MKSI - MKS Inc.

Operator: Good day, and thank you for standing by. Welcome to the MKS Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Paretosh Misra. Please go ahead. Paretosh Misra: Good morning, everyone. I'm Paretosh Misra, Vice President of Investor Relations, and I'm joined this morning by John Lee, President and Chief Executive Officer; and Ram Mayampurath, Executive Vice President and Chief Financial Officer. Yesterday, after market close, we released our financial results for the third quarter of 2025, which are posted to our investor website at investor.mks.com. As a reminder, various remarks about future expectations, plans and prospects for MKS comprise forward-looking statements. Actual results may differ materially as a result of various important factors, including those discussed in yesterday's press release, our most recent annual report on Form 10-K and any subsequent quarterly reports on Form 10-Q. 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. During the call, we will be discussing various non-GAAP financial measures. Unless otherwise noted, all income statement-related financial measures will be non-GAAP other than revenue and gross margin. Please refer to our press release and the presentation materials posted to the Investor Relations section of our website for information regarding our non-GAAP financial results and a reconciliation to our GAAP measures. Our investor website also provides a detailed breakout of revenues by end market and division. Now I'll turn the call over to John. John Lee: Thanks, Paretosh, and good morning, everyone. MKS delivered a solid third quarter with revenue and EPS in the upper half of our guided ranges and healthy results across each of our 3 end markets. Third quarter revenue of $988 million was up 10% year-over-year, driven by strong demand in our semiconductor and electronics and packaging end markets. We continue to demonstrate strong execution in delivering value to our customers' most critical needs. Net earnings per diluted share totaled $1.93. We also continue to take advantage of our improved cash flow to reduce our leverage with another voluntary prepayment of $100 million on our term loan completed in October. MKS is uniquely positioned at the forefront of accelerating innovation and enabling the advanced technologies that power the AI era. Increasing device complexity is creating significant challenges and opportunities in both the semiconductor and advanced packaging markets. We are differentiated in our ability to serve many critical applications with our comprehensive portfolio of semiconductor capital equipment subsystems, advanced packaging chemistries and advanced packaging equipment systems. Our Q3 performance in our end market demonstrates how we are benefiting in this dynamic environment. Starting with our semiconductor market, we reported solid revenue growth year-over-year, driven by continued strength in our products supporting deposition and etching applications, which are increasingly critical for advanced memory and logic manufacturing. Our dissolved gas systems for advanced logic applications were also a solid contributor to our performance, and our services business continues to contribute steady year-over-year growth. Lower NAND upgrade activity, which was expected after a very strong second quarter, drove the sequential decline in semiconductor sales; however, our leadership in power delivery remains as strong as ever in this space. We expect fourth quarter semiconductor revenue to remain flat on a sequential basis, which would translate into a healthy double-digit year-over-year growth for 2025. This underscores how well positioned we are with the broadest portfolio of products and technologies to drive our industry's increasingly challenging technology road maps. In Electronics and Packaging, revenue exceeded the midpoint of our expectations, growing 25% year-over-year. This strong performance reflects continued momentum across our portfolio, driven by robust demand for our chemistry solutions and in particular, our chemistry equipment. The investments we have made over the past several years to position MKS to optimize the interconnect in advanced electronics are now paying off as we gain momentum in AI-related applications. Today, our chemistry revenue growth reflects our position as a leader of the most advanced packaging technologies used in high-performance computing applications. Longer term, our chemistry equipment business highlights how critical we are to our customers as they rapidly build their next-generation infrastructure. The high attach rates from our equipment sales are a leading indicator of sustainable longer-term revenue from our proprietary chemistries. It's important to keep in mind that once we build and install the equipment, it can take 6 to 12 months for customers to qualify it and then put it into production. Once in production, our chemistry provides a long tail of steady consumable revenue generally for the life of that equipment. With high single-digit growth in chemistry revenues and strong equipment sales through Q3, we have confidence our proprietary chemistry will be a key revenue generator for us in the years ahead. In Q4, we expect revenue from our electronics and packaging market to be up on a sequential basis and up double digits on a year-over-year basis. Our strong performance reflects our ability to capture emerging AI-driven demand even as broader industry demand trends remain stable in markets such as smartphones and PCs. We anticipate continued strength in our chemistry equipment business, supported by AI, offset by modest sequential declines in chemistry due to seasonal factors consistent with prior years. Assuming the midpoint of our Q4 guidance, our Electronics and Packaging business is on track to deliver robust full year growth of approximately 20%. Our specialty industrial market revenue was consistent with the stable trends we've seen over the past several quarters. Within this market, the industrial category showed sequential improvement in life and health sciences and research and defense end markets remained steady. We had a healthy quarter of design wins, particularly in research and defense. This success highlights how MKS leverages its semi and electronics R&D investments to unlock new opportunities in specialty industrial markets that generate attractive incremental margins and cash flow. Looking ahead to Q4, we expect Specialty Industrial revenue to remain relatively flat sequentially. Overall, MKS is continuing to perform at a high level in 2025, with year-over-year growth powered by our semiconductor and electronics and packaging markets. Our broad portfolio of differentiated products and technologies in areas such as vacuum, power, photonics, laser drilling and advanced chemistries positions us favorably to win new opportunities in applications critical to enabling the AI transformation. Against this exciting backdrop, we are executing with financial discipline, aligning our business to win in our key markets and reducing our leverage. I'll close by extending my thanks to our MKS team for their tireless work driving the great results we are reporting today and also to our customers and our suppliers across the globe for their collaboration and support. With that, let me turn it over to Ram to run through the financial results and fourth quarter guidance in more detail. Ram? Ramakumar Mayampurath: Thank you, John, and good morning, everyone. We delivered strong results in the third quarter, driven by healthy demand in our semiconductor and electronics and packaging end markets and continued stability in our specialty industrial end market. As in prior quarters, our execution remains strong with healthy margins, robust free cash flow and continued progress on our deleveraging goals. Third quarter revenue was $988 million, up 2% sequentially and up 10% year-over-year. The result was at the high end of our guidance and reflected better-than-expected trends in key end markets. Third quarter semiconductor revenue was $415 million, down 4% sequentially, but up 10% year-over-year. This result was at the high end of our expectations. The sequential decline was driven by lower RF power sales due to the timing of NAND upgrade activity as expected. The year-over-year growth was driven by strength in many product categories, including our vacuum products and plasma and reactive gas businesses. The fundamentals of our semiconductor business remains strong. Third quarter Electronics and Packaging revenue was $289 million, up 9% sequentially, driven by growth in our chemistry and equipment businesses. On a year-over-year basis, sales were up 25%, driven by growth in chemistry, chemistry equipment and flexible PCB drilling equipment sales. These strong results underscore the strength of our Electronics and Packaging business as we deliver enabling technologies for high-growth emerging AI applications and today's advanced consumer electronics. Chemistry revenue was up 10% year-over-year, excluding the impact of FX and palladium pass-through, continuing the strong growth trend over the last year. In our specialty industrial market, third quarter revenue was $284 million, an increase of 3% sequentially, mainly due to the improvement in the industrial market. Revenue was down 1% on a year-over-year basis. Overall, our Specialty Industrial business has remained steady for well over a year. Third quarter gross margin was 46.6%, just above the midpoint of our guidance. Gross margin were stable relative to the prior quarter, with tariff impacts of about 80 basis points, 35 basis points better than last quarter, offset by a higher mix of chemistry equipment sales. As we have stated before, the strong equipment sales we have seen throughout 2025 are a good indicator of future high-margin chemistry revenues. Third quarter operating expenses were $256 million at the high end of our guidance and higher sequentially, primarily as a result of an increase in variable costs, mostly related to employee incentive compensation tied to stronger business performance. Third quarter operating income was $205 million with an operating margin of 20.8%. Third quarter adjusted EBITDA was $240 million and above the midpoint of our expectations with adjusted EBITDA margin of 24.3%. Net interest expenses was $45 million, in line with our guidance. Third quarter effective tax rate was 17.9%, just below the midpoint of our guidance. Third quarter net earnings were $130 million or $1.93 per diluted share and above the midpoint of our guidance. Free cash flow generation was very strong at $147 million, representing over 100% of our net earnings and 15% of our revenue. Through the first 3 quarters of 2025, we generated cumulative free cash flow of $405 million, nearly as much as we did in all of 2024. We invested $50 million in capital expenditure in the quarter. We expect CapEx to sequentially increase in Q4 but fall within the low end of our annual CapEx guidance of 4% to 5% of revenue. We closed the quarter with approximately $1.4 billion of liquidity comprised of cash and cash equivalents of $697 million and our undrawn revolving credit facility of $675 million. As John highlighted, we made a voluntary principal prepayment of $100 million in October. In total, we have made $400 million in voluntary payments thus far in 2025. We remain focused on executing our long-term capital allocation priorities of investing in organic growth opportunities while reducing our leverage through principal prepayments and working with our banking partners to reduce our interest expenses as market opportunities arise. We exited the quarter with a gross debt of $4.4 billion and a net leverage ratio of 3.9x based on our trailing 12-month adjusted EBITDA of $953 million. We continue to bring down our net leverage ratio as we generate strong free cash flow, make proactive principal prepayments and deliver high year-over-year adjusted EBITDA. Finally, during the quarter, we paid a dividend of $0.22 per share or $15 million. Let me now turn to our fourth quarter outlook. The guidance we are providing represents our best estimate based on the dynamic trade environment in which we are operating. We expect revenue of $990 million, plus or minus $40 million. By end market, we expect semiconductor revenue to be $415 million, plus or minus $15 million, reflecting the continued strong fundamentals of our business. Revenue from electronics and packaging market is expected to be $295 million, plus or minus $10 million, which would be up 16% year-over-year at midpoint. As we look to model 2026, we would remind you that chemistry equipment revenue is poised to have a record year in 2025 and has historically varied significantly from year-to-year. Chemistry revenue, which is the majority of our E&P revenue, is much steadier and more predictable. Revenue from our specialty industrial market is expected to remain relatively steady at $280 million, plus or minus $15 million. We are guiding gross margin of 46%, plus or minus 100 basis points. The sequential decline is due to higher chemistry equipment sales in the mix and lower chemistry sales due to seasonality, partially offset by lower tariff-related impacts. We anticipate our mitigation actions will nearly offset tariff costs dollar for dollar beginning in Q4; however, these costs are passed through at 0 margins, and we anticipate tariff will continue to dilute our gross margin in Q4 and moving forward by approximately 50 basis points. With our mitigation initiatives in place, we remain confident in our plan to deliver our long-term gross margin objective of 47% plus. We expect fourth quarter operating expense of $255 million, plus or minus $5 million. As a reminder, OpEx is typically higher in Q1 as a result of higher stock-based compensation and fringe benefits consistent with prior years. We expect fourth quarter adjusted EBITDA of $235 million, plus or minus $24 million. We expect tax rate of approximately 2% in the fourth quarter, benefiting from certain favorable discrete tax items in the quarter and bringing our full year tax rate to just over 14%. We expect fourth quarter net earnings per diluted share of $2.27, plus or minus $0.34. Wrapping up, MKS has executed at a high level through the third quarter, and we are expecting this momentum to continue in Q4. We are winning exciting opportunities across our semiconductor and electronics and packaging end markets, and we are focused on managing our business with discipline to drive profitability and free cash flow. We remain focused on reducing our leverage. With our broad portfolio of products, strong secular tailwinds and an improving balance sheet, MKS is in a great position as we look to 2026. With that, operator, please open the call for Q&A. Operator: [Operator Instructions] Your first question comes from the line of Melissa Weathers with Deutsche Bank. Melissa Weathers: I think first, I want to touch on the E&P side. You said a couple of times in your commentary that equipment orders generally precede chemistry orders, and that can take about 6 to 12 months. You also mentioned that chemistries were at, I think, a record year in 2025. But I wasn't quite clear on how you were guiding 2026, whether or not that should maybe come down or be stable. So any color on how we should be thinking about the chemistries flow-through into 2026 after all the strong equipment sales? John Lee: Melissa it's John. Thanks for the question. So we're not really guiding 2026, obviously, for chemistry or for the company. But I would say this, the equipment that we are building and installing now puts us in a very good position for additional chemistry revenue starting in '26 and forward. I would say this, we really look at the whole market and its growth, and we've kind of said in our E&P market, we would grow 300 basis points above GDP. And that was made up of -- that was what we said at the Analyst Day, and that was made up of higher growth substrate business, single -- mid-single-digit HDI business and GDP-type MLB business. And those numbers are what we're staying with for now. But obviously, when we gave those numbers, AI wasn't in the mix, right? And so I think generally, things are better. And I would say our ability to hit the 300 basis points above GDP, our longer-term target is -- we're very confident in that fundamentally because we are shipping a lot of that equipment and a lot of the chemistry that goes with it will help us get to those longer-term targets. Melissa Weathers: Great. And then maybe on the semiconductor side, it seems we've seen some really positive pricing data points in memory in the last couple of weeks or months. And I think a lot of people are expecting a shortage situation in memory in 2026. So can you talk about like the order patterns that you guys saw in the quarter? Have you seen an acceleration in orders ahead of maybe potential capacity additions in the memory space? John Lee: Yes. We read those same reports as you do, Melissa. So I think in general, we're happy that memory is recovering, pricing is recovering and that the industry is moving towards a more constrained supply-constrained environment. And I think our customers are probably better to answer whether they're going to be ordering more equipment from us. But certainly, in general, I think everything is positive in the trend towards memory equipment. Operator: Your next question comes from the line of Jim Ricchiuti with Needham & Company. James Ricchiuti: Wondering if you could give us a little bit of a better sense within the E&P business and you could comment on Q3 or 9 months, how much of that growth is actually coming from equipment, which admittedly has been strong, and we know can be a little bit lumpy. John Lee: Yes. Thanks for the question, Jim. I think we've said historically, when we looked at the MSD business, equipment can be anywhere from 5% of total revenue to 15%. And I would say because of the last 4 quarters of really strong revenues, orders and therefore, revenues, we're towards the higher end of that range and maybe a little higher than that. So it's really going to be probably the historic 4 quarters or a year for the equipment business. James Ricchiuti: And John, the -- also curious, there's another element of equipment in the PCB area. Are you seeing any signs of a cyclical pickup in the flex PCB drilling equipment business, just given somewhat improving smartphone shipments and I guess, the potential that there may be some form factor changes coming in the market next year? John Lee: Yes, we are actually seeing a pickup in Flex. The business there, as you know, we're a market share leader in flex laser drilling. And so we have seen that pick up. And this is actually the second year where we've seen a healthy business there. It's not at the historic rates that were kind of in the 2000 time frame, 2021 time frame, but it has recovered to a very healthy level. Operator: Your next question comes from the line of Shane Brett with Morgan Stanley. Shane Brett: I want to follow up on that E&P question earlier. But considering that your chemistry sales for this year are up high single digits, some back of the envelope math indicates that your tooling business could be almost doubling this year. One, is that kind of the right way to think about it is that in the right ballpark? And just how much visibility do you have on equipment sales on a go-forward basis? John Lee: Shane, I think your math is roughly right with respect to the equipment business for chemistry equipment. And then I think what we can say is that we've had 4 strong quarters of bookings for that chemistry equipment. And we can look out certainly the lead times of our equipment are 4 to 12 months. And so we have added some capacity even to some of our equipment factories, not new buildings, but just expanding within the space that we have. And so we look forward to a couple more quarters at least of large equipment builds. We know that we have the backlog for that. Shane Brett: Got it. And for my follow-up, so your semi customers have spoken about a pickup in equipment shipments from the second half of next year. And I think your peers have been kind of cautiously optimistic towards a pickup from Q2. Just where are you guys in terms of your expectations towards semi revenue cadence through 2026? And if there's sort of any idiosyncratic tailwinds for MKS that should drive your shipments above WFE in 2026, that would be very helpful. John Lee: Yes. Certainly, we read the same things, and a lot of folks are saying kind of second half '26 is where WFE really picks up. I think we're just focused on this quarter, next quarter and the next 6 months. I would say this, our semi revenue has improved double digits year-over-year on a quarterly basis as well as year-over-year. And this is really not with a lot of NAND upgrade yet, right? We had a good NAND upgrade in Q2, not so much in Q3. And so that's still yet to come. Certainly, our customers think that's going to happen. I think we know and we're very confident in our position in our power for the high aspect ratio dielectric etch. We're very confident that when those upgrades occur, that will be us. And then certainly, even without the NAND upgrade, you can see the broad portfolio of semiconductor critical subsystems we have continued to outgrow WFE even this year. And so we look forward to 2026, where WFE follows the trends that people are expecting, another maybe high single-digit increase, we're going to enjoy some of that as well. Operator: The next question comes from the line of Krish Sankar with TD Cowen. Sreekrishnan Sankarnarayanan: I had 2 of them too. John, just to follow up on the previous question. If you do assume that in second half of next year, let's just take a time frame and say, in Q3 of next year's inflection, in theory, should you not start seeing it one quarter earlier? Or do you think there's something else different this cycle? John Lee: No, in general, I think that's still true, Krish. We -- if our customers are shipping in Q3, for instance, to your assumption, then we would certainly see that at least a quarter ahead of time. Our lead times have come back to historically low lead times anywhere from 4 to 8 weeks, sometimes 12 weeks depending on how complex the system is. But in a 4-week time frame and 8-week time frame, we do see a lot of in-quarter turns as we've talked about in the last couple of quarters. So yes, I don't see any changes to that assumption, Krish. Sreekrishnan Sankarnarayanan: Got it, John. And then I just had a 2-part question. One is, how much of your E&P sales was advanced packaging chemistry? And how much within that was AI? And then on the PCB drilling side, are drill bits a constraint? And is that impacting your business? Or you're not seeing any of that? John Lee: Yes. Maybe I'll talk about chemistry and how AI has played a part in that. In the past, we have talked about AI servers driving the top 1/3 of the PCB industry. The PCB industry calls that the substrate, right? And that top 1/3 was -- the AI part of that top 1/3 was going from 5% to 10% to 15% of that top 1/3 of the PCB industry. Since then, though, as we now know, AI is also driving the equipment for HDI and MLB. This is the next 1/3 and the last 1/3 of the PCB industry. And of course, the chemistry that goes with those. So in general, our AI revenue has gone from -- if you -- for the chemistry, kind of like 5% of the total PC business, not just the top 1/3 to double that over the last year. So it's kind of 10%. If you add equipment to that, of course, we're pushing the mid-teen percentage of the MSD business due to AI. I think your second question about -- maybe clarify your second question about... Sreekrishnan Sankarnarayanan: I was just wondering on the PCB drilling side, is drill -- drill bits a constraint? And is it impacting your PCB drilling business? John Lee: Yes, I don't know if I can comment on that drill bits. We don't do that. That's mechanical drilling, I think, what you're referring to. We're really doing laser drilling, but I have not heard that, that mechanical drilling is constraining the industry. Operator: Your next question comes from the line of Michael Mani with BofA Securities. Michael Mani: On E&P, could you help us parse through when you look at your growth drivers, what is exactly secular versus more idiosyncratic to MKS? So I mean, it seems like a lot of the HDI and MLB momentum reflects some of this secular uptick in AI. But obviously, with Atotech, you're able to go into many of these opportunity selling both equipment and chemistry. So is there a share gain overlay aspect to it that you're seeing? Can you attribute these wins to that deal? Or is it mainly just broad-based secular growth? John Lee: Yes. I think it's both, Mike. So the regular growth is -- we're an industry leader in it. And so more square meters of PCB boards and the chemistry that just enjoy that. But I would say the thing that is different this time and that's beneficial for MKS is that AI is driving these incredibly thick boards, many, many layers of HDI boards, substrate boards as well as MLB boards. And as we talked about, a lot of the equipment orders that we have gotten tied to AI for HDI and MLB are because our equipment is uniquely qualified to process much thicker boards. We had to make modifications to the equipment. We did, and then we got those orders. Now as we said, we have very high attach rates of chemistry to our equipment. So if we are unique in being able to supply that equipment versus our competitors, we're also going to get that chemistry as we talked about in the call. So I think that's unique this time around. Michael Mani: Great. And maybe a question on gross margins. Given this flow-through from potentially higher chemistry revenues over the next couple of quarters, how should we be thinking about as a good baseline for gross margins through next year? It seems like volumes are trained the right way, you're getting -- you're having seen a little more of this margin accretive business. But just any way to think about how to model margins through '26? Ramakumar Mayampurath: Michael, this is Ram. I'll take that. So if you look at the progress we have made in gross margin in 2024, all the way to Q1 of 2025, we were well over 47% in gross margin. Since then, a couple of things have happened. One is the impact of the mix that you talked about of very high fast-growing equipment sales and the impact of tariffs. As we said in our prepared remarks, we have offset the impact of tariffs dollar for dollar, but we'll see an ongoing 50 basis points impact on our gross margin because we are not marking up the tariffs that we pass through, right? So in time, we'll offset that with efficiency and ongoing operational excellence programs. And in the long term, with a normalized mix, we are very confident we can get back to that 47-plus percent that we were having before. Operator: Your next call comes from the line of Matthew Prisco with Cantor. Matthew Prisco: I guess to start, how do you see the NAND lumpiness playing out over the next handful of quarters? Kind of what are the primary moving parts you are focused on here as determinants for the linearity of that upgrade cycle? John Lee: Yes, Matt, I wish I knew. But I would say this, we have plenty of capacity, manufacturing capacity to meet any kind of uptick in either upgrades or greenfield. And I think one of our key customers has said there is a large opportunity still of upgrades just in the '26 and maybe beyond time frame. But they have said it's lumpy. But then I think overlay on top of that, the industry discussion of NAND pricing that I think Melissa asked earlier, that's just a tailwind. The discussion by many of the chip makers that NAND is now constrained. And then what's exciting is potentially a new application for NAND, driven by AI again, of course, which is in the solid state -- replacing solid state -- sorry, solid-state drives using more NAND for AI. And that would drive another layer of growth. So I think we're ready. It's lumpy, can be lumpy. We will certainly try to guide you guys as best we can in terms of when we see that coming. And -- but things can change and things probably will change rapidly. Matthew Prisco: And then maybe you could talk about progress you've made in the litho inspection and metrology part of your business. Maybe remind us of kind of year-to-date highlights and what success would look like to the team from a share gain perspective through next year? John Lee: Yes, Man, we have talked about world-class optics. This is our effort to gain more presence, obviously, in litho metrology inspection. And we've talked about in the past, revenue from that sector kind of going from $150 million to $300 million because we invested in it. And as you know, litho metrology inspection is a little flatter this past year. And so we're not immune to the cycles, but the cycles are more muted than in dep etch. But we're really happy with some of the really difficult things that we have been asked to do and delivered on that are now integral to some of the most advanced lithography machines in the world. So we will continue to invest there and continue to try to grow that share. I don't think anybody would say litho metrology inspection won't be important to semi, right? It will always be important to semi, always be a key component of semi. And I think maybe stepping back a little bit, the strategy for MKS is to be a foundational technology supplier to the entire industry. So in one decade, dep etch is more important because it's multi-patterning. In the next decade, EUV takes over and litho metrology inspection become a little more important. And from an MKS standpoint, we kind of hope that all the markets grow. But if something shifts, then we can -- we don't have to worry about it shifting away from what we're doing. Operator: Your next question comes from the line of Steve Barger with KeyBanc Capital Markets. Steve Barger: John, you alluded to some of this already, I think, but we've been reading that CoWoS or other packaging formats are evolving from organic interposer to RDL. From your perspective, is that just switching from one format you enable to another? Or is that evolution good for you due to more layers or smaller features? John Lee: Yes. I think the industry is certainly working hard on various configurations for this redistribution layer, the RDL layer using CoWoS, CoWoS-R, CoWoS-L and then even CoOP, right? So I would say this, that RDL layer is more complex as we move to organic layers. That's good for us. That's our traditional strength, organic layers versus silicon. And when you go to organic layers, the RDL layers increase a little bit, maybe from one layer to 2 or 3. So that's good for us. But I think the bigger picture are the 40 layers beneath that, that are all the substrates and PCBs. And that's really the largest growth factor for us. And that used to be 20 layers, now it's 40. As we visit customers, as we work with our customers, they're already looking at 80 layers. So think about that. It's gone from 20 to 40 just in the last couple of years, and we're working on 80. And the one after that is 3 digits, let's put it that way in terms of number of layers. Each of these layers made one at a time. You can imagine the challenges of yield, making sure that when you put 100 layers on top of each other that it still yield the same as if you had 4. So those are great challenges for the industry and opportunities for us. So that's the bigger picture. At the same time, to your point, there's a lot of CoWoS-L or S, coOp, and all that going on. We're involved in all of that. If it goes more towards organic, that's a tailwind for us. But the bigger picture is 40 layers going to 80 going to 100. Steve Barger: Right. That's good detail. And just listening to some of that, this is being driven by compute right now, which is high growth, but smaller unit volume maybe. But at some point, this likely transitions to like PC or mobile, higher volume applications. Is that your understanding? And any view on like time line of when that could happen? John Lee: Yes. I think our view is consistent with the industry is that as inferencing goes out to PCs and phones and whatnot, the chips will be bigger and more complicated. There'll be more chips that need to be integrated together. And therefore, there will be more layers of PCBs or substrates underneath. So that still has not really happened much yet, Steve. And so that's a huge potential growth driver for us. And I think everybody is working hard to make sure that things -- that AI drives this inferencing need. So I think TBD, but we're optimistic that, that will happen or some form of that will happen. Operator: Your next question comes from the line of David Liu with Mizuho. David Liu: For Vijay. Maybe the first one on revenue by geo. Can you just highlight what types of trends you're looking at split by geo? I know your customers mentioned some write-offs, but there's also maybe some tailwinds in the U.S. John Lee: Just to make sure I understand your question, you wanted some color on revenue by geography? David Liu: Yes. Just what you're seeing in terms of the demand trends by geo, yes. John Lee: Yes. Well, certainly, a lot of Asia is driving a lot of the growth for sure. But as you know, some of that's coming back to the United States as well as to Japan and Europe as people start onshoring chip fabs and packaging fabs for that matter. But I think the other larger geographic trend is China Plus One trend as things move to Southeast Asia. As you know, we are building some factories in Southeast Asia to meet that demand because our customers are moving there. So I think there is a lot of geographic movement in the industry today, especially the packaging industry, but also the chip industry as you see fabs coming up in United States, Europe, Japan and potentially India as well. David Liu: Okay. And then I don't know, any comment on the recent rumors of potentially selling the specialty coating divestiture? John Lee: Well, we're aware of those articles, but we really don't comment on market speculation, Dave. Operator: Your next question comes from the line of Joe Quatrochi with Wells Fargo. Joseph Quatrochi: Maybe one on the semi side. Given the entity list affiliate rule, it looks like it's delayed. Have you seen any change in order patterns or discussions with your customers? John Lee: Yes. Thanks for the question, Joe. Not really because I think when that rule came out, we didn't have -- I don't think the industry had time to react. But some of our customers have said the impact is X, Y, Z, but now it's delayed. So as you know, the tariff environment is kind of wake up every day and it changes. So we really haven't had any kind of different discussions with our customers based on that specific rule. Joseph Quatrochi: Got it. And then just your, I guess, conservative comments in terms of looking at like chemical growth into 2026. Is there a particular end market that you're maybe a little bit more conservative in the outlook for? Is it smartphones or PCs, something like that? John Lee: Yes. I would say the PC and smartphone markets have been stable, if you will, Joe. But there are some things that could drive it higher in the future. We're just not sure if they will, one of which is new form factors for phones, foldables, for instance, more foldables. And the other one is what we talked about earlier, I think what Steve asked the question about if inferencing cut out to phones and PCs, that certainly would be -- would change the outlook in terms of more of a growth outlook for PCs rather than kind of more stable, which is kind of our assumption. Operator: Your next question comes from the line of Mark Miller with the Benchmark Company. Mark Miller: You noted strength in dep and etch. Are you just getting share in those areas? John Lee: Yes. I think we've had a traditional strength there in deposition and etch. That's kind of a legacy MKS business. I would say this, we've gained share in multiple areas. We talked a little bit about even dissolved gas. And as the industry moves towards more advanced nodes like 2-nanometer, the ability to clean wafers, the ability to do soft etching and soft cleaning. These are all things that are driving some of our subsystems in the reactive gas part of our business. So we've got a lot of good opportunities there that we've been capitalizing on. And of course, power for NAND is something that we are very confident, we will hold that share and as that grows into higher aspect ratio etching for things like DRAM. And then we're working hard on conductor etch. And we have some great solutions there that our customers have told us are industry-leading. Mark Miller: I was wondering if you could give us some color on lasers and your outlook for next year from the laser business. John Lee: Yes, Lasers has been a little muted because, as you know, lasers are used in industrial applications and industrial applications have been more muted in the last couple of years. [ PMI ] is still kind of hovering around 50% or a little below. So I think we really have to see a change in that, Mark, before we would kind of see the lasers part of our business grow. Operator: [Operator Instructions] Your next question comes from the line of Jim Schneider with Goldman Sachs. James Schneider: I was wondering if you could maybe kind of comment on, given all the things were covered earlier with respect to tariffs, how you expect your direct China business to trend directionally heading into next year? What do you expect it to be sort of up, down or flattish? John Lee: Yes. Well, in China, we have 2 markets that go to China. The semiconductor equipment direct to China, that's out of our numbers. We still sell a little bit there, what's allowed, but that's not -- that's been out of our numbers for a while. So we do have the indirect exposure to China based through our OEM customers, and that's well known. But then we also sell obviously, advanced electronics packaging to customers in China. And that still remains a good portion of our business, but many of those customers are also building new capacity in Southeast Asia, as we talked about earlier. So we see that trend probably China will be a big part of our business from the packaging standpoint, not so much from the semi direct standpoint. And then things start moving, I think, outside of China from the packaging standpoint. James Schneider: And then maybe relative to your leverage target, you've talked consistently about 2x in 2027. Maybe talk about sort of the level of urgency to get there. Could you achieve it perhaps a little bit earlier than that? And maybe talk about some of the levers you might pull to sort of achieve it? Ramakumar Mayampurath: Jim, this is Ram. I'll take that. So we have made great progress in keeping our focus on deleveraging. We paid down $400 million in prepayment this year. That's following $426 million of prepayment we did last year. And that remains our focus. Our capital allocation strategy has not changed, investing in our business and then paying our debt down. That's been our focus. In terms of accelerating that, the best way to do that will be with our current cost structures when we see the top line come back to more normal levels, we will be able to generate more cash and accelerate our debt payment. 2.5, you're right, is the net leverage target we want to get to, and that's our goal. I don't want to speculate on a time when we'll get there, but 2.5 is our net leverage target. Operator: I'm showing no further questions at this time. I would now like to turn it back to Paretosh Misra for closing remarks. Paretosh Misra: Thank you all for joining us today and for your interest in MKS. Kathy, you may close the call, please.

Operator: Good day, and thank you for standing by. Welcome to the MKS Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Paretosh Misra, Vice President of Investor Relations. Please go ahead. Paretosh Misra: Good morning, everyone. I'm Paretosh Misra, Vice President of Investor Relations, and I'm joined this morning by John Lee, President and Chief Executive Officer; and Ram Mayampurath, Executive Vice President and Chief Financial Officer. Yesterday, after market close, we released our financial results for the second quarter of 2025, which are posted to our investor website at investor.mks.com. As a reminder, various remarks about future expectations, plans and prospects for MKS comprise forward-looking statements. Actual results may differ materially as a result of various important factors, including those discussed in yesterday's press release, our most recent annual report on 10-K and our most recent quarterly report on Form 10-Q. 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. During the call, we will be discussing various non-GAAP financial measures. Unless otherwise noted, all income statement-related financial measures will be non-GAAP other than revenue and gross margin. Please refer to our press release and the presentation materials posted to the Investor Relations section of our website, for information regarding our non-GAAP financial results and reconciliations to our GAAP measures. Our investor website also provides a detailed breakup of revenues by end market and divisions. Now I'll turn the call over to John. John T. C. Lee: Thanks, Paretosh, and good morning, everyone. MKS delivered excellent results in the second quarter, highlighted by strong revenue performance and solid profitability. We executed well in delivering for our customers in a dynamic environment while continuing to manage our costs. And since our last earnings call, we made two additional prepayments on our term loan totaling $200 million, demonstrating our continued ability to use healthy free cash flow to delever the balance sheet. Second quarter revenue of $973 million was above the high end of our guidance, driven by demand growth in our Semiconductor and Electronics & Packaging end markets. Net earnings per diluted share of $1.77 were at the high end of our guidance. Our gross margins, while in line with our guidance, reflect higher cost absorption due to tariffs. However, we held the line well and remain confident in our mitigation strategies. Ram will share more in his remarks. I'll turn now to Q2 performance in our 3 end markets. Starting with our semiconductor market. Revenue came in above the high end of our guidance. With customer inventories having largely normalized, we benefited from very strong NAND upgrade activity that drove continued sequential momentum and demand for our RF power solutions, and we saw sequential improvement in our vacuum products business as well. We continue to gain traction with our remote plasma and gas delivery solutions for advanced logic applications. We also continue to execute well in our services business, which is seeing strong growth as our customers increasingly rely on higher-value solutions for reliability and uptime. Over the past couple of years, we have expanded our value-added services capabilities. And this, combined with our larger installed base, is resulting in higher levels of growth. Services is a stable annuity-like revenue stream that delivers margins above our corporate average. In the third quarter, we expect semiconductor revenue to moderate on a sequential basis, mainly due to anticipated lumpiness in NAND upgrade activity. We believe it is still relatively early in the upgrade cycle, but customer indications suggest that the pace of conversions will fluctuate from quarter- to-quarter. Our semi outlook represents a mid- to high single digits year-over-year growth rate for the quarter, putting us in a strong position to outperform WFE for the year based on available industry commentary and forecasts. Electronics and packaging revenue was well above the high end of our guidance. The better-than-expected result was driven by strength in both chemistry and chemistry equipment which more than offset normalization of flexible PCB drilling equipment shipments following a strong Q1 as we noted on our last earnings call. Our products and technologies play a key role in enabling the manufacturing of increasingly complex devices, and that is validated by the momentum we are seeing in advanced packaging and AI-related applications. This includes continued strong orders for our chemistry and chemistry equipment solutions for advanced multilayer boards and high-density interconnect boards related to AI applications as well as several advanced packaging and AI-related chemistry design wins. The trends we're seeing demonstrate our unique capabilities and how we collaborate with customers to solve their most complex problems. We expect revenue from our Electronics & Packaging market to be up on a sequential basis and up double digits on a year- over-year basis in Q3. This is particularly noteworthy in an environment where many analysts see fairly muted smartphone and PC growth, validating MKS' position in a market where complex electronics applications like AI are driving growth. We believe revenue from our chemistry solutions will increase sequentially, consistent with prior years, and we anticipate continued strength in our chemistry equipment business, where we've already seen 4 consecutive quarters of strong orders in what has historically been a lumpy business. We view equipment sales is a good leading indicator of future chemistry revenue given our high attach rates. Our specialty industrial market revenue was slightly above the midpoint of our guidance in Q2. Within this market, the life and health sciences and research and defense end markets showed modest sequential improvement and industrial remains steady. Notable orders in this business include dissolved gas delivery systems used in flat panel display manufacturing, highlighting how we are successfully leveraging our R&D for Semiconductor and Electronics & Packaging end markets into other areas of high technology. We also secured multiple design wins for applications in areas including research and defense and life and health sciences. Looking ahead to Q3, we expect revenue in our specialty industrial market to be flattish. Overall, we executed well and delivered strong financial results in Q2. Our integrated portfolio of power, vacuum, chemistries and photonics remains well positioned to capitalize on the advanced applications driving growth in our semiconductor and electronics and packaging end markets. I'd like to thank our global teams for their hard work in driving these results and our full momentum in a dynamic market environment. An important pillar of our success is the culture we have built at MKS, and I'm happy to see the broader recognition we have received. Recently, U.S. News & World Report named us the Best Company to Work for and TIME included us among America's Best Midsized Companies. With that, let me turn it over to Ram to run through the financial results and third quarter guidance in more detail. Ram? Ramakumar Mayampurath: Thank you, John, and good morning, everyone. We delivered strong results in the second quarter, driven by healthy demand in our semiconductor and electronics and packaging end markets, continued stability in our specialty industrial end market and disciplined execution. Second quarter revenue was $973 million, up 4% sequentially and up 10% year-over-year. The result was above the high end of our guidance and reflected better-than-expected trends in key end markets. Second quarter semiconductor revenue was $432 million, up 5% sequentially and 17% year-over-year. This result exceeded the high end of our expectations. Sequential growth was driven by healthier demand in our Vacuum Solutions business, while year-over-year growth reflected continued demand in our broad portfolio of technologies enabling deposition and etch applications. Results also benefited from normalization of customer inventories and FX tailwinds. Second quarter Electronics & Packaging revenue was $266 million, up 5% sequentially and above the high end of our guidance. This was driven by growth in our chemistry and chemistry equipment business, partially offset by lower demand for flexible PCB drilling equipment, which, as we communicated on our last call, was lower after a strong growth in Q1. We believe a small portion of the sequential improvement in Electronics & Packaging revenue reflects tariff-related pull-in demand. However, underlying demand trends remained favorable, especially as we gain traction in AI and more complex applications, as John noted. On a year-over-year basis, sales were up 16%, driven by growth in chemistry, chemistry equipment and flexible PCB drilling equipment sales. Chemistry revenue was up 10% year-over-year, excluding the impact of FX and palladium pass-through, continuing the strong growth trend from last year. Chemistry is a large portion of our consumables and service revenue stream, which adds stability to our business and accounts for roughly 40% of our revenue. In our Specialty Industrial business, second quarter revenue was $275 million, an increase of 2% sequentially and above the high end of our guidance midpoint. Revenue was down 5% on a year-over-year basis, primarily due to continued softness in the industrial market, partially offset by a modest improvement in research and defense. Moving down to P&L. Second quarter gross margin was 46.6%, just above the midpoint of our guidance. The sequential decline was largely driven by incremental costs related to tariffs. We estimate that incremental tariffs negatively impacted our gross margin by 115 basis points, which was slightly higher than expected, reflecting the volatility in the tariff landscape at the time of our projection in May. While the situation remains dynamic, we have implemented a range of mitigation strategies over the past few months that we anticipate will be effective in limiting the tariff impact going forward. Second quarter operating expenses were $251 million, slightly favorable to our guidance, demonstrating our continued focus on managing our OpEx as we balance investing for growth with driving profitability. Second quarter operating income was $202 million with an operating margin of 20.8%. This reflects the strong revenue performance and OpEx discipline that I highlighted. Second quarter adjusted EBITDA was $240 million and above the high end of our expectations, with adjusted EBITDA margin of 24.7%. Net interest expenses was $46 million, slightly favorable to our guidance. The second quarter effective tax rate was 18.2%, which is consistent with our guidance. Second quarter net earnings were $119 million or $1.77 per diluted share and at the high end of our guidance, reflecting our strong financial performance. Free cash flow, a defining strength of our company was up sequentially and year-over-year to $136 million, representing over 100% of our net earnings and 14% of our revenue. We invested $29 million in capital expenditures in the quarter. We continue to expect full year CapEx to fall within 4% to 5% of our revenue. We closed the quarter with approximately $1.3 billion of liquidity comprised of cash and cash equivalents of $674 million and our undrawn revolving credit facility of $675 million. We made a voluntary principal prepayment of $100 million in June and another $100 million prepayment earlier this month. We remain focused on executing our long-term capital allocation priorities of investing in organic growth opportunities while reducing our leverage through principal prepayment and working with our banking partners to reduce our interest expenses as market opportunities arise. We exited the quarter with gross debt of $4.5 billion and a net leverage ratio of 4x based on our trailing 12-month adjusted EBITDA of $945 million. Our net leverage ratio improved slightly from the end of the prior quarter, reflecting our strong free cash flow and higher year-over-year adjusted EBITDA sales. Finally, during the second quarter, we paid a dividend of $0.22 per share or $15 million. Let me now turn to our third quarter outlook. The guidance we are providing represents our best estimate based on the dynamic trade environment in which we are operating. We expect revenue of $960 million, plus or minus $40 million. We believe our technology is integral to our customers' success, and we are designed into many of the advanced applications of product support. By end market, we expect semiconductor revenue to be $405 million, plus or minus $15 million. Revenue from Electronics & Packaging market is expected to be $285 million, plus or minus $10 million. And revenue from our Specialty Industrial market is expected to be $270 million, plus or minus $15 million. We are guiding gross margin of 46.5%, plus or minus 100 basis points. Our estimated tariff impact is expected to be below 100 basis points, marking an improvement from Q2. As I noted earlier, we have largely implemented our short-term mitigation strategies based on the current trade environment. This environment has remained fluid, but we are committed to optimizing our performance and offsetting these costs. We expect third quarter operating expenses of $252 million, plus or minus $5 million and adjusted EBITDA of $232 million, plus or minus $24 million. We expect a tax rate of approximately 18% in the third quarter. We expect our full year tax rate to be at the lower end of the 18% to 20% range we provided previously. The new U.S. tax bill was passed subsequent to quarter end. We are currently evaluating the impact of this legislation, which is not reflected in our guidance. We expect third quarter net earnings per diluted share of $1.80, plus or minus $0.29. We are pleased with our performance in the first half of the year. Despite trade-related challenges, our revenue, earnings per share and free cash flow in the first half of the year are up significantly relative to the prior year. In the second half, we will continue to work on capitalizing on opportunities as we collaborate closely with our customers, maintain a disciplined cost structure and keep our focus on strong cash generation that will allow us to make the investments necessary to support our long-term growth and to continue to lower our leverage. With that, operator, please open the call for Q&A. Operator: [Operator Instructions] Our first question comes from Krish Sankar from TD Cowen. Krish Sankar: John, I had a couple of them. Number one is, when I look past the September quarter, even if I try to flatline semis in December, it looks like you might probably grow 10% year-over-year, which is better than WFE. I'm just kind of curious how to think about semi revenue trends beyond September? And are there anything that we need to keep in mind kind of like what you mentioned, there is some Q-over-Q volatility with NAND, et cetera. John T. C. Lee: Krish, thanks for the question. I think the way to think about it is that the basic WFE portfolio that we have is growing year-over-year, and we believe it's growing faster than the market. So that's good. And the way I think about it is that there's a NAND upgrade overlay over that. You saw that result in a really strong Q2, but it can be lumpy. And certainly, our customers are going to tell us when they need it. But longer term, of course, the NAND upgrade cycle is great for MKS given our long history in providing high aspect ratio dielectric etch, power for dielectric etch. So I think that's the way to think about it, Krish. The base is pretty strong growing year-over-year for us. And then the NAND upgrades can be lumpy and can make the quarter much higher or more flatter. Krish Sankar: Got it. And then as a quick follow-up. On the E&P side, I think your PCB business, 3 months ago, you said they might be a little slightly weaker in June because of pull-ins of the tools in March, but then it looks like June came in better. I'm wondering if some of the PCB strength you're seeing has to do with more of downstream smartphone pull-ins or how to think about the PCB business going forward? John T. C. Lee: Yes. I think we saw a little bit of pull-ins. It's hard to tell, but it's pretty minimal, Krish. I think Q2 was just strong because a lot of it was driven by AI, both the equipment and the chemistry. And our guidance in Q3 is higher. And as you know, typically, Q3 is higher due to the consumer product cycle that we have in chemistry. And equipment for chemistry remains very strong. So I think there probably was a little bit of pull in EP. We don't think there was any pull-in for semi, but Q3 was still guiding higher. Operator: Our next question comes from the line of Steve Barger from KeyBanc Capital Markets. Robert Stephen Barger: John, I'm going to stick with the chemistry equipment orders and some of the momentum there. Does it feel like that's the beginning of a sustainable trend? And what are you hearing from substrate manufacturers in terms of capacity utilization and how they're viewing growth, whether it's from traditional products or AI-related products? John T. C. Lee: Yes, I'll take the last one first, the substrate makers, they are seeing high utilization rates, and we're seeing that in our chemistry business. And it's fundamentally driven by AI. So no mystery there, really, Steve. I think your question on equipment. Traditionally, historically, it's been a pretty lumpy business. We've seen now 4 straight quarters of sustained relatively high bookings and then the shipments that follow for chemistry equipment. And we believe most of that is related to demand for AI capacity, not necessarily package substrates, but in HDI and MLB that support that AI need. And so having this really broad portfolio is really helpful for MKS. When E&P goes up, we benefit from that, especially given semi could be a little lumpy. Also having the broad portfolio of chemistry and chemistry equipment really helps us deliver solutions faster and more completely to our customers. Robert Stephen Barger: That's good detail. And I suspect you all have been engaged in strategic planning for next year. And certainly, with things feeling maybe a little bit better than last year, any high-level thoughts on where you want to point the company, what your operational priorities are or anything in the portfolio that we should be thinking about? John T. C. Lee: Well, I think some of the areas that we talked about that we're focused on to outgrow in semi, for instance, world-class optics power for high aspect ratio etch, both anti electric and conductor, those remain. And then certainly, our efforts in Electronics & Packaging, giving that a complete solution of chemistry, chemistry equipment, as well as laser equipment. So I don't think those priorities really change. Those have been well thought out long-term priorities. And you're starting to see some of that benefit as those markets come back. Operator: Our next question comes from Melissa Weathers from Deutsche Bank. Melissa Weathers: I wanted to go back to the NAND piece within the semis business and talk about that lumpiness. I totally understand we're in the early innings on that upgrade cycle. But I also know there was a pretty large inventory overhang in that business. So like could we see some inventory replenishment on that side of the business? Or is it really just that customers are just pulling what they need and nothing more than that. So it should move pretty closely in line with demand? John T. C. Lee: Yes. I think I would characterize it as the latter, Melissa, just because inventory has burned as we have said in the past, also lead times are much better now in general, getting the chips to make our power supplies, you have normalized lead times. And so given that, then I think it's probably going to be more tied together rather than a buildup of inventory. Of course, during a large ramp, very large ramp, then, of course, you could see some buildup of inventory, but right now, it feels like because our lead times are relatively back to normal, we expect that we'd be shipping to demand. Melissa Weathers: Got it. And then on the gross margin outlook, I don't know if this is for John or for Ram, but I know the chemistries piece does typically carry higher gross margins, and the E&P business is supposed to grow pretty nicely. So the moving pieces on that gross margin outlook, why wouldn't you see more of an uplift just from that higher chemistries mix in the third quarter? Ramakumar Mayampurath: This is Ram. I'll take that. So we did see -- we do see a seasonality pickup in better chemistry in Q3. And we are seeing the benefit of that in the margin. However, we are also seeing higher equipment sales, which, as you know, comes with a lower gross margin, but we are very happy to have equipment business because it commits to future chemistry orders with high margins. So that equipment orders will sort of offset some of the mix advantage we get from chemistry. Tariffs are a bit better, as I noted in Q3 compared to Q2, but then our volume is slightly lower than Q2. So we are guiding margins relatively at the same levels. Operator: Our next question comes from Shane Brett from Morgan Stanley. Shane Brett: Firstly, on E&P. If I take your Q3 guide, you're tracking about 20% year-over-year growth through Q3, which is well ahead of the GDP plus 300 basis points you spoke about at your 2022 Analyst Day. Just given the AI strength that you're seeing, maybe in some revenue synergies with Atotech, have your growth expectations for this business materially changed since the Analyst Day? John T. C. Lee: Yes, Shane, thanks for the question. I think it hasn't really changed. We're not updating our 5-year model yet. But I would say that we are seeing that advantage driven by AI. I think we're seeing a unique advantage for MKS, which is that we're providing a more complete solution. So the chemistry revenue, organic chemistry revenue, we believe, is also outgrowing some of our competitors quarter-on-quarter year-over-year. But also in addition to that, we have equipment and which most of our competitors, if not all, don't have that. And that equipment, we're finding is incredibly crucial for our customers to be able to deliver the more complex HDI and MLB processes needed for AI. So we're benefiting from both of those right now. And then -- so we're in a great position to hit our long-term models. Shane Brett: Got it. And as for my follow-up, so this might be a bit of a long shot question, but there has been talks that the big GPU customer may move from CoWoS to CoPoS, but just including this inflection, how should sort of this inflection or the any other inflections that may sort of significantly impact your business for the E&P side going forward? John T. C. Lee: Yes. So I think what you're talking about is CoWos moving potentially to CoWoP, I guess, I don't know how we say this anymore, but that S used to be substrate -- stands for substrate and the P stands for PCB. So the idea of CoWoP is that you remove and you skip substrates, as I think you know, going right to the PCB, which is the HDI and MLB. Traditionally, our -- we have had a very strong position in HDI, not only in chemistry, but in equipment, as you know, and we're seeing that as well driven by AI. So if the industry were to skip the substrate or some part of the industry were to skip the substrate, we believe that's actually a tailwind for us because of our historic position there, and because our tools are uniquely enabling for that HDI layer. And this goes back to the longer thesis that we have for the acquisition of Atotech. If that were to happen, the HDI boards would have to become much more sophisticated, smaller lines, smaller features, many more layers. And the whole idea there is in order to do that, you need that, we believe, combination of chemistry knobs and equipment knobs to get there. So the industry is very flexible. They will always look for the most economic solution. And this is certainly an area of interest for some companies. Operator: Our next question comes from Peter Peng from JPMorgan. Kaykin Peng: Within your semiconductors, can you kind of provide some color on how the lithography and inspection applications are doing? I think the last you updated us, you guys were kind of in this $300 million revenue run rate, any color on that? John T. C. Lee: I would say that we're not immune to cycles in world-class optics either for lithography metrology inspection. So as you know, it's been a little more muted than it has been in the past. I would say this, the cycles there are a little more muted. So I would say that $300 million range is still intact. And maybe it might be pushed out a little bit in terms of growing from that. But we're really happy with the design wins we continue to participate with, with our customers. We designed in, as you know, into the most advanced pieces of equipment in that market. And so when the market returns, we'll enjoy that growth. Kaykin Peng: Got it. And then my follow-up on. In your Electronics & Packaging, if I look at from an absolute dollar year-over-year, you guys have been almost growing like $40 million to $50 million in terms of absolute year-over-year. And you mentioned that the smartphone and PC markets are [indiscernible]. Can I kind of correlate that this is all driven by AI applications this $40 million, $50 million? Or is there any other stuff in there that's driving that kind of year-over-year growth? John T. C. Lee: Yes, Peter, I think that's the right way to look at it. We're happy with the year-over-year growth despite the fact that it's well known that certainly PCs and smartphones are still muted. And we saw that a year ago, and AI was a part of our growth, but not as important or not as big as you see it now. So PCs, smartphones remain muted, but we're outgrowing due to the fact that more and more of our business is targeted to AI. And as I mentioned before, we not only have the chemistry, but we have the equipment that's enabling AI. Operator: [Operator Instructions] Our next question comes from Joe Quatrochi from Wells Fargo. Joseph Michael Quatrochi: Maybe just a follow-up on that. I guess as I think about the expectations for chemistry growth in 3Q, it sounds like relatively seasonal. So do we assume that to get to seasonal it's because you're seeing outperformance at AI and your kind of traditional applications would be otherwise below seasonal growth? John T. C. Lee: I think the way to think about it, Joe, is that the seasonal growth is driven by consumer products. So that's kind of the PC smartphone market. And so that really hasn't changed too much. We said a little earlier to an earlier question. It might be a little pull in, but we're still seeing an uptick in Q3 versus Q2. And then overlaid on top of all that is just the growth in AI. So the seasonality is still driven by those consumer products, Joe. Joseph Michael Quatrochi: But I guess the rate of growth is -- I mean, is it better than normal seasonality given that there's added AI applications that are seeing incremental demand? John T. C. Lee: Well, I think that's true. The base, the foundation is much higher because there's an AI additive to it. So yes, I think that's the way to think about it. And as a reminder, as you know, Joe, because of seasonality in Q4 for the consumer product cycle for chemistry is usually one of the lower quarters as well. Joseph Michael Quatrochi: Yes. That's helpful. And maybe as a follow-up in the semi business, just outside of the NAND lumpiness, I mean, are you seeing customers -- we've heard customers kind of focusing more on inventory optimization versus buying incremental new components or keeping inventory flat, just given kind of the tariff dynamics and trying to avoid some of those. Are you seeing that in your business as well? John T. C. Lee: Yes. No, I think we saw some peers say that. We haven't really seen any of that, Joe, because our lead times are very low, our -- we believe our customers are buying to need rather than trying to optimize inventory. So we didn't see any of that. Operator: Our next question as from Mark Miller. Mark S. Miller: Some of the laser firms are reporting that after many sluggish quarters that their business is improving. I'm just wondering what you're seeing in your laser segment? John T. C. Lee: Yes. No. I think our laser segment, we continue to gain some design wins in some of the key markets. I think we talked about HBM dicing in the past. But in general, industrial lasers, that remains relatively muted, Mark. It has really no change from the several quarters before. I think some of it is just customers being a little more cautious as well as you can see from the PMIs around the globe that it's still relatively balanced between growth and contraction. So No, we haven't really seen a lot of pickup there for lasers for industrial applications. Mark S. Miller: In terms of your key component suppliers, are you seeing any price increases from them due to tariffs? John T. C. Lee: We partner with our suppliers as well as with our customers, especially with tariffs. And so we're trying to find ways that both of us can reduce the impact of tariffs. So no one's trying to make money on this, obviously. So I think it's been a collaborative working relationship with our suppliers, and we haven't really seen any impact of tariffs and price increases from our partners there. Operator: Our next question comes from Jim Schneider from Goldman Sachs. James Edward Schneider: I was wondering if you could maybe focus on the topic of tariffs from a different angle for a moment. First of all, can you talk about whether you baked any relative conservatism into the September quarter guidance based on some of the pull-in commentary you had earlier? And secondly, as a result of President Trump's announcement on semiconductor tariffs last night, I'm wondering if you see any kind of competitive advantage for you relative to your competitors as a result of that or kind of any other angle on that you can foresee at this point? John T. C. Lee: Jim, it's John. I'll take maybe the first one, and Ram can add. But the announcement last night was last night. And so it's hard to tell where that will end up. Certainly, broad strokes, it's complex. It may or may not impact the entire semiconductor ecosystem. So I would say it's hard for us to tell right now the puts and takes. I would say in general, though, with respect to tariffs, as Ram said, we had more of an impact in Q2. We're looking at less of an impact in Q3 as some of our mitigation actions start taking hold. But it is a very dynamic environment and things can change quickly, as you know. So I think it's a little hard for us to determine if there's any kind of competitive advantage or disadvantage with what was announced last night. I don't know, Ram, if you want to add anything to that? Ramakumar Mayampurath: Yes. I think you covered it, John. I'll just add that with regard to the guidance, there are 2 key variables here. One is the shifting rules itself and the second is the timing of our mitigation actions kicking in. So when we guide, we guide based on the best information we have at this point of time based on the rules we know at that point. So I wouldn't say there's any conservatism built into the guide, it's the best information we have at that point. Operator: [Operator Instructions] David Liu, the floor is yours. Jing Xiao Liu: I was wondering if you can provide a little bit more color on your HDI, MLB for AI applications, maybe to the extent you have visibility, whether you see them going into [ merchant ] GPUs, hyperscaler versus neocloud, custom ASICs, any color you have there? John T. C. Lee: I think in general, it's probably customers trying to get all that business. It's a little difficult for us to tell if it's going to particular parts of the AI food chain. But I think, in general, many of our customers need that capacity, many customers are trying to get into that market in a stronger sense. And so they're building that capacity up, and that's where we're seeing the equipment orders, which have been, as we said, strong over the last several quarters. So I think it's a little hard for us to tell specifically what that substrate or that HDI MLB is going towards, but I think in general, HDI- type chips require a lot more layers in HDI, more layers in MLB and that's why that is the application these customers are asking for. Jing Xiao Liu: And then maybe a follow-up on OpEx. Are you guys still seeing the $250 million to $260 million range for fiscal '25? And then maybe 2026, where do you guys see you're investing in your business? Ramakumar Mayampurath: Yes, David, this is Ram. I would keep the $250 million to $260 million as the range for Q4. We are not guiding beyond Q3, but that's a useful range to model. As you saw in Q2 and our guidance for Q3, we are at the lower end of that rate. So OpEx is something we take very seriously and try and manage while making the investments needed for the company's long-term success. So it's a balance between meeting profitability and investments to -- for long-term success. But it's something which we watch very carefully. Operator: Our final question comes from the line of Shane Brett from Morgan Stanley. Shane Brett: Let me ask another question. I just have one. So in the June quarter, your Specialty Industrial business grew quarter-over-quarter for the first time since I think June quarter of '23, if I'm correct. I know you're guiding the September quarter down a touch sequentially, but are there any positive lead indicators in that business that you would call out? John T. C. Lee: Yes, Shane, I think as you know, our Specialty Industrial segment is made up of several different markets. And I would say, in general, industrials has been muted and remains muted. I would say that. Defense has been a bright spot, growing quite a bit. And life and health sciences remains relatively stable. So lots of puts and takes, but I think those are the ones I would point out. Operator: This concludes the question-and-answer portion of our session. I would now like to turn it back to Paretosh Misra, Vice President of Investor Relations for closing remarks. The floor is yours. Paretosh Misra: Thank you all for joining us today and for your interest in MKS. Gerard, you may close the call, please. Operator: Thank you, and thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Paretosh Misra - VP, IR: John Lee - President and CEO: Ram Mayampurath - EVP, CFO and Treasurer: Steve Barger - KeyBanc Capital Markets: Shane Brett - Morgan Stanley: Krish Sankar - TD Cowen: Jim Ricchiuti - Needham & Company: Michael Mani - Bank of America Securities: Matthew Prisco - Cantor Fitzgerald: Melissa Weathers - Deutsche Bank: Operator: Good day, and thank you for standing by. Welcome to the MKS Instruments First Quarter 2025 Earnings Conference Call. At this time, all participants, they are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Paretosh Misra, Vice President of Investor Relations. Please, go ahead. Paretosh Misra: Good morning, everyone. I'm Paretosh Misra, Vice President of Investor Relations, and I'm joined this morning by John Lee, President and Chief Executive Officer; and Ram Mayampurath, Executive Vice President, Chief Financial Officer, and Treasurer. Yesterday, after market close, we released our financial results for the first quarter of 2025, which are posted to our investor website at investor.mks.com. As a reminder, various remarks about future expectations, plans, and prospects for MKS comprise forward-looking statements. Actual results may differ materially as a result of various important factors, including those discussed in yesterday's press release and in our most recent annual report on Form 10-K. 