Q4 2023 MKS Instruments Inc Earnings Call
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Operator: Welcome to the MKS Instruments 4th Quarter and Full Year 2023 Earnings Conversation. At this time, all participants are in a listen-only mode.
Welcome to the U K.
K S instruments fourth quarter and full year 2023 earnings conference call.
At this time all participants are in a listen only mode.
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Operator: For all your questions, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Ryzhik.
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I would now like to hand, the conference over to your speaker today.
David Ryzhik: Vice President of Investor Relations. Please go ahead. Good morning, everyone. I am David Ryzhik, Vice President of Investor Relations, and I am 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 fourth quarter and full year 2023, which are posted on our investor website at investor.mks.gov. 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 31st, 2022. These statements represent the company's 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.
David Ritchie: David Ritchie.
David Ritchie: Vice President of Investor Relations. Please go ahead.
David Ritchie: Good morning, everyone I am David Richard <unk>, Vice President of Investor Relations and I'm joined this morning by John Reed, 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 fourth quarter and full year 2023, which are posted to our investor website at Investor Dot MKS Dot com.
David Ritchie: As a reminder, various remarks about future expectations plans and prospects for MKS comprise forward looking statements.
David Ritchie: 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.
David Ritchie: These statements represent the company's 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.
David Ryzhik: During the call, we will be discussing various financial measures. Unless otherwise noted, all references to combined company financial measures reflect the 2022 combined results of MKS and Adtech Limited, which MKS acquired on August 17, 2022. Also, unless otherwise noted, all income statement-related financial measures will be non-GAAP other than revenue.
David Ritchie: During the call we will be discussing various financial measures unless otherwise noted all references to combined company financial measures reflect the 2022 combined results of MKS and AD Tech limited, which MKS acquired on August 17 2022.
David Ritchie: Also unless otherwise noted all income statement related financial measures will be non-GAAP other than revenue.
John Tseng Chung Lee: Please refer to our press release and the presentation materials posted to the investor relations section of our 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 breakdown of reported and combined company revenues by end market and division, please visit our investor website. Now, I'll turn the call over to John. Thanks, David. Good morning, everyone.
David Ritchie: Please refer to our press release and the presentation materials posted to the Investor Relations section of our website for information regarding our combined company results non-GAAP financial results and a reconciliation of our GAAP and non-GAAP financial measures.
David Ritchie: For a detailed breakout of reported and combined company revenues by end market and division. Please visit our Investor website now I'll turn the call over to John.
John Tseng Chung Lee: And thank you for joining us today. MKS delivered solid results in 2023 against a challenging market backdrop. For the full year, we delivered revenue of $3.6 billion, adjusted EBITDA of $863 million, and net earnings per diluted share of $4.43. Our performance highlighted the resilience of our business. We face headwinds from a softer demand environment in our semiconductor and electronics and packaging market, but we generated solid profitability due to a combination of prudent cost controls and the underlying strength of our broad portfolio of proprietary solutions. We appreciate the continued support of our customers who rely on MCAS to solve their toughest challenges and of our employees who work relentlessly to deliver on the MKS promise. Our results also reflect our first full year operating with Adatech as a combined, capable global company. The addition of Adatech's industry-leading chemistry and plating equipment solutions has expanded our broad range of capabilities and provided us with a higher mix of consumables and services revenue. We are on track to achieve our targeted cost synergies from the ADATEC Act.
John Reed: Thanks, David Good morning, everyone and thank you for joining us today.
John Reed: MKS delivered solid results in 2023 against a challenging market backdrop.
John Reed: For the full year, we delivered revenue of $3 6 billion adjusted EBITDA of $863 million and net earnings per diluted share of $4 43.
John Reed: Our performance highlighted the resilience of our business, we faced headwinds from a softer demand environment in our semiconductor and electronics and packaging markets.
John Reed: We generated solid profitability due to a combination of prudent cost controls.
John Reed: And the underlying strength of our broad portfolio of proprietary solutions.
John Reed: We appreciate the continued support of our customers who rely on MKS to solve their toughest challenges.
John Reed: And our employees, who work relentlessly to deliver on the MKS promise.
John Reed: Our results also reflect our first full year operating without a tech as a combined capable global company the.
John Reed: The addition of <unk> industry, leading chemistry, and plating equipment solutions have expanded our broad range of capabilities and provided us with a higher mix of consumables and services revenue.
John Reed: We are on track to achieve our targeted cost synergies from the <unk> acquisition.
John Tseng Chung Lee: I'm also encouraged by the progress we made in 2023 in positioning for future revenue opportunities, as our electronics and packaging teams are actively engaged with key customers on their next generation designs for advanced packaged substrates, a critical enabler for new applications such as artificial intelligence. Most industry observers expect the recovery in our end markets to slowly unfold in the second half of this year. We have established ourselves as a critical enabler of advanced electronics with our foundational solutions for the semiconductor and electronics and packaging market. Staying focused on our innovation roadmaps, controlling costs, managing our balance, and driving design wins with key customers, we are positioning MKS to generate attractive growth and value creation in the years ahead. Now, let me discuss our fourth quarter results in more detail.
John Reed: I'm also encouraged with the progress we made in 2023 and positioning for future revenue opportunities.
John Reed: Our electronics and packaging teams are actively engaged with key customers on their next generation designs for advanced packaging substrates, a critical enabler for new applications, such as artificial intelligence.
John Reed: Most industry observers expect the recovery in our end markets to slowly unfold in the second half of this year.
John Reed: We have established ourselves as a critical enabler of advanced electronics with our foundational solutions for the semiconductor and electronics and packaging markets.
John Reed: By staying focused on our innovation roadmaps controlling costs, managing our balance sheet and driving design wins with key customers, we are positioning MKS to generate attractive growth and value creation in the years ahead.
Speaker Change: Now, let me discuss our fourth quarter results in more detail.
John Tseng Chung Lee: We delivered revenue of $893 million, adjusted EBITDA of $218 million, and net earnings per due share of $1.17, all above the high end of our guidance. Revenue from our semiconductor market exceeded our expectations, as we saw better-than-expected demand in certain product categories, such as plasma and reacted gas and analytical controls solutions, that offset a continued muted demand environment for our vacuum solutions for deposition and etch applications due to the industry downturn in NAN equipment spending, which remains at a historically low level. Demand for our photonic solutions for lithography, metrology, and inspection applications has remained robust.
Speaker Change: We delivered revenue of $893 million adjusted EBITDA of $218 million and net earnings per diluted share of $1 17.
Speaker Change: All above the high end of our guidance range.
Speaker Change: Revenue from our semi custom market exceeded our expectations as we saw better than expected demand in certain product categories, such as plasma and reactive gas and analytical controls solutions.
Speaker Change: That offset a continued muted demand environment for our vacuum solutions for deposition and etch applications due to the industry downturn in NAND equipment spending which remains at historically low levels.
Speaker Change: Demand for our Photonics solutions for lithography metrology and inspection applications remained robust.
