but it was just a little better.
Yeah.
Got it and then.
Maybe on the semi side.
Or your peers are talked about.
Preparing for kind of flattish 2024, and talking to their customers I guess curious how you're thinking about that and maybe you know in.
Contact you to talk about Nan being definitely weaker.
Thinking about the setup in the next year.
Yeah, obviously, we'd we read the same thing so you guys too and the visibility is poor for the industry right now I think what we're preparing for is to continue supporting our customers and R&D. So that when it comes back we will be enjoying you know need a stronger position.
The meantime, we're watching cost very close as you can see from our numbers you know I think the industry is kind of looking at first half is relatively muted kind of the same is kind of the second half of twenty-three and.
And then I think after that I think there's varying opinions. So yeah. That's that's what I would say is that reading the same kind of things you are and it looks pretty pretty flat for the next few quarters to us as well.
Thank you.
Thanks, Joe.
Please stand by for the next question.
The next question comes from Steve Pioneer at Keybanc capital markets, Steve Your line of sight.
Thanks.
John I think we all understand this has been a really challenging cycle, but the stock is obviously acting like they're bigger risks and problems here. So can you just discuss again why you're confident M. K S is better with ATC in the portfolio and and maybe further discuss just how you see this playing out in coming quarters in years.
Yeah, Steve Thanks for the question. So you know we talk.
About advanced packaging and we've talked about how critical that's going to be to enable the next generation of electronics. So as an as I said a prayer marks.
No longer that suggest the semiconductor will enable advanced electronics, I think everybody's talking about <unk> packaging or systems packaging.
If we're gonna continue as an industry pushing the concept the economic concept of Moore's law. So we loved having add a tech is part of our portfolio. There's no. Other company that has market leadership and packaging chemistry, and the equipment that side effects as well as market leadership and abroad set of technologies and semiconductor critical subsystems.
As we've talked about in the past that enables you know tap and heche as well as lithography metrology an inspection. So we firmly believe that the combination of both really sets up and kiss uniquely for the future.
And can you just talk about what the feedback has been from customers. As you go out and then maybe how you see you know the Capex cycle next year and what you think that can translate into for MK.
Well you know customers are certainly very receptive to the concept of you know MKS, bringing more solutions to them that include lasers as well as chemistry equipment and then other types of packaging solutions.
In terms of Capex I think that's you know similar to Joe's question, it's going to be something that seems a bit muted for packaging, though I think next year.
If things stabilize the compares will be good.
But you know your guess is as good as mine as to you know how much it comes back but I would also comment that the packaging market for us is less cyclical there are sick.
<unk> cycles for sure, but the amplitude is much less than in Sydney Capex as you've seen in our numbers.
Got it and says can I squeeze in a quick one uhm <unk> sorry, if I missed it did you did you talk about free cash flow and four Q and can we expect incremental debt pay down and the remainder of this year.
Yeah, we didn't.
Disclose or give guidance on free cash loan for in the queue for.
Q3 was quite strong by the way Steve is it sort of Lee that's our goal going forward to drive that free cash flow up so it will depend on working capital needs, but so we can really give that type of guidance in the fourth quarter.
Trying to debt pay down we have done a lot of finals levers that you saw prepared remarks, we did have a million dollars in October.
At our plant Delevered wrestling going forward and that'll.
Roll out as the as the year progresses.
Re pricing that took a lot of $9 off the table. So that's again level we pulled.
Without attack, we grabbed the tax rate down longterm as well and it's a big value driver and then the cost synergies is 45 $55 million one year and so.
Things, we can control his prepared remarks, we've actually done a lot already a short period of time was more opportunity going forward as well and they'll roll out there's no change in our philosophy too you know.
Delever drive free Cashflow drive the integration activities respond very well.
I appreciate the time, thanks, Yep Yep Thanksgiving.
One moment for our next question.
And the next question comes from Kim Ricchiuti at Needham and company.
New line is open.
Thank you.
To.
Focus on the Protonix solutions.
Portion of the savvy business, which.
Appears to be holding up better.
And.
John maybe you could talk to.
Your visibility your line of sight in that area of the business are you any more optimistic that that portion.
The business is able to hold up in a cyclical downturn.
