Q1 2024 MKS Instruments Inc Earnings Call
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Operator: Welcome to the MKS Instruments First Quarter 2024 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. To ask a question during this session, you will need to press star one, one on your telephone and wait for your name to be announced. You will then hear an automated message advising your hand is raised. To withdraw your question, 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 first speaker today, David Ryzhik. Vice President of Investor Relations. Please go ahead.
Speaker Change: Welcome to the MKS instruments first quarter 2024 earnings conference call.
Speaker Change: At this time all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session.
Speaker Change: Ask a question. During this session you will need to press star one wondering your telephone and wait for your name to be announced.
Speaker Change: Dan here, an automated message advising your hand is raised.
Speaker Change: To withdraw your question. Please press star one again.
Speaker Change: Please be advised that today's conference is being recorded.
David Ryzhik: Good morning, everyone. I am David Ryzhik, Vice President of Investor Relations. And I'm joined this morning by John Lee, President and Chief Executive Officer, and Michelle McCarthy, our Vice President and Chief Accounting Officer. Yesterday, after market close, we released our financial results for the first quarter of 2024, which are posted on our investor website at investor.mks.com. As a reminder, various remarks about future expectations, plans, and prospects for MKS constitute forward-looking statements.
Speaker Change: Now I'd like to hand, the conference over to your first speaker today, David Ritchie.
David Ritchie: Vice President of <unk>.
David Ritchie: Mr Relations. Please go ahead.
David Ryzhik: 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, 2023. 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 today, and the company disclaims any obligation to update the statement. During the call, we will be discussing various non-GAAP financial measures. Unless otherwise noted, all income statement-related financial measures will be non-GAAP other than revenue and gross margin.
David Ritchie: Good morning, everyone I am David Richard <unk>, Vice President of Investor Relations and I'm joined this morning by John Lee, President and Chief Executive Officer, and Michele Mccarthy, Our Vice President and Chief Accounting Officer.
Speaker Change: Yesterday after market close we released our financial results for the first quarter of 2024, 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: 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 2023.
David Ritchie: 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.
David Ritchie: And the company disclaims any obligation to update these statements.
David Ritchie: During the call we will be discussing various non-GAAP financial measures unless otherwise noted all income statement related financial measures will be non-GAAP other than revenue and gross margin. Please refer to our press release and the presentation materials posted to the Investor Relations section of our website for information regarding our non-GAAP financial results.
David Ryzhik: Please refer to our press release and the presentation materials posted in the investor relations section of our website for information regarding our non-GAAP financial results and a reconciliation of our GAAP and non-GAAP financial measures. For a detailed breakdown of revenues by end market and division, please visit our investor website. Now, I'll turn the call over to John.
David Ritchie: And a reconciliation of our GAAP and non-GAAP financial measures.
David Ritchie: For a detailed breakout of revenues by end market and division. Please visit our Investor website now I will turn the call over to John Thanks, David and good morning, everyone and thanks for joining US today MKS delivered strong results in the first quarter, despite a muted market backdrop.
John T. C. Lee: Thanks, David. Good morning, everyone, and thanks for joining us today. MKS delivered strong results in the first quarter, despite a muted market backdrop. First quarter revenue of $868 million exceeded the midpoint of our guidance, and adjusted EBITDA of $217 million and net earnings per diluted share of $1.18 both exceeded the high end of our guidance. We're particularly pleased with our strong gross margins, which reflect the value of our proprietary offerings, disciplined cost control, and operational execution.
John T. C. Lee: First quarter revenue of $868 million exceeded the midpoint of our guidance adjusted EBITDA of $217 million and net earnings per diluted share of $1 18.
John T. C. Lee: Both exceeded the high end of our guidance, we're particularly.
John T. C. Lee: We are pleased with our strong gross margins, which reflect the value of our proprietary offerings disciplined cost control and operational execution.
John T. C. Lee: We continue to expect a recovery in our semiconductor and electronics and packaging markets to unfold slowly in the second half of 2024 and are poised to capitalize on our leading positions when we enter the next uptake. In our semiconductor market, we are foundational to key suppliers of leading-edge process equipment in an era where AI is beginning to have a transformative impact on compute and memory architecture. We believe that AI is a powerful secular trend that will drive growth in our industry for years to come. But it's only the latest example in the long history of powerful secular trends in this market.
John T. C. Lee: We continue to expect a recovery in our semiconductor and electronics packaging markets to unfold slowly in the second half of 2024 and are poised to capitalize on our leading positions when we enter the next upturn.
John T. C. Lee: In our semiconductor market, we are foundational to key suppliers of leading edge process equipment in an era, where AI is beginning to have a transformative impact on compute and memory architectures.
John T. C. Lee: We believe that AI is a powerful secular trend that will drive growth in our industry for years to come.
John T. C. Lee: But it is only the latest example, and a long history of powerful secular trends in this market.
John T. C. Lee: Personal computers, mobile devices, and data centers are earlier examples of transformative use cases in their time, all a result of the miniaturization and packaging of semiconductors. Our vacuum solutions enable critical deposition and etch processes that are necessary for the manufacturing of high-bandwidth memory, as well as a broader array of DRAM, NAND, and logic semiconductors. In photonics, our optical solutions help our customers solve complex challenges in lithography, metrology, and inspection. In addition, our motion control solutions are used to enable precise positioning of the wafer in hybrid bonding applications. In the electronics and packaging market, our unique combination of laser and chemistry expertise positions us for attractive growth in packaged substrates. These are a key building block of advanced packaging architecture.
John T. C. Lee: Personal computers, and mobile devices and data centers are earlier examples of transport related use cases and their time.
John T. C. Lee: All the results of the miniaturization and packaging of semiconductors.
John T. C. Lee: Our vacuum solutions enable critical deposition and etch processes that are necessary in the manufacturing of high bandwidth memory as well as a broader array of DRAM NAND and logic semiconductors.
John T. C. Lee: If its hynix, our optical solutions help our customers solve complex challenges in lithography metrology and inspection. In addition, our motion control solutions are used to enable precise positioning of the wafer in hybrid bonding applications.
John T. C. Lee: In our electronics and packaging market, our unique combination of laser and chemistry expertise positions us for attractive growth in packaged substrates, which are a key building block of advanced packaging architectures.
John T. C. Lee: This complements our opportunity in high-density interconnect PCs, which are required for smartphone and AR VR applications, and where we also see a growing opportunity in the Low Earth Orbit application. In our specialty industrial market, we address a broad array of specialized applications, where we are leveraging our proprietary technology to deliver strong margins and attractive cash. Across all these markets, we harness a broad base of capabilities and key enabling technologies such as vacuum, photonics, and materials solutions.