John Tseng Chung Lee: In 2023, this business grew on a year-over-year basis and exited the year at more than 20% of our overall semiconductor revenue. Photonic solutions remain an important area of investment for MKS. We expect it to be one of the key growth drivers for our semiconductor market in the years to come. As we look to the first quarter of 2024, we expect revenue in our semi-finished market to be down sequentially from our better-than-expected fourth quarter as overall demand remains muted. While customer inventory levels in some of our product categories have eased, we expect continued drawdown in categories tied to memory space.
Speaker Change: In 2023 this business grew on a year over year basis, and exited the year at more than 20% of our overall semiconductor revenue.
Speaker Change: Photonics solutions remain an important area of investment for MKS, and we expect it to be one of the key growth drivers for our semiconductor market in the years to come.
Speaker Change: As we look to the first quarter of 2024, we expect revenue in our semi trailer market to be down sequentially from our better than expected fourth quarter as overall demand remains muted.
Speaker Change: While customer inventory levels of some of our product categories have eased. We expect continued drawdown in categories tied to memory spending.
John Tseng Chung Lee: Turning to our Electronics and Packaging Markets, revenue was slightly better than expected due to the lumpiness of certain laser drilling equipment sales. Overall demand remains stable but muted, consistent with PC, smartphone, and server production volumes. That said, the long-term growth drivers for our electronics and packaging market remain as strong as ever. We frequently discuss how the trends of miniaturization complexity are moving from semiconductors to other critical components of advanced electronic devices, including packaged substrates, which are a key building block of advanced packaging architecture.
Speaker Change: Turning to our electronics packaging market.
Speaker Change: Revenue was slightly better than expected due to the lumpiness of certain laser drilling equipment sales.
Speaker Change: They're all demand remains stable that muted consistent with PC smartphone and server production volumes.
Speaker Change: That said the long term growth drivers for our electronics and packaging market remains as strong as ever.
Speaker Change: We frequently discuss how the trends administration complexity are moving from semiconductors to other critical components of advanced electronic devices, including packaged substrates, which are a key building block that advanced packaging architectures.
John Tseng Chung Lee: There are many packaging architectures enabling today's cutting-edge applications, of which TSMC's Chip-on-Wafer-on-Substrate architecture, or COASP, is one. Let me walk you through how MKS is a foundational enabler to that architecture for the C-O-W, which represents the chip on wafer. We have a leading portfolio of critical subsystems across deposition, etch, lithography, metrology, and inspection applications that are integral to the manufacturing of individual semiconductors, as well as bonding these individual semiconductor chips to each other. We also have a small but growing chemistry business for this application. These stacks of chips are then packaged on top of a silicon interposer, which is the W or wafer, which is then integrated on a packaged substrate.
Speaker Change: Many packaging architectures, enabling today's cutting edge applications of which tsmc's chip on wafer on substrate architecture of course is one.
Speaker Change: Let me walk you through how MKS is a foundational enabler to that architecture for.
Speaker Change: For the C O W, which represents the chip on wafer we have a leading portfolio of critical subsystems across deposition etch lithography metrology and inspection applications that are integral to the manufacturing of individuals semiconductors as well as bonding. These individuals senator semiconductor chips.
Speaker Change: Each other.
Speaker Change: We also have a small but growing chemistry business for this application.
Speaker Change: These stacks of chips, so that package on top of silicon into poser, which is the W or wafer.
Speaker Change: Which is that integrated on a packaged substrate.
John Tseng Chung Lee: This last step represents the O and the S in co-op. MKS has leading expertise in laser drilling, chemistry, and plating equipment that addresses more than 70% of the critical process steps to manufacture these packaged substrates. Similar to transistor scaling for semiconductors, the lines, the faces, and the interconnecting vias of a packaged substrate are getting smaller, while the size of the substrate is getting larger. The number of layers in each package continues to increase. All of this creates more complexity and miniaturization, and MKS is unique.
Speaker Change: This last that represents the oh in the <expletive> and costs.
Speaker Change: MKS has leading expertise and laser drilling chemistry, and plating equipment that addresses more than 70% of the critical process steps to manufacture these packaged substrates.
Speaker Change: Similar to transistor scaling for semiconductors, the lines the spaces and the interconnecting gears, a packaged substrate or getting smaller.
Speaker Change: The size of the substrate is getting larger than.
Speaker Change: The number of layers in each package continue to increase.
Speaker Change: All of this creates more complexity and miniatures Asian, and MKS is uniquely positioned with a broadest portfolio to help our packaged substrate manufacturing customers meet these challenges.
John Tseng Chung Lee: The Broadest Portfolio to help our packaged substrate manufacturing customers meet these challenges. As we look to the first quarter of 2024, we expect revenue from our electronics and packaging market to be down slightly on a sequential basis, primarily due to the typical seasonality associated with the Chinese New Year. Turning to our specialty industrial market, revenue was slightly weaker than expected, primarily due to modest softness and demand for research and defense applications. As we look to the first quarter, we expect demand trends in our specialty industrial market to remain stable, with revenue to be relatively in line with fourth-quarter levels.
Speaker Change: As we look to the first quarter of 2024.
Speaker Change: We expect revenue from our electronics packaging market to be down slightly on a sequential basis, primarily due to typical seasonality associated with the Chinese new year.
Speaker Change: Turning to our specialty industrial market revenue was slightly weaker than expected primarily due to modest softness in demand for research and defense applications.
Speaker Change: As we look to the first quarter, we expect demand trends in our specialty industrial market to remain stable with revenues to be relatively in line with fourth quarter levels.
John Tseng Chung Lee: As a reminder, we leverage our R&D investments in our semiconductor and electronics and packaging markets. We drive incremental revenue opportunities in our specialty industrial market, which is a more stable business with good margins and cash flow. Wrapping up, I want to thank the entire MKS team for their passion, dedication, and resilience this past year.
Speaker Change: As a reminder, we leverage our R&D investments in our semiconductor and electric trucks and packaging markets to drive incremental revenue opportunities in our specialty industrial market, which is a more stable business with good margins and cash flow.
Speaker Change: Wrapping up I want to thank the entire <unk> team for their passion dedication and resilience this past year.
John Tseng Chung Lee: In addition to weathering a softer end market backdrop, the MKS team worked tirelessly to resume normal production and deliver for our customers as we recovered from the ransomware event in the first quarter of 2023. The strength of our team and our culture is reflected in the industry accolades we receive during the year, including being named to U.S. News & World Report's inaugural Best Companies to Work For in the Industrials and Business Services Industry, as well as being named by Newsweek and Statista as one of America's most responsible companies for 2020. Finally, before I hand the call over to Seth, I want to thank him for his dedication and service to MKS and to congratulate him on his upcoming retirement.
Speaker Change: In addition to weather a softer end market backdrop. The MKS team worked tirelessly to resume normal production and deliver for our customers as we recovered from the ransomware event in the first quarter of 2023.
Speaker Change: The strength of our team and our culture is reflected in the industry accolades, we received during the year.
Speaker Change: <unk> being named to USD <unk> reports inaugural best companies to work for in the Industrials and business services industry list.
Speaker Change: As well as being named by Newsweek and statistics as one of America's most responsible companies for 2024.
Speaker Change: Finally, before I hand, the call over to Seth I want to thank him for his dedication and service to MKS and to congratulate him on his upcoming retirement.
John Tseng Chung Lee: Without Seth's long and distinguished career at MKS, he has been instrumental in our growth and transformation. His foresight, financial stewardship, and ability to navigate complex financial landscapes have earned him the admiration and respect of all who have had the privilege of working alongside him. Our search for his replacement is well underway.
Seth H. Bagshaw: <unk> long and distinguished career at MKS, He has been instrumental to our growth and transformation.
Seth H. Bagshaw: <unk> foresight financial stewardship and ability to navigate complex financial landscapes have earned him the admiration and respect the ball who have had the privilege of working alongside him.
Seth H. Bagshaw: We look forward to updating you when we have named our next chief financial officer. And now, I'd like to turn the call over to John. Before I discuss our results and outlook, I just want to say a heartfelt thank you to the entire MKS team, as well as our shareholders, for your support and partnership in the past 18 years. It's been a privilege to serve as Chief Financial Officer of MKS. I am proud to have been a part of the company's substantial growth and transformation over that period. MKS is a strong operating model and unique position to capitalize on a number of attractive secular growth opportunities. It leaves me very excited about the company's future, and I look forward to following MKS's continued success. Let me now cover our fourth quarter and full year results and provide some thoughts on our first quarter of 2024. Starting with the fourth quarter, we delivered revenue of $893 million, above the high-end of our guidance, primarily due to higher-than-expected revenue from the semiconductor and electronic packaging market. Rentals are down 4% sequentially and down 18% year-to-year.
Seth H. Bagshaw: Our search for his replacement is well underway, we look forward to updating you when we have named our next Chief Financial Officer.
Seth H. Bagshaw: And now I'd like to turn the call over to Seth.
Seth H. Bagshaw: Thank you John before I discuss our results I look, yes, when I say a heartfelt. Thank you to the entire MKS team as well as our shareholders for their support and partnership in the past 18 years.
Seth H. Bagshaw: It's been a privilege to serve as chief financial Officer of MKS I am proud to be had been a part of the company's substantial growth and transformation over that period.
Seth H. Bagshaw: MKS with strong operating model and unique positioned to capitalize across a number of attractive secular growth opportunities.
Seth H. Bagshaw: Leaves me very excited by the company's future.
Seth H. Bagshaw: Look forward to following <unk> continued success.
Seth H. Bagshaw: Let me now cover our fourth quarter and full year results and provide some thoughts on our first quarter of 2024.
Seth H. Bagshaw: Starting with the fourth quarter delivered revenue of $893 million above the high end of our guidance range, primarily due to better than expected revenue from our semiconductor and electronics packaging markets.
Seth H. Bagshaw: Revenue was down 4% sequentially and down 18% year over year.
Seth H. Bagshaw: Turning to our end market results, fourth quarter semiconductor revenue was $362 million, declining 1% sequentially and 28% year-over-year. Fourth quarter electronics and packaging revenue was $226 million, a decrease of 7% sequentially and 15% year-over-year. Due to the impact of foreign exchange played in pass-through, fourth quarter revenue declined 9% on a year-over-year basis.
Seth H. Bagshaw: Turning to our end market results fourth quarter semiconductor revenue was $262 million declining, 1% sequentially and 28% year over year.
Seth H. Bagshaw: Fourth quarter electronics packaging revenue was $226 million a.
Seth H. Bagshaw: A decrease of 7% sequentially and 15% year over year.
Seth H. Bagshaw: The impact of foreign exchange played in pass through fourth quarter revenue declined 9% on a year over year basis.
Seth H. Bagshaw: Moving to our specialty industrial market, revenue in the fourth quarter was $305 million, down 5% sequentially and down 3% year-over-year. Due to the impact of foreign exchange and palladium pass-through, fourth quarter revenue declined 3% year-over-year. In the fourth quarter, consumable services revenue across our three end market categories comprised 41% of our total revenue. Turning to our margins, we reported a fourth quarter gross margin of 46%, exceeding the midpoint of our guidance range. The more favorable gross margins were a function of unexpected volumes, as well as favorable product mix. Our healthy growth margins reflect the value of technological capabilities in the complex problems we solve for our customers. Fourth quarter operating expenses were $229 million below the low end of our guidance range, due to strong cost control, even though we had better than expected revenue.
Seth H. Bagshaw: Moving to our specialty industrial market revenue in the fourth quarter was $305 million down, 5% sequentially and down 3% year over year.
Seth H. Bagshaw: The impact of foreign exchange of Palladium pass through fourth quarter revenue declined 3% year over year.
Seth H. Bagshaw: Yeah.
Seth H. Bagshaw: In the fourth quarter consumables and services revenue across our three end market categories comprised 41% of our total revenue.
Seth H. Bagshaw: Turning to our margins, we reported fourth quarter gross margin of 46% exceeding the midpoint of our guidance range.
Seth H. Bagshaw: The more favorable gross margins were a function of unexpected volumes as well as favorable product mix.
Seth H. Bagshaw: Our healthy gross margins reflect the value of our technological capabilities in the complex problems, we solve for our customers.
Seth H. Bagshaw: Fourth quarter operating expenses were $229 million below the low end of our guidance range due to strong cost control, even though we had better than expected revenue.
Seth H. Bagshaw: Fourth quarter operating margin was 20.3%, well above the height of our guidance range due to higher revenue, stable mix, and prudent cost control, resulting in robust operating leverage. We exited the fourth quarter delivering almost $50 million of annualized run rate cost synergies, on track to achieve our cost energy target of $55 million next in the second quarter of 2024. Fourth quarter just to EBITDA was $218 million, also above the Art Guidance Range. Just leave it.
Seth H. Bagshaw: Fourth quarter operating margin was 23% well above the high end of our guidance range due to higher revenue favorable mix and prudent cost control, resulting in robust operating leverage.
Seth H. Bagshaw: Continue to work toward our cost synergy targets with AD Tech.
Seth H. Bagshaw: We exited the fourth quarter, delivering almost $50 million of annualized run rate cost synergies are on track to achieve our cost synergy target of $55 million exiting the second quarter of 2024.
Seth H. Bagshaw: Fourth quarter, adjusted EBITDA was $218 million.
Seth H. Bagshaw: The A margin was 24%. Net expense for the fourth quarter was $76 million, lower than anticipated due to more favorable interest rates relative to our expectations. Our tax rate for the fourth quarter was 16 percent.
Seth H. Bagshaw: Also above our guidance range.
Seth H. Bagshaw: Just the EBITDA margin was 24%.
Seth H. Bagshaw: Net <unk> expense for the fourth quarter was $76 million lower than anticipated due more favorable interest rates relative to expectations.
Seth H. Bagshaw: Our tax rate for the fourth quarter was 16%.
Seth H. Bagshaw: Net earnings for the fourth quarter were $78 million, or $1.17 per diluted share. Now, turn to our balance sheet and cash flow. We exit the fourth quarter with more than $1.3 billion in liquidity, including cash assured to investments of $875 million, and an undrawn revolving crib facility of $500 million. We also exit the quarter with gross debt of $5 billion. And last month, we successfully completed the refinancing of our $744 million Secure Tranche A term loan by raising incremental secured U.S. dollars in Eurotrunch B term. As a result of the refinancing, we extended the maturity of the refinance debt to 2029, consistent with our existing Tranche B term law. He eliminated the financial maintenance covenant that applied while a Tranche 8 term loan was outstanding.
Seth H. Bagshaw: Net earnings for the fourth quarter was $78 million or $1 17 per diluted share.
Seth H. Bagshaw: Turning to our balance sheet and cash flow, we exited fourth quarter with more than $1 3 billion in liquidity.
Seth H. Bagshaw: Including cash and short term investments of $875 million.
Seth H. Bagshaw: And an undrawn revolving credit facility of $500 million.
Seth H. Bagshaw: We exited the quarter with gross debt of $5 billion.
Seth H. Bagshaw: And last month, we successfully completed the refinancing of our $744 million secured tranche a term loans by raising incremental secured U S dollar and euro tranche b term loans.
Seth H. Bagshaw: As a result of the refinancing we extend maturity of the refund of the refinance debt to 2029.
Seth H. Bagshaw: Consistent with our existing tranche b term loans.
Seth H. Bagshaw: Eliminated the financial maintenance covenant that applied while our tranche a term loan was outstanding.
Seth H. Bagshaw: Based on current interest rates, we also expect the refinancing to result in modest interest savings. In addition, we made a voluntary debt prepayment of $50 million earlier this month, following the $100 million voluntary debt prepayment we made in the fourth quarter. We continue to prioritize deleveraging our balance sheet while managing the cash and investment needs of the business. In this context, it's worth noting that the first quarter typically has lower free cash flow due to the timing of variable compensation payments. Our net leverage ratio actually in the fourth quarter was 4.7 times based on trailing 12 months of just EBITDA of $863 million. For the fourth quarter, free cash flow was $146 million.
Seth H. Bagshaw: Based on current interest rates. We also expect the refinancing resulted in modest interest savings.
Seth H. Bagshaw: In addition, we made a voluntary debt prepayment of $50 million earlier this month.
Seth H. Bagshaw: Following the $100 million voluntary debt prepayment, we made in the fourth quarter.
Seth H. Bagshaw: We continue to prioritize deleveraging our balance sheet, while managing the cash and investment needs of the business.
Seth H. Bagshaw: In this context, it's worth noting that in the first quarter typically has lower free cash flow to a timing of variable compensation payments.
Seth H. Bagshaw: Our net leverage ratio exiting the fourth quarter was four seven times based on trailing 12 month, adjusted EBITDA of $863 million.
Seth H. Bagshaw: Yes.
Seth H. Bagshaw: For the fourth quarter free cash flow was $146 million.
Seth H. Bagshaw: And unlevered free cash flow was $194 million. Consistent with prior quarters, we made a dividend payment of $15 million, or $0.22 per share. Moving to full year 2023 results, revenue was $3.6 billion, down 19% year-over-year on a combined company basis. Semiconductor revenue totaled $1.48 billion, declining 28% year-over-year. Due to the decline in global semiconductor capital equipment, the largest driver of that decrease was a significant decline in NAND spending, where we are a key enabler with certain subsystems, such as RF power generators for high aspect ratio, Electronics and Packaging revenue was $916 million in 2023, down 19% year-over-year compared to combined company results in 2022. Including the impact of foreign exchange and plug-in pass-through, electronics and With the electronics and packaging market, total chemistry sales declined 10% year over year on a combined company basis. We exclude the impact of foreign exchange in the plague impasse.
Seth H. Bagshaw: And Unlevered free cash flow was $194 million.
Seth H. Bagshaw: Consistent with prior quarters, we made a dividend payment of $15 million or 22 per share.
Seth H. Bagshaw: Moving to full year 2023 results revenue was $3 6 billion down 19% year over year on a combined company basis.
Seth H. Bagshaw: Semiconductor revenue totaled $1, four 8 billion declined 28% year over year.
Seth H. Bagshaw: Due to the decline in global semiconductor capital equipment spending.
Seth H. Bagshaw: The largest driver that decrease was significant decline in NAND spending where we are a key enabler with certain sub systems, such as RF power generators for high aspect ratio hedging.
Seth H. Bagshaw: Electronic and packaging revenue was $916 million in 2023.
Seth H. Bagshaw: Down 19% year over year compared to combined company results in 2022.
Seth H. Bagshaw: Excluding the impact of foreign exchange and <unk> pass through electronics and packaging revenue declined 13% on a year over year basis.
Seth H. Bagshaw: Within electronics and packaging market total chemistry sales declined 10% year over year on a combined company basis.
Seth H. Bagshaw: When excluding the impact of foreign exchange in play and pass through.
Seth H. Bagshaw: Specialty Industrial Revenue was $1.23 billion in 2023, down 4% year-to-year on a combined company basis, excluding the impact of foreign exchange and plaguing pass-through, sales declined 2% year-over-year. In 2023, the revenue split between our semiconductor, electronics, and packaging, especially industrial markets, was 41%, 25%, and 34%, respectively. For the full year, gross margin was approximately 46%, and operating margin was approximately 20%.
Seth H. Bagshaw: Especially industrial revenue was $123 billion in 2023.
Seth H. Bagshaw: Down 4% year over year combined company basis.
Seth H. Bagshaw: Excluding the impact of foreign exchange and plaguing pass through sales declined 2% year over year.
Seth H. Bagshaw: In 2023, the revenue split between our semiconductor electronics packaging, especially industrial markets was 41%, 25% and 34% respectively.
Seth H. Bagshaw: For the full year gross margin was approximately 46% and operating margin was approximately 20%.
Seth H. Bagshaw: Again, that performance is a reflection of the value of our proprietary and differentiated technology, as well as disciplined cost management. We are pleased with execution on margins given a lower level of revenue due to broader industry software. Turning to cash flow, we generate operating cash flow of $319 million and free cash flow of $232 million. Furthermore, we generate unlevered free cash flow of $473 million for 13% of total revenue.
Seth H. Bagshaw: Again that performance is a reflection of the value of our proprietary and differentiated technology as well as disciplined cost management.
Seth H. Bagshaw: We are pleased with the execution on margins given the lower level of revenue due to broader industry softness.
Seth H. Bagshaw: Turning to cash flow, we generate operating cash flow of $319 million and free cash flow of $232 million.
Seth H. Bagshaw: Furthermore, we generated unlevered free cash flow of $473 million or 13% of total revenue.
Seth H. Bagshaw: We are pleased with the strength of the underlying cash generation in our business, despite a challenging demand environment in our end markets, as well as a ransomware event in the first quarter of 2023. As our end markets recover, we expect cash generation to improve, which will enable us to accelerate our debt paydown. Now, let me turn to our first quarter outlook. We expect first quarter revenue of $840 million, plus or minus $40 million, from N Market. Our outlook is as follows. Redwood Farmhouse Semiconductor Market, $330 million, plus or minus $15 million, revenue from the electronics and packaging market of $210 million, plus or minus $10 million, and revenue from a specialty industrial market of $300 million, plus or minus $15 million. Based on anticipated product mix and revenue levels, we estimate a first quarter gross margin of 45.5% plus or minus 1% For the first quarter, we expect operating expenses of $240 million, The exponential increase is due to a typical increase in fringe expenses.
Seth H. Bagshaw: We are pleased with the strength of the underlying cash generation of our business. Despite a challenging demand environment in our end markets as well as a ransomware event in the first quarter of 2023.
Seth H. Bagshaw: As our end markets recover we expect cash generation to improve which will enable us to accelerate our debt pay down.
Seth H. Bagshaw: Now, let me turn to our first quarter outlook.
Seth H. Bagshaw: We expect first quarter revenue added $40 million, plus or minus $40 million.
Seth H. Bagshaw: By end market.
Seth H. Bagshaw: <unk> is as follows.
Seth H. Bagshaw: Revenue for our semiconductor market of $330 million plus.
Seth H. Bagshaw: Plus or minus $15 million.
Seth H. Bagshaw: Revenue from electronics, and packaging market of $210 million, plus or minus $10 million.
Seth H. Bagshaw: And revenue from our specialty industrial market $300 million.
Seth H. Bagshaw: Plus or minus $15 million.
Seth H. Bagshaw: Based on anticipated product mix of revenue levels, we estimated first quarter gross margin of 45, 5% plus or minus one percentage point.
Seth H. Bagshaw: For the first quarter, we expect operating expenses of $240 million, plus or minus $5 million.
Seth H. Bagshaw: The sequential increase was due to typical increase in fringe expenses.
Seth H. Bagshaw: There is a continued investment in the business, but operating expenses can fluctuate due to underlying business levels. We believe a $240 million to $250 million quarterly run rate is a reasonable estimate to think about OPEX for the balance of 2024. We'll also continue to manage our cost structure carefully. For the first quarter, we estimate adjusted EBITDA of $182 million, plus or minus $22 million. For the first quarter, net interest expense is expected to be $78 million, reflecting current interest rates, our recent refinancing, and the $50 million voluntary prepayment we made earlier this year.
Seth H. Bagshaw: Continued investments into the business.
Seth H. Bagshaw: While operating expenses can fluctuate due to underlying business levels, we believe a $240 million to $250 million quarterly run rate is a reasonable estimate to think about opex balance of 2024.
Seth H. Bagshaw: We'll also continue to manage our cost structure carefully.
Seth H. Bagshaw: For the first quarter, we estimate adjusted EBITDA $182 million plus.
Seth H. Bagshaw: Plus or minus $22 million.
Seth H. Bagshaw: For the first quarter net <unk> expense expected to be $78 million, reflecting current interest rates. Our recent refinancing in the $50 million voluntary prepayment we made early this month.
Seth H. Bagshaw: For the first quarter, we expect our tax rate to be approximately 24 percent. However, for the full year, we expect our tax rate to be approximately 20 percent. We are very pleased with the execution optimizing our tax rates following the closing of the ATT&CK acquisition in August of 2022. In fact, after any tax, any change in tax legislation. We now expect a long-term tax rate to be approximately 19 to 21%, compared to a tax rate of 25 to 27 percent, which is presented in our long-term financial model in our 2022 annual data.
Seth H. Bagshaw: For the first quarter, we expect our tax rate to be approximately 24%. However for the full year, we expect our tax rate to be approximately 20%.
Seth H. Bagshaw: Yes.
Seth H. Bagshaw: We are very pleased with the execution optimizing our tax rate following the close of the <unk> acquisition in August of 2022.
Seth H. Bagshaw: In fact absent any tax changes in tax legislation.
Seth H. Bagshaw: We now expect our long term tax rate to be approximately 19% to 21%.
Seth H. Bagshaw: Compared to tax rate of 25% to 27%.
Seth H. Bagshaw: <unk>, our long term financial model.
Seth H. Bagshaw: And our 2022 analyst day.
Seth H. Bagshaw: Given these assumptions, we expect first quarter net earnings of $0.72 per diluted share plus or minus $0.25. In closing, we perform well navigating through cyclical softness in our end markets by focusing on what we can control. We maintain strong gross operating margins. We prudently manage our cost structure while remaining aggressive with product innovation. We significantly lowered our tax rate through a series of tax planning initiatives.
Seth H. Bagshaw: Given these assumptions, we expect first quarter net earnings of 72 per diluted share plus or minus 25.
Seth H. Bagshaw: In closing reformed well navigating through cycle softness in our end markets by focusing on what we can control.
Seth H. Bagshaw: We maintained strong gross and operating margins.
Seth H. Bagshaw: We prudently manage our cost structure will remain aggressive in product innovation.
Seth H. Bagshaw: We significantly lowered our tax rate to a series of tax planning initiatives.
Seth H. Bagshaw: We optimized our balance sheet by extending certain debt maturities and simplified our debt structure by eliminating the financial maintenance coverage that applied to our existing debt. We reduced our cost of debt by repricing our USD. Term Loan B.
Seth H. Bagshaw: We optimize our balance sheet by extending certain debt maturities and simplified our debt structure by eliminating the essential maintenance covenant that applied to our existing debt.
Seth H. Bagshaw: We reduced our cost of debt through a repricing of our USD.
Seth H. Bagshaw: Term loan B.
Seth H. Bagshaw: We maintained strong liquidity as we manage through a cycle down slowdown.
Seth H. Bagshaw: We maintain strong liquidity as we manage to cycle down, slow down, and finally, we deploy more than 80% of free cash flow to DebtPay.debt. All of these actions have made MKS a stronger company; we're well-positioned to capture the long-term secular growth opportunities we see across our portfolio and translate that into attractive value creation for our shareholders. With that, Operator, you can now open up for Q&A. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again.
Seth H. Bagshaw: And finally, we deployed more than 80% of free cash flow to debt Paydown.
Seth H. Bagshaw: All of these actions have made <unk>, a stronger company well positioned to capture long term secular growth opportunities, we see across our portfolio and.
Seth H. Bagshaw: And translate that into attractive value creation for our shareholders.
Speaker Change: With that operator, you can now open up for Q&A.
Seth H. Bagshaw: As a reminder to ask a question. Please first star one one on your telephone.
Seth H. Bagshaw: Wait for your name to be announced to withdraw your question. Please press star one again.
Operator: Please stand by while we compile the Q&A roster. Our first question comes from Joe. Joe, you're atrocious with Wells Fargo, your line is now open.
Speaker Change: Please standby, while we compile the Q&A roster.
Seth H. Bagshaw: Our first question comes from Joe.
Joe: Quattrochi with Wells Fargo. Your line is now open.
John Tseng Chung Lee: Thanks for taking the questions. Maybe first, just to start, as we kind of think about, you know, total revenue and your guidance for the first quarter and think about the seasonality for some of the businesses that are in markets, how should we think about, I guess, the rest of the year? Do you view the March quarter as kind of the low point of revenue for the year? Hi Joe. It's John.
Joe Quattrochi: Yes, thanks for taking the questions.
Joe Quattrochi: Maybe first just to start as we kind of think about.