Yeah J M. I think we do believe that there is less cyclicality in the the lithography metrology inspection part of the semi business and we've seen that play out over multiple quarters.
Constant contact with those key customers and you can see what they say publicly about their revenue over the next several quarters as well. So we believe that you know that's really just an area of semi that's just much more consistent than certainly the the tip edge part. So that's our that's our visibility right now and.
And that's I believe that it will continue.
And have a specialty industrial.
Obviously, it's a newer area who are you and.
Are you more concerned now.
The overall macro environment potentially impacting that portion of the business as we.
<unk> 2024.
Are you any more.
I'm concerned about the near term ma'am that area of the business.
Yeah, Jim I mean, what we've seen in the past is it the industrial part has been pretty steady our revenue and it's.
But we're always watching you know some of the key markets such as automotive and that's why we made the comment about automotive in our prepared remarks.
But as I said in the past two industrials are certainly less it could well.
Then the semi Capex world.
All set to also comment that much of our industrial revenue is utilization dependent chemistry, so that adds a little more stability to it but.
But to your point, Jim we're always watching the macro environment to see how that may or may not affect our industrial business.
Yeah, I'll I'll, just lob, one more and I was just wondering on G. O you seem to be getting subtraction, how should we be thinking about.
The.
Potential for that to be a bigger contributor in the near term.
Yeah, I think you know what we talked about at this call was this low earth orbit application. The P. C. DS that are needed to support that both on the satellites as well as the ground stations.
And you know that had a technology requirement that our tool was uniquely a position to to deliver on on that.
So that's just another proof point of the technology that we've developed I think that we continue to make progress in other areas as well.
And so we just wanted to point out that you know we continue to get signs that what we've developed in the technology. There is really unique.
Thank you.
Thanksgiving [noise].
[noise] one moment.
<unk>.
Okay.
The next question comes from Sydney, how at Deutsche Bank. Your line is open.
Great. Thank you good morning.
I'm not trying to ask for specific guidance will make sure how you're thinking about the redfin trajectory for each cycling in 2024 do you think there will be another step down in the first half and any of the <unk> cyclically seasonally it sounds like you think families will be flattish for a few coins, but how about the other segment and what.
Kind of <unk> do you have right now any color by second name I'll, even buy and market will be great.
Yeah, Thanks to any sense, yeah, I think we talked about semi and what kind of bouncing on the bottom as as we said.
I would say, especially industrialist is just held up and been very steady for this whole duration of the semi downturn. So that's kind of expectation electronics packaging did see some cyclicality as you've seen in the quarter. There is some seasonality to it.
As well, but certainly less less cyclical in terms of amplitude and semi business.
It is much more utilization dependent so I think that we watched the the macro demands for P. C's Ah and servers and all that.
[noise] drive some of that electronics packaging business. So I think the semi recovery in electronics and packaging Curry may go hand in hand, but the amplitudes of those are much different very different between the two markets.
Okay. Sir now my second question do you guys have a good track record off the leg, reaching out in an acquisition, giving a sluggish Damian what is a realistic rose from <unk>, we should be expecting.
24, and how should we think about the memories of it and waiting for the business.
Thank you.
Yeah. Thanks, Yeah. So we kind of aspirin guidance looking out in 24, So I can't give you that type of details but.
You know.
You know obviously, a Q3 can I give you a snapshot at those revenue levels, what type of cash flow comes off the business or you're gonna have that view in mind.
Mentioned with things sami's kind of at the trough levels or at least low levels for sure historically speaking certainly <unk> environment.
We think that'll over time, you know you know opportunity for us, but I would say you know fundamentally it'll be revenue driven we will work hard on working capital efficiency. We think we have more opportunity in certain areas that were working pretty hard right now, but I would say, it's really you know revenue profitability, driven and then working capital management.
And you saw on the Q3 resolves we work very hard to deliver really quite strong results given the environment. So so I think those are things I would focus on it things were kind of working pretty hard and that's been a playbook historically speaking.
Okay. Thank you.
Yep, Thanks to the.
I am showing no further questions at this time. So this concludes the question and answer session I would now like to turn it back to you.
David <unk> with closing remarks.
Thank you for joining us today and for your interest in M. K S. Operator, you may close the call. Please.
Thank you for your participation in today's conference. This does conclude the program and you may now disconnect.
Mmm.
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