Q3 2024 MKS Instruments Inc Earnings Call
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Speaker Change: After the Speakers' presentation, there'll be a question and answer session.
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Speaker Change: Please be advised that today's conference is being recorded.
Speaker Change: I would now like to hand, the conference over to your first speaker today, Petrash Mithra, Vice President of Investor Relations.
Petrash Mithra: These go ahead.
Petrash Mithra: Good morning, everyone I'm proud Josh Mr up widespread of Investor Relations and I'm joined this morning by John Lee, President and Chief Executive Officer, Rob <unk> Executive Vice President Chief Financial Officer, and Treasurer, and Michelle Mccarthy, Vice President and Chief Accounting Officer.
Petrash Mithra: Yesterday after market close we released our financial results for the third quarter of 2024, which are posted to our investor website at Investor <unk> Dot <unk> Dot com.
Petrash Mithra: As a reminder, various remarks about future expectations plans and prospects for MKS comprise forward looking statements.
Petrash Mithra: Actual results may differ materially as a result of various important factors, including those discussed in yesterday's press release and in our most recent annual report on Form 10-K.
Speaker Change: These statements represent the companys expectations only as of today.
Speaker Change: 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.
Speaker Change: During the call we will be discussing various non-GAAP financial measures.
Speaker Change: Unless otherwise noted all income statement related financial measures will be non-GAAP.
Speaker Change: Other than revenue and gross margin.
Speaker Change: 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 and a reconciliation to GAAP measures.
Speaker Change: However, investor website also provides a detailed breakout of revenues by end market and division.
Speaker Change: Now I'll turn the call over to John.
John: Thanks, Pat and good morning, everyone I'm pleased to introduce and welcome our new CFO, Ron <unk> to MKS, Ron joined <unk> in October and is actively diving into the business engaging with our business leaders and already contributing to our strategic initiatives.
John: We're excited to have non board and I'm confident his leadership will be instrumental as we continue to drive growth and execute on our long term strategy.
Speaker Change: Brian will share. Some brief remarks later on this call and he will take the lead in discussing our financial results next quarter Michel will handle the financial results today and I would add that she has done a terrific job for MKS during this transition period.
Speaker Change: MKS delivered a strong third quarter with all key financial metrics at or above the high end of our guidance ranges.
Speaker Change: Our gross margin strength reflects the value of our broad and differentiated product portfolio, including our chemistry revenues, which have supported profitability during a period of muted semiconductor demand <unk>.
Speaker Change: Additionally, our operating margin profile demonstrates our continued cost discipline, resulting in continued strong cash flows.
Speaker Change: We have also made meaningful progress on our highest priority proactively managing our leverage during the quarter, we repriced our U S dollar and euro term loan b's, reducing our interest rate by 25 basis points.
Speaker Change: And we continue to actively pay down our debt supported by our strong free cash flow generation of over $140 million in the third quarter. These.
Speaker Change: These actions bring our year to date 2020 for prepayments to $426 million.
Speaker Change: During my recent travels to Asia to meet with customers. We discussed many of the key trends and challenges they must overcome to execute their technology roadmaps, especially as many of them prepare for the next generation challenges in AI related advancements.
of the high end of our guidance ranges.
Our gross margin strength reflects the value of our broad and differentiated product portfolio, including our chemistry revenues, which have supported profitability during a period of muted semiconductor demand.
Speaker Change: As node sizes continue to shrink and technology grows more complex the importance of our broad portfolio of critical technologies has never been more important and our customers recognize this.
Additionally, our Operating Margin Profile demonstrates our continued cost discipline, resulting in continued strong cash flows.
We have also made meaningful progress on our highest priority, proactively managing our leverage. During the quarter we repriced our US dollar at euro term loan B's, reducing our interest rate by 25 basis points.
Speaker Change: As a result, I came away from these conversations even more confident that our differentiated capabilities we.
Speaker Change: We'll accelerate our customers' roadmaps and lead to their market success.
Speaker Change: Now I'll review our performance in our three end markets.
And we continue to actively pay down our debt, supported by our strong free cash flow generation of over $140 million in the third quarter. These actions bring our year-to-date 2024 prepayments to $426 million.
Speaker Change: Our semiconductor market revenue increased 3% sequentially.
Speaker Change: And above the high end of our guidance range.
Speaker Change: Similar to our first half results. This higher revenue trend was primarily driven by in quarter demand conversion related to DRAM and logic foundry applications.
So in my recent travels to Asia and meet with customers, we discussed many of the key trends and challenges they must overcome to execute their technology roadmaps, especially as many of them prepare for the next generation challenges in AI related advancements.
Speaker Change: <unk> has remained relatively stable, albeit at historically low levels, and we remain well positioned when that market recovers.
Speaker Change: Our teams are engaged with equipment Oems and leading semiconductor fabs and addressing a broad range of technology inflections, such as atomic layer deposition in both logic and memory applications high aspect ratio exiting for memory devices and selective removal processes for logic gate all around transistors.
As node sizes continue to shrink and technology grows more complex, the importance of our broad portfolio of critical technologies has never been more important, and our customers recognize this.
As a result, I came away from these conversations even more confident that our differentiated capabilities will accelerate our customers' roadmaps and lead to their market success.
Speaker Change: Additionally, we continue to advance our strategy to grow segment share in lithography metrology and inspection.
Now I'll review our performance in our three end markets. In our semiconductor market, revenue increased three percent sequentially and above the high end of our guidance range.
Speaker Change: Following the strategic photonics, when we talked about last quarter. We recently achieved a design win for our World class Opex initiatives with another customer that further highlights our increasingly differentiated technology capabilities in this attractive segment of the WSI market.
Similar to our first half results, this higher revenue trend was primarily driven by in-quarter demand conversion related to DRAM and logic foundry applications.
NAN has remained relatively stable albeit at historically low levels and we remain well positioned when that market recovers.
Speaker Change: In our laser business. We also received an order for a backend application related to high bandwidth memory validating the important role the MKS solutions play in AI related applications.
Our teams are engaged with equipment OEMs and leading semiconductor fabs in addressing a broad range of technology inflections, such as atomic layer deposition in both logic and memory applications.
Speaker Change: In the fourth quarter, we expect semiconductor revenue to be flattish on a sequential basis. The guidance demonstrates continued stability in DRAM and logic foundry demand with NAND remaining at low levels.
High Aspect Ratio Etching for Memory Devices Selective Removal Processes for Logic Gate All-Around Transistors
Speaker Change: Overall, we remain confident that the work we've been doing and the development of innovative solutions for the next wave of technological advancements positions us well for the future success.
Additionally, we continue to advance our strategy to grow segment share in lithography, metrology, and inspection.
Speaker Change: Turning to electronics and packaging revenue grew 1% sequentially driven by chemistry sales.
Following the strategic photonics win we talked about last quarter, we've recently achieved a design win for our world-class optics initiative with another customer that further highlights our increasingly differentiated technology capabilities in this attractive segment of the WFE market.
Speaker Change: Equipment sales were down sequentially in line with our expectations and reflecting typical quarter to quarter variations.
Speaker Change: While demand overall remains muted we are seeing encouraging order activity, including in flexible PCB drilling used in smartphone applications.
In our laser business, we also received an order for a back-end application related to high bandwidth memory, validating the important role that MCAS solutions play in AI-related applications.
Speaker Change: And for our chemistry and equipment solutions for advanced MLP, HDI and packaged substrates related to AI applications.
In the fourth quarter, we expect semiconductor revenue to be flattish on a sequential basis.
Speaker Change: Our combined expertise and laser drilling chemistries and chemistry equipment enables our unique role in optimizing the interconnect.
The guidance demonstrates continued stability in DRAM and logic foundry demand with NAND remaining at low levels.
Speaker Change: Which is central to addressing increasingly complex packaging needs in the AI era.
Overall, we remain confident that the work we have been doing in the development of innovative solutions for the next wave of technological advancements positions us well for the future success.
Speaker Change: These wins are expected to support higher electronics packaging revenue in Q4 with growth anticipated to be in the low single digits on a sequential basis.
Turning to electronics and packaging, revenue grew 1% sequentially driven by chemistry sales. Equipment sales were down sequentially in line with our expectations and reflecting typical quarter-to-quarter variations.
Speaker Change: And especially industrial market revenues decreased approximately 1% sequentially with steady performance in the industrial and research and defense end markets offset by softness in the life and health Sciences market.
While demand overall remains muted, we are seeing encouraging order activity, including in flexible PCB drilling used in smartphone applications.
Speaker Change: As a reminder, our specialty industrial market consists of a variety of applications across multiple end markets.
and for our chemistry and equipment solutions for advanced MLB, HDI and packaged substrates related to AI applications.
Speaker Change: We leverage our proprietary technologies and R&D investments in the semiconductor and electronics packaging sectors to provide unique solutions that yield strong incremental margins and cash generation.
Our combined expertise in laser drilling, chemistries, and chemistry equipment enables our unique role in optimizing the interconnect, which is central to addressing increasingly complex packaging needs in the AI era.
Speaker Change: Looking ahead to Q4, we expect revenue in our specialty industrial market to increase slightly from Q3.
Speaker Change: In conclusion, we are pleased with our execution and financial performance in the third quarter, given our strong third quarter results and our fourth quarter outlook. We now expect second half revenue to be up low to mid single digits compared to the first half.
These wins are expected to support higher electronics and packaging revenue in Q4, with growth anticipated to be in the low single digits on a sequential basis.
In our specialty industrial market, revenues decreased approximately 1% sequentially with steady performance in the industrial and research and defense end markets, offset by softness in the life and health sciences market.
Speaker Change: Although signs of a recovery have not yet emerged across our end markets. Our execution remains solid in the areas we can control.
Speaker Change: Our strong gross and operating margins have led to solid cash flow generation to support debt reduction throughout a year, where our major end markets have been soft.
As a reminder, our specialty industrial market consists of a variety of applications across multiple end markets.
Speaker Change: This along with our design wins and continuous innovation gives me confidence that we are well positioned as markets recover.
We leverage our proprietary technologies and R&D investments in the semiconductor and electronics and packaging sectors to provide unique solutions that yield strong incremental margins and cash generation.
Speaker Change: Now, let me turn it over to Ron to provide some brief remarks, and then Michelle will run through the third quarter financial results in more detail Rob.
Looking ahead to Q4, we expect revenue in our specialty industrial market to increase slightly from Q3.
Ron: Thank you John and good morning, everyone I'm very excited to be part of the MKS team and I look forward to working with John and the leadership team to execute on our strategic plan.
In conclusion, we are pleased with our execution and financial performance in the 3rd quarter. Given our strong 3rd quarter results and our 4th quarter outlook, we now expect 2nd half revenue to be up low to mid-single digits compared to the 1st half.
Ron: It's obviously early days at this point, but let me share a few comments on my initial observations.
Ron: MKS is a technology driven secular growth company, the breadth of our product offering and early engagement strategy with customers combined with the execution capabilities of the MKS team puts the company in an enviable position.
Although signs of a recovery have not yet emerged across our end markets, our execution remains solid in the areas we can control.
Our strong gross and operating margins have led to solid cash flow generation to support debt reduction throughout a year where our major end markets have been soft.