John T. C. Lee: This complements our opportunity in high density interconnect, Pcbs, which are required for smartphone and AR VR applications and we also see a growing opportunity in the low Earth orbit application.
John T. C. Lee: In our specialty industrial market, we address a broad array of specialized applications, where we are.
John T. C. Lee: Leveraging our proprietary technology to deliver strong margins and attractive cash flows.
John T. C. Lee: Across all these markets, we harnessed, our broad base of capabilities and key enabling technologies, such as vacuum photonics and materials solutions.
John T. C. Lee: With a leadership position in a broad array of product categories, this affords us a holistic view of the ever-increasing device scaling requirements faced by our customers, enabling us to develop integrated, novel solutions to address these challenges. As an example, our team in Korea was recently recognized by Samsung Electromechanics for their support in the development and trial production of new products.
John T. C. Lee: With a leadership position in a broad array of product categories.
John T. C. Lee: <unk> us a holistic view of the ever increasing device scaling requirements faced by our customers, enabling us to develop integrated novel solutions to address these challenges.
John T. C. Lee: As an example, our team in Korea was recently recognized by Samsung electro mechanics for their support in the development and trial production of new products.
John T. C. Lee: We were also recently recognized by STMicroelectronics, receiving the Best Performance Material Supplier Award and the Innovation Value Engineering Award for our work in developing a new adhesion promoter technology that enhances automotive IC package reliability. We are proud of the deep customer relationships that we've built over the last several decades and are excited about the opportunities that lie ahead for MKS. Now, I'll turn now to our end mark.
John T. C. Lee: We were also recently recognized by S. T microelectronics, receiving the best performance materials supplier Award and the innovation and value Engineering Award for our work in developing new adhesion promoter technology that enhances automotive IC package reliability.
John T. C. Lee: We are proud of the deep customer relationships that we built over the last several decades.
John T. C. Lee: Excited about the opportunities that lie ahead for MKS.
John T. C. Lee: I'll turn now to our end markets.
John T. C. Lee: Revenue from our semiconductor market exceeded our expectations in the first quarter, as we saw slightly stronger demand and improved conversion of customer backlog. However, overall, demand for our vacuum solutions for deposition and etch applications remains muted, primarily due to historically low levels of NAND equipment spending. We believe broader customer inventories across our vacuum portfolio are generally in a more balanced state today compared to a few quarters ago, but we may see some additional pockets of workdowns in areas tied to NAM.
John T. C. Lee: Revenue from our semiconductor market exceeded our expectations in the first quarter as we saw slightly stronger demand and improved conversion of customer backlog.
John T. C. Lee: Overall demand for our vacuum solutions for deposition and etch applications remains muted.
John T. C. Lee: Similarly, due to historically low levels of NAND equipment spending.
John T. C. Lee: We believe broader customer inventories across our vacuum portfolio are generally in a more balanced state today compared to a few quarters ago, but we may see some additional pockets of work downs in areas tied to NAND.
John T. C. Lee: In our Photonics Solutions Division, revenue from our optical solutions for lithography, metrology, and inspection applications remained robust in the first quarter. We continue to see momentum in our world-class optics. This is a unique offering where MKS brings optics, coatings, motion stages, optical subsystems, and lasers to solve complex challenges in transistor scaling.
John T. C. Lee: With our Photonics solutions Division revenue from our optical solutions for lithography metrology and inspection applications remained robust in the first quarter.
John T. C. Lee: We continue to see momentum in our World Class Optics initiative. This is a unique offering where MKS brings optics coatings motion stages optical subsystems and lasers to solve complex challenges in transistor scaling.
John T. C. Lee: As we look to the second quarter of 2024, we expect revenue in our semiconductor market to be slightly down sequentially from a better-than-expected first quarter result. However, early memory market indicators, including improved pricing and increasing demand, as well as continued spending tied to AI applications, are encouraging. But as the industry first brings idled capacity back online, we expect the recovery in capital equipment spending to return gradually in the second half of the year.
John T. C. Lee: As we look to the second quarter of 2024, we expect revenue in our semiconductor market to be slightly down sequentially from our better than expected first quarter results.
John T. C. Lee: Early memory market indicators, including improved pricing and increasing demand as well as continued spending tied to AI applications are encouraging.
John T. C. Lee: As the industry first brings idled capacity back online, we expect a recovery in capital equipment spending to return gradually in the second half of the year.
John T. C. Lee: Turning to our electronics and packaging market, revenue was in line with expectations, despite the unfavorable impact of foreign currency and lower palladium prices. Sales of our chemistry solutions for PCB and packaged substrate markets were stable amidst a muted market for PCs, smartphones, and non-AI servers. Our results also reflected expected seasonal softness due to the Lunar New Year holiday. However, we did see a slight pickup in demand for our plating equipment lines for complex, high-density, multi-layer PCB production, which we believe was primarily driven by the growing AI server market. As many of you know, AI GPUs require a large amount of advanced semiconductor content, which in turn requires complex packaging schemes.
John T. C. Lee: Turning to our electronics and packaging market revenue was in line with expectations. Despite the unfavorable impact of foreign currency and lower palladium prices.
John T. C. Lee: <unk> of our chemistry solutions for PCB and packaged substrate markets were stable amidst the muted market for Pcs smartphones and non AI servers.
John T. C. Lee: Our results also reflected expected seasonal softness due to the lunar new year holiday.
John T. C. Lee: However, we did see a slight tick up in demand for our trailing equipment lives for complex high density multi layer PCB production, which.
John T. C. Lee: Which we believe was primarily driven by growing AI server demand.
John T. C. Lee: As many of you know AI Gpus require a large amount of advanced semiconductor content, which in turn requires complex packaging schemes.
John T. C. Lee: Semiconductors are mounted onto a packaged substrate that is then mounted onto a high-density PCB and, afterwards, is mounted onto an advanced multi-layer PCB. This growing substrate and PCB content in AI architectures puts MKS in a unique position to benefit from our proprietary laser drilling, chemistry, and plating equipment solutions. We also saw additional demand for laser drilling systems for the fast-growing, low-Earth orbit application within the PCB market, where we are the process tool for exploration.
John T. C. Lee: <unk> amounted answer a packaged substrate.
John T. C. Lee: Ted answer a high density PCB and afterwards is mounted onto an advanced multi layer PCB.