Joe Quattrochi: Total revenue in your guidance for the first quarter and thinking about the seasonality for some of the businesses are in markets.
Joe Quattrochi: How should we think about I guess the rest of the year do you view the March quarter is kind of a low point.
Joe Quattrochi: Revenue for the year.
John Tseng Chung Lee: I'll take that. You know, as you know, we only guide one quarter. Our visibility is limited, as usual, but we certainly read the same things you do.
Joe Quattrochi: Hi, Joe It's John I'll take that.
John Reed: As you know, we only guide one quarter out visibility is limited as usual, but we certainly read the same things you do and we're certainly in constant contact with our customers.
John Tseng Chung Lee: And we're certainly in constant contact with our customers. And I think, you know, our view is consistent with the industry, meaning the first half is kind of consistent with current levels, you know, kind of with our guidance. And then certainly the industry feels that the second half can be a little better. And, you know, our focus is really to continue to, you know, do the R&D for the future projects with our customers. And so, as you know, MKS has always been very lean and able to react very quickly to any changes in those assumptions. So we are looking at a first half that's kind of consistent with what we just talked about and guided for Q&A. Not at this level.
John Reed: And I think our view is consistent with the industry, meaning the first half is kind of consistent with current levels kind of with our guidance and then suddenly the industry feels that the second half can be a little better.
John Reed: <unk>.
Joe Quattrochi: Our focus is really to continue to.
Joe Quattrochi: Do the R&D for the future projects with our customers.
Joe Quattrochi: And so as you know <unk> always been very lean and able to react very quickly to any changes in those assumptions.
Joe Quattrochi: So we are looking at a first half that's kind of consistent with what we just talked about and guided for Q1.
John Tseng Chung Lee: And then just as a follow-up, I think in the past, you guys have talked about, you know, the number of MKS plus Adotech opportunities in your pipeline. And, you know, I think a lot of them have still been kind of driven by Adotech. But just kind of curious, just as we turn over the new calendar year, if there's any update on the number of opportunities there, and then maybe, you know, any color on just the number that are being driven by MKS. Yeah, sure, Joe.
Speaker Change: Got it that's helpful. And then just as a follow up I think in the past you guys have talked about the number of MKS first at our tech opportunities in your pipeline and I think a lot of them that so then kind of driven by auto tech, but just kind of curious if just as we turned over the new calendar year. If there was any update there and the number of opportunities.
Speaker Change: There and then maybe.
Speaker Change: Any color on just the number that are being driven by MKS.
Speaker Change: Yes, sure Joe So we've kind of alluded to double digit numbers of customer opportunities with different customers double digit and that's remained the same as you know the development and work with the customers takes time, because we are working on the next generation packaged substrates with these customers.
John Tseng Chung Lee: So, you know, we've kind of alluded to double digit numbers of customer opportunities with different customers, double digits. And that remains the same. As you know, development and working with customers takes time because we're working on next-generation package substrates with these customers. As you know, Adatech has leading industry market share in that space, and the top 30 customers are their customers. So the majority of it is the synergy of Adatech and those relationships bringing over the laser groups. But our laser group also has market share leadership in flex drilling, and there are examples there as well, customers there, where the laser group is bringing the Adatech opportunity to that customer. Perfect. Thank you. Thanks, Joe.
Speaker Change: As you know <unk> has leading industry market share in that space in the top 30 customers or their customers. So the majority of it is the synergy of AMETEK and those relationships, bringing over the laser groups, but our laser group also has had market share leadership in flex drilling and.
Speaker Change: There are examples there as well and customers there where the laser group is bringing the additive.
Speaker Change: <unk> into into that customer.
Speaker Change: Alright, thank you.
Speaker Change: Thanks, Joe.
Speaker Change: Thank you and one moment for our next questioner.
Operator: Thank you, and one moment for our next question. Our next question comes from Krish Sankar with TD Cohen. Hi, thanks for taking my question, and Seth, thanks for all your help through the years. You'll definitely be missed.
Speaker Change: Our next question comes from Krish Shankar with TD Cowen. Your line is now open.
Krish Sankar: Hi, Thanks for taking my question and thanks for all your help through the years, you'll definitely be missed.
John Tseng Chung Lee: John, my first question is, last year, your semi-business, you know, underperformed WFE. This year, arguably, WFE is expected to be flat, although the second half is biased. I'm kind of curious how to think about your business because, historically, you know, it seems like in the years when WFE improves, you should outperform WFE, but how to think about your business in a year when WFE is actually flat? Yeah, that's a good question, Krish.
Krish Sankar: John My first question.
Krish Sankar: Last year your semi business.
Krish Sankar: Underperform Wi Fi this year arguably guarantee fees expected to be flat.
Krish Sankar: Although the second half bias.
Krish Sankar: Kind of curious how do you think about your business because historically.
Krish Sankar: It seems like in the yields and WP improves you should outperform WP, but how do you think about your business in the European WPS actually flat.
John Tseng Chung Lee: Certainly, we look at our performance relative to WFE over the long term because, as you know, during the cycles, it varies when you're going up or going down. You know, many industry analysts are thinking of 2024 being flat, as you said, for WFE. I think the only characteristic I'd say that's a little different is that when it's flat that long, the inventory burndown, you know, eventually finishes.
Speaker Change: Yes, that's a good question Krish certainly we look at our performance relative to <unk> over the long term because as you know during the cycles. It varies when you are going up or going down.
Krish Sankar: Yeah.
Krish Sankar: Many industry.
Speaker Change: Analysts are thinking of Q of 2024 being flat as you said for WMC.
Speaker Change: I think the only.
Krish Sankar: Characteristic I would say that's a little different is when it's flat that long.
Krish Sankar: The inventory burn down eventually finishes.
John Tseng Chung Lee: And so even if it's flat, because there's just less inventory burndown, it should be beneficial to those of us in that part of the supply chain. And in our prepared remarks, we did call out that there have been many product categories where inventory burndown has completed, and we're kind of seeing a balance between, you know, what our customers are shipping versus what we're shipping to them. But it's not done yet.
Krish Sankar: So even if it's flat.
Krish Sankar: Because there's just less inventory burn down that should be beneficial to those of us in that part of the supply chain.
Krish Sankar: And in our prepared remarks, we did call out that there have been many product categories, where inventory burn down has completed and we're kind of seeing balanced between what our customers are shipping versus what we're shipping to them, but it's not done yet and we called out the memory.
John Tseng Chung Lee: And we called out that memory, specifically product categories tied to memory, there's still, we believe, some inventory burndown that has to happen, and that is certainly going to be a function of, you know, how fast that part of the semi market turns up. And then, you know, on the additive side, I guess I should say the PCB part of your business. Is it fair to assume that the material side, which is your legacy additive business, that is really going to be driven by smartphone volumes? And on the PCB drilling side, one of the questions I get is, you know, even if smartphone units grow this year, they're still below the peak pandemic levels. So there is really no need to buy PCB drilling equipment. So I'm just kind of curious; can you help answer those two parts of the PCB question?
Krish Sankar: Specific product categories tied to memory. There is still we believe some inventory burn down that has to happen.
Krish Sankar: It's certainly going to be a function of how fast that part of the semi market turns up.
Krish Sankar: Got it done and then.
Krish Sankar: On the additive side, I guess I should say the PCB part of your business.
Krish Sankar: Is it fair to assume that the material side.
Krish Sankar: Which is the legacy <unk> business that is really going to be driven by smartphone volumes.
Krish Sankar: And on the PCB drilling side, one of the questions I get is.
Krish Sankar: Even the smartphone unit growth this year.
Krish Sankar: Below the peak pandemic levels. So there is really no need to buy PCB drilling a coupon. So I'm just kind of curious can you help answer those two parts of the PCB question.
John Tseng Chung Lee: Yeah, I think there's no real change. The dynamics are very, very much determined by utilization versus capacity expansion. So there's no change there.
Speaker Change: Yes, I think Theres no real change to the dynamics are very very much determined by utilization versus capacity expansion. So no change there and to your point as utilization rates increase you will see that in the consumables part immediately and first and just like in semi once the utilization rate.
John Tseng Chung Lee: And to your point, as utilization rates increase, we'll see that in the consumables part, you know, immediately. And first, and just like in SEMI, once the utilization rates hit a certain level, our customers would then be making plans for capacity additions, and the CapEx then would follow, not just in laser drilling but also in equipment for chemistry plating.
Krish Sankar: <unk> hit a certain level our customers would then be making plans for capacity additions and the Capex then would follow not just in laser drilling, but also equipment for chemistry plating.
John Tseng Chung Lee: So what we're focused on now is making sure that we're designed in so that when those volumes of CapEx occur, we're going to see that volume. But the characteristics of the consumable part of our business versus the CapEx part haven't really changed. Got it. Thanks a lot, John. Thanks, Chris.
John Tseng Chung Lee: So what we're focused on now is making sure that we're designed in so that when those volumes of capex occur, we're going to see that volume, but the characteristics of the consumable part of our business versus the Capex part haven't really changed.
John Tseng Chung Lee: Got it tons of our job.
Speaker Change: Thanks, Chris.
Operator: Thank you, and one moment for our next question. Our next question comes from Jim Rischuti with Niedermann Company. Your line is now open.
Speaker Change: Thank you.
Speaker Change: One moment for our next question.
John Tseng Chung Lee: Our next question comes from Jim <unk>.
Jim: <unk> with Needham <unk> Company. Your line is now open.
Operator: All right. Thank you. Good morning.
John Tseng Chung Lee: I want to go back to the comment about the E&P business and, you know, what you described as the lumpiness in the laser systems business. So in other words, where did you see some strength? Was it in the legacy flex drilling business? Or, you know, did you see some momentum in the HDI laser systems business in the Geo tool? Yeah, Jim, we can give you a little color on that, you know, capital expenditure for lasers is a little lumpy in the packaging business, and the better than expected result in q4 was really driven by laser drilling for the flex market. Okay, and John, how would you how would you characterize what you're seeing for the HDI portion of that?
Speaker Change: Alright. Thank.
Jim Rischuti: Thank you and good morning.
Jim: I wanted to go back to the comment about the <unk>.
Speaker Change: <unk> business and.
John Tseng Chung Lee: What you described as Lumpiness.
John: Laser systems business.
John Tseng Chung Lee: Where did you see some some strength was it in the.
John Tseng Chung Lee: Legacy Flex drilling or are you did you see some momentum in the HDI laser systems business on the <unk>.
Speaker Change: Yes, Jim Yes, we can give you a little color on that.
John Tseng Chung Lee: Capex for lasers is a little lumpy in the packaging business.
John Tseng Chung Lee: And better than expected results in Q4 was really driven by laser drilling for the flex market.
John Tseng Chung Lee: Okay, and John how would you how would you characterize what youre seeing for the the HDI portion of that business.
John Tseng Chung Lee: Yeah, I think it's still muted, Jim. I think, you know, you can see the utilization rates of many of our customers. And, as you know, that's driven a lot by smartphones, PCs, and servers. And so, you know, some of our substrate customers, publicly, you know, public companies have been, you know, down 30% year over year. So when those utilization rates pick up, then, as my answer to Krish's question, we'll see that chemistry go up. And then, as that continues, we'll see that CapEx investment happening. But right now, HDI CapEx seems still a little muted. All right, just a follow-up question. On the photonics solutions division, the PSD, you know, we saw some, a little bit more of a sequential decline in Q4. I'm trying to understand that a little better.
John Reed: Yes, I think it's still muted Jim I think you.
Jim: Can see the utilization rates.
Jim: Many of our customers.
Jim: And as you know that's driven a lot by smartphones Pcs and servers and so some of our substrate customers publicly public companies.
Speaker Change: Down 30% year over year, so when those utilization rates pick up then as you know my answer to <unk> question, you will see that chemistry co op and then as that continues we'll see that capex investment happening, but right now the HDI capex.
Jim: It seems still a little muted.
Speaker Change: Got it.
Speaker Change: Follow up question.
John Tseng Chung Lee: On the Photonics solutions Division the PSD.
Speaker Change: Yes, we saw some.
Speaker Change: A little bit more of a sequential decline in Q4, I'm trying to understand that a little scanner is that semi portion of that business may be catching up with some of the weakness you've seen in other areas in the semi business or is it just.
John Tseng Chung Lee: Is that the semi-conductor portion of that business maybe catching up with some of the weakness you've seen in other areas of the semi-conductor business? Or is it just possibly a case of weakness in some of the other markets that's overall impacted the photonics, the PSD revenue? Yeah, that's a good question.
John Tseng Chung Lee: Possibly a case of weakness in some of the other markets Thats overall impacted the photonics and PSD revenue.
John Tseng Chung Lee: The PSD division, the semi-autonomous part of PSD that has continued to be strong, as we, as we mentioned in the previous remarks, and that's, as you said, going to be one of the bigger long-term drivers of our outgrowth in market share in WFE because of the exposure to lithography, metrology, and inspection. And so the slight downtick in PSD was really some muted demand in research and defense relative to our expectations. But that's not suggested by any.
John Tseng Chung Lee: Yes.
John Tseng Chung Lee: All right. Good question, the PSD division that semi part of PST that has continued to be strong as we as we mentioned in the prepared remarks and Thats as you said, it's going to be one of the bigger long term drivers of our outgrowth in.
John Tseng Chung Lee: In market share in Wi Fi because of the exposure to lithography metrology and inspection.
John Tseng Chung Lee: And so the slight downtick in PST was really.
John Tseng Chung Lee: Some muted demand in research and defense.
John Tseng Chung Lee: Relative to our expectations were.
John Tseng Chung Lee: But that's not suggestive of any.
John Tseng Chung Lee: Maybe there is a change in the market, in that non-semi-semi portion of the business, where you think it's more of a timing issue, John? Have you seen any change in dynamics in the market? No, in fact, you know, we, you know, the specialty industrials are made up of many markets, and some can be a little lumpy up and down. But, in general, it's been a pretty steady business. And some of the industrials, for instance, like automotive, have actually been very, very steady. So this particular quarter, we're just calling out a little bit of research and defense that was a little lower than our expectations, but the rest of the specialty industrial markets were very steady. Yeah, that actually segues to the last question about automobiles.
John Tseng Chung Lee: Maybe change in the market in that non semi portion of the business, where you think it's is it a case of.
John Tseng Chung Lee: More of a timing issue, Joe you're seeing any change in dynamics in the market.
Speaker Change: No in fact.
John Tseng Chung Lee: Yes.
John Tseng Chung Lee: The specialty industrial is made up of many markets and some can be a little lumpy up and down but in general it's been a pretty steady business in some of the industrials for instance, like automotive has actually been very very steady. So this particular quarter, we're just calling out a little bit.
John Tseng Chung Lee: Research and defense that was a little lower than our expectations, but the rest of the specialty industrial markets were very steady actually yes.
Speaker Change: Yes, that's it's actually a segue from the last question about automotive are you seeing any impact from all of the headlines we're seeing in automotive as it relates to the <unk> business.
John Tseng Chung Lee: Are you seeing any impact from all of the headlines we're seeing in automotive as it relates to the added cost? Yeah, we see the same things. You see a lot of the chip companies, right, they're just playing the automotive game, guiding guiding down, but we really haven't seen that, Jim. It's been a very steady, steady business throughout the year. And kind of our expectation leads in Q1 as well.
John Tseng Chung Lee: Yes, we see the same things you see a lot of the chip companies right that is playing automotive guy.
John Tseng Chung Lee: Adding guiding down, but we really haven't seen that Jim it's been a very steady steady business throughout the year and kind.
John Tseng Chung Lee: Our expectation at least in Q1 as well.
Speaker Change: Thank you.
Speaker Change: Thanks, Ken.
Operator: Thank you. One moment for our next question. And our next question comes from Steve Barger with KeyBank Capital Markets. Your line is now open. Hey, good morning. My first question is related to the cycle.
Speaker Change: Thank you one moment for our next question.
Operator: And our next question comes from Steve Barger with Keybanc capital markets. Your line is now open.
Steve Barger: Hey, good morning.
Steve Barger: My first question is related to the cycle in the past you've talked about how semi in the E&P are likely to recover in a similar timeframe, but at different magnitudes do you still expect a more or less simultaneous recovery or is there any scenario one segment or the other would lag or not participate as the market recovers.
John Tseng Chung Lee: In the past, you've talked about how SEMI and E&P are likely to recover in a similar timeframe, but to different magnitudes. Do you still expect a more or less simultaneous recovery? Or is there any scenario where one segment or the other would lag or not participate as the market recovers? Yeah, thanks, Steve. It's a good question.
John Tseng Chung Lee: I think, you know, in general, they are correlated. Because, you know, if you're making more chips, you're going to have to package them. I think, so our view is that they are going to continue to be correlated. The difference for MKS is that our exposure to SEMI is really about CapEx, and our exposure, most of our exposure to E&P, is consumable. So as we talked about earlier in the earlier question, we'll see that sooner E&P just because of the consumable nature of the business, and then CapEx there would follow as well. Right, got it.
Speaker Change: Yes, Thanks, Steve It's a good question I think in general there.
John Tseng Chung Lee: Our correlated because if youre, making more chips, you're going to have to package them.
John Tseng Chung Lee: I think our view is that they are continually going to continue to be correlated the difference for MKS is that our exposure to semi is really about capex and our exposure in most of our exposure to E&P is consumables. So as we talked about earlier in the earlier question we.
John Tseng Chung Lee: We will see that sooner E&P, just because of the consumable nature of the business and then Capex there would follow as well.
Seth H. Bagshaw: And free cash flow has been in the $140 million range the last couple of quarters. Do you feel like that's stabilizing to the point where it could be more predictable around these levels as you go through the year and think about working capital and inventory? Yeah, Steve. This is Seth.
Speaker Change: Right got it and free cash flow has been in the $140 million range. The last couple of quarters do you feel like that stabilizing to the point, where it could be more predictable around these levels as you go through the year and think about working cap and.
Seth H. Bagshaw: Inventory.
Seth H. Bagshaw: I'll take that. So I think the... It's hard to pick cash flow in any one quarter, but the inventory levels, as we talked about before, have been really sticky because of the supply chain constraints. So we're starting to see inventory levels sort of peak in the last quarter. That'll be helpful going forward as well. But fundamentally, as you have outlined here, at certain revenue levels, which we're hitting right now, the cash flow becomes quite robust. Q1 is a little more working capital requirements because of variable compensation payments. But, you know, Q4, we're very pleased with cash flow, very, you know, very strong execution on margins and on OPEX. That will continue through 2024 as well. So it's hard to pick exactly cash flow, you know, each quarter.
Seth: Yes, the use of SaaS I'll take that question, obviously, so I think the.
Seth H. Bagshaw: Sure.
Seth H. Bagshaw: It's hard to get cash flow any one quarter, but the inventory levels as we talked before has been really sticky because of the supply chain constraints. So we started seeing inventory levels sort of peak in last quarter that will be helpful going forward as well.
Seth H. Bagshaw: But fundamentally.
Seth H. Bagshaw: Brought.
Seth H. Bagshaw: As outlined here.
Seth H. Bagshaw: At certain revenue levels, which we're hitting right now the cash flow becomes quite robust.
Seth H. Bagshaw: Q1, a little more working cap requirements because of variable compensation payments, but Q.
Seth H. Bagshaw: Q4, we're very pleased with cash flow very very strong execution on margins on opex.
Seth H. Bagshaw: Continue through.
Seth H. Bagshaw: 2024, as well so it's hard to pick exactly cash flow each quarter, but I would expect cash flow to be more robust going forward as revenues pick up.
Seth H. Bagshaw: But I would expect cash flow to be more robust going forward as a revenue spectrum. Got it. Thank you. Thank you. I'm showing no further questions at this time. I would now like to turn it back to David Ryzhik for closing remarks. Yes, I'd like to thank everyone for joining the call and, operator, you can close the call. This concludes today's conference call. Thank you for participating.
Speaker Change: Got it thank you.
Seth H. Bagshaw: <unk>.
Speaker Change: Thank you.
David Ryzhik: I'm showing no further questions at this time.
David Ryzhik: I would now like to turn it back to David.
David Ryzhik: For closing remarks.
David Ryzhik: Yes, I'd like to thank everyone for joining the call and operator, you can close the call.
Speaker Change: This concludes today's conference call. Thank you for participating you may now disconnect.
Seth H. Bagshaw: Okay.
Seth H. Bagshaw: Okay.
Seth H. Bagshaw: [music].
Seth H. Bagshaw: Okay.
Seth H. Bagshaw: Okay.
Seth H. Bagshaw: Okay.
Seth H. Bagshaw: Okay.
Seth H. Bagshaw: Yes.
Seth H. Bagshaw: Okay.
Seth H. Bagshaw: Okay.
Seth H. Bagshaw: Okay.
Seth H. Bagshaw: Okay.
Seth H. Bagshaw: Okay.
Seth H. Bagshaw: [music].
Operator: Upbeat guitar music
Speaker Change: Uh huh.