Ron: We are focused on attractive growth areas that enable today's advanced electronics devices.
Ron: In the past few weeks I've had a chance to meet many of our employees.
This, along with our design wins and continuous innovation, gives me confidence that we are well positioned as markets recover. Now let me turn it over to Ram to provide some brief remarks, and then Michelle will run through the third quarter financial results in more detail. Ram?
Ron: Tremendous respect for their knowledge of the business and ability to execute.
Ron: I see great value in the talent culture and discipline here at MKS.
Speaker Change: As for my own team, we have a deep bench of finance and accounting professionals with the mosaic of talent. We have a good mix of several recent hires with new ideas and capabilities and veterans with in depth knowledge of MKS.
Ram: Thank you, John, and good morning, everyone. I'm very excited to be a part of the MKS team, and I look forward to working with John and the leadership team to execute our strategic plan. It's obviously early days at this point, but let me share a few comments and my initial observations.
Speaker Change: In the coming quarters, my focus will be on maintaining our cost discipline driving profitability.
Ram: MKS is a technology-driven, secular growth company. The breadth of our product offering and early engagement strategy with customers, combined with the execution capabilities of the MKS team, puts the company in an enviable position.
Speaker Change: We will continue to maximize cash generation to support our capital allocation strategy, which will primarily be centered around debt management and investing in capex to support our business strategy.
Ram: We are focused on attractive growth areas that enable today's advanced electronics devices.
Speaker Change: We will remain focused on improving our overall cost structure to ensure that we are well positioned to take full advantage of the semiconductor and electronics market returns to normal levels of growth.
Speaker Change: In the past few weeks, I've had a chance to meet many of our employees, and I have tremendous respect for their knowledge of the business and ability to execute.
Speaker Change: With that let me turn it over to Michelle to review our financial results for the quarter.
Ram: I see great value in the talent, culture, and discipline here at MKS.
Michelle Mccarthy: Thank you Ron and good morning, everyone.
Speaker Change: As for my own team, we have a deep bench of finance and accounting professionals with a mosaic of talent. We have a good mix of several recent hires with new ideas and capabilities and veterans with in-depth knowledge of MKS.
Michelle Mccarthy: For the third quarter, <unk> reported revenue of $896 million up 1% sequentially and at the high end of our guidance range.
Michelle Mccarthy: Driven by better than expected semiconductor and electronics and packaging revenue.
Speaker Change: In the coming quarters, my focus will be on maintaining our cost discipline, driving profitability,
Michelle Mccarthy: Third quarter semiconductor revenue was $378 million up 3%, both sequentially and year over year.
Speaker Change: We will continue to maximize cash generation to support our capital allocation strategy, which will primarily be centered around debt management and investing in CapEx to support our business strategy.
Michelle Mccarthy: The result was above the high end of our expectations.
Ron: Consistent with the first half of the year, we executed on strong in quarter demand, especially as it related to DRAM and logic foundry applications.
Ram: We will remain focused on improving our overall cost structure to ensure that we are well positioned to take full advantage as the semiconductor and electronics market returns to normal levels of growth.
Ron: Third quarter electronics, and packaging revenue was $231 million, an increase of 1% quarter over quarter and also above the high end of our expectations.
Ram: With that, let me turn it over to Michelle to review our financial results for the quarter.
Ron: This result was led by seasonal strength in chemistry, partially offset by lower equipment sales, which were in line with our expectations.
Ron: On a year over year basis sales were down 5%, primarily due to palladium prices as well as natural variability in our equipment business.
Ron: Excluding the impact of FX and Palladium pass through chemistry sales grew 7% year over year, continuing our gradual recovery trend and industry wide softness.
Michelle: Third quarter semiconductor revenue was $378 million, up 3% both sequentially and year-over-year. The result was above the high end of our expectations.
Ron: In our specialty industrial market third quarter revenue was 287 million a decline of 1% sequentially and just below our guidance midpoint.
Ram: Consistent with the first half of the year, we executed on strong in-quarter demand, especially as related to DRAM and Logic Foundry applications.
Ron: Revenue was down 11% on a year over year basis, primarily due to general industrial weakness.
Ram: Third quarter electronics and packaging revenue was $231 million, an increase of 1% quarter over quarter and also above the high end of our expectations. This result was led by seasonal strength in chemistry, partially offset by lower equipment sales, which were in line with our expectations.
Ron: Consistent with the prior quarter, we observed miner and mostly offsetting fluctuations throughout the multiple end markets served within specialty industrial.
Ron: Turning to margin, we reported third quarter gross margin of 48, 2% above the high end of our guidance.
Ram: On a year-over-year basis, sales were down 5%, primarily due to palladium prices, as well as natural variability in our equipment business.
Ron: Gross margin was up sequentially due to product mix as well as operating leverage on higher revenues.
Ram: Excluding the impact of FX and palladium pass-through, chemistry sales grew 7% year-over-year, continuing a gradual recovery trend from industry-wide softness.
Ron: We continue to prudently manage our costs with third quarter operating expenses of $237 million coming within our guidance range.
Ron: We have a strong track record of managing our cost structure throughout market cycles, which allows us to balance investing in our business with near term profitability and cash generation.
Ram: In our specialty industrial market, third quarter revenue was $287 million, a decline of 1% sequentially, and just below our guidance midpoint.
Ron: Looking ahead, we expect operating expenses will increase modestly from third quarter levels due to compensation costs, including the timing of new planned hires as well as certain third party spend.
Ram: Revenue is down 11% on a year-over-year basis, primarily due to general industrial weakness.
Ram: Consistent with the prior quarter, we observed minor and mostly offsetting fluctuations throughout the multiple end markets served within specialty industrial.
Ron: Third quarter operating income was $195 million.
Ram: Turning to margins, we reported third-quarter gross margin of 48.2% above the high end of our guidance.
Ron: Building, an operating margin of 21, 8%, both well above our guidance driven by strong sales higher gross margin and prudent operating expense management.
Ram: Gross margin was up sequentially due to product mix as well as operating leverage on higher revenues.
Ron: Third quarter, adjusted EBITDA was $232 million and also above the high end of our expectations with a 25, 9% margin.
Ram: We continue to prudently manage our costs with third quarter operating expenses of $237 million coming within our guidance range.
Ron: Net interest expense was $53 million slightly favorable to our guidance of $54 million, reflecting a decrease in Europe more rates in the quarter.
Ram: We have a strong track record of managing our cost structure throughout market cycles, which allows us to balance investing in our business with near-term profitability and cash generation.
Ron: Third quarter net earnings were 116 million or $1 72 per diluted share well above our guidance range, reflecting the strong operating performance I, just detailed and a lower than expected tax rate.
Ram: Looking ahead, we expect operating expenses will increase modestly from third-quarter levels due to compensation costs including the timing of new plant hires, as well as certain third-party spend.
Ron: Free cash flow was 141 million or nearly 16% of revenue demonstrating the cash flow generation potential of the business.
Ram: Third quarter operating income was $195 million, yielding an operating margin of 21.8%, both well above our guidance, driven by strong sales, higher gross margin, and prudent operating expense management.
Ron: As the topline expands and we continue to prudently manage working capital and operating costs, we expect to see strong flow through to the bottom line and higher cash flows, allowing us to accelerate our deleveraging.
Ram: Third quarter adjusted EBITDA was $232 million and also above the high end of our expectations with a 25.9% margin.
Ron: We closed the third quarter with more than one 5 billion of liquidity comprised of cash and cash equivalents of $861 million and our undrawn revolving credit facility of $675 million.
Ram: Net interest expense was $53 million, slightly favorable to our guidance of $54 million, reflecting a decrease in yearable rates in the quarter.
Ron: We exited the quarter with gross debt of $4 9 billion and a net leverage ratio of four five times based on our trailing 12 month adjusted EBITDA of $895 million.
Ram: Third quarter net earnings were $116 million, or $1.72 per diluted share, well above our guidance range, reflecting the strong operating performance I just detailed and a lower than expected tax rate.
Ron: We continue to prioritize deleveraging our balance sheet, while managing the cash and investment needs of the business.
Ram: Free cash flow was $141 million, or nearly 16% of revenue, demonstrating the cash flow generation potential of the business.
Ron: In July we made $110 million voluntary prepayment on our term loan b in connection with our repricing.
Ram: As the top line expands and we continue to prudently manage working capital and operating costs, we expect to see strong flow through to the bottom line and higher cash flows allowing us to accelerate our deleveraging.
Ron: Additionally in October we made another voluntary prepayment of $216 million on our euro denominated term loan b.
Ron: These actions underscore our continued focus on debt reduction.
Ram: We close the third quarter with more than $1.5 billion of liquidity comprised of cash and cash equivalents of $861 million and our undrawn revolving credit facility of $675 million.
Ron: To put perspective around the impact of our debt actions. This year, we enter 2024 with an annual interest expense run rate of approximately $330 million.
Ron: With the actions, we've taken year to date and favorable movements in Europe, where rates, we have reduced our annual interest expense run rate by one third are over 100 million to approximately $220 million.
Ram: We exited the quarter with gross debt of $4.9 billion and a net leverage ratio of 4.5 times, based on our trailing 12-month adjusted EBITDA of $895 million.
Ram: We continue to prioritize deleveraging our balance sheet while managing the cash and investment needs of the business.
Ron: Finally during the third quarter, we paid a dividend of <unk> 22 cents per share or $15 million.
Ram: In July, we made $110 million voluntary prepayment on our term loan B, in connection with our repricing.
Speaker Change: With that I'd like to turn the call back over to John who will review our outlook John.
John Lee: Thank you Michelle let me now turn to our fourth quarter outlook, we expect revenue of $910 million plus or minus $40 million.
Ram: Additionally, in October, we made another voluntary prepayment of $216 million on our euro-denominated term loan B.
Ron: By end market, our fourth quarter outlook is as follows revenue from our semiconductor market is expected to be $380 million plus or minus $15 million.
These actions underscore our continued focus on debt reduction.
Ram: To put perspective around the impact of our debt actions this year, we entered 2024 with an annual interest expense run rate of approximately $330 million.
Ron: Revenue from our electronics and packaging market is expected to be $240 million plus.
Ron: Plus or minus $10 million in.
Ram: With the actions we've taken year-to-date, and favorable movements in year-above rates, we have reduced our annual interest expense run rate by one-third, or over $100 million, to approximately $220 million.
Ron: And revenue from our specialty industrial market is expected to be $290 million, plus or minus $15 million.
Ron: Based on anticipated revenue levels and product mix.
Ron: We estimate fourth quarter gross margin of 47% plus or minus 100 basis points.
Ram: Finally, during the third quarter, we paid a dividend of $0.22 per share or $15,000,000.
Ron: We expect fourth quarter operating expenses of $240 million, plus or minus $5 million.
Speaker Change: With that, I'd like to turn the call back over to John, who will review our outlook. John?
Ron: We estimate adjusted EBITDA of $226 million, plus or minus $23 million.
John: Thank you, Michelle. Let me now turn to our fourth quarter outlook. We expect revenue of $910 million plus or minus $40 million.
Ron: We expect a tax rate of approximately 6% in the fourth quarter benefiting from certain favorable discrete tax items in the quarter.
By end market, our fourth quarter outlook is as follows.
Ram: Revenue from our semiconductor market is expected to be 380 million dollars plus or minus 15 million dollars.
Ron: And bringing our full year tax rate to just under 16%.
Ron: Based on these assumptions, we expect fourth quarter net earnings per diluted share of $1 95.
Ram: Revenue from our electronics and packaging market is expected to be two hundred and forty million dollars plus or minus ten million dollars and revenue from our specialty industrial market is expected to be two hundred and ninety million dollars plus or minus fifteen million dollars.
Ron: Plus or minus 32.
Ron: Our execution has remained strong despite the cyclical challenges in our end markets.
Ron: We are confident that we are uniquely positioned to capitalize on the opportunities that lie ahead.
Ram: Based on anticipated revenue levels and product mix, we estimate fourth quarter gross margin of 47%, plus or minus 100 basis points.
Speaker Change: With that operator, please open the call for Q&A.
Speaker Change: Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Ram: We expect fourth quarter operating expenses of $240 million, plus or minus $5 million.
Ram: We estimate adjusted EBITDA of $226 million plus or minus $23 million.
Speaker Change: <unk> the Q&A roster.
Ram: We expect a tax rate of approximately 6% in the fourth quarter, benefiting from certain favorable discrete tax items in the quarter, and bringing our full year tax rate to just under 16%.
Speaker Change: Our first question comes from the line of Matthew personnel of Cantor. Your line is now open.
Speaker Change: Hey, guys. Thanks for taking the question I guess, maybe to start on your semiconductor business can you maybe add some more color on what youre seeing in terms of customer utilization rates spare business ordering patterns or anything else that may help inform an early view into 2025 dynamics.
Ram: Based on these assumptions, we expect fourth quarter net earnings per diluted share of $1.95 plus or minus $0.32.
Ram: Our execution has remained strong despite the cyclical challenges in our end markets. We are confident that we are uniquely positioned to capitalize on the opportunities that lie ahead.
Speaker Change: Hi, Matt its Jon Thanks for the question I think.
Speaker Change: Continuing to see.
Speaker Change: Utilization rates pick up certainly HBM.
With that, Operator, please open the call for Q&A.
Speaker Change: Graham Utilizations have been great.
Speaker Change: Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you'll need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster.
Speaker Change: So we're seeing the same things that many people have talked about logic and foundry or certain customers remains very strong and then NAND remains muted. So I think when you think about 2025.
Speaker Change: I think our views have come down over the year, but it's still generally an up year.
Speaker Change: Our first question comes from the line of Matthew Prisco of Cantor. Your line is now open.
Speaker Change: That's not Miss our opinion, that's what we're seeing from many of our customers and what they are telling us.
Speaker Change: I think NAND still remains muted and it depends on when that turns.
Matthew Prisco: Hey guys, thanks for taking the question. I guess maybe to start, on your semiconductors business, can you maybe add some more color on what you're seeing in terms of customer utilization rates, spare business, ordering patterns, or anything else that may help inform an early view into 2025 dynamics?
Speaker Change: Foundry logic, DRAM seem to be holding up well and the expectations that it will hold up well in 2025 as well.
Speaker Change: Great. That's helpful. And then would love to hear a little bit more color on your progress in photonics initiatives and then also given the given the push outs experienced viral margins lethal player. How does this change will ramp expectations around your new photonics women subsequent duration of that margin headwind.
Hi Matt, it's John. Thanks for the question.
John: I think we've continued to see, you know, utilization rates pick up. Certainly, HBM, DRAM utilizations have been great. So, we're seeing the same things that many people have talked about. Logic and Foundry, certain customers, remains very strong. And then NAND remains muted. So, I think, you know, when you think about 2025,
Speaker Change: Thanks.
Speaker Change: Right.
Speaker Change: So we talked about last quarter, our photonics win this quarter, we talked about another photonics win with a different customer.
John: You know, I think the views have come down over the year, but it's still generally an up year and that's not our opinion. That's what we're seeing from many of our customers and what they're telling us.
Speaker Change: So this is the lithography metrology inspection space as you know.
Speaker Change: Certainly the lead times for those kinds of sub systems as well as of course, the systems are much longer than in the vacuum area for WMC and so short term I don't think there's really any effect because the lead times are quite long for our stuff as well as their stuff so longer term of course market.
John: So, I think NAN still remains muted and depends on when that turns, but Foundry Logic DRAM seems to be holding up well and the expectation is that it will hold up well in 2025 as well.
Speaker Change: Chris, that's helpful. And then I would love to hear a little bit more color on your progress in the photonics initiatives. And then also, given the push-outs experienced by the largest litho player, how did this change or ramp expectations around your new photonics win and subsequent duration of that margin headwind? Thanks.
Speaker Change: Hands will determine what the long term needs are for our critical lithography tools metrology tool metrology tools and inspection tools.
Speaker Change: So I think our point is there's lots of opportunity there to gain share with the technology will provide we think we're unique because we can bring more tools in the toolbox integrating different kinds of technologies together that makes us unique so longer term, we're still very excited about our growth and world class optics initiative as well.
Speaker Change: Right, so we talked about last quarter a Photonics win. This quarter we talked about another Photonics win with a different customer.
Speaker Change: So, this is in the lithography metrology inspection space, as you know.
Speaker Change: <unk>.
Speaker Change: The market share gain opportunities in this segment of WMC.
John: Certainly, the lead times for those kinds of subsystems as well as, of course, the systems are much longer.
Speaker Change: Very helpful. Thank you.
Speaker Change: Thanks, Matt.
Speaker Change: Thank you.
than in the vacuum area for WFE.
Speaker Change: Our next question comes from the line of Steve Barger at KBC M. Your line is now open.
John: And so, short term, I don't think there's really any effect because, you know, the lead times are quite long for our stuff as well as their stuff. So, longer term, of course, market demands will determine, you know, what the long-term needs are for critical lithography tools, metrology tools, and inspection tools.
Speaker Change: Hey, good morning, everyone.
Speaker Change: Okay.
Speaker Change: Looking at the guidance at the midpoint gross margin steps down about 120 basis points sequentially is that mix or can you talk through what the swing factors are around that range.
John: So I think our point is there's lots of opportunity there to gain share with the technology we provide. We think we're unique because we can bring more tools to the toolbox, integrating different kinds of technologies together that makes us unique.
Speaker Change: Yes, Steve Thanks for the question.
Speaker Change: No.
Speaker Change: Is mix.
Speaker Change: We expect to electronics and packaging revenue to be a little higher next quarter as we just said.
John: So longer term, we're still very excited about our growth in the World Class Optics Initiative, as well as the market share gain opportunities in this segment of WFE.
Speaker Change: A lot of that is driven by equipment. So we did see some.
Speaker Change: Some are promising orders in Q3 for equipment related to AI.
Very helpful. Thank you.
Speaker Change: And this is equipment that's.
Speaker Change: Servicing all segments of the PCB industry. The HDI the MLP and then the packaged substrate and as we've talked about in the past to make an AI board you need the packaged substrate of course, that's the highest density that type of most advanced part of the PCB industry.
Thanks, Matt.
Thank you.
Speaker Change: Our next question comes from the line of Steve Barger of KBCM. Your line is now open.
Hey, good morning everyone.
Speaker Change: At the looking at the guidance at the midpoint gross margin steps down about 120 basis points sequentially Is that mix or can you talk through what the swing factors are around that range?
Speaker Change: But then you've got to put it on HDI and MLP boards and so it was quite interesting for us to see some of our customers start ordering for those applications and so that equipment revenue will flow through into Q4, and as you know our equipment gross margin is slightly lower than the chemistry. So that's really.
John: Yes, Steve, thanks for the question. You know, it is mixed. We expect electronics and packaging revenue to be a little higher next quarter, as we just said, and a lot of that is driven by equipment.
Speaker Change: Part of it it's really that mix.
Speaker Change: Got it so encouraging but a little lower margin on the equipment that's good.
So we did see some
John: You know, some promising orders in Q3 for equipment related to AI. And this is equipment that's...
Speaker Change: And maybe a question for Rob.
Speaker Change: We're coming into a situation where the end markets are recovering, but theres still some uncertainty how are you going to balance cost control versus the.
John: servicing all segments of the TCV industry, the HDI, the MLB, and then the packaged substrate.
Speaker Change: The market share initiatives that we're talking about inventory levels just to make sure that service levels are high maybe just talk about what's your prioritizing as you go through the next few quarters.
John: And as we've talked about in the past, to make an AI board, you need to package substrate, of course, that's the highest density type of most advanced part of the PCB industry.
Speaker Change: Yeah. Thanks, Steve Thats, a great question I think it's always a balance between meeting your current quarter and forecast guidance and making sure. Your long term strategic plan initiatives are well funded and resource.
John: But then you've got to put it on HDI and MLP boards. And so it was quite interesting for us to see some of our customers start ordering for those applications.
John: And so that equipment revenue will flow through into Q4. And as you know, our equipment gross margin is slightly lower than the chemistry. So that's really part of it. That's really that mix.
Speaker Change: So we have done a good job in maintaining our cost discipline and my immediate focus will be to make sure that continues the margin progression continues and the cash generation.
Speaker Change: Got it. So, encouraging, but a little lower margin on the equipment. That's good.
Speaker Change: We have demonstrated keeps growing so that we can strengthen our balance sheet.
and maybe a question for Ram.
Speaker Change: With that management, so those priorities don't change will remain our focus.
Speaker Change: You're coming into a situation where end markets are recovering, but there's still some uncertainty. How are you going to balance cost control versus, you know, the market share initiatives that we're talking about, inventory levels, just to make sure that service levels are high. Maybe just talk about what you're prioritizing as you go through the next few quarters.
Speaker Change: Yeah, I would add to Steve that we're really investing where we think the best opportunities are so R&D is not starved.
Speaker Change: We expanded even field service to service the growing base of equipment as well so to Ron's point, it's always a balance but we are certainly very aggressive in putting money into opportunities as we see them and you know some examples where our power five years ago and World class.
Speaker Change: Yeah, thanks Steve. That's a great question. I think it's always a balance between meeting your current quarter and forecast guidance and making sure your long-term strategic plan initiatives are well funded and resourced.
Speaker Change: Optics, more recently as well as lasers and other opportunities that.
Speaker Change: So we we have done a good job in maintaining our cost discipline.
Speaker Change: That come about.
Speaker Change: and my immediate focus will be to make sure that continues, the margin progression continues, and the cash generation that we have demonstrated keeps going so that we can strengthen our balance sheet.
Speaker Change: As the markets change.
Speaker Change: Yeah, just to add one more thought towards John just said.
Speaker Change: We are not starving, our capex or we continue to invest in the business both in Capex and in the P&L like John said, so those activities and focus will continue.
Speaker Change: with debt management. So those priorities don't change will remain our focus.
Speaker Change: I would add too, Steve, that we're really investing where we think the best opportunities are. So R&D is not starved. You know, we've expanded even field service to service the growing base of equipment as well. So to Ron's point, it's always a balance, but we are certainly very aggressive.
Speaker Change: I appreciate the detail thanks.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Jim Ricchiuti at Needham <unk> Company. Your line is now open.
Speaker Change: Hi, Good morning. This is Chris <unk> on for Jim. Thank you for taking the questions.
Speaker Change: in putting money into opportunities as we see them. And some examples were RF Power five years ago and world-class optics more recently, as well as lasers and other opportunities that come about as the markets change.
Speaker Change: Could you elaborate on what you're seeing from a from a demand standpoint, and some of the primary industrial.
Speaker Change: Market.
Speaker Change: In particular automotive.
Speaker Change: And could you remind us.
Speaker Change: What.
Speaker Change: Yeah, and just to add one more thought to what John just said
Speaker Change: Share of.
Speaker Change: Of revenue.
Speaker Change: <unk> exclusively for enabling EV type applications. Thank you.
Speaker Change: We are not starving our CAPEX or you know we continue to invest in the business both in in CAPEX and in the P&L like Dr. John said so those activities and focus will continue.
Speaker Change: Yeah. Thanks for the question, Chris So what we've seen in automotive is certainly more muted.
Speaker Change: And that's not a surprise.
Appreciate the detail. Thanks.
Speaker Change: Well documented.
Thank you. Thank you. Thank you.
Speaker Change: Our automotive revenue has been pretty stable, though even in this muted environment.
Thank you. Thank you. Thank you.
Thank you.
Speaker Change: Our next question comes from the line of Jim Ricciuti of Needham & Company. Your line is now open.
Speaker Change: And this is really the Gms business, you know the kind of brake calipers and decorative type of things that go into cars, both ice and <unk>, we havent broken out EV versus ice.
Speaker Change: Hi, good morning. This is Chris Granga on for Jim. Thank you for taking the questions.
Speaker Change: Could you elaborate on what you're seeing from a demand standpoint in some of the primary industrial markets, in particular automotive? And could you remind us what share of
Speaker Change: I think theres a lot of opportunities that arise with EV such as all the components that go into the battery that require a metal coatings. So those are opportunities tailwind and then some things go away such as perhaps as much chrome on the front of the grille, So theres puts and takes.
Speaker Change: of Revenue is exclusively for enabling EV type applications. Thank you.
Speaker Change: Right now we think that.
Speaker Change: Evs offer a slightly better opportunity.
Speaker Change: Thanks for the question, Chris. So, you know, what we've seen in automotive is certainly more muted and that's not a surprise.
Speaker Change: For our Gms business, and that's not even adding to the electronics parts. So they'll tronox part for automotive its really still not categorized in the automotive part of our business is really part of our electronics business. So.
It's well documented.
Speaker Change: Our automotive revenue has been pretty stable, though, even in this muted environment.
Speaker Change: And this is really the GMF business, you know, the kind of brake calipers and...
Speaker Change: So automotive units are down worldwide.
Speaker Change: Our business, there seems to be holding up pretty steadily.
Speaker Change: decorative type of things that go into cars, both ICE and EV. We haven't broken out EV versus ICE. I think there's a lot of opportunities that arise with EV, such as all the components that go into the battery.
Speaker Change: Yeah.
Speaker Change: Okay. Thank you.
Speaker Change: And given given some of the concerns that we're reading about in terms of <unk> spend in.
Speaker Change: In China and in prospectively can.
Speaker Change: that require metal coating. So those are opportunities, tailwinds. And then some things go away, such as perhaps as much chrome on the front of the grill.
Speaker Change: Can you offer any sense of how much your business in some semiconductor either directly or indirectly.
Speaker Change: Is it is exposed to that to that region.
Speaker Change: So there's puts and takes but right now we think that you know EVs offer a slightly better opportunity
Speaker Change: Sure.
Speaker Change: In 2022 October 2022, that's when it affected us the most because it restricted our ability to sell directly to specific equipment OEM customers in China.
for our GMF business.
Speaker Change: and that's not even adding to the electronics part. So the electronics part for automotive, it's really still not categorized in the automotive part of our business, it's really part of our electronics business. So automotive units are down worldwide, but our business there seems to be holding up pretty steadily.
Speaker Change: We had talked about that publicly to the order of $200 million debt that was at risk. So those numbers are out of our numbers now they've been out for two years now so so theres no additional risk. Besides just the normal Wi Fi market of China, and we are selling indirectly we're selling to the five big equipment.
Thank you.
Speaker Change: And given some of the concerns that we're reading about in terms of WFE spend in China and prospectively, can you offer any sense of how much your business in semiconductor, either directly or indirectly, is exposed to that region?
Speaker Change: And Oems as well as others.
Speaker Change: And as they are shipped to China, then that's where our revenue comes from so we really look at the exposure is much more in line with the market exposure and not anything particular to MKS.
Speaker Change: Great. Thank you very much.
Speaker Change: Sure, you know in 2022, October 2022, that's when it affected us the most because it restricted our ability to sell directly to specific equipment OEM customers in China.
Speaker Change: Thanks, Chris.
Speaker Change: Thank you.
Speaker Change: Question comes from the line of became cash.
Speaker Change: Well liana.
Speaker Change: Yeah, Hi, Thanks for letting me ask a question.
Speaker Change: Couple of questions. When you look at the March quarter, just wondering how the season that argued that the theme on the seasonality and then just big picture.
Speaker Change: We had talked about that publicly to the order of 200 million dollars that that was at risk. So those numbers are out of our numbers now. They've been out for two years now.
Speaker Change: And can you quantify on Wi Fi.
Speaker Change: So there's no additional risk besides just the normal WFE market of China, and we're selling Indirectly, we're selling to the five big equipment OEMs as well as others
Speaker Change: Just on the puts and takes.
Speaker Change: China restrictions under tip stack, especially the new administration, how are you thinking.
Speaker Change: Yes, I think your first part was about any cyclicality or seasonality sorry in Q3, there is always a little seasonality to our chemistry business for electronics.
Speaker Change: And as they ship to China, then that's where our revenue comes from. So, we really look at the exposure as much more in line with the market exposure, not anything particular to MCAS.
Speaker Change: And because it has that consumer product cycle to it so chemistry was higher.
Speaker Change: But it was even higher year over year in Q3 as well. So there was that normal seasonality, we kind of expect chemistry to kind of moderate a little bit in Q4, just because of seasonality, but as you because we just talked about e&ps up and a lot of that is driven by E&P equipment.
Great, thank you very much.
Thanks Chris.
Speaker Change: Thank you. This question comes from the line of Vijay Rakesh of Mizzou Hill.
Yeah, hi. Thanks for letting me ask your question.
Speaker Change: A couple of questions. When you look at the March quarter, I'm just wondering how the seasonality is, and then there's a big picture on 2025 on WSE. Some of the push and takes between the China restrictions and the TIPS Act, especially with the new administration. How are you thinking?
Speaker Change: So those are the puts and takes of seasonality.
Speaker Change: With respect to 2025 <unk> I think your question was does the election change anything and you know certainly there's a lot of smart people that couldn't have opinions on that I would say this specifically in terms of how the geopolitics will shake out.
Thanks for watching!
[inaudible]
Speaker Change: Yeah, I think your first part was about any cyclicality or seasonality. Sorry in Q3 There is always a little seasonality to our chemistry business for electronics
Speaker Change: We have been the opinion that.
Speaker Change: That's been a bipartisan.
Speaker Change: Agreement in terms of how the United States treats that and so we don't expect any change from the particular semiconductor.
Speaker Change: because it has that consumer product cycle to it. So chemistry was higher.
Speaker Change: but it was even higher year over year in Q3 as well. So there was that normal seasonality. We kind of expect chemistry to kind of moderate a little bit in Q4 just because of seasonality. But as we just talked about, EMP is up and a lot of that is driven by EMP equipment.
Speaker Change: Restrictions, so whatever that was going to be.
Speaker Change: Going forward, we don't expect that to change too much.
Speaker Change: Got it and then on the.
Speaker Change: That side one of them.
Speaker Change: Only planning industrial peer down.
Speaker Change: 295 acres.
Speaker Change: In terms of leverage of the balance sheet.
Speaker Change: So those are the puts and takes of seasonality. With respect to 2025 WFC, I think your question was...
Speaker Change: Yeah, well certainly be that's still our number one priority we will be using.
Speaker Change: Excess free cash flow are focused to delever.
Speaker Change: Does the election change anything? And certainly there's a lot of smarter people that can have opinions on that. I would say this, you know, specifically in terms of how the geopolitics will shake out.
Speaker Change: We will certainly do other things such as repricing and whatnot if it makes sense if the market allows.
Speaker Change: So our focus for the next 12 to 18 months as we've said before is to really focus on delevering with any excess free cash flow how much that is of course will depend on the markets.
Speaker Change: We have been the opinion that that's been a bipartisan, you know, agreement in terms of how the
Speaker Change: The United States treats that, and so we don't expect any change from the particular semiconductor restrictions. So whatever that was going to be going forward, we don't expect that to change too much.
Speaker Change: As you can see in 2024 with a very muted market for semiconductors and electronics packaging. Our two main markets, we were still able to prepay $426 million and so theres a lot of leverage in our model certainly if revenue were to go up.
Speaker Change: Got it. And then on the debt side, what are you planning in terms of pay down through 2025, I guess, in terms of leverage in the balance sheet?
Speaker Change: Significantly.
Speaker Change: A lot of that would flow through through the cash the free cash flow.
Speaker Change: As Michelle said this quarter it was 16% of revenue free cash flow.
Thank you. Thank you.
Speaker Change: Yeah, well, we'll certainly be, that's still our number one priority. We will be using access-free cash flow focused 2D lever.
Speaker Change: Got it thank you.
Speaker Change: Thank you Vijay.
Speaker Change: Thank you.
Speaker Change: We'll certainly do other things, such as repricing and whatnot, if it makes sense, if the market allows. So our focus for the next 12 to 18 months, as we've said before, is to really focus on de-levering with any excess free cash flow.
Speaker Change: Our next question comes from the line of Krish tank car T. D. Cohen. Your line is now open.
Speaker Change: Hi, Thanks for taking my question two of them John.
Speaker Change: One of the things you mentioned was you saw strength in semi business in DRAM logic and foundry.
Speaker Change: How much that is, of course, will depend on the markets. As you can see, in 2024, with a very muted market for semiconductors and electronics and packaging are two main markets.
Speaker Change: <unk> NAND.
Speaker Change: I'm kind of figured out then do you expect to see Nansen, because some of your other component peers like I call said that they are beginning to see.
Speaker Change: <unk> for the business I'm kind of curious.
Speaker Change: we were still able to prepay $426 million. And so there's a lot of leverage in our model. Certainly if revenue were to go up significantly, a lot of that would flow through the free cash flow.
Speaker Change: Is there a lag effect as we begin to see anything or is it more of a 'twenty 'twenty five event.
Speaker Change: Yeah. Thanks for the question Krish I certainly can't comment on what other peers are seeing we can comment on what we're seeing and I think what we're saying is still feels very muted.
Speaker Change: As Michelle said, this quarter it was 16% of revenue, free cash flow.
Thank you.
Speaker Change: Some customers have talked about upgrades and things like that and.
Thank you, Vijay.
Thank you.
Speaker Change: Rates come in a couple of different flavors right.
Speaker Change: Our next question comes from the line of Krish Sankar of TD Cohen. Your line is now open.
Speaker Change: To upgrade.
Speaker Change: Significant increases.
Speaker Change: Increases in layer count you really need new RF power.
Speaker Change: Yeah, I had time to take my question. I have two of them. John...
Speaker Change: You can also upgrade with smaller changes and that may not require a new RF tech as much as required chemistry or cryo. So I think that all depends on what the customers see.
Speaker Change: One of the things you mentioned was, you know, you saw strength in semi-business and DRAM logic and foundry.
Speaker Change: not in NAND. I'm trying to figure out when do you expect to see NAND strength because some of your other component peers like Ico said that they're beginning to see
Speaker Change: And what their customers want them to do.
Speaker Change: But right now we see NAND is still.
Speaker Change: I'm kind of curious, is there a lag effect, have you begun to see anything, or is it more of a 2025 event?
Speaker Change: Is pretty muted.
Speaker Change: No.
Speaker Change: That's all we can say about what we see.
Speaker Change: Got it got it that's very helpful.
Speaker Change: And then a quick follow up Jon if I remember right you said that the E&P strength wasn't flex PCB drilling I hope I heard that right because the question was mainly <unk>.
Speaker Change: Yeah, thanks for the question Krish. So we can't comment on what other peers are seeing. We can comment on what we're seeing and I think what we're saying is still feels very muted.
Speaker Change: <unk> is mainly used for smartphone end markets, but it seems like the market hasnt quite recovered so I'm trying to figure out what drove that strength for you in the quarter.
Speaker Change: You know, some customers have talked about upgrades and things like that. And, you know, upgrades come in a couple of different flavors, right? To upgrade...
Speaker Change: On the E&P side, and then just wanted to also say that our welcome to the <unk> hope to interact with you more in the future. Thank you.
Speaker Change: significant increases in layer count, you really need new RF power. But you can also upgrade with, you know, smaller changes and that might not require a new RF deck, it might just require chemistry.
Speaker Change: Thank you Chris look forward to more conversations yeah yeah.
Speaker Change: or Cryo. So I think that all depends on what the customers see and what their customers want them to do. But right now we see Nan is still pretty muted so that's that's you know all we can say about what we see.
Speaker Change: Yeah to answer your question Krish that Theyre actually two things that are driving E&P up quarter on quarter. It is both a the flex equip.
Speaker Change: Equipment, so for smartphones, you're right. There. So we did see an increase there in and bookings and that's going to turn into revenue.
Speaker Change: Got it, got it. That's very helpful. A little quick follow-up, John. If I remember right...
Speaker Change: Just a quarter or so.
Speaker Change: And in addition to that we saw an increase in bookings for rigid <unk>.
Speaker Change: You said that the ENP strength was in flex PCB drilling.
Speaker Change: P C b.
Speaker Change: I hope I heard it right because the question was mainly, I thought sex PCB is mainly used for smartphones and markets.
Speaker Change: Equipment for chemistry related to AI, so its actually both that are happening.
Speaker Change: But it seems like that end market hasn't quite recovered. So I'm trying to figure out what drove that trend for you in the quarter on the E&P side. And then I just want to also say that welcome to the team, Ram. Hope to interact with you more in the future. Thank you.
Speaker Change: Got it thank you.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Joseph Moore of Morgan Stanley.
Speaker Change: Line is now open.
Speaker Change: Hi, This is Shane on behalf of Jerry. Thank you for letting me ask a question. My first question is how should we think about theaters idiosyncratic gross margin tailwind and headwind that you're envisioning for 2025. Thank you.
Thank you, Chris. Look forward to more conversations.
Speaker Change: To answer your question, Krish, there are actually two things that are driving E&P up quarter on quarter. It is both the Flex equipment, so for smartphones, you're right there. So we did see an increase there in Bookingston. That's going to turn into revenue in the next quarter or so.
Speaker Change: Yeah.
Speaker Change: Yeah gross margins in 2025 is certainly.
Speaker Change: You can see that our gross margins.
Speaker Change: It's a slightly different by division.
Speaker Change: Chemistry, and the AMETEK acquisition has really helped keep.
Speaker Change: And in addition to that, we saw an increase in bookings for rigid PCB equipment for chemistry related to AI. So it's actually both that are happening.
Speaker Change: Keep the profitability up even during a downturn.
Speaker Change: Cycle. So we're really happy about that and it's improved right under <unk>. The last two years. The gross margin for a particular volume of business that <unk> has improved that's also the case with PST as is the case with DST.
Got it. Thank you.
[inaudible]
Thank you.
Speaker Change: Our next question comes from the line of Joseph Moore of Morgan Stanley. Your line is now open.
Speaker Change: Volume will improve all of them and so if 2025 volume is higher we should expect that 50% gross margin flow through that we've talked about in our model.
Speaker Change: Hi, this is Shane on behalf of Joe. Thank you for letting me ask a question. My first question is how should we think about the idiosyncratic gross motion tailwinds and headwinds that you're envisioning for 2025? Thank you.
Speaker Change: And then of course Ah.
Speaker Change: The inflationary costs have come down over this year. So you know the PPV.
Speaker Change: Yeah, ghost margins in 2025, but certainly you can see that our ghost margins
Speaker Change: Is pretty much.
Speaker Change: Balanced now, it's not back to where it used to be where we can always count on some kind of a one or 2% lower P. P V. A year on year, but some parts of the supply chain and some parts of the materials are getting to that point as well. So right now it's still imbalanced and so that could be a tailwind of course, if inflation goes up it's a <unk>.
are slightly different by division.
Speaker Change: Chemistry and the Attec acquisition has really helped keep the profitability up even during, you know, a downturn, a down cycle.
Speaker Change: So we're really happy about that and it's improved right under MKS the last two years the gross margin for particular volume of business at IoTeX has improved That's also the case with PSD as is the case with VSD Volume will improve all of them
Speaker Change: And so those are the things we think about in terms of gross margin drivers going forward.
Speaker Change: Got it. Thank you my follow up is sort of non capex potentially returns how is <unk> positioned that customer tools sort of relative to the last up cycle. In 2023 2020. Thank you very much.
Speaker Change: And so if 2025 volume is higher, we should expect that 50% gross margin flow-through that we talked about in our model.
Speaker Change: Yeah, we believe we still have.
And then, of course,
Speaker Change: The leadership position.
Speaker Change: The inflationary costs have come down over this year, so the PPV is pretty much...
Speaker Change: For certainly some of the most the most critical etch and Deanne.
Speaker Change: With our RF power.
Speaker Change: And so we're pretty confident that the next up cycle that that we will enjoy that with our RF power business I think you're probably talking about new kinds of power such as pulse DC, where.
Speaker Change: balance now it's not back to where it used to be where we can always count on some kind of
Speaker Change: one or two percent lower PPV year-on-year, but some parts of the supply chain and some parts of the materials are getting to that point as well.
Speaker Change: Working on that as well as others and that will remain to be seen as to when that gets put into production but.
Speaker Change: So right now it's still in balance, and so that could be a tailwind. Of course, if inflation goes up, it's a headwind. So those are the things we think about in terms of gross margin drivers going forward.
Speaker Change: But it's certainly not probably the next cycle.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: Got it, thank you. My follow-up is, so a non-CAPEX eventually returns, how is MKSI positioned at customer tools, sort of, relative to the last up cycle in 2020 through 2022? Thank you very much.
Speaker Change: Our next question comes from the line of Joe QUADRA Archie of Wells Fargo. Your line is now open.
Speaker Change: Yeah, Thanks for taking the questions.
Speaker Change: I know you guys announced kind of a new semiconductor factory Youre building in Malaysia I was wondering if you could talk about why maybe that the capex kind of requirements. There over the next few quarters as we think about excess free cash flow for debt pay down and then also how do we think about that makes it a production I think.
Speaker Change: Yeah, you know, we believe we still have the leadership position for certainly some of the most the most critical etch in VNN.
Speaker Change: with our art power and so we're pretty confident that the next up cycle
Speaker Change: A lot of your semi related production capacities located in China.
Speaker Change: is that we will enjoy that with our power business. I think you're probably talking about, you know, new kinds of power, such as Pulse DC. We're working on that as well as others, and that will, you know, remain to be seen as to when that gets put into production, but certainly not probably in the next cycle.
Speaker Change: Yes, Joe that's a great question. So we are we announced the groundbreaking in Malaysia for another factory target towards our semiconductor and maybe even photonics types of products.
Speaker Change: And that's you know expansion for capacity that we think we will need it certainly are putting less risk in our footprint, our manufacturing footprint and that's certainly something our customers want to see and.
Speaker Change: The first time I've seen a movie, I've seen a movie that I've never seen before.
Thank you.
Thank you.
Speaker Change: Our next question comes from the line of Joe Quattrochi of Wells Fargo. Your line is now open.
Speaker Change: So those are the two reasons why we're doing that.
Joe Quattrochi: Thanks for taking the questions. I know you guys announced kind of a new semiconductor factory you're building in Malaysia. I was wondering if you could talk about one, maybe that the CapEx kind of requirements there over the next two quarters as we think about
Speaker Change: Terms of Capex I think the way to think about it Joe is we've always been in that 3% to 5%.
Speaker Change: A level in terms of Capex spend so very very low.
Speaker Change: Maybe the next year or two it might edge up towards the five because we've got a couple of factories being built for good reasons.
Speaker Change: Access Free Cash Flow for Debt Paydown, and then also, how do we think about the mix of the production, I think, a lot of your semi-related production capacities located in China?
Speaker Change: But you know this past year I think we'll be in that 3% range and then you know it could oscillate between three to five but still quite a low capex intensity model that we have.
Speaker Change: Yeah, Joe, that's a great question. So we announced a groundbreaking in Malaysia for another factory target towards our semiconductor and maybe even photonics types of products.
Speaker Change: That's helpful. And then I guess you know I know you guys, obviously guided in December but how do we think about is there anything to call out in terms of seasonality into the March quarter.
Speaker Change: And that's, you know, expansion for capacity that we think we will need. It's certainly, you know, putting less risk in our footprint, our manufacturing footprint. And that's certainly something our customers want to see.
Speaker Change: Our March quarter, usually is a little lower from a consumer product cycle standpoint, that's true.
Speaker Change: So that's typically what we would see and part of our.
Speaker Change: So those are the two reasons why we're doing that. In terms of CapEx, I think the way I think about it, Joe, is we've always been in that 3% to 5%.
Speaker Change: MST out a tech business.
Speaker Change: Just like we saw an uptick in Q3, so that that's an expectation that things can change certainly a new product release of some sort could change that.
Speaker Change: level in terms of cap expense. So very, very low. Maybe the next year or two, it might edge up towards the five because we've got, you know, a couple of factories being built for good reasons.
Speaker Change: The only kind of difference is equipment equipment is not necessarily a consumer products cycle right.
Speaker Change: but you know this past year I think we'll be in that 3% range and then you know it could oscillate between 3 to 5 but still quite a low capex intensity model that we have.
Speaker Change: The investment cycle and capacity cycle and so that's why we see kind of a Q4 uptick in E&P because of not just flex equipment, but also rigid equipment and you know it remains to be seen what that'll be in Q1.
Speaker Change: It's helpful and then I guess you know I know you guys obviously guided December but how do we think about is there anything to call out in terms of seasonality into the March quarter?
Speaker Change: Got it thank you.
Speaker Change: Thanks, Joe.
Speaker Change: Yeah.
Speaker Change: As a reminder to ask a question or an additional question you will need to press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Speaker Change: The Mars quarter usually is a little lower from a consumer product cycle standpoint. That's true. So that's typically what we would see in part of our
Speaker Change: Our next question comes from the line of Melissa Weathers of DB your.
MSD, out-of-tech business.
Speaker Change: just like we saw an uptick in Q3. So that that's the expectation. Things can change. Certainly a new product release of some sort could change that. I think the only kind of difference is equipment. You know, equipment is not necessarily a consumer products cycle, right? It's just it's an investment cycle.
Speaker Change: Your line is now open.
Speaker Change: And I. Thank you for letting me ask a question and look forward to working with you Ron I think I heard in your preamble that you talked about a backend win for H B M.
Speaker Change: Can you give us any more color on what that is how big it can be and.
Speaker Change: and Capacity Cycle. And so that's where we see kind of a Q4 uptick in E&P because of not just flex equipment, but also rigid equipment. And, you know, it remains to be seen what that'll be in Q1.
Speaker Change: And if you expect any other similar ones.
Speaker Change: Yeah. Thanks Melissa.
Speaker Change: The H P M. When we talked about with lasers and so lasers.
Speaker Change: Can be used are used to to do cutting chips, that's not news, but H b M type of die, you're putting dies on topic of each other and so precision and the findings of the edges and all that.
Got it. Thank you.
Thanks, Joe.
Thank you.
Speaker Change: As a reminder, to ask a question or an additional question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
Speaker Change: Our giving laser makers us opportunities because the more precise you can make those cuts the better yield you're going to have on those kinds of chips. So.
Speaker Change: Our next question comes from the line of Melissa Weathers of DB. Your line is now open.
Speaker Change: Hi there, thank you for letting me ask a question and I look forward to working with you, Ram. I think I heard in your preamble that you talked about a back-end win for HBM. Can you give us any more color on what that is, how big it can be, and if you expect any other similar wins?
Speaker Change: And we called out one particular customer and it's a it's pretty significant but you know MKS is pretty big so.
Speaker Change: But for the laser group, it's significant and it's not just one customer so it's multiple customers doing this.
Speaker Change: Got it.
Speaker Change: And then on the advanced logic side, you guys said you saw strength in the quarter. There, it's pretty clear that the main player. There is seeing strength, but the two kind of second tier foundries are struggling so anyway that we should think about if that market.
Speaker Change: Yeah, thanks Melissa. The HBM1 we talked about was lasers and so lasers...
Speaker Change: can be used, are used, to do cutting of chips. That's not news, but...
Speaker Change: Rusty just one major player how would that impact on cash and how you're derisking fare.
Speaker Change: HBM type of dye, you know, you're putting dyes on top of each other. And so precision and the fineness of the edges and all that.
Speaker Change: That dynamic.
Speaker Change: Yeah, you know I think we're.
Speaker Change: are giving laser makers, us, opportunities because the more precise you can make those cuts...
Speaker Change: We're not too worried about that Melissa I think the reason is because we've been in a consolidating industry for 30 years and so you could argue that you know there were 30 chip companies now they're five.
Speaker Change: the better yield you're going to have on those kinds of chips. So, and we call that one particular customer, and it's pretty significant, but, you know, MCAS is pretty big, so, but for the laser group, it's significant, and it's not just one customer, so it's multiple customers doing this.
Speaker Change: There were dozens of Oems now that are five so and certainly we want to provide the best value to our customers, but we also want to get paid for the fair value that we bring and as you can see our gross margins are in the same ZIP code as if you will as our customers and our customers' customers.
Got it.
Speaker Change: And then on the advanced logic side, you guys said you saw strength in the quarter there. It's pretty clear that the main player there is seeing strength, but the two kind of second tier foundries are struggling. So any way that we should think about if that market recedes to just one major player, how would that impact MKS? And how are you de-risking for that dynamic?
Speaker Change: I think that's just the.
Speaker Change: Collaboration of the value.
Speaker Change: Technology that we bring and I think all companies that bring this kind of technology you need those kinds of gross margins. So you can invest in next generation. So we've been able to demonstrate that over 50 years.
Speaker Change: Yeah, you know, I think we're not too worried about that, Melissa. I think the reason is because, you know, we've been in a consolidating industry for 30 years.
Speaker Change: So, yes, there could be consolidation and whatnot throughout the industry, but so we feel that the value of our portfolio is really going to be what determines the gross margin.
Speaker Change: And so you could argue that, you know, there were 30 chip companies, now there are five.
Speaker Change: Thank you.
Speaker Change: Thank you Melissa.
Speaker Change: Thank you.
Speaker Change: There were dozens of OEMs, now there are five, so And certainly we want to provide the best value to our customers But we also want to get paid for the fair value that we bring
Speaker Change: Our next question comes from the line of Steve Barger at KBC.
Speaker Change: Line is now open.
Speaker Change: Hey, Thanks for the follow up John when you think about the initiatives around photonics or litho or some of the other growth areas. You're targeting can you talk about how this affects the market opportunity for you, whether it's growth rates or or how this affects the tam longer term.
Speaker Change: And as you can see, our gross margins are, you know, in the same zip code, if you will, as our customers.
Speaker Change: They're our customers' customers, and I think that's just a corroboration of the value
Speaker Change: technology that we bring and I think all companies that bring this kind of technology you need those kinds of gross margins so you can invest in the next generation so
Speaker Change: Yeah, I think it's really a back to the playbook. We've we've demonstrated over the last 10 15 years Steve.
Speaker Change: We've been able to demonstrate that over 50 years, and so, yes, there could be consolidation and whatnot throughout the industry, but we feel that the value of our portfolio is really going to be what determines the gross margin.
Speaker Change: There's only so many ways you can outgrow the Wi Fi and we've demonstrated that we could do that for by 200 basis points.
Speaker Change: More recently, we've had headwinds China right a lot of that business got a god removed and so we have to make it up somewhere else and so I think lithography metrology inspection that was a great area, where as a company. We were less index to that then then our contribution to the vacuum.
Thank you.
Thank you, Melissa.
Speaker Change: Thank you. Our next question comes from the line of Steve Barger of KBCM. Your line is now open.
Steve Barger: Hey, thanks for the follow-up. John, when you think about the initiatives around photonics or litho or some of the other growth areas you're targeting, can you talk about how this affects the market opportunity for you, whether it's growth rates or how this affects the TAM longer term?
Speaker Change: Part of <unk>, So that's where we made the investment and we've demonstrated that we can continue to outgrow even that subsegment of Wi Fi and we have been over the last couple of years. So that's just an example of you know that the plan and the playbook of outgrowing W. E. We have to move to where the opportunities are.
Speaker Change: Yeah, I think it's really, back to the playbook we've demonstrated over the last 10-15 years, Steve, you know, there's only so many ways you can outgrow WFE, and we've demonstrated that we could do that by 200 basis points.
Speaker Change: And I think that is also really the strength leveraging the strength of having a broad portfolio you can move to those areas much faster because you're already in them.
Speaker Change: Understood. Thanks, I appreciate that.
Speaker Change: You know, and more recently, we've had headwinds, China, right? A lot of that business got got removed. And so we have to make it up somewhere else. And so I think lithography, metrology inspection, that was a great area where, as a company, we were less indexed to that than
Steve Barger: Yeah. Thanks, Steve.
Speaker Change: I'm showing no further questions at this time I would now like to turn it back to par tossed Misra, Vice President of Investor Relations for closing remarks.
Parthos Misra: Thank you all for joining us today and for your interest in MKS Operator, you may close the call. Please.
Speaker Change: than our contribution to the vacuum part of WFE. So that's where we made the investment and we've demonstrated that we can continue to outgrow.
Speaker Change: Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Speaker Change: even that sub-segment of WFE, and we have been over the last couple of years. So that's just an example of, you know, the plan and the playbook of outgrowing WFE. We have to move
Speaker Change: to where the opportunities are. And I think that is also really the strength, leveraging the strength of having a broad portfolio. You can move to those areas much faster because you're already in them.
Understood. Yeah, thanks. Appreciate that.
Yeah, thanks Steve.
Thank you.
Speaker Change: I'm showing no further questions at this time. I would now like to turn it back to Paretosh Misra, Vice President of Investor Relations, for closing remarks.
Paretosh Misra: Thank you all for joining us today and for your interest in MKS. Operator, you may close the call, please.
[inaudible]
Speaker Change: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
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Speaker Change: Good day and thank you for standing by. Welcome to the MKS Instruments 3rd Quarter 2024 Earnings Conference Call.
At this time, all participants are in a listen-only mode.
Speaker Change: After the speaker's presentation, there will be a question and answer session.
Speaker Change: To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised.
Speaker Change: To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded.
Speaker Change: I would now like to hand the conference over to your first speaker today, Paretosh Misra, Vice President of Investor Relations. Please go ahead.
Good morning, everyone.
Speaker Change: I'm Paretosh Misra, Vice President of Investor Relations, and I'm joined this morning by John Lee.
Speaker Change: President and Chief Executive Officer, Ram Mayankarath, Executive Vice President, Chief Financial Officer and Treasurer, and Michelle McCarthy, Vice President and Chief Accounting Officer.
Speaker Change: As a reminder, various remarks about future expectations, plans, and prospects for MPS comprise forward-looking statements.
Speaker Change: Actual results may differ materially as a result of various important factors, including those discussed in yesterday's press release and in our most recent annual report on Form 10-K.
Speaker Change: 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.
Speaker Change: During the call, we will be discussing various non-GAAP financial measures.
Speaker Change: And as otherwise noted, all income statement related financial measures will be non-GAAP other than revenue and gross margin.
Speaker Change: 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 and a reconciliation to our GAAP measures.
Speaker Change: Our investor website also provides a detailed breakout of revenues by end market and division.
Now, I'll turn the call over to John.
Speaker Change: Thanks, Paretosh, and good morning, everyone. I'm pleased to introduce and welcome our new CFO, Ram Mayankarath, to MKS.
John Lee: Ram joined MKS in October and is actively diving into the business, engaging with our business leaders and already contributing to our strategic initiatives. We're excited to have him on board and I'm confident his leadership will be instrumental as we continue to drive growth and execute on our long-term strategy.
Speaker Change: Ron will share some brief remarks later on this call and he'll take the lead in discussing our financial results next quarter. Michelle will handle the financial results today and I'd add that she's done a terrific job for MKS during this transition period.
Speaker Change: MCAS delivered a strong third quarter with all key financial metrics at or above the high end of our guidance ranges.
Speaker Change: Our gross margin strength reflects the value of our broad and differentiated product portfolio, including our chemistry revenues, which have supported profitability during a period of muted semiconductor demand.
Speaker Change: Additionally, our operating margin profile demonstrates our continued cost discipline resulting in continued strong cash flows.
Speaker Change: We have also made meaningful progress on our highest priority, proactively managing our leverage. During the quarter, we repriced our US dollar at euro term loan fees, reducing our interest rate by 25 basis points.
Speaker Change: And we continue to actively pay down our debt, supported by our strong free cash flow generation of over $140 million in the third quarter.
These actions bring our year-to-date 2024 prepayments to $426 million.
Speaker Change: So in my recent travels to Asia to meet with customers, we discussed many of the key trends and challenges they must overcome to execute their technology roadmaps.
Speaker Change: especially as many of them prepare for the next generation challenges in AI related advancements.
Speaker Change: As node sizes continue to shrink and technology grows more complex, the importance of our broad portfolio of critical technologies has never been more important, and our customers recognize this.
Speaker Change: As a result, I came away from these conversations even more confident that our differentiated capabilities will accelerate our customers' roadmaps and lead to their market success.
Now I'll review our performance in our three end markets.
Speaker Change: In our semiconductor market, revenue increased 3% sequentially and above the high end of our guidance range.
Speaker Change: Similar to our first half results, this higher revenue trend was primarily driven by in-quarter demand conversion related to DRAM and logic foundry applications.
Speaker Change: NAN has remained relatively stable, albeit at historically low levels, and we remain well positioned when that market recovers.
Speaker Change: Our teams are engaged with equipment Oems and leading semiconductor fabs and addressing a broad range of technology inflections, such as atomic layer deposition in both logic and memory applications high aspect ratio ethane for memory devices and selective removal processes for logic gate all around transistors.
Speaker Change: Our teams are engaged with equipment OEMs and leading semiconductor fabs in addressing a broad range of technology inflections, such as atomic layer deposition in both logic and memory applications.
High Aspect Ratio Etching for Memory Devices
and Selective Removal Processes for Logic Gate All-Around Transistors.
Speaker Change: Additionally, we continue to advance our strategy to grow segment share in lithography metrology and inspection.
Speaker Change: Additionally, we continue to advance our strategy to grow segment share in lithography, metrology, and inspection.
Speaker Change: Following the strategic photonics, when we talked about last quarter. We recently achieved a design win for our World Class Opex initiative with another customer that further highlights our increasingly differentiated technology capabilities in this attractive segment of the WSI market.
Speaker Change: Following the strategic photonics win we talked about last quarter, we've recently achieved a design win for our world-class optics initiative with another customer.
Speaker Change: that further highlights our increasingly differentiated technology capabilities in this attractive segment of the WFE market.
Speaker Change: In our laser business. We also received an order for a backend application related to high bandwidth memory validating the important role that <unk> solutions play in AI related applications.
Speaker Change: In our laser business, we also received an order for a back-end application related to high bandwidth memory, validating the important role that MCAS solutions play in AI-related applications.
Speaker Change: In the fourth quarter, we expect semiconductor revenue to be flattish on a sequential basis. The guidance demonstrates continued stability in DRAM and logic foundry demand with NAND remaining at low levels.
Speaker Change: In the fourth quarter, we expect semiconductor revenue to be flattish on a sequential basis.
Speaker Change: The guidance demonstrates continued stability in DRAM and logic foundry demand with NAND remaining at low levels.
Speaker Change: Overall, we remain confident that the work we've been doing and the development of innovative solutions for the next wave of technological advancements positions us well for the future success.
Speaker Change: Overall, we remain confident that the work we have been doing in the development of innovative solutions for the next wave of technological advancements positions us well for the future success.
Speaker Change: Turning to electronics and packaging revenue grew 1% sequentially driven by chemistry sales.
Speaker Change: Turning to electronics and packaging, revenue grew 1% sequentially driven by chemistry sales.
Speaker Change: Equipment sales were down sequentially in line with our expectations and reflecting typical quarter to quarter variations.
Speaker Change: Equipment sales were down sequentially, in line with our expectations and reflecting typical quarter-to-quarter variations.
Speaker Change: While demand overall remains muted we are seeing encouraging order activity, including in flexible PCB truly used in smartphone applications.
Speaker Change: While demand overall remains muted, we are seeing encouraging order activity, including in flexible PCB drilling used in smartphone applications.
Speaker Change: For our chemistry and equipment solutions for advanced MLP, HDI and packaged substrates related to AI applications are.
Speaker Change: and for our chemistry and equipment solutions for advanced MLB, HDI and packaged substrates related to AI applications.
Speaker Change: Combined expertise and laser drilling chemistries and chemistry equipment enables our unique role in optimizing the interconnect, which is central to addressing increasingly complex packaging needs in the AI era.
Speaker Change: Our combined expertise in laser drilling, chemistries, and chemistry equipment enables our unique role in optimizing the interconnect.
John: which is central to addressing increasingly complex packaging needs in the AI era.
John: These wins are expected to support higher electronics packaging revenue in Q4 with growth anticipated to be in the low single digits on a sequential basis.
John: These wins are expected to support higher electronics and packaging revenue in Q4, with growth anticipated to be in the low single digits on a sequential basis.
John: And especially industrial market revenues decreased approximately 1% sequentially with steady performance in the industrial and research and defense end markets offset by softness in the life and health Sciences market.
John: In our specialty industrial market, revenues decreased approximately 1% sequentially, with steady performance in the industrial and research and defense end markets, offset by softness in the life and health sciences market.
John: As a reminder, our specialty industrial market consists of a variety of applications across multiple end markets, we leverage our proprietary technologies and R&D investments in the semiconductor and electronics packaging sectors to provide unique solutions that yield strong incremental margins and cash generation.
John: As a reminder, our specialty industrial market consists of a variety of applications across multiple end markets.
John: We leverage our proprietary technologies and R&D investments in the semiconductor and electronics and packaging sectors to provide unique solutions that yield strong incremental margins and cash generation.
John: Looking ahead to Q4, we expect revenue in our specialty industrial market to increase slightly from Q3.
John: In conclusion, we are pleased with our execution and financial performance in the third quarter, given our strong third quarter results and our fourth quarter outlook. We now expect second half revenue to be up low to mid single digits compared to the first half.
John: Although signs of a recovery have not yet emerged across our end markets. Our execution remained solid in the areas we can control.
John: Our strong gross and operating margins have led to solid cash flow generation to support debt reduction throughout a year, where our major end markets have been soft.
John: This along with our design wins and continuous innovation gives me confidence that we are well positioned as markets recover.
John: Now, let me turn it over to Ron to provide some brief remarks, and then Michelle will run through the third quarter financial results in more detail Rob.
Ron: Thank you John and good morning, everyone I'm very excited to be part of the MKS team and I look forward to working with John and the leadership team to execute on our strategic plan.
Ron: It's obviously early days at this point, but let me share a few comments on my initial observations.
Ron: MKS is a technology driven secular growth company, the breadth of our product offering and early engagement strategy with customers combined with the execution capabilities of the MKS team puts the company in an enviable position.
Ron: We're focused on attractive growth areas that enable today's advanced electronics devices.
Ron: In the past few weeks I've had a chance to meet many of our employees.
Ron: Tremendous respect for their knowledge of the business and the ability to execute.
Ron: I see great value in the talent culture and discipline here at MKS.
Speaker Change: As for my own team, we have a deep bench of finance and accounting professionals with the mosaic of talent. We have a good mix of several recent hires with new ideas and capabilities and veterans with in depth knowledge of MKS.
Ron: In the coming quarters, my focus will be on maintaining our cost discipline driving profitability.
Ron: We will continue to maximize cash generation to support our capital allocation strategy, which will primarily be centered around debt management and investing in capex to support our business strategy.
Ron: We will remain focused on improving our overall cost structure to ensure that we are well positioned to take full advantage of the semiconductor and electronics market returns to normal levels of growth.
Ron: With that let me turn it over to Michelle to review our financial results for the quarter.
Michelle: Thank you Ron and good morning, everyone.
Michelle: For the third quarter and cancer reported revenue of $896 million up 1% sequentially and at the high end of our guidance range.
Michelle: Driven by better than expected semiconductor and electronics and packaging revenue.
Michelle: Third quarter semiconductor revenue was $378 million up 3%, both sequentially and year over year.
Michelle: The result was above the high end of our expectations.
Speaker Change: Our first question comes from the line of Matthew Christo of Cantor. Your line is now open.
Matthew Christo: Hey, guys. Thanks for taking the question I guess, maybe to start on your semiconductors business can you maybe add some more color on what youre seeing in terms of customer utilization rates spare business ordering patterns or anything else that may help inform an early view into 2025 dynamics.
John: Yeah, Hi, Matt its Jon Thanks for the question Yeah, I think we've continued to see.
John: Utilization rates pick up certainly HBM.
Graham: Graham Utilizations have been great.
Graham: So we're seeing the same things that many people talked about logic and foundry or certain customers remains very strong and then NAND remains muted. So I think when you think about 2025.
John: I think our views have come down over the year, but it's still generally in up here.
John: That's not necessarily our opinion, that's what we're seeing from many of our customers and what they're telling us. So I think that still remains muted and.
John: Ends on when that turns.
John: Foundry logic DRAM seem to be holding up well and the expectation is that it will hold up well in 2025 as well.
Speaker Change: Great. That's helpful. And then would love to hear a little bit more color on your progress in the photonics initiatives in and then also given the given the push outs experienced by our largest litho player. How does this change will ramp expectations around your new photonics, one and subsequent duration of that margin headwind.
John: Thanks.
John: Right.
John: So we talked about last quarter, our photonics win this quarter, we talked about another photonics win with a different customer.
John: So this is the lithography metrology inspection space as you know.
John: Certainly the lead times for those kinds of sub systems as well as of course, the systems are much longer than in the vacuum area for WMC and so short term I don't think there's really any effect because the lead times are quite long for our stuff as well as their stuff so longer term of course market.
John: What will determine what the long term needs are for our critical lithography tools metrology tools metrology tools and inspection tools.
John: So I think our point is there's lots of opportunity there to gain share with the technology will provide we think we're unique because we can bring more tools in the toolbox integrating different kinds of technologies together that makes us unique so longer term, we're still very excited about our growth and our world class optics initiative as well.
John: <unk>.
John: The market share gain opportunities in this segment of WMC.
Speaker Change: Very helpful. Thank you.
Speaker Change: Thanks, Matt.
John: Thank you.
Speaker Change: Our next question comes from the line of Steve Barger at <unk>. Your line is now open.
Speaker Change: Hey, good morning, everyone.
Speaker Change: Okay.
Speaker Change: Looking at the guidance at the midpoint gross margin steps down about 120 basis points sequentially is that mix or can you talk through what the swing factors are around that range.
Speaker Change: Yes, Steve Thanks for the question.
Speaker Change: It is mix.
Speaker Change: We expect to electronics and packaging revenue to be a little higher next quarter as we just said and that a lot of that is driven by equipment.
Speaker Change: So we did see some.
Speaker Change: Some promising orders in Q3 for equipment related to AI.
Speaker Change: And this is equipment that's.
Speaker Change: Servicing all segments of the PCB industry. The HDI the MLP and then the packaged substrate and as we've talked about in the past to make an AI board you need the packaged substrate of course, that's the highest density that type of the most advanced part of the PCB industry.
Speaker Change: Then you've got to put it on HDI and MLP Board and so that was quite interesting for us to see some of our customers start ordering for those applications and so that equipment revenue will flow through into Q4, and as you know our equipment gross margin is slightly lower than the chemistry. So that's really <unk>.
Speaker Change: Part of it it's really that mix.
Speaker Change: Got it so encouraging but a little lower margin on the equipment that is good.
Speaker Change: And maybe a question for Rob.
Speaker Change: We're coming into a situation where the end markets are recovering, but theres still some uncertainty how are you going to balance cost control versus the.
Speaker Change: The market share initiatives that we're talking about inventory levels just to make sure that service levels are high maybe just talk about what you are prioritizing as you go through the next few quarters.
Speaker Change: Yeah. Thanks, Steve Thats, a great question I think it's always a balance between meeting your current quarter and forecast guidance and making sure. Your long term strategic plan initiatives are well funded and resource.
Speaker Change: We have done a good job in maintaining our cost discipline.
Speaker Change: And my immediate focus will be to make sure that continues the margin progression continues and the cash generation.
Speaker Change: But we have demonstrated keeps growing so that we can strengthen our balance sheet.
Speaker Change: With that management, so those priorities don't change will remain our focus.
Speaker Change: Yes, I would add to Steve that.
Speaker Change: We really are.
Speaker Change: Investing where we think the best opportunities are so R&D is not starved.
Speaker Change: It will be expanded even field service to service the growing base of equipment as well so to <unk> point, it's always a balance but we are certainly very aggressive in putting money into opportunities as we see them. Some examples where are our power five years ago in Wolf.
Speaker Change: S optics more recently as well as lasers and other opportunities that are there.
Speaker Change: Come about.
Speaker Change: As the markets change.
Speaker Change: Yeah, just to add one more thought to what John just said.
Speaker Change: We are not starving, our capex or you continue to invest in the business Bolton.
Speaker Change: Capex on the P&L like John said, so those activities and focus will continue.
Speaker Change: I appreciate the detail thanks.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Jim Ricchiuti of Needham <unk> Company. Your line is now open.
Speaker Change: Hi, Good morning. This is Chris Green go on for Jim. Thank you for taking the questions.
Speaker Change: Could you elaborate on what you're seeing from a from a demand standpoint, and some of the primary industrial.
Speaker Change: Markets.
Speaker Change: In particular automotive.
Speaker Change: And could you remind us.
Speaker Change: What.
Speaker Change: Share of.
Speaker Change: Sure.
Speaker Change: <unk> revenue is exclusively for enabling EV type applications. Thank you.
Speaker Change: Yeah. Thanks for the question, Chris So what we've seen in automotive is certainly more muted.
Speaker Change: That's not a surprise.
Speaker Change: Well well documented.
Speaker Change: Our automotive revenue has been pretty stable, though even in this muted environment.
Speaker Change: And this is really the gms business.
Speaker Change: Brake calipers and decorative type of things that go into cars, both ice and EV, we haven't broken out EV versus ice.
Speaker Change: I think theres a lot of opportunities that arise with EV such as all the components that go into the battery that.
Speaker Change: Higher metal coatings. So those are opportunities tailwind and then some things go away such as perhaps as much chrome on the front of the grille, So theres puts and takes.
Speaker Change: Right now we think that.
Speaker Change: Evs offer a slightly better opportunity.
Speaker Change: For our Gms business, and that's not even adding to the electronics parts, so they'll tronox.
Speaker Change: Heart for automotive its really still not categorized in the automotive part of our business is really part of our electronics business. So.
Speaker Change: So automotive units are down worldwide, but our business there seems to be holding up pretty steadily.
Speaker Change: Okay. Thank you.
Speaker Change: And given given some of the concerns that we're reading about in terms of <unk> spend in.
Speaker Change: And China in prospectively.
Speaker Change: Offer any sense of how much your business and semiconductor either directly or indirectly.
Speaker Change: Is it is exposed to that to that region.
Speaker Change: Sure.
Speaker Change: In 2022 October 2022, that's when it affected us the most because of restricted our ability to sell directly to specific equipment OEM customers in China.
Speaker Change: We had talked about that publicly to the order of $200 million.
Speaker Change: At risk. So those numbers are out of our numbers now they've been out for two years now so so theres no additional risk. Besides just the normal Wi Fi market of China, and we're selling indirectly we're selling to the five big equipment Oems as well as others and as they are shipped to China, then that's where.
Speaker Change: Our revenue comes from.
Speaker Change: So we really look at the exposure as a much more in line with the market exposure not anything particular to MKS.
Speaker Change: Great. Thank you very much.
Chris Green: Thanks, Chris.
Speaker Change: Thank you.
Speaker Change: Christian comes from the line of became cash flow.
Speaker Change: Hi.
Speaker Change: Yeah, Hi, Thanks, Linda you May ask your question.
Speaker Change: Couple of questions. When you look at the March quarter, just wondering how this season that argued.
Speaker Change: One of the seasonality and then just.
Speaker Change: Big picture and could you quantify on Wi Fi.
Speaker Change: The puts and takes between the two.
Speaker Change: Restrictions on the Pip Sac is this with the new administration, how are you thinking.
Speaker Change: Yes, I think the first part was about any cyclicality or seasonality sorry in Q3, there is always a little seasonality to our chemistry business for electronics.
Speaker Change: And because it has that consumer product cycle to it so chemistry was higher.
Speaker Change: But it was even higher year over year in Q3 as well. So there was that normal seasonality, we kind of expect chemistry to kind of moderate a little bit in Q4, just because of seasonality, but as you because we just talked about e&ps up and a lot of that is driven by E&P equipment.
Speaker Change: So so those are the puts and takes of seasonality.
Speaker Change: With respect to 2025 <unk> I think your question was does the election change anything in.
Speaker Change: Now certainly there's a lot of smart people.
Speaker Change: Didn't have opinions on that I would say this is specifically in terms of how the geopolitics will shake out.
Speaker Change: Have been the opinion that.
Speaker Change: That's been a bipartisan.
Speaker Change: Agreements in terms of how the United States treats that and so we don't expect any change from the particular semiconductor.
Speaker Change: Restrictions, so whatever that was going to be.
Speaker Change: Going forward, we don't expect that to change too much.
Speaker Change: Got it and then on the debt side.
Speaker Change: Only planning industrial peer down.
Speaker Change: 25 acres.
Speaker Change: In terms of leverage of the balance sheet.
Speaker Change: Yeah, well certainly be that's still our number one priority we will be using.
Speaker Change: Excess free cash flow are focused to delever well.
Speaker Change: We will certainly do other things such as repricing and whatnot if it makes sense if the market allows.
Speaker Change: So our focus for the next 12 to 18 months as we've said before is to really focus on de levering with any excess free cash flow how much that is of course will depend on the markets.
Speaker Change: As you can see in 2024 with a very muted market for semiconductors and electronics packaging. Our two main markets, we were still able to prepay $426 million and so theres a lot of leverage in our model certainly if revenue were to go up.
Speaker Change: Significantly.
Speaker Change: A lot of that would flow through the cash the free cash flow.
Speaker Change: As Michelle said this quarter it was 16% of revenue free cash flow.
Speaker Change: Got it thank you.
Speaker Change: Thank you Vijay.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Krish tank car T. D. Cohen. Your line is now open.
Speaker Change: Hi, Thanks for taking my question two of them John.
Speaker Change: One of the things you mentioned was you saw strength in semi business in DRAM logic and foundry.
Speaker Change: <unk> NAND.
Speaker Change: I'm trying to figure out when do you expect to see Nansen, because some of your other component peers like I call said that they are beginning to see non.
Speaker Change: <unk> for the business I'm kind of curious.
Speaker Change: Is there a lag effect as we begin to see anything or is it more of a 'twenty 'twenty five event.
Speaker Change: Yeah. Thanks for the question Krish, certainly we can't comment on what other peers are seeing we can comment on what we're seeing and I think what we're saying is still feels very muted.
Speaker Change: Some customers have talked about upgrades and things like that and upgrades coming a couple of different flavors right.
Speaker Change: To upgrade.
Speaker Change: Significant increase.
Speaker Change: Increases in layer count you really need new RF power.
Speaker Change: But you can also upgrade with smaller changes and that may not require a new RF tech as much as required chemistry or cryo. So I think that all depends on what the customers see and what their customers want them to do.
Speaker Change: But right now we see NAND is still.
Speaker Change: Is pretty muted.
Speaker Change: So that's all we can say about what we see.
Speaker Change: Got it got it that's very helpful. And then a quick follow up Jon If I remember right you said that the E&P strength wasn't flex PCB drilling I hope I heard that right because the question was mainly <unk>.
Speaker Change: <unk> is mainly used for smartphone end markets, but it seems like the end market hasnt quite recovered so I'm trying to figure out what drove that strength for you in the quarter.
Speaker Change: On the E&P side, and then just wanted to make.
Speaker Change: I'll, just say that welcome to the <unk> hope to do more in the future. Thank you.
Speaker Change: Thank you Chris look forward to more conversations.
Speaker Change: Yeah to answer your question Krish that Theyre actually two things that are driving E&P up quarter on quarter. It is both the flex.
Speaker Change: Equipment, so for smartphones, you're right. There. So we did see an increase there in <unk>.
Speaker Change: Bookings and that's going to turn into revenue.
Speaker Change: On the next quarter or so and in addition to that we saw an increase in bookings for rigid P.
Speaker Change: PCB.
Speaker Change: Equipment for chemistry related to AI, so its actually both that are happening.
Speaker Change: Got it thank you.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Joseph Moore of Morgan Stanley. Your line is now open.
Speaker Change: Hi, This is Shane on behalf of Joe. Thank you for letting me ask a question.
Speaker Change: First question is how should we think about theaters idiosyncratic gross margin tailwind and headwind that you're envisioning for 2025 in Q.
Speaker Change: Yeah.
Speaker Change: Yeah gross margins in 2025, but certainly.
Speaker Change: You can see that our gross margins.
Speaker Change: It's a slightly different by division.
Speaker Change: Chemistry, and the Alphatec acquisition has really helped keep.
Speaker Change: The profitability up even during a downturn.
Speaker Change: <unk> cycle. So we're really happy about that and it's improved right under MKS. The last two years. The gross margin for particular volume of business that <unk> has improved that's also the case with PST as is the case with DST.
Speaker Change: Volume will improve all of them and so if 2025 volume is higher we should expect that 50% gross margin flow through that we've talked about it in our model.
Speaker Change: And then of course.
Speaker Change: The inflationary costs have come down over this year so the PPV.
Speaker Change: Is pretty much.
Speaker Change: Balanced now, it's not back to where it used to be where we can always count on some kind of a 1%, 2% lower PPV are year on year, but some parts of the supply chain and some parts of the materials are getting to that point as well. So right now it's still imbalanced and so that could be a tailwind of course, if inflation goes up it's a <unk>.
Speaker Change: And so those are the things we think about in terms of gross margin drivers going forward.