John T. C. Lee: This growing substrate in PCB content, and AI architectures puts MKS in a unique position to benefit with our proprietary laser drilling chemistry and plating equipment solutions.
John T. C. Lee: We also saw additional demand for laser drilling systems for the fast growing low Earth orbit application within the PCB market, where we are the process tool of record.
John T. C. Lee: As we look to the second quarter of 2024, we expect revenue from our electronics and packaging market to be up on a sequential basis due to an increase in planning equipment revenues and a seasonal increase in chemistry revenues following typically lower first quarter utilization. Turning to our specialty industrial market, revenue was slightly better than expected, driven by a modest sequential improvement in our life and health sciences and research and defense. Revenue from our general metal finishing business in the automotive market remains flat overall on a sequential basis.
John T. C. Lee: As we look to the second quarter of 2024, we expect revenue from our electronics packaging market to be up on a sequential basis due to an increase in cleaning equipment revenues and a seasonal increase in chemistry revenues following typically lower first quarter utilization.
John T. C. Lee: Turning to our specialty industrial market revenue was slightly better than expected driven by the modest sequential improvement in our life and health Sciences, and research and defense markets.
John T. C. Lee: Revenue from our general metal, finishing business in the automotive market remained flat overall on a sequential basis.
John T. C. Lee: As we look to the second quarter, we expect demand trends in our specialty industrial market to remain stable, with revenue relatively in line with first quarter levels. Wrapping up, MKS delivered strong profitability in the first quarter despite a continued soft end market demand environment. While we expect overall industry demand to remain muted in the near term, we feel very good about the positioning of our portfolio and the investments we've made to capitalize on the key secular trends driving our end market.
John T. C. Lee: As we look to the second quarter, we expect demand trends in our specialty industrial market to remain stable with revenue relatively in line with first quarter levels.
John T. C. Lee: Wrapping up and kept delivered a strong profitability in the first quarter. Despite a continued soft end market demand environment.
John T. C. Lee: While we expect overall industry demand to remain muted near term, we feel very good about the positioning of our portfolio and the investments we've made to capitalize on the key secular trends driving our end markets.
John T. C. Lee: Turning now to the finance discussion, I'd like to introduce you to Michelle McCarthy, our Vice President and Chief Accounting Officer, who will walk through our financial results in more detail. Michelle recently joined MKS and brings a strong public company accounting background to complement our deep finance expertise. This team is doing an outstanding job as we conduct our search for MKS's next chief financial officer, and we will keep you posted on our progress. Michelle, why don't we take it from here? Thank you.
Michelle Mccarthy: Turning now to the financial discussion I'd like to introduce you to Michelle Mccarthy.
Michelle Mccarthy: Vice President and Chief Accounting Officer, who will walk through our financial results in more detail Michel recently joined <unk> and brings a strong public company accounting background to complement our deep finance team.
Michelle Mccarthy: This team is doing an outstanding job as we conduct our search for MKS as next Chief Financial Officer, and we will keep you posted on our progress Michelle why don't you take it from here.
Michelle M. McCarthy: Thanks, John. It's a privilege to be part of the MKS team.
Michelle: Thanks, Ken it's a privilege to be part of the MKS team in.
Michelle M. McCarthy: In the first quarter, we delivered revenue of $868 million, above the midpoint of our guidance, primarily due to better-than-expected revenue from our semiconductor market. First Quarter Semiconductor revenue was $351 million above the high end of our guidance and declining 3% sequentially. The year-over-year comparison is not meaningful, as it was distorted by the ransomware incident last February.
Michelle: In the first quarter, we delivered revenue of $868 million above the midpoint of our guidance, primarily due to better than expected revenue from our semiconductor market.
Michelle: First quarter semiconductor revenue was $351 million above the high end of our guidance and declining 3% sequentially. The.
Michelle: The year over year comparison is not meaningful as it was distorted by the ransomware incident last February.
Michelle M. McCarthy: Revenue performance in the quarter was led by better than expected conversion of backlog in the vacuum solution segment, as well as continued robust sales of our photonic solutions. First quarter electronics and packaging revenue was $208 million, relatively in line with the midpoint of our guidance, and a decrease of 8% sequentially. Excluding the impact of foreign exchange and palladium pass-through, sales of our chemistry solutions in this market grew 15% on a year-over-year basis as our business bounced back from industry softness a year ago.
Michelle: Revenue performance in the quarter led by better than expected conversion of backlog in the vacuum solutions segment.
Michelle: As well as continued robust sales of our photonic solutions.
Michelle: First quarter electronics, and packaging revenue with 208 million relatively in line with the midpoint of our guidance and a decrease of 8% sequentially.
Michelle: Excluding the impact of foreign exchange and Palladium pass through sales of our chemistry solutions in this market grew 15% on a year over year basis.
Michelle: Business bounce back from industry softness a year ago.
Michelle M. McCarthy: Moving to our specialty industrial market, revenue in the first quarter was $309 million, above the midpoint of our guidance and up 1% sequentially. Similar to our semiconductor business, the year-over-year comparison is distorted by the ransomware incident. Consumables and services revenue across our three end market categories comprised 42% of our total revenue. Turning to our margins.
Michelle: Moving to our specialty industrial market revenue in the first quarter was $309 million above the midpoint of our guidance and up 1% sequentially.
Michelle: Similar to our semiconductor business the year over year comparison is distorted by the ransomware incident.
Michelle: Consumables and services revenue across our three end market categories comprised 42% of our total revenue.
Michelle: Turning to our margins.
Michelle M. McCarthy: We reported a first quarter gross margin of 47.8%, exceeding the high end of our guidance range. The strong results were a function of better-than-expected volumes, favorable product mix, and continued cost control. We also benefited by approximately 60 basis points from certain non-recurring items. First quarter operating expenses were $240 million, in line with expectations. Throughout the current cycle, MKS has focused on prudently managing our cost structure while ensuring we invest to innovate for our customers and capitalize on the attractive opportunities we see ahead of us.
Michelle: We reported first quarter gross margin of 47, 8% exceeding the high end of our guidance range.
Michelle: The strong results were a function of better than expected volumes.
Michelle: Verbal product mix and continued cost control.
Michelle: We also benefited by approximately 60 basis points from certain nonrecurring items.
Michelle M. McCarthy: First quarter operating expenses were $240 million in line with expectations.
Michelle: Throughout the current cycle MKS is focused on prudently managing our cost structure, while ensuring we invest to innovate for our customers and capitalize on the attractive opportunities. We see ahead of us.
Michelle M. McCarthy: Our first quarter operating margin was 20.2% and exceeded the high end of our guidance range, reflecting strong gross margin performance coupled with the natural operating leverage in the business. It is noteworthy that our acquisition of Adotech has been a meaningful contributor to our strong performance in both gross and operating margins. Further to that point, exiting the first quarter, we exceeded our Atotech cost synergy target of $55 million, and we accomplished this at the earlier end of our expected time frame of 18 to 36 months, continuing our track record of executing well on M&A synergies.
Michelle M. McCarthy: Our first quarter operating margin was 22% and exceeded the high end of our guidance range, reflecting strong gross margin performance, coupled with the natural operating leverage in the business.
Michelle M. McCarthy: It is noteworthy that our acquisition of Arrow Tech has been a meaningful contributor to our strong performance in both gross and operating margins.
Michelle M. McCarthy: Further to that point exiting the first quarter, we exceeded our cost synergy target of $55 million.
Michelle M. McCarthy: And we accomplished this at the earlier end of our expected timeframe of 18 to 36 months, continuing our track record of executing well and M&A synergies.
Michelle M. McCarthy: First quarter adjusted EBITDA was $217 million, representing a 25% margin and exceeding the high end of our guidance range. Net interest expense for the first quarter was approximately $75 million, slightly favorable compared to our expectations. As a reminder, in the first quarter, we refinanced our term loan and completed a $50 million voluntary debt prepayment. Our refinancing included the pay-down of our Term Loan A with incremental borrowings against our Term Loan B and the elimination of the Financial Maintenance Covenant that applied while our Term Loan A was outstanding.
Michelle M. McCarthy: First quarter, adjusted EBITDA was $217 million, representing a 25% margin and exceeding the high end of our guidance range.
Michelle M. McCarthy: Net interest expense for the first quarter was approximately $75 million slightly favorable compared to our expectations.
Michelle M. McCarthy: As a reminder, in the first quarter, we refinanced our term loan and completed a $50 million voluntary debt prepayments.
Michelle M. McCarthy: Our refinancing included the Paydown of our term loan a with.
Michelle M. McCarthy: With incremental borrowings against our term loan b and the elimination of the financial maintenance Covenant at applied while our term loan was outstanding.
Michelle M. McCarthy: We expect second quarter net interest expense to be approximately $79 million. Also, in early April, we made another $50 million voluntary debt prepayment. Our tax rate for the first quarter was approximately 23 percent, slightly favorable as compared to our expectations entering the quarter. We expect our tax rate for the second quarter to be about 23% and our full year tax rate to be approximately 20%.
Michelle M. McCarthy: We expect second quarter net interest expense will be approximately $79 million also in early April we made another $50 million voluntary debt prepayments.
Michelle M. McCarthy: Our tax rate for the first quarter was approximately 23% slightly favorable as compared to our expectations entering the quarter.
Michelle M. McCarthy: We expect our tax rate for the second quarter to be about 23% and our full year tax rate to be approximately 20%.
Michelle M. McCarthy: First quarter net earnings were $79 million, or $1.18 per diluted share, exceeding the high end of our guidance. We exited the first quarter with more than $1.5 billion of liquidity, including cash and short-term investments of $846 million and an undrawn revolving credit facility of $675 million. Gross debt was $4.9 billion at the end of the quarter. Our net leverage ratio exiting the first quarter was 4.3 times, based on trailing 12 months adjusted EBITDA of $940 million.
Michelle M. McCarthy: First quarter net earnings were $79 million or.
Michelle M. McCarthy: Our $1 18 per diluted share exceeding the high end of our guidance.
Michelle M. McCarthy: We exited the first quarter with more than $1 5 billion of liquidity, including cash and short term investments of 846 million and an undrawn revolving credit facility of six.
Michelle M. McCarthy: $175 million.
Michelle M. McCarthy: Gross debt was $4 9 billion at the end of the quarter.
Michelle M. McCarthy: Net leverage ratio exiting the first quarter was four three times based on trailing 12 months adjusted EBITDA of $940 million.
Michelle M. McCarthy: Free cash flow was approximately $49 million, and unlevered free cash flow was $108 million. As a reminder, our first quarter free cash flow is typically lower due to the timing of variable compensation payments. Consistent with prior quarters, we made a dividend payment of $15 million, or $0.22 per share.
Michelle M. McCarthy: Free cash flow was approximately 49 million and Unlevered free cash flow was $108 million.
Michelle M. McCarthy: As a reminder, our first quarter free cash flow is typically lower due to timing of variable compensation payments.
Michelle M. McCarthy: Consistent with prior quarters, we made a dividend payment of $15 million or.
Michelle M. McCarthy: R 22 cents per share.
John T. C. Lee: With that, let me turn the call back to John. John? Thank you, Michelle.
John T. C. Lee: Let me turn the call back to John John Thank.
John T. C. Lee: Revenue from our semiconductor market is expected to be $335 million, plus or minus $15 million, reflecting our view that the market continues to bounce along the bottom with a modest recovery expected in the second half of the year. Revenue from our electronics and packaging market is expected to be $220 million, plus or minus $10 million. And revenue from our special industrial market is expected to be $305 million, plus or minus $15 million.
John T. C. Lee: Thank you, Michelle. Let me now turn to our second quarter outlook. We expect revenue of $860 million, plus or minus $40 million, reflecting the slow path to market recovery that we've discussed on recent calls. By end market, our outlook is as follows.
Speaker Change: Thank you Michelle let me now turn to our second quarter outlook, we expect revenue of $860 million, plus or minus $40 million, reflecting the slow path to market recovery.
John T. C. Lee: We've discussed on recent calls by.
John T. C. Lee: By end market. Our outlook is as follows revenue from our semiconductor market is expected to be $335 million, plus or minus $15 million, reflecting our view that the market continues to bounce along the bottom with a modest recovery expected in the second half of the year.
John T. C. Lee: Revenue from our electronics packaging market is expected to be $220 million, plus or minus $10 million.
John T. C. Lee: Revenue from our specialty industrial market is expected to be $305 million, plus or minus $15 million.
John T. C. Lee: Looking ahead to the second half of 2024, we expect revenue to be slightly higher than the first half. Reflecting a modest improvement in our semiconductor market combined with typical seasonality in our electronics and packaging, our specialty industrial market is expected to remain relatively consistent, mirroring global GDP trends. Based on anticipated product mix and revenue levels, we estimate a second quarter gross margin of 46.5%, plus or minus one percentage. The step-down in gross margin as compared to the first quarter reflects anticipated product mix, as well as certain items that we do not expect to recur in the second quarter.
John T. C. Lee: Looking ahead to the second half of 2024, we expect revenue to be slightly higher than the first half.
John T. C. Lee: Reflecting a modest improvement in our semiconductor market combined with typical seasonality in our electronics and packaging market.
John T. C. Lee: Our specialty industrial market is expected to remain relatively consistent mirroring global GDP trends.
John T. C. Lee: Based on anticipated product mix and revenue levels, we estimate second quarter gross margin of 46, 5% plus or minus one percentage point.
John T. C. Lee: The step down in gross margin as compared to the first quarter reflects anticipated product mix as well as certain items that we do not expect to recur in the second quarter.
John T. C. Lee: We expect second-quarter operating expenses of $240 million, plus or minus $5 million. We continue to believe $240 to $250 million is an appropriate run rate for the balance of 2024. We estimate adjusted EBITDA of $197 million, plus or minus $23 million. Given these assumptions, we expect second-quarter net earnings per diluted share of $0.93, plus or minus $0.20.
John T. C. Lee: We expect second quarter operating expenses of $240 million, plus or minus $5 million. We continue to believe $240 million to $250 million is an appropriate run rate for the balance of 2024.
John T. C. Lee: We estimate adjusted EBITDA of $197 million, plus or minus $23 million.
John T. C. Lee: Given these assumptions, we expect second quarter net earnings per diluted share of <unk> 93.
John T. C. Lee: That's the amount of 26.
Operator: We continue to execute very well in navigating the cyclical softness in our end markets. I'm very pleased with the strong profitability and margin profile of our business. This, along with our differentiated product and technology portfolio tied to key secular trends in our end markets, positions us well for the next cyclical uptick. With that operator, please open the call for Q&A.
John T. C. Lee: We continue to execute very well in navigating the cyclical softness in our end markets I am very pleased with the strong profitability and margin profile of our business. This along with our differentiated product and technology portfolio tied to key secular trends in our end markets positions us well for the next cyclical upturn.
Operator: With that operator, please open the call for Q&A.
Operator: Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you need to press star 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. We ask that you please limit your questions to one question and one follow-up. Please stand by while I compile the Q&A list. Our first question comes from Steve Barger of KeyBank Capital Markets. Please go ahead.
Speaker Change: Thank you.
Speaker Change: At this time, we will conduct a question and answer session.
Operator: As 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.
Operator: To withdraw your question. Please press star one again.
Operator: We ask that you. Please limit your questions to one question and one follow up please standby, while a compile the Q&A roster.
Operator: Our first question comes from Steve Barger from Keybanc capital markets markets. Please go ahead.
Steve Barger: Thanks, Good morning.
Steve Barger: John, I know you expect – yeah, good morning. I know you expect recovery to unfold slowly in the back half, but we're hearing more commentary about 2025 being a strong year for memory and initial positioning for the two nanometer transition next year. I know you don't want to get too far ahead, but inflections can happen quickly when they come. So can you talk about customer conversations about memory and leading edge and just how you're thinking about timing and capacity to support that inflection?
Steve Barger: John I wanted to say no you expect yes, good morning.
Steve Barger: I know you expect recovery to unfold slowly in the back half, but we're hearing more commentary about 2025 being a strong year for memory and initial positioning for the two nanometer transition next year.
Steve Barger: I know you don't want to get too far ahead, but inflections can happen quickly when they come. So can you talk about customer conversations for memory, and leading edge and just how youre thinking about timing and capacity to support that inflection.
John T. C. Lee: Yeah, Stevie, great question. Certainly, we're very intimate with our customers and have these discussions all the time. But obviously, we need to prepare our factories to support them.
David Ryzhik: Yes, David.
Speaker Change: Great question, certainly, we're very intimate with our customers and having discussions all the time, obviously, we need to prepare our factories to support them.
John T. C. Lee: I would say that, you know, we still expect a slowly unfolding second half. But to your point, there are good signs with memory pricing and utilization picking up. Logic remains strong, and as you pointed out, 2 nanometer and 3 nanometer capacity is getting used up too.
John T. C. Lee: I would say that we still expect a slowly unfolding second half, but to your point there are good signs with memory pricing and utilization picking up.
John T. C. Lee: Logic remained strong as you pointed out two nanometer and three nanometer capacity is getting used up too so I think that.
John T. C. Lee: So, you know, I think that the discussions are all about us being on the bottom, bouncing along the bottom. And it's really about timing, Steve. And you are right; things can change very quickly. But as you know, MKS is pretty good at that. We've been at this for 60 years, and we have the capacity to support, obviously, a much higher run rate than we have had in the past few years. So, we're just waiting and ready for that whenever that happens.
John T. C. Lee: They are all about where on the bottom bouncing along the bottom and it's really about timing, Steve and you are right things can change very quickly, but as you know MKS is pretty good at that we've been at this for 60 years.
John T. C. Lee: We have the capacity to support obviously much higher run rate.
John T. C. Lee: We had already in the past few years, so we're just waiting and ready for that whenever that happens.
John T. C. Lee: Got it. And a similar question on substrates. You talked about AI and some other opportunities like low earth orbit. Can you talk through the roadmap for more layers or tighter tolerances on those substrates and how increasing complexity will benefit you given your position in drilling, plating equipment, and chemistry?
Steve Barger: Got it and similar question on substrate, you talked about AI and some other opportunities like lower but can you talk to the roadmap for more layers or tighter tolerances on the substrates and how increasing complexity will benefit you given your position in drilling plating equipment and chemistry.
John T. C. Lee: Yeah, see, we're really excited about things like AI driving not only the semiconductors but the electronics and packaging. You know, AI boards are going up to 20 layers now. And, of course, the lines and spaces in the vias are also smaller. So that's all good for us.
John T. C. Lee: Yes, so we're really excited about things like AI driving not only the semiconductors, but the electronics and packaging.
John T. C. Lee: AI boards are going up to 20 layers now.
John T. C. Lee: And of course, the lines and spaces and the views are also smaller so.
John T. C. Lee: It's more chemistry, it's more difficult chemistry, it's more laser drilling, it's more difficult laser drilling, it's more difficult bonding layers between the various layers in that PCB. And so when you have the ability to toggle laser equipment, chemistry equipment, and chemistry, you just have a better solution set for the customers in solving these really tough challenges. So we believe that MKS is uniquely positioned in the industry to solve these really advanced packaging problems.
John T. C. Lee: That's all good for us it's more chemistry, it's more difficult chemistry, it's more laser drilling its more difficult laser drilling it's more difficult bonding layers between between the various layers in that PCB.
John T. C. Lee: And so when you have the ability to toggle laser equipment chemistry equipment and chemistry, you just have a better solution set for the customers in solving these really tough challenges. So we believe that MKS is uniquely positioned in the industry to solve these really advanced packaging problems.
John T. C. Lee: And just one quick follow-up. So as you've had the conversations with customers, are they telling you to prepare for a higher capital spending environment for that, the drilling, plating, equipment, and chemistry? Well, it varies, but I...
Speaker Change: And just one quick follow up so as you had the conversations with customers are they are they telling you to prepare for.
John T. C. Lee: Higher capital spending environment for that.
John T. C. Lee: The drilling plating equipment and chemistry.
John T. C. Lee: Well, it varies, but as we pointed out in the earnings script, we have seen this uptick in equipment orders tied to, we believe, AI. This is for, actually, the high-density multilayer boards. So as we talked about in the earnings call, there are three different types of packages, you know, the advanced stuff that connects the chips and goes on to a high-density board, then goes on to this very complex multi-layer board. And so this is the first sign where we've seen actual CapEx increases for some part of the food chain associated with AI.
John T. C. Lee: Well.
John T. C. Lee: There is but I think as we pointed out in the earnings script, we have seen this uptick in equipment orders tied to we believe AI. This is for actually the high density Multilayer Board. So as we talked about in the earnings call. There's three different types of packages.
John T. C. Lee: They've asked us that connect the chips and it goes onto a high density Board then goes on to this very complex multilayer board and so this is the first sign we've seen actually capex increases for some part of the food chain associated with AI.
Speaker Change: Terrific. Thanks.
Speaker Change: Thanks, Steve.
Speaker Change: Thank you.
Speaker Change: Our next question.
Operator: Thank you. One moment for our next question. Our next question comes from Jim Ricchiuti from Needham and Company. Please go ahead.
John T. C. Lee: Our next question comes from Jim Jim Ricchiuti from Needham <unk> Company. Please go ahead.
James Andrew Ricchiuti: Hi, thank you. Good morning. One of your competitors in the specialty chemistry market recently, I think last month, talked about improving demand in the electronics market in a couple of the geographic regions. I'm wondering if that is consistent, John, with what you're seeing? In general, how would you characterize the pricing environment within the out-of-tech business, and to what extent that might be helping your margin?
James Andrew Ricchiuti: Alright, Thank you good morning.
James Andrew Ricchiuti: One of your <unk>.
James Andrew Ricchiuti: Competitors in the specialty Cameron Street market recently.
James Andrew Ricchiuti: I think last night talked about improving demand in the electronics market and a couple of the geographic regions.
James Andrew Ricchiuti: I'm wondering is that consistent with what youre seeing in general.
James Andrew Ricchiuti: In general how would you characterize also the pricing environment.
James Andrew Ricchiuti: Within the athletic business and to the extent that might be helping your margins.
John T. C. Lee: Yeah, I think we would agree with that, Jim. I think it's slowly improving. You saw in our commentary that, year over year, our Q1 is significantly better in our electronics chemistry than it was last year to 215%. You know, it's been gradual and improving, so that's a good sign.
John T. C. Lee: In terms of pricing, you know, we talked about gross margin for the business. We talked about Adatech gross margins, really significantly adding to the gross margin profile of MKS. I also want to point out that we saw gross margin improvement in all three divisions, so not just Adatech. Adatech certainly comes with, I would argue, industry-leading gross margins, and that's obviously indicative of the value they're bringing to those customers. So, pricing has been strong. We're getting paid for the value that we bring, and then, you know, we see slight improvement, and we hope that continues.
John T. C. Lee: Got it. On the drilling side, apart from that, that application that you alluded to, the lower orbit application, are you seeing any lift in the March quarter bookings that, you know, more consistent with the seasonality that we've seen occasionally in this part of the business? Or is that still something we're still kind of bouncing along the bottom in this part of the business? Yeah, I think we can see a slight improvement.
John T. C. Lee: On the drilling side apart from that that application that you alluded to vanilla.
John T. C. Lee: <unk> application are you seeing any any lift in the March quarter bookings that yeah, I'm more consistent with the seasonality that we've seen occasionally and there's parts of the business or is that still something that we're still kind of bouncing along the bottom in this part of the business.
John T. C. Lee: Yeah, I think we can see a slight improvement, Jim, but I don't look at it as, you know, any kind of trend right now. I think it's still muted, still bouncing along the bottom, but, you know, flex, laser drilling versus HDI, laser drilling, of course, is different, so the flex is certainly still very muted. HDI is, you know, slightly better. I would just characterize it as still bouncing along the bottom. All right. Thank you.
John T. C. Lee: Yeah, I think we can see a slight to improving Ah June but I don't look at it as you know any kind of trend right now I think it's still muted still bouncing along the bottom, but you know flex.
John T. C. Lee: Drilling versus HCI laser drill and of course is different so the flex it certainly still very muted H D. Eyes, you know slightly better I would characterize it is still bouncing along the bottom Chen.
Speaker Change: Alright, thank you.
Speaker Change: Thanks to you.
Operator: Thank you. One moment for our next question. Our next question comes from Krish. Sankar from TD Cowen, please go ahead.
Speaker Change: Thank you one moment for our next question.
Krish Sankar: Our next question comes from <unk> <unk>.
Krish Sankar: <unk> from TB Cowan. Please go ahead.
Krish Sankar: Hi, thanks for taking my question. I have a few of them.
Krish Sankar: Hi, Thanks for taking my question I don't feel then John I'm just wanted to cancel your statement that second half you'd be slightly better than first off in terms of revenue.
John T. C. Lee: John, I'm just trying to reconcile your statement that the second half should be slightly better than the first half in terms of revenues. That would imply that calendar 24 revenues for you could be down on a year-over-year basis or slightly down. I'm just kind of curious, is that true? If so, do you expect both semi-finished and electronic packaging to be down, or one down more than the other?
John T. C. Lee: That would imply that calendar 24 revenue for you could be downloading you, though your basis, a slightly down this kind of <unk> is that a true if so the checkbook sent me an E electronics package, you need to be down on one down more than the other.
John T. C. Lee: Well, yeah, I think there's still a lot of uncertainty with respect to revenue, but we do expect it to be slightly better in the second half versus the first half. And, you know, it depends on what your assumptions are for Q3 and Q4, obviously, whether the whole year is up or down. But, you know, as was pointed out earlier, this thing can change quickly. We're planning on, you know, a slight uptick in the second half, but we're also planning on being ready in case it accelerates. So, I would say, you know, that's still TBD in terms of year over year comparison for the full year.
John: Well, Yeah, I think there's a lot of still uncertainty with respect to revenue, but we do expect it to be slightly better in the second half versus the first half.
John T. C. Lee: And you know it depends on what your assumptions are for Q3, and Q4, obviously, whether the whole years up or down.
John T. C. Lee: But you know I I is was pointed out earlier this thing they can change quickly.
John T. C. Lee: We're planning on you know in a slight uptick second half, but we're also planning on being ready in case. It accelerates. So I would say that's still T. B D in terms of year over year comparisons for the full year.
John T. C. Lee: Got it, got it. And then can you just give an estimate of what you think your advanced packaging learnings will be this year and what they were last year?
Speaker Change: Got it got it and then can you just give an estimate of what you think <unk> advanced packaging <unk> and what it was last year.
John T. C. Lee: Yeah, you know, we've talked about advanced packaging being a third of our business. And when you know, servers and PCs and phones were kind of more normalized. This year is probably more on that quarter percent, 25%.
John T. C. Lee: Yeah, you know I think it's we've talked about a dance packaging being a third of our business and when you know servers and P. C's and phones were kind of more normalized this year is probably more of that quarter per cent 25 per cent sorry, but you know that can vary and of course, that's you can.
John T. C. Lee: Read about you know the public companies.
John T. C. Lee: Who are our customers and advanced packaging and you can see that you know obviously their revenues are down significantly so that's consistent with that.
John T. C. Lee: But you know, that can vary. And of course, that's the case. You can read about the public companies who are our customers in advanced packaging, and you can see that, obviously, their revenues are down significantly. So that's consistent.
John T. C. Lee: Got it, got it. If we could just squeeze in one more, John, just curious.
Speaker Change: <unk> John just curious.
John T. C. Lee: How do you think Adrotech will benefit or, you know, the impact of Adrotech when some of your customers start moving to glass panels or advanced packaging down the road?
John: How do you think about <unk>.
John T. C. Lee: Sitting on the impact of agitated than some of your customers start moving to blast planets are advanced packaging down the road.
John T. C. Lee: Yeah, no, glass is certainly something that the industry has talked about for a long time, obviously, and more people are talking about it now. I would just say this: Atateck is an industry leader in packaging, advanced packaging, and the next generation. I would characterize it as we're certainly always in those discussions, always certainly looking at what our customers' needs are and developing the necessary processes to enable what they need.
John: Yeah, I know class is certainly something that the industry has talked about for a long time, obviously and more people are talking about it now I would just say this you know add a tech is industry leader in packaging advanced packaging and the next generation.
John T. C. Lee: I would I would characterize it as we're certainly always in those discussions always certainly looking at what our customers needs are and developing the necessary processes to enable what they need and glasses. You know one of the things that we are working on along with the rest of that industry.
John T. C. Lee: And glass is, you know, one of the things that we are working on, along with the rest of the industry. Thanks, John. By the way, Krish, I wanted to just clarify my statement about 25% advanced packaging. That's 25% of electronics and packaging, not 25% of MKS. Sorry, done. Thank you.
John T. C. Lee: The Samsung.
John T. C. Lee: By the way Christian I wanted to <unk>, just clarify my statement about 25%.
John T. C. Lee: Pakistan 25 per cent of electronics and packaging not 25 per cent of Amcast sorry.
Krish Sankar: <unk>. Thank you.
Speaker Change: Thanks, Chris.
Operator: Thank you. One moment for our next question. The next question comes from Joe Quadrochi, from Wells Fargo, please.
Speaker Change: Thank you.
Joseph Michael Quatrochi: Only for our next question.
Joseph Michael Quatrochi: Our next question comes from Joe <unk>.
Joseph Michael Quatrochi: From Wells Fargo. Please.
Joseph Michael Quatrochi: Please go ahead.
Joseph Michael Quatrochi: Yeah, thanks for taking the time to ask the question. I wanted to stick on the cynic side. You know, as you think about just the recovery in the memory industry and you think about just, you know, what's going to be driving demand on the NAND side, it sounds like, you know, the recovery and spending is going to be more related to, you know, system upgrades or node transitions. So curious about how you think about the revenue opportunity for NKS when maybe it sounds like the WIP is going to be a little bit more tied to, you know, migration versus net new greenfield ads.
Joseph Michael Quatrochi: Yeah. Thanks for taking the questions I wanted to ask some suicide.
Joseph Michael Quatrochi: Did you think about just the recovery and the memory industry and you think about this you know that what's gonna be driving to me on the knee inside it sounds like you know the recovery and spending as can be more related to.
Joseph Michael Quatrochi: System upgrades or no transitions. So curious is how do we think about the rising an opportunity for N. K S. When maybe it sounds like the density I think it's gonna be a little bit more tied to migrate.
Joseph Michael Quatrochi: Migration vs net new Greenfield ad.
John T. C. Lee: Yeah, thanks, Joe. When the customers are upgrading the chambers for the next node, certain critical subsystems on there have to be upgraded, otherwise you can't do the next node. And one of those is the RF power decks. So, as you may or may not know, there are three power decks in every chamber for a VNAN etcher. And all three have to get upgraded if you're moving from one node to the other. And that is obviously the biggest part of our spend.
Speaker Change: Yeah. Thanks, Joe the when when the customers are upgrading the chambers for the next node.
John T. C. Lee: Certain critical subsystems on there has to be upgraded otherwise you can't do the next node and one of those is the RF power decks. So as you may or may not know, there's 383 paradox on every chamber for a V. Nan at sure and all three have to get upgraded if you're moving from one node to the other.
John T. C. Lee: So we don't really, you know, notice the difference when they're doing the chamber upgrade versus the entire tool. Obviously, if they're doing the entire tool, we may see other parts of MKS products go in there, but the chamber upgrade really benefits us equally, I guess, from the RF power standpoint. Now, having said that, we did talk about inventory burndown, and there's still a little bit left in the NAND market. So, but this is a good sign when some of the customers are talking about node upgrades, because that will start burning off that inventory. And then at some point, you know, they'll need new stuff from us as well.
John T. C. Lee: And that is obviously the biggest part of our span Ah. So so we don't really you know noticed a difference when they're doing chamber upgrade versus the the entire tool.
John T. C. Lee: Obviously, if they were doing the entire tool me see other parts of them cast products go in there, but the chamber upgrade really benefits us equally I guess from the R. A power standpoint, now having said that we did talk about inventory burned down and there's still a little bit left in the end market.
John T. C. Lee: So but this is a good sign when some of the customers are talking about note upgrades because that will start burning off that inventory and then at some point they'll need the the new stuff from us as well.
Joseph Michael Quatrochi: That's helpful as a follow-up to that. Do you expect, as we kind of look into the second half of this year, that the NAND inventory burndown is still going to play out to some extent? I guess maybe starting to play out more this quarter.
Speaker Change: That's tough on it as a follow up to that <unk>. It is we kind of look into the second half of this year. The <unk> inventory burned down is still to play out to some extent or is it just.
Joseph Michael Quatrochi: I guess, maybe starting to play out more of this quarter.
John T. C. Lee: Yeah, I think, you know, it depends, right? It depends on how many people are changing nodes and upgrading nodes. But I think our view now is that it's still slowly unfolding. So that's why we're saying it's slowly unfolding. So I think there's still more to go. And so I think in the second half, there's still some of that NAND inventory burndown that has to happen, certainly for us. But as we talked about earlier, it can change fast, right? And that could accelerate, but we're ready for that, whether that happens.
Joseph Michael Quatrochi: Yeah, I think you know it depends right. It depends on how many people are changing nodes upgrading the nodes, but I think our view now is that it's still a solely on folding. So that's why we're saying that slowly unfolding. So I think there's still more to go and so I think in the second half there's still some of that.
John T. C. Lee: And inventory burned down that has to happen.
John T. C. Lee: Certainly for us.
John T. C. Lee: But as we talked about earlier it can change fast right and that could accelerate but we're ready for that whether that happens or not.
Joseph Michael Quatrochi: Got it. And just as a follow-up question, on the services gross margin strength that you had in the quarter, was that a one-time item, or can you help us understand what drove that?
John T. C. Lee: Got it and you said the <unk>.
Speaker Change: Follow up questions.
Joseph Michael Quatrochi: On the service is gross margins shrink that you had in the quarter was that one where the one time item was or just can you help us understand what drove that.
Michelle M. McCarthy: Yeah, I can take that question. This is Michelle.
Michelle: Yeah, I can I.
Michelle M. McCarthy: I can take that question. This is Michelle so yeah, we have capability in the corner has been referenced in the prepared remarks about 60 basis points. That's non-recurring it's really related to favorable material dalliances as long as favorably and frightened duty cost recovery, that's really the bulk of it.
Michelle M. McCarthy: So yeah, we had favorable variances in the quarter, as we referenced in the prepared remarks, about 60 basis points. That's non-recurring. It's really related to favorable material variances, as well as favorable variances in freight and duty cost recovery. That's really the bulk of it.
Speaker Change: Yeah, so not necessarily tied to service, Joe, but you did point out our service Rep. Our service gross margins, where probably record I guess, so let's call. It that but you know all the divisions had improved gross margin as well, but service. We're really happy with you know the performance of that group with the last quarter.
John T. C. Lee: So not necessarily tied to service, Joe, but you did point out our service gross margins were probably a record high, I guess I would call it that. But all the divisions had improved gross margins as well, but service was really happy with the performance of that group in the last quarter.
Michelle M. McCarthy: Is there anything to point out what drove that? There was a bit of product mix.
John T. C. Lee: Is there anything that.
Michelle M. McCarthy: I drove that.
John T. C. Lee: There was a bit of product mix, you know, and certainly some, you know, pricing has rolled through, and some, you know, some cost pressures that have been in the past are no longer there. So, kind of a mix of a whole bunch of things, Joe.
Michelle M. McCarthy: There was a good product mix, you know and certainly some you know pricing has a roll through and some some costs pressures that had been in the past or no longer there. So it kind of makes a whole bunch of things Joe.
Speaker Change: Thank you.
Speaker Change: Thanks, Joe.
Operator: As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. One moment for our next question. Our next question comes from Steve Barger from KeyBank Capital Markets. Please go ahead.
Speaker Change: Thank you.
Steve Barger: As a reminder to ask a question. Please press star one one of your telephone and wait for your name to be announced one moment for our next question.
Steve Barger: Yeah, thanks. Just a quick follow-up. As you've modeled out free cash flow and how EBITDA progresses, do you think net leverage can get to four or below by year-end, or is that too aggressive?
Operator: Next question comes from Steve Barger.
Steve Barger: From Keybanc capital markets. Please go ahead.
Steve Barger: Yeah. Thanks, just a quick follow up as you modeled out free cash flow and how EBITDA progresses do you think net leverage can get to four or below by year end or is that too aggressive.
John T. C. Lee: Yeah, Steve, obviously, we're very aggressive in deleveraging. As you saw, in Q1, we added, we voluntarily paid another 50 million. And we talked about in April, we added, we voluntarily paid on yet another 50 million. Yeah, I think our ability to delever and prepay is really going to be a function of profitability, Steve. So, not news to you, I'm sure.
Steve Barger: Yeah, Steve you know, obviously, we're very aggressive and deleveraging as you saw you know to one we added we voluntarily paid another $50 million and we talked about in April we added we voluntarily paid on yet another 50 million.
John T. C. Lee: Yeah, I think our ability to deliver and prepay is really gonna be a function of profitability, Steve So not not news to you I'm sure. So I think it depends on how the year unfolds in our model still is 50 per cent gross margin flow through 40% operating margin flow through but as you know we have.
John T. C. Lee: So I think it depends on how the year unfolds. Our model still is 50% gross margin flow through, and 40% operating margin flow through. But as you know, we have a lot of leverage in the model. And so when revenue does pick up, you'll see a lot of cash flow, and then we'll be able to delever quickly.
John T. C. Lee: A lot of leverage and the model and so when revenue does pick up you'll see a lot of cash flow and then we'll be able to see like a quicker.
Speaker Change: Great. Thanks.
John T. C. Lee: Thanks to you.
Operator: Thank you. I am showing no further questions. I would now like the time to call over to David for closing remarks.
Speaker Change: Okay. Thank you.
David Ryzhik: I am showing no further questions I would now like to <unk> call over today before closing remarks.
David Ryzhik: Thank you all for joining us today and for your interest in MKS. Operator, you may close the call, please.
David Ryzhik: Thank you all for joining us today and for your interest in M. K S. Operator, you may close the call. Please.
Operator: Thank you. This does conclude the program. You may now disconnect.
David Ryzhik: Thank you <unk>.
David Ryzhik: Include the program you may now disconnect.
Operator: [music].