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. During the call, we will be discussing various non-GAAP financial measures. Unless otherwise noted, all income statement-related financial measures will be non-GAAP other than revenue and gross margin. Please refer to our press release and the presentation materials posted to the investor relations sections of our website for information regarding our non-GAAP financial results and a reconciliation to our GAAP measures. Our investor website also provides a detailed breakout of revenues by end market and division. Now, I'll turn the call over to John. John Lee: Thanks, Paretosh, and good morning, everyone. MKS delivered excellent results in the first quarter as we reported strong revenues, executed well on cost management, delivered to our customers' production demand, and continued our deep technology engagements with them. First quarter revenue of $936 million and gross margins of 47.4% were both at the high end of our guidance. Net earnings per delivered share of $1.71 exceeded the high end of our guidance. Our performance is a result of outstanding work by our team in a demand environment that has been showing early signs of improvement. The announcement of new and changing trade policies since February has injected uncertainty into our industry and our end markets. Our team is working closely with our suppliers and our customers to mitigate adverse impacts from these trade policies. At present, we do not expect a material impact to revenue, but we do anticipate some near-term impact on margins as we optimize supply chain and manufacturing activities in response to the dynamic geopolitical environment. Ron will provide more details later in the call. I'll turn now to Q1 performance in our three end markets. Starting with our semiconductor market, revenue came in at the high end of our guidance and improved sequentially, driven by modest increases in demand for our vacuum product offerings for NAND. Specifically, our RF power solutions offerings in our plasma and reactive gas businesses performed well. NAND picked up from prior year levels as customer inventories have largely normalized and system upgrades have increased. We also saw notable order activity in thermal sensors for etch applications and reactive gases for advanced wet cleaning applications. In the second quarter, we expect semiconductor revenue to be consistent on a sequential basis, but up low double digits year over year, reflective of an environment that is steadily improving. We are confident in our ability to outperform as the market recovery gains momentum and as our history has repeatedly shown during these upturns. Electronics and packaging revenue were also at the high end of our guidance. Better-than-expected result during a quarter that included the lunar New Year was driven by increased sales of flexible PCB drilling equipment as well as rigid PCB chemistry equipment. Some of our flexible PCB drilling equipment customers pulled forward purchases into Q1. We also saw continued momentum in orders for our chemistry and chemistry equipment for advanced multi-layer boards, high-density interconnects, and packaged substrates related to AI applications. Our products and technologies play key roles in enabling the manufacturing of increasingly complex electronic devices in this era of heterogeneous integration. Additionally, we saw strong orders for laser equipment for low earth orbit satellite applications where we are the process tool record for multiple customers, validating our position as an innovator in advanced laser technologies. Looking ahead to Q2, we expect revenue from our electronics and packaging market to be down mid-single digits on a sequential basis but up mid-single digits year over year. Consistent with prior years, we believe our chemistry revenue will increase sequentially. However, we anticipate this increase will likely be offset by lower sales in our flexible PCB drilling equipment business given the pull forward of shipments I mentioned earlier. Our guidance implies a healthy low-teens, year-over-year growth rate for electronics and packaging the first half of the year. Q2 is expected to be the third consecutive quarter of strong chemistry equipment revenue, which is a good leading indicator for our consumable chemistry products. Our specialty industrial revenue was above the midpoint of our guidance. Within this market, life and health sciences and research and defense end markets performed steadily, but we did see some softness across the broader industrial market, especially with automotive applications. As a reminder, our specialty industrial market consists of a variety of applications across multiple end markets that leverage existing MKS technologies. Looking ahead to Q2, we expect revenue in our specialty industrial market to remain flattish as the broader industrial market remains soft. Overall, we executed well and delivered strong financial results in Q1. Our Q2 end market outlook and overall financial guidance reflect the increased uncertainty of the trade policies against, what otherwise appears to be an early-stage recovery in the end markets we serve. While we are actively working on mitigation strategies in the near term, the situation remains fluid as our customers and the broader electronics ecosystem adapt to both tariffs and their potential macroeconomic implications. That said, we believe MKS is in a strong position to manage through these uncertainties with the industry's broadest portfolio of leading technologies, strong customer relationships, a strong financial operating model, and a team that is battle-tested. Now let me turn it over to Ram to run through the financial results and second quarter guidance in more detail. Ram? Ram Mayampurath: Thank you, John, and good morning, everyone. We delivered strong results in the first quarter, driven by a continued recovery in demand in our semiconductor and electronics and packaging end markets, along with disciplined execution and cost management. First quarter revenue was $936 million, similar to last quarter, and up 8% year-over-year. The result was at the high end of our guidance and reflects better-than-expected trends across all our end markets. Excluding the impact of FX and palladium pass-through, revenue grew 10% year-over-year. First quarter semiconductor revenue was $413 million, up 3% sequentially, and 18% year-over-year. Excluding FX, revenue was up 20% year-over-year. The result was all at the high end of our expectations as our team continued to capitalize on sequential demand recovery in NAND, DRAM, and logic and foundry applications. Compared to last year, we saw strong performance in our plasma and reactive gas and RF power solutions businesses, reflecting benefits of NAND upgrades as well as normalization of customer inventory. First quarter electronics and packaging revenue was $253 million, similar to last quarter, and at the high end of our guidance. The sequential result was led by unusually strong, flexible PCB drilling and chemistry equipment sales, partially offset by normal seasonal declines in chemistry. On a year-over-year basis, sales were up 22%, and excluding the impact of FX and palladium pass-through, sales were up 26%. Chemistry revenue was up 8%, excluding the impact of FX and palladium pass-through, continuing the strong growth trend we have seen from last year. Flexible PCB drilling and chemistry equipment sales also rendered strong growth over the prior year. As John mentioned, we see our strong equipment sales as a positive leading indicator for future chemistry sales given the historical attach rates. In our specialty industrial markets, first quarter revenue was $270 million, a decline of 4% sequentially, but above our guidance midpoint. Revenue was down 13% on a year-over-year basis and down 11%, excluding the impact of FX and palladium pass-through, primarily due to the continued softness in the general industrial and automotive markets. Moving down to the P&L, first quarter gross margin was 47.4%, which was at the high end of our guidance. We are pleased with the gross margin performance, which was up sequentially despite higher mix of equipment. This demonstrates the value our products bring to our customers and our continued execution on manufacturing excellence and supply chain efficiency. First quarter operating expenses were $254 million, near the midpoint of our guidance. We remain committed to managing our OpEx carefully as we balance investing for growth with driving profitability. First quarter operating income was $189 million, with an operating margin of 20.2%. This results in the strong revenue and gross margin that I highlighted. First quarter adjusted EBITDA was $236 million, and at the high end of our expectations, an adjusted EBITDA margin of 25.2%. Net interest expenses was $45 million, just below our guidance of $46 million. The first quarter effective tax rate was 19.9%, which was lower than our guidance of 22%. First quarter net earnings were $116 million, or $1.71 per diluted share, and above the high end of our guidance, reflecting the strong operating performance and lower income tax rates. First quarter free cash flow remained strong at $123 million, which is over 100% of our net earnings and 13% of revenue. We invested $18 million in our capital expenditures in the quarter, or slightly under 2% of revenue. We expect full year CapEx to fall within 4% to 5% of revenue. We closed the quarter with approximately $1.3 billion of liquidity, comprised of cash and cash equivalents of $655 million, and our undrawn revolving credit facility of $675 million. As we mentioned in our last earnings call in January 2025, we made a voluntary principal prepayment of $100 million in connection with the repricing of our term loans, which reduced our credit spreads by 25 basis points. We exited the quarter with a gross debt of $4.6 billion and a net leverage ratio of 4.2 times based on our trailing 12-month adjusted EBITDA of $933 million. Our net leverage ratio improved slightly from the end of prior quarter, reflecting our strong year-over-year adjusted EBITDA results. Also in the quarter, we repurchased approximately 0.5 million shares under our existing share repurchase program. The repurchase was accretive and is expected to offset full year stock compensation dilution. In addition to this, we expect to make another voluntary prepayment on our term loan in the current quarter. We remain focused on executing on our long-term capital allocation priorities of investing in organic growth opportunities and reducing our leverage through principal prepayments and working with our banking partners to reduce our interest expenses as market opportunities arise. Finally, during the quarter, we paid a dividend of $0.22 per share, or $15 million. We are very pleased with our performance in the quarter. The fundamentals of our business remain strong. At our current cost structure, we expect significant improvements in cash generation as the demand environment improves, which would allow us to accelerate our deleveraging efforts even further. Let me now turn to our second quarter outlook. The guidance we are providing represents our best estimates based on the dynamic environment in which we are operating. We expect revenue of $925 million plus or minus $40 million, reflecting our view that underlying demand remains stable despite the trade-related uncertainties. We believe our technology is integral to our customer success, and we are designed into many of the advanced applications our products support. Buy-in market, we expect semiconductor revenue to be $415 million plus or minus $15 million. Revenue from our electronics and packaging market is expected to be $240 million plus or minus $10 million. And revenue from our specialty industrial market is expected to be $270 million plus or minus $15 million. This guidance reflects relative stability in our business, with the exception of slight downtick in flex PCB drilling equipment following the exceptional first quarter results. We are guiding gross margin of 46.5% plus or minus 100 basis points. The guidance incorporates expectations of a certain higher near-term costs related to tariffs. Our current estimate is that tariffs could be up to 100 basis points. We will remain agile in light of the fluid trade and tariff environment to optimize our performance as we implement cost mitigation strategies. We expect second quarter operating expenses of $252 million plus or minus $5 million and adjusted EBITDA of $216 million plus or minus $23 million. We expect tax rates of approximately 18% in the second quarter. Based on the progress we have made on our ongoing tax planning efforts, we now expect our full year tax rate to be in the range of 18% to 20%. We expect second quarter net earnings per diluted share of $1.56 plus or minus $0.28. This includes our estimated impact of incremental tariff costs. We are pleased with the demand trends we are seeing in key areas of our business and the overall encouraging start to the year. Our execution has remained strong and we have a longstanding track record of managing through uncertainty. We remain confident in our position as a key provider of enabling technologies to our customers across the electronics ecosystem and in our ability to help them solve their most complex challenges. With that, operator, please open the call for Q&A. Operator: Thank you. [Operator Instructions] Our first question today comes from the line of Steve Barger of KeyBank Capital Markets. Your line is now open. Steve Barger: Hey, thanks. Good morning. John, you said system upgrades for memory tools have increased. Does it feel like that trend has some momentum and can you talk about size and timing of what that could look like? John Lee: Yeah, good morning, Steve. I would say this, two things. One is that the inventory burn of our inventory for the NAND market looks like it's normalized, so that's one factor. But we are seeing the upgrades for NAND, and that's really where we were mentioning about the improving semiconductor market. In terms of outlook, we kind of expect more upgrades to continue, but certainly that can vary. We can see a quarter out, a little more, and I think really it's going to depend on the NAND customers and what their plans are. But for right now, we're pretty happy with the improvement in NAND year over year and the fact that our inventory has now normalized. Steve Barger: And just in terms of overall size, I know you're incumbent on a lot of the machines that are out there. Is there any way to gauge what the size of it could be for upgrades? John Lee: Well, I think the good thing is that upgrades means that you can only upgrade what's out there, the install base, and that is obviously one large customer of ours, and all of that is our RF power. It's hard to gauge the size of that. Of course, we know the install base, but it really will depend on which customers are upgrading. And certainly one customer has said they see a lot of these customers planning on upgrades, but I think they're probably going to have the best visibility. Steve Barger: Got it. And then for my follow-up, really great to hear about momentum for the chemistry equipment solutions. Can you frame up what customers are telling you about two-half visibility or what your second-half visibility is there and maybe timing of installation and how that results or flows through to chemistry? John Lee: Sure. The chemistry equipment bookings and now the revenue, this is the third quarter of those increased bookings there. We've talked about it in the past. This is tied to HDI and MLB for AI. So artificial intelligence is driving a lot of these new equipment bookings. We see it steady right now. Of course, the bookings that occurred a three quarters ago are going in now last quarter, we will go in next quarter. So that's the kind of lead time you can expect. And this quarter, we also saw continued strength there. And also, as you know, we have a very, very high attach rate of our chemistry to that equipment. And it portends a very good future for that chemistry revenue. Now, of course, chemistry revenue is determined by market demand in the end. But when we start with our equipment, it's certainly beneficial for MKS. Steve Barger: Yeah, thanks. Sounds promising. I'll pass it along. John Lee: Thanks, Steve. Operator: Thank you. Our next question comes to the line of Shane Brett of Morgan Stanley. Your line is now open. Shane Brett: Thank you for letting me ask a question. So my first question is on tariffs. So you mentioned that tariffs will have an impact of 100 basis points on gross margins. Could you talk about how you and your customers are looking to mitigate or offset the impact? And have you seen any change to customer order patterns from tariffs? And I'm asking really in the context of whether you see any signs of Poland-like activity? Thank you. Ram Mayampurath: Hi, Shane. This is Ram. I'll take that. We are very closely engaged both with our customers and suppliers to find the best solution. And in addition to that, as you know, we have global manufacturing and multi-site manufacturing capabilities with a very resilient supply chain. So those are our mitigation actions that we are looking at. As you know, the situation is still very fluid. And we're looking at a broad array of mitigation plans, including selective commercial actions when necessary. And on your question on the top line, so far we haven't seen any impact to the top line from the tariffs. John Lee: Hey, Shane. This is John. I would clarify, too. We incorporated the effect of tariffs on our gross margin. We did say that that could be up to 100 basis points. We didn't say we incorporated that whole amount. I just want to make sure that was clear to everyone. Shane Brett: Thank you for the clarification. And for my follow-up, this is kind of a big-picture question, but is there any preliminary outlook on the second half? And how has the stronger-than-expected first half possibly impacted your outlook, maybe three months ago? John Lee: I think we were happy with our first-half performance, certainly in our semi-market as well as our E&P markets. When you take our guidance for Q2 and add it to our results for Q1, you can see double-digit increases year over year in semi as well as even in E&P. So we're really happy with those developments. I think your question is what will happen in the second half. I think, in general, if all things were equal, we would kind of be happy with a stable demand and potentially increasing demand in those markets. I think the biggest issue now is what will happen with the macroeconomic issues because of tariffs. And so that puts a little more uncertainty into it. But if everything else were the same, we would certainly be happy with these pockets of improvements in our markets and then the year-over-year improvements in our markets. Operator: Thank you. Our next question comes to the line of Krish Sankar of Cowen & Company. Your line is now open. Krish Sankar: Hi, thanks for taking my question. I have two of them. First one, John, you mentioned about land upgrades, et cetera, on the trend there. Is that a function of just the overall industry upgrades or is your RF power supply share gains helping incrementally? I'm just trying to figure out, has any share gains helped you or is it just more the industry cyclicality right now? And then I have a follow up. John Lee: Yeah, I would say this, Krish. The upgrades are picking up, and that's the real driver, as well as the fact that our inventory is burned off. I don't know how you gain more share when you're at 100%, so I'm not sure that question is relevant at this point. But we know we are 100% market share. Krish Sankar: This is on the RF side. Do you have any traction on the pulsed DC side? John Lee: Yeah, I think we've talked in the past. Pulsed DC is something we work on, as well, and we're engaged with all the major players in pulsed DC. And pulsed DC is certainly something that may happen in volume production, but right now it has not. So we're working on that with customers. I think depending on the customer and the applications, some may adopt it, some may not. Krish Sankar: And then just as a follow-up, John, if you go back three months ago, a lot of your legacy Atotech business is leveraged to smartphones, and there's a view that smartphones are recovering the back half. Now that seems to have been pushed into next year, I'm just kind of curious, does that change the dynamics on how you look into your second half for the Atotech business, or is it too early to make that call? John Lee: Yeah, I would make a couple comments on that, Krish. We actually saw a little bit of improvement in our Atotech business related to smartphone builds and even little PCs. Not a lot, but you can see that in the year-over-year numbers in our chemistry revenue. I think in Q1 of 2025, our chemistry organic growth was 8% over Q1 of last year. So we're seeing some of that. A lot of it also is driven by AI, but to your point, the cyclicality of the consumer product cycle is typical that Q1 is the lowest for chemistry revenue, Q2 starts accelerating, Q3 is the peak, and then Q4 depends, depending on the demand. So I think we still are expecting that kind of pattern for the consumer markets-related part of our chemistry business. Krish Sankar: Thanks a lot, John. Thank you. John Lee: Thanks, Krish. Operator: Thank you. Our next question comes to the line of Jim Ricchiuti of Needham & Company. Your line is open. Jim Ricchiuti: Good morning. John, what do you think drove the pull forward on the flex drilling side of the business? Any anticipation of tariffs, or do you think it was just some real underlying demand? I mean, it sounded like you were seeing some positive signs, which you alluded to in the last quarterly call. John Lee: Yeah, that's right, Jim. As far as we could tell, it's really just demand was needed a little earlier than what we typically see in the cycle. You've covered us a long time; you know that cycle. It wasn't because of tariffs, as far as we could tell. It was just a demand pull-in because our customers needed it. So really not tariff-related. Jim Ricchiuti: And did that include demand also as it relates to HDI applications in that area for drilling? John Lee: Sorry, you broke up a little bit, Jim. Can you repeat that? Jim Ricchiuti: Yeah. John, I just wanted to know how satisfied you are with the progress you're seeing in the HDI drilling portion of the business. John Lee: Right. Yes. We mentioned, again, that low-earth orbit applications continue to grow. As you know, more and more customers are getting into that market, and being a production tool record is very helpful there. I think, in general, the HDI drilling market still remains a little muted in terms of CapEx. But we have several design wins throughout the year, and so we're still very happy with the progress there. I think the point I would make about the HDI, as we said in our prepared remarks, is that's confirmation for us that the tool we make, some customers definitely think it's very much something that is competitive and maybe differentiating from a cost of ownership standpoint. Jim Ricchiuti: And just one quick follow-up. I'm wondering how you're thinking about mitigation actions as it relates to gross margins ahead when you're seeing, if we look after the second half. Do you anticipate having this behind you? I know it could be as much as 100 basis points in Q2, but how are you thinking about it in the back half? Ram Mayampurath: Hi, Jim. This is Ram. Let me start by saying that we are very pleased with the continued strength in our gross margin. Our gross margin has remained well above 47% for about five quarters now. So the fundamentals of our business still remain very strong. As you know, this is a very uncertain time and we are working through mitigation actions, so we are watching the new cycle and the developments as they come. One thing I can tell you is that we are committed to a 47% plus gross margin in the long term. Operator: Thank you. Our next question comes from the line of Vivek Arya of Bank of America Securities. Your line is now open. Michael Mani: Hi, this is Michael Mani on for Vivek Arya. Thanks so much for taking our question. I just wanted to dive a little more into the specific pain points you're seeing with regards to tariffs. So, exactly which product areas, which segments are seeing the most impact? Could you give us a sense of-- I know there's a significant manufacturing presence in China. I mean, how much of that is being exported back to the U.S.? Is it largely serving domestic China customers? And then, conversely, how much of what you produce in the U.S. is being sent to China? Thank you. John Lee: Yeah, Michael, thanks for the question. So, I think the short answer is everything is occurring that you just called out, and we're trying to mitigate all of that. We do have footprints in China. A lot of it is China for China, certainly in our chemistry business. So, I would say in the chemistry business, there's very minimal impact from tariffs because of that localization. Most of the issue is coming from the vacuum side because we do have some factories there that ship worldwide. And so, this is the mitigation work we're doing now is to minimize that. Some of it does come back to the United States. A lot of it does not. And we're trying to work with our customers to try to minimize that. We also have, as Rob said, factories all over the world. And so, while not every factory makes everything, longer term, we can also make those kinds of changes. And so, to Jim Ricchiuti's earlier point, I think there's an impact from tariffs in the short term. And that's why we are confident that longer term, if the tariffs stay the way they are, we would be able to have mitigation actions so that we can commit to that 47% plus gross margin long term. Michael Mani: Great. Thank you. And for my follow-up, I just want to think a little more medium term about the recovery we're seeing in semi-market here. So, if I look at where this is running relative to maybe the peak in 2022, you're down around 20%. And I know that last peak included some customers you might have not been able to ship to. Obviously, that was the peak of the last NAND cycle. So, as we think about getting back to that peak over the medium term, would you need a recovery in the NAND market to get back there? Or could the foundry and logic wins and progress in metrology, lithography, these other places, help you get back to the peak? Especially because I know with the NAND upcycle you're seeing, since a lot of that's upgrade driven, while that's still beneficial to you, it might not be as beneficial as Greenfield ads. So, how should we think about getting back to your former rates? Thank you. John Lee: Yeah, Mike, I would say that we look at the wafer fab equipment market as a totality. And as we've talked about in the past, MKS is addressing 85% of WFE. And then to your point, there are sub-segments of it, some driven by NAND, some driven by logic and DRAM. And while we have had that headwind of not being able to ship to many of our previous customers in China, and our non-U.S. competitors are, and so that's a headwind to market share just by math, we have taken the actions and controlling things we can, which is to double down on world-class optics and push the lithography metrology inspection, continuing to push share gains wherever we can. And I think then, of course, the natural growth of the wafer fab equipment market will also help us get back to that peak. But to your point, I think NAND won't ever get back to that peak, because that was quite a large peak, but other things can grow. And so, if you think about what people are talking about today get all around and backside power, a lot of that is step-edge centric, and that's still we're more levered versus lithography metrology inspection. I think a lot of the other things that are going on, like packaging or putting chips together or wafers together, that drives backing processes as well. And so you've seen some of our customers talk about that. And then I would pivot more importantly is that with advanced packaging, that's really another area for growth where MKS is uniquely positioned to enjoy both the packaging growth as well as the chip growth. Michael Mani: Thanks so much for the color. Operator: Thank you. Our next question comes from the line of Matthew Prisco of Cantor Fitzgerald. Your line is now open. Matthew Prisco: Hey, guys. Thanks for taking the question. I wanted to start on maybe the photonic side of the business and just what type of traction are you seeing there today? Any changes over the last three months? And maybe how do you think about the ramp of the major wins here that you've previously announced? Anything around timing or impact of the model would be helpful. John Lee: Yeah. Good morning, Matt. And I think for photonics, you're talking about the semi side of it or in general the broader photonics business? Matthew Prisco: Talking about the semi side specifically. John Lee: Yeah. So I would say that the design wins that we talked about in the past, those remain highly engaged technical engagements with our customers. We're continuing to work on new things as well with those customers. We're not immune to the cycles for even lithography metrology inspection, but the lead times are much longer. So those cycles are a little more muted. And you can see that in 2024 that segment of WFE for us was $300 million, which is a much faster growth than the market. I would say this. Some of the things that we have designed in, we talked about in the past some complex integrated subsystems that only MKS can do because of our portfolio, those are going into production on some of the most advanced lithography metrology inspection tools. So we're seeing that what we're doing is incredibly critical to some of the most incredibly critical tools in a fab. So we're really pretty pleased with that momentum, Matt. Matthew Prisco: And then just a quick follow up. How should we think about your ability and willingness to continue paying down debt within the uncertain backdrop? Maybe if you can update us on a minimum cash balance and the current prepayment strategy. I know normally when you guys report, you've already got the repayment for the quarter in the book. I haven't seen that yet. So what are we thinking for kind of magnitude this quarter and moving forward? Ram Mayampurath: Hi, Matt. In general, you can expect a similar pattern as we did last year with regard to our debt pay down. As we said in the prepared remarks, we will do a prepayment in Q2. Our capital allocation strategy has not changed. After we invest in CapEx and in the business, our priority remains repayment of debt. And we are very confident that we can operate. Our liquidity is very strong. And at these levels of cash, we are very confident given the systems and cash poolings we have put in place. We have a very flexible system to apply cash and there's no need to maintain the levels of cash we did in the past. So at these levels, it frees up a lot more cash for applying towards our debt. As we mentioned in the call, in the beginning of the quarter, we found an opportunity to buy back some stock. Because we have a lot of confidence in our business. It was a modest amount. It was accretive too and also helped offset the dilution in the year. But that does not reflect any shift in our capital allocation strategy. We are committed to paying down debt one more prepayment in Q2. And that focus will continue. Matthew Prisco: Thank you. Operator: Thank you. [Operator Instructions] Our next question comes from the line of Melissa Weathers of Deutsche Bank. Your line is now open. Melissa Weathers: Hi there. Thank you for letting me ask a question. I guess for my first one on the specialty industrial business, I know there's a couple moving pieces. You guys called out automotive being a bit worse in this most recent quarter. Could you talk a little bit more about what you're seeing in that segment? What are the moving pieces? What kind of growth rate or what trend would we be expecting in 2025? Just because it is so chunky and there are some differing trends by different end markets. John Lee: Good morning, Melissa. Thanks for the question. Yes, we called out general industrial as well as automotive being muted and obviously down year over year and causing our specialty industrial markets to be down year over year. Quarter over quarter was actually a little better than we thought. But year over year, it's definitely down. I would say this, even as late as yesterday, a forecast for light vehicle production changed, went down. So automotive is really something that is quite muted. And then I think with the tariff environment that just added just a tremendous amount of more uncertainty to it. You've seen many automotive companies come out with huge numbers of profitability impact because of the tariffs. And obviously, you've seen a lot of folks buy before the tariffs and now they're not going to buy. So I think it's a very volatile and uncertain time for the automotive industry. And that's certainly going to affect our customers who are down the supply chain. So we don't believe there's any share loss. I think it's really just a market driven macro effect. Could it go worse? It could. I think that's the part of the tariffs that could make it worse. And of course, if we get relief from tariffs or some deal is made, then of course that would put the market back into maybe a more normal seasonality. So just a lot of uncertainty right now, Melissa. And I don't know if we could really tell you more than that. Melissa Weathers: Got it. Well, thank you for attempting to share your crystal ball with us because we all have the same questions. And then as my follow up on the, I want to go back to the chemistries side of the business, specifically within E&P. You walked us through the seasonality in a prior question, which is really helpful. Can you just help us, just remind us how we should think about the growth rate of that business beyond just seasonality? But is that a GDP plus type grower? Is there any content applications? I know AI is a nice driver and you've got the equipment sales that are getting pulled in. But how do we think about the growth rate of that chemistries piece in E&P beyond just seasonality? John Lee: Yeah, that's a great question. And I think when you look at the entire PCB industry and the chemistry that goes with it, we have said in our long-term model that it's GDP plus 300 basis points. Now, it's broken up into three segments, the PCB industry. The very difficult high-end packaged substrate segment, that's the PCB right underneath the chips. That is growing at high single digits and maybe even double digits now, low double digits. So that CAGR is an exciting area for growth. And then HDI, that middle layer of technology, is really driven more by things like smartphones. And that has been a little muted, but we kind of thought mid-single digit CAGR. And then MLB, the lower end, we thought was GDP. And I think what we're seeing is that AI is actually even adding some incremental growth to MLB and HDI, as well as the packaged substrate. But overall, I think we kind of still subscribe to the GDP plus 300 basis points that we talked about three years ago. But it's incrementally a little better. Just like AI has driven chips, the trillion-dollar target in 2030 for chip sales, AI has kind of added incremental positivity to that. I think it's also doing the same for the PCB industry. Melissa Weathers: Thank you. John Lee: Thank you. Operator: All right, thank you. Our next question comes from the line of David Liu of Mizuho. I hope I've pronounced that right. Your line is now open. Unidentified Analyst: Hi, thanks for letting me ask a question. I'm on for DJ here. Maybe another on second half, I know a lot of customers and suppliers are pulling their four-year outlook and not providing forecast, but I was wondering on the other side, where are you guys seeing customers maybe more strong and bullish maintaining that four-year outlook? And where is MKSI benefiting there? And also, how that drives the, specifically, maybe how the semiconductor business still growing above 200 basis points, above WFE? Thank you. John Lee: Hey, David, thanks for the question. I guess the way we would think about it is we're very engaged with all of our semi customers for sure, as well as E&P customers. And in general, I think the def-etch customers in semi are relatively more positive, I think, for the second half. There's puts and takes. There's some constraints because of restrictions. And then there's some backside power and get all around that are tailwinds. So, there's some puts and takes. But in general, I think most people are pretty positive on the year-over-year growth. And certainly, many analysts think that 2025 is a slight growth year relative to 2024. Now, of course, we don't know if that's going to work out or not, but that is what we're hearing from our customers. And, of course, that is what they're ordering. That's the order pattern we're seeing. With respect to packaging, we've talked about these equipment orders for three quarters in a row now tied to AI applications. And these equipment orders are for MLB and HDI, very thick MLB layers, many layers. And the reason I think we're getting a lot of those equipment orders is, in the equipment industry for chemistry, our equipment is on the high end. We do the most difficult types of equipment. And so, when you're doing the most difficult kinds of packaging, you need our equipment. And so, that's why I think we're seeing a little tailwind there. So, those customers are very bullish, obviously. They are investing very quickly. They're pulling as fast as they can so that they can put that capacity in so they can either grow their share or compete for a share to support the AI industry. Unidentified Analyst: Thanks. And can you give us a review on ‘25 or ‘26 WFE globally? Thanks. That's it. John Lee: Yeah. As I've said many times in the past, if I could do that, I don't have to do this job. But I would say this, we always pivot back to longer term. The wafer fab equipment industry is a great neighborhood that's getting better. And that's because it's driven by continued need for more semiconductors, more complex semiconductors that require more steps and more equipment. You can see CapEx intensity trending over the decades in a direction where it's now maybe in that 15% range in terms of CapEx intensity. And so, at a trillion-dollar chip industry, that's $150 billion WFE, which is 50% more than today. And so, I think longer term trend, it's a great neighborhood. We're incredibly proud of the fact that we are the market leader in terms of addressing 85% of every piece of equipment out there. Operator: Our next question comes from the line of Steve Barger of KeyBank Capital Markets. Your line is now open. Steve Barger: Hey, thanks for the follow up. $123 million in free cash flow is the best first quarter I can see in my model. And it looks like working cap was a smaller use than normal. Is that just timing? And do you expect a normal kind of low double digit or low teens free cash flow margin this year? Ram Mayampurath: Well, I can comment on the Q1 cash flow, Steve. The improvements we have made to working capital through last year clearly has helped. We are able to operate at a much better level now. In addition to that, we also had a strong top line and good margin here. CapEx was a little light in Q1, but that's purely timing. That will come back up. But we do see, we are very happy with the strength of our cash flow and where we are positioned. Steve Barger: Do you see anything unusual for the remainder of the year that we should be thinking about? Or would this be kind of a normal year in the context of whatever the top line does? Ram Mayampurath: That's correct. That's what I was going to say. It really goes back to the top line discussion, right? Outside that, we don't see anything abnormal this year other than CapEx ramp up in the coming quarters. I was going to also comment that we did guide a little bit of an incremental improvement in our tax rates too, which is helpful as well. Steve Barger: I know your primary focus is debt reduction, as it should be, but with your strong free cash flow and the recent downside volatility in the stock, why not be opportunistic when shares are trading at a sizable discount to however you calculate intrinsic value? Ram Mayampurath: We did that. Steve Barger: It was offset dilution, but would you remain opportunistic going forward? Ram Mayampurath: It's something which we look at. It's a fair question. It's something which we look at, and when it's accretive, we certainly take that into consideration. We still have a little under $30 million left from our existing authorization, so it's an evaluation that we do internally. Debt repayment is strengthening the balance sheet. It's our primary focus, but it's an analysis we do internally. John Lee: I would also add that debt reduction through paydown is one avenue. Certainly, we're always looking at portfolio and staying focused on our main markets. It's strategic planning season. It's the time where we refocus on that again. I think there are other ways to accelerate debt repayment, and we're looking at all those ways. Steve Barger: Good. I would just urge the board to really consider that as an option, given some of the volatility we've seen. Thanks. Operator: Thank you. [Operator Instructions] I am showing no further questions at this time. I will go ahead, and I will turn it back to Paretosh Misra for closing remarks. Paretosh Misra: Thank you all for joining us today and for your interest in MKS. Travis, you may close the call, please. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Operator: Thank you for standing by and welcome to the MKS Instruments’ Fourth Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, today’s program is being recorded. And now, I’d like to introduce your host for today’s program, Paretosh Misra, Vice President, Investor Relations. Please go ahead, sir. Paretosh Misra: Good morning, everyone. I am Paretosh Misra, Vice President of Investor Relations. And I’m joined this morning by John Lee, President and Chief Executive Officer and Ram Mayampurath, Executive Vice President, Chief Financial Officer, and Treasurer. Yesterday, after market closed, we released our financial results for the fourth quarter and full year 2024, which are posted to our investor website at investor.mks.com. As a reminder, various remarks about future expectations, plans and prospects for MKS comprise forward-looking statements. Actual results may differ materially as a result of various important factors, including those discussed in yesterday’s press release and in our most recent Annual Report on Form 10-K. 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. During the call, we will be discussing various non-GAAP financial measures. Unless otherwise noted, all income statement related financial measures will be non-GAAP other than revenue. Please refer to our press release and the presentation materials posted to the Investor Relations sections of our website for information regarding our non-GAAP financial results and a reconciliation to our GAAP measures. Our investor website also provides a detailed breakout of revenues by end market and division. Now, I’ll turn the call over to John. John Lee: Thanks, Paretosh and good morning, everyone. Before I discuss our quarterly results, I’d like to take a moment to review 2024 which was a year of impressive execution in a challenging environment. Despite roughly flat year-over-year revenue of $3.6 billion, we achieved a 190 basis point expansion in gross margin. We managed our operating expenses effectively, increased earnings per share by 49%, and improved free cash flow by $178 million. Additionally, we took several actions to proactively manage our leverage and significantly reduce our interest expense. This included an upsized $1.4 billion convertible note offering, voluntary prepayments of $426 million on our term loan facility, and an opportunistic refinancing and repricing of our term loans. We took these steps while also maintaining investments in R&D and strategic initiatives, including delivering technology innovations in areas such as world-class optics, lasers and laser systems and new chemistry solutions for advanced packaging in the AI era. We also upgraded and expanded our operations in Romania, broke ground on our new super center factory in Malaysia, and purchased the site in Thailand for a future chemistry factory and tech center. These investments add capacity and resiliency to our manufacturing footprint. We are proud of our accomplishments in 2024, and I want to acknowledge our teams across MKS who delivered these results despite muted end markets. I also want to thank our customers across our semiconductor, electronics and packaging, and specialty industrial markets for their support and engagement as we work to deliver unique solutions that enable their success. Entering 2025, MKS is in a strong position with one of the broadest and deepest product portfolios that uniquely allow us to solve our customers’ most complex challenges. These challenges are placing increasing pressure on traditional Moore’s Law innovation cycles. MKS is enabling solutions to this more-than-more environment through design and production wins in areas like optical modules for the lithography, metrology, and inspection market, lasers for next-generation back-end applications, and chemistry equipment for multilayer substrates for advanced AI servers. These examples demonstrate the impact that technological innovations have on our industry and we believe our position as a foundational enabler across semiconductors and electronics sets us up well as these trends accelerate. Now, let’s discuss our fourth quarter results in more detail. We ended 2024 on a strong note, with revenue, gross margin, and earnings per diluted share above the midpoint of our Q4 guidance ranges. Revenue was up 5% year-over-year, driven by double-digit growth in both our electronics and packaging and semiconductor end markets. We continue to make good progress proactively managing our leverage, including another successful repricing of our term loans, a $100 million voluntary principal prepayment in January 2025. Combined with similar actions we took in 2024 and a slight improvement in the interest rate environment, we have reduced our annual interest expense run-rate by over $130 million compared to the prior year. Looking at our performance in our three end markets, starting with our semiconductor market, revenue increased 6% sequentially, above the high-end of our guidance range. Similar to the trends seen throughout the year, this higher revenue trend was mainly driven by better than anticipated in-quarter demand primarily related to DRAM and logic foundry applications for our vacuum product offerings. NAND has picked up from early 2024 and remains at historically low levels. We are well positioned for both upgrade activity as customers move to higher layer counts and potential new greenfield investments when that market recovers. We are achieving a healthy pace of design wins that create great opportunities for us when semiconductor investment recovers, including reactive gas solutions for leading-edge nodes. Additionally, we continue to advance our positions in lithography, metrology, and inspection, with another design win supplying optical assemblies for a leading customer. We also maintain our momentum in the back-end applications related to high-bandwidth memory, with more orders for our lasers during the quarter. We have continued to invest in our laser business over the years and we believe we are well-positioned for strong growth. In the first quarter, we expect semiconductor revenue to be flattish on a sequential basis. The guidance demonstrates continued stability in DRAM and foundry logic demand, with NAND remaining at low levels. Overall, while demand remains low, it is higher than a year ago. The investments we are making, along with our design wins, strengthen our confidence and our ability to outperform as the market recovery gains momentum. Turning to electronics and packaging, revenue grew 10% sequentially, and above the high end of our guidance. The sequential increase was driven by increased equipment sales. We saw continued momentum in orders for our chemistry and equipment solutions for advanced MLB, HDI, and packaged substrates related to AI applications. This shows the key role our products and technologies play as advanced packaging, and specifically the interconnect, becomes more critical at enabling the manufacturing of increasingly complex electronic devices. Excluding the impact of FX and palladium pass-through, sales of chemistry increased 9% in the fourth quarter over the prior year. For the full year, chemistry sales finished up 12% and significantly outperformed the PCB industry in 2024. Looking ahead to Q1, we expect revenue from our electronics and packaging market to be down 4% on a sequential basis, primarily due to seasonality associated with the Lunar New Year. In our specialty industrial market, revenues decreased 2% sequentially and was at the lower end of our guidance range. While the life and health sciences and research and defense end markets were steady, we saw softness across the broader industrial market. As a reminder, our specialty industrial market consists of a variety of applications across multiple end markets. Looking ahead to Q1, we expect revenue in our specialty industrial market to decline 6% from Q4 mainly due to softness in the industrial market and Lunar New Year impacts, especially related to our general metal finishing business. Overall, we executed well and delivered solid financial performance in the fourth quarter and full year 2024. With green shoots emerging in a few key areas of our business and improving profitability, MKS enters 2025 in a robust financial position. I mentioned the strength of our team earlier. Their efforts, coupled with our dynamic culture, are reflected in the industry accolades we received during the year. For the second consecutive year, we were named to U.S. News & World Report’s Best Companies to Work For in our industry, as well as named by Newsweek and Statista as one of America’s most responsible companies for 2025. Now, let me turn it over to Ram to run through the financial results and first quarter guidance in more detail. Ram? Ram Mayampurath: Thank you, John and good morning everyone. As I’ve had a few months now to dive deeper into my role, I am impressed with the level of execution that MKS delivers, especially in light of the industry demand backdrop of the past couple of years. In the coming quarters, we will maintain our focus and discipline on managing costs while we make the necessary investments for long-term growth and business continuity. I will talk a little more about how we are looking at the coming quarters in a moment, but first, let me review our Q4 and full year performance in detail. For the fourth quarter, MKS reported revenue of $935 million, up 4% sequentially and 5% year-over-year. The result was above the midpoint of our guidance range and was driven mainly by better than expected semiconductor and electronics and packaging revenue. Fourth quarter semiconductor revenue was $400 million, up 6% sequentially and 10% year-over-year. The result was above the high-end of our expectation as our team continued to execute on strong in-quarter demand, especially as related to DRAM and logic foundry applications, where we have seen relative normalization of inventory levels at our customers. NAND is bouncing off very low base, but we are seeing evidence that we are making good progress in burning through excess inventory at some customers. Fourth quarter electronics and packaging revenue was $254 million, an increase of 10% quarter-over-quarter and also above the high-end of our expectations. This result was led by higher flexible PCB drilling and chemistry equipment sales, partially offset by normal seasonal declines in chemistry. On a year-over-year basis, sales were up 13% driven by stronger performance in chemistry, flexible drilling equipment, and chemistry equipment. Chemistry sales were up 9%, excluding the impact of FX and palladium pass-through, continuing a gradual recovery trend from the industry-wide softness. In our specialty industry markets, fourth quarter revenue was $281 million, a decline of 2% sequentially and below our guidance midpoint, largely due to softness across the broader industrial markets. Revenue was down 8% year-over-year basis, also primarily due to softness in the industrial market. The prior year results benefited from strong chemistry equipment sales within the general metal finishing business. Turning to gross margin, we reported fourth quarter gross margin of 47.2%, which is above the midpoint of our guidance. Gross margin was down sequentially due to higher equipment mix in the fourth quarter and consistent with our expectations. We continue to prudently manage our costs, balancing investing in our business with near-term profitability and cash generation. Fourth quarter operating expenses were $242 million and within our guidance range. Fourth quarter operating income was nearly $200 million, yielding an operating margin of 21.3% and above our guidance driven mostly by higher gross profit. Adjusted EBITDA was $237 million and also above the midpoint of our expectations, yielding a 25.3% margin. Net interest expenses was $45 million lower than our guidance of $48 million as a result of a year-to-date reclassification of approximately $3 million of pension plan interest costs to other non-operating expenses. Net interest expenses, was otherwise in line with our guidance. The fourth quarter effective tax rate was 4%, which was lower than our guidance due to certain favorable discrete items in the quarter. Fourth quarter net earnings were $146 million, or $2.15 per share, above the midpoint of our guidance reflecting strong operating performance and lower income taxes I just detailed. For the fourth quarter, free cash flow was $125 million, or 13% of revenue. We recorded capital expenditures of $51 million in the quarter, slightly above 5% of revenues. We expect CapEx to average 4% to 5% of revenues for the foreseeable future. We closed the quarter with approximately $1.4 billion of liquidity comprised of cash and cash equivalent of $714 million and our undrawn revolving credit facility of $675 million. We exited the quarter with gross debt of $4.6 billion and net leverage ratio of 4.3x based on our trailing 12-month adjusted EBITDA of $914 million. We continue to prioritize deleveraging our balance sheet, which remains our top priority after investing in our business. As John mentioned, in 2024, we made a total of $426 million of voluntary prepayments on our term loan. In January 2025, we repriced our term loan, reducing credit spreads by an additional 25 basis points and made another $100 million of voluntary principal prepayment. Based on the current interest rates, the combined effect of these recent actions will reduce our annual interest expense run-rate by approximately $15 million. As the demand environment improves alongside our continued focus on prudently managing working capital and gross margins, we expect to see stronger flow through to the bottom line and higher cash flows, allowing us to continue to make good progress on deleveraging. Finally, during the fourth quarter, we paid a dividend of $0.22 per share, or $15 million. Moving to full year 2024 results, revenue was $3.6 billion, down 1% year-over-year. Semiconductor revenue totaled $1.5 billion, up 1% year-over-year, and up 2%, excluding the impact of foreign exchange. We experienced growth in world-class optics and continued stability in DRAM and logic foundry applications, while NAND remained at low levels. Electronics and packaging revenue was $922 million in 2024, up 1% year-over-year, excluding the impact of FX and palladium. Sales were up 7%, driven by strength in chemistry. Total chemistry sales increased 12% year-over-year, excluding the impact of foreign exchange and palladium pass-through. Specialty industrial revenue was $1.2 billion, down 5% year-over-year, primarily driven by softness in the industrial market. Excluding the impact of foreign exchange and palladium pass-through, sales declined 3% year-over-year. Full year gross margin was 47.6%, up 190 basis points year-over-year, driven by product mix as well as operating efficiencies. In addition to successfully capturing value through our truly differentiated product portfolio, we have also taken measures to manage our material and labor cost efficiently. Full year operating margin of 21.3% was up 180 basis points year-over-year, primarily as a result of higher gross margin coupled with disciplined operating expense management. Turning to cash flow, we generated operating cash flow of $528 million, an improvement of $209 million year-over-year. Full year free cash flow was $410 million, an increase of $178 million year-over-year. Free cash flow conversion of 11.4% improved 500 basis points over the prior year. We are pleased with our execution on the margins and the strength in the underlying cash generation in our business, despite a challenging demand environment in our end markets. Let me now turn to first quarter outlook. We expect revenue of $910 million, plus or minus $40 million, consistent with the guidance we provided last quarter and consistent with our view that the market is relatively stable, albeit at a slightly higher run-rate than what we saw a year ago. By end market, our first quarter outlook is as follows. Revenue from our semiconductor market is expected to be $400 million, plus or minus $15 million. Revenue from our electronics and packaging market is expected to be $245 million, plus or minus $10 million. And revenue from our specialty industrial market is expected to be $265 million, plus or minus $15 million. Based on anticipated revenue levels and product mix, including lower chemistry sales in the light of the Lunar New Year, we estimate first quarter gross margins of 46.5%, plus or minus 100 basis points. We expect first quarter operating expenses of $255 million, plus or minus $5 million. We expect our OpEx spending to remain at this range of $250 million to $260 million a quarter as we continue to invest in people and infrastructure. We estimate adjusted EBITDA of $217 million plus or minus $23 million. We expect tax rate of approximately 22% in the first quarter. For the year, we expect our tax rate to be in the range of 19% to 21%. Based on these assumptions, we expect first quarter net earnings per diluted share of $1.40 plus or minus $0.27. 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. With that, I will turn the call back over to John for concluding remarks. John Lee: Thank you, Ram. I’ll wrap up by saying I am very pleased with the performance we delivered in 2024. We have leveraged our broad and deep product portfolio to capture opportunities across our businesses in a tough demand environment and that’s thanks to the deep engagement we enjoy with our customers. We have managed our costs well, maintained strong margins, and made progress on our deleveraging agenda. Going forward, we are well positioned on multiple fronts. Improvement in NAND when it comes, continued order and design win traction in our world-class optics portfolio, and incremental design win and order activity in both chemistry and chemistry equipment, which are benefiting from increasing complexity for advanced packaging in the AI era. You also heard from Ram that we will invest incrementally both in growth and business continuity to ensure we are ready to capture exciting opportunities when markets return to growth. Of course, we’ll do that while maintaining the prudent focus on profit and cash generation that investors know us for. We are looking forward to an eventful year ahead. With that, operator, please open the call for Q&A. Operator: Certainly. [Operator Instructions] And our first question for today comes from the line of Krish Sankar from TD Cowen. Your question please. Krish Sankar: Yes. Hi, thanks for taking my question. I had a couple of them. First one, John you mentioned how some of your NAND component inventory at your semi cap customers is being burnt. I’m kind of curious, where do you think those levels are today versus before and how much ahead would they start purchasing your components again when they anticipate a NAND upturn? John Lee: Yes, good morning, Krish. Yes, that’s great question. So we have seen green shoots there. We’ve talked in the past about a lot of inventory being burned off. We are starting to see some of that happen and we are starting to see some new orders for that. So it’s already happening. So we are happy with that progress. It’s just that it’s still off of a low level. So good progress, green shoots, but certainly not at the level where it used to be. Krish Sankar: So, is it fair to assume just given what your customers are seeing, what you are seeing semi revenue should remain around these levels until even the June quarter? John Lee: Well, we are not guiding out beyond that, as you know, but I would say this. Because we are starting to see these orders coming in for NAND, it will depend on how much upgrade business occurs or whether there is a new greenfield. So, if those happen, they would drive that part of our revenue up. And so we’re in a good position if and when that happens. Krish Sankar: And then just a quick follow-up for Ram, you kind of mentioned $250 million to $260 million in OpEx, is that the run-rate to use for the rest of the year? I mean, and should it normalize, because it seems like it’s stepping up quite a bit from last year? Ram Mayampurath: Yes, hi. Good morning, Krish. So first of all, let me just say that we are very disciplined and focused on our OpEx pending. Our OpEx in 2024 was flat to slightly less compared to the previous year. In 2025, we see some opportunities to invest in long-term growth and to build some efficiencies within our business. And that’s why we are having the additional step up investment. Over the long-term, we remain committed to a 40% incremental operating margins, which we will see as the top line picks up. Krish Sankar: Got it. Thanks, John. Thanks, Ram. John Lee: Thanks, Krish. Operator: Thank you. And our next question comes from the line of Peter Peng from JPMorgan. Your question please. Peter Peng: Hey, guys. Thanks for taking my question. Just on your semiconductor segment, some of your customers and peers are talking about a mid single-digit growth for WFE. So against that backdrop, can you just give any some of the end market dynamics and some of your design wins, how are you thinking about your relative performance versus that level for the year? John Lee: Yes. Good morning, Peter. Well, we’ve been able to outperform WFE over the long-term by 200 basis points through cycles. So we are really well positioned. The design wins, activities that we’ve seen are really helpful. Our focus on world-class optics is another lever for us to gain share relatively. You are right, most of our peers and customers have said kind of mid-single digit growth in WFE. And if that happens, we certainly will be enjoying that level of growth as well. As you know, during a strong upturn, we outperform because our customers are pulling a lot more. And then downturn, we underperform. And overall, we look through the cycle, and that’s where we are still at that 200 basis points above the long-term CAGR. Peter Peng: Got it. Okay. And then on your specialty industrial, that business looks like it’s kind of been steady declining over the last few quarters, any idea of when you think that business would kind of bottom and start to recover? John Lee: Yes. And as we have said on the call, Peter, it’s made up of several different kinds of markets. And so we called out that general industrial is the area that is seeing weakness, which is not a surprise. I think if you read all the PMI data, that wouldn’t be a surprise. And even organically, though, it’s only down 3% year-over-year for the entire – that segment of our market. So, it’s bouncing along the bottom. And I think our best visibility is the guides we gave. And it can be lumpy because it’s made up of several different markets. So, I think steady and slightly down is how we see it right now. Peter Peng: Thank you. John Lee: Thank you, Peter. Operator: Thank you. And our next question comes from the line of Melissa Weathers from Deutsche Bank, your question please. Melissa Weathers: Hi there. Thank you for letting me to ask the question. I wanted to go back to the NAND side. Can you talk about when we are seeing the spending happen in upgrades versus greenfield capacity, where does MKS fit in that narrative? Do you have higher content in greenfield versus upgrades, or how do we think about the upgrade dynamics this year? John Lee: Yes. Good morning, Melissa. Yes, so certainly a greenfield requires brand new tools. And as you know, MKS has a broad portfolio around those tools. With upgrades, most of the benefit for us is in the power, the RF power. And as I have said before, it depends on what the upgrade is, and if it’s going from 100 layers to 200 layers, there is certainly a lot of RF power that is needed. And so that’s where we are starting to see some of the inventory burn off, as we talked about, and some of that pulls on certain particular product lines there. Melissa Weathers: Got it. Thank you. And then still on the semi side, but on the logic piece, this year we are expecting some pretty healthy spending on the leading edge nodes. Gate-all-around volumes are going to ramp throughout the year. So, can you talk about what the impact of that trend is on MKS’s business? Is there, do you have any kind of content story with gate-all-around nodes or how should we think about that logic piece continuing to ramp through this year? John Lee: Yes. There are lots of things that we play in and contribute to enabling this advanced logic capability. One thing we called out in the earnings call is, advanced ozone applications for gate-all-around. And so, we have a broad portfolio, so we are playing in that advanced node growth, but we have particular areas of product lines that enable that particular growth as well. Melissa Weathers: Thank you. John Lee: Thank you. Operator: Thank you. And our next question comes from the line of Jim Ricchiuti from Needham & Company, your question please. Jim Ricchiuti: Hi. Good morning. Hey John, besides NAND, which other areas, markets, or subsectors are you seeing some signs of recovery green shoots as you pointed out? John Lee: Yes. Good morning, Jim. Well, we are starting to see some of that chemistry recover in advanced packaging. Even though quarter-on-quarter can be lumpy, we do see year over year an increase in the PCB chemistry world. And we grew 12% organically. We believe that is – far outpaces the industry, by the way. And the other green shoots that I would call out besides NAND, as you say, is the equipment, chemistry equipment for advanced packaging. We saw these orders pick up a couple quarters ago. They continue to pick up. And this is for MLB and HDI applications for AI. Jim Ricchiuti: Got it. Hey John, looking at that EMP business, can you help us and maybe remind us again how much of that you would characterize as advanced packaging and whether you want to give it to us for the quarter and just some sense as to how that might have grown over the year? John Lee: Yes. I think what we used to talk about for advanced packaging was really the IC substrate part, the one that’s really enabling for things like AI servers and non-AI servers and PCs. That’s about a third of the PCB market. What’s surprising and good for us is that because of the number of layers and the complexity of the number of chips being packaged, we are starting to see AI drive growth in MLB and HDI. And so MLB is a third of the market, HDI is a third of the market, and IC substrates are a third of the market. And the equipment that we talk about is driven – the equipment orders is driven mostly by HDI and MLB. Packaged substrates remains, the part for the AI servers is great. Those customers are really ramping. But as we have talked about, that’s still 10%, 15% of the entire IC substrate market. And so the other 85% of the market is still relatively muted because that’s driven by PCs and non-AI servers. Jim Ricchiuti: Got it. Thank you. John Lee: Thanks Jim. Operator: Thank you. And our next question comes from the line of Vivek Arya from Bank of America Securities, your question please. Michael Mani: Hey, this is Michael Mani on for Vivek Arya. Thanks so much for taking our questions. To start maybe on gross margins, it seems like they are dipping into this quarter, but that’s related to higher equipment mix. But what are the puts and takes for gross margins as we go through the year? Should we expect the greater contribution from chemistry to help any other segment dynamics there? Appreciate any color. Thank you. Ram Mayampurath: Yes. Hi Michael. I will take that. First of all, we are very, very happy with the improvements we have seen in gross margin year-over-year. We improved our gross margins by 190 basis points, ‘23 to ‘24. And a lot of that was due to the commercial actions and operational excellence programs in place. Most of those operational excellence programs will continue, which includes manufacturing excellence and procurement savings, and will continue to help our gross margin in the coming quarters. What we are seeing in Q1 is a higher concentration of equipment that we saw in Q4. That is going to continue and that will impact our mix. That combined with the impact of the Lunar New Year reducing our chemistry mix is the reason why we are guiding our gross margin slightly lower in Q1. So, to your question, the actions that we control to influence the gross margin will continue, and the mix is seasonal. John Lee: Yes. And I would add too, Michael, that it is seasonal, the chemistry revenue for packaging, because we do have a consumer products component to our business. And Lunar New Year, where many of our customers are shutdown for a week or so, it doesn’t occur going forward. And so we kind of expect if normal cyclicality happens that the proportion of our revenue that’s chemistry returns and so that’s a tailwind for gross margin. Michael Mani: Great. Thank you. And then for my follow-up I just wanted to ask about your design win pipeline, so with Auto Tech, Electro Scientific, how does your design win pipeline look based off the synergies you were able to generate from a customer revenue basis from these acquisitions? Has it grown? And when do you expect most of these revenues to kind of convert? Is that something we could see later this year? Is it more further out in 2026, 2027? And then finally on that, were there any areas within that pipeline where maybe the company was surprised at how competitive it was, like areas that maybe it didn’t expect to land a win, but it was more competitive than initially anticipated. Thank you. John Lee: Yes. No, we still have great engagement with many customers on this portfolio that we are able to provide, meaning laser systems as well as the chemistry and chemistry systems. So, that engagement and the design wins that come from that remain strong. We have multiple design wins that we have talked about in the past. To your point, it does take 1 year or 2 years or 3years, depending on the customer, for that revenue to show up. Your other question about were there any headwinds and whatnot, I think most of the headwinds would be you win a design, and then maybe that customer is not levered to AI, and they may not grow as much. Maybe they are levered to PCs, and so they would certainly not be adding volume. But once you win that design win and once that market returns, we expect them to be successful as well. Michael Mani: Great. Thank you. John Lee: Thank you. Operator: Thank you. And our next question comes from the line of Steve Barger from KeyBanc Capital Markets, your question please. Steve Barger: Thanks. John, for your comment about a healthy pace of design wins for optical assemblies, are those coming from a product refresh or are those new programs that you haven’t been on before? John Lee: Yes. Both, Steve, some are a program we are already on, but it’s an upgrade, the next generation of it. And some are literally new things that no one has ever done, including our customers. So, it’s exciting to do both. Number one, you are not losing share. You are actually being asked to upgrade what you already delivered. Number two, we are being asked to do things that are more and more complex, require more and more of our portfolio, and therefore require much stickier and fewer and fewer our competitors can actually do that. So, it’s a combination of both Steve. Steve Barger: Are you seeing the pace of RFQs or the conversion rate from that initial process to wins change as the cycle starts to move forward or how would you characterize that process? John Lee: Well, I think for world-class optics, those design – the timing for designs is multiple years before they go into the market. So, really no change, because that pace has to continue no matter where you are in the cycle. I would say we are seeing more of it on average over time because of the investments we made in capability in world-class optics. So, it’s really long design cycles, difficult things to do, and they continue through the cycle. Steve Barger: Got it. And then as you look at the progression of advanced packaging demand, is there a meaningful difference across different variations like CoWoS-S versus CoWoS-L? I guess is there an optical demand trend beyond just broader packaging proliferation? John Lee: Well, packaging, to your point, is evolving quickly, and it’s a very dynamic area, which we love, right, because that means new technology, new opportunities. I think to your point, CoWoS-S is moving to L, to R and all of that. And that’s important, but really what we are talking about at MKS are the 50 layers below that, and the chemistry, and the drilling and the equipment below that. And so that 50 layers used to be 40 layers, and before that was 30 layers. So, that’s an exciting area for us. And that’s really why we thought putting Auto Tech together with MKS makes a lot of sense, enabling that roadmap to go faster. Steve Barger: Understood. Thanks. John Lee: Thanks Steve. Operator: [Operator Instructions] Our next question comes in line of Toshiya Hari from Goldman Sachs, your question please. Toshiya Hari: Hi. Good morning. Thank you so much for taking the question. John, a couple of your customers have spoken to the recent export restrictions and how that’s having an impact on revenue in calendar ‘25. I know most of this should be indirect for you guys, but I am curious if there is a way to quantify any negative hit from the recent restrictions in semis, obviously. John Lee: Yes. Maybe I will let Ram take that. Ram Mayampurath: I can start. So, our guidance reflects our best view at this point. We don’t see any material impact based on what’s in place today. Now, as you know, the situation is quite fluid, and we are evaluating it closely. John Lee: Toshiya, I think you were asking about the BIS restrictions that came out at the end of the year, or you are asking about tariffs? Toshiya Hari: At the end of the year, the BIS restrictions. John Lee: Yes. Well, yes, as you read, KLA, Lam, everybody has come up with some new numbers. And we are, as Ram said, this is our best view because of what we see from our customers. Obviously, if their revenue goes down, we will see that. But I would say our direct sales to China for the semiconductor market is very, very low. The numbers that impacted us occurred in October 2022, and that revenue is out of our numbers right now. So, it’s still indirect impact on the same order as what it impacts our customers. Toshiya Hari: Got it. That’s helpful. And then as my follow-up, maybe one for Ram, so you have been with the company for a couple of months now. I am curious, I know you guys are very focused on paying down debt on the balance sheet, but curious if you have been able to identify any opportunities to sort of improve the operations of the company, how you guys think about working capital, tax strategy, anything that you have been able to kind of identify and potentially improve going forward, if you can share that with us, that would be really helpful. Thank you. Ram Mayampurath: Yes, certainly. On cash flow itself, where you were going, as John mentioned in his script, $410 million increase from $178 million year-over-year. Strong free cash flow generation and a good link to the P&L. 11.4% of revenue was 500 basis points improvement year-over-year. So, on debt repayment, our continued focus will be, start from the P&L, maintain and continue the actions we are working on now to keep the margin growth and profitability going. Free cash flow is about 92% of our non-GAAP net earnings. So, that bridge is very good and we need to see that translate into the cash flow. We continue to look at re-pricing and prepayment of our debt, as you saw in January. Those opportunities will continue. And in terms of P&L, I think the company is executing well. We are constantly looking at operational excellence programs, which we will continue to do, and then drive that cash flow to help with the debt repayment. And our capital allocation strategy has not changed. Prepayment of debt is our number one priority after we invest in the business. Toshiya Hari: Thank you very much. Operator: Thank you. And our next question comes from the line of Shane Brett from Morgan Stanley, your question please. Shane Brett: Thank you for taking my questions. So, your balance sheet inventory was down 20 days, quarter-over-quarter. Is there anything worth noting here? And how should we think about your targets on days of inventory going forward? The reason why I am asking this is that with what seems like within lead time orders increasing for semi, I am just trying to understand how much longer can you support semi continue to come higher than your expectations? Thank you. John Lee: Yes. So, we are happy with the progress we made on inventory, Shane. And I think as it starts burning down, we are getting to leaner, normalized turns rates. And as you know, if there is a large ramp, obviously we would use some working capital to prepare ahead of time for that normal. But I think we have a little higher inventory than we have in the historic past. And that’s because of certain strategic components that we have elected to keep, given what happened at the last ramp with shortages. So, inventory is a little higher, but we are happy with the progress we made in decreasing it. John Lee: Does that answer your questions? Shane Brett: Yes. Thank you very much. Operator: Thank you. And our next question then comes from the line of Vijay Rakesh from Mizuho, your question please. Vijay Rakesh: Yes. Hey John and Ram. Just on the AI side, you mentioned the tailwind in packaging. Can you talk to like, what person is that AI makes as a percent of your total revenues and how do you see that, I would say, growing in 2025? I know you mentioned as a percent of the substrate market, it’s pretty small. But if you walk through like, just for you, what the exposure is. John Lee: Yes, Vijay, so it’s a little – it’s easy to say in certain submarkets, like the IC substrate part, which we talked about being kind of 10%, 15% is driven by AI. It’s harder to break that out with respect to MLB and HDI. We see the tool orders because those are big markets that are levered to other device types. I would say also remember that AI is driven by semiconductors, a lot of semiconductors. And we have over 85% of every step in the process for making semiconductor chips. So, if you – you do understand certainly that AI is driven by Moore’s Law. Moore’s Law is driven by semiconductor progress and packaging progress. We address 85% of semiconductor processes, 70% of packaging processes. So, as a company, we are levered to AI as much as we always have been to Moore’s Law. So, that’s our best answer for you because otherwise breaking it up is pretty difficult for us to do. Vijay Rakesh: Got it. And then, Ram, as you look at better free cash flow and driving faster with better prepayments, any thoughts on deleveraging from the ForEx down to the 2x was your longer target, any timing on that, are you pulling it in? How do you look at that? Thanks. Ram Mayampurath: Yes. Let’s just go back to last year, just to drive the point home that we are very focused on what you are asking. In a year when we did not get much help from sales, we repaid close to $500 million, $476 million, including the $50 million mandatory. That alone has brought our number down to 4.3x. And all expectations are that with a little help from top line, we can accelerate that given our current cost structure. So, the plan and the focus is exactly what you said, to get that down to acceptable levels, which we have said, 2x net, and that’s our focus. As for timing, I don’t want to predict that now, but rest assured our focus is to get it down to that level. Vijay Rakesh: Thanks. John Lee: Thanks Vijay. Operator: [Operator Instructions] Our next question comes from the line of Joe Quatrochi from Wells Fargo, your question please. Joe Quatrochi: Yes. Thanks for taking the question. I think in the past, during the December quarter call, you talked about the growth that are – in your optics business within the semis business. I was curious of how that did in 2024 and how do you think about the opportunity for growth in 2025 given the outlook for some of those customers? John Lee: Yes. Joe, good morning, it’s John. We have talked about optics, world-class optics, and we have talked about that revenue over a longer time period, as you know, going from kind of the $150 million to the $300 million level run rates. So, over the last year or 2 years, we have actually outgrown that segment of WFE, the lithography, metrology, inspection segments. So, ‘24 was a good year, a strong year. Certainly, we are not immune to any cycles in that sub-segment of WFE. But as we talked about earlier, it’s really the design wins that really give us confidence that we will continue this effort and it will lead us to outperform, certainly in that sub-segment, in WFE overall. Joe Quatrochi: Thanks. And this is a follow-up, maybe a little bit more housekeeping, but I think you are guiding interest expense to be up slightly quarter-over-quarter. I know it’s a net number, but I would have thought, I guess that would be down given the re-pricing and prepayment in January. Ram Mayampurath: Yes. The main reason is because of, there was two things. We clarified the pension re-class impact in Q4, right, did you guess that. So, if you take that out, our interest in Q4 is $48 million, which is very close to what we guided. The full impact of the $100 million prepayment and the 25 basis points of reduction that we got in January is not included in our Q1 guidance. Our Q1 guidance is $49.5, which is, if you look at quarter-over-quarter, we have dropped our interest rates by 40% compared to Q1 ‘24 versus Q1 ‘25. So, that’s a good model for you to look at what we have done today, the impact of what we have done today. And we will continue to look for additional opportunities to bring our interest rate down and also to accelerate our prepayments. Joe Quatrochi: Okay. Thank you. John Lee: Thanks Joe. Operator: Thank you. This does conclude the question-and-answer session of today’s program. I would like to hand the program back to Paretosh Misra for any further remarks. Paretosh Misra: Thank you all for joining us today and for your interest in MKS. Operator, you may close the call, please. Operator: Certainly. Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.

Operator: Good day and thank you for standing by. Welcome to the MKS Instruments' Third Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Paretosh Misra, Vice President of Investor Relations. Please go ahead. Paretosh Misra: Good morning, everyone. I am Paretosh Misra, Vice President of Investor Relations, and I'm joined this morning by John Lee, President and Chief Executive Officer; Ram Mayampurath, Executive Vice President, Chief Financial Officer and Treasurer; and Michelle McCarthy, Vice President and Chief Accounting Officer. Yesterday, after market close, we released our financial results for the third quarter of 2024, which are posted to our Investor website at investor.mks.com. As a reminder, various remarks about future expectations, plans and prospects for MKS comprise forward-looking statements. Actual results may differ materially as a result of various important factors, including those discussed in yesterday's press release and in our most recent annual report on Form 10-K. 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. During the call, we will be discussing various non-GAAP financial measures. Unless otherwise noted, all income statement-related financial measures will be non-GAAP other than revenue and gross margin. Please refer to our press release and the presentation materials posted to the Investor Relations section of our website for information regarding our non-GAAP financial results and a reconciliation to our GAAP measures. Our Investor website also provides a detailed breakout of revenues by end market and division. Now I'll turn the call over to John. John Lee: Thanks, Paretosh, and good morning everyone. I'm pleased to introduce and welcome our new CFO, Ram Mayampurath to MKS. 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. Ram 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. MKS delivered a strong third quarter, with all key financial metrics at or above 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. 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 U.S. dollar at euro term loan Bs, reducing our interest rate by 25 basis points, and we continue to actively paydown 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. 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. 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. Now I'll review our performance in our three end markets. In our semiconductor market revenue increased 3% sequentially, and above the high end of our guidance range. 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. NAND has remained relatively stable, albeit at historically low levels, and we remain well positioned when that market recovers. 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. Additionally, we continue to advance our strategy, to grow segment share in lithography, metrology and inspection. Following the strategic photonics win we talked about last quarter, we 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. In our laser business, we also received an order for a back end application related to high bandwidth memory, valid0ating the important role that MKS solutions play in AI-related applications. 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. 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. 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. While demand overall remains muted. We are seeing encouraging order activity including inflexible PCB drilling used in smartphone applications, and for our chemistry and equipment solutions, for advanced MLB, HDI and packaged substrates related to AI applications. 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. 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. 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 and packaging sectors, to provide unique solutions that yield strong incremental margins, and cash generation. Looking ahead to Q4, we expect revenue in our Specialty Industrial market to increase slightly from Q3. 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. 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. 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? Ram Mayampurath: 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. 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. We are focused on attractive growth areas that enable today's advanced electronics devices. In the past few weeks I have had a chance to meet many of our employees, and I have tremendous respect for their knowledge of the business and ability to execute. I see great value in the talent, culture and discipline here at MKS. 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. In the coming quarters my focus will be on maintaining our cost discipline driving profitability. 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. 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. With that, let me turn it over to Michelle to review our financial results for the quarter. Michelle McCarthy: Thank you Ram, and good morning everyone. For the third quarter, MKS reported revenue of $896 million, up 1% sequentially and at the high end of our guidance range, driven by better than expected semiconductor and electronics and packaging revenue. 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. Consistent with the first half of the year we executed on strong in quarter demand, especially as related to DRAM and Logic/Foundry applications. 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. On a year-over-year basis, sales were down 5% primarily due to palladium prices as well as natural variability in our equipment business. 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. In our specialty industrial market, third quarter revenue was $287 million, a decline of 1% sequentially and just below our guidance midpoint. Revenue was down 11% on a year-over-year basis, primarily due to general industrial weakness. Consistent with the prior quarter we observed minor and mostly offsetting fluctuations throughout the multiple end markets served within specialty industrial. Turning to margins, we reported third quarter gross margin of 48.2% above the high end of our guidance. Gross margin was up sequentially due to product mix as well as operating leverage on higher revenues. We continue to prudently manage our costs with third quarter operating expenses of $237 million coming within our guidance range. 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. 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. 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. Third quarter adjusted EBITDA was $232 million and also above the high end of our expectations with a 25.9% margin. Net interest expense was $53 million, slightly favorable to our guidance of $54 million reflecting a decrease in Euribor rates in the quarter. 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. Free cash flow was $141 million or nearly 16% of revenue demonstrating the cash flow generation potential of the business. 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. We closed 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. We exited the quarter with gross debt of $4.9 billion and a net leverage ratio of 4.5 times based on our trailing twelve month adjusted EBITDA of $895 million. We continue to prioritize deleveraging our balance sheet while managing the cash and investment needs of the business. In July we made $110 million voluntary prepayment on our term loan B in connection with our repricing. Additionally, in October we made another voluntary prepayment of $216 million on our euro denominated term loan B. These actions underscore our continued focus on debt reduction. 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. With the actions we've taken year to-date and favorable movements in Euribor rates, we have reduced our annual interest expense run rate by one-third for over $100 million to approximately $220 million. Finally, during the third quarter, we paid a dividend of $0.22 per share or $15 million. 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. 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. Revenue from our electronics and packaging market is expected to be $240 million, plus or minus $10 million, and revenue from our specialty industrial market is expected to be $290 million plus or minus $15 million. Based on anticipated revenue levels and product mix, we estimate fourth quarter gross margin of 47%, plus or minus 100 basis points. We expect fourth quarter operating expenses of $240 million, plus or minus $5 million. We estimate adjusted EBITDA of $226 million, plus or minus $23 million. 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%. Based on these assumptions, we expect fourth quarter net earnings per diluted share of $1.95, plus or minus $0.32. 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 with that. Operator, please open the call for Q&A. Operator: Thank you. At this time, we will conduct the question and answer session. [Operator Instructions] Our first question comes from the line of Matthew Prisco of Cantor. Your line is now open. Matthew Prisco: Hi, guys. Thanks for taking the questions. 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? John Lee: Yes, hi Matt. It's John. Thanks for the question. I think we've continued to see 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 at certain customers remains very strong. And then NAND remains muted. So I think, when you think about 2025, I think the views have come down over the year, but it's still generally an up year. And 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 NAND still remains muted and depends on when that turns. But Foundry logic drams seem to be holding up well and the expectation is that it will hold up well in 2025 as well. Matthew Prisco: Great. That's helpful. And then would love to hear a little bit more color on your progress in the photonics initiatives. And then also given the given the pushouts experienced by the largest litho player, how does this change your ramp expectations around your new Photonics win and subsequent duration of that margin headwind? Thanks. John Lee: Right. So, we talked about last quarter a Photonics win. This quarter we talked about another Photonics win with a different customer. So this is in the lithography metrology inspection space as you know. Certainly the lead times for those kinds of subsystems as well as of course the systems are much longer than in the vacuum area for WFE. 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 demands will determine what the long-term needs are for critical lithography tools, metrology tools and inspection tools. 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. 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. Matthew Prisco: Very helpful. Thank you. John Lee: Thanks Matt. Operator: Thank you. Our next question comes from the line of Steve Barger of KBCM. Your line is now open. Steve Barger: Hi, good morning everyone. 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 Lee: Yes, Steve, thanks for the question. You know it is mix. We expect 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. So we did see some, you know, some promising orders in Q3, for equipment related to AI. And this is equipment that's servicing all segments of the PCB industry. The HDI, the MLB and then the packaged substrate. And as we've talked about in the past, to make an AI board you need the package substrate. Of course that's the highest density type of most advanced part of the PCB industry. But then you've got to put it on HDI and MOP 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 part of it. That's really that mix. Steve Barger: Got it. So encouraging, but a little lower margin on the equipment. That's good. And maybe a question for Ram. 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 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? Ram Mayampurath: Yes, 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, resourced. 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 that we have demonstrated keeps going, so that we can strengthen our balance sheet with debt management. So those priorities don't change, will remain our focus. John Lee: Yes, I would add too Steve, that we're really investing where we think the best opportunities are. So R&D is not starved. We expanded even field service to service, you know, the growing base of equipment as well. So to Ram's point, it's always a balance. But we are certainly very aggressive 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. Ram Mayampurath: Yes, and just to add one more thought to what John just said, 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. Steve Barger: Appreciate the detail. Thanks. Operator: Thank you. Our next question comes from the line of Jim Ricchiuti of Needham & Company. Your line is now open. Chris Grenga: Hi, good morning. This is Chris Grenga on for Jim. Thank you for taking the questions. Could you elaborate on what you're seeing from a demand standpoint in some of the primary industrial end markets, in particular automotive. And could you remind us what share of revenue, is exclusively for enabling EV type applications? John Lee: Thank you. Thanks for the question, Chris. So what we've seen in automotive is certainly more muted and that's not a surprise. It's well documented. Our automotive revenue has been pretty stable though, even in this muted environment. And this is really the GMF business. The kind of brake calipers and 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 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. So there's puts and takes. But right now we think that EVs offer, a slightly better opportunity for our GMF business. 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. Chris Grenga: Thank you. And given some of the concerns that we're reading about in terms of WFE spend in, in China prospectively, can you offer any sense of how much your business in semiconductor either directly or indirectly is exposed to that region? John Lee: Sure. 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. We had talked about that publicly to the order of $200 million that was at risk. So those numbers are out of our numbers now. They've been out for two years now. 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. 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 MKS. Chris Grenga: Great. Thank you very much. John Lee: Thanks, Chris. Operator: Thank you. Our next question comes from the line of [Jay Rakesh of Mozingo]. Your line is now open. Unidentified Analyst: Yes, hi. Thanks for letting me ask a question. Just a couple of questions. When you look at March quarter, just wondering how you are thinking about the seasonality and then just big picture on 2025 on WFE, based on the puts and takes between the China restrictions and the CHIPS Act, especially the new administration, how are you thinking? John Lee: 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, because it has that consumer product cycle to it. So chemistry was higher, 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 as we just talked about, EMP is up and a lot of that is driven by EMP equipment. So those are the puts and takes of seasonality. With respect to 2025 WFE, I think your question was does the election change anything? And certainly there's a lot of smarter people that can have opinions on that. I would say this, specifically in terms of how the geopolitics will shake out. We have been of the opinion that that's been a bipartisan agreement in terms, of how 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. Unidentified Analyst: Got it. And then on the debt side, what are you planning in terms of paydown through '25? I guess in terms of leverage on the balance sheet? Thanks. John Lee: Yes, well, we'll certainly be. That's still our number one priority. We will be using excess free cash flow focused to delever. 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 delevering with any excess free cash flow. 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, our two main markets, 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. As Michelle said, this quarter, it was 16% of revenue free cash flow. Unidentified Analyst: Got it. Thank you. John Lee: Thank you. Jay. Operator: Thank you. Our next question comes from the line of Krish Sankar of TD Cowen. Your line is now open. Krish Sankar : Hi, thanks for taking my question. John, one of the things you mentioned was you saw strength in semi business in DRAM, Logic and Foundry, not in NAND. Kind of figured out when do you expect to see NAND strength? Because some of your other component peers like iCore [ph] said that they're beginning to see NAND strength for their business. I'm kind of curious, is that a lag effect? Have you begun to see anything or is it more of a 2025 event? John Lee: Thanks for the question, Krish. 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. Some customers have talked about upgrades and things like that. And upgrades come in a couple different flavors, right? To upgrade significant increases in layer count, you really need new RF power. But you can also upgrade with smaller changes and that might not require a new RF tech, it might just require chemistry 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 NAND is still pretty muted. So that's all we can say about what we see. Krish Sankar : Got it, got it. That's very helpful. A little quick follow up, John, if I remember right, you said that the EMP strength was in flex PCB drilling. I hope I heard it right. Because the question was mainly I thought Flex PCB is mainly used for smartphone end markets, but it seems like that end market hasn't quite recovered. So I'm trying to figure out what drill that strength for you in the quarter on the EMP side and then just wanted to also say that welcome to the team Ram. Hope to interact with you more in the future. Thank you. Ram Mayampurath: Thank you, Krish. Look forward to more conversations. John Lee: To answer your question, Krish, there are actually two things that are driving EMP up quarter-on-quarter. It is both the flex equipment. So four smartphones. You're right there. So we did see an increase there in bookings and that's going to turn into revenue in the next quarter or so. 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. Krish Sankar : Got it. Thank you. Operator: Thank you. Our next question comes from the line of Joseph Moore of Morgan Stanley. Your line is now open. Unidentified Analyst: 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 margin, tailwinds and headwinds that you're envisioning for 2025? Thank you. John Lee: Yes. Gross margins in 2025, certainly you can see that our gross margins are slightly different by division. Chemistry and the Atotec acquisition has really helped keep profitability up even during a down cycle. So we're really happy about that. And it's improved under MKS the last two years. The gross margin for a particular volume of business at Atotec has improved. That's also the case with PSD, as is the case with VSD. Volume will improve all of them. And so, if 2025 volume is higher, we should expect that 50% gross margin flow through that we talked about in our model. And then of course, the inflationary costs have come down over this year, so the PPV is pretty much balanced now. It's not back to where it used to be, where we can always count on some kind of 1% or 2% 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. 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. Unidentified Analyst: Got it. Thank you. My follow up is, so a non-CapEx eventually returns, how is MKSI positioned that customer tools sort of relative to the last up cycle in 2023, 2022? Thank you very much. John Lee: Yes. We believe we still have the leadership position for certainly some of the most critical etch in VNAND with ARP power. And so we're pretty confident that the next up cycle that we will enjoy that with our ARP power business. I think you're probably talking about new kinds of power such as Pulsed DC. We're working on that as well as others and that will remain to be seen as to when that gets put into production, but certainly not probably the next cycle. Unidentified Analyst: Thank you. Operator: Thank you. Our next question comes from the line of Joe Quatrochi of Wells Fargo. Your line is now open. Joe Quatrochi: Yes, thanks for taking the questions. I know you guys announced kind of a new semiconductor factory you're building in Malaysia. I'm wondering if you could talk about one, maybe the CapEx kind of requirements there over the next two quarters as we think about excess free cash flow for debt pay down. And then also how do we think about the mix of production? I think a lot of your semi related production capacities located in China. John Lee: Yes, Joe. That's a great question. So we announced the groundbreaking in Malaysia for another factory target towards our semiconductor and maybe even photonics types of products. And that's expansion for capacity that we think we will need. It's certainly putting less risk in our footprint, our manufacturing footprint and that's certainly something our customers want to see. So those are the two reasons why we're doing that. In terms of CapEx, I think the way to think about it, Joe, is we've always been in that 3% to 5% level in terms of CapEx spend. So very, very low. 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. But this past year I think we'll be in that 3% range and then it could oscillate between 3 to 5. But still quite a low CapEx intensity model that we have. Joe Quatrochi: That's helpful. And then I guess, I know you guys obviously guided December, but how do we think about it? Is there anything to call out in terms of seasonality into the March quarter? John Lee: The March 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 MSD Atotec business, just like we saw an uptick in Q3. So 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. Equipment is not necessarily a consumer products cycle, right? It's just -- it's an investment cycle and capacity cycle. And so that's where we see kind of a Q4 uptick in EMP because of not just flex equipment but also rigid equipment. And remains to be seen what that will be in Q1. Joe Quatrochi: Got it. Thank you. John Lee: Thanks Joe. Operator: [Operator Instructions] Our next question comes from the line of Melissa Weathers of DB. Your line is now open. Melissa Weathers: Hi there. Thank you for letting me ask a question and 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? John Lee: Yes, thanks, Melissa. The HBM win we talked about was lasers. And so lasers can be used, are used to do cutting of chips. That's not news. But HBM type of die, you're putting dyes on top of each other. And so precision and the fineness of the edges, and all that are 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. And we called out one particular customer and it's pretty significant, but MKS 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. Melissa Weathers: Got it. 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? John Lee: Yes, I think 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, , there were 30 chip companies, now they're five, 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. And as you can see, our gross margins are in the same zip code, if you will, as our customers and our customers, customers. And I think that's just a corroboration of the value of 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 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. Melissa Weathers: Thank you. John Lee: Thank you, Melissa. Operator: Thank you. Our next question comes from the line of Steve Barger of KBCM. Your line is now open. Steve Barger: Hi, 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? John Lee: Yes, I think it's really back to the playbook we've demonstrated over the last 10, 15 years, Steve. The there's only so many ways you can outgrow WFE. And we've demonstrated that we could do that by 200 basis points. And more recently, we've had headwinds. China, right. A lot of that business got removed, and so we had 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 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 even that sub-segment of WFE, and we have been over the last couple of years. So that's just an example of, the plan and the playbook of outgrowing WFE. We have to move 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. Steve Barger: Understood. Yes. Thanks. Appreciate that. John Lee: Thanks, Steve. Operator: I am 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. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Operator: Welcome to the MKS Instruments' Second Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the call over to Paretosh Misra, Vice President of Investor Relations. Please go ahead. Paretosh Misra: Good morning, everyone. I am Paretosh Misra, Vice President of Investor Relations, and I'm joined this morning by John Lee, President and Chief Executive Officer; and Michelle McCarthy, Vice President and Chief Accounting Officer. Yesterday, after market close, we released our financial results for the second quarter of 2024, which are posted to our investor Web site at investor.mks.com. As a reminder, various remarks about future expectations, plans and prospects for MKS comprise forward-looking statements. Actual results may differ materially as a result of various important factors, including those discussed in yesterday's press release and in our annual report on Form 10-K for the year ended December 31st, 2023. These statements represent the company's expectations only as of today, and should not be relied upon as representing the company's estimates or views as of any date subsequent to today, and the company disclaims any obligation to update these statements. During the call, we will be discussing various non-GAAP financial measures. Unless otherwise noted, all income statement-related financial measures will be non-GAAP other than revenue and gross margin. Please refer to our press release and the presentation materials posted to the Investor Relations section of our Web site for information regarding our non-GAAP financial results and a reconciliation of our GAAP and non-GAAP financial measures. For a detailed breakout of revenues by end market and division, please visit our investor Web site. Now, I'll turn the call over to John. John Lee: Thanks, Paretosh, and good morning everyone. Let me start by welcoming Paretosh to MKS as our new Vice President of Investor Relations. Paretosh brings strong experience in both investor relations and sell-side research, where we covered MKS earlier in his career. I assume a number of you may already know Paretosh. We're glad to have him onboard. You'll be hearing from him soon. In addition, we are making very good progress on our search for MKS' next CFO. I hope to have news to share in the not too distant future. MKS delivered a strong second quarter, with revenue of $887 million, at the high end of our guidance, and EPS of $1.53, exceeding the high end of our guidance. Our EPS included approximately $0.14 of interest expense benefit from our recent convertible note offering and term loan B paydown. But even without this tailwind, we still exceeded the high end of our guidance. Our results reflect the continued excellent financial execution which positions the company well for the eventual end market recovery. In addition to our revenue and earnings performance, we maintained strong gross margins above 47%, reflecting the value of our proprietary and differentiated solutions, as well as our consistent focus on cost control. Our operating expenses were better than guided as a result of lower than expected compensation and benefit costs primarily related to the timing of new hires and prudent management of third-party spend. Our solid execution extended to the balance sheet where we continued our long-standing track record of proactively managing our leverage. During the quarter, we closed an upsized $1.4 billion convertible note offering at a fixed coupon rate of 1.25%. We used approximately $1.2 billion of the net proceeds to pay down our term loan B, which significantly reduced our cash interest expense. The transaction was also structured to mitigate potential dilution to our existing shareholders through capped call transactions, which Michelle will discuss in more detail. The convertible note offering also positioned us to re-price our term loan B in July, and we made a $110 million voluntary prepayment on that loan in connection with the re-pricing. While we are pleased with our financial execution, we continue to see muted market demand. Given our stronger than expected results in the second quarter, we are now expecting second-half revenue to be relatively in line with first-half revenues. We're very encouraged about our market positioning, and we believe we are continuing to gain share within certain product categories. Highlights include a strategic photonics win in our semiconductor market that we expect will ramp over the next several quarters. We also achieved some very early stage revenue synergies and design wins in our Electronics & Packaging market. The breadth and depth of our proprietary portfolio of products and solutions, combined with our strong customer relationships in the semiconductor and advanced packaging markets put MKS in a great position when our markets recover. Now, I'll review our performance in our three end markets. In our semiconductor market, revenue increased 5% sequentially. Similar to our first quarter results, the higher revenue trend was primarily driven by in-quarter demand conversion. The second quarter year-over-year comparisons are distorted given that the prior-year quarter reflects recovery from the ransomware incident in Q1, 2023. Starting the third quarter, year-over-year comparisons should be largely normalized. With the exception of NAND, we're seeing early signs of improvement, especially in DRAM and Logic/Foundry in support of artificial intelligence-related investments. As device markers step up investments in key areas such as high-bandwidth memory and new logic architectures, like gate-all-around, MKS is well-positioned to leverage our broad technology capabilities to solve the most difficult challenges. Our Vacuum Solutions products enable the critical etch and deposition processes that help semiconductor manufacturers achieve high throughput and yield as chip architectures become more complex. In our Photonics Solutions, we provide key subsystems to lithography, metrology, and inspection applications; currently one of the highest growth areas of WFE investment. As I mentioned earlier, we had a strategic photonics win through our world-class Optics initiative, with initial unit production starting this year. This is a great win for us that highlights how we integrate multiple MKS technologies to create a unique solution that no one else can provide, and is an example of how we have continued to outperform WFE in this category. Until we fully ramp production of this product over the next several quarters, we're seeing some slight pressure on our Photonics Solutions Division gross margin, which is reflected in our Q2 results. That said, this is an exciting win for us that we believe will drive strong revenue over the long-term, provides a great opportunity to showcase our unique innovation capabilities. In the third quarter, we expect Semiconductor revenue to be down slightly on a sequential basis. This reflects our continued view that we are bouncing along the bottom of the industry cycle. We remain in a very good position for the next industry up-cycle given that we are a critical enabler embedded with all key customers, and have the broadest exposure of any subsystems provider. Turning to Electronics & Packaging, we saw double-digit revenue growth quarter-over-quarter. Our revenue performance was led by chemistry sales with some seasonal strength relative to Q1, which included the Lunar New Year. Q2 results also included higher equipment sales sequentially. At present, demand is primarily driven by investment in AI servers, which represent a small but increasing proportion of the total server market. We are expecting Electronics & Packaging revenue in Q3 to be down slightly on a sequential basis while we wait for stronger signs of PC and smartphone market recovery. We are excited by how our combined laser and chemistry capabilities can drive new growth opportunities. We are continuing to make good progress in the LEO satellite space including achieving a synergistic design win in copper plating in Q2. We have also notched an early synergy win in chemistry with a key player in the smartphone supply chain. These are individually small deals from a revenue standpoint. But, represent early proof points that our combined laser and chemistry capabilities are resonating with customers. We continue to believe that our Electronics & Packaging business will be increasingly driven by the same trends that drove our Semi business mainly miniaturization, complexity, and chemistry. At this point, some of you attended a recent visit to our tech centre in Berlin to learn more about our optimized interconnect offering that underpins the strategic rationale of our combination with Atotech. We are the only player who combines laser drilling expertise with plating tools and chemistries, the best enabled key technology inflections at the substrate and PCB levels. And we are leveraging our broad combined relationships to increase customer engagement. In our Specialty Industrial market, revenues decreased about 7% sequentially with softness in vacuum and photonics products for select specialty categories. But, stable automotive revenues in our General Metal Finishing business. As a reminder, our Specialty Industrial market is comprised of numerous applications that spans several end markets, and leverages our proprietary technologies and related R&D investments within Semiconductor and Electronics & Packaging, providing strong incremental margins and cash generation. As we await the broader industrial market recovery, chemistry from our Material Solution Division provides a relatively steady consumable driven source of revenue with strong margins, contributing to both our Electronics & Packaging and Specialty Industrial markets. It's also an area of innovation for the company as industrial customers increasingly seek sustainable and environmentally friendly solutions. A great example of this is the suite of solutions we have developed in trivalent chrome, to provide the automotive market a more sustainable path from the hexavalent chrome that's been used in automotives for decades. We believe we are a leader in pioneering end-to-end solutions OEMs that deliver sustainable surface processing and cost-efficient applications. And, we received two new orders in Q2 for our TriChrome solutions. Another innovation in General Metal Finishing is our equipment recycling solutions where we can extend the equipment life through chemistry reformulations and innovative equipment processing solutions, creating investment savings and environmental benefits for our customers. We have had multiple design wins here in recent months. Looking ahead to Q3, we expect revenue in our Specialty Industrial market to be in line with Q2. Let me wrap-up by saying, we are pleased with our execution and performance in the second quarter. We are taking the steps necessary to drive profitable growth and improved cash generation as demand remains fairly stable across our end markets. Consistent with our historic performance, we are confident in our ability to outperform WFE when the market recovers. We have the broadest product portfolios spanning both the Semiconductor and Electronics & Packaging markets. And we leverage our expertise across these markets to solve our customers' hardest problems. Our breadth gives us a unique view into upcoming inflections. And, that makes us an important resource across the entire advanced electronics ecosystem. Now, let me turn it over to Michelle to cover our second quarter financial results in more detail. Michelle McCarthy: Thank you, John, and good morning, everyone. For the second quarter, MKS reported revenue of $887 million, up 2% sequentially and at the high end of our guidance range, driven by better than expected Semiconductor and Electronics & Packaging revenue. Second Semiconductor revenue was $369 million. Up 5% sequentially and well ahead of our expectations, primarily driven by stronger than expected in-quarter demand conversion. As John mentioned, a year-over-year comparison for semiconductors is not meaningful given our second quarter 2023 results include recovery from the ransomware incident in the first quarter of 2023. Year-over-year comparisons should be largely normalized starting with the third quarter. Second quarter Electronics & Packaging revenue was $229 million, an increase of 10% quarter-over-quarter and 2% year-over-year. This result was led by seasonal strength in chemistry and higher equipment sales. Excluding the impact of foreign currency and palladium pass-through, chemistry sales grew 19% year-over-year, as we are seeing some recovery from industry-wide softness in the second quarter of 2023. In our specialty industrial market, second quarter revenue is $289 million, a decline of 7% sequentially and just below our guidance expectations. Revenue can fluctuate from quarter-to-quarter as a result of trends within the multiple end markets served, but overall has been generally stable over the last four quarters. Similar to our semiconductor market, the year-over-year comparison is distorted as a result of recovery from the ransomware incident. Turning to margins, we reported second quarter gross margin of 47.3%, representing the high end of our guidance. Gross margin was down sequentially as expected due to favorability from the non-recurring items in the first quarter, as well as product mix, including the impact of startup costs related to the world-class optics win in our Photonic Solutions division, as John discussed. Our margins continue to reflect the strength of our differentiated product portfolio. We continue to prudently manage our costs with second quarter operating expenses of $227 million, coming in well below our expectations. This was driven primarily by lower compensation and benefits expenses, especially with regard to the timing of planned new hires, as well as lower third-party spend. We are proud of our long-standing 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. Looking ahead, we expect operating expenses will increase from second quarter levels, but remain below our earlier expectations of a $240 million to $250 million run rate for the balance of 2024. Second quarter operating income was $192 million, yielding an operating margin of 21.7% and above the high end of our guidance, driven by higher sales, strong gross margin, and lower operating expenses. Second quarter adjusted EBITDA was also above the high end of our expectations at $228 million, with a 25.7% margin. Net interest expense was $69 million, below our guidance of $79 million, reflecting interest savings from the May closing of our $1.4 billion convertible note offering and term loan B pay down. As a result of entering into capped call transactions, we expect there will be no dilution to shareholders in the event of any conversion of the notes until our stock price exceeds $237.42, which was double our stock price when we announced the transaction. We used $1.2 billion of the net proceeds to repay borrowings under our term loan B facility, which, based on current interest rates, will save over $75 million of annualized cash interest and reduce our effective interest rate by over 100 basis points. We expect those cash savings will accelerate the deleveraging of our balance sheet. In addition, the convertible note offering positioned us to reprice the remaining balance of our term loan B in July, reducing the interest rate by 25 basis points and saving an additional $9 million of annualized cash interest. Second quarter net earnings were $103 million, or $1.53 per diluted share, well above our guidance ranges. These results reflect the strong operating performance in the quarter, as well as the $0.14 per share of interest expense reduction from our recent convertible note offering and term loan B paydown, as well as a lower than expected tax rate of 20.5% for the quarter. The benefit from the convertible note offering and term loan B paydown represents only a partial quarter given our execution in mid-May and is expected to represent approximately $0.27 of earnings per share in the third quarter. Free cash flow was $96 million and unlevered free cash flow was $156 million. We closed the second quarter with more than $1.5 billion of liquidity, comprised of cash, cash equivalents, and short-term investments of $851 million and our undrawn revolving credit facility of $675 million. Gross debt was $5 billion and our net leverage ratio was 4.6 times based on our trailing 12-month adjusted EBITDA of $904 million. We expect to continue to prioritize debt pay down with our excess free cash flow as evidenced by the $110 million voluntary debt paydown made in July in parallel with our term loan repricing. This prepayment resulted in an $8 million reduction to our annualized cash interest based on current interest rates. 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. With the actions we've taken year-to-date and the recent reduction in the year-over-all rates, that value has been reduced to approximately $240 million. During the second quarter, we paid a dividend of $0.22 per share, or $15 million. 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 third quarter outlook. We expect revenue of $870 million, plus or minus $40 million, reflecting the better-than-expected second quarter and a continued slow path to market recovery as we continue to bounce along the bottom of this industry cycle. We now expect second-half revenue to be relatively in line with first-half levels. By end market, our third quarter outlook is as follows. Revenue from our semiconductor market is expected to be $360 million, plus or minus $15 million. Revenue from our Electronics & Packaging market is expected to be $220 million, plus or minus $10 million. And revenue from our specialty industrial market is expected to be $290 million, plus or minus $15 million. Based on anticipated revenue levels and product mix, we expect third quarter gross margin of 46.5%, plus or minus 100 basis points. We expect third quarter operating expenses of $235 million, plus or minus $5 million. As we continue to manage expenses, we believe $235 million is an appropriate run rate for the fourth quarter as well. We estimate adjusted EBITDA of $206 million, plus or minus $23 million. As Michelle mentioned, the recent convertible note offering and term loan B paydown is expected to be accretive by roughly $0.27 per share in the third quarter. We expect a tax rate of approximately 16.5% in the third quarter, and we expect to remain on track to achieve a tax rate of 20% for the full fiscal year. Given these assumptions, we expect third quarter net earnings per diluted share of $1.43, plus or minus $0.28. I'm proud of how our team has navigated the cyclical softness in our end markets while delivering for our customers and our shareholders. This along with our differentiated product and technology portfolio tied to key secular trends in our end markets, positions us well for the next cyclical upturn. With that, operator, please open the call for Q&A. Operator: Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions] Our first question comes from Joseph Moore of Morgan Stanley. Your line is now open. Joseph Moore: Great. Thank you. It looks like those margins in the quarter were stronger than we expected, and your Q3 guidance was pretty good. Can you talk about the puts and takes, and what's driving that gross margin improvement? John Lee: Yes, good morning, Joe. I think the gross margin is reflective of the proprietary nature of our products. I think, there was a good product mix again, mainly MSD, chemistry revenue, remained a good proportion of the revenue, but also gross margin was improving as well in VSD as well as service. And we did note a little bit of gross margin headwind in PSD. So, that kind of range of 46 to, give or take, 100 basis points, 46.5, that's really the right way to think about our gross margin with the current mix that we have today. Joseph Moore: Great. Thank you. And as a follow-up, separately, can I ask about on the semi side, are you seeing any indications of NAND spending picking up, either second-half this year or early next year? John Lee: Yes, I think, it's hard to predict that, but I think we read the same things you guys read. And I think NAND does seem to be pushing out a little bit relative to maybe the industry view early in the year. So, I think we're still bouncing along the very bottom for NAND. And as you know, we have some great set of proprietary solutions there. So, when that market picks up we'll certainly enjoy that pickup. But right now, Joe, I think we're a little more bouncing along the bottom a little longer, and I think that's consistent with the industry view. Joseph Moore: Great, thank you. John Lee: Thanks, Joe. Operator: Thank you. [Operator Instructions] Our next question comes from Vivek Arya of Bank of America Securities. Your line is now open. Michael Mani: Hi. This is Michael Mani on for Vivek Arya. Thank you for taking a few of our questions. First off, I think some of your major customers in the semi market reported so far indicated relatively strong sequential growth into the second-half. So, I guess, how can we reconcile this with some of the more muted trends you're seeing in Q3? And what sign should we look for as these customers prefer a more sustained can occur is it largely a function of utilization or are there other signs we should monitor? Thank you. John Lee: Yes, Michael, I think one of the things that's happening now in the industry and with MKS is that our lead times have been pulled in, which is good. They've pulled in to kind of the normal historic lead times, which are pretty short. And that does limit our visibility a little bit. And as we noted in the call this time, as well last quarter, there is a lot more of the unexpected, if you will, in-quarter conversions because our lead times are shorter. And so, I agree that some of our customers have indicated that there may be some -- better second-half. And then, we'll see if that happens to us -- for us. But certainly if they do, and they need our equipment, we'll see that. But right now the best we can see is that the second-half first-half is relatively consistent. And I would note, as we said in the prepared remarks, that Q2 was much higher than we had expected coming into Q2. Michael Mani: Got it, thank you. And next, could you share any more color on the strategic photonics win in the quarter? Once this fully ramps over the coming quarters, how much could this potentially contribute to growth next year? And is there any way to frame the long-term opportunities of optic photonics market for MKS? Thank you. John Lee: Yes, I think this is just the latest example of a multiyear strategy we've had of investing in world-class optics. We believe that we have a unique capability in the industry because of our broad product portfolio, and we can integrate many things together that no one else can. And so, this is a big win, and we're happy to have gotten it. There is always the historic costs, cycle time is longer in the beginning, and manufacturing efficiency is a little less efficient in the beginning until you start making more units. As you order more parts, obviously pricing of the supply, the parts goes down. So, we do have a little headwind on that in the beginning, but that's kind of normalized. So, I think it's just part of our bigger effort in world-class optics, which I think we'd point out our revenue in lithography, metrology and inspection has continued to grow, even during this current down cycle, and that's part of the reason why we continue to believe we can outperform WFE growth. Michael Mani: Thank you. John Lee: Thanks. Operator: [Operator Instructions] Our next question comes from Melissa Weathers of DB. Your line is now open. Melissa Weathers: Hi there. Thank you for letting me ask a question. I wanted to talk about the specialty industrial business. Can you summarize where you think we are cyclically in that business? Think it came in a little bit lighter than what I thought in the recent quarter. So, how do we think about that business cyclically? I know there are a bunch of different moving parts within it. John Lee: Yes, thanks for the question, Melissa. I think we look at it as not cyclical. It's made up of a bunch of different markets that tend to sum up to something pretty stable. And we've seen that over the past several quarters. It can be lumpy. And this quarter was down a little more than we had expected, as we said. I would look at this -- I would look at the longer-term revenue for specialty industrials, that's why we look at a year at a time. And when you look at it in that perspective, it is still very stable. So, it can be lumpy depending on some sub-segments of the markets. Melissa Weathers: Got it. And then, on E&P side, I think last quarter you talked about an uptick in demand for high-density multilayer PCBs related to AI servers. How is that business trending, are you still seeing momentum from AI? John Lee: Yes, I think we do. Many of those customers that are more levered to AI are our customers. And we see that momentum. And many of them are public companies because -- so, you can see what they're saying. And the good thing is that the proportion of the PCB market that is driven by AI is increasing. But as we noted before, it's still relatively a small proportion of the PCB markets. PCs, and smartphones, and non-AI servers are still the largest part of it. And as you know there's still a little bit of muted demand in PCs and smartphones. Melissa Weathers: Got it, thank you. John Lee: Thank you. Operator: Thank you. Our next question comes from Jim Ricchiuti of Needham & Company. Your line is now open. Jim Ricchiuti: Hi, and thanks. Good morning. Hey, John, wanted to go back to the E&P performance in Q2, which was a little better than expected. It sounds like it was both equipment and chemistry related. I wonder if you can give a little bit more color on which was the bigger driver to that outperformance. And then, I have a follow-up question on E&P. John Lee: And good morning, Jim, you're right, Q2, the uptick in E&P was driven by both equipment and chemistry, but chemistry is by far the bigger driver, Jim. And as you know, our guidance in Q3 is slightly down, but the -- just to give everybody a little more color, it's really because of the equipment that's slightly down. The chemistry is still, as we expect, Q3 being a little higher than Q2. So, I just want to give everybody a little color that that's consistent probably with what the industry is seeing. Jim Ricchiuti: Got it, that's helpful. And yes, there are expectations, as you know, that we could see a better refresh cycle with smartphones next year. And I'm not going to ask you if you agree with that unless you want to offer some perspective. But if that's accurate, and I'm curious, which parts of the business is going to lead that recovery from a bookings standpoint? Is it going to be the PCB drilling business followed by the chemistry or is chemistry more -- it sounds like that's more book-and-ship, and when could you see a possible uptick in orders if we're in that kind of a scenario? John Lee: Yes, it's a great question, Jim. If there was just steady business and people weren't adding CapEx, obviously the chemistry utilization and the chemistry bookings, which happen right when we ship, by the way, so there's really not a lag, would be the first indicator. But you raise a good point, if there was a big up-cycle, if you will, in CapEx investments, we would have to see those bookings with the lead times that we have on laser systems. And we don't report bookings. So, I think -- but to your point, you're right. If there is a buildup that requires new CapEx, we should see that in equipment sooner than just utilization rate. Jim Ricchiuti: Okay. Thanks a lot. John Lee: Thanks, Jim. Operator: Thank you. The next question comes from Krish Sankar of TD Cowen. Your line is now open. Krish Sankar: Yes, hi, thanks for taking my question. I think, one, John, your outlook on September quarter, it jives with what your customers have said also. But I'm curious, the biggest delta between them and now is the fact that Intel-type CapEx. And I'm just wondering how much of that has had any important, if any, in the second-half of this year and, more realistically, in calendar '25? John Lee: Yes, I think you're right; Intel did have their call, and did guide CapEx down a little bit in 2024. I'm not sure that really impacted our view of the guidance. And our view, obviously, is made up of all the customers in the industry. But I think the -- when you think about the industry, everybody is kind of thinking 2025 is going to be good. But the time in which it does turn up is pushed out a little bit. And I think that's what we're seeing. And that's why we're looking at second-half being very similar to first-half. I think coming into the year, Krish, we're all hopeful, we didn't know that there might be a stronger hock stick towards the end of the year. And as the year progressed, I think that has gradually come down. And I think, right now, our best view is that second-half roughly the same as the first-half. Krish Sankar: Got it. I mean maybe let me ask the question a different way, John. Intel also gave a calendar '25 CapEx number which is down 17% year-over-year. Baking that in, are you still in the camp that WFE will be a strong growth year next year? John Lee: Well, I think that is certainly a headwind to all WFE, but as you know, if someone's not spending on WFE, as long as the chip revenues are needed and the capacity is needed, someone else will be spending the CapEx as well. So, I still think that 2025 will be better. And we don't really predict WFE going forward. It's very hard to do. And thankfully you guys have to and we don't. But I still think 2025 will be better. But in terms of an impact on my specific customer, I don't think I could really predict what that will be on 2025. Krish Sankar: Got it. And then, a quick follow-up on the Atotech side, obviously the Atotech business does have some exposure to Intel, but you also have some exposure to some of these AI chips, which has seen some delays with cobalt, I'm kind of curious, has that really changed your perspective on Atotech's advanced packaging opportunity into next year? John Lee: Yes, no, I think the next generation PCBs and substrate work that we're doing with our most advanced customers, that's still a couple years out anyway. And your commentary is really about utilization rates today and any impacts from any kind of specific customer commentary. But as we said in the answer to an earlier call, a question, we still see that AI-driven chemistry business is good. It's just that we have to put that in perspective in terms of the proportion of AI chemistry relative to the chemistry for the entire PCB market. Krish Sankar: Got it, got it. Thank you, Joe. John Lee: Thanks, Krish. Operator: Thank you. Our next question comes from Joe Quatrochi of Wells Fargo. Your line is now open. Joe Quatrochi: Yes, thanks for taking the question. I just wanted to kind of understand the second-half versus first-half now, expecting flat. I think as I think about like the beat, the magnitude of the beat in T&Q, and then kind of where the street producer was modeling kind of a low single-digit increase half on half for second-half, it seems like the flat half on half is a bigger change in the magnitude of the Beat in 2Q. So, I'm just kind of trying to understand is there anything else that changed aside from the upside that you put up in 2Q, particularly in Semi? John Lee: Yes, Joe, I don't think there was a big change. We kind of looked at every quarter through the year as kind of bouncing along the bottom. As I said earlier, coming into the year, we kind of expected with the industry that there would be more of an uptick in the second-half, but slight, as we said. And now I think most of the industries have said that there is a bit of a push out. And so, whatever the consensus had for us and for the industry in Q3 and Q4 is probably more muted, that's for sure. And this is our best view right now. So, I think not much change. I think we're just bouncing along the bottom. I think the only change is we're probably bouncing along the bottom a little longer than we thought we might at the beginning of the year. Joe Quatrochi: Got it. And as a follow-up, can you talk a little bit about the early synergistic plating and chemistry design win that you saw in the quarter. Was that -- and does that include MKS, like laser drilling as well, or is it just on the Atotech side? John Lee: Yes, we've talked in the past about laser drilling wins synergistic. The ones we mentioned this time were Atotech wins synergistically. And as we've said before, if Atotech and MKS were already in that customer and we both won, we don't count that as synergy. It's really the case where either the legacy MKS laser guides were in and Atotech wasn't. And if Atotech wins, then we count that as a synergy. And that's really what we're talking about with these two wins we called out. Joe Quatrochi: That's helpful. Just to be clear, is that one of the first kind of MKS-led wins then? John Lee: It is, it is. The other ones we've talked about in the past were the Atotech bringing in the laser group. So, these are the first two. Now remember, it wouldn't take a while, right, because you're qualifying, you're testing, etc. So, we have been working at this for multiple quarters and we have other things we're working on right now that hopefully in the future will turn into wins as well. So, yes, these are the first two Atotech chemistry wins because of the laser group. Joe Quatrochi: Helpful. Thank you. John Lee: Thanks, Joe. Operator: Thank you. [Operator Instructions] Our next question comes from Steve Barger of KeyBanc Capital Markets. Your line is now open. Steve Barger: Thanks. I know there is a lot of variables to this question. But in general, if you sell a new plating system and it gets to full run rate, how can we think about what that adds to consumables in terms of percentage to the base chemistry business, or maybe you can talk about it in terms of dollars per system? I am just trying to understand the relationship between new equipment installs and consumable uptake. John Lee: Yes, Steve. Thanks for calling. I know you are probably on an airplane there somewhere. But, I would say this, the ASPs of the equipments, the CapEx depends on how big it is, number one. But if you take one -- maybe one of our biggest exciting tools. And, we are talking about electronics versus GMF, it could be couple of million dollars or so. Now, the chemistry is, I would say, think of it an order of magnitude less per month. And so, this chemistry in all these tanks, but that chemistry last forever. So, that's kind of way we think about it. We can give you a little more color on that going forward. So, I just don't have it off the top of my head because it does vary by the chemistry -- by how much the chemistry we have. And then, of course, the gross margins could vary slightly depending on the chemistry. So, I think when we get the CapEx in, we are just really happy about the longer term prospects of that chemistry. And, that could be 30 years of chemistry revenue. Steve Barger: Right. Yes, great. That's good start. And a lot of industrial end markets are soft right now. But, are you seeing opportunities outside of automotive in the other established end markets in specialties that could you a little revenue leverage to the cycle when it does improve? John Lee: Yes, I think it is not the end. I would say you are right. Some of the industrial -- industrial customers outside of automotive seem to be a little more hesitant if you will, but I would say in one of the specialty industrial markets that seems to have been doing a little better was defense. And we probably mentioned that a couple of times over the last couple quarters. But, as I said that's a small percentage of our business. But, it has been doing well in the last couple of quarters. So, that's one I would call out. But as again, it's really made of multiple, multiple markets of our specialty industrials revenue. Steve Barger: Understood. Thanks. John Lee: Thanks, Steve. Operator: Thank you. [Operator Instructions] This concludes question-and-answer session. I would now like to turn it back to Paretosh Misra 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. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Operator: Welcome to the MKS Instruments First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, David Ryzhik, Vice President of Investor Relations. Please go ahead. David Ryzhik: Good morning, everyone. I am David Ryzhik, Vice President of Investor Relations, and I'm joined this morning by John Lee, President and Chief Executive Officer; and Michelle McCarthy, our Vice President and Chief Accounting Officer. Yesterday after market close, we released our financial results for the first quarter of 2024, which are posted to our investor website at investor.mks.com. As a reminder, various remarks about future expectations, plans and prospects for MKS comprise forward-looking statements. Actual results may differ materially as a result of various important factors, including those discussed in yesterday's press release and in our annual report on Form 10-K for the year ended December 31, 2023. These statements represent the company's expectations only as of today and should not be relied upon as representing the company's estimates or views as of any date subsequent today, and the company disclaims any obligation to update these statements. During the call, we will be discussing various non-GAAP financial measures. Unless otherwise noted, all income statement-related financial measures will be non-GAAP other than revenue and gross margin. Please refer to our press release and the presentation materials posted to the Investor Relations section of our website for information regarding our non-GAAP financial results and a reconciliation of our GAAP and non-GAAP financial measures. For a detailed breakout of revenues by end market and division, please visit our investor website. Now I'll turn the call over to John. John Lee: Thanks, David. Good morning, everyone, and thanks for joining us today. MKS delivered strong results in the first quarter despite a muted market backdrop. First quarter revenue of $868 million exceeded the midpoint of our guidance. Adjusted EBITDA of $217 million and net earnings per diluted share of $1.18 both exceeded the high end of our guidance. We're particularly pleased with our strong gross margins, which reflect the value of our proprietary offerings, disciplined cost control and operational execution. We continue to expect a recovery in our semiconductor and electronics and packaging markets to unfold slowly in the second half of 2024 and are poised to capitalize on our leading positions when we enter the next upturn. In our semiconductor market, we are foundational to key suppliers of leading-edge process equipment in an era where AI is beginning to have a transformative impact on compute and memory architectures. We believe that AI is a powerful secular trend that will drive growth in our industry for years to come. But it's only the latest example in the long history of powerful secular trends in this market. Personal computers, mobile devices and data centers are earlier examples of transformative use cases in their time, all a result of the miniaturization and packaging of semiconductors. Our Vacuum Solutions enable critical deposition and etch processes that are necessary in the manufacturing of high-bandwidth memory as well as a broader array of DRAM, NAND and logic semiconductors. In Photonics, our optical solutions help our customers solve complex challenges in lithography, metrology and inspection. In addition, our motion control solutions are used to enable precise positioning of the wafer and hybrid bonding applications. In our electronics and packaging market, our unique combination of laser and chemistry expertise positions us for attractive growth in packaged substrates, which are a key building block of advanced packaging architectures. This complements our opportunity in high-density interconnect PCBs. which were required for smartphone and AR/VR applications and where we also see a growing opportunity in the low earth orbit application. In our specialty industrial market, we addressed a broad array of specialized applications where we are leveraging our proprietary technology to deliver strong margins and attractive cash flows. Across all these markets, we harness a broad base of capabilities and key enabling technologies such as vacuum, photonics and Materials Solutions. With a leadership position in a broad array of product categories, this affords us a holistic view of the ever-increasing device scaling requirements faced by our customers enabling us to develop integrated novel solutions to address these challenges. As an example, our team in Korea was recently recognized by Samsung Electro-Mechanics for their support in the development and trial production of new products. We were also recently recognized by ST Microelectronics receiving the best Performance Material Supplier Award and the Innovation Value Engineering Award for our work in developing a new adhesive promoter technology that enhances automotive IC package reliability. We are proud of the deep customer relationships that we've built over the last several decades and are excited about the opportunities that lie ahead for MKS. I'll turn now to our end markets. Revenue from our semiconductor market exceeded our expectations in the first quarter. As we saw slightly stronger demand and improved conversion of customer backlog, overall, demand for our Vacuum Solutions for deposition and etch applications remains muted primarily due to historically low levels of NAND equipment spending. We believe broader customer inventories across our vacuum portfolio are generally in a more balanced state today compared to a few quarters ago, but we may see some additional pockets of work downs in areas tied to NAND. With our Photonics Solutions division, revenue from our optical solutions for lithography, metrology and inspection applications remained robust in the first quarter. We continue to see momentum in our world-class optics initiative. This is a unique offering where MKS brings optics, coatings, motion stages, optical subsystems and lasers to solve complex challenges in transistor scaling. As we look to the second quarter of 2024, we expect revenue in our semiconductor market to be slightly down sequentially from a better-than-expected first quarter results. Early memory market indicators, including improved pricing and increasing demand as well as continued spending tied to AI applications are encouraging. But as the industry first brings idle capacity back online, we expect the recovery in capital equipment spending to return gradually in the second half of the year. Turning to our electronics and packaging market. Revenue was in line with expectations, despite the unfavorable impact of foreign currency and lower palladium prices. Sales of our chemistry solutions for PCB and package substrate markets were stable in this muted market for PCs, smartphones and non-AI servers. Our results also reflected expected seasonal softness due to the Luna New Year holiday. However, we did see a slight pickup in demand for our plating equipment lines for complex, high-density multilayer PCB production, which we believe was primarily driven by growing AI server demand. As many of you know, AI GPUs require a large amount of advanced semiconductor content which in turn requires complex packaging schemes. Semiconductors are mounted onto a package substrate that is then mounted on to a high-density PCB and afterwards, is mounted on to an advanced multilayer PCB. This growing substrate and PCB content and AI architectures puts MKS in a unique position to benefit with our proprietary laser drilling, chemistry and plating equipment solutions. We also saw additional demand for laser drilling systems for the fast-growing, low-earth orbit application within the PCB market, where we are the process tool of record. As we look to the second quarter of 2024, we expect revenue from our electronics and packaging market to be up on a sequential basis due to an increase in planting equipment revenues and a seasonal increase in chemistry revenues following typically lower first quarter utilization. Turning to our specialty industrial market, revenue was slightly better than expected, driven by the modest sequential improvement in our Life and Health Sciences and research and defense markets. Revenue from our general metal finishing business in the automotive market remained flat overall on a sequential basis. As we look to the second quarter, we expect demand trends in our specialty industrial market to remain stable with revenue relatively in line with first quarter levels. Wrapping up, MKS delivered a strong profitability in the first quarter despite a continued soft end market demand environment. While we expect overall industry demand to remain muted near term, we feel very good about the positioning of our portfolio and the investments we've made to capitalize on the key secular trends driving our end markets. Turning now to the finance discussion. I'd like to introduce you to Michelle McCarthy, our Vice President and Chief Accounting Officer, who will walk through our financial results in more detail. Michelle recently joined MKS and brings a strong public company accounting background to complement our deep finance team. This team is doing an outstanding job as we conduct our search for MKS' next Chief Financial Officer and we will continue to post it on our progress. Michelle, why don't you take it from here? Michelle McCarthy: Thanks, John. It's a privilege to be part of the MKS team. In the first quarter, we delivered revenue of $868 million, above the midpoint of our guidance, primarily due to better-than-expected revenue from our semiconductor market. First quarter semiconductor revenue was $351 million, above the high end of our guidance and declining 3% sequentially. The year-over-year comparison is not meaningful as it was distorted by the ransomware incident last February. Revenue performance in the quarter was led by better-than-expected conversion of backlog in the Vacuum Solutions segment as well as continued robust sales of our Photonics Solutions. First quarter electronics and packaging revenue was $208 million, relatively in line with the midpoint of our guidance and a decrease of 8% sequentially. Excluding the impact of foreign exchange and palladium pass-through, sales of our chemistry solutions in this market grew 15% on a year-over-year basis, as our business bounced back from industry softness a year ago. Moving to our specialty industrial market. Revenue in the first quarter was $309 million, above the midpoint of our guidance and up 1% sequentially. Similar to our semiconductor business, the year-over-year comparison is distorted by the ransomware incident. Consumables and services revenue across our 3 end market categories comprised 42% of our total revenue. Turning to our margins. We reported first quarter gross margin of 47.8%, exceeding the high end of our guidance range. The strong results were a function of better-than-expected volumes, favorable product mix and continued cost control. We also benefited by approximately 60 basis points from certain nonrecurring items. First quarter operating expenses were $240 million in line with expectations. Throughout the current cycle, MKS is focused on prudently managing our cost structure while ensuring we invest to innovate for our customers and capitalize on the attractive opportunities we see ahead of us. Our first quarter operating margin was 20.2% and exceeded the high end of our guidance range, reflecting strong gross margin performance, coupled with the natural operating leverage in the business. It is noteworthy that our acquisition of Atotech has been a meaningful contributor to our strong performance in both gross and operating margins. Further to that point, exiting the first quarter, we exceeded our Atotech cost synergy target of $55 million, and we accomplished this at the earlier end of our expected time frame of 18 to 36 months, continuing our track record of executing well on M&A synergies. First quarter adjusted EBITDA was $217 million, representing a 25% margin and exceeding the high end of our guidance range. Net interest expense for the first quarter was approximately $75 million, slightly favorable compared to our expectations. As a reminder, in the first quarter, we refinanced our term loan and completed a $50 million voluntary debt prepayment. Our refinancing included the paydown of our term loan A with incremental borrowings against our term loan B and the elimination of the financial maintenance covenants that applied while our term loan A was outstanding. We expect second quarter net interest expense will be approximately $79 million. Also in early April, we made another $50 million voluntary debt prepayment. Our tax rate for the first quarter was approximately 23%, slightly favorable as compared to our expectations entering the quarter. We expect our tax rate for the second quarter to be about 23% and our full year tax rate to be approximately 20%. First quarter net earnings were $79 million or $1.18 per diluted share, exceeding the high end of our guidance. We exited the first quarter with more than $1.5 billion of liquidity, including cash and short-term investments of $846 million and an undrawn revolving credit facility of $675 million. Gross debt was $4.9 billion at the end of the quarter. Our net leverage ratio exiting the first quarter was 4.3x based on trailing 12 months adjusted EBITDA of $940 million. Free cash flow was approximately $49 million and unlevered free cash flow was $108 million. As a reminder, our first quarter free cash flow is typically lower due to timing of variable compensation payments. Consistent with prior quarters, we made a dividend payment of $15 million or $0.22 per share. With that, let me turn the call back to John. John? John Lee: Thank you, Michelle. Let me now turn to our second quarter outlook. We expect revenue of $860 million, plus or minus $40 million, reflecting the slow path to market recovery that we have discussed on recent calls. By end market, our outlook is as follows: revenue from our semiconductor market is expected to be $335 million, plus or minus $15 million, reflecting our view that the market continues to bounce along the bottom with a modest recovery expected in the second half of the year. Revenue from our electronics and packaging market is expected to be $220 million, plus or minus $10 million and revenue from our Specialty Industrial market is expected to be $305 million, plus or minus $15 million. Looking ahead to the second half of 2024, we expect revenue to be slightly higher than the first half reflecting a modest improvement in our semiconductor market, combined with typical seasonality in our electronics and packaging market. Our Specialty Industrial market is expected to remain relatively consistent, mirroring global GDP trends. Based on anticipated product mix and revenue levels, we estimate second quarter gross margin of 46.5%, plus or minus 1 percentage point. The step down in gross margin as compared to the first quarter reflects anticipated product mix as well as certain items that we do not expect to recur in the second quarter. We expect second quarter operating expenses of $240 million, plus or minus $5 million. We continue to believe $240 million to $250 million is an appropriate run rate for the balance of 2024. We estimate adjusted EBITDA of $197 million, plus or minus $23 million. Given these assumptions, we expect second quarter net earnings per diluted share of $0.93, plus or minus $0.26. We continue to execute very well in navigating the cyclical softness in our end markets. I'm very pleased with the strong profitability and margin profile of our business. This, along with our differentiated product and technology portfolio tied to key secular trends in our end markets positions us well for the next cyclical upturn. With that, operator, please open the call for Q&A. Operator: [Operator Instructions] Our first question comes from Steve Barger from KeyBanc Capital Markets. Steve Barger: John, I know you expect recovery to unfold slowly in the back half, but we're hearing more commentary about 2025 being a strong year for memory and initial positioning for the 2-nanometer transition next year to start. I know you don't want to get too far ahead, but inflections can happen quickly when they come. So can you talk about customer conversations for memory and leading edge and just how you're thinking about timing and capacity to support that inflection? John Lee: Yes, Steve, great question. Certainly, we're very intimate with our customers and have these discussions all the time. Obviously, we need to prepare our factories to support them. I would say that we still expect a slowly unfolding second half. But to your point, there are good signs with memory pricing and utilization picking up. Logic remains strong, as you pointed out, 2-nanometer and 3-nanometer capacity is getting used up too. So I think that the discussions are all about -- we're on the bottom, bouncing along the bottom. And it's really about timing, Steve. And you are right, things can change very quickly. But as you know, MKS is pretty good at that. We've been at this for 60 years. We have the capacity to support, obviously, much higher run rate that we had already in the past few years. So we're just waiting and ready for that whenever that happens. Steve Barger: Got it. And similar question on substrate. You talked about AI and some other opportunities like low earth orbit. Can you talk through the road map for more layers or tighter tolerances on those substrates and how increasing complexity will benefit you given your position in drilling, plating equipment and chemistry. John Lee: Yes. So, we're really excited about things like AI driving not only the semiconductors, but the electronics and packaging. AI boards are going up to 20 layers now. And of course, the lines and spaces in the VS are also smaller. So that's all good for us. It's more chemistry, it's more difficult chemistry. It's more laser drilling, it's more difficult laser drilling. It's more difficult bonding layers between the various layers in that PCB. And so when you have the ability to toggle, laser equipment, chemistry equipment and chemistry, you just have a better solution set for the customers and solving these really tough challenges. So we believe that MKS is uniquely positioned in the industry to solve these really advanced packaging problems. Steve Barger: And just one quick follow-up. So as you've had the conversations with customers, are they telling you to prepare for a higher capital spending environment for that -- the drilling and plating equipment in chemistry? John Lee: Well, it varies. But I think as we pointed out in the earnings script, we have seen this uptick in equipment orders tied to, we believe, AI. This is for actually the high-density multilayer board. So as we talked about in the earnings calls, there's 3 different types of packages: The advanced stuff that connects the chips and goes on to a high-density board then goes on to this very complex multilayer board. And so this is the first sign where we've seen actually CapEx increases for some part of the food chain associated with AI. Operator: Our next question comes from Jim Ricchiuti from Needham & Company. James Ricchiuti: One of your competitors in the specialty chemistry market recently, I think, last month. talked about improving demand in the electronics market and a couple of the geographic regions. I'm wondering, is that consistent John, with what you're seeing -- in general, how would you characterize also the pricing environment within the Atotech business? And to the extent that might be helping your margins? John Lee: Yes, I think we would agree with that, Jim. I think it's slowly improving. You saw in our commentary that year-over-year, our Q1 is significantly better in our electronics chemistry than it was last year to the tune of 15%. It's been gradual and improving. So that's a good sign. In terms of pricing, we talked about gross margin for the business. we talked about Atotech gross margins really significantly adding to the gross margin profile of MKS. I also want to point out that we saw the gross margin improvement in all 3 divisions, so not just Atotech but Atotech certainly comes with, I would argue, industry-leading gross margins and that's obviously indicative of the value they're bringing to those customers. So pricing has been strong. We're getting paid for the value that we bring. And then we see a slight improvement, and we hope that continues. James Ricchiuti: Got it. On the drilling side, apart from that application that you alluded to, the lower orbit application, are you seeing any lift in the March quarter bookings that more consistent with the seasonality that we've seen occasionally in those parts of the business? Or is that still something that we're still kind of bouncing along the bottom in this part of the business. John Lee: Yes. I think we can see a slight improvement, Jim, but I don't look at it as any kind of trend right now. I think it's still muted, still bouncing along the bottom. But flex laser drilling versus HDI laser drilling, of course, is different. So the flex is certainly still very muted. HDI is slightly better. I would just characterize it as still bouncing along the bottom, Jim. Operator: Our next question comes from Krish Sankar from TD Cowen. Sreekrishnan Sankarnarayanan: I have a few of them. John, I'm just rig to reconcile your statement that second half should be slightly better than first half in terms of revenues. That would imply that calendar '24 revenues for you could be down on a year-over-year basis. or slightly down. Just kind of curious is that true? If so, do you expect both semi and electronic packaging to be down or one down more than the other? John Lee: Well, yes, I think there's a lot of still uncertainty with respect to revenue, but we do expect to be slightly better in the second half versus the first half. And it depends on what your assumptions are for Q3 and Q4, obviously, whether the whole year is up or down. But as was pointed out earlier, these things -- they can change quickly. We're planning on a slight uptick in second half, but we're also planning on being ready in case it accelerates. So I would say that's still TBD in terms of year-over-year comparison for the full year. Sreekrishnan Sankarnarayanan: Got it. Got it. And then can you just give an estimate of what you think our advanced packaging learnings would be this year and what it was last year? John Lee: Yes. I think it's -- we've talked about advanced packaging being 1/3 of our business. And when servers and PCs and phones were kind of more normalized. This year is probably more in that 25% -- 25%, sorry. But that can vary. And of course, that's -- you can read about the public companies who are our customers in advanced packaging. And you can see that obviously, the revenues are down significantly. So that's consistent with that. Sreekrishnan Sankarnarayanan: Got it. Got it. If I could just squeeze one more, John. Just curious how do you think about Atotech benefiting or the impact of Atotech when some of your customers start moving to glass panels or advanced packaging down the road? John Lee: Yes. No, glass is certainly something that the industry has talked about for a long time, obviously, and more people are talking about it now. I would just say this, Atotech is an industry leader in packaging, advanced packaging and the next generation. I would characterize it as we're certainly always in those discussions, always certainly looking at what our customers' needs are, and developing the necessary processes to enable what they need and glass is 1 of the things that we are working on along with the rest of the industry. By the way, Chris, I wanted to just clarify my statement about 25% advanced package, that's 25% of electronics and packaging, not 25% of MKS. Sorry. Operator: Our next question comes from Joe Quatrochi from Wells Fargo. Joseph Quatrochi: I wanted to -- on the NAND side, as you think about just the recovery in the memory industry, and you think about just what's going to be driving demand on the NAND side? It sounds like the recovery in spending is going to be more related to system upgrades or node transitions. So curious of how do you think about the revenue opportunity for MKS when maybe it sounds like the WAP is going to be a little bit more tied to migration versus net new greenfield ad? John Lee: Yes. Thanks, Joe. The -- when the customers are upgrading the chambers for the next node, certain critical subsystems on there have to be upgraded, otherwise, you can't do the next node. And 1 of those is the RF power decks. So as you may or may not know, there's 3 power decks on every chamber for VNAND etcher. And all 3 have to get upgraded if you're moving from one node to the other. And that is obviously the biggest part of our spend. So we don't really notice the difference but when they're doing chamber upgrade versus the entire tool, obviously, when they're doing the entire tools, we may see other parts of MKS products go in there. But the chamber upgrade really benefits us equally, I guess, from the RF-power standpoint. Now having said that, we did talk about inventory burn down and there's still a little bit left in the NAND market. So -- but this is a good sign when some of the customers are talking about node upgrades because that will start burning off that inventory and then at some point, they'll need the new stuff from us as well. Joseph Quatrochi: That's helpful. And as a follow-up to that, do you expect that as we kind of look into the second half of this year that NAND inventory burn down is still to play out to some extent? Or is it just, I guess, maybe starting to play out more this quarter? John Lee: Yes. I think it depends, right? It depends on how many people are changing nodes, upgrading the nodes. But I think our view now is that it's still slowly unfolding. So that's why we're saying that, slowly unfolding. So I think there's still more to go. And so I think in the second half, there's still some of that NAND inventory burn down that has to happen, it's only for us. But as we talked about earlier, it can change fast, right? And that could accelerate, but -- and we're ready for that, whether that happens or not. Joseph Quatrochi: Got it. And just as a follow-up question. On the services gross margin strength that you had in the quarter, was that where the onetime item was? Or just can you help us understand what drove that? Michelle McCarthy: Yes, I can take that question. This is Michelle. So yes, we have favorability in the quarter, as we referenced in the prepared remarks, about 60 basis points. That's nonrecurring. It's really related to favorable material variances as well as favorability in freight and duty cost recoveries. That's really the bulk of it. John Lee: Yes. So not necessarily tied to service, Joe. But you did point out our service gross margins were probably a record, I guess, I would call it that. But all the divisions had improved gross margin as well. But service, we're really happy with the performance of that group with the last quarter. Joseph Quatrochi: Is there anything to point out what drove that? John Lee: There was a good product mix. And certainly, some pricing has rolled through and some cost pressures that have been in the past are no longer there. So kind of a mix of whole bunch of things, Joe. Operator: [Operator Instructions] Our next question comes from Steve Barger from KeyBanc Capital Markets. Steve Barger: Yes. Just a quick follow-up. As you've modeled out free cash flow and how EBITDA progresses, do you think net leverage can get to 4 or below by year-end? Or is that too aggressive? John Lee: Yes, Steve, obviously, we were very aggressive in deleveraging. As you saw Q1, we added -- we voluntarily paid another $50 million, and we talked about -- in April, we added -- we voluntarily paid down yet another $50 million. I think our ability to delever and prepay is really going to be a function of profitability, Steve. So not news to you, I'm sure. So I think it depends on how the year unfolds. And our model still is 50% gross margin flow through, 40% operating margin flow-through. But as you know, we have a lot of leverage in the model. And so when revenue does pick up, you'll see a lot of cash flow and then we'll be able to delever quicker. Operator: I am showing no further questions. I would now like to turn the call over to David for closing remarks. David Ryzhik: Thank you all for joining us today and for your interest in MKS. Operator, you may close the call, please. Operator: Thank you. This does conclude the program. You may now disconnect.

Operator: Good day, and thank you for standing by. Welcome to the MKS Instruments Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Ryzhik, Vice President of Investor Relations. Please go ahead. David Ryzhik : Good morning, everyone. I am David Ryzhik, Vice President of Investor Relations, and I'm joined this morning by John Lee, President and Chief Executive Officer; and Seth Bagshaw, Executive Vice President and Chief Financial Officer. Yesterday, after market close, we released our financial results for the fourth quarter and full year 2023, which are posted to our investor website at investor.mks.com. As a reminder, various remarks about future expectations, plans and prospects for MKS comprise forward-looking statements. Actual results may differ materially as a result of various important factors, including those discussed in yesterday's press release and in our annual report on Form 10-K for the year ended December 31, 2022. These statements represent the 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. During the call, we will be discussing various financial measures. Unless otherwise noted, all references to combined company financial measures reflect the 2022 combined results of MKS and Atotech Ltd, which MKS acquired on August 17, 2022. Also, unless otherwise noted, all income statement-related financial measures will be non-GAAP other than revenue. Please refer to our press release and the presentation materials posted to the Investor Relations section of our website for information regarding our combined company results, non-GAAP financial results and a reconciliation of our GAAP and non-GAAP financial measures. For a detailed breakout of reported and combined company revenues by end market and division, please visit our investor website. Now I'll turn the call over to John. John Lee : Thanks, David. Good morning, everyone, and thank you for joining us today. MKS delivered solid results in 2023 against a challenging market backdrop. For the full year, we delivered revenue of $3.6 billion, adjusted EBITDA of $863 million and net earnings per diluted share of $4.43. Our performance highlighted the resilience of our business. We faced headwinds from a softer demand environment in our Semiconductor and Electronics and Packaging markets, but we generated solid profitability due to a combination of prudent cost controls and the underlying strength of our broad portfolio of proprietary solutions. We appreciate the continued support of our customers, who rely on MKS to solve their toughest challenges, and on our employees who worked relentlessly to deliver on the MKS promise. Our results also reflect our first full year operating with Atotech as a combined, more capable global company. The addition of Atotech's industry-leading chemistry and plating equipment solutions have expanded our broad range of capabilities and provided us with a higher mix of consumables and services revenue. We are on track to achieve our targeted cost synergies from the Atotech acquisition. I'm also encouraged with the progress we made in 2023 in positioning for future revenue opportunities as our Electronics and Packaging teams are actively engaged with key customers on their next-generation designs for advanced package substrates, a critical enabler for new applications such as artificial intelligence. Most industry observers expect a recovery in our end markets to slowly unfold in the second half of this year. We have established ourselves as a critical enabler of advanced electronics, with our foundational solutions for the semiconductor and electronics and packaging markets. By staying focused on our innovation road maps, controlling costs, managing our balance sheet and driving design wins with key customers, we are positioning MKS to generate attractive growth and value creation in the years ahead. Now let me discuss our fourth quarter results in more detail. We delivered revenue of $893 million, adjusted EBITDA of $218 million and net earnings per diluted share of $1.17, all above the high end of our guidance range. Revenue from our Semiconductor market exceeded our expectations, as we saw better-than-expected demand in certain product categories such as plasma and reacted gas and analytical controls solutions. That offset a continued muted demand environment for our vacuum solutions for deposition and etch applications, due to the industry downturn in NAND equipment spending, which remains at historically low levels. Demand for our photonic solutions for lithography, metrology and inspection applications remained robust. In 2023, this business grew on a year-over-year basis and exited the year at more than 20% of our overall semiconductor revenue. Photonics Solutions remain an important area of investment for MKS, and we expect it to be one of the key growth drivers for our semiconductor market in the years to come. As we look to the first quarter of 2024, we expect revenue in our semiconductor market to be down sequentially from our better-than-expected fourth quarter, as overall demand remains muted. While customer inventory levels of some of our product categories have eased, we expect continued drawdown in categories tied to memory spending. Turning to our Electronics and Packaging market. Revenue was slightly better than expected due to the lumpiness of certain laser drilling equipment sales. Overall demand remained stable but muted, consistent with PC, smartphone and server production volumes. That said, the long-term growth drivers for our Electronics and Packaging markets remain as strong as ever. We frequently discussed how the trends of miniaturization and complexity are moving from semiconductors to other critical components of advanced electronic devices, including packaged substrates, which are a key building block of advanced packaging architectures. There are many packaging architecture is enabling today's cutting-edge applications. of which TSMC's chip-on-wafer-on-substrate architecture or CoWos is one. Let me walk you through about MKS, as a foundational enabler to that architecture. For the CoW, which represents a chip-on-wafer, we have a leading portfolio of critical subsystems across deposition, etch, lithography, metrology and inspection applications that are integral to the manufacturing of individual semiconductors as well as bonding these individual semiconductor chips to each other. We also have a small but growing chemistry business for this application. These stacks of chips are then packaged on top of a silicon interposer, which is the W or wafer, which is then integrated on a package substrate. This last step represents the O and the S in CoWos. MKS has leading expertise in laser drilling, chemistry and plating equipment that addresses more than 70% of the critical process steps to manufacture these package substrates. Similar to transistor scaling for semiconductors, the lines, the spaces and the interconnecting views of a package substrate are getting smaller. The size of the substrate is getting larger, the number of layers in each package continue to increase. All of these creates more complexity and miniaturization, and MKS is uniquely positioned with the broadest portfolio to help our package substrate manufacturing customers meet these challenges. As we look to the first quarter of 2024, we expect revenue from our Electronics and Packaging market to be down slightly on a sequential basis, primarily due to typical seasonality associated with the Chinese New Year. Turning to our Specialty Industrial market. Revenue was slightly weaker than expected, primarily due to modest softness in demand for research and defense applications. As we look to the first quarter, we expect demand trends in our Specialty Industrial market to remain stable, with revenue to be relatively in line with fourth quarter levels. As a reminder, we leverage our R&D investments in our Semiconductor and Electronics and Packaging markets to drive incremental revenue opportunities in our Specialty Industrial market, which is a more stable business with good margins and cash flow. Wrapping up, I want to thank the entire MKS team for their passion, dedication and resilience this past year. In addition to weathering a softer end market backdrop, the MKS team worked tirelessly to resume normal production and deliver for our customers, as we recovered from the ransomware event in the first quarter of 2023. The strength of our team and our culture is reflected in the industry accolades we received during the year, including being named to U.S. News and World Report's inaugural Best Companies to Work For in the industrials and business services industry list, as well as being named by Newsweek and Statista as one of America's most responsible companies for 2024. Finally, before I hand the call over to Seth, I want to thank him for his dedication and service to MKS, and to congratulate him on his upcoming retirement. Seth has a long and distinguished career at MKS. He has been instrumental to our growth and transformation. Seth's foresight, financial stewardship and ability to navigate complex financial landscapes have earned him the admiration and respect of all who have had the privilege of working alongside him. Our search for his replacement is well underway. We look forward to updating you when we have named our next Chief Financial Officer. And now I'd like to turn the call over to Seth. Seth Bagshaw : Thank you, John. Before I discuss our results and outlook, I just want to say a heartfelt thank you to the entire MKS team, as well as our shareholders for their support and partnership in the past 18 years. It has been a privilege to serve as Chief Financial Officer of MKS. I am proud to have been a part of the company's substantial growth and transformation over that period. MKS' strong operating model and unique position to capitalize across a number of attractive secular growth opportunities, leaves me very excited about the company's future and look forward to following MKS' continued success. Let me now cover our fourth quarter and full year results and provide some thoughts on our first quarter of 2024. Starting with the fourth quarter, we delivered revenue of $893 million, above the high end of our guidance range, primarily due to better than expected revenue from a Semiconductor and Electronics and Packaging markets. Revenue was down 4% sequentially and down 18% year-over-year. Turning to our end market results. Fourth quarter semiconductor revenue was $362 million, declining 1% sequentially and 28% year-over-year. Fourth quarter electronics and packaging revenue was $226 million, a decrease of 7% sequentially and 15% year-over-year. Excluding the impact of foreign exchange and palladium pass-through, fourth quarter revenue declined 9% on a year-over-year basis. Moving to our specialty industrial market. Revenue in the fourth quarter was $305 million, down $0.05 sequentially and down 3% year-over-year. Excluding the impact of foreign exchange and palladium pass-through, fourth quarter revenue declined 3% year-over-year. In the fourth quarter, consumables and services revenue across our 3 end market categories comprised 41% of our total revenue. Turning to our margins. We reported fourth quarter gross margin of 46%, exceeding the midpoint of our guidance range. The more favorable gross margins were a function of unexpected volumes as well as favorable product mix. Our healthy gross margins reflect the value of technological capabilities in the complex problems we solve for our customers. Fourth quarter operating expenses were $229 million, below the low end of our guidance range, due to strong cost control, even though we had better than expected revenue. Fourth quarter operating margin was 20.3%, well above the high end of our guidance range due to higher revenue, favorable mix and prudent cost control, resulting in robust operating leverage. We continue to work toward our cost synergy targets with Atotech. We exited the fourth quarter, delivering almost $50 million of annualized run rate cost synergies, on track to achieve our cost synergy target of $55 million exiting the second quarter of 2024. Fourth quarter adjusted EBITDA was $218 million, also above our guidance range. Adjusted EBITDA margin was 24%. Net interest expense for the fourth quarter was $76 million, lower than anticipated due to more favorable interest rates relative to our expectations. Our tax rate for the fourth quarter was 16%. Net earnings for the fourth quarter was $78 million or $1.17 per diluted share. Turning to our balance sheet and cash flow. We exited the fourth quarter with more than $1.3 billion in liquidity, including cash and short-term investments of $875 million and an undrawn revolving credit facility of $500 million. We exited the quarter with gross debt of $5 billion. And last month, we successfully completed the refinancing of our $744 million secured Tranche A term loans by raising incremental secured U.S. dollar in euro Tranche B term loans. As a result of the refinancing, we extended maturity of the refinance debt to 2029, consistent with our existing Tranche B term loans. It eliminated the financial maintenance covenant that applied, while our Tranche A term loan was outstanding. Based on current interest rates, we also expect the refinancing result in modest interest savings. In addition, we made a voluntary debt prepayment of $50 million earlier this month, following the $100 million voluntary debt prepayment we made in the fourth quarter. We continue to prioritize deleveraging our balance sheet while managing the cash and investment needs of the business. In this context, it's worth noting that the first quarter typically has lower free cash flow due to timing of variable compensation payments. Our net leverage ratio exiting the fourth quarter was 4.7x based on trailing 12-month adjusted EBITDA of $863 million. For the fourth quarter, free cash flow was $146 million and unlevered free cash flow was $194 million. Consistent with prior quarters, we made a dividend payment of $15 million or $0.22 per share. Moving to full year 2023 results. Revenue was $3.6 billion, down 19% year-over-year on a combined company basis. Semiconductor revenue totaled $1.48 billion, declined 28% year-over-year due to a decline in global semiconductor capital equipment spending. The largest driver of that decrease was a significant decline in NAND spending, where we are a key enabler with certain subsystems such as RF power generators for high aspect ratio etching. Electronic and Packaging revenue was $916 million in 2023, down 19% year-over-year compared to combined company results in 2022. Excluding the impact of foreign exchange and palladium pass-through, Electronics and Packaging revenue declined 13% on a year-over-year basis. Within Electronics and Packaging market, total chemistry sales declined 10% year-over-year on a combined company basis when excluding the impact of foreign exchange and palladium pass-through. Specialty Industrial revenue was $1.23 billion in 2023, down 4% year-over-year on a combined company basis. Excluding the impact of foreign exchange and palladium pass-through, sales declined 2% year-over-year. In 2023, the revenue split between our Semiconductor, Electronics and Packaging, Specialty Industrial markets was 41%, 25% and 34%, respectively. For the full year, gross margin was approximately 46% and operating margin was approximately 20%. Again, that performance is a reflection of the value of our proprietary and differentiated technology as well as disciplined cost management. We are pleased with execution on margins, given the lower level of revenue due to broader industry softness. Turning to cash flow. We generated operating cash flow of $319 million and free cash flow of $232 million. Furthermore, we generate unlevered free cash flow of $473 million or 13% of total revenue. We are pleased with the strength of the underlying cash generation in our business, despite a challenging demand environment in our end markets, as well as the ransomware event in the first quarter of 2023. As our end markets recover, we expect cash generation to improve, which will enable us to accelerate our debt paydown. Now let me turn to our first quarter outlook. We expect first quarter revenue of $140 million, plus or minus $40 million. By end market, our [indiscernible] is as follows. Revenue from our semiconductor market of $330 million, plus or minus $15 million. Revenue from electronics and packaging market of $210 million, plus or minus $10 million; and revenue from our specialty industrial market of $300 million, plus or minus $15 million. Based on anticipated product mix and revenue levels, we estimate first quarter gross margin of 45.5%, plus or minus 1 percentage point. For the first quarter, we expect operating expenses of $240 million, plus or minus $5 million. Sequential increase was due to typical increase in fringe expenses, so we'll continue investments into the business. While operating expenses can fluctuate due to underlying business levels, we believe a $240 million to $250 million quarterly run rate is a reasonable estimate to think about OpEx for the balance of 2024. We'll also continue to manage our cost structure carefully. For the first quarter, we estimate adjusted EBITDA of $182 million, plus or minus $22 million. For the first quarter, net interest expense expected to be $78 million, reflecting current interest rates, our recent refinancing and the $50 million voluntary prepayment we made earlier this month. For the first quarter, we expect our tax rate to be approximately 24%. However, for the full year, we expect our tax rate to be approximately 20%. We are very pleased with execution optimizing our tax rate following the close of the Atotech acquisition in August of 2022. In fact, absent any tax -- changes in tax legislation, we now expect our long-term tax rate to be approximately 19% to 21% compared to a tax rate of 25% to 27% represented in our long-term financial model at our 2022 Analyst Day. Given these assumptions, we expect first quarter net earnings of $0.72 per diluted share, plus or minus $0.25. In closing, we performed well navigating through sickle softness in our end markets by focusing on what we can control. We maintained strong gross operating margins. We prudently manage our cost structure, while remaining aggressive on product innovation. We significantly lowered our tax rate through a series of tax planning initiatives. We optimized our balance sheet by extending certain debt maturities, and simplified our debt structure by eliminating the financial maintenance covenant that applied to our existing debt. We reduced our cost of debt through repricing our USD Term Loan B. We maintained strong liquidity as we manage through a slowdown. And finally, we deployed more than 80% of free cash flow to debt pay down. All these actions have made MKS a stronger company. We're well positioned to capture long-term secular growth opportunities we see across our portfolio and translate that into attractive value creation for our shareholders. With that, operator, you can now open up for Q&A. Operator: [Operator Instructions] Our first question comes from Joe Quatrochi with Wells Fargo. Joe Quatrochi : Maybe first, just to start, as we kind of think about total revenue and your guidance for the first quarter and think about the seasonality for some of the businesses or in markets, how should we think about, I guess, the rest of the year, do you view the March quarter as kind of the low point of revenue for the year? John Lee: Joe, it's John. I'll take that. As you know, we only guide one quarter out. Visibility is limited as usual. But we certainly read the same things you do, and we're certainly in constant contact with our customers. And I think our view is consistent with the industry, meaning the first half is kind of consistent with current levels, kind of with our guidance. And then certainly, the industry feels that the second half can be a little better. And our focus is really to continue to do the R&D for future projects with our customers. And so as you know, MKS has always been very lean and able to react very quickly to any changes in those assumptions. So we are looking at a first half that's kind of consistent with what we just talked about and guided for Q1. Joe Quatrochi : Got it. That's helpful. And then just as a follow-up, I think in the past, you guys have talked about the number of MKS plus Atotech opportunities in your pipeline. And I think a lot of them have still been kind of driven by Atotech. But just kind of curious just as we turn over the new calendar year, if there's any update there on the number of opportunities there? And then maybe any color on just the number that are being driven by MPS? John Lee: Yes, sure, Joe. So we've kind of alluded to double-digit numbers of customer opportunities at different customers, double digit. And that's remains the same. As you know, the development and work with the customers takes time, because we're working on the next-generation package substrates with these customers. As you know, Atotech has leading industry market share in that space and the top 30 customers are their customers. So the majority of it is the synergy of Atotech and those relationships, bringing over the laser groups. But our laser group also has had market share leadership in flex drilling. And there are examples there as well and customers there where the laser group is bringing the Atotech opportunity into that customer. Operator: Our next question comes from Krish Sankar with TD Cowen. Krish Sankar : Seth, thanks for all your help through the years. You'll definitely be missed. John, my first question is, last year, your semi business underperformed WFE. This year, arguably, WFE is expected to be flat, although the second half [indiscernible]. Kind of curious how to think about your business? Because historically, it seems like in the years when WFE improves, you should outperform WFE. But how to think about your business in the year when WFE is actually flat? John Lee: Yes. That's a good question, Krish. Certainly, we look at our performance relative to WFE over the long term because, as you know, during the cycles, it varies when you're going up or going down. Many industry analysts are thinking of 2024 being flat, as you said, for WFE. I think the only characteristic I'd say that's a little different is when it's flat that long, the inventory burn down eventually finishes. And so even if it's flat, because there's just less inventory burn down, that should be beneficial to those of us in that part of the supply chain. And in our prepared remarks, we did call out that there have been many product categories where inventory burn down has completed, and we're kind of seeing a balance between what our customers are shipping versus what we're shipping to them. But it's not done yet. And we called out that memory specific product categories tied to memory. There's still, we believe, some inventory burn down that has to happen. And that is certainly going to be a function of how fast that part of the semi market turns up. Krish Sankar : Got it. And then on the Atotech side, I guess I should say the PCB part of your business. Is this fair to assume that the material side, which is your legacy Atotech business, that is really going to be driven by smartphone volumes? And on the PCB drilling side, one of the questions I get is, even if smartphone units grows this year, they're still below the peak pandemic levels. So there is really no need to buy PCB drilling equipment. So I'm just kind of curious, can you help answer those 2 parts of the PCB question? John Lee: Yes. I think there's no real change. The dynamics are very much determined by utilization versus capacity expansion. So no change there. And to your point, as utilization rates increase, we'll see that in the consumables part immediately and first. And just like in semi, once the utilization rates hit a certain level, our customers would then be making plans for capacity additions. And the CapEx then would follow, not just in laser drilling, but also equipment for chemistry plating. So what we're focused on now is making sure that we're designed in. So that when those volumes of CapEx occur, we're going to see that volume. But the characteristics of the consumable part of our business versus the CapEx part haven't really changed. Operator: Our next question comes from Jim Ricchiuti with Needham & Company. Jim Ricchiuti : I wanted to go back to the comment about the E&P business and what you described as lumpiness in the laser systems business. So in other words, where did you see some strength? Was it in the -- that legacy flex drilling? Or are you -- did you see some momentum in the HDI laser systems business in the GO 2? John Lee: Yes, Jim. Yes, we can give you a little color on that. CapEx for lasers is a little lumpy in the packaging business. And the better-than-expected result in Q4 was really driven by laser drilling for the flex market. Jim Ricchiuti : Okay. And John, how would you characterize what you're seeing for the HDI portion of that business? John Lee: Yes. I think it's still muted, Jim. I think you can see the utilization rates of many of our customers. And as you know, that's driven a lot by smartphones, PCs and servers. And so some of our substrate customers publicly -- public companies have been down 30% year-over-year. So when those utilization rates pick up, then as my answer to Krish's question, we'll see that chemistry go up. And then as that continues, we'll see that CapEx investment happening. But right now, HDI CapEx seems still a little muted. Jim Ricchiuti : Got it. Just a follow-up question. On the Photonics Solutions division, the PSD, we saw some a little bit more of a sequential decline in Q4. I'm trying to understand that a little better. Is that the semi portion of that business may be catching up with some of the weakness you've seen in other areas in semi business? Or is it just possibly a case of weakness in some of the other markets that's overall impacted the Photonics PSD revenue? John Lee: Yes, that's a good question. The PSD division, the semi part of PSD, that has continued to be strong as we -- as we mentioned in the prepared remarks. And that's, as you said, is going to be one of the bigger long-term drivers of our outgrowth in market share in WFE because of the exposure to lithography, metrology and inspection. And so the slight downtick in PSD was really some muted demand in research and defense relative to what our expectations were. Jim Ricchiuti : But that's not suggestive of any, maybe change in the market in that non-semi evolution of the business? Or do you think it's -- is it more of a timing issue, Joe? Have you seen any change in dynamics in the market? John Lee: No. In fact, -- we -- the specialty industrials is made up of many markets, and some can be a little lumpy up and down. But in general, it's been a pretty steady business. And some of the industrials, for instance, like automotive, have actually been very, very steady. So this particular quarter, we're just calling out a little bit of research and defense. That was a little lower than our expectations. But the rest of the specialty industrial markets were very steady, actually. Jim Ricchiuti : Yes. And I just actually segue to the last question about automotive. Are you seeing any impact from all of the headlines we're seeing in automotive as it relates to the Atotech business? John Lee: Yes, we see the same things you see a lot of the chip companies, right? That is playing automotive guiding down. But we really haven't seen that, Jim. It's been a very steady, steady business throughout the year. And kind of our expectation, at least in Q1 as well. Operator: And our next question comes from Steve Barger with KeyBanc Capital Markets. Steve Barger : My first question is related to the cycle. In the past, you've talked about how semi and E&P are likely to recover in a similar time frame, but at different magnitudes. Do you still expect a more or less simultaneous recovery? Or is there any scenario where one segment or the other would lag or not participate as the market recovers? John Lee: Yes. Thanks, Steve. It's a good question. I think in general, they are correlated. Because if you're making more chips, you're going to have to package them. I think -- so our view is that they are continuing -- going to continue to be correlated. The difference for MKS is that our exposure to semi is really about CapEx and our exposure, most of our exposure to E&P is consumables. So as we talked about earlier in the earlier question, we'll see that sooner E&P just because of the consumable nature of the business. And then CapEx there would follow as well. Steve Barger : Right. Got it. And free cash flow has been in the $140 million range in the last couple of quarters. Do you feel like that’s stabilizing to the point where it could be more predictable around these levels as you go through the year and think about working cap and inventory? Seth Bagshaw: Yes, Steve, this is Seth. I’ll take that question, obviously. So I think the – it’s hard to get cash flow in any one quarter. But the inventory levels, as we talked before, has been really sticky because of the supply chain constraints. So we started to see image level sort of peak in the last quarter, that will be helpful going forward as well. But fundamentally, as you brought – outlined here, at certain revenue levels, which we’re hitting right now, the cash flow becomes quite robust. Q1 is a little more working capital requirements because of variable compensation payments. But Q4, we’re very pleased with cash flow, very strong execution on margins and on OpEx. That continued through 2024 as well. So it’s hard to be exactly cash flow each quarter. But I would expect cash flow to be more robust going forward as the revenues pick up. Operator: Thank you. I'm showing no further questions at this time. I would now like to turn it back to David Ryzhik for closing remarks. David Ryzhik : Yes. I'd like to thank everyone for joining the call. And operator, you can close the call. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.

Operator: Good day and thank you for standing by. Welcome to the MKS Instruments' Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today. David Ryzhik. David Ryzhik: Good morning, everyone. I am David Ryzhik, Vice President of Investor Relations. And I'm joined this morning by John Lee, President and Chief Executive Officer; and Seth Bagshaw, Executive Vice President and Chief Financial Officer. Yesterday after market close, we released our financial results for the third quarter of 2023, which are posted to our investor website at investor.mks.com. As a reminder, various remarks about future expectations plans and prospects for MKS comprise forward-looking statements. Actual results may differ materially as a result of various important factors, including those discussed in yesterday's press release and in our Annual Report on Form 10-K for the year-ended December 31, 2022. These statements represent the 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. During the call, we will be discussing various financial measures. Unless otherwise noted, all references to combined company financial measures reflect the combined results of MKS and Atotech Ltd, which MKS acquired on August 17, 2022. Also, unless otherwise noted, all income statement related financial measures will be non-GAAP other than revenue. Please refer to our press release and the presentation materials posted to our investor website for information regarding our combined company results, non-GAAP financial results and a reconciliation of our GAAP and non-GAAP financial measures. For a detailed breakout of reported and combined company revenues by end market and division, please visit our investor website. Now, I'll turn the call over to John. John Lee: Thanks, David. Good morning everyone, and thank you for joining us today. Before I discuss our third quarter results and key business trends, I'd like to touch on the devastating violence that has occurred in the Middle East over the past month. There's simply no words that can describe the events that have unfolded, and our primary concern is the health and safety of our employees and their families in the region. As some of you may know, MKS has three facilities in Israel that manufacture some of our controls, optics and photonics solutions, which all remain operational. The dedication and resilience of our Israeli team is unmatched, and we hope for a return to peace quickly. Turning to our third quarter results, MKS delivered strong profitability despite continued softness in end market demand. We reported revenue of $932 million, adjusted EBITDA of $235 million, and net earnings per diluted share of $1.46. Revenue from our semiconductor market was in line with our expectations as the cyclical downturn in industry memory spending continued. As expected, demand for our critical vacuum subsystems for deposition and etch remained muted. However, demand for our photonic solutions for lithography, metrology and inspection continues to be resilient. Looking to the fourth quarter, we expect revenue from our semiconductor market to decline sequentially due to the continued weakness in industry memory spending, particularly for NaN, which is at a historically low level, and where leading edge tools contain relatively more MKS content. We also expect continued inventory workdowns at key customers as they adjust for current demand. The semi market will have its cycles, but the secular growth drivers over the long term are quite clear. The connected world will need more semiconductors with enhanced capabilities, creating the need for miniaturization and increased complexity. MKS is actively engaged with customers across a broad range of technology inflections. Examples include next-generation power solutions for advanced etch applications, optical subsystems for lithography, metrology and inspection, and precision motion for advanced bonding processes that enable applications such as high bandwidth memory. We pride ourselves on investing during a downturn to position us to be even stronger in the next upturn. That is the exact playbook we have deployed over the past 60 plus years, enabling us to become a foundational supplier to the semiconductor industry with number one or number two segment share across more categories of critical subsystems than anyone else in the industry. Turning to our Electronics & Packaging market, revenue grew sequentially and slightly better than expected due to normal seasonality associated with the consumer electronics market, as well as slightly higher PCB and Packaged Substrate production ahead of the Golden Week holidays in Asia in the beginning of the fourth quarter. I'm pleased to announce that we also shipped a number of HDI laser systems to the low-earth orbit, or LEO satellite communications space. We are the process tool record from multiple customers serving the LEO space due to the unique capabilities of our proprietary HDI via drilling technology, which enables increased productivity for one of the industry's fast emerging applications. This is a validation of our technology leadership and our unique ability to solve the hardest problems, establishing us as a key supplier to the leading PCB manufacturers. In addition, we also deliver our proprietary chemistry and playing [ph] equipment to this market, which highlights opportunities for an integrated approach. Looking to the fourth quarter, we expect revenue from our Electronics & Packaging market to be down sequentially, primarily due to seasonally softer chemistry utilization as well as the lumpy nature of our equipment sales. We are seeing some signs of stabilization in the PC and smartphone markets. Within the server market, there is continued strength in the Package Substrate market for AI applications, but this is more than offset by broader softness in non-AI server applications. Turning to our Specialty Industrial market, revenue was slightly below our expectations. Overall, the business was stable across our markets, but we saw some modest weakness in solar and LED applications. We leveraged our expertise in R&D investments in our Semiconductor and Electronics & Packaging markets to drive opportunities in our Specialty Industrial market. One example is the investment we have made in laser technology for advanced micromachining applications, where we see portability into Specialty Industrial applications such as solar and life and health sciences. Looking to the fourth quarter, we expect revenue from our Specialty Industrial market to be slightly down compared to third quarter levels, while demand across our end markets remains cyclically muted. We are highly engaged with customers and believe we are well positioned for the upturn. I'm proud of how our team continues to execute and deliver timely solutions for our customers while pursuing operational efficiency through tight management of discretionary costs. We have a long history of prudent, cost control and financial stewardship of our business throughout various market conditions, and today is no exception. Many of you on the call are familiar with the multi-decade secular growth story of the semiconductor market. We have been and will continue to be foundational to that market. However, electronic devices of today and the future will need more than just semiconductor transistor scaling. As we move into an era of multi-chip packaging or systems scaling. MKS is uniquely positioned to enable this new era of scaling with the broadest portfolio of critical technologies across equipment, chemistry and services. And now I'd like to turn the call over to Seth. Seth Bagshaw: Thank you, John. Before I cover our third quarter results provide details our outlook for the fourth quarter. I want to echo John's comments regarding our concern for the health and welfare of our employees in Israel. We are amazed at the dedication and fortitude of our Israeli team as they operate in extremely difficult circumstances. This is a point of reference. Revenue from our manufacturing operations in Israel the last 12 months represented approximately 7% of our total revenue. Turning to our third quarter results. We delivered a revenue of $932 million just above the midpoint of our guidance. As expected, we recovered substantially all the remaining revenue impacted by the ransomware incident in the first quarter, which estimated approximately $30 million. After excluding the impact of ransomware incident recovery from the second and third quarters, our revenue grew slightly on a sequential basis. Turning to our semiconductor market. Revenue was $367 million in third quarter. After seeing the impact of ransomware incident recovery from the second and third quarters, our semiconductor revenue was relatively flat on a sequential basis. Revenue for Electronics & Packaging market was $243 million, an increase of 8% sequentially. Excluding the impact of foreign exchange palladium pass-through third quarter revenue declined 9% on a year-over-year basis with Q3 2022 representing combined company results. Moving to our Specialty Industrial market. Revenue in the third quarter was $322 million declining 5% sequentially. However, after excluding the impact of ransomware incident in the second and third quarters, our Specialty Industrial revenue was relatively stable on a sequential basis. Within our Specialty Industrial market, sales of our general metal finishing solutions to the automotive industry were flat on a sequential basis. On a year-over-year basis Specialty Industrial revenue was relatively flat excluding the impact of the ransomware incident, foreign exchange and palladium pass-through with Q3 2022 representing combined company results. In the third quarter, overall consumables and services revenue was also consistent on a year-over-year combined company basis, excluding the impact of foreign exchange and palladium pass-through and comprised 42% of our total revenue. We expect consumables and services revenue to remain a resilient source of revenue and profitability going forward. Turning to our margins. Third quarter gross margin was 47.1%, a sequential increase of 20 basis points exceeding the high end [ph] of our guidance. Efficient factory utilization, disciplined cost management and favorable product mix contribute to this outperformance. Third quarter operating expenses were $236 million sequential decrease of $7 million and below low-end of our guidance reflecting continued disciplined cost management. Third quarter operating margin was 21.8% and adjusted EBITDA margin was 25.2%, both exceeding our expectations reflecting the strength in our operating model. Our integration of Atotech continues to progress very well. Remain on track to achieve our cost synergy target of $55 million within 18 months to 36 months post close. We exited the third quarter achieving annualized synergies of nearly $45 million. Net interest expense for the third quarter was $84 million, relative in line with our expectations. Our tax rate for the third quarter was 14%, favorable to our expectations and reflective of the success of certain tax planning initiatives following the closing of the Atotech acquisition. As a result of these efforts, we now expect full year 2023 tax rate to be 19%. Looking beyond the fourth quarter, we believe the low 20% tax rate is the right way to think about it at this time, we expect to provide a more formal update to our long term tax rate in our fourth quarter earnings call. Net earnings for the third quarter with $98 million or $1.46 per diluted share. Turning to the balance sheet and cash flow. We exited the third quarter with more than $1.3 billion of liquidity, including cash to short term investments of $860 million in an undrawn revolving credit facility of $500 million. The cash position represents the increase with $758 million at the end of the second quarter. Free cash flow in the quarter were $142 million primarily results of strong cost control and sequential improvement in working capital. We exited the third quarter with gross debt of $5 billion. In October, we had a voluntary debt prepayment of $100 million, which is consistent with our strategy of deleveraging our balance sheet. Also in the current quarter, we successfully completed a repricing by $3.6 billion secured tranche B term loan. The repricing reduced the spread on our term loan from SOFR plus 275 basis points to SOFR plus 250 basis points, and also eliminated the credit spread adjustment respect to our term loan, which was 10 basis points at the time of the repricing. This repricing, completed despite challenging market conditions, is consistent with our long term practice of proactively managing our leverage and demonstrates the confidence lenders have in our operating model. At current rates, we estimate the combination of the repricing and prepayment will reduce our annualized interest expense by approximately $19 million. Our net leverage ratio exiting the third quarter was 4.6 times based on a trailing 12 month adjusted EBITDA. Our net leverage, as defined in our credit agreement, includes several other adjustments and was 4.2 times exiting the third quarter. Consistent with the prior quarter, we made a dividend payment of $15 million, $0.22 per share. I'll now turn to our fourth quarter outlook. We expect fourth quarter revenue $840 million plus or minus $40 million by end market outlook is as follows. Revenue from a semiconductor market of $320 million plus or minus $15 million. Revenue from Electronics & Packaging market of $205 million plus or minus $10 million. And revenue from a Specially Industrial market of $315 million plus or minus $15 million. Based on the midpoint of our guidance, we now expect revenue in the second half of 2023 to be slightly lower than the first half, compared to our prior expectation that it would be slightly higher than the first half. This is primarily due to our expectation of short term customer inventory workdowns in our semiconductor market. Based on anticipated product mix and revenue levels, we estimate fourth quarter gross margin of 45.5% plus or minus one percentage point. We expect operating expenses of $235 million plus or minus $5 million, relatively consistent with third quarter levels. For the fourth quarter, we estimate adjusted EBITDA of $185 million plus or minus $20 million. For the fourth quarter net interest expense, expect to be $80 million, reflecting current interest rates, as well as our recent successful tranche B term loan repricing and voluntary debt prepayment. Our tax rate expect to be 16% for the fourth quarter, consistent with the updated full year 2023 tax rate outlook of 19% that I mentioned earlier. Given these assumptions, we expect fourth quarter net earnings at $0.85 per diluted share plus or minus $0.27. In closing, we executed very well in maintaining profitability and generating solid cash flow despite cyclical softness in our end markets. These are things we can't control. We remain confident in long-term secular growth opportunities across our portfolio. When the market does bounce back, we are well positioned to emerge from the current environment even stronger than we were going in. With that, I'll turn it back to the operator for Q&A. Operator: Thank you. [Operator Instructions] The first question comes from Krish Sankar at TD Cowen. Krish, your line is live. Krish Sankar: Yes, hi. Thanks for taking my question. I had two of them. John, on the first one. I understand your semi revenues are worse than WFE, which happens during a cyclical downturn. It also probably looks like a tad [ph] lower than some of your peers. So I’m curious is that purely because your debt as exposure, or is there something else going on the market share front? And then I had a follow up. John Lee: Yes, Krish, thanks for the question. I think it’s a pretty simple. We are an enabler for vertical NAND. I think we’ve talked about that in the past. And as I think we’ve heard and you’ve heard from many of our customers, NAND is one of the WFE segments that’s really particularly down. And so our exposure there, and therefore our enablement there is really, what’s causing us to be slightly worse than maybe some of our peers. As I want to remind everybody, we love being an enabler for VNAND in the industry with our RF power solutions. And of course, I don’t think anybody would say VNAND won’t come back. It’s certainly in a cyclical downturn. But when it comes back, we’ll be enjoying that market leadership again. Krish Sankar: Got it. Thanks. And then I just wanted to follow up on some of the advanced packaging, I mean you highlighted Atotech exposure there, but it looks like Atotech as a percentage of revenue has really kind of been in this low 30% range for the last couple of quarters. Are you not seeing any of the benefits from advanced packaging? Or is it too early for that? John Lee: Yes, I think it’s early days Krish, I think one of the things we talk about is packaged substrates. This is the advanced packaging that we’ve talked about. Lots of interest, lots of acceleration there, especially in high performance computing. And so we’re seeing a lot of that interest. But that’s still a relatively small percentage. But we expect that to grow as a percentage of advanced packaging and packaging overall. Krish Sankar: Got it. Thanks, John. John Lee: Thanks, Krish. Operator: [Operator Instructions] Next question comes from Joe Quatrochi at Wells Fargo. Joe, your line is open. Joe Quatrochi: Yes, thanks for taking the questions. It looks like your chemicals revenue was up nicely sequentially in the quarter. Wondering if, how much of that just normal seasonality or maybe some pass through the palladium costs?. John Lee: Yes, Joe, certainly part of it was seasonality, but it was a little better than we expected, even taking into account seasonality. Now, as we said in our prepared remarks, there was a little bit of pull in, because of the holiday week in the first quarter Q4, but it was just a little better. And so we’re happy to see that. Joe Quatrochi: Got it. And then maybe on the semi side, one of your peers had talked about preparing for a kind of flattish 2024 and talking to their customers, I guess curious how you’re thinking about that. And maybe in the context you did talk about NaN being definitely weaker, how you’re thinking about the set up into next year. John Lee: Yes, obviously we read the same things you guys do and the visibility is poor for the industry right now. I think what we’re preparing for is to continue supporting our customers in R&D so that when it comes back, we will be enjoying an even stronger position and in the meantime we’re watching costs very closely as you can see from our numbers. I think the industry is kind of looking at first half is relatively muted, kind of the same as kind of the second half of 2023, and then I think after that I think there’s varying opinions. So that’s what I would say is that we’re reading the same kind of things you are and it looks pretty flat for the next few quarters to us as well. Joe Quatrochi: Thank you. John Lee: Thanks Joe. Operator: Please stand by for the next question. The next question comes from Steve Barger at Keybanc Capital Markets. Steve, your line is live. Steve Barger: Thanks. John, I think we all understand this has been a really challenging cycle, but the stock is obviously acting like there are bigger risks and problems here. So can you just discuss again why you’re confident MKS is better with ATC in the portfolio and maybe further discuss just how you see this playing out in coming quarters and years? John Lee: Yes. Steve, thanks for the question. So, we’ve talked about advanced packaging and we’ve talked about how critical that’s going to be to enable the next generation of electronics. So as I said in our prepared remarks, it’s no longer that just a semiconductor will enable advanced electronics. I think everybody’s talking about chiplet packaging or systems packaging if we are going to continue as an industry pushing the concept, the economic concept of Moore’s Law. So we love having Atotech as part of our portfolio. There’s no other company that has market leadership in packaging, chemistry and the equipment that’s Atotech as well as market leadership in the broad set of technologies in semiconductor critical subsystems, as we’ve talked about in the past, that enables dep and etch as well as lithography, metrology and inspection. So we firmly believe that the combination of both really sets up MKS uniquely for the future. Steve Barger: And can you just talk about what the feedback has been from customers as you go out and maybe how you see the CapEx cycle next year and what you think that can translate into for MK? John Lee: Well, customers are certainly very receptive to the concept of MKS bringing more solutions to them that include lasers as well as chemistry equipment and then other types of packaging solutions. In terms of CapEx, I think that’s similar to Joe’s question. It’s going to be something that seems a bit muted for packaging though. I think next year if things stabilize, the compares will be good, but your guess is as good as mine as to how much it comes back. But I would also comment that the packaging market for us is less cyclical. There are cycles for sure, but the amplitude is much less than semi CapEx as you’ve seen in our numbers. Steve Barger: Got it. And Seth, can I squeeze in a quick one? Sorry if I missed it. Did you talk about free cash flow in 4Q, and can we expect incremental debt pay down in the remainder of this year? Seth Bagshaw: Yes, we didn’t disclose or give guidance on free cash flow in Q4. You saw Q3 was quite strong. By the way, Steve, is it certainly that’s our goal going forward to drive that free cash flow up. So it’ll depend on working capital needs. But so we didn’t really give that type of guidance in the fourth quarter. In terms of debt pay down, we have done a lot of pulling of levers, as you saw in prepared remarks. We did $100 million in October, and our players do lever aggressively going forward now, and roll out as the year progresses. Did the repricing that took $11 million off the table. So that’s, again a level we pulled with Atotech we’ve driven the tax rate down long term as well. That’s a big value driver. And then the cost synergies is $45 million to $55 million one year in. So things we can control as in prepared remarks. We’ve actually done a lot already in a short period of time. There’s more opportunity going forward as well. And that’ll roll out, there’s no change in our philosophy to delever drive free cash flow, drive the integration activities, which gone very well. Steve Barger: Appreciate the time. Thanks. Seth Bagshaw: Yep. Thanks, Steve. Operator: One moment for our next question. And the next question comes from James Ricchiuti at Needham & Company. Your line is open. James Ricchiuti: Thank you. I wanted to focus on the photonics solutions portion of the semi business, which appears to be holding up better. And, John, maybe you could talk to what your visibility, your line of sight in that area of the business? Are you any more optimistic that that portion of the business is able to hold up in this cyclical downturn? John Lee: Yes, Jim, I think we do believe that there is less cyclicality in the lithography, metrology inspection part of the semi business, and we’ve seen that play out over multiple quarters. We’re in constant contact with those key customers, and you can see what they say publicly about their revenue over the next several quarters as well. So, we believe that’s really just an area of semi that’s just much more consistent than certainly the dep etch part. So that’s our visibility right now, and that’s our belief that it will continue. James Ricchiuti: And on the Specialty Industrial, obviously, it’s a newer area for you. And are you more concerned now about the overall macro environment potentially impacting that portion of the business as we enter 2024? In other words, are you any more concerned about the near term outlook in that area of the business? John Lee: Yes, Jim, I mean, what we’ve seen in the past is that the industrial part has been pretty steady, our revenue in it, but we’re always watching some of the key markets, such as automotive, and that’s why we made the comment about automotive in our prepared remarks. But as I said in the past, two industrials are certainly less cyclical than the semi CapEx world. Also comment that much of our industrial revenue is utilization dependent chemistry. So that adds a little more stability to it. But to your point, Jim, we’re always watching the macro environment to see how that may or may not affect our industrial business. James Ricchiuti: I’ll just lob one more in. I was just wondering, on geo, you seem to be getting some traction. How should we be thinking about the potential for that to be a bigger contributor in the near term? John Lee: Yes, I think what we talked about at this call was this low-earth orbit application, the PCBs that are needed to support that both on the satellites as well as the ground stations. And that had a technology requirement that our tool was uniquely positioned to deliver on that. So that’s just another proof point of the technology that we’ve developed. I think that we continue to make progress in other areas as well. And so we just wanted to point out that we continue to get signs that what we’ve developed and the technology there is really unique. James Ricchiuti: Thank you. John Lee: Thanks, Jim. Operator: One moment for our next question. The next question comes from Sidney Ho at Deutsche Bank. Your line is open. Sidney Ho: Great, thank you. Good morning. I’m not trying to ask for specific guidance for next year. How are you thinking about the revenue trajectory for each segment in 2024? Do you think there will be another step down in the first half in any of the segments, whether it’s cyclically or seasonally? It sounds like you think semis will be flattish for a few quarters, but how about the other segments and what kind of visibility do you have right now? Any color by segment or even by end market will be great. John Lee: Yes. Thanks, Sidney. Yes, I think we talked about semi and we’re kind of bouncing on the bottom, as we said. I would say Specialty Industrial has just held up and been very steady for this whole duration of the semi downturn. So that’s kind of the expectation. Electronics & Packaging did see some cyclicality, as you’ve seen in the quarter. There is some seasonality to it as well, but certainly less cyclical in terms of amplitude than the semi business. And it’s much more utilization dependent. So I think that we watch the macro demands for PCs and servers and all that, and that drives some of that Electronics & Packaging business. So, I think the semi recovery and the Electronics & Packaging recovery may go hand in hand, but the amplitudes of those are much different, very different between the two markets. Sidney Ho: Okay, that’s fair. Now, my second question is you guys have a good track record of deleveraging [indiscernible] acquisition. Given the sluggish demand, what is a realistic gross leverage ratio we should be expecting by the end of calendar 2024, and how should we think about the levers other than waiting for the business to recover? Thank you. Seth Bagshaw: Yes, thanks. And so we kind of asked for guidance looking out in 2024. So probably can’t give you that type of details. But obviously the Q3 kind of gives you a snapshot at certain those revenue levels, what type of cash flow comes off the business. So you got to have that view in mind. As John mentioned, we think semi is kind of at the trough levels or at least low levels for sure, historically speaking, certainly in the NAND environment. So we think that’ll over know be an opportunity for us. But I would say fundamentally it’ll be revenue driven. We will work hard on working capital efficiency. We think we have more opportunity in certain areas that we’re working on pretty hard right now. But I would say it’s really revenue profitability driven and then working capital management. And you saw in the Q3 results we work very hard to deliver really quite strong results given the environment. So, I think those are things I would focus on, the things we’re kind of working pretty hard and that’s been our playbook historically speaking. Sidney Ho: Okay, thank you. Seth Bagshaw: Yep. Thanks, Sidney. Operator: I am showing no further questions at this time. So this concludes the question-and-answer session. I would now like to turn it back to David Ryzhik with closing remarks. David Ryzhik: Thank you for joining us today and for your interest in MKS. Operator, you may close the call, please. Operator: Thank you for your participation in today’s conference. This does conclude the program and you may now disconnect.

Operator: Good day and thank you for standing by. Welcome to the MKS Instruments' Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today. David Ryzhik, Vice President of Investor Relations. Please go ahead. David Ryzhik : Good morning, everyone. I am David Ryzhik, Vice President of Investor Relations. And I'm joined this morning by John Lee, President and Chief Executive Officer and Seth Bagshaw Executive Vice President and Chief Financial Officer. Yesterday after market close, we released our financial results for the second quarter of 2023, which are posted to our investor website at investor.mks.com. As a reminder, various remarks about future expectations plans and prospects for webcast comprise forward-looking statement. Actual results may differ materially as a result of various important factors, including those discussed in yesterday's press release and in our Annual Report on Form 10-K for the year ended December 31 2022. These statements represent the 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. During the call, we will be discussing various financial measures. Unless otherwise noted, all references to combined company financial measures reflect the combined results of MKS and Atotech Ltd, which MKS acquired on August 17, 2022. Also, unless otherwise noted, all income statement related financial measures will be non-GAAP other than revenue. Please refer to our press release and the presentation materials posted to our investor website for information regarding our combined company results, non-GAAP financial results and a reconciliation of our GAAP and non-GAAP financial measures. For a detailed breakout of reported and combined company revenues by end market and division, please visit our investor website. Now I'll turn the call over to John. John Lee: Thanks, David. Good morning, everyone. And thank you for joining us today. MKS delivered strong results in the second quarter, led by excellent execution in our semiconductor market, and crude and cost management, as reflected in our better than expected margins. We delivered second quarter revenue of $1 billion, adjusted EBITDA of $254 million and net earnings per diluted share of $1.32. Revenue from our semiconductor market was above the high end of our expectations despite the widely publicized decline in WFE spending. Our operations team executed well in shipping products from backlog, including those delayed due to the ransomware incident we experienced in the first quarter. Demand for our critical vacuum subsystems for deposition and etch applications declined considerably compared to a year ago, consistent with capital equipment spending trends, particularly for memory applications. However, Photonics solutions demand for lithography, metrology and inspection remain resilient, offsetting some of the weakness. We anticipate continued strength in these Photonics applications. Design and activity remains robust, demonstrating that customers value the unique capabilities MKS offers in these areas. In fact, revenue from lithography, metrology and inspection applications in the first half of 2023 grew considerably compared to the same period a year ago. Our breadth and diversity across WFE applications combined with our leadership position across most of the product categories we serve, reinforces our belief that we can continue to outperform industry WFE spending over the long-term. We are a critical enabler of key inflection points in semiconductors, such as atomic layer deposition, High Aspect Ratio Etch, extreme [indiscernible] lithography and advanced inspection and are well positioned for when industry capital equipment spending recovers. Looking to the third quarter, we expect revenue from our semiconductor market to decline sequentially. However, as excluding the impact of the ransomware incident from the second and third quarters, we expect revenue in the third quarter to be consistent with second quarter revenue levels. Turning to our Electronics and Packaging market. Revenue was softer than we expected amid the well-known weakness in demand for global electronics, such as PCs and smartphones. Demand for our chemistry solutions improved modestly on a sequential basis, but this was offset by continued softness in capital equipment spending, including for our laser drilling and plating equipment. Despite the cyclical weakness, we remain very excited about the long-term opportunity in Electronics and Packaging. One of the areas of particular focus is packaged substrates, which are a critical enabler and key building block for high-performance computing applications such as AI. Just to build on that last point, much like what we've seen in the semiconductor industry over the past 60 years, the manufacturing of package substrates is getting harder, not easier. High-performance computing applications require greater interconnect density as layer counts increase to 20 or more while interconnect feature sizes continue to shrink. This high degree of complexity gives MKS with our unique combination, proprietary chemistry, plating equipment and laser drilling solutions the opportunity to expand our presence in this high-growth segment of our Electronics and Packaging market. As a reminder, this opportunity is one of the key reasons behind our acquisition of Atotech is why MKS is strongly positioned for advanced patching, which will continue to be an area of focus and investment for the company. For context, based on combined company full year 2022 results, advanced packaging represents just under third of Electronics and Packaging revenue. Driven by our foundational portfolio for package substrate applications as well as smaller revenue streams from wafer level packaging, hybrid bonding and other applications, we think advanced packaging solutions will be a more meaningful contributor to our revenue over the long-term. Looking to the third quarter, we expect revenue from our Electronics and Packaging market to be consistent with second quarter levels. We anticipate a slight improvement in chemistry sales due to the seasonality of consumer electronics production as well as an improvement in package substrate demand due to high-performance computing applications such as AI. These improvements are expected to be partially offset by a cyclical downturn in plating equipment sales. Turning to our specialty industrial market. Revenue was in line with our expectations with stable demand for our chemistry solutions for the automotive market, combined with good execution and recovering delayed revenue due to the ransomware incident. Looking to the third quarter, we expect revenue to be consistent with second quarter levels. However, after excluding the impact of the ransomware incident from the second and third quarters, we expect revenue to be slightly higher than second quarter levels. In summary, I'm very pleased with our performance in the second quarter. Despite muted demand across some of our end markets, we executed well. Thinking about our business in the second half of 2023, we continue to expect MKS' total revenue in the second half to be slightly higher than first half levels, driven by modest improvements across all three of our end markets. Longer term, we are very excited about how we are positioned to capitalize on multiple secular drivers, AI, cloud, virtual reality and electrification are just some of the examples of what is made possible by advanced electronics and we are foundational to those trends. And now I'd like to turn the call over to Seth. Seth Bagshaw : Thank you, John. I'll cover our second quarter results, then provide details and outlook for the third quarter. Starting with the second quarter, we delivered revenue of $1 billion above the midpoint of our guidance. Our strong top-line results are driven by better-than-expected revenue from our semiconductor market, more than offsetting soft to Electronics and Packaging revenue. Revenue from our Specialty Industrial market was in-line with expectations. We estimate we recovered $120 million of the approximate $160 million of revenue impacted by the ransomware incident in the first quarter. We expect to recover substantially all of the remaining revenue in the third quarter. Turning to our semiconductor market. Revenue was $440 million in the first quarter growing 42% sequentially and exceeding our outlook due to strong execution on shipping products from backlog, including those that delayed by the ransomware incident in the first quarter. In the second quarter, we estimate we recovered $90 million of the approximately $110 million of revenue impacted by the ransomware incident in the first quarter. After excluding the impact of ransomware incident from the first and second quarter, our semiconductor revenue declined on a sequential basis consistent with softer industry demand for semiconductor capital equipment. Turning to Electronics and Packaging market. Revenue was $225 million, an increase of 1% sequentially and declined 21% year-over-year, with Q2 2022, representing combined company results including Atotech for the full prior year period. Excluding the impact of foreign exchange and platinum pass-through, second quarter revenue declined 15% on a year-over-year basis. As a reminder, the ransomware incident had a minimal impact on revenue from Electronics and Packaging market. Moving to the Specialty Industrial market. Revenue in the first quarter was $338 million, growing 29% sequentially, in line with our outlook due to stable demand trends across our submarkets. We estimate we recovered $30 million of the approximately $45 million of revenue impacted by the ransomware incident in the first quarter. As a result, after excluding the impact of ransomware incident in the first and second quarters, our Specialty Industrial revenue was relatively flat sequentially. Excluding the impact of the ransomware incident, foreign exchange and platinum pass-through, second quarter revenue declined approximately 3% year-over-year on a combined company basis. In the second quarter, consumables and service revenue across our three 3 end markets comprised 38% of our total revenue. Turning to our margins. Second quarter gross margin was 46.9%, a sequential increase of 470 basis points, exceeding the high end of our guidance. Higher volumes, increased factory utilization, disciplined cost management and favorable product mix contributed to the strong performance. Second quarter operating expenses were $243 million, a sequential increase of $3 million, but still below the low-end of our guidance, reflecting disciplined cost management. Second quarter operating margin was 22.6%. Adjusted EBITDA margin was 25.3%, both exceeding our expectations due to strong operating leverage in the model. Our integration of Atotech is progressing well. We remain on track to achieve our cost synergy target of $55 million within 18 to 36 months post close. We exited the second quarter achieving annualized cost synergies of over $30 million. Net interest expense for the second quarter was $79 million, lower than we anticipated due primarily to favorable interest income and slightly lower interest rates relative to our forecast. Our tax rate for the second quarter was 35.5%, above our expectations due to the geographic mix of income and changes in timing of tax credits and tax planning activities. We expect our tax rate to normalize in the third quarter. Net earnings for the second quarter were $88 million or $1.32 per diluted share. Turning to our balance sheet and cash flow. We exited the second quarter with cash and short-term investments of $758 million compared $880 million in the first quarter. Free cash flow in the quarter was a negative $77 million, primarily a result of lingering effects of the ransomware incident on working capital needs and timing of income tax payments. We expect our cash conversion cycle to improve in the third quarter in free cash flow to return to more normalized levels. We maintain an undrawn revolving credit facility of $500 million and exited the quarter with gross debt of $5.1 billion. Our net leverage ratio exiting the second quarter was 4.3 times, and based on a trailing 12-month adjusted EBITDA on a combined company basis. Existing with prior quarter, we made a dividend payment of $15 million or $0.22 per share. Before I discuss our third quarter outlook, I'd like to touch upon the noncash, goodwill and intangibles impairment charges in the quarter, which totaled $1.8 billion associated with our Materials Solutions division, which represents the former Atotech business and our Equipment Solutions business, which represents the former Electro-Scientific Industries business. The current market environment, particularly the softer demand in the PC and smartphone markets is the primary driver of both write-downs with higher market interest rates playing significant role in the Atotech impairment analysis as well. As John indicated in his prepared remarks, we very excited about the opportunity ahead of us in Advanced Packaging. In fact, since we announced our intent to acquire Atotech just over two years ago, it has increasingly recognized how much Advanced Packaging is critical to high-performance computing applications, including AI. Our leading position in deep customer relationships allows us to see inflection points earlier as we help our customers solve the greatest challenges on the horizon. That's why we assembled a broader set of capabilities across chemistry and equipment that serve as an attractive market in the growth we see ahead of us. I'll now turn to our third quarter outlook. We expect third quarter revenue of $930 million, plus or minus $50 million. By end market, our outlook is as follows: Revenue from our semiconductor market of approximately $370 million, plus or minus $20 million. Revenue from Electronics and Packaging market of approximately $225 million, plus or minus $10 million, and revenue from our Specialty Industrial market of approximately $335 million, plus or minus $20 million. This outlook includes approximately $30 million of revenue we expect to recover from the ransomware incident in the first quarter, therefore, we expect to essentially be caught up with the backlog of the customer deliveries by the end of this quarter. Moreover, as John mentioned, we continue to expect revenue in the second half of 2023 to be slightly higher than the first half across all three end markets. Based on anticipated product mix and revenue levels, we estimate third quarter gross margin of 45%, plus minus 1 percentage point. We expect operating expenses of $245 million, plus and minus $5 million consistent with second quarter levels. For the third quarter, we estimate adjusted EBITDA of approximately $210 million, plus or minus $26 million. For the third quarter, net interest expense expected to be approximately $85 million, reflecting projected interest rate increases. Our tax rate expected to be approximately 26% for the third quarter. And given these assumptions, we expect third quarter net earnings of $0.98 per diluted share, plus or minus $0.29. In summary, MKS recovered well on the ransomware incident in the first quarter despite the soft end market backdrop in the first half of 2023, delivering solid non-GAAP profitability. This is a testament to our more resilient and diversified business model following the Atotech acquisition. Our ability to drive strong factory utilization and disciplined cost management and our leading portfolio of foundational solutions essential to the markets we serve. Moving forward, we are focused on maintaining the high level of execution we delivered in Q2, returned to normalized free cash flow generation and working towards further deleveraging our balance sheet. With that, I'll turn it back to the operator for Q&A. Operator: Thank you. [Operator Instructions] Our first question comes from the line of Sidney Ho of Deutsche Bank. Your line is now open. Unidentified Analyst: Good morning. This is Joe Mark [ph] on for Sidney. Guys, My first question is on capacity additions, I guess, in Electronics and Packaging. And what I'm trying to gauge is when would customers return to these capacity additions? I guess and the question is, is it fair to think about this as a call like memory cycle, right, where you would first see utilization come back first then would be upgrades, I guess, benefiting your services? And then as a last step, customers would start adding capacity. Am I thinking about it the right way? And I have a follow-up. John Lee : It's John Lee. I think your question is about the Electronics and Packaging market. And I think those dynamics are very similar to semi utilization rates going up and then capacity additions. So I think that is the right way to think about it. Utilization is something that we see immediately with chemistry revenue. In terms of service, certainly servicing our equipment would be coming next. And then, of course, after that is capacity additions. And as we pointed out, there have been a little bit of weakness in Q2 on the equipment part of our Electronics and Packaging, and that's consistent with the industry trends right now. Unidentified Analyst: Great. Very clear, John. And I guess staying on utilization rates within Electronics and Packaging. Can you guys sort of give us a sense as to where utilization rates are right now? And based on conversations with your customers, where would you see those trend, I guess, in the second half? And maybe just to add to that, where should investors, I guess, look to gauge how utilization rates are trending through the second half. John Lee: Yeah. I think what we're seeing with our customer base certainly is that utilization rates are incrementing upwards. I think that's why our guide for the second half is slightly higher than the first half. And a lot of that is driven by the cyclicality of the consumer electronics part of our Electronics and Packaging chemistry revenue. And so I think that's consistent with what happens every year with the consumer product cycle. And so that's why we're guiding second half to be slightly better than the first half. Unidentified Analyst: Thank you. Operator: Thank you. One moment please for our next question. Our next question comes from the line of James Ricchiuti of Needham & Company. Your line is now open. James Ricchiuti : Hi, good morning. John, you've talked about revenue synergies from Atotech and the legacy E&P business. With the overall market weakness, does that incremental benefit at this point, just get pushed further into '24? Or are you seeing any indications of some momentum in that area? John Lee: Thanks for the question. I think we pointed out even a quarter ago that we're getting some of that blue birds coming in a little earlier than you would expect. And I think what we are seeing is that the interest in our combined solutions remains very high. We talked about our Yokohama TechCenter, where we have a new plating tool, new chemistry and new laser tools. So that interest remains very high. I think the synergy and revenue will certainly come when ramps occur. And hopefully, that happens in 2024. But of course, we're prepared for whatever eventuality that is. Today, we're just focused on getting those design wins and showing our customers the benefit of having that combined solution. James Ricchiuti : And a follow-up question. Seth, you may have addressed this. But with the gross margins coming in a little better than expected, can you elaborate a little bit more about what drove that? Was it mix? Was it just the revenues coming in a bit above target? Seth Bagshaw : Yeah James. I mentioned in prepared remarks, there's a combination of all those factors, mix, very strong execution, the factory utilization, cost containment, to me, it's a testament of kind of how well we execute on a really typical environment. I think that's fundamentally why we drove the margins up the way we did. So really happy execution. Team has done a great job and I think that's really part of our DNA historically speaking. James Ricchiuti : And your guidance this quarter, a less favorable mix? Or is that -- I'm just trying to reconcile it just in terms of the way you're thinking about gross margins at the midpoint. Seth Bagshaw : Yeah. That's the way I would think about it as well. I think the mix is more normalized in Q3 guidance, a little bit light on the revenue side, obviously, is a piece as well. But fundamentally, it's really mix in Q3, a little lower volumes. And again, we continue to execute very well in the quarter. James Ricchiuti : Thank you. Operator: Our next question comes from the line of Krish Sankar of Cowen. Your line is now open. Krish Sankar : Yeah, hi. Thanks for taking my question. First one, John, if I look at your guidance for semi ex ransomware, it looks like it's going to be flat sequentially, which kind of makes sense where the industry is, but also your customers are talking about drawing down their own inventory. So if I put those two together, is it fair to assume your semi revenues could potentially dip sequentially in the December quarter? John Lee: Thanks Krish. That's not what we're seeing right now, Krish. And the reason I'd say that is customers have been drawing down their inventory for a few quarters already. And so that's why we've guided kind of flat to slightly up in our semi revenue. So I understand and I've heard that some customers are drawing down have said they're drawing down the inventory. But what we've seen is that's been happening for multiple quarters already. Krish Sankar : Got it. Got it. That's very helpful. And then a similar one on the Electronics Packaging side, you said advanced packaging is less than one third revenue, but it's growing, which makes a lot of sense. But if you look at the other part of the business there, even on the PCB side, it looks like that business has not inflected. So I'm just curious, like is the advanced packaging strength is kind of what informs you that your 3Q revenues could be similar to 2Q, given the other parts of the market are pretty weak. John Lee: Yeah. I think that's the way to think about it, Krish. Advanced packaging, especially package substrates and package substrates are the latest kind of most advanced 20-plus layer type packaging of chiplets, if you will. And that's the area where we think there's going to be more of an uptick driving the overall E&P segment of our business. The other parts like HDI and MLB, those areas remain kind of muted. So I think it's really about these new technologies that we think will be helping us have a slightly better second half than first half in E&P. Krish Sankar : Got it. Thanks. And then a quick housekeeping for FET. Term Loan A, is this still $900 million left? Or is it lower than that? Seth Bagshaw : I'm sorry. What was the question again, Krish, I missed that. Krish Sankar : On the term loan A, is it still $900 million left in Term Loan A? Or is it less than that? John Lee: Yeah, that's right. That's correct. Krish Sankar : Got it. Thank you very much. Operator: Thank you. One moment please for our next question. Our next question comes from line up Steve Barger of Keybanc Capital Markets. Your line is now open. Steve Barger : Thanks. Just staying on the advanced packaging theme. I think there's been a lot of talk about chip on wafer on substrate capacity being added and I know you sell laser drilling packages to substrate manufacturers now. But I think that requires plating too, right? So can you talk about how ramping co-op [ph] volume would benefit you? Or is some other packaging scheme more of -- better for your mix? John Lee: Yeah, Steve. That's a great question. The short answer is yes, that will benefit us. The chip on wafer part, they were a little less exposed in terms of chemistry. But then the last part, if you will, the chip on substrate part, that is where we play, and that's the substrate part. And so even as people package chips onto wafers, eventually that gets then packaged onto substrates. And that's really where Atotech and our laser drilling tools are exposed. So yes, we hope co-ops continues to ramp and we will be a beneficiary of it. Steve Barger: And I guess, to the second part of the question, any specific packaging schemes beyond co-op which are which are most beneficial to you? Or is that all just kind of variation on a theme? John Lee: It's really variation on a theme, Steve. So however you get the chip packaged, eventually have to put it on a substrate. And so co-ops is one approach. There are multiple other approaches depending on the need. And but they all end up going on to a substrate. Steve Barger: And, as we've gone through this downturn, have you been able to pick up any share with PCB makers? Or can you talk about conversations there? And are there any signs of consolidation at the lower end for those manufacturers? John Lee: Yes, I think that consolidation has always been a theme in that industry. So I don't -- but I don't think there's anything new in terms of trends there. And it's certainly in terms of share pickup, the conversations we've had, with many customers has really been, very, very good in terms of the package of solutions we're bringing to them. And so we hope that ends up, turning into market share wins. And that's what we're working hard on. Steve Barger: Got it? And can I get a quick one in for Seth. I just tried to do the math on the fly. But for the past three quarters, it looks like you've run primary working cap in the mid-30% range of trailing 12 months of revenue. Is seeing that come down to the low 30% range part of the comment about cash flow, normalizing or what metric would you point us to, to watch that? Seth Bagshaw: Yeah, I think is a good question, Steve. So the first half of the year obviously had a lot going on. Ramps were in the first quarter. And we covered a lot of that in the Q2, as we talked about. So the working capital metrics those first half of this year were a little bit atypical for sure. And the reason we use free cash flow, negative, free cash flow in Q2 was really normalized in the working capital metrics. So on the period mark, we said, as we think Q3 be more normalized, work capital is in pretty good shape relative to our guide and midpoint on revenue. And that's why we believe the cash will be more normalized in the third quarter. You can go back in history and look at kind of a free cash flow metric grows revenue. And Ben saw that, probably that low teens rate, 12% or 13%. They'll move around on working capital requirements. But that's kind of how I think about in the third quarter. Again, we don't go that level of detail. That's probably a decent way of looking at for Q3. Again, it'd be much better than second quarter for sure. Steve Barger: I understood. Yeah. Thank you. Seth Bagshaw: Yeah. You're welcome. Operator: Thank you. One moment, please for our next question. Our last question comes from the line of Joseph Quatrochi of Wells Fargo. Your line is now open. Joseph Quatrochi : Yeah, thanks for taking the question. One on the semi side. I think last quarter, we talked about, further clarity on the China export restrictions. And I think that's in part you shipping to your customers that they can then ship to their Chinese customers, and then also you shipping to Chinese equipment OEMs. I was just curious how that factored into kind of the results or the upside in semi side this quarter. John Lee: Joe, thanks for the question. I think the short answer is no change in terms of how we look at the China revenue going forward. I think the last quarter we talked about more clarity, in terms of what's allowed to be shipped by our customers, shipping to their Chinese customers. That hasn't really changed. We also talked a lot about how we are exposed to the Chinese OEMs and the restrictions there. And that has not changed either. And so even though we're guiding semi to be flat to slightly up, it's not because of any change in our view of the dynamics for what we can and can't ship to China. Joseph Quatrochi : Got it. That's helpful. And then a sort of a follow up, you talked about improving free cash flow looking in to next quarter. Should we think about voluntary payments on the debt, is starting to see that again next quarter. Seth Bagshaw: Yeah, I would probably -- we've said many times, we plan on deleveraging pretty aggressively. So there's no change, obviously, in our policy and our goals. We will -- when the cash levels get back to appropriate levels, that generating free cash flow will definitely lead into that debt. But that will be a -- wouldn't guide on that on the third quarter at this point. Joseph Quatrochi : Okay, thank you. John Lee: Yeah, hey, Joe, maybe I'll add a comment to the semi comment ahead. The guide of flat to slightly up is ex ransomware [ph]. So apples to apples in Q3. Just to make sure that's understood and clear. Thanks. Joseph Quatrochi : Yeah. Thank you. Operator: Thank you. I would now like to turn the conference back to David Ryzhik for closing remarks. David Ryzhik : Thank you for joining us today and for your interest in MKS. Operator, you may close the call please. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.

Operator: Good day, and thank you for standing by. Welcome to the MKS Instruments First Quarter 2023 Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today, David Ryzhik, Vice President of Investor Relations. Please go ahead. David Ryzhik: Good morning, everyone. I am David Ryzhik, Vice President of Investor Relations, and I'm joined this morning by John Lee, President and Chief Executive Officer; and Seth Bagshaw, Executive Vice President and Chief Financial Officer. Yesterday, after market close, we released our financial results for the first quarter of 2023, which are posted to our Investor website at investor.mks.com. As a reminder, various remarks about future expectations, plans and prospects for MKS comprise forward-looking statements. Actual results may differ materially as a result of various important factors, including those discussed in yesterday's press release and in our annual report on Form 10-K for the year ended December 31, 2022. These statements represent the 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. During the call, we will be discussing various financial measures. Unless otherwise noted, all references to combined company financial measures reflect the combined results of MKS and Atotech Ltd., which MKS acquired on August 17, 2022. Also, unless otherwise noted, all income statement-related financial measures will be non-GAAP other than revenue. Please refer to our press release and the presentation materials posted to our Investor website for information regarding our combined company results, non-GAAP financial results and a reconciliation of our GAAP and non-GAAP financial measures. For a detailed breakout of reported revenues by end market as well as Atotech and combined company revenues by end market, please visit our Investor website. Now I'll turn the call over to John. John Lee: Thanks, David. Good morning, everyone, and thank you for joining us today. I'm very pleased to report that we have restored our global operations following the ransomware incident we identified in early February. We are on track to meet our commitment to substantially recover revenue by the end of the second quarter. I can't say enough about how proud I am with the entire MKS family. Thanks to their dedication, hard work and ingenuity of our 10,000-plus employees, we are a stronger and more resilient company today than we have ever been. I also want to take a moment to thank our customers and suppliers for their support and cooperation throughout this process so that we continue to deliver as a critical enabler to the industries we serve. With that, I'll review our operating environment, including our first quarter results and the trends we are seeing in the second quarter. We delivered first quarter revenue of $794 million, adjusted EBITDA of $142 million and net earnings per diluted share of $0.48. We estimate the ransomware incident had a negative impact on revenue of approximately $160 million for the quarter. As Seth will detail, revenue for the quarter, excluding the impact of the ransomware incident was a little lower than we anticipated. The difference reflected softer demand that developed in the latter part of the quarter, which was relatively more pronounced in our electronics and packaging market. In our semiconductor market, business levels continued to soften in the first quarter, consistent with the well-publicized decline in industry-wide WFE spending in 2023. We remain very engaged with our customers across a spectrum of opportunities in deposition, etch, lithography, metrology and inspection. And our ability to invest through the cycles has been a key reason we have outperformed WFE and the critical subsystems market over the long term. In fact, as reported by TechInsights, our share of the overall critical subsystems market grew in 2022 on top of the gains we made in 2021. Our performance in 2022 exemplified our technical leadership and the breadth of our surround the Wayfair portfolio, where we gained share in a number of categories, including remote plasma sources, Microwave Power, Liquid ozone, FTIR gas analysis, linear motion subsystems and optical fiber thermometry. Our broad portfolio positions us well for when WFE spending recovers. Now more than ever, we are reminded of how important semiconductors are to our daily lives, and we firmly believe they will become even more important over time. This reliance on semiconductors will require not just more equipment, but also solutions addressing increased miniaturization and complexity in semiconductor design and manufacturing, and MKS is uniquely positioned as the broadest critical subsystem solutions provider in the industry, enabling more process steps in the fab than anyone else in the world today. As we look into the second quarter, we anticipate demand for semiconductor capital equipment to remain muted, consistent with expectations for a decline in WFE spending in 2023. Turning to our electronics and packaging market. Revenue was below our expectations, but consistent with softness in demand for global electronics, such as PCs, servers and smartphones. Customers scale back production, which impacted our chemistry sales as well as delayed delivery of plating equipment for PCB and substrate applications. That said, we expect demand to improve sequentially in the second quarter due to additional working days in the quarter and delivery of equipment pushed from the first quarter. We are pleased with the progress of the integration of Atotech both from a cost perspective and in establishing the value proposition of our combined proprietary chemistry and laser drilling solutions, which positions us at the forefront of what we call optimized the interconnect. This is the next frontier in the integration of semi and PCB design for advanced electronics. On our last earnings call, I noted that we had received our first HDI laser-driven order from a long-time Atotech customer. Since then, we received our second HDI order from another Atotech customer. These wins were a result of the combination of Atotech's long-standing relationships in the HDI market, and the reference wins that our GEO laser drilling tool had already achieved in an emerging market application. It's early in the game, but we are very pleased with customer interest in our combined capabilities as it provides initial validation of the potential for revenue synergy. At our Analyst Day in December, we discussed how package substrates are a critical building block for electronic devices and in particular, high-performance computing architectures. I'm pleased to announce that we recently held an expansion ceremony, at our Yokohama Tech Center in Japan, which included the introduction of two new significant products. The first is an extension of our ESI Geode drilling platform, which is geared towards next-generation package substrate applications such as ABF buildup laminate processing. Our proprietary via drilling technology enables the highest throughput and lowest cost per part for advanced flip chip ball grid array packaging which is critical for high-performance computing applications. The second new product is our Atotech G-Plate vertical desmear and electroless copper plating tool for next-generation package substrates. This new tool will support customers in their yield optimization and next-generation process development for advanced packaging applications with lines of spaces below 5 microns. These product announcements further extend our capabilities as a foundational solutions provider for advanced PCB and substrate applications as we are the industry's only integrated provider of advanced laser drilling, proprietary chemistry and horizontal and vertical plating solutions. As the defining trends of miniaturization and complexity dominate advanced PCB and substrate manufacturing the way they did in the semi industry, we are well positioned to become the industry's go-to technology enabler. Turning to our specialty industrial market. Business levels softened slightly on a sequential basis in the quarter. However, our GMF business held up well. Looking out to the second quarter, we expect demand to remain fairly steady. In summary, while the year got off to an unexpected start, we have rebounded well operationally and are delivering affected shipments to customers. We're also building early momentum with customers for our optimized the interconnect offering. Overall business levels have softened entering the second quarter, but we remain optimistic about the quarters to come. We expect MKS' total revenue in the second half of 2023 to be slightly higher than the first half levels, driven by a modest improvement across each of our three end markets. We will continue to keep a close eye on near-term macro and industry-specific conditions. Longer term, we are as bullish as ever on the secular tailwinds and attractive growth opportunities across our markets, and we intend to seize them. Now I'd like to turn the call over to Seth. Seth Bagshaw: Thank you, John. I will cover our first quarter results and provide details on our outlook for the second quarter of 2023. Starting with the first quarter to the revenue of $794 million. As John mentioned, our global team executed well during a challenging period for the company as we work through store operations following the ransomware incident. We estimate the negative impact to revenue was approximately $160 million for the quarter, and our team worked diligently to restore production relative to our initial expectations of at least $200 million impact when we report our fourth quarter results. While recovery has gone well, we've seen a softening of business levels relative to our prior outlook, mainly in electronics and packaging market. As a result, and excluding the impact of ransomware incident, we estimate first quarter revenue would have been lower than our original expectations. As our outlook indicates, we expect softness in overall business levels will continue in the second quarter. However, we see a slight improvement in the second half of the year. Turning to our end markets for the first quarter. As a reminder, the ransomware incident only impacted our Vacuum Photonics Solutions divisions. And therefore, we mostly felt an impact in our semiconductor and specialty industrial markets and to a lesser extent, to electronics and packaging market. We expect to recover approximately 95% of this revenue, remaining 5% largely tied to a transactional catalog business in our specialty industrial market. With as a backdrop, semiconductor revenue was $309 million in the first quarter, declining 38% sequentially and 37% year-over-year primarily due to negative impact of the ransomware incident as well as lower industry demand for semiconductor capital equipment. We estimate the ransomware incident impacted our semiconductor revenue by approximately $110 million in the first quarter. Excluding the impact of the ransomware incident, we estimate semiconductor revenue was down approximately 17% sequentially and 14% year-over-year. We expect to make up approximately 75% of that delayed revenue in the second quarter and virtually all the remaining balance made up in the third quarter. While the first quarter was challenging, we have deep relationships with our customers and work closely with them to restore shipments as quickly as possible. Turning to electronics and packaging market. Revenue was $222 million, a decrease of 17% sequentially and 24% year-over-year, with Q1 2022, representing combined company results. Excluding the impact of foreign exchange and palladium pass-through. First quarter revenue declined 20% on a year-over-year basis compared to combined company results. We estimate the ransomware incident has only nominally impacted our electronics and packaging revenue. We expect this to be substantially recovered in the second quarter. As John mentioned, our chemistry and platelet equipment sales were negatively impacted by the industry slowdown in global electronics demand. Our chemistry revenue declined 13% year-over-year, excluding the impact of foreign exchange and palladium pass-through, reflecting the widely publicized slowdown in unit production volumes across PC, smartphone and server applications. To add some context, going to Gartner, overall PC shipments declined 30% year-over-year in the first quarter. Smartphone shipments declined 12% year-over-year. Because the more factory working days in the second quarter due to the Chinese New Year holiday in the first quarter, we expect electronics and packaging revenue to improve sequentially in the second quarter. In addition, we expect revenue to grow in the second half compared to first half levels. Moving to our specialty industrial market. Revenue in the first quarter was $263 million declining 17% sequentially and 18% year-over-year, with Q1 2022, representing combined company results. We estimate the ransomware incident impact of specialty industrial revenue by approximately $45 million in the first quarter, which we expect to recover approximately $20 million in the second quarter and mostly the remainder in the second half of the year. Excluding the impact of the ransomware incident and foreign exchange and palladium pass-through, first quarter revenue declined approximately 2% year-over-year on a combined company basis. We do not expect to recover a nominal amount of revenue in this part of our business due to the transactional book and turn nature of orders that we generate through our catalog business. In the first quarter, consumables and service revenue across our three end markets comprised 43% of our total revenue. Turning to our margins. We reported first quarter gross margin of 42.2%. The sequential decline of 370 basis points, primarily due to the underutilization of our factory associated with the ransomware incident. First quarter operating expenses were $240 million, a sequential decline of $2 million due to lower variable compensation associated with the reduced revenue levels in the first quarter as well as prudent cost control. First quarter operating margin was 12.1%. Adjusted EBITDA margin was 17.8%, both negatively impacted by lower revenue volumes as well as factory underutilization associated with the ransomware incident. Our integration of Atotech is progressing well and remain on track to achieve our cost synergy target of $55 million within 18 to 36 months post close. We exited the first quarter achieving annualized synergies of $25 million. Net interest expense in the first quarter was $76 million, slightly lower than we anticipated due to favorable interest income. Our tax rate for the first quarter was a benefit of 47% driven by a geographic mix of earnings in the quarter. Net earnings for the first quarter were $32 million or $0.48 per diluted share. Turning to our balance sheet and cash flow. Despite the usual challenges we faced, we exited the quarter maintaining strong liquidity with cash and short-term investments of $880 million with a revolving credit facility of $500 million. We exited the quarter with gross debt of $5.1 billion. Our net leverage ratio exiting the first quarter, which is calculated on a combined company basis was 4.0x based on trailing 12-month adjusted EBITDA. For the first quarter, operating cash flow was $37 million, and free cash flow was $20 million, but negatively impacted by the ransomware incident. Consistent with prior quarters, we had dividend payments of $15 million or $0.22 per share. I'll now turn to our second quarter outlook. We expect second quarter revenue of $980 million, plus or minus $50 million. While we normally do not provide specific guidance by end market, given the different moving pieces such as recovery of ransomware revenue and underlying business levels, we believe a little more granularity would be helpful. With that, in the second quarter, we expect revenue from the semiconductor market to be approximately $400 million, plus or minus $20 million; revenue from electronics and packaging market to be approximately $240 million, plus or minus $10 million; specialty industrial market to be approximately $340 million, plus or minus $20 million. Excluding the impact of ransomware incident for the first and second quarters, we estimate second quarter revenue of approximately $870 million, which represents a sequential decline from the first quarter. We expect this to be primarily a result of softer revenue from a semiconductor market, reflecting declines in wafer fab equipment spending, partially offset by most improvements in revenue of electronics and packaging and specialty industrial markets. Based on anticipated product mix and revenue levels, we estimate second quarter gross margin of 45%, plus or minus 1 percentage point. We expect operating expenses of $255 million, plus or minus $6 million. The sequential increase from the first quarter level is due to higher revenue volumes, timing of annual merit increases, variable compensation and normalization of product spending following a ransomware incident. For the second quarter, we estimate adjusted EBITDA of approximately $223 million, plus or minus $27 million. For the second quarter, net interest expense is expected to be approximately $82 million, reflecting slightly higher interest rates compared to the first quarter, and our tax rate is expected to be approximately 27% for the second quarter. Given the tax benefit we recorded in the first quarter, along with our guidance for the second quarter, we expect our tax rate to be higher in the second half to arrive at an estimated full year rate of 27% and is within our long-term model range. Given these assumptions, we expect second quarter net earnings of $1.13 per diluted share, plus or minus $0.29. In summary, despite unusual challenges, we executed well on driving profitability in the first quarter. Moving forward, we are focused on resuming strong free cash flow generation, realizing acquisition synergies and executing our disciplined strategy of deleveraging our balance sheet. With that, I'll turn it back to the operator for Q&A. Operator: [Operator Instructions]. Our first question comes from the line of Steve Barger of KeyBanc Capital Markets. Steve Barger: Great to hear about that second system order from an ATC customer. Are you surprised by the timing of that given how tough the cycle has been? And can you talk about customer engagement around the combined advanced packaging applications versus what you expected given current conditions? John Lee: Steve, it's John. Thanks for the question. As I said last quarter, it's a bit of a bluebird a little sooner than we'd expect for these, but I think it does validate the thesis for the acquisition, the synergy and combined capabilities of Atotech chemistry solutions and chemistry equipment as well as laser drilling. You're right. The industry is a little more muted at this point, but at these times, design wins continue and design work continues and that kind of interaction we have with our customers continues to be very strong. As we mentioned in the prepared remarks, we had a ceremony at the Yokohama Tech Center and many customers are invited, and we had great participation. We got to give them a tour of two brand new capital equipment, a laser tool and Vitrocoat tool, a vertical Vitrocoat tool. So that engagement remains very strong, and we're really happy to see that. Steve Barger: And for the electronics chemistries and plating business, can you remind us, is it basically a one-to-one relationship between volume and fab utilization rates, meaning as the cycle turns, do you see an immediate increase in volume? John Lee: I think that's how we look at it, especially the chemistry part, obviously, that is very much utilization dependent in. So I think that's the latter half of Q1, we started seeing some of that slowing down. And that's what caused the slight down in Q1. And as we talk to customers, as we talk to and read about the industry and plans by our customers, that's why we think that number one, Q2 will be a little better, more working days, mostly. That is the assumption. And then the second half, we think, will be slightly better because we see the markets improving slightly in terms of utilization rates. Operator: Our next question comes from the line of Krish Sankar with TD Cowen. Krish Sankar: I have two of them. The first one, John, if I look at your commentary on slicing revenues slightly above, it does imply that September quarter revenue will be sequentially down from June of $980 million, but I understand June half like the -- some of the ransomware. So if I strip that out, it seems where September could be up from June ex ransomware? Is that the way to think about it? John Lee: Krish, I think that is the way to think about it. So I think your question is ex-ransomware is Q2 kind of a trough and trough quarter. And I think that's the way to think about it. And so the second half is going up slightly in all three markets. And so that's how we are seeing the market at this point. Seth Bagshaw: Just to add to that, too, Krish, the second half to be obviously revenue that we didn't ship in the first quarter that roll into the second half of the year. And we say slightly higher, that's above kind of those roll over revenue numbers. So it's actually increasing the markets. Krish Sankar: Got it. Got it. And then just out of curious this is my follow-up, argument that Q2 is the trough in semi revenues. I understand some of your customers have also spoken about kind of running at these Q2 revenue levels into Q3 and Q4. But historically, like as the use of the inventory, and it seems like coming out of a downturn or getting into the first part of the down cycle, you should lag your customers because of the use of the inventory, but that doesn't seem to be happening based on what and some of the other subsystem folks have mentioned, I'm kind of curious why do you think that's going on where your bottom is kind of in tandem with your customers versus lagging them? John Lee: Well, I think we tend to precede our customers, obviously, our semi equipment customers. And I think that's what we're seeing right now. I think the backlog was strong coming into Q1. And so there was a lot of that maybe add a little more confusion to the normal cycles. But I think what we see right now is a lot of inventory burn off in the market. And we can see from the plans of our customers that it should be slightly up. Operator: Our next question comes from the line of Joe Quatrochi of Wells Fargo. Joseph Quatrochi: A question on the materials solutions business, the improvement that you're expecting in the second half of the year. How much should we think about that being maybe more seasonally driven versus kind of a bottoming in 2Q of kind of in demand? John Lee: Joe, it's John. I think maybe I'll address Q2 first. As I said earlier, Q2 is really about more working days relative to Q1, as Seth said in his prepared remarks. I think to your question in the second half, there can be and it's usually some seasonality especially with the consumer products part of the portfolio. But remember that the chemistry business for Atotech addresses not just the consumer products, but also servers and industrials and all that. So it's a little broader. And when you look at all the markets and all the data we're getting from all the customers, that's how we kind of come up with a slightly better second half versus first half. So it's not just the consumers only -- consumer markets only. Joseph Quatrochi: Got it. That's helpful. And then just as a follow-up, for Seth, how do we think about the cadence of voluntary debt paydown now that we kind of have the Ransomware attack behind us. Should we expect that to start to pick back up this quarter? Seth Bagshaw: Yes. There's been no change in our approach. You delever the balance sheet pretty aggressively. And we'll lead to the term loan A, by the way. We've done that $100 million voluntary payment back in the fourth quarter. And so that's kind of we're lean in going forward. We haven't kind of given a bright line of that curve. That's certainly our policy and our desire and our goals. So it's kind of leading to that, for sure. I think Q2, because of the lower revenue we booked in the first quarter will catch up in Q2. That might be a little more working capital required on the receivable side in Q2. So that kind of give you full transparency there. But again, we think the back half of the year will be a little bit stronger, slightly up a little bit, get back to that free cash flow generation. So once that cash is generated, that's what we're going to put back to work to take off the term loan A off the balance sheet. Operator: Our next question comes from the line of Sidney Ho of Deutsche Bank. Sidney Ho: Great. I guess, if you strip out the impact of the ransomware, how do you think your semis revenue for the full year versus what you thought 2 months ago? I know there's a lot of moving parts with more production cuts in memory and foundry. But your customers also talk about able to ship more to China and maybe lagging edge foundry and logic is a little bit stronger than they thought. Just wanted to get your thoughts on that. John Lee: Yes, Sidney, it's John. So you're asking me to predict semi again. But I would say this, Sidney, I would say we came into the year certainly expecting the well-publicized downturn in memory CapEx. And I think that's not a surprise. I think we've been monitoring foundry, and that's kind of been operating, I guess, as we kind of expected, still beginning -- as we expected in the beginning of the year. But to point, lagging edge does seem to be a little stronger probably than even we expected, and the industry probably expected. And then as you've seen, obviously, China is -- what we can ship to China, what our customers can ship to China, there's a little more clarity to that. And I think we have said that the impact of the October 7th restrictions on our revenue in China was a range of $250 million to $350 million at kind of 2022 run rates. And I would say our view now is that's probably towards the lower end of that is our view today. Sidney Ho: Okay. That's great. That's helpful. Maybe a second question on the gross margin. I think you guys guided the second quarter to be 45%. Should we expect that to be at the normal -- fully normalized number and to start going up as revenue goes up in the second half of the year? Or there is some lingering impact from the underutilization coming from this the ransomware events? Seth Bagshaw: Yes, this is Seth. Yes. So the volume is the biggest driver for sure. So if you model revenue up, that would be the uptick on the overall margins as well because the variable margin is higher than 45%. And then we talked before, in the longer term, we have inflationary pressures every else is faced. Do we take the action to kind of mitigate that going forward as well. So our goal always kind of drive gross margin improvement to those actions and product development, high-value offerings for our customers and so forth. So that will be obviously continued our view on margins going forward. But for kind of short-term modeling, I think the way you want to look at it is the volume is the biggest driver. Operator: Our next question comes from the line of Jim Ricchiuti of Needham & Company. James Ricchiuti: So specialty industrial ex the ransomware was down about 2% sequentially. Is that what you said? John Lee: Yes, Jim, I think what we said is we had about a $45 million impact from ransomware in Q1. And I believe that number is right that you mentioned, but we'll triple check that for you. James Ricchiuti: Yes. And I guess, John, where I'm going with this is we don't have a lot of experience with the GMF portion of the business. And obviously, we're seeing signs of slowing in different markets, different industrial markets. And I'm wondering how you guys are thinking about that part of the business as we look out to the second half of the year? Not looking for guidance, but just maybe in terms of has there -- have there been some changes at all in the demand trends? You alluded to the fact that it's holding up relatively well. John Lee: Yes. That's right. And Jim, just to answer your first question, that 2% is year-over-year for the specialty industrial. So okay -- but as I said in the prepared remarks, as we look at all the specialty industrial markets, we do expect that market also to be slightly better in the second half than our first half. And so what has stayed pretty much pretty stable in the first half ex ransomware. We do see that it will also it looks like will improve slightly in the second half. And that's made up of many different markets, as you can imagine. And that's what we're seeing today. And so I think it's a great stabilizing part of our revenue stream for the company now. James Ricchiuti: Got it. Seth, you mentioned synergies in Q1, was that in line with your expectations going back to the December quarter? Or did things change just given what happened with the ransomware and just the changing macro environment, I'm curious if that's been consistent? And how do we think about synergies on a go-forward basis? Seth Bagshaw: Yes. The $25 million we realized annualized for the first quarter is probably better than we expected, I would say, 6 months ago. The team has done a really good job getting engaged and obviously finding opportunities. And obviously, the MSD [indiscernible] was not impacted by ransomware. So they had been as usual for the quarter. So I would say the takeaway is, we feel very good about the $55 million in 18 to 36 months obviously trying to pull that low as best as we possibly can. The $25 million, I think, is a little bit above our expectations. And again, the teams have been really engaged in working on the right opportunities, and we think there's more opportunity going forward as well. Operator: Our next question comes from the line of Steve Barger of KeyBanc Capital Markets. Steve Barger: Seth, you mentioned getting back to better free cash flow generation in the back half. Can you estimate what free cash flow could look like this year? And more broadly, where do you expect free cash flow margin will run as your operations in the cycle normalize? Seth Bagshaw: Yes. So thanks for the question, Steve. So obviously, not giving guidance for the full year, but I think it went back to typical volume that we had pre ransomware, look at the cash flow off that those quarters will get a good indication of what we expect going forward. There's really nothing unique looking forward in Q3 and Q4 based on work capital requirements or profitability and our expectations for sure, that has any different impact on free cash flow. You saw kind of pre ransomware. So I think if you look at those back quarters, you get a pretty good sense of the free cash flow generation. There's always things we can do better, obviously, we're always going to challenge ourselves to drive more efficiency in working capital and certain profitability. So consider those things always front and center how we're going to run the business. But -- that's kind of how I look at look at historical kind of pre-ransomware metrics. We kind of give you a good sense of the free cash flow generation we can pull off. Steve Barger: Got it. And this has been a tough cycle even before the ransomware attack. Does anything you've seen from the cycle, from the integration, change how you think about the level of the 2027 revenue and EPS targets, whatever the timing may be? Seth Bagshaw: No, not at all. I mean, obviously, there's always cycles in any business, certainly in the semi space, we're well tuned to that. But everything we talked about at the Analyst Day, and we're seeing today is exactly intact. We are well positioned across the markets we play in. We gained share this past year in '22 in a very challenging environment on top of a very substantial share gain in '21. So we're kind of doubling down on that. The engage with customers is really strong, and the interactions are very good. The R&D teams are fully engaged. So there's really no change in the fundamental piece of the business and how we grow long-term shareholder value. As John mentioned in the prepared remarks, the team has done a fantastic job navigating a very, very difficult supply chain environment in a ransomware incident, and we did better than we expected coming into this quarter. So no, no change in our view. Looking out 5 years, you'll have these fluctuations for sure, but we can manage these pretty well, we think. Operator: I'd now like to turn the call back to David for closing remarks. David Ryzhik: Thank you for joining us today and for your interest in MKS. Operator, you may close the call, please. Operator: Thank you, and thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.

Operator: Good day, and thank you for standing by. Welcome to the MKS Instruments Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. And I would now like to hand the conference over to your speaker today, Mr. David Ryzhik. Mr. Ryzhik, please go ahead. David Ryzhik : Good morning, everyone. I am David Ryzhik, Vice President of Investor Relations, and I'm joined this morning by John Lee, President and Chief Executive Officer; and Seth Bagshaw, Executive Vice President and Chief Financial Officer. Yesterday, after market close, we released our financial results for the fourth quarter and full year 2022, which are posted to our investor website at investor.mks.com. As a reminder, various remarks about future expectations, plans and prospects for MKS comprise forward-looking statements. Actual results may differ materially as a result of various important factors, including those discussed in yesterday's press release and in our quarterly report on Form 10-Q for the quarter ended September 30, 2022. These statements represent the company's expectations only as of today and should not be relied upon as representing the company's estimates or views as of any date subsequent to today, and the company disclaims any obligation to update these statements. During the call, we will be discussing various financial measures. Unless otherwise noted, all references to combined company financial measures reflect the combined results of MKS and Atotech Limited, which MKS acquired on August 17, 2022. Also, unless otherwise noted, all income statement-related financial measures will be non-GAAP other than revenue. Please refer to our press release and the presentation materials posted to the Investor Relations section of our website for information regarding our combined company results, non-GAAP financial results and a reconciliation of our GAAP and non-GAAP financial measures. As a reminder, in the fourth quarter, MKS updated its end market classifications, including replacing advanced electronics with electronics and packaging, reclassifying products and services supporting light emitting diodes, laser diode and solar markets from electronics and packaging to specialty industrial and reclassifying Material Solutions division products and services supporting wafer-level packaging from semiconductor to electronics and packaging. For a detailed breakout of reported revenues by end market as well as Atotech and combined company revenues by end market, please visit the Investor Relations section of our website. Now I'll turn the call over to John. John Lee : Thanks, David. Good morning, everyone, and thanks for joining us today. We ended 2022 on a strong note with revenue and EPS exceeding the high end of our guidance range. Of course, the first quarter did not begin the way we expected. On February 3, we identified the MKS have been a victim of a ransomware incident. We took immediate action to contain the incident, which has materially impacted our business systems as well as the operations of our Photonics Solutions division and Vacuum Solutions division, including our ability to process orders, ship products and provide service to customers. The operations of our Materials Solutions division were not impacted. Today, we are well into the recovery phase. And we've begun starting up the effective manufacturing and service operations, and we expect these operations will be restored over the coming weeks. We plan to provide a more complete picture of the costs and related impacts of the incident. On our first quarter earnings call, well we do expect there will be a material impact on our first quarter performance. Our main focus today, of course, is on ramping up our production and service operations to meet the needs of our customers. I do want to take a moment to reflect on how enormously grateful I am for the efforts of the entire MKS team through leadership from all key functional departments in responding to and managing the situation. You always hear that the best proven metal in the toughest moments, but you often don't get to see that. I'm extremely proud of the unprecedented responsiveness, stamina, innovation and resiliency demonstrated by our teams. I also want to thank our customers, suppliers and other business partners for their understanding, patience and support through this difficult period. We're working hard to be fully back up soon, and I look forward to delivering on our commitments to all of you. Now on to the business. I start by reflecting on the major milestone of 2022, which, of course, is the addition of Atotech to the MKS portfolio. Atotech's critical process chemistry and equipment solutions across our electronics and packaging and specialty industrial markets further strengthened our position as a foundational technology solutions provider. We've hit the ground running with Atotech. Our integration efforts have been progressing extremely well, and our initial engagements with major PCB manufacturing customers have been very positive. We look forward to demonstrating the value of our company's broader and unique capabilities to all of our stakeholders. 2022 also marked another record year for our semiconductor business, highlighted by strong demand across our vacuum and photonics portfolios. Our customers count on our broad domain and process expertise to solve their most complex challenges. We are uniquely positioned in the semiconductor capital equipment industry as MKS solutions are used in over 85% of the steps needed to manufacture a semiconductor chip. Operationally, during 2022, our global team navigated well through continued supply chain constraints and significant inflationary pressures. I'm proud of how we executed to meet those challenges while remaining focused on innovating across our portfolio to solve the industry's critical technology challenges. While we believe macroeconomic challenges along with expected pressures and WFE investment will persist this year. Our 2022 achievements, combined with our leadership across a broad array of end markets should significantly enhance our long-term potential to deliver sustainable and profitable growth within an estimated $25 billion addressable market. Now let me discuss our results in more detail. We delivered fourth quarter revenue of $1.09 billion, adjusted EBITDA of $282 million and net earnings per diluted share of $2. Sales to our semicon market exceeded our expectations as we executed well in responding to supply chain constraints and delivered on shipments better than anticipated. Our Photonics Solutions revenue set another record reflecting continued customer traction and market penetration in advanced lithography, metrology and inspection applications. We were pleased to see our Optical Solutions business continue to gain traction across the EUV ecosystem for both lithography and inspection applications with OXY metrology and inspection applications continue to grow as a percentage of our overall semiconductor revenue and for 2022, our revenue from these applications grew almost 30%, outpacing estimated industry growth rates. We expect this will remain an area of growth and investment for MKS. Now moving to our electronics and packaging market. Revenue was in line with our expectations of a sequential decline when compared to combined company results for the third quarter. As anticipated, softening in global electronics demand impacted sales of our chemistry solutions for advanced PCBs and package substrate applications. Sales of our flexible PCB laser drilling equipment remained muted in this quarter as expected, as customers continue to digest the strong growth in flex capacity added in 2020 and 2021. However, we saw encouraging signs of customer activity in our HDI PCB via drilling business. In the fourth quarter, we received a meaningful order for our GEO HDI tool. And we are starting off the year well with a multiunit order in the first quarter from a long-time Atotech customer. This is the first example, highlighting the potential cross-selling synergies as we further integrate our businesses. For the full year, sales to our electronics and packaging market from the Atotech business grew by 3% when excluding the impact of foreign exchange and palladium pass-through. Overall, we're very pleased with Atotech's performance in a difficult near-term electronic device market. Turning to our specialty industrial market. Revenue was also consistent with our expectations and flat sequentially. The compared to combined company results for the third quarter. Our general metal finishing business continued to be impacted by lower automobile production volumes due to lingering supply chain constraints. In addition, some of our GMF customers were negatively impacted by disruptions associated with COVID-19 in China in the fourth quarter. That said, when excluding the impact of foreign exchange and palladium pass-through, Atotech's GMS business grew 2% year-over-year in the fourth quarter and 4% for the full year. Looking ahead to the first quarter of 2023 because of the impact of the ransomware incident, we're not able to provide our usual guidance at this time, but Seth will provide some color shortly. In summary, our fourth quarter results highlight our solid execution in a challenging environment. 2023 kicked off with its own challenges as the ransomware incident has demonstrated. It also presents opportunity. As we execute on our recovery efforts, we will remain focused on our growth strategy across our end markets, which includes attractive revenue synergy opportunities. These markets feature powerful secular growth drivers. And as near-term industry headwinds abate, we look forward to capturing the valuable opportunities of live heads. Now I'd like to turn the call over to Seth. Seth Bagshaw: Thank you, John. I'll cover our fourth quarter and full year results and provide some thoughts for our first quarter of 2023, including eliminate impact of the ransomware incident. Starting with the fourth quarter, we did revenue of $1.09 billion, above the high end of our guidance range. Revenue was down $0.05 sequentially and down 6% year-over-year each compared to combined company results for the previous period. Excluding the impact of foreign exchange fluctuations in palladium pass-through, fourth quarter revenue grew 1% on a year-over-year basis compared to combined company results. Turning to our end market results. Fourth quarter semiconductor revenue was $503 million, declining 6% sequentially and growing 2% year-over-year each compared to combined comps result for the previous period, which was better than our expectations. Despite headwinds from continued supply chain constraints as well as newly enacted U.S. export restrictions in the fourth quarter, our team executed very well in delivering to our customers. Fourth quarter revenue from electronics and packaging market was $266 million, a decrease of 8% sequentially and 19% year-over-year each compared to combined company results for the previous period. Excluding the impact of foreign exchange, inflation pass-through, fourth quarter revenue declined 11% on a year-over-year basis compared to combined company results. On a sequential basis, this decrease in revenue is primarily a function of lower chemistry revenue resulting from the softer global electronics demand. Electronics and packaging revenue, we have 25% of overall revenue in the fourth quarter. As we mentioned in our recent Analyst Day, we have a unique opportunity to combine our capabilities to optimize the interconnect as package substrates advance PCBs require greater integration due to trends in miniaturization and complexity. We are very pleased with the initial reaction in the marketplace our combined laser drilling and chemistry capabilities. That reaffirms our belief that we can deliver meaningful revenue synergies from the combination of our 2 companies as customers begin to focus on next-generation device design cycles. Moving to our specialty industrial market. Revenue in the fourth quarter was $316 million flat sequentially and declining 4% year-over-year, each compared to combined company results in the previous period. Excluding the impact of foreign exchange in palladium pass-through, fourth quarter revenue grew 3% year-over-year on a combined company basis. In the quarter, the specialty industrial market made up 29% of total revenue. As a reminder, our specialty industrial market utilizes our proprietary technologies in vacuum, photonics, in materials to serve a broad array of applications. This share of expertise allows us to tap into some attractive secular growth opportunities, diversifies our revenue in case of healthy margins and cash flow. In the fourth quarter, consumables and service revenue across the 3 end market categories comprised 37% of our total revenue, up 3% year-over-year on a combined company basis, excluding the impact of foreign exchange in palladium pass-through. Looking forward, we expect this revenue stream to provide greater resilience in our financial model as we enter a period of cyclical and macroeconomic softness. Our services revenue, in particular, showed strong momentum led by our semiconductor market. These results are a bipart of the actions we took several years ago, strategically reorganizing services to drive a more market-centric growth and profitability strategy. Turning to our margins. We reported fourth quarter gross margin of 45.9%, exceeding the high end of our guidance range. We did well in addressing continued supply chain constraints, a inflationary pressures and also benefited from a more favorable product mix. Fourth quarter operating expenses were $242 million, up slightly from the midpoint of our guidance due to higher revenue volume. Fourth quarter operating margin was 23.6%, significantly above the high end of our guidance range due to strong operating leverage in our financial model along with favorable product mix. Our integration of Atotech is progressing well, and we are on track to achieve our cost synergy target of $55 million within 18 to 36 months post close. Fourth quarter adjusted EBITDA was $282 million, also above our guidance range. Just EBITDA margin was 26%. Net interest expense for the fourth quarter was $75 million. This is slightly lower than we anticipated with favorable timing of Fed rate increases relative to interest reset dates of our term loans as well as higher interest income. Our tax rate for the fourth quarter was 20% better than expected due primarily to refinement of acquisition-related valuations estimates in a favorable geographical mix of income. Net earnings for the fourth quarter were $133 million or $2 per diluted share. Turning to our balance sheet and cash flow. Consistent with our track record of deleveraging, we made a voluntary principal payment of $100 million in the fourth quarter. Exiting the quarter maintained strong liquidity with cash and short-term investments of $910 million and revolving credit facility of $500 million. We exited the quarter with gross debt of $5.1 billion, which included the voluntary debt prepayment, partially offset by a revaluation of euro-denominated debt due to a strong euro in the quarter. Our net leverage ratio exiting the fourth quarter has been calculated on a combined company basis was 3.4x based on trailing 12-month adjusted EBITDA. For the fourth quarter, operating cash flow was $184 million, and free cash flow was $130 million. Our capital expenditures in the fourth quarter were $54 million, an increase of $28 million compared to the third quarter, reflecting a full quarter contribution from Atotech. It is with prior quarters, we had a dividend payment of $15 million or $0.22 per share. Moving to full year 2020 results, revenue was a record $3.5 billion, up 20% year-over-year with $2.9 billion we reported in 2021. On a combined company basis with Atotech, revenue was consistent year-over-year. However, through the impact of foreign exchange inflation pass-through, 2022 revenue grew 5% for the combined company. Semiconductor revenue set another record in 2022, totaling $2.04 billion, growing 12% year-over-year. Through the impact of foreign exchange. Semiconductor revenue grew 16% year-over-year. We delivered strong growth across our portfolio of vacuum and photonic solutions, reflecting our unique breadth and technology leadership. [indiscernible] packaging revenue was $1.1 billion in 2022 on a combined company basis. Excluding the impact of foreign exchange, palladium pass-through, combined company sales declined 8% on a year-over-year basis. Atotech's business performed well in electronics and packaging market, growing 3% year-over-year, including foreign exchange inflation pass-through. Specialty Industrial revenue was $1.3 billion in 2022 on a combined company basis, excluding the impact of foreign exchange palladium pass-through, combined company sales grew 4% on a year-over-year basis. In 2022, on a combined company basis, the revenue split between our semiconductor Lutron packaging, especially industrial markets was 46%, 25% and 29%, respectively. Total consumables and service revenue amounted to $1.7 billion in 2022 on a combined company basis, up 5% year-over-year from the effect of foreign exchange in palladium pass-through. For 2022, on a reported basis, operating cash flow was $529 million and free cash flow was $365 million. I'll now turn to our first quarter outlook. John addressed the current SaaS recovery from the ransomware incident. Given that our effective operations are just starting to return to production and our focus on serving our customers, we are not able to provide our usual guidance for the first quarter. In addition, as you may have seen yesterday, we filed a verification with the SEC of an extension to file our 10-K. Given that we're in the process of restoring our systems, we require additional time to complete our annual report. As John noted, the incident has materially impacted our operations for our Vacuum and Proton Solutions divisions. The operations of our Materials Solutions division were not impacted. MSD revenues are spread across electronics and packaging and specialty industrial markets. What we can share is that prior to Ransomware event, we are planning to guide total MKS revenue for the first quarter to be approximately $1 billion. This reflected widely publicized cycle softness in the semiconductor industry, offset somewhat by a strong backlog coming into the quarter, continued weakening in global electronics spending impacted our electronics and packaging market and a modest sequential decline in revenue, especially industrial market. We estimate the Ransomware incident will impact our forest quote revenue by at least $200 million. However, we expect to substantially recover this revenue by the end of the second quarter. Price the incident, we're also expecting gross margins of 44.5% down from the fourth quarter levels due to lower volume and mix. In terms of operating expenses, we're also expecting approximately $260 million in the first quarter, up from fourth quarter levels primarily due to seasonal increase in compensation and fringe expenses as well as continued investment into product development and customer-facing sales and marketing expenses. Our ability to continue to invest in critical initiatives has been a key strategic driver behind our long-standing ability to exit cycle in a stronger market position to continue to accelerate our customers' product road maps. We plan to maintain its investments. We're also keeping a close eye on macroeconomic and industry trends and our proven playbook for managing costs for cycles allow us to adjust spending levels when and if needed. As an example, we've already executed approximately 1/3 of our $55 million ad tech cost synergy target within just a short period of time. Just to run our expectations prior to into the first quarter, we expect our tax rate to be 27%. We currently expect our net interest expense to be $78 million. With that, I'll turn it back to John to wrap up. John Lee : Thanks, Seth. While the events of the last month have been an unpleasant distraction, they do not change the MKS story. Following an important 2022, which we closed our strategic acquisition of Atotech and delivered strong financial performance. MKS is even better positioned for the future. We now address all of the core building blocks of advanced electronic devices from the semiconductor chip, to wafer level packaging to the package substrate to the PCB with enabling technologies that solve for miniaturization, complexity and novel chemistry. And we do so with an enhanced business profile featuring the most comprehensive technology portfolio in the industry, spanning vacuum, photonics and chemistry, market leadership in 20 critical product categories across a balanced end market profile, a resilient business model with a significant mix of consumable and services revenue and a larger addressable market. For all of these reasons, we are confident that we are ready to capture a broader set of exciting market opportunities. Now I'd like to turn the call back to the operator for Q&A. Operator: [Operator Instructions] Our first question will come from Jim Ricchiuti of Needham & Company. Jim Ricchiuti: So if we look beyond the ransomware incident and you seem to be suggesting you think you could pick up a significant amount of that revenue impact in Q2. I'm wondering how we might think about some of the other metrics that you outlined in the Q1 guide prior to the incident. In other words, should we think in terms of those kind of expense levels and margins. And again, I'm not looking for guidance for Q2, but you've offered up this slide. I'm just wondering as we think beyond this into the June quarter, how we might think about some of these other metrics other than interest expense, which you have given some color on. Seth Bagshaw: Yes. Thanks, Jim. This is Seth. I'll answer your question. Yes, I think you'll -- in our view, we gave a little snapshot of the Q2 expected guidance prior to the incident. And so we gave you a metric for how to think of the business going forward. Obviously, we've got a much different platform in terms of more resilient revenue stream from unit-based chemistry and service revenue. We've got many opportunities to grow the business in other multiple markets. And we'll continue to invest in the areas that really drive product investment as well as customer-facing opportunities, like of sales and marketing. So we have a lot of opportunities we want to invest in. And our goal is to exit any cycle, strong worth that we enter that cycle. So really no change in the business. As John mentioned, this is kind of a -- that's what Q1 speed month for us is very important. We continue to get our customers up from operation side, local service side as well. But we're really focused on, again, growing the business in the long term, making those investments. Jim Ricchiuti: Okay. My follow-up question just relates to your specialty industrial business. If I heard you correctly, you're talking about a modest, I think, sequential decline. And I'm wondering is that -- we don't have a lot of experience with that part of the business. Is that seasonal? Or is that macro related? John Lee: Jim, it's John. I'll take that. There is a little bit of seasonality to the automotive industry, but really it's end demand driven. And I think if you read about supply chain constraints in automotive, you can see that the first half, lease expectations are that it's a little weaker in automotive and perhaps later. Of course, we don't know what will happen later. But really, that's really what's driving most of that. Operator: [Operator Instructions] Our next question will come from Sidney Ho of Deutsche Bank. Sidney Ho : I want to start off with the ransom way events. You talked about at least $200 million of revenue impact in the first quarter, and most of that will be recovered by the end of second quarter. If you double-click on that, is that mostly impacting the semi business versus your other segments? And the other part of the question is, do you think any of the revenue is perishable, whether it's potentially losing share to a competitor? Or that's an opportunity for your customer to cancel order based on what's going on in the broader market? John Lee: In, thanks for the question. It's John. I would say that a lot of the revenue is, of course, semi based. And that's why, as you know, in the industry, these critical subsystems that we make are co-design with our customers, qualified by their customers. And so really difficult to displace. And we've had relationships with these customers for decades, and they've been very supportive. So we feel that all this revenue is easily recovered in terms of designs. I think that there are other revenue that could be lost a little bit, but those are very de minimis. And we're really not worried about that, and we're going to try to get those back as well. Sidney Ho : Okay. That's helpful. My follow-up question is, if I look at the first quarter, you gave some color on -- in the pre-ransomware events, what you've guided $1 billion, down 8%, you give a little comment on semi versus electronics packaging and especially Industrials. Just on an order basis, do you expect first quarter to be the trough for any of these businesses. Maybe you can comment on the kind of backlog or what you're seeing into second quarter Well, that would be great. Seth Bagshaw: Yes, Sandy. So we don't really comment on order rates, but I think that you can surmise that because we would have guided $1 billion, the strength of the backlog is really carrying that, especially for the semiconductor industry, as you mentioned. And so we're really happy with the strength of our backlog that we would have done much better. As I said before, whatever gets lost in Q1 because of the ransomware event we expect substantially will be made up by Q2. Operator: [Operator Instructions] Our next question will come from Krish Sankar of Cowen and Company. Krish Sankar : Drove them to first one, John, back to the prior question about pre-runs I would have guided $1 billion, thanks to the backlog. Is it fair to assume if you try to look at the linearity through the year, your revenue should eventually follow the WFE pattern. In other words, your customers are knowing their inventory in theory, semi should start slowing free progress through after Q1 pre ransomware. Is that a fair assumption? John Lee: Yes, Chris, I think that's a fair assumption, but I would point out, though, that because we're exposed to 85% of WFE, as you well know, you covered these companies, not all of them are behaving the same way. Some customers of ours in wafer fab equipment are saying they're going to go down in Q1 and -- or first half and some have different rates at which they're going to go down. Some are saying, no, it's still pretty steady in the first half. And some of the saying is going up. for the whole year even. So we're exposed to all those customers. So in general, you're right, if WFE goes down, we'll go down. Our long-term model has obviously demonstrated that we can outperform WFE by 200 basis points. But we're a much broader company now, and we're exposed to different parts of WFE. And so I think that just allows us to be a lot stronger supplier to the ecosystem. Krish Sankar : Got it. And then a follow-up for Seth. You said just curious with this random impact on your revenue. How does that affect your term loan covenants? Seth Bagshaw: Yes. As we talked about in the exit in the fourth quarter, our net leverage ratio was 3.4, gives a lot of headroom relative to a 5.25 leverage covenant ratio, which is on the term loan A only, by the way, which is where we paid off the $100 million in the fourth quarter. So that covers only tied to term loan A. That's $90 million exiting Q4. And looking ahead, we see headroom going forward as well. So that's an area we feel very comfortable with, quite honestly. That revenue moving from Q1, we believe entity recover in Q2 will kind of offset that on a 6-month basis. So we feel very comfortable with covenants going forward. But we'll kind of lean into that term loan A as well. It's kind of where we're going to kind of delever more aggressively. And I just want to come back to one comment I had before early on, as I responded to Jim Ricchiuti call, I meant to refer Q1 pre-ransomware information relative to Q2. So I just want to kind of clarify that point as well. Operator: Our next question will come from Joe Quatrochi of Wells Fargo. Joe Quatrochi : I wanted to understand the gross margin guidance or commentary for 1Q. Maybe if you could unpack that a little bit in terms of just like the moving parts there? Because I would have thought that, I guess, maybe it could have been a little bit better than that given Material Solutions should be a higher percentage of the total company revenue. And I believe that has a higher kind of corporate average gross margin. If you could just help us out there. Seth Bagshaw: Yes, Joe, I'll take this, it's Seth. So in the fourth quarter, we talked about a little favorable impact favorable on the mix for the quarter. That's why we're above the high end of the guidance range. And then in the Q1 commentary, $1 billion, most of the impact on the margin is really volume-driven with a slight mix differential there as well. You're absolutely right on the MSD side, those margins a little bit higher than our corporate average. But fundamentally, that $1 billion commentary has quite a bit of revenue in the Photonics Solutions division as well as with the vacuum solution division as well. So really, the Q1 commentary is primarily volume driven, a little bit more normalized mix. Joe Quatrochi : Got it. And then just -- is there any sort of like cash outlay related to the ransomware attack that we should be aware of, I guess, when you think about that kind of back to your estimating the net leverage? John Lee: Yes, Joe, I appreciate the question, but we're really not going to provide any details on the ransomware investigation. Certainly, we are hiring experts to help us recover and those are expenses. But in terms of cash outlay, I think there's really no comment here. Operator: Next question will come from Mark Miller of the Benchmark Company. Mark Miller : I just was wondering between the ransomware issue and also the expected macro slowdown, can you discuss how the back -- what happened with the backlog last quarter? And -- are -- does the backlog indicate it's going to be a front end, back end or basically an even year in terms of sales? John Lee: Yes, Mark, it's John. I would say that, as I said earlier, the guidance we would have given prior to the ransomware of $1 billion, a lot of that is on the strength of the backlog that we have entering Q1. And so we can't really predict what will happen after that for sure. But certainly, the strength of the backlog allows us to probably we probably would have outperformed many of our peers in Q1 if the ransomware event hadn't happened. Mark Miller : And the margin profile, what's in the backlog, is that similar to what you've been seeing recently? John Lee: Yes, I think there's no change there, Mark. Same kind of customers. So no real change there on the margin profile for. Operator: Our next question will come from Steve Barger of KeyBanc Capital Markets. Steve Barger: You mentioned the 4Q Geode order, and I think a separate multiunit order. Can you talk about pipeline visibility into further orders from legacy ATC customers? John Lee: Yes, Steve. I would say we were -- we talked about the 4Q order. That was a multiunit order. That was -- that was not with Atotech's extra synergy, if you will. There was another order, which we did call out in Q1, which was a long-time Atotech customer that we really didn't have a relationship with. So that was clearly a synergy. That happened a lot sooner than I was expecting, Steve, so I'll take it for sure. But we have a long pipeline that's reviewed with me every month of other potential synergy opportunities going both ways, areas where ESB could help Atotech and vice versa. And these are -- you got to look at these as multiyear efforts. You talk to the customer, you get qualified, then they ramp -- and that's the kind of time frame that you should think about. And every one while you get a bluebird like we talked about in the call. Krish Sankar : Got it. And can you talk about how ATC's recurring revenue stream performed during the quarter versus your model? And is that revenue stream running as expected to start the year? John Lee: Yes, it is. As Seth talked about, excluding FX and palladium like everybody else in the industry, we are really pleased with how they did relative to the industry. We believe we maintain share in electronics and GMF. And so that's really met our expectations, and we're really pleased with how Atotech is performing. Operator: Thank you. And that will conclude the Q&A portion of the conference. I would now like to turn the conference back to David Ryzhik for closing remarks. David Ryzhik : All right. Thank you for joining us today and for your interest in MKS. Operator, you may close the call, please. Operator: This will conclude today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.

Operator: Good day ladies and gentlemen, and thank you for standing by. Welcome to MKS Instruments Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] At this time, I would like to turn the conference over to Mr. David Ryzhik. Mr. Ryzhik, you may begin sir. David Ryzhik: Good morning, everyone. I am David Ryzhik, Vice President of Investor Relations and I'm joined this morning by John Lee, President and Chief Executive Officer; and Seth Bagshaw, Senior Vice President and Chief Financial Officer. Yesterday, after the market closed, we released our financial results for the third quarter of 2022, which are posted to our website. As a reminder, various remarks about future expectations, plans and prospects for MKS comprise forward-looking statements. Actual results may differ materially as a result of various important factors, including those discussed in yesterday's press release and in our current report on Form 8-K filed with the SEC on August 17, 2022 and any subsequent quarterly reports on Form 10-Q. 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. During the call, we will be discussing various financial measures. Unless otherwise noted, all references to pro forma financial measures reflect MKS and Atotech Limited, which MKS acquired on August 17, 2022 on a U.S. GAAP basis and include adjustments to confirm the accounting policies of MKS. Also, unless otherwise noted, all income statement related financing measures will be non-GAAP other than revenue. For a detailed breakout of reported revenues by end market, as well as Atotech and combined company revenues by end market, please visit the Investor Relations section of our website. Please refer to our press release and the presentation materials posted to our website for information regarding our non-GAAP financial measures and a reconciliation of our GAAP and non-GAAP financial measures. Now, I'll turn the call over to John. John Lee: Thanks, David. Good morning, everyone, and thank you for joining us today. The third quarter marked a major advancement in MKS' long-term strategy as we completed the acquisition of Atotech Limited. Atotech further broadens MKS' capabilities by bringing leadership in critical chemistry solutions for advanced electronics and specialty industrial applications and we are pleased to welcome the talented global team of over 4,000 new employees to the MKS family. We delivered strong results in the third quarter with record revenue and strong profitability. On a pro forma basis for the third quarter, we delivered revenue of $1.1 billion of which over $360 million was from Atotech. Excluding the partial quarter contribution from Atotech, our revenue exceeded the midpoint of our guidance range and was another quarterly record. We continue to execute in a challenging environment of supply chain constraints and inflationary pressures. While we have overcome numerous constraints throughout the quarter, we are still facing shortages of a small number of components that are impacting shipments of some high value solutions. We are also operating in an environment of increasing macroeconomic uncertainty and an anticipated decline in wafer fabrication equipment spending. And I'll provide our perspective on these factors shortly. Next, I want to share an update on our organizational structure and divisional reporting following the closing of our acquisition of Atotech. In the third quarter, our Equipment Solutions Division was consolidated into our photonics solutions division. This consolidation aligns with our broader portfolio of photonics solutions and further enhances synergies between our critical photonics subsystems and our laser systems. As a result, going forward and in our third quarter 10-Q, the financial results of the equipment solutions division will be combined with the photonics solutions division. And the Atotech business operates as a separate division, which we refer to as the Materials Solutions division. As a reminder, earlier this year, we introduced our three end-market categories: semiconductor, advanced electronics, and specialty industrial, These market categories will remain the focus of our external reporting. Now, I'd like to provide more detail on our third quarter results and my thoughts as we look into the fourth quarter. Semiconductor market revenue reached another record in the third quarter. We saw broad-based demand across our portfolio. Our market leadership in RF Power for dielectric etch continues to be a significant driver and we delivered another record quarter benefiting from investments into leading edge 3D NAND. We also continue to gain traction in RF Power for conductor etch where we see an attractive market penetration opportunity. Demand for our remote plasma sources remained very strong, driven by both on wafer and chamber cleaning applications. We also had a record quarter in our analytical and control solutions led by growth in physical vapor deposition chambers as interconnect density increases for logic devices. Photonics solutions revenue for the semiconductor market reached another record as we continue to gain traction in our optical solutions and motion businesses for advanced lithography, metrology, and inspection applications. We continue to gain significant design wins and our engagement with key customers in this important market segment continues to strengthen. In fact, when excluding the inorganic contribution from the Photon Control acquisition, we delivered more than 35% year-over-year organic growth in our photonics solutions for the semiconductor market. Overall, our semiconductor market results in the third quarter were exceptional, even as we continue to face supply chain constraints in the quarter. Given nearly every semiconductor chip manufacturer in the world today is made possible by MKS' technology, I'm excited about how well-positioned we are to continue to leverage the attractive long-term secular opportunities in this market. While these long-term secular trends remain unchanged, recently issued U.S. export restrictions on advanced semiconductor equipment sales to China are immediately impacting our direct customers who rely on our subsystems. In addition, as I mentioned earlier, we continue to see shortages of components needed for certain high value products. As a result, we expect revenue from our semiconductor market to decline sequentially by approximately 20% in the fourth quarter, compared to pro forma revenue for the third quarter. We have also seen a moderation in order rates in the fourth quarter and we expect wafer fabrication equipment spending to decline in 2023 as the industry scales back investments to restore supply demand balance. Turning to our Advanced Electronics market, revenue from our flexible PCB via drilling systems remain muted in the quarter as expected. Demand for our chemistry solutions moderated in the quarter, due to weakening end market demand for electronics such as smartphones and PCs. However, we saw strong demand for our plating equipment in the quarter. And overall, pro forma Advanced Electronics revenue grew slightly on a year-over-year basis when excluding the impact of foreign exchange and palladium pricing. Since the closing of the Atotech acquisition, our teams have been in active discussions with customers outlining the unique value proposition behind our combined laser drilling and chemistry expertise to optimize their interconnect. We believe this is an increasingly critical focal point in enabling the integration of Advanced Electronic devices. In addition to our HDI market, our capabilities are focused increasingly on packaged substrates, which is the fastest growing segment of the advanced PCB market. Package substrates have become a critical building block of heterogeneous computing architectures such as [indiscernible], as well as other advanced computing applications. Today, we occupy uniquely differentiated position by virtue of our market leadership and chemistry solutions along with the laser drilling capabilities of our geo platform. Our positive engagements with customers thus far confirm the strong value proposition of our combined laser drilling and chemistry solutions as a path to enhancing yield and reducing time to market. In the immediate term, we expect that macroeconomic headwinds in electronics end markets will negatively impact our performance with revenue from our Advanced Electronics market expected to decline sequentially in the fourth quarter, compared to pro forma results for the third quarter. It is worth noting that the fourth quarter is typically seasonally lower than the third quarter. Moving to our specialty industrial market, we saw relatively stable demand across our industrial, life and health sciences, and research and defense applications. Within the specialty industrial market, our general metal finishing business continued to be impacted by supply chain constraints in the automotive market. Nonetheless, demand was steady in the third quarter and we expect GMF to benefit once supply chain constraints ease though growth will ultimately be anchored by end demand. For the fourth quarter, we expect revenue from our specialty industrial market to remain consistent pro forma results for the third quarter. In short, I'm very pleased with how MKS executed in the third quarter. While the macroeconomic backdrop is a factor we are closely watching, I'm very excited about our long-term positioning for the numerous secular trends supporting MKS' business opportunities. Finally, we will host an Analyst Day on December 14, where we will provide updates on our strategy, market opportunities, and long-term financial model for the new combined company. With that, I'd like to turn the call over to Seth. Seth Bagshaw: Thank you, John. I'll cover third quarter results and provide additional detail on guidance for the fourth quarter. In the third quarter, we delivered revenue of $954 million and net earnings per share of $2.74, which includes a partial quarter contribution from Atotech following the close of the acquisition. So, in the Atotech acquisition, we delivered record revenue in the third quarter and exceeded the midpoint of our guidance range led by record revenue from our semiconductor market. On a pro forma basis for the third quarter, we delivered revenue of $1.1 billion. In an adjusted pro forma basis, we delivered just EBITDA of $327 million. Furthermore, even though we delivered strong financial results, recent foreign exchange volatility resulted in approximate mid-single-digit headwind to overall year-over-year revenue growth on a pro forma basis. Following the acquisition, our revenue mix is more balanced by end market. On a pro forma basis for the third quarter, revenue from our semiconductor market was 48%. It was 26% each from our advanced electronics in specialty industrial markets. In addition, we now possessed a higher mix of more consistent consumables in service revenue, which made up about 37% of overall pro forma revenue for the third quarter. Now, turning to end market results, while be commenting on pro forma revenue in change from prior periods on a pro forma basis, we delivered record pro forma revenue from our semiconductor market in the third quarter, increasing 4% sequentially to $552 million and growing 9% year-over-year. We saw a broad-based strength from across our vacuum portfolio, while growth in our photonics solutions products continues to be strong outpacing overall industry growth. As John mentioned, recent U.S. export control restrictions on products sold for advanced semiconductor applications are impacting our sales to certain China customers. Based upon our preliminary assessment of sales through our direct sales channel and through our OEMs, we estimate the overall annualized impact could be in the range of $250 million to $350 million. That amounts to approximately 6% to 8% of our projected pro forma revenue for 2022, assuming the midpoint of our guidance for the fourth quarter. Moving to advanced electronics market, pro forma revenue in the third quarter was $296 million, growing 1% sequentially and declining 9% year-over-year. As you may be aware, the cost of palladium makes a significant portion of overall cost of goods sold for Atotech’s chemistry business. In order to [insulate sale] [ph] from typical market based price fluctuations in palladium, Atotech has implemented an effective pass-through pricing mechanism to customers. In this context, assuming the effects of palladium pricing pass-through revenue, as well as foreign exchange headwinds, pro forma advanced electronics revenue was up 1% on a year-over-year basis. In our specialty industrial market, we delivered pro forma revenue of $292 million in the third quarter, declining 1% sequentially and flat on a year-over-year basis. Excluding the effects of palladium pricing pass-through and foreign exchange headwinds, pro forma [specialty industrial] [ph] revenue grew 7% year-over-year. On a standalone basis for MKS, excluding the partial quarter contribution from the Atotech acquisition, we executed very well. Revenue and operating margin exceeded the midpoint of our guidance with operating expenses favorable to the midpoint of our guidance, reflecting strong cost controls. Turning to our margins. We reported third quarter gross margin of 44.9%. Given well-known supply chain inflationary pressures, we are pleased with [how we exit] [ph] in the quarter and continue to work hard in addressing these macroeconomic factors. Third quarter operating expenses were $189 million, up $35 million sequentially, primarily due to the partial quarter contribution from Atotech. Third quarter operating margin was 25.1%, up 100 basis points sequentially. We can prudently manage our cost structure while maintaining our commitments to invest in organic growth opportunities that we believe absorb attractive long-term returns. In addition, our integration of Atotech is progressing very well. We are on track to achieve our cost hedging target of $55 million within 18 to 36 months post close. We recently marked the one-year anniversary of the acquisition of Photon Control. We delivered synergies and profitability improvements ahead of our own internal expectations, [indiscernible] strong track record of M&A integration. Third quarter adjusted EBITDA was $268 million and adjusted EBITDA margin was 28%. Net interest expense for the third quarter was $36 million, a sequential increase of $30 million, reflecting the incremental debt associated with the Atotech acquisition. In the quarter, we implemented interest rate hedges such that approximately 50% of our total debt outstanding is at a fixed rate. Our tax rate for the third quarter was approximately 18%, which benefited from transaction related expenses. Net earnings for the third quarter were $167 million or $2.74 per diluted share. Exiting the third quarter, we maintained strong liquidity with cash and short-term investments of $885 million and revolving credit facility of $500 million. We exited the quarter with gross debt of $5.2 billion and our net leverage ratio to be calculated on a combined company basis with 3.3x. For the third quarter, operating cash flow was $199 million, and free cash flow was $173 million. Each inclusive of $36 million in acquisition, integration, and restructuring costs. Our capital expenditures in third quarter were $26 million. Consistent with prior quarters, we had dividend payment of $12 million or $0.22 per share. I'll now turn to our fourth quarter outlook for the combined company. On a pro forma basis, we expect revenue from semiconductor in advanced electronics markets to decline sequentially, while revenue from our specialty industrial market expect to remain consistent with third quarter levels. Overall, we expect fourth quarter revenue of $1 billion, plus or minus $50 million. Based on anticipated product mix and revenue levels, we estimate third quarter gross margin of 44.5%, plus or minus 1 percentage point and we continue to take necessary steps to counteract inflationary impacts on our business. We expect operating expenses of $240 million, plus or minus $6 million. For the fourth quarter, we estimate adjusted EBITDA of approximately $240 million, plus or minus $27 million. The sequential decline in adjusted EBITDA on a pro forma basis is a function of lower projected revenues, as well as a $20 million foreign exchange gain recorded by Atotech in the pro forma third quarter period, which is not expected to repeat in the fourth quarter. For the fourth quarter, net [interest expense] [ph] is expected to be approximately $81 million, reflecting a full quarter of net interest expense associated with the Atotech acquisition. As we've stated, our primary folks de lever our balance sheet, which we have demonstrated strong track record of doing so, following the last two debt finance acquisitions, Newport in 2016 and ESI in 2019. Our tax rate is expected to be approximately 27% for the fourth quarter. This increase is due primarily to the mix of geographical income associated with the Atotech acquisition for the [fourth quarter] [ph]. Given the assumptions, we expect fourth quarter net earnings of $1.34 per diluted share, plus or minus $0.27. In closing, we are very excited to close the Atotech acquisition, provides us with critical chemistry solutions for advanced electronics in specialty industrial markets. Today, we are a more scaled company with a higher proportion of more consistent consumables in service revenues. Our integration activities are well underway and we're well-positioned to adapt to changing market conditions, continue to execute on a long standing strategy of sustainable long-term growth and profitability. Let me now turn the call back to the operator for Q&A. Operator: [Operator Instructions] Our first question or comment comes from the line of Sidney Ho from Deutsche Bank. Your line is open. Sidney Ho: Great. Thank you very much. My first question is on semiconductors, you're guiding Q4 semi's revenue down 20%, but when I look at your largest customer, they're guiding roughly flat quarter-over-quarter for Q4. And even if you back out the deferred revenue, they're not down nearly as much, can you help us reconcile the difference? And to the extent that you think that delta is driven by inventory adjustments at the customers, do you think that will complete by the end of the quarter and maybe you can start shipping to demand starting in Q1? John Lee: Yes. Thanks for the question. Fundamentally, there are two drivers for the guide down for semi in Q4. Most of it is still driven by supply chain constraints. So, nothing to do with demand. As I've mentioned before, the number of components that are constrained is fewer or fewer. However, the components that we're seeing constrained are tied to some of our high value products. And so, that's the majority of it. There's a little bit from the China export restrictions, but mostly it's still a supply chain constraint issue. Sidney Ho: Okay. Maybe a follow-up question. I want to talk about gross margin. To guide the gross margin down for – to 44.5% to down 50 basis points, can you walk us through some of the puts and takes that's impacting Q4? And more importantly, as we look beyond Q4, not asking for specific guidance, are there any one-time charges that would come out in first quarter or should we think about using incremental margins of 50% with the 4Q as the base going forward, that's the right way you're thinking about it? Thank you. Seth Bagshaw: Yes. This is Seth. I'll take that question. So yes, so on the guide for the fourth quarter, you'll probably well know, Atotech’s margins are above our typical margins. So, that's helpful in the quarter, be helpful going forward for sure, but really the primary change in the margins on a combined company basis is just lower volumes like in the MKS business. So, that's really the driver there quite honestly is the biggest factor. Going forward in terms of guiding for margins, well the Analyst Day in December 14, we'll kind of walk through that a little more detail by growth by markets and gross margins. And on a combined company basis, we'll be able to articulate, kind of how to look at the growth and the margins and operating margins going forward. So, I'd kind of wait for that Analyst Day to, kind of lay out that model in more detail. Sidney Ho: Okay, great. Thank you. Seth Bagshaw : Sorry, Sidney. So, for the first quarter, we'll have normal amortization of purchasing accounting cost and cost of goods sold, but we'll non-GAAP those items out, otherwise, really nothing that we’re are aware of as usual in the first quarter. Sidney Ho: Thanks, Seth. Seth Bagshaw: Yes. Thanks, Sidney. Operator: Thank you. Our next question or comment comes from the line of Jim Ricchiuti from Needham & Company. Mr. Ricchiuti, your line is open. Jim Ricchiuti: Hi, thank you. Good morning. So, yes, we don't have a lot of history about how the Atotech business performs during periods of economic weakness? I guess with the exception of 2020, but I wonder if you can give us a little color on how you're thinking about the electronics and the GMF business, during potentially or recessionary cycle, including that consumer loans business that gives it, I guess, some support? John Lee: Hi, Jim. It's John. Yes, that's a great question. So, we have some history when we look back at Atotech that during any kinds of recessionary time frames, because they have so much more of the revenue being consumables that they do not see the levels of decline that we typically see in the CapEx environment. And so, I think that's really going to help support the entire company during any, kind of recessionary downturns or even semi-cyclical downturns. As, I think we all know, the automotive market has been constrained as well. And I think as those constraints ease, that should also be helpful for that side of the Atotech business as well. Jim Ricchiuti: And John, a follow-up question just on supply chain, particularly in the semi-business. It's still a headwind, but what are your expectations as you look out over the next one to two quarters. Is that going to be largely behind you? And then you're just dealing with these other factors, including the weaker WFE, I mean the export controls? John Lee: Jim, I think it's – my expectation is that we're in for still a couple of more quarters at least constraints, but it has been getting better even in our prepared remarks, I did mention that it's a fewer number of components actually that we're chasing. So, that's helpful. And we just happen to be in a particular quarter where some of those components are tied to some of our high value products. Obviously, we're looking very hard to overcome those obstacles. And then we are able to do that within the quarter, of course, that's upside, but our guidance is basically based on what we see today. Jim Ricchiuti: Thank you. John Lee: Thanks Jim. Operator: Thank you. Our next question or comment comes from the line of Krish Sankar from Cowen & Co.. Standby. Krish Sankar: Hi, thanks for taking my question. I had a couple of them. First one, I just want to double check, maybe my math is strong given you guys have re-segmented the divisions, but is your vacuum solution, which I believe is primarily the semiconductor business? Is that undergoing or outgoing WFE this year? John Lee: I think you're asking about 2022, Krish? Krish Sankar: Yes. John Lee: Yes, I think it's slightly under growing WSE. And I think as you know, when we're in a upcycle we tend to outgrow as it flattens out and we are kind of flattish. Then when there's a downturn, of course, we underperform, but as we look at the long-term performance of our semiconductor business with respect to WFE, we plotted it 5 years, 10 years, 15 years, we are still above 200 basis points higher than WFE over the long-term. Krish Sankar: Got it. And I mean, John, just out of curiosity, but undergoing WFE this year, I mean, you’ve spoken about market share wins and power supplies, are you seeing any share losses in other parts of your semi business, like vacuum components or pumps and things like that? John Lee: Yes, Krish, no, we're not. In fact, a you mentioned, RF Power Supplies shipments in Q3 were a record for that division again. And when you look at the market share data from third parties, we either have held our own or gained in many of the categories that we have for vacuum. So, right now, we're pretty happy with how each of the product groups are performing. Krish Sankar: Got it. And then a quick question for Seth. Just for modeling purposes. In 2022, how should we think about interest expense, tax rates and then also OpEx, if you're assuming similar revenue levels as [December quarter] [ph]? Seth Bagshaw: Yes. So, tax rate, again, we’ll outline this more in the Analyst Day in a couple of months, but I'll give you some high level thoughts on that. So, tax rate should be in that, kind of mid-20% range, mid-up to [20%] [ph] range going forward. It's kind of our goal there as well. I think you asked on interest rates. I mean, right now, we're looking at for Q4 like little over 6% weighted average rate on our debt. We've hedged half of that as we mentioned in the prepared remarks. So, you can kind of look at the rate curves going out in the future, but that gives you a sense of how best to kind of model that. And then, again, OpEx, I would say that we'll always be prudent in managing our cost structure. You say in the third quarter, we're favorable on the legacy MPS side. And so, as John mentioned, we're seeing some potential slowdown in the semi-cap space next year. So, we'll respond to that as we've always done many times before, but I think if you were to say steady state run rate business, you probably see some inflationary impact on OpEx you can take to Q4 and annualize that. Usually first half of the year, we have wage increases. However, we've had a longstanding policy and program to reduce and be more efficient in our cost structure. So, that will kind of drive those costs down on a steady state business. So, I think you can rely on us to be pretty prudent on our cost structure going forward, but there's nothing I see out there right now in the Q4 run rates that would drive that up substantially for sure, even our steady state business. Krish Sankar: Got it. Thanks a lot, Seth. Thanks John. Seth Bagshaw: Yes. Thanks, Krish. John Lee: Thanks, Krish. Operator: Thank you. Our next question or comment comes from the line of Joe Quatrochi from Wells Fargo. Mr. Quatrochi, your line is open. Joe Quatrochi: Yes. Thanks for taking the question. Post the acquisition, just how should we think about the right level of cash that you need on the balance sheet to run the day to day operations? And I guess, how do you think about balancing that with debt reduction during the cyclical downturn? Seth Bagshaw: Yes, Joe, so I'll take that question. So, we modeled, as I said before, in the acquisition, $800 million of cash on the balance sheet and we're going to revolve our 500 million on top of that. So, we thought – very thoughtful doing a number of modeling back. We announced transaction, the summer of 2021. Obviously, again, when the rates were higher in the March, April time frame. So, we feel very comfortable that quantum of cash can take us through any cycle. And so that's kind of how we look at it. We can certainly run the company a little leaner than that, but our view is to be again pretty [high build] [ph] liquidity in the balance sheet. So, we'll kind of maintain that level of cash going forward. And then, kind of pivot to our goal going forward, we had the same [indiscernible] but we ran many times before with other debt financed transactions to de-lever pretty rapidly. And again, that's our goal going forward as well. That's always been our view with the rates being higher for sure. That just doubles down our strategy as well. So, I think to kind of wrap it up, we're well tuned of the rate environment. We do want to de-lever very aggressively. That is our goal and always has been, and the amount of liquidity we have in the cash and the balance sheet is pretty substantial, frankly, to weather through any potential slowdown in the business. But we look at that on a quarterly basis and we put the high beams on. We're always kind of reassessing that position as well. Joe Quatrochi: Got it. And then maybe as a quick follow-up. You talked about 40% of the combined company now having a revenue basis somewhat recurring. I guess is that the right way still to think about it? And then maybe, is there any way you can help us kind of understand how does that translate into maybe like EBITDA or free cash flow? John Lee: Yes, Joe, I think that is the right way to think about it. So, that 37%, 40% of the quarter's revenue was recurring or resilient if you will, service revenue and chemistry consumables. And as Seth mentioned, the gross margins for the Atotech business is actually higher than legacy MKS business. The operating margins of the MKS Service Business, which we publish, is actually very high as well. And so, not only are those resilient revenues, but the profitability that comes off of them is marginally higher than the rest. Seth Bagshaw: And just to add to that, those revenues are not tied to the semi-cap cycle. So, if you look forward and if you have a view on semi-cap softening, that percentage could actually increase the total company. That's part of the theme on, kind of the acquisition as well. We thought about that recurring revenue is very important to us going forward. Joe Quatrochi: Got it. Thank you. Operator: Thank you. Our next question or comment comes from the line of Mark Miller from Benchmark Company. Mr. Miller, your line is open. Mark Miller: I just wanted to clarify, you are talking about for 2023 in terms of semi-sales impact will be around $250 million to $350 million from slowing. Is that correct? John Lee: Mark, that's just what we view as the impact from the potential sanctions of China business. So, that includes both our direct business, as well as any impacts from our – indirectly through our OEM customers. Mark Miller: Okay. Interest expense for the December quarter, is that around 80 million? Seth Bagshaw : 81 million correct, give or take, yes. Mark Miller: And in terms of these impacts, what percent of the total terms of semi-spending, what percent of your semi-spending the impact will be coming from the restrictions versus just general slowing? Will it be mainly driven by the impact of restrictions? John Lee: Yes. Well, if you take the midpoint of that range of 250 to 350, 300, call it, our semi-revenue in 2022 is on that order of 2 billion. So, we're talking about 10% to 20% to [15%] [ph]. Mark Miller: Thank you. Mark Miller: Thanks Mark. Operator: Thank you. This concludes our Q&A session. I would like to turn the conference back over to Mr. David Ryzhik for any closing comments. David Ryzhik: Thank you for joining us today and for your interest in MKS. Operator, you may close the call please. Operator: Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.

Operator: Good day, and thank you for standing by, and welcome to MKS Instruments Second Quarter 2022 Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Ryzhik, Vice President of Investor Relations. Please go ahead. David Ryzhik: Thank you. Good morning, everyone. I'm David Ryzhik, Vice President of Investor Relations and I'm joined this morning by John Lee, President and Chief Executive Officer; and Seth Bagshaw, Senior Vice President and Chief Financial Officer. Yesterday after market closed, we released our financial results for the second quarter of 2022, which are posted to our website, which we recently changed to mks.com. As a reminder various remarks about future expectations, plans and prospects for MKS comprise forward-looking statements. Actual results may differ materially as a result of various important factors including those discussed in yesterday's press release and in our most recent annual report on Form 10-K and any subsequent quarterly reports on Form 10-Q. 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. During the call, we will be discussing various financial measures. Unless otherwise noted, all forward-looking financial measures exclude any contribution from Atotech Limited, the acquisition of which is still pending. Also unless otherwise noted, all income statement-related financial measures will be non-GAAP other than revenue. Please refer to our press release and the presentation materials posted to our website for information regarding our non-GAAP financial results and a reconciliation of our GAAP and non-GAAP financial measures. Now I'll turn the call over to John. John Lee: Thanks David. Good morning, everyone and thank you for joining us today. We delivered exceptional results in the second quarter with record revenue of $765 million and strong profitability with net earnings per diluted share of $2.59. Both metrics exceeded the high end of our guidance range as we manage through continued supply chain constraints and inflationary pressures. These results are a testament to our ability to execute by managing costs and factory efficiency, while continuing to invest in our ambitious R&D plans for the future. This performance is also the result of the hard work, dedication and ingenuity of our employees, as well as the collaboration with our valued supply chain partners and customers who continue to place their trust in MKS. Now, I'd like to provide more detail on our second quarter results and my thoughts on current demand trends. We delivered record revenue from our semiconductor market in the second quarter, increasing 6% sequentially and exceeding our expectations. While there's clearly a lot of focus on the current macro environment, our business levels remained strong in the second quarter. Our operations and engineering teams executed extremely well, navigating industry-wide supply chain constraints to deliver to our customers. Availability of certain components somewhat improved in the second quarter but we continue to remain supply constrained in our ability to fully meet customer demand. Our strong performance in the semiconductor market was the result of broad-based success across our portfolio with record semiconductor revenue for both our vacuum and Photonics Solutions divisions. These results highlight the value of our deep customer relationships and the engineering and development investments we've made to help solve their most complex problems at the most advanced technology nodes. A good example of the return on our R&D investments is the strong demand for our market-leading RF power supplies, which is a critical enabler of vertical scaling in the semiconductor industry. Our market share gain has been primarily driven by dielectric etch applications for 3D NAND. We are also continuing to gain traction in conductor etch solutions where we see an attractive market share gain opportunity. In addition, we see increasing opportunities in advanced deposition applications. For example, we displaced the incumbent for leading-edge foundry deposition process because of our dual level pulsing capability. As reported by tech insights, we have taken market share leadership in our power supplies over the past year. We continue to see an attractive opportunity for further growth given the continued trend of vertical scaling in semiconductor structures. We also saw a strong demand across our market leading plasma and reactive gas portfolio where we delivered record revenue in the quarter. We received significant follow-on orders for our dissolved ozone solutions from a large foundry for wet clean applications. Our customers are increasing their use of our dissolved ozone solutions, as an environmentally sustainable alternative to traditional wet clean chemistries. While traditional solutions use toxic chemicals that require careful disposal, our ozone solutions naturally break down to oxygen and water, after the cleaning process. We believe we are well positioned to benefit not only from leading-edge foundry fab expansions, but also from the semiconductor industry's grown need for green solutions. We also delivered record revenue from the pressure, valves and analytic control products in our vacuum portfolio, which is yet another proof point of our leadership in critical vacuum subsystems, over an unmatched breadth of solutions. Our solutions play a critical enabling role in the products that our customers provide to the marketplace. Take for example our flagship pressure measurement solutions. We were able to measure gas pressure in the chamber with extreme precision, which is critical to quality and yield across deposition and etch applications. Our market-leading Baratron capacitance manometer enables unprecedented sensitivity and accuracy, akin to detecting a millimeter of movement from more than one kilometer away. It's important to underscore that our strategy as a technology enabler in the semiconductor market, extended beyond the vacuum chamber. And I'm pleased with the growing traction of our Photonics solutions division, in lithography, metrology and inspection applications. In the second quarter, our Photonics solutions revenue to the semiconductor market reached another record, growing considerably on a year-over-year basis. We saw a particular strength in our optical solutions and motion products. Our Precision Motion Solutions are worth highlighting, as we have seen an acceleration in business levels and design win activity from our semiconductor customers over the past few quarters. In advanced packaging, metrology and inspection applications, customers are using our Motion Solutions to enable rapid movement and precise placement of the wafer to win -- to within the accuracy of a few atoms which is critical to process performance and throughput. As we look to the third quarter, demand trends in our semiconductor market remains strong across our vacuum and photonics portfolios that serve deposition, etch, lithography, metrology, inspection and wet clean applications. While our demand outlook is healthy, we remain impacted by supply chain constraints and as such, we expect revenue to be consistent with second quarter levels. In short, we are executing well across our semiconductor business as a leading, critical subsystem technology provider. We believe that nearly every chip manufacturer in the world today is made using MKS Technology. And we are well positioned to capitalize on the long-term secular growth in the semiconductor market. We have the number one or number two positions in nearly all of our major product categories in the semiconductor market. We intend to grow even further and extend our lead in this space as we have done for more than 50 years. Moving to our advanced electronics market, revenue in the second quarter declined 6% sequentially. Consistent with our expectations and as discussed in our Q1 earnings call, industry demand for flexible PCB via drilling has continued to soften, as customers have temporarily slowed capacity expansions due in part to softness in smartphone demand. In addition to the flexible PCB market, we've also seen softness in other applications tied to consumer electronics. While our advanced electronics market is soft right now, we believe this is transitory. And we remain very excited about the long-term secular opportunity, for laser-based manufacturing and electronics applications. The same trends that drive our semiconductor business, miniaturization and complexity are key drivers for advanced electronics, as customers demand more processing power, more features and new form factors for their devices. We believe our flexible PCB, HDI PCB and IC substrate via drilling solutions are all well positioned for the years ahead. In the third quarter we expect PCB industry demand to remain muted. As such, we expect revenue from our Advanced Electronics market to remain consistent with second quarter levels. Turning to our specialty industrial market, revenue grew 1% sequentially consistent with our expectations. We saw steady demand across Industrial, Life and Health Sciences and Research and Defense applications. As a reminder, our Specialty Industrial market provides a more stable revenue stream comprised of a broad array of applications with good margins and cash flow. For the third quarter we expect revenue from our Specialty Industrial Market to remain consistent with second quarter levels. Moving to our pending acquisition of Atotech, we remain very excited and look forward to combining our capabilities in lasers, optics, motion and process chemistry, to drive faster solutions and new innovations for our customers. We expect that our adjacent expertise will uniquely position MKS to optimize the interconnect, which is a significant, enabling point of next-generation Advanced Electronics. As for the status of the transaction, I'm pleased to announce that today we received unconditional merger approval from China's State Administration for Market Regulation. The acquisition is anticipated to close on August 17th, subject to obtaining the required section by the Royal Court of Jersey and the satisfaction of customary closing conditions. As many of you know MKS has a long-standing track record of technology leadership and operational excellence and we continue to execute well in today's challenging environment has clearly demonstrated in our second quarter results. While we are closely monitoring the macroeconomic landscape and supply chain impacts on our business, our overall demand environment is healthy and we are in an outstanding position to continue delivering for our customers. With that, I'd like to turn the call over to Seth. Seth Bagshaw: Thank you John. I’ll cover second quarter results then provide additional detail on guidance for the third quarter. Revenue for the second quarter reached a record $765 million, up 3% sequentially and exceeding the high end of our guidance range. Revenue from the semiconductor market reached a record at $515 million, up 6% sequentially and up 19% year-over-year, reflecting broad-based demand for our Vacuum and Photonic Solutions. Power Solutions live another strong quarter in our plasma reactive gas, pressure, valves and illiquid control product groups, as well as our Photonic Solutions division each delivered record revenue in the semiconductor market. This is a strong validation of our consistent strategy of cultivating a broad and complementing portfolio both organically and through acquisitions that provides the fundamental building blocks essential for semiconductor manufacturing. Subnetting customers are increasingly relying with MKS to enable the multiyear product development road maps. Moving to our Advanced Electronics market. Revenue in the second quarter was $77 million, a decline of 6% sequentially and 44% year-over-year. As expected, we saw a continued industry demand for flexible PCB via drilling equipment. We believe the long-term secular trend of flexible PCB industry remain intact given us growing importance in enabling new form factors and more features in next-generation electronic devices. Therefore, I believe the current softness we are seeing is transitory. We continue to work closely with current and potential customers to drive growth in our HDI PCB via drilling platform. One of our initial high-volume manufacturing customers has continued to add capacity. While another customer that previously qualified our platform has deployed additional units across other global sites. Our HDI solution made a strategic opportunity for MKS. We're excited about the potential cross-selling opportunities the pending action of Atotech brings us as the leading provider of electroplating in the HDI industry. As we said before, defining trends of miniaturization and complexity they have dominated the semiconductor market for decades are becoming increasingly critical to Advanced Electronics. We're using the same strategic playbook they made successful in the semiconductor market become a foundational solution provider in Advanced Electronics. We were delivering the key building blocks for next-generation technologies. We look forward to closing Atotech acquisition to flex a transformational step in our long-standing strategy. Turning now to our Specialty Industrial market. Revenue was $173 million in the second quarter, growing 1% sequentially but declining 5% year-over-year. We saw a steady sequential demand across a wide array of applications. Our strategy in Specialty Industrial is quite simple. We're able to leverage our innovative vacuum photonics technology designed for semiconductor and advanced electronics applications by applying that technology to a broad array of applications across industrial, life and health sciences and research and defense. In the second quarter, I am pleased to say we also delivered record revenue in our services business, growing 8% sequentially and 9% over year to surpass a $100 million level for the first time. This success resulted to a strategic decision years ago to operate our worldwide services business as a distinct business unit with a dedicated leadership team and a customer-centric focus. With an increasing small base and further opportunities to drive new value-added customer solutions, we are well positioned to continue to drive growth in the years ahead. Our second quarter gross margin was 44.2% exceeding the midpoint of our guidance by 70 basis points. Given well-known inflationary pressures, we are very pleased with how we executed in the quarter. Second quarter operating expenses, which included annual compensation increases were $154 million, $2 million favorable midpoint of our guidance. We continue to prudently manage our cost structure, while investing in a number of attractive organic growth opportunities. Second quarter operating margin was 24.1%, exceeding the high end of our guidance range by 70 basis points, reflecting strong execution and challenging macroeconomic environment and strong operating leverage in our financial model. Second quarter adjusted EBITDA was $208 million and adjusted EBITDA margin was 27.2%. Net interest expense for the second quarter was $6 million and our tax rate is approximately 18%. Net earnings for the second quarter were $145 million or $2.59 per diluted share. Exiting the second quarter, we maintained a strong balance sheet and liquidity position with cash and short-term investments at a record of over $1 billion which positions us well ahead well for the pending Atotech acquisition. Our term loan principal balance was $820 million at the end of the second quarter and we exited the quarter with $246 million, net cash balance. In terms of working capital, days outstanding were 54 days at the end of the second quarter, compared to 59 days into the first quarter. Inventory turns were 2.5x at the end of the second quarter compared to 2.6x at the end of the first quarter. For the second quarter, operating cash flow was $105 million and free cash flow was $41 million. Our capital expenditures in the quarter included an approximately $40 million investment to acquire and expand the facility in South Korea. We have a long-standing strategy to provide sales, service and technical support, the South Korean semiconductor industry, which has significantly increased our direct sales to these local customers. This investment will allow us to expand our capabilities and support our future growth objectives in this region. Consistent with prior quarters, we had a dividend payment of $12 million or $0.22 per share. I'll now turn to our third quarter outlook. With this levels remain robust continue to face supply chain constraints. As such, we expect third quarter revenue of $770 million plus or minus $30 million. Based on anticipated product mix and revenue levels, we estimate third quarter gross margin of 44.5% plus or minus one percentage point. And we continue to take necessary steps to counteract inflationary impacts on our business. We expect operating expenses of $155 million plus or minus $4 million. In the third quarter, net interest expense expected to be approximately $6 million and our tax rate expected to be approximately 18%. Given these assumptions, we expect third quarter net earnings of $2.66 per diluted share plus or minus $0.25. In summary, we're exiting well and delivering growth and profitability across a number of attractive market opportunities. Despite macroeconomic inflationary headwinds, our financial performance is very strong and we believe the pending acquisition of Atotech provide long-term value creation for our employees, customers and shareholders. I'd like to now turn the call back to the operator for Q&A. Operator: Thank you. [Operator Instructions] And our next -- first question comes from Amanda Scarnati from Citi. Your line is now open. Amanda Scarnati: Hi. Good morning. The first question I have is on the semiconductor side of the business. Lam talked about lowering the WFE estimates for 2022 on supply constraints. Can you just talk a little bit about sort of what's happening in your backlog? Are you able to ship more than expected on the semiconductor market, or are you still seeing supply constraints there? John Lee: Hi, Amanda, it's John. Thanks for the question. As we said we still see supply chain constraints and that is something we factor into our guidance for Q3. Our backlog, we don't really report on it but it's really been strong. So as I mentioned in the prepared remarks, the demand is not the problem. We wish we could ship more. So I think Lam's commentary was just reflective of the reality that all of us have been constrained throughout the year. So demand remains strong and but we are still constrained. Amanda Scarnati: And the other question is on the PCB side of the market. Obviously, there's a lot of consumer constraints, particularly in the mobile and compute markets. When do you see these headwinds in the PCB market to abate? Do you think it gets worse before it gets better, or do you think that there is a lot of stability that you're seeing from your customers? John Lee: Well, I think that the PCB market is made up of multiple markets. So what's weak right now are some of the consumer electronics, smartphones, notably in PCs. But the PC market also supplies data center type of markets. So we believe that smartphones have been a little weak and that does affect our flexible portion of our market – of our product line. But utilizations have been pretty high in general, because we have many of our tools out there in the field and they're being used. So I think we're just ready for the next CapEx build-out and this year was a digestion year as we've seen and we've talked about before. But looking forward we remain very positive on the long-term trends of the PCB market. Amanda Scarnati: Okay. Thank you. John Lee: Thanks, Amanda. Operator: And thank you. And one moment for question. And our next question comes from Patrick Ho from Stifel. Your line is now open. Patrick Ho: Thank you very much. John maybe first off on the semiconductor side of things. It's good to hear the continued expansion of that business outlook and you talked about share wins in areas like RF Power. Maybe on a bigger picture perspective, what are additional areas within your product portfolio, where you're either seeing market expansion or the potential for additional share gains? What are some of the semiconductor areas where those opportunities still exist? John Lee: Thanks for the question, Patrick. Well, first off I think as we mentioned in the prepared remarks, we see additional opportunities just in our Power itself. So that's one large opportunity. We also see opportunities as the semiconductor industry inflects to more vertical structures. And that drives opportunities in atomic layer deposition, where our ozone products have a lot of potential growth as well. And then more importantly we've talked about our expansion into world-class optics, addressing the customers in lithography, inspection and metrology. It's an area where we haven't had as high market share as in our vacuum products. We made multiyear investments in there and we see some great design wins in that area as well. So that's another area for growth. Patrick Ho: Great. That's helpful. And maybe as a follow-up question for Seth in terms of the supply chain issue, margins are holding up pretty well, given everything that's going on. Are there specific areas where the constraints are still I guess really persistent where those are the biggest challenge, or have you seen improvement in certain areas, whereas in other places they haven't shown improvements yet? Seth Bagshaw: Yes. Thank you, Patrick. Yes. So I think we – I mean it's a number of areas but the component piece it's like component is still in the area of the most headwinds we've seen which has been the case for a number of quarters. Obviously, I think that's also true across the industry. So the good news is the operations team is really leaning into a number of inventory objectives. I think we're going to be again working through all those supply chain sets over time. Again I think it will take a while to work through all those. But until in the quarter we did go above the high end of the guidance range on revenue. Margins were a little bit than expected. So I really give a lot of high marks to the operational execution within the MKS team here. So – but again, as John mentioned in the prepared remarks, we still see some headwinds there in supply chain. But I think we're over time, I'm sure we'll gain on it like everybody else. So we're pretty happy with execution in the quarter for sure. Patrick Ho: Great. Thank you, again. John Lee: Thanks, Patrick. Operator: And thank you. And one moment for questions. And our next question comes from Joe Quatrochi from Wells Fargo. Your line is now open. Joe Quatrochi: Yes. Thanks for taking the question. And congrats on getting the China approval for that [indiscernible] deal. Maybe one on the semi side. Can you talk about the linearity in terms of component availability, you saw during the quarter? And then I guess, what are you embedding in your September quarter guidance from a component perspective, relative to the June quarter? John Lee: Joe, it's John. In terms of linearity on component supply, I think that's really not the issue. It's usually, whether we have it or not. So when we get it, it's fine. It could be linear or not but that's not really the cause of concern. It's really the surprises and we think we're going to get it and we don't. And then it causes a whole slew of running around trying to account for it. Going forward, I think it still surprises. I think we have line of sight to many things, because we've worked on it. But we could have said that last quarter and the quarter before. It has gotten better. There are fewer surprises, but there are still surprises. So I think really that's the way I would characterize, how the component and supply chain constraints seem to be working over the last several quarters. Joe Quatrochi: Got it. That's, helpful. And then on the Atotech side. Can you guys remind us just, how should we think about accretion for the deal given the moves that we've seen in interest rates, over the last few months? John Lee: Well, Joe we're going to certainly have an Analyst Day, at some point after close. And at that point, we'll be very happy to share the financial models of the combined company. So I'd like to leave it to Lam. But one reminder is that, the pro forma revenue when combining Atotech's chemistry revenue, the service revenue, our service revenue, MKS will be about 40% recurring revenue. And that's really a powerful financial foundation, from which we can build in terms of supporting our customers' R&D events or products and projects over any kind of CapEx downturns. Joe Quatrochi: Got it. Thank you. John Lee: Thanks, Joe. Operator: And thank you. [Operator Instructions] And our next question comes from James Ricchiuti from Needham & Company. Your line is now open. Q – James Ricchiuti: Hi. Good morning. Just a question on the Specialty Industrial business. I'm just wondering, if you're seeing any change in customer behavior just related to some of the increased macro uncertainty? And how would you -- could you characterize the demand that you're seeing in some of the larger verticals in that business? John Lee: Yes. Thanks, for the question, Jim. We really haven't seen a lot of change. You can kind of see the numbers. It's very steady in all the verticals, of what we call Specialty Industrials. There's always gives and takes. Defense is lumpy, but R&D is lumpy. But when you combine it all, Jim, I can't really point to any kind of macro behavior in any of the verticals. It's just been very steady. Q – James Ricchiuti: Got it. Follow-up question just as it relates to Advanced Electronics. I know we don't talk a whole lot about it, but we continue to see pretty healthy demand in the MLCC business. And I'm wondering to what extent is that providing support, to that part of the business as you go through this cyclical downturn on the flex PCB drilling side? John Lee: Yes. The MLCC market is certainly strong and supports the -- many of the electronics products markets that we play in. But we're really -- as you know the CapEx part of it, so it has been pretty muted as well as we characterize it, similar to flex. The factories are running, our tools with high utilization but right now, they don't seem to have a need for CapEx expansion. We think that will change next year. Typically, when you have a down year in CapEx investment next year usually picks up. Now, that's not a promise, but that's what we've seen in the past. Q – James Ricchiuti: Got it. Thanks and congratulation on the approval in China. John Lee: Thanks Jim. Operator: Thank you. And our next question comes from Krish Sankar from Cowen. Your line is now open. Krish Sankar: Yes, hi. Thanks for taking my question and congrats on getting the approval from China on Atotech. I've two of them. First one John just a hypothetical question. When you look at prior cycles and like obviously, one of your customers Lam reported last evening really good numbers but your inventory has also grown. I'm just wondering if they start seeing a slowdown would you see that a quarter earlier because they're going to start using up from their inventory versus you shipping it to them. Is there a way to think about it like you would probably see a one quarter earlier decline in your semi revenues before your semi-cap customers see it? John Lee: Krish, yes, thanks for the question. Yes, as you know we typically are a bit ahead of our OEM customers. That's natural since we supply to them and they supply to their customers. Whether it's a quarter or not and whether it's in particular product groups or not it can vary depending on the cycle. But we will always probably front run a little bit. So, that's fair. But really we like to think about performing through the cycles. We outperform through the cycles 200 basis points above WFE and some of that's market share gains and some of it is in the markets that we place. So, -- but we do front run a little bit. Krish Sankar: Got it. Very helpful John. And then one quick question. Just in your semiconductor product portfolio you have a wide range obviously you're also gaining share in the power supply side. I'm curious like if and when there is a slowdown most investors worry about maybe slowdown in memory maybe slowdown in mature nodes later on which product category of your huge product portfolio in SEMES will you see that first, or would it be impacted across the board? John Lee: Yes, I think it's really going to be something that impacts us across the board. We are -- our strategy is to be a very broad portfolio supplier and enabler in the semiconductor market. So, every one of our products goes into all types of chip making memory, foundry, legacy types of chips as well. And it's a little more complex too because as we grow our Photonic Solutions division addressing lithography, metrology, and inspection as you know the dynamics there are a little different than the vacuum types of customers. Those tend to be much longer lead items and so you have a little less volatility there than the vacuum component. So, it's a mix, but we probably see all of them altogether up and down in terms of the breadth of our portfolio. Krish Sankar: Thanks a lot John. John Lee: Thanks Krish. Operator: Thank you. And our next question comes from Paretosh Misra from Berenberg. Paretosh Misra: Thanks and good morning guys. A question on Photonics. What sort of trends are you seeing in that market as it relates to your semiconductor business? In other words, how is the dollar spending on Photonics trending versus the WFE? And do you expect that to outperform WFE and maybe by how much? John Lee: Thanks. Good question Paretosh. As I said the Photonics customers of ours or the lithography metrology and inspection customers. And just by the nature of those tools and the long lead items of the critical subsystems of those tools there is certainly less volatility there. With respect to your question of is it -- are they spending more or less in vacuum I think that's pretty difficult to say. Certainly our major customers there are leaders but so are the major customers that we have in vacuum. And so they are all pulling for the products. I would say that for sure and they're all saying they're they don't see any kind of pushouts or anything at least in the foreseeable future. Paretosh Misra: Thanks John. And then I was wondering if you could provide some more color on your Power business as to what sort of growth rate you saw in Q1 and Q2? John Lee: I think I would say this we continue to be very pleased with the market share gains that we're seeing in Power. We probably don't want to break out by quarter for one product group, but -- because it can be lumpy too as you can imagine Paretosh. But overall, year-over-year, we're really, really pleased with how that group is performing. Paretosh Misra: Fair enough. Thanks, guys. John Lee: Thanks, Paretosh. Operator: And thank you. And one moment for questions. And our next question comes from Mark Miller from The Benchmark Company. Your line is now open. Mark Miller: Congrats on your record quarter and the Atotech closure of that acquisition. I'm just wondering can you provide any estimates on the impact of component availability either on your margins and/or sales, if they are at normal levels, what would you expect to see? Seth Bagshaw: Yes. Hey, Mark. It’s Seth. Thanks for the question. Yes, we don't provide a little of detail. There's a lot of moving pieces obviously. But what I'll kind of say, if I went back to similar volumes. So the big impact for us is, obviously, supply chain headwinds and inflationary pressure, like everybody else is experiencing, but if you went back to kind of our margins a year ago and roughly these volumes gives you a good sense of kind of the impact overall for MKS, both supply chain headwinds as well as inflationary pressure. Now, we've got a long-standing track record of working on profit and cash recovery activities. So, I mentioned in prior calls, we saw this coming early. We've leaned into it, and we've done a number of activities. It take a little while to roll through the P&L, but our goal is get back up to historical margins. It'll take a little while for sure, because you have large backlog and some of things take a while to execute. But, there's a long list of things we're working on and have been working on to get us back up to those historical levels, and that's kind of our goal for sure both intermediate and long-term, and just driving that those efforts going forward. Mark Miller: Your inventories have been trending up over the last year. Is that just tracking your backlog? Seth Bagshaw: Yes. I would say it's more on the, especially prepared remarks, we are seeing obviously supply chain challenges. So, we've leaned into a few areas. A couple of things are kind of at a high level. One is we've thoughtfully looked at long lead time parts and have gone out there and secure those. So that will be a strategic investment if you will long-term. But probably the biggest portion of the growth has been the fact that, again, you can't bring in every part you need to complete a finished goods. You bring in what you can, because it's available, and we have the flexibility in our balance sheet and capabilities to kind of make that type of investment, that type of long-term decision. But that's probably the bigger driver in some of the growth in the inventory. It's really not quite bringing in all of the parts to complete finished goods. Now, as the supply chain, again, is faster almost over time, that should normalize the inventory levels of back of historical levels if you will. So, it's really, fundamentally, an impact on the supply chain we're addressing in that fashion. Mark Miller: Thank you. Seth Bagshaw: Yes. Thanks Mark. Operator: And thank you. And I'm showing no further questions. I would now like to turn the call back over to David Ryzhik for closing remarks. David Ryzhik: All right. Thank you for joining us today and for your interest in MKS. Operator, you may close the call please. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.

Operator: Good day, and thank you for standing by. Welcome to the MKS Instruments First Quarter 2022 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference may be recorded. [Operator Instructions] I would now like to hand the conference over to your host today, David Ryzhik, Vice President of Investor Relations. Please go ahead. David Ryzhik: Good morning, everyone. I am David Ryzhik, Vice President of Investor Relations, and I’m joined this morning by John Lee, President and Chief Executive Officer; and Seth Bagshaw, Senior Vice President and Chief Financial Officer. Yesterday, after market closed, we released our financial results for the first quarter of 2022, which are posted to our website, mksinst.com. As a reminder, various remarks about future expectations, plans and prospects for MKS comprise forward-looking statements. Actual results may differ materially as a result of various important factors, including those discussed in yesterday’s press release and in our most recent annual report on Form 10-K and any subsequent quarterly reports on Form 10-Q. 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. During the call, we will be discussing various financial measures. Unless otherwise noted, all forward-looking financial measures excluding any contribution from Atotech Limited, the acquisition of which is still pending. Also, unless otherwise noted, all income statement-related financial measures will be non-GAAP other than revenue. Please refer to our press release and the presentation materials posted to our website for information regarding our non-GAAP financial results, a reconciliation of our GAAP and non-GAAP financial measures and certain pro forma financial information. Now, I’ll turn the call over to John. John Lee: Thanks, David. Good morning, everyone, and thank you for joining us today. I’m very pleased with our Q1 results, especially given the significant industry supply chain challenges. First quarter revenue of $742 million was within 1% of the midpoint of our guidance range. Profitability was strong with net earnings per diluted share of $2.71, exceeding the midpoint of our guidance range and an increase of 6% year-over-year. We credit this profitability to excellent execution in our factories and an emphasis on cost control while continuing to make targeted R&D investments across our portfolio. We believe our performance highlights prudent management of our expenses while still investing in the long-term growth of our business. While underlying demand trends remain very healthy, industry supply chain constraints are limiting growth, which is particularly true in our Semiconductor business. Before I review the key trends across our end markets, I want to explain the change in how we will present our revenue. Beginning with this quarter, we have divided what we previously referred to as our Advanced Markets into two separate end markets: Advanced Electronics, Specialty Industrial. We believe this change better represents the end markets we serve and will enable you to better understand the key drivers of our business. There will be no change to our Semiconductor Market, which includes deposition, etch, lithography, metrology, inspection, wet clean and packaging applications. In the first quarter, revenue from our Semiconductor Market comprised 66% of overall revenue. Advanced Electronics represents revenue from advanced printed circuit board, solar, display and electronic component applications. We view our Advanced Electronics Market as a close cousin to the Semiconductor Market, each of which benefits from the same defining trends of miniaturization and complexity. We believe packaging technologies will become increasingly critical to enabling better performance, design and cost of electronic devices from high-end smartphones to electric vehicles to high-performance microprocessors for data centers and artificial intelligence. And advanced PCBs and package substrates are the next key drivers of these trends, underscoring the strategic rationale of our pending acquisition of Atotech, where we plan on leveraging Atotech’s electroplating solutions and our advanced laser drilling solutions to accelerate our customers’ road maps. In the first quarter, revenue from our Advanced Electronics Market comprised 11% of overall revenue. Our Specialty Industrial Market represents a broad array of industrial, life sciences, research and defense applications. These are businesses that leverage our domain expertise in Semiconductor and Advanced Electronics. They represent a collection of proprietary technologies with strong margins. In the first quarter, revenue from our Specialty Industrial Market comprised 23% of overall revenue. Now, I’d like to provide more detail on our first quarter results and my thoughts on second quarter demand trends. Sales to our Semiconductor Market declined 1% sequentially in the first quarter, in line with our expectations, reflecting continued supply chain constraints, as well as a temporary shutdown at our Shenzhen facility due to local government COVID-19 measures. Our operations and engineering teams continue to respond to these challenges with agility, flexibility and determination in partnership with our customers and suppliers. Overall, semiconductor demand trends remained robust in the first quarter with broad-based strength across our vacuum and photonics portfolio. We continue to see strong demand for our RF Power solutions for dielectric etch applications as well as for our dissolved ozone solutions for advanced foundry applications, especially in new fab expansions. I’m also pleased to announce that we commenced shipment of our new clean line solution in the first quarter. This innovative system is a compact remote plasma source used to reduce buildup of byproducts that arise from vacuum processing, which improves fab yields and lowers preventative maintenance costs. It is a direct result of our Surround the Chamber strategy as it leverages our expertise across our RF Power, remote plasma, valve and integrated process solutions teams to deliver a unique solution, which again demonstrates the strength of MKS’ innovation engine. We are seeing very positive interest from multiple customers. We also continue to see strong demand for our photonics solutions with particular strength in our precision motion subsystems, securing design wins across multiple back-end applications, including annealing and advanced packaging lithography. As we look to the second quarter, demand trends in our Semiconductor Market remain very strong. However, we expect supply chain constraints to remain a factor. Accordingly, we expect revenue from our Semiconductor Market to be consistent to slightly down as compared to first quarter levels. Before I discuss our Advanced Electronics and Specialty Industrial Markets, I want to share my thoughts on 2021 critical subsystem market share data published earlier this month by the independent market research firm, TechInsights, formerly VLSI. The report validated that MKS has continued to take share in the overall critical subsystem category in 2021. In fact, the research shows MKS is now the market leader in RF Power Supplies. This achievement was a culmination of many years of targeted investments, innovation, execution and close collaboration with our customers. I’m extremely proud of the MKS team for achieving this milestone, which took hard work, dedication and expertise. And we see additional opportunities on the horizon for RF Power, fueled by continued industry investments into vertical scaling. TechInsights also highlighted our share gains across other critical subsystem categories such as RF matching networks, remote plasma sources, pressure sensing, residual gas analyzers and linear motion subsystems. As a critical subsystem leader with the broadest set of capabilities in the industry, we are well positioned to capitalize on many opportunities that lie ahead in the Semiconductor Market. Moving to our Advanced Electronics Market. Revenue in the first quarter declined 15% sequentially and 29% year-over-year. Declines were primarily a result of softer industry demand for flexible PCB via drilling equipment. We believe our customers have taken a risk-averse approach to expanding Flex PCB capacity at this time, given the growing uncertainty resulting from factors such as supply chain constraints, geopolitical tensions, inflation risk and its impact on consumer and demand. As we look to the second quarter, we expect revenue from Advanced Electronics to be down sequentially led by continued softness flexible PCB equipment spending. Excluding flexible PCB via drilling, our Advanced Electronics revenue is expected to be consistent with first quarter levels. Revenue from our Specialty Industrial Market declined 1% sequentially, but grew 2% year-over-year. We saw good sequential and year-over-year growth in life sciences applications, offsetting seasonal softness in research spending. For the second quarter, we expect revenue from our Specialty Industrial Market to remain consistent with first quarter levels. Before I hand the call over to Seth, I want to share a few thoughts regarding our pending acquisition of Atotech. As you may have seen, on April 1, we announced an extension of the date for completing the acquisition to September 30, 2022. The strategic benefits of acquiring Atotech have become increasingly compelling as the trends towards advanced packaging continue to accelerate. We believe the unique combination of MKS’ laser drilling and Atotech’s advanced electroplating solutions will allow MKS to become a foundational enabler of electronic devices. Spanning from the transistors on a chip to the interconnects in an advanced PCB, the defining trends of miniaturization and complexity that have driven continuous innovation in the semiconductor industry for decades are rapidly disrupting the PCB and package substrate landscape. Just like what we did in semi more than two decades ago, we are positioning ourselves to be at the forefront of these trends. We believe Atotech’s General Metal Finishing business will fit nicely within our Specialty Industrials business, sharing the common thread of leveraging core domain expertise to address a wide variety of specialty industrial applications. We continue to work with China’s state administration for market regulation to obtain regulatory clearance, which is the remaining jurisdiction for which approval is a condition to closing. And we’re looking forward to closing the transaction and welcoming the talented Atotech team to MKS. With that, I’d like to turn the call over to Seth. Seth Bagshaw: Thank you, John. I will first provide additional detail and updated end market classification then cover our first quarter 2022 results followed by guidance for the second quarter. Let’s start with Advanced Electronics, which is a key enabler of laser-based manufacturing solutions for cutting-edge electronics applications. This market includes flexible and HDI PCB via drilling, laser and vacuum processing solutions for solar and display applications and a number of other precision manufacturing applications for electronic devices. We believe our unique Surround the Workpiece portfolio of lasers, motion, optics and other photonic solutions combined with our applications expertise from our Equipment Solutions Division provide us with a unique opportunity to be the go-to enabler of advanced electronics manufacturing. These applications offer attractive secular growth or maybe some level of cyclicality, given this market is tied to capital equipment spending. Looking ahead, our pending acquisition of Atotech would add critical electroplating solutions for advanced interconnects. With these solutions, one of the laser drilling systems, we believe we’re well positioned to optimize the interconnect and accelerate customer road maps, next-generation electronic devices. We also believe Atotech’s electronics business will add a large base of stable recurring revenue with a strong margin profile. For 2021, revenues from Advanced Electronics Market comprised 15% of MKS’ total revenue and on a pro forma basis with Atotech’s 2021 reported financial results would have comprised 32% of overall revenue. Our Specialty Industrial Market represents a broad array of leading technologies across industrial, life and health sciences, research and defense markets. Examples of applications include vacuum solutions for synthetic diamond manufacturing, lasers for ophthalmic surgery, vibration isolation for advanced research and infrared zoom lenses for both commercial and defense application. This market provides more stable revenues and strong margins and cash flow. In this market, we leverage product and technology capabilities that we developed from our investments in the Semiconductor and Advanced Electronics Markets. Atotech’s General Metal Finishing business would fall into our Specialty Industrial Market. Similar to our existing Specialty Industrial applications, this important domain expertise in chemistry is leveraged across a wide array of applications such as surface finishing, in functional coatings for electric vehicles, renewable energy and a host of other industrial and commercial applications. In 2021, revenues from our Specialty Industrial Market comprised 23% of MKS’ total revenue. On a pro forma basis, Atotech’s 2021 reported financial results would have comprised about 27% of overall revenue. In addition to dividing our Advanced Market to two separate markets, we also modified the names of three divisions. Our Vacuum and Analysis Division is now our Vacuum Solutions Division. Our Light and Motion Division is now our Photonic Solutions Division and our Equipment and Solutions Division is now our Equipment Solutions Division. A historical snapshot of our results broken down by our divisions in new markets for the prior three years is available in the Investor Relations section of our website. With that, let’s now discuss our first quarter results and outlook for the second quarter. Sales for the first quarter was $742 million and declined 3% sequentially but up 7% year-over-year. While overall revenue was below the midpoint of our guidance, we are very pleased with how we executed in the quarter, given ongoing global supply chain constraints as well as temporary shutdown of our Shenzhen facility due to local COVID-19 restrictions. In the first quarter, Semiconductor sales were $488 million, down 1% sequentially but up 19% year-over-year, reflecting broad-based demand from our vacuum and photonic solutions. While supply chain constraints draw most attention these days, our relentless focus on innovation is the strongest ever. The market share gains we delivered in 2021 are a clear reflection of our ability to accelerate our customer road maps. We are innovating areas key to Advanced Electronic -- advanced semiconductor manufacturing, including vertical scaling, atomic layer processing, advanced lithography, metrology and inspection as well as wet clean applications. We have significant domain expertise across each of these areas and in many cases where we combine our broad expertise to introduce new solutions that create new market applications such as our clean line solution that John discussed. We have a long track record of gaining market share. We continue to leverage new opportunities. Moving to Advanced Electronics Market. Revenue in the first quarter was $82 million, a decline of 15% sequentially and 29% year-over-year. The primary driver behind the decline was soft industry demand for flexible PCB via drilling equipment. As a result of the factors John highlighted, we expect demand for our flexible PCB equipment to remain relatively muted in the second quarter. This market continues to be a long-term secular grower, but given our exposure to the capital equipment spending in this industry, our quarterly revenue remains lumpy. For context, between 2019 to 2021, flexible PCB equipment revenue grew at a 40% compounded annual growth rate. We continue to work closely with the HDI PCB via drilling beta customers to drive further qualifications while continuing to generate interest from new customers. We have dozens of tools in high-volume manufacturing running 24/7, which is a clear validation of our technology. One of the attractions of this market is that it’s sticky once you get designed in. We would have liked to have made faster progress gaining share, we are encouraged by the customer conversations and the performance of our offering. Moreover, we’re excited about the growing attention on advanced HDI PCBs in package substrates and the role this play in authorizing performance, cost and designs of Advanced Electronic devices. We expect this to become more critical to enabling high-end smartphone applications, those high-performance servers, wearables, electric vehicles and other electronic devices. Importantly, these increasing market requirements align very well with MKS and Atotech’s capabilities. And we believe our combined capabilities will allow us to optimize the interconnect and drive better and faster solutions for our customers. Turning now to Specialty Industrial Market. Revenue was $172 million in the first quarter, declining 1% sequentially, but growing 2% year-over-year. On a sequential basis, we saw growth in life and health sciences and defense applications, offset by seasonal softness in the research market. Our first quarter gross margin was 45%, which at the midpoint of our guidance. As expected, we were negatively impacted by higher inflation, but we’re pleased how we execute our gross margin despite revenue being below the midpoint. While first quarter research and development expenses remained flat sequentially, reflecting continued investment in product development, first quarter operating expenses were down $3 million sequentially to $144 million and below our guidance range as a result of strong cost controls as well as the timing of certain equity compensation expenses, which will be reflected in the second quarter. First quarter operating margin was 25.6%, 100 basis points above the midpoint of our guidance to near the high end of our guidance range. Operating income was $190 million, up $11 million year-over-year. First quarter adjusted EBITDA was $211 million. Adjusted EBITDA margin was 28.4%. Net interest expense for the first quarter was $6 million, and our tax rate was approximately 18%. Net earnings for the first quarter were $151 million or $2.71 per diluted share. Exiting the first quarter, maintained a strong balance sheet and liquidity position with cash and short-term investments at a record $1 billion, which well positions us to have the pending Atotech acquisition. Our term loan principal balance was $822 million at the end of the first quarter. We exited the first quarter with $231 million net cash balance. In terms of working capital, day sales outstanding were 59 days at the end of the first quarter compared to 53 days at the end of the fourth quarter, reflecting the timing of revenue during the quarter. Inventory turns were 2.6 times at the end of the first quarter compared to 2.8 times at the end of the fourth quarter, which was impacted by supply chain constraints. These metrics combined with the annual bonus payment resulted in first quarter operating cash flow of $41 million and free cash flow of $22 million. Consistent with prior quarters, we had a dividend payment of $12 million or $0.22 per share. I’ll now turn to our second quarter outlook. Even though business levels remain robust, we expect second quarter revenue of $730 million, plus or minus $30 million, primarily due to continued supply chain constraints. Based on anticipated product mix and revenue levels, we estimate second quarter gross margin of 43.5%, plus or minus one percentage point. Like many other companies, we’re not immune to exceptional macroeconomic inflationary challenges impacting our markets. However, we have a strong track record of driving continuous improvement in our operating model. We will continue to take all necessary steps to counteract these inflationary impacts over time. We expect operating expenses of $156 million, plus or minus $4 million. The sequential increase is largely due to timing of annual compensation increases. For the second quarter, net interest expense is expected to be approximately $6 million, and our tax rate expected to be approximately 18%. Given these assumptions, we expect second quarter net earnings of $2.28 per diluted share, plus or minus $0.24. Before I turn the call back to the operator, I’d like to share a few thoughts on our pending acquisition of Atotech. I am pleased to announce we successfully resyndicated our debt financing earlier this month following the expiration of the previous syndication. Our updated financing includes a term loan B with a USD 3.6 billion tranche and a EUR 600 million tranche, both of which were substantially oversubscribed. We also diversified our lending base with a $1 billion term loan A. Funding will coincide with the close of the pending acquisition of Atotech. Given the current debt market environment, the price was understandably somewhat higher this time around. However, we are very pleased with the final terms and the mix of debt capital we achieved. We believe the successful pricing demonstrates lenders’ belief in the strong credit profile of the combined company. We are confident that cash flow generation of the combined company will position us to aggressively delever the balance sheet, consistent with prior acquisitions. We’re also pleased with Atotech’s business performance as evidenced by their full year 2021 results released on April 4. In fact, on a pro forma basis, 2021 adjusted EBITDA for the combined company would have amounted to $1.3 billion. Atotech has also performed slightly better than we expected when we performed our initial due diligence. Furthermore, we originally announced the acquisition, we said that we expected net leverage at closing to be slightly below 3.5 times. Given the extension of the timing of the transaction, anticipated cash flow generation for both MKS and Atotech, we now anticipate a more favorable net leverage ratio at closing. MKS is in a strong position to drive shareholder value creation by capitalizing on a number of attractive secular trends. And we believe Atotech would further enhance those efforts. I’d like to now turn the call back to the operator for Q&A. Operator: Thank you. [Operator Instructions] Our first question comes from the line of Patrick Ho with Stifel. Your line is open. Please go ahead. Patrick Ho: Thank you very much. John, maybe first off, I know there are a lot of moving parts on the whole supply chain and COVID-related issues. But can you give a little bit of color for the June quarter, what the bigger impacts are? Is it the ability to procure certain components or the Shenzhen lockdowns and the after effects still impacting your ability to ramp up the facility there? And maybe as a follow-up to that, what’s been the ability on your end to flex some of that capacity to – because you have a large footprint. What’s the ability to flex some of that capacity to, I guess open capacity? John Lee: Yes. Thanks, Patrick for the question. I think I’ll take the Shenzhen one. So our factory was closed for about a week or so because of the COVID-19 restriction. So we did recover after about a week, and so that’s factored into our Q2 guidance. But I would comment that the supply chain constraints are not getting better. Electronic components remain a big part of it, but also it broadened to other types of materials, resins, specialty metals. And so we’re factoring that into our Q2 guidance as well. In terms of moving capacity between factories, there are a few factories where we can do that. But mostly, our factories are still running pretty well in terms of utilization because they’re still constrained by supply. Patrick Ho: Great. That’s helpful. And maybe as my follow-up question for Seth, in terms of gross margins, you guys performed really well despite the shortfall in revenues and the supply chain constraints. Can you just give some of the levers that are keeping gross margins at still pretty high levels, given the current environment? Seth Bagshaw: Yes. Thank you, Patrick. Yes, I would say that the – obviously, what we do is provide to our customers high-value applications. So I think what you’re seeing is a reflection in our margin, reflects frankly that value to our customers in the overall markets we serve. Kind of on the tactical level to your question, we have a number of levers. We’ve got a world-class operations team. We’re really working to qualify potential other sources to mitigate some inflationary pressure. We do have some pricing ability. We’ve talked about that in the past that we’ve definitely leaned into, and there’s more opportunity there as well in the future. And we’ve broad-based portfolio across a number of different markets, I think, kind of mitigate some of the things that John talked about in some of the markets we serve. So it’s a wide range of opportunities. It’s a wide range of different levers we pull. I think fundamentally, you’ll see our margins go back up over time to historical levels. That’s our goal, for sure. Patrick Ho: Great. Thank you again. Seth Bagshaw: Thanks, Patrick. Operator: Thank you. And our next question comes from the line of Jim Ricchiuti with Needham & Company. Your line is open. Please go ahead. Jim Ricchiuti: Hi, thank you. So if I look at the Vacuum Solutions business being down sequentially, guys, that was mainly supply chain and the COVID disruption, and that’s, I assume, the area of the semiconductor business that you’re a little bit more cautious about continuing supply chain issues in the June quarter? John Lee: Jim, it’s John. That’s right. Give or take, it was about down 1% in our semi business, and that is where the majority of the supply chain constraints are hitting our business. Jim Ricchiuti: Okay. And if we look at the photonic solutions portion of the business and look at the way you’re now characterizing that business, what I’m wondering is if you could provide some color on the nonsemi photonics business, how that’s performing. For instance, are you seeing any signs of changing demand in the European part of that business just in light of the geopolitical situation that we’re experiencing there? John Lee: Yes, Jim, thanks for the question. No, we’ve actually seen that part of the business of the photonic solutions division to be pretty stable. We don’t have a lot of exposure of business to Russia, if you will, and no supply chain. And so the business has been actually pretty stable in the – as we talked about life and health sciences, research and defense so – and other industrials. Jim Ricchiuti: Okay. Thanks a lot. John Lee: Thanks, Jim. Operator: Thank you. And our next question comes from the line of Scott Graham with Loop Capital Markets. Your line is open. Please go ahead. Scott Graham: Yes, hi. Good morning. Thanks for taking the question John, Seth and David. So I’m just looking at the weakness in the PCB business, and you’re alluding to your sort of the OEs CapEx weakening there. That’s does seem to be a pivot versus where we were understanding, of course, that this is a lumpy business. How will we read that across – we’re gearing up for an acquisition. I just – we’re much more than doubling down in PCB, we’re kind of 5x-ing it, right? So I’m just wondering how – why should we be comfortable over the next couple of quarters with the PCB business weakness, and you’re about to significantly increase the size of a business where the customers’ capital spending is weak? John Lee: Yes, Scott, that’s a fair question. I would always pivot to the fact that our strategies are always long term. And when we look at advanced packaging and package substrates, we see that as a really attractive long-term opportunity for MKS. And that’s why we are trying to acquire Atotech. When you look at our flex business, it is lumpy. And I think it’s well known that smartphone and consumer demands and some of the uncertainties have made our customers cautious in terms of adding capacity for flex. But we also know that we are the leader in Flex PCB via drilling. There’s been no loss of market share as far as we know. So we always look at the long term, and flex business will come back. HDI business will grow. And if Atotech is part of the family, their business for electronics plating will also grow. So we’re really looking at the long-term play with respect to advanced packaging. Scott Graham: Understood. Thank you. So I appreciate that, John. It was good. I suspect the same. The other question I had was about sort of price cost, and some companies look at price cost as pricing versus materials. Some look it as pricing versus company-wide deflation. However you look at it, it does look like the second quarter is going to be behind that curve. And so I know you mentioned that there’s some opportunity for you in pricing. Kind of why does the gross margin sink that much? How – why are we not increasing prices maybe a little bit faster, right, to buffer that second quarter gross margin? Maybe just talk about price cost in the context of your second quarter guide. John Lee: Yes, Scott. I think the inflationary costs have hit us pretty hard, as I said, everybody pretty hard. We have been leaning into price increases, but that does take some time to recover. And so the pace of which inflationary costs have hit us and the pace of our levers in terms of price increases, there’s a bit of a gap, I guess. And I think you’re seeing that in our guidance in Q2. But as I’ve said, we expect that to recover over the next outer quarters as well. And we have a lot of backlog. And so backlog is commitments at previous prices. And so it’s a bit of a constraint in terms of how fast we can change prices versus, for instance, a consumable company where you can just change prices immediately or a chip company, for that matter. And so we do have a little bit of a lag there, but be rest assured that we expect to recover that gross margin in the outer quarters. Scott Graham: And I appreciate that, John. Thank you and I guess it will be like a two quarter event. But just to tuck-in sort of question 2a here, is there any reason why with demand strong because it doesn’t sound to me like semi is weaker, and that’s where the supply chain is kind of hitting you the hardest. It sounds to me like the end demand is pretty strong. Is there any reason why we can’t reprice the backlog? John Lee: It’s always an option that we’ve looked at. And we have to balance that with partnerships and relationships with key customers. And so we look at that as well. But we also try to make sure that we’re partnering in a long-term sense with our key customers. That’s really important to us that we maintain those long-term partnerships. And I think we get rewarded for that by our biggest customers. Seth Bagshaw: Just to add what John said is the market share gains we generated back in 2021 is kind of extension what John mentioned. Obviously, technology, seeing the right inflection points, investing ahead of that curve is a big driver for share gains. But the fact that our customers trust us to work with us, I think, is pretty important as well. So I would say it’s a big picture view is how we look at it. Scott Graham: Guys, thanks a lot for taking my questions. John Lee: Yes, thanks Scott. Operator: Thank you. And our next question comes from the line of Joe Quatrochi with Wells Fargo. Your line is open. Please go ahead. Joe Quatrochi: Yes. Thanks. Thanks for taking the question. Maybe one on the semi side. I’m just curious, several of your customers are talking about diversifying the supply chains or qualifying additional critical sub components. Have you guys benefited from any of that type of practice in terms of being able to maybe gain some share and some critical applications that maybe you previously weren’t? John Lee: Joe, it’s John. Actually, we have. We have actually been the beneficiary of some of that behavior from our customers. And going back to Scott’s earlier question, that’s because our customers trust us, and we partner with them. And so when they have constraints in their supply chain, MKS is one of the first companies they always come to and say, "Can you deliver these other new products or more of the ones that are designed in?" And so we actually have been the beneficiary of that. So we’re working hard in our operations team to continue to deliver and overcome the supply chain constraints. But in this kind of environment, the operations team is going to be responsible for share gains actually. Usually, we get share gains from technology, new innovations, et cetera, and that’s normal. But in this kind of constrained environment, our ability to gain market share because of our operational team’s excellence and performance is really a great – another lever for us. Joe Quatrochi: That’s helpful. And then just as a follow-up on the flex side, how would you characterize the industries or your customers’ discipline relative to maybe the last down cycle? Have you seen them maybe pull back on the CapEx somewhat quicker or faster than the past cycle in terms of just kind of hoping to see a less of a peak to trough? John Lee: Yes. No, I think this one is a little different than the last cycle, Joe. I think this one was – started off the year with kind of uncertainty. What – people weren’t sure or customers weren’t sure their capacity needs because there was uncertainty by their customers in terms of the signals from them. And then as the quarter progressed, I think those uncertainties became realized. And that – the inflationary expectations and expect on consumer demand, the geopolitics of Eastern Europe didn’t help. And so those uncertainties became realized into kind of a risk-off approach. And that’s what we’re seeing right now in our flex market. Joe Quatrochi: Very helpful. Thank you. John Lee: Thanks, Joe. Operator: Thank you. [Operator Instructions] Our next question comes from the line of Krish Sankar with Cowen and Company. Your line is open. Please go ahead. Unidentified Analyst: Hi, good morning. This is Steven calling on behalf of Krish. Thanks for taking my question. I guess the first one is just a little bit more of a high level if you could talk a little bit about the linearity across the three businesses throughout the quarter. I guess just looking at the higher DSOs in the quarter, I’m kind of wondering whether it was the semis business that saw some of the orders sort of frozen there, closer to the end of the quarter due to the Shenzhen production impact or if there are other interesting characteristics of the orders and sales across the other segments during the quarter. Seth Bagshaw: Yes, Steve, this is Seth. I’ll take that question. Yes, I said in the prepared remarks, the DSO’s a little bit higher this quarter versus prior quarters because the linearity of revenue in the – during the quarter. Usually, we have a little more of a hockey stick at the back end, which is more a photonics piece of the business. But I think what you’re seeing, we saw in Q1 is the supply chain constraints; it was sort of a linear impact there as well. So I wouldn’t say it’s a timing of orders per se. I think it’s more of how we get the parts into the operations and how we shipped out products. That was more of the linear impact, I think, on the quarter. And that drove up DSO. I mean, the aging is in good shape, everything else. It’s really just the timing of revenue during the quarter. It’s more operational-driven than order-driven. Unidentified Analyst: Got it. Thank you for the answer. And also one more for you as well on the gross margin side. So just in terms of the sequential decline in gross margins, can you provide more color on what is the incremental change that’s driving that? Is it partly mix? Or is it more the inflationary costs becoming a higher burden in the June quarter? And any additional color around that would be great. Seth Bagshaw: Yes. Yes, exactly. I’ll take that one as well, Steve. So yes, you’re right. So we’re down about 1.5 points sequentially, and it’s virtually all inflationary pressure. That’s a little bit of mix too because we mentioned the flex, the PCB drilling revenue in Q2 be relatively muted. It’s a little bit of mix there, but the lion’s share of the sequential decrease is inflationary pressure. And we know where it’s coming from. As John mentioned, we have actions in place. We’re very committed to kind of get back to historical levels, and that’s certainly all hands on deck work on that right now. But that’s what’s driving at least in the short term the impact on Q2. Unidentified Analyst: I think the magnitude of it, is it the higher cost? Is it affecting the semi business more than the other two segments? Seth Bagshaw: Yes, correct. Yes. So you’ll see it in the back of the analysis division is the biggest impact is. It’s affecting every division, but the vast majority is the semi piece of our business. Unidentified Analyst: Great. Thanks Seth. Seth Bagshaw: Yes. Thank you. Operator: Thank you. And our next question comes from the line of Paretosh Misra with Berenberg. Your line is open. Please go ahead. Paretosh Misra: Thank you. Good morning. Your photonics business is holding up better sequentially and was up a lot on a year-over-year basis. So what are you seeing there? Has it been impacted less by these supply chain issues? Or it’s just better demand which is driving that? John Lee: Yes. Paretosh, we strategically made some decisions early on when we bought Newport, which was to take the photonics technologies that we had and try to leverage that into some of the semi markets where Newport was relatively less levered. And that, again, like RF Power was a multiyear strategic decision. And we’ve been making progress with design wins over the last several years that we’ve talked about on these calls. And you’re starting to see that. You’re starting to see that a big part of the Photonic Solutions division growth is coming from the semi market. You see the Specialty Industrial being relatively stable, and you see the Advanced Electronics for the Photonics division also relatively stable. But the growth, a lot of that growth is driven by strategic decisions we made to put that technology for the semiconductor market. Paretosh Misra: Got it. And then as a follow-up, in this Specialty Industrial segment or market, how should we think about the growth potential in that business? Is it similar to Advanced Electronics? Or could it be lower than the electronics over the long run? John Lee: Yes. No, that’s – Specialty Industrial, we kind of look at it as a GDP plus kind of business. So that is lower than what we expect for the Advanced Electronics. And so – but that’s stable, much more stable, you can see in our guidance as well. It levers the research that we put into Semiconductors and Advanced Electronics. And we only play in certain niches where we have value and where we can have that steady gross margin and cash flow from it. Paretosh Misra: Got it. Thanks, John. John Lee: Thanks, Paretosh. Operator: Thank you. And our next question comes from the line of Hans Chung with D.A. Davidson. Your line is open. Please go ahead. Hans Chung: Thank you for taking my question. So first, is it possible to quantify like the impact from the supply chain constraint to our second quarter outlook? Like how much of amount like for example, like without supply chain constraint and what we can do in terms of top line? And then what’s the backlog exiting the March quarter versus three quarters ago? John Lee: Hans, it’s John. It’s difficult to quantify exactly what the supply chain constraints are on the top line. I think that’s your question. Suffice it to say, though, that our backlog is continuing to increase. We don’t publish that backlog. Bookings also continue to increase. So it’s not a demand problem. It’s not a backlog problem. It’s a supply chain constraint problem. And so we’re working real hard to try to increase our output every quarter. But as I said before, the supply chain constraints seem – they’re not getting better. And they continue to surprise. We continue to react. We react better. We have better partnerships with our customers and our suppliers, but they continue to surprise. And I think we’re also contemplating or including in our guidance the fact that there are COVID shutdowns now. We were affected by Shenzhen in Q1. As you know, there are potential effects of shutdowns in Shanghai and now Beijing. And we don’t have factories there, but we have offices, and certainly maybe third-tier suppliers have factories there. And so we’re taking all that into account as we guide the revenue going forward. Hans Chung: Got it. Okay. And then next question is regarding your RF Power, the business. So you have gained market share for the past couple of years, I would say. And just kind of how much room for you guys to continue to gain share, particularly in the contact edge side of business? John Lee: Yes. No. As you know, we’ve been talking about design wins and incremental share gains for many years. And I think many of our long-term investors have stayed with us, and they’ve benefited from that. Many other investors didn’t know who to believe. So they might have bailed out. Too bad for them. But we were consistent, we were determined. And you can see that this is something that doesn’t happen very often in the semiconductor equipment market because of Copy Exact! For us to be a distant number two in RF Power six years ago to being number one in RF Power. My career, that has happened maybe two or three times in the entire industry. So that’s a really significant change. And to your question, going forward, we see that continuing to grow. All that share gain that we talked about in terms of making us distant number two to number one was almost all driven by dielectric etch. We haven’t even tapped into conductor etch, where we have some design wins, and we expect to continue to have more design wins. And so we think that RF Power will continue to grow and extend its lead in market share. Hans Chung: Thank you. Operator: Thank you. And this does conclude today’s question-and-answer session. And I would like to turn the conference back over to David Ryzhik for any further remarks. David Ryzhik: Thank you, Michelle, and thank you all for joining us today and for your interest in MKS. Operator, you may close the call, please. Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the MKS Instruments’ Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions] After the speakers’ presentation, there will be a question and answer session. [Operator Instructions] I would now like to turn the call over to your host, David Ryzhik. David Ryzhik: Good morning, everyone. I am David Ryzhik, Vice President of Investor Relations, and I’m joined this morning by John Lee, President and Chief Executive Officer; and Seth Bagshaw, Senior Vice President and Chief Financial Officer. Yesterday, after market close, we released our financial results for the fourth quarter and full year 2021, which are posted to our website, mksinst.com. As a reminder, various remarks today about future expectations, plans and prospects for MKS comprise forward-looking statements. Actual results may differ materially as a result of various important factors, including those discussed in yesterday’s press release and in the most recent Annual Report on Form 10-K and any subsequent quarterly reports on Form 10-Q for the company. 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. During the call, we will be discussing various financial measures. All forward-looking financial measures exclude any contribution from Atotech Limited, the acquisition of which we expect to close by the end of the first quarter of 2022. Also, unless otherwise noted, all income statement-related financial measures will be non-GAAP other than revenue. Please refer to our press release for information regarding our use of non-GAAP financial results, including reconciliation to our GAAP measures. Now I’ll turn the call over to John. John Lee: Thanks David. Good morning, everyone and thank you for joining us today. Before I discuss our quarterly results and current market trends, I would like to take a moment to reflect on the past year. 2021 presented MKS with a number of unexpected challenges and unique circumstances and also significant opportunities for growth, and we seized them. Against this backdrop, I'm extremely proud of what our employees accomplished this past year, as we marked our 60th anniversary. Our strong fourth quarter kept a year in which we delivered record performance in both semiconductor and advanced markets, despite unprecedented supply chain constraints and continuous COVID disruptions. We overcame these challenges by executing with laser focus on meeting our customers’ needs, while ensuring the safety and wellbeing of our employees, which remains our highest priority. Our focus on meeting our customers’ needs did not impact our strategy for the long term. We invest in a number of areas to drive organic growth, while executing on strategic M&A opportunities. Our acquisition of Photon Control, which we closed in July, brought us critical temperature sensing, which is a seamless fit within our surround the chamber portfolio. And we expect our pending acquisition of Atotech will add valuable chemistry expertise, enhance the breadth of our innovation capabilities, and accelerate our customers’ roadmaps in this era of miniaturization and complexity. We also made important strides in strengthening MKS by prioritizing our corporate social responsibility efforts. We issued our inaugural CSR report, in which we articulated our strong commitments to diversity, equity and inclusion, as well as environmental management, employee development, and governance. All of these achievements combined with attractive industry tailwinds positions MKS for an exciting 2022. Now let me discuss our fourth quarter results in more detail. We delivered revenue of $764 million and net earnings per diluted share of $3.02, both above the midpoint of our guidance range. Sales to our semiconductor market further strengthened in the fourth quarter, growing 1% sequentially, and 26% year-over-year. Our results were strong across the board from our well-established vacuum subsystems portfolio to our emerging photonics business. With our broad and unmatched portfolio, which we estimate serves greater than 85% of WFE, we play in every critical semiconductor manufacturing process in the world today, including deposition, etch, wet clean, lithography, metrology and inspection. Our performance this past quarter and year was a clear reflection of that. Demand across our vacuum portfolio was robust, led by another strong quarter in RF Power Solutions. We continue to extend our market leadership in RF Power for dielectric etch, particularly for 3D NAND. We believe we took additional market share in RF power generators in 2021, on top of our gains in 2020. This puts us in an outstanding position looking ahead and we anticipate industry investments into vertical scaling will be a driver for years to come. We are also executing on our strategy to gain share in RF Power for conductor etch. As a reminder, this is a meaningful untapped opportunity for us and we believe we can harness the technical expertise and know how that define our leadership in dielectric etch and extend that into a growing share position in conductor etch. In the past, we have talked about how important it is to secure design wins for the future growth and we are now beginning to see revenue from these design wins in conductor etch. Though we are still at an early stage, the incremental progress we are making is tangible and is corroborated by multiple OEMs ramping with MKS RF Power generators for conductor etch. We also delivered record quarterly revenue in a number of other categories such as our market leading pressure measurement, and plasma and reactive gas solutions. We continue to see healthy demand for our dissolved ozone and dissolved ammonia solutions used in wet clean applications, with particular interest from our foundry customers. We deliver another quarter of significant sequential and year-over-year growth in photonics solutions for semiconductor applications, driven by the lithography, metrology and inspection customers, as well as critical temperature sensing for etching customers. As we look ahead to the first quarter of 2022, we expect revenue in our semiconductor [phonetic] market to be consistent to slightly down with fourth quarter levels. Demand trends remain strong, but supply chain constraints will continue to be a factor near term. Shifting to our advanced markets, revenue exceeded our expectations growing 6% sequentially in the fourth quarter and 1% year-over-year. We were pleased to see a recovery in revenue from industrial applications and we also delivered healthy sequential growth in advanced electronics applications. Demand for our flexible PCB via drilling solutions was consistent with our expectations. As we look into the first quarter, we have less visibility than usual into the flex drilling market due to the uncertainty associated with supply chain constraints. As visibility improves, we are well positioned to quickly respond to our customers’ needs. We continue to focus on our high density interconnect via drilling opportunity, leveraging the successes we have already made in high-volume manufacturing. We received a follow-on multi unit order for our Geode HDI solution from one of our key customers that previously qualified us that has been operating multiple tools over the past year in high volume production. We also received a follow-on design window from another customer, setting the stage for additional orders in the future, as this customer expands deployment of our Geode tool to more applications and facilities. Moving to the first quarter of 2022, we expect revenue from our advanced markets to be consistent to slightly down with fourth quarter levels. Before I hand the call over to Seth, I wanted to note that we continue to expect to close our pending acquisition of Atotech in the first quarter. Upon closing, MKS will occupy a unique position as a foundational provider of technology solutions across semiconductors, advanced electronics, and an array of attractive specialty industrial applications. The majority of applications in these markets are targeted at addressing the long-term trends of miniaturization and complexity in enabling advanced charts [phonetic]. Our integration planning activities are on track to ensure that we are fully ready to hit the ground running once we close. In the meantime, as we continue to interact with the world-class employees at Atotech, we're even more excited about the opportunities that lie ahead for Atotech’s electronics and general metal finishing businesses and we look forward to welcoming the Atotech team to the MKS family. And now, I’d like to turn the call over to Seth. Seth Bagshaw: Thank you, John. MKS kept another record year of revenue and profitability, despite the well known global challenges John discussed earlier. These results are both reflection of the strong cycle of tailwinds MKS allowed to across our semiconductor advanced markets, as well as is the result of the hard work, talent and dedication of our global employees. While our financial performance in 2021 was exceptional, we are excited to build upon a strong foundation with our pending acquisition of Atotech, which will accelerate our strategy of delivering an even more comprehensive set of technology solutions in the era of miniaturization and complexity. I'll discuss our fourth quarter and full year results and provide additional detail and guidance for the first quarter of 2022. Starting with the fourth quarter, sales were a record $764 million, up 16% year-over-year, and up 3% sequentially. Fourth quarter sales to the semiconductor market set another record at $495 million, up 26% year-over-year, and up 1% sequentially, reflecting broad-based demand across our portfolio and the strong execution of our world-class operations team. In the past earnings calls, we discussed our breath and unique exposure to all major semiconductor manufacturing processes and our fourth quarter results reflected that diversity. Not only did the sales of our vacuum subsystem to semiconductor customers grow 19% year-over-year, but sales of our photonic solutions portfolio grew organically more than 50% year-over-year, and grew 90% year-over-year with our Photon Control acquisition. We continue to executing on our strategy to gain share with key lithography, metrology, inspection customers. Our photonic sales to the semiconductor market exited 2021 at well over a $300 million annual run rate. We continue to progress on additional design win opportunities. Fourth quarter sales to advanced markets were up – were $269 million, up 1% year-over-year and up 6% sequentially. We saw recurring revenue from industrial applications and delivered strong sequential growth in sales to advanced electronics applications such as PCB cutting and IC substrate drilling, while it offsets seasonally muted flexible PCB via drilling system systems demand. As John noted, we see an encouraging follow-on demand for our HDI solution from customers that have previously installed and geo tool high volume manufacturing applications. We believe our success in deploying our HDI tool to high volume environments is a clear indication of market acceptance. And once the Atotech transaction closes, we focus on leveraging our combined expertise in HDI market to accelerate our customers’ roadmaps and reduce the critical time to market. For the fourth quarter, revenue split between our semiconductor and advanced markets was 65% and 35% respectively. Fourth quarter gross margin was 46.4%, which exceed the midpoint of our guidance by 40 basis points and grew 70 basis points year-over-year. Our gross margin performance, which includes previous anticipated increases in input costs, reflection of our strong operational execution and broad based ongoing initiatives to continue to drive margin expansion through our long standing profit and cash recovery program discussed in our Analysts Day in December 2020. Fourth quarter operating expenses were $147 million, slightly down sequentially, at the low end of our guidance range. Fourth quarter operating margin was 27.1%, flat sequentially and up 240 basis points year-over-year, reflecting effective cost control and strong operating leverage in our financial model. Adjusted the EBITDA in the fourth quarter was $228 million resulting in adjusted EBITDA margin of 30%. Net interest expense for the fourth quarter was $6 million and a non GAAP tax rate was approximately 16%. Net earnings for the fourth quarter were $168 million, with $3.02 per diluted share. In terms of working capital, day sales outstanding with 53 days in the fourth quarter, compared to 54 days at the end of the third quarter. Inventory turns with 2.8 times in the fourth quarter compared to 2.9 turns in the third quarter. Operating cash flow for the fourth quarter was a record $194 million and free cash flow was also a record at $171 million. In the fourth quarter, we made a dividend payment of $12 million or $0.22 per share. Exiting the fourth quarter, we maintained a strong balance sheet and liquidity position with cash and short-term investments at a record over $1 billion, which well positions us ahead of the pending Atotech acquisition. Our term loan principal balance was $824 million at the end of the fourth quarter. We exited the quarter with $218 million net cash balance. Moving on to full year 2021 results, sales were a record $2.9 billion, up 27% year-over-year. With a record 2020 year, semiconductor sales for 2021 were up 32% to a record $1.8 billion with broad base strength across our vacuum and photonics portfolios. Advanced market sales were up 19% to a record $1.1 billion. Growth was led by strong result in advanced electronics applications where we are well positioned with an extensive array of lasers, optics, motion in via drilling systems, serving PCB, solar display, and electronics components applications. As we told at our Analyst Day, we expect advanced electronics applications to be a long-term growth driver for our advanced markets, given the increased need for advanced laser-based manufacturing processes to solve miniaturization in complex electronics. That’s exactly what we experienced in 2021. Moreover, we also experienced growth in our other advanced market applications such industrial, life and health science, and research and defense. 2021, the revenue split between our semiconductor and advanced markets was 62% and 38%, respectively. Gross margin was 46.8%, up 160 basis points from 2020. Operating margin was 27%, up 440 basis points from 2020. Our incremental growth and operating margins for 2021 were 53% and 43% respectively, exceeding the long term financial model we outlined at our Analysts Day. This strong operating leverage was achieved despite the global supply chain challenges and cost inflation we are experiencing. Net earnings were a record $634 million or $11.38 per diluted share, both of which grew at twice the rate of our revenue growth. For 2021, operating cash flow was a record $640 million and free cash flow was a record $553 million. As John mentioned, Atotech integration activities are progressing very well and funding the financing will coincide with the close of the acquisition, and until then the financing remains subject to customary ticking fees. I'll now turn to our first quarter outlook which excludes any contribution from Atotech. We estimate first quarter revenue of $750 million plus a minus $30 million. This estimate includes headwinds of industry-wide supply chain constraints, which we expect to persist through the first quarter. However, overall demand trends are expected to remain strong. We estimate first quarter gross margin of 45%, plus or minus 1 percentage point. The primary driver behind the sequential declining gross margin is higher cost inflation associated with supply chain constraints. We estimate operating expenses of $153 million, plus or minus $4 million. First quarter net interest expense is expected to be approximately $6 million and our tax rate is expected to be 19%. Given these assumptions, we expect our first quarter net earnings of $2.57 per diluted share, plus or minus $0.25. I'd like to now turn the call back the operator for Q&A. Operator: [Operator Instructions] Our first question comes from Krish Sankar with Cowen & Company. Steven Cohen: Hi, this is Steven Cohen on behalf of Krish. Thank you for taking my questions. Yeah, first question if I could on the advanced markets. So just in terms of the commentary regarding the sequential trends there for the March quarter, it sounds like it's consistent to down slightly sequentially. Just curious, like is that more of a function that supply constraints or is there some downward trends in the end markets that you guys are playing in describing that? And also within it, is China – in terms of geographically, is China a strong influence on that sequential trend this quarter? John Lee: Hi, Steven. This is John. Thanks for the question. We have supply constraints for sure that are affecting our semiconductor market but also advanced markets similar kinds of components. So that's part of it. A little part of it also is the kind of less visibility that we have in Q1 on some of our advanced markets, businesses, but in general, the demand for those kinds of products in our advanced markets remains very strong, actually. So it's really about constraints and a little bit of uncertainty on our customer standpoint. As we said, in our prepared script, when that visibility changes, and it will, we will be in a very good position to deliver on that very quickly. Steven Cohen: Okay. Got it. Thanks. And from a follow up, in terms of the component constraints, I was just wondering if you could offer any additional color on the types of components that might be affecting both your semis markets and also advanced markets supply chain? Is it the same type of semis or other hardware components across the last 90 days or is the choke point like sort of switching between different components as time goes on? John Lee: Steve, it is very similar to what we've said in the past, it's still the kinds of electronic components that are, you know, kind of from legacy fabs, so it's really not necessarily the most advanced types of electronic components. And these components are shared in multiple industries and that's where we're seeing the constraints, so no change really from the past. Steven Cohen: Okay. And is it the same type of components across both, for example, photonics products, as well as semis products and advanced photonics? John Lee: Yeah, they're similar because all kinds of products, either in our photonics portfolio or our semi portfolio usually have controllers and PCB boards with electronic components on it. Steven Cohen: Okay. Got it. Thank you and nice job navigating the current environment. John Lee: Thanks, Steven. Operator: Our next question comes from Tom Diffely with D.A. Davidson. Tom Diffely: Yeah, good morning. Thanks for the question. Well, maybe John, one more question on the supply chain. So it sounds like it's kind of just, you know, remains in this whack-a-mole situation? And you haven't necessarily seen it deteriorate over the last quarter? John Lee: Yeah, that's a perfect description, Tom, whack-a-mole. Once we fix one particular issue, another one pops up. I think we're all getting better at handling it but the rate of surprises continues and I would characterize it as kind of very similar to what we've seen in the past several quarters. Tom Diffely: Okay, great. And then, Seth, what do you seen on your -- for your own internal inventory levels of some of these components, has it gotten a little bit slimmer over the last few quarters or are you still kind of at a good inventory level? Seth Bagshaw: Yeah, I think – hi, good morning, Tom. I would say inventory levels in total, obviously, are leaning into the higher production volumes. As I mentioned, prepared remarks, the overall demand across all of our portfolios are really strong, so we're very pleased about that. I really can't comment on individual components or inventory just on the data in front of me but I think it's safe to say that the components that we are working on to bring in to the operating facilities, probably lean on the inventory side as well, it just naturally is going to happen. But as John mentioned, our team is doing a great job, we've got a real strong operational team. I think we saw some supply chain constraints later than some of our peer groups is our impression, so I think it's a testament to how we've managed this, historically speaking. And we have a lot of comps who are work with us, you know, through 2022 as well, but the global fact that we're working through, but we're pretty optimistic we'll eventually pull out of this. Tom Diffely: Great. Okay. And then John, it sounds like some nice momentum on the HDI tool, is there a certain market inflection that we're looking for before those turn into real volume production? John Lee: No, Tom. I think that market continues to drive a roadmap to smaller features to higher density of features to even new materials and that really hasn't changed. But our tool is prepared and has been demonstrated, they can address all those types of challenges going forward. So we're really happy with you know, we've had tons of tools running in high volume manufacturing with two major customers, one's been running for nine months, one's been running for 12 months, so these tools are delivering revenue as we speak to those customers. And then we talked about a couple more design wins, one of which was for another high volume customer that we're all set up for future orders. So I think that's really a testament to the fact that the tool we have is really capable to run in high volume manufacturing, and we're really pleased with the progress we've made so far. Tom Diffely: Great. And then final question, John, when you look at the semicond market that will present equipment market, do you agree with the $100 billion estimate for this year and perhaps the second half ramp? John Lee: It's tough to say. I would say, Tom, that we're always ready for incremental increases in demands from our customers. As you know, we have our factories that are very lean and capable of ramping with surge capacity; we're always able to do that. And in 2021, of course, it was kind of an $85 billion to $90 billion WFE and we did pretty well. We believe we gained share in certain product lines as well. And we're ready for the higher WFE that some folks that predicted in that range or higher. Tom Diffely: Great. Well, thank you both for your time today. John Lee: Thanks, Tom. Operator: Our next question comes from Patrick Ho with Stifel? Patrick Ho: Thank you very much. John, maybe just following up another supply chain question for you. Can you give a little color is it primarily components and parts shortages that you're experiencing or is it a mix of different things, you know higher input freight costs, workforce reductions within your supplier base? Can you just give a little bit of color of, I guess, the different variables that are impacting you in the near term? John Lee: Yeah. Yeah, sure, Patrick. I think, in terms of freight costs, that hasn't really materially got worse, it's not great; of course, it's been there and still there. In terms of workforce effects of our suppliers, it really was much worse in the early part 2021 with the Malaysia shutdown, but you know, recently that's really not been that big of an issue. It's really just demand outstripping supply for those electronic components that's really causing us the headaches today. Patrick Ho: Great, that's helpful. And maybe as my follow up question, also, for you, John, in terms of some of the opportunities within the RF power side, in the conductor etch market, are you leveraging the relationships in the wind you had on the dielectric etch to further penetrate into the conductor etch market, or some of these cool new opportunities? John Lee: We characterize it, you know, we have had long term relationships with all the major seven kinds of OEMs and our dielectric etch market share is leading as you know. And so that relationship has been there, those relationships have been there for decades. And then, you know, when they need a conductor etch supplier and a solution, that's really when we came in and got those few design wins that we talked about a few years ago, that we are now seeing the ramps with those design wins. Patrick Ho: Great, thank you very much. John Lee: Thanks, Patrick. Operator: Next question comes from Sidney Ho with Deutsche Bank. Jeff Rand: Hi, this is Jeff Rand on for Sid. While still very strong, your semis market likely undergrew WFP in 2021 and historically, your growth versus WFE will vary based on where we are in the cycle. Do you think this lower growth this time reflects where we are in the cycle or is it more of a reflection of supply chain environment? John Lee: Jeff, thanks for the question. Really, it's probably where we are in the cycle mostly and you're right, we were about the same growth rate as WFE, maybe a little less in 2021. But as you know, we front run the ramp and so our 2020 growth rate was 50%, which certainly was a lot higher than WFE. So we always looked at it in the long term and if you even take the last two years, 2021 and 2020, we outgrew WFE by 700 basis points. And so we're still very happy and confident with our model, which is the 200 basis points above WFE for the long term. Jeff Rand: And that's my follow up. How should we think -- how should we be thinking about the trajectory of operating expenses as we go through calendar year 2022? I would assume you'll see an uptick in travel and labor costs, but also perhaps a decline in some COVID safety costs. Seth Bagshaw: Yeah. Jeff, this is Seth. Thanks for the question. Yeah, so we guided in Q1 $153 million, you know, plus or minus 4 million. So, I think you'll see our expectations a little bit in Q2 and probably level outs, so probably $160 million range, sort of, you know, Q2, and thereafter is kind of good way of thinking about it, is how we looked at it. So that's kind of what I would use for modeling purposes. Jeff Rand: Great, thank you. John Lee: Yep. Thanks, Jeff. Seth Bagshaw: Thanks, Jeff. Operator: Our next question comes from Paretosh Misra with Berenberg. Paretosh Misra: Good morning. Thanks for taking my question. So in the semis market, it sounds like you expect sales to be flat or slightly down in Q1, is there any major product line in your semis portfolio where you think sales might be sequentially up or is that pretty much kind of same view across the board? John Lee: Hi, Paretosh. So, we have a very, very broad portfolio and so quarter-to-quarter by product category, it can vary. So even if the entire semiconductor revenue is flat to slightly down, there can be products that would exceed that. I would point out RF Power that we talked about in the script, you know, 2021, I think we grew in high 30% year-over-year growth rate. And of course, that's a great growth rate for the year, shows our leadership in dielectric etch, our incremental growth in conductor etch and the fact that 3D NAND is ramping as well as has helped. And so, you know, certain product categories could continue to grow and outgrow the average. Paretosh Misra: Got it. And in terms of how you guys are managing inflation on the component and logistics side. Are you announcing price hikes and is there -- depending on, I guess, the product, is there anything that would maybe kick in at the start of the calendar year that we should be thinking about in terms of price increase? John Lee: Paretosh, we have, as you know, a profit and cash approach. That's something we do all the time every day and we're always looking for ways to make ourselves more efficient, ways to make sure that we're getting fair value for -- and fair price to the value we bring. So there's no, you know, step, increments of activity. That's something we do all the time. And so we continue to do that, we still continue to lean in, especially since the input costs are going up. But, you know, that's something we do all the time. Paretosh Misra: Understood. And if I could ask just one more, in the pressure measurement business, I believe you mentioned, it was a new record -- quarterly record. Is there any other color you could write in terms of where -- how much revenue you're generating in that business? John Lee: Well, you know, as pressure management, as you know, is the market leader there and we're really happy with its performance. I would say that that's one of those product categories that's outgrown the average, when you look at our semiconductor revenue. And that's saying something because when you're the leader in market share on that – in a particular category, it's really incrementally more difficult to grow market share, but we have, so we're really pleased with how the pressure team has performed. Paretosh Misra: That's useful. Thanks, John and good luck with everything. John Lee: Thanks, Paretosh. Operator: Our next question comes from Joe Quatrochi with Wells Fargo. Joe Quatrochi: Yeah, thanks for taking the question. I was hoping you could help us kind of maybe understand that the component availability in semis. I think, on a sequential basis, at least, within your light and motion business was up sequentially evolved, the vacuum analysis business was, at least from a semis perspective down sequentially. So, are you seeing a difference in component availability, just given the different building materials there or just any sort of detail will be helpful? John Lee: Yeah, Joe, thanks for the question. I think that I would characterize the differences between photonics types of products and vacuum-based types of products. Photonic-based products have little less electronic components to them in our subsystems versus the vacuum chamber types of subsystems. And so if there are a plethora of electronic component shortages, it certainly would affect our vacuum analysis type of products more than our photonics products. And so that's what we're seeing but it's affecting both sides now. But it's certainly a little more bigger effect on the vacuum analysis types of critical subsystem products. Joe Quatrochi: Got it. That's helpful. And then you talked about having the manufacturing capacity to support this 100 billion WFE this year. Curious, what about your suppliers, maybe thinking outside of the kind of component constraints right now, but how do you think about your suppliers manufacturing capacity to support you supporting 100 billion WFE? Do you need to bring on additional suppliers to do that? John Lee: Great question, Joe. So we have been, throughout, the last six quarters, bringing on new suppliers, working with current suppliers to expand their capacity and they have done a great job doing that. And I think really, it's really their ability to get those components, so it's really not their capacity, it's really just getting the actual electronic components so they can build them into their factory. So it's not done, it's continuously something we have to watch and work with our suppliers on. But that's really not been a major part of the constraints, it is just actually getting those electronic components. So it's really our suppliers, suppliers, in effect. Joe Quatrochi: Got it. Very helpful. Thank you. John Lee: Thanks, Joe. Operator: Our next question comes from Mark Miller with Benchmark Company. Mark Miller: Congrats on your record quarter. You've been talking about supply constraints but what about supply constraints at your major customers? Is that also impacting you in terms of reduced orders? John Lee: Thanks for the question, Mark. Our major customers, and I think it's true across the industry, continue to order at record levels, as we talked about demand is not the problem. And I think as some other folks have said, the visibility of demand is going out further and further than we've ever seen before as an industry, so that's not been the constraint at all. And even though the supply constraints are affecting the entire industry, it's not affecting how they're planning and how they're ordering. Mark Miller: Okay. What can you tell me about factory utilization, is that high? Do you still have some room to expand if you needed? John Lee: Yeah, it's a great question. I think when COVID hit and supply chain constraints continue to be challenging, certainly is a headwind on our factory utilization but that has been improving actually quarter on quarter on quarter. And so really, utilization has gotten a lot better. And the degradation gross margin is really about input costs, not about our utilization. Mark Miller: Thank you. John Lee: Thanks, Mark. Operator: It looks like there are no further questions. I'll turn the call back to David Ryzhik for any closing remarks. David Ryzhik: Thank you for joining us today and for your interest in MKS. Operator, you may close the call please. Operator: Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.

Operator: Thank you for standing by, and welcome to the MKS Instruments Third Quarter 2021 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to your host, David Ryzhik. David Ryzhik: Good morning, everyone. I am David Ryzhik, and I’m joined this morning by John Lee, President and Chief Executive Officer; and Seth Bagshaw, Senior Vice President and Chief Financial Officer. Yesterday, after market close, we released our financial results for the third quarter of 2021, which are posted to our website, mksinst.com. As a reminder, various remarks today about future expectations, plans and prospects for MKS comprise forward-looking statements, and actual results may differ materially as a result of various important factors, including those discussed in yesterday’s press release and in the most recent annual report on Form 10-K and any subsequent quarterly reports on Form 10-Q. 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. During the call, we will be discussing various financial measures. All forward-looking financial measures exclude any contribution from Atotech Limited, the acquisition of which we expect to close by the end of the year. Also, unless otherwise noted, all income statement-related financial measures will be non-GAAP other than revenue. Please refer to our press release for information regarding our non-GAAP financial results and a reconciliation to our GAAP measures. Now I’ll turn the call over to John. John Lee: Thanks David. Good morning, everyone. And thank you for joining us today. We delivered strong third quarter results with revenue of $742 million and net earnings per diluted, share of $2.79. I’m very pleased with the strong execution of the entire MKS team as we worked tirelessly to address supply chain constraints while remaining focused on technology innovation and design win opportunities with our customers. Sales to our semiconductor market grew 36% year-over-year and 13% sequentially to another record and was led by broad based strength across our differentiated vacuum and photonics portfolios. We delivered another record quarter in our RF Power solutions business, which benefited from robust demand from leading-edge 3D NAND applications. As memory manufacturers, scale 3D NAND to higher layer accounts and greater density, we anticipate a continuing need for higher power and more precise RF generators for high aspect ratio etching. We are the market leader for these solutions and remain well positioned to continue solving these challenges for our customers. In fact, following an outstanding 2020, where we deliver triple digit growth and significant market share gains revenue from our RF Power solutions has grown more than 50% year-to-date, translating to another year of meaningful market share gains. We also saw continued momentum in our plasma and reactive gas solutions with strength in our Dissolved Ozone products for wet clean applications. Given the increased need for water efficiency and semiconductive fabrication, we have designed a solution that recycles unused ozonated water. And I’m pleased to say in the third quarter, we installed our first system in a leading-edge semiconductor fab and are seeing growing interest from other customers. Sales of our photonic solutions to the semiconductor market grew notably in the third quarter, partly due to our acquisition of Photon Control early in the quarter, as well as continued growth in our optical solutions for lithography, metrology and inspection applications. Our high-performance optical assemblies enable our customers to increase throughput, while moving to shorter wavelengths and finer features. As we look out into the fourth quarter, demand in our semi market remains strong and we anticipate revenue to remain consistent to slightly up relative to third quarter levels. And this does factor in the continued industry-wide supply chain constraints that we are all facing. We continue to make good progress in our advanced markets, which grew 10% year-over-year, but declined 20% sequentially, primarily due to the seasonality in our flex PCB drilling business, which we mentioned in our second quarter call. Design win activity remained strong. We secured picosecond laser design wins for solar and PCB cutting applications and won a meaningful world-class optics design for a defense application. We added another beta customer for our HDI via drilling solution. I’m also very proud to announce that we received the Laser Focus World magazine’s Innovators Award for excellent innovation for our Capstone flex PCB via drilling solution. For the fourth quarter, we expect revenue from our advanced markets to be consistent, to slightly up driven by steady demand across our end markets. I also wanted to provide an update on our pending acquisition of Atotech. We are progressing as planned and continue to expect the transaction to close by the end of this year. Our Atotech transaction is all about accelerating the next frontier in miniaturization and complexity for advanced electronics manufacturing. And we are looking forward to combining our highly complimentary expertise and capabilities to optimize, to interconnect. High performance interconnects are the highways that carry the massive quantities of data between semiconductors, sensors and other components in advanced electronic devices. We believe that optimizing the interconnect requires a cross collaboration of laser-based processing and advanced chemistry applications to meet rapidly evolving customer requirements. Here is an example of how a high density interconnect PCB in a mobile device has evolved in a short period of time. Since 2007, the number of vias on an HDI PCB panel have increased more than four times from 250,000 to more than 1 million. This has been resulted in a more than 60% decrease in the size of the lines and spaces as well as the diameters of the vias. These small geometries and greater density have been vital to enabling more functionality in our phones, such as more cameras, microphones, facial recognition, LiDAR, front cameras, 5G antennas and more. These changes have also made it possible for smart phone makers to build in larger batteries while delivering thinner form factors. Enabling this rapid scaling of PCBs is what we and Atotech do. We believe these trends will only continue over time. And we are excited to harness our combined capabilities to accelerate new designs and roadmaps for our customers. We are also excited about Atotech’s general metal finishing business or GMF. This is well – which is well positioned for a number of attractive secular trends, such as automobile premiumization, electrification, and lightweighting, as well as the industry transition to Chrome six alternatives. This business also provides plating of new plastics for 5G antennas and chemistry for renewable energy applications, such as solar and wind turbines. Needless to say, we are eager to close a transaction, given our excitement about the opportunities that lie ahead for the combined company. With that, I’d like to turn the call over to Seth. Seth Bagshaw: Thank you, John. I’ll cover our third quarter results and provide additional detail and guidance for the fourth quarter. Sales for third quarter with $742 million, up 26% year-over-year and down 1% sequentially. While sales are negatively impacted by industry wide chain constraints in the third quarter. Our team continue to execute well, responded to our customer needs to allowed us to exceed in midpoint of our guidance, even supply chain constraints, sales, the semiconductor market set another record at $488 million up 36% year-over-year and up 13% sequentially reflecting broad based demand from our semiconductor capital equipment customers. In particular, we delivered record revenue from our RF power, pressure and plasma and reactive gas solutions. We also delivered strong growth in photonics revenue from semiconductor customers. This included continued momentum in our ample solutions business, as well as $15 million contribution from the acquisition of photon control, the market leader in temperature measurement for the semiconductor market. This acquisition represents another seamless extension of our surround the chamber portfolio and integration is already well ahead of schedule. MKS’s broad vacuum and photonics portfolio allows us to address the widest array of critical semiconductor manufacturing steps, spanning deposition, etch, wet clean lithography, metrology, and inspection, which we believe is unique to the industry. Sales to advanced markets grew 10% year-over-year to $254 million in a third quarter and decline 20% sequentially, primarily due to seasonality of demand for a flexible PCB via drilling solutions, which we discussed at our second quarter earnings call. In addition, sales, industrial applications soft in the third quarter, due to supply chain constraints and packing of vacuum portfolio. However, demand trends in these applications also remain healthy. For example, synthetic diamond manufacturing, we’ve seen growing demand for our microwave pressure inflow products that are critical to the chemical vapor deposition process used in the manufacturer of synthetic diamonds. For the third quarter, the revenue split between our semiconductor advanced markets with 66% in 34% respectively. The third quarter gross margin was 47% a decrease of 40 basis points. Sequentially due to marginally higher input costs, but up 190 basis points year-over-year. Third quarter operating expenses were $148 million, up less than $1 million sequentially. It was in our expectations for the quarter. Third quarter operating margin was over 27%, a decrease of 60 basis points sequentially, but up 400 basis points year-over-year reflects a strong operating leverage in our financial model. Adjusted EBITDA the third quarter was $222 million resulting an adjusted EBITDA margin of 30%. Net interest expense of third quarter was $6 million and a non-GAAP tax rate was approximately 20% reflected in geographical mix of our taxable income. Net earnings for the third quarter were $155 million or $2.79 per diluted share. In terms of working capital day sales outstanding were 54 days at the end of the third quarter, we appeared to 52 days at the end of the second quarter. The inventory turns were 2.9 times in third quarter, compared to 3 times in the second quarter. Remained focused on improving our cash conversion cycle in third quarter, operating cash flow was $153 million and free cash was $133 million. We had increased our dividend the second quarter by 10%, they made a dividend payment in the third quarter of $12 million or $0.22 per share. Exiting the third quarter, maintained a strong balance sheet and liquidity position with cash and short-term investments of $880 million. Our term loan principle balance was $827 million at the end of the third quarter. And we exit the quarter with a $53 million net cash balance, which included a net payment for the Photon Control acquisition of $268 million. As John mentioned, our pending acquisition of Atotech is proceeding as planned. Integration planning activities are progressing very well. We’re also pleased to announce that successfully syndicated our debt financing on October 22. Our term loan financing was 2 times oversubscribed comprised of two tranches, a U.S. $4.7 billion loan at 225 basis points over LIBOR with a 50 basis point floor in a euro tranche of €500 million at 275 basis points above EURIBOR with a zero basis point floor. Both tranches were priced at 99.75. The funding of the financing will coincide with the close of acquisition of Atotech is subject to customary ticking fees. We believe this overwhelmingly strong interest from the lender community is a testament to strategic rationale of the acquisition as well as our strong combined financial model in our track record of successful acquisition integrations and deleveraging. We look forward to closing the acquisition and excited to welcome the talented Atotech team to MKS. I’ll now turn to our fourth quarter outlook, which excludes any contribution from Atotech. We estimate fourth quarter revenue of $760 million plus or minus $30 million. This forecast includes the headwinds of industry-wide supply chain constraints, which we expect to persist through the fourth quarter. However, overall business levels expected to remain strong. Based anticipated product mix, revenue levels and elevated input costs, we estimate fourth quarter gross margin of 46% plus or minus 1 percentage point in operating expenses of $151 million plus or minus $4 million. For the fourth quarter, net interest expense expect to be approximately $6 million and our tax rate expect to be 18%. Given these assumptions, we expect fourth quarter net earnings of $2.85 per diluted share plus or minus $0.26. I’d like to now turn the call back the operator for Q&A. Operator: Thank you. [Operator Instructions] Our first question comes from the line of Jim Ricchuiti of Needham. Your line is open. Jim Ricchuiti: Hi, good morning. A couple of questions on the Advanced Markets business. I’m wondering if you can give us any sense as to how you see the equipment portion of that business in the current quarter. Is there any kind of disruption as it relates to some of the supply chain issues that we’re seeing throughout the consumer electronics market? John Lee: Hey, Jim. Thanks for the questions. This is John. Yes, I think, when we look at the Advanced Markets and the contributions from the various divisions, the expectations for light motion and equipment solutions were consistent with what we expected. And the constraint – supply chain constraints manifested mostly in the V&A side of the business. As you know, we have supply chain constraints on the V&A side and we’ve talked about the semi equipment side of it, but obviously those constraints also affect the portion of the Advanced Market business for V&A as well. Jim Ricchuiti: And John are you satisfied with the progress of you’re seeing in HDI or is it you added another customer there. But I’m just wondering the existing customers that you’re working with. Are you seeing the kind of scale up that you anticipated? Or is this just because it’s a new product it’s taken longer to scale it? John Lee: Yes. We’re really happy with the customers that we’ve previously announced that have placed volume orders. So those tools have been running in production 24/7 for the past six to eight months. And those tools have been performing well. And we also have these other design wins with other large volume PCBA manufacturers. And when they ramp, we certainly expect that the orders will pick up. The interest on testing our tool remains very high. So we continue to do demos for various customers. And our goal is to make sure that we continue to get these data sites, get the design wins, and then when they ramp then we should see the volumes pick up. Jim Ricchuiti: Got it. I’ll jump back in the queue. Thank you. Operator: Thank you. Our next question comes from Patrick Ho of Stifel. Your line is open. Patrick Ho: Thank you very much and congrats on a really nice quarter given the circumstances. John, maybe following up supply constraint issues as you mentioned continue to persist, but you guys did a really good job in both the September and the December quarter outlook on the semiconductor side of things. Can you just qualitatively provide a little more details? Are they the same components, the same issues that you experienced in the September quarter or are things changing kind of on a dynamic basis, where one thing may be resolved and something else pops up? Can you just give a little bit of color of the issues you’re dealing with? John Lee: Thanks for a question, Patrick. It gets the ladder. So when a particular part becomes constrained, we solve that issue and then another one with pop up. And so this has been true for the last couple of quarters. So these supply chain constraints are still largely about electronic components, but not the same electronic components. So as we solve each one, then a new one pops up. I’d say the difference in this particular cycle with supply chain constraints is that, we’re partnering with our customers much more closely. And I’d like to – partnership has been great to see. So working with them to resolve supply chain constraints, working with them to design substitute components. That’s actually been silver lining and silver lining in the supply chain constraint issues, this stronger relationship with our partners and customers. Patrick Ho: Great. And as my follow up question, it looks like you continue to gain here on the RF Power side of things you talked about, the 3D NAND applications. High aspect ratio is something that’s also becoming a bigger application in DRAM. Do you see, I guess, progress and gains continuing on the RF Power front, particularly as DRAM has more and more of these high aspect ratio applications as well. John Lee: Yes, Patrick. We’re really excited about the industry trend towards vertical structures in general that was started by even earlier than 3D NAND [indiscernible] 3D NAND certainly accelerated that. And we think that as you pointed out, DRAM has become very vertical as well. And then of course, when 3D DRAM becomes a reality, that’s going to continue that trend towards verticality in the semiconductor industry and the experience that we’ve had over the last six or seven years in developing our power solutions for that that really puts us in a poll position to offer those solutions and develop new solutions as these new challenges come up. Patrick Ho: Great. Thank you. John Lee: Thanks Patrick. Operator: Thank you. Our next question comes from Krish Sankar of Cowen & Company. Please go ahead. Krish Sankar: Hi. Thanks for taking my question. I had two of them too. John, I remember you said last quarter, September revenues would have been $750 million without supply constraints that I was zooming for that got pushed into December. So if I look at it without supply constraint, it looks like September to December quarter, the revenues are flat. Am I thinking about it right? Or is there something else going on? And then I have a follow-up. John Lee: No. I mean, in our semi business it’s certainly going up quarter-to-quarter. The supply constraints, we certainly wanted to highlight that. If you think about our Q2 to Q3 a decrease in revenue, remember that E&S was due to its natural cyclicality going to go down about $50 million. So we actually did better than that with the rest of the business. So when you take that out, we’re actually up a quarter-over-quarter. And then, Q4 is also the cyclical downturn down turn – down quarter for E&S. And so our guidance for Q4 is actually also up quarter-over-quarter relative to Q3. Krish Sankar: Got it, got it. That’s super helpful. And I just had a follow-up, I think Seth kind of mentioned about the higher input costs impacting gross margins. It looks like everyone in the supply chain is increasing prices, and I understand it’s hard for you to increase price at your semi customers, maybe they pay for shipping, but not for product pricing increases. But are you doing any price increase on the advanced market side where you have a longer tail of customers? Seth Bagshaw: Yes. Krish, this is Seth, I’ll take that question. Yes. So we have higher input cost in Q3 and obviously through Q4 and we don’t have a view in that we’ll kind of abate. But you might recall, we have like a pretty unique process MKS called a profit and cash recovery team. So we’ve had that in place for probably six, seven years. So what I would kind of say is we meet on a monthly basis at the executive level in next couple levels down the organization, it’s really global initiatives. And that’s all designed to exact – do exactly what you mentioned, kind of drive profitability improvements. And there’s a many lever there. It’s obviously we try to drive down product development cost, higher margins there, low cost country migration. There’s always some level of pricing ability in that mix as well. So, that’s an ongoing cadence. We meet again on a monthly basis. We do offset inflation every year, simple inflation, every pressure. And then also create opportunities to invest other areas in the business. So I would say, not to get into details about pricing dynamics, but that is part of that overall equation. And it’s again, embedded process we’ve had for a number of years. That’s been very successful and that’s very much robust today. Krish Sankar: Got it. Thanks, Seth. Seth Bagshaw: Yes. You’re welcome. Operator: Thank you. Our next question comes from Paretosh Misra of Berenberg. Your line is open. Paretosh Misra: Thanks guys. Good morning. So regarding Atotech, can you talk about the cyclicality in the PCB business? Does that industry need more capacities similar to what we are seeing in the semi’s business or how supply versus demand? John Lee: Hey, Paretosh. There’s different aspect to the PCB industry. So in terms of high density interconnect, it’s less cyclical because that covers many, many more types of end devices. In terms of flexible PCB that’s a little more cyclical because the adoption today is strongly influenced by smartphones and those advanced devices. And that’s also spreading across different types of advanced devices as well. So if that’s a proxy for the electronics division of Atotech, there’s certainly less cyclicality than the semi equipment type of business. But it’s also growing very fast because the growth of semiconductors as well. Paretosh Misra: Got it. And then looking further ahead, what sort of opportunities you think exists for Atotech to increase their content per device? Because I would think that as devices get smaller, they’re probably likely to use more of these chemistries and materials per device. John Lee: Yes. No, we are excited about once we close the kinds of opportunities for us to work together with Atotech with our laser drilling group to provide solutions to our customers faster. And I think there’s a great amount of opportunity there to increase share for both the Atotech side and the MKS side. We’ve talked about that in the past. And to your point as features get smaller, it requires the ability to deliver, advanced processes and that requires investments in R& D and as you know Atotech invests more in R&D than any of their competitors. And it’s also, part of the MKS DNA, we’d like industries that continually evolve continually require more difficult challenges and require investments in R&D. And I think that’s really a formula for success for MKS and also a formula for success Atotech. Paretosh Misra: Great. Thanks John. John Lee: Thanks. Operator: Thank you. Our next question comes from Tom Diffely of D.A. Davidson. Your question please. Tom Diffely: Yesh, good morning. Thank you. John, I was wondering, another, Atotech question. Have you been able to collaborate with them over the last couple quarters, any kind of joint development work going on ahead of the potential close? John Lee: Well, we’ve been, working with them before any announcement on the acquisition as well. So that kind of work continues Tom and that’s kind of normal business as we are still independent companies. But certainly we are in the middle of integration planning, and while we’re keeping, to the fact that we’re both independent companies. We can start planning on what we might do together afterwards, but the regular collaboration type of work that the two independent companies work on that that has continued great. Tom Diffely: Okay. And then Seth, another supply question obviously, it looks like issues continue into the fourth quarter when you’re talking to the suppliers. Do you get sense as to when either excess capacity comes on board or when they think the supply constraints might alleviate? Seth Bagshaw: Yes, it’s a good question, Tom. And I think John kind of answered this question a little earlier as well, because it’s kind of a fluid situation. As John mentioned, we’ll solve kind of one component shortage and we’ll pop up kind next day. So think kind of our approach, the last couple of quarters, and that’s not too atypical in a big ramp environment, obviously we’re much higher in record volumes. It’s much more magnified, but it’s really no it’s continued working through each of the suppliers working closely with them. As one issue comes up, we solve another comes up, we solve that one. So it’s kind of that type of process at this point in time. So it’s hard to say we’ll be alleviated, but everybody’s working on a lot of smart people are kind of driving the right behavior. And our team, I said before has done a great job because we did beat up midpoint of our guidance for the quarter and we’re working very hard to keep our customers obviously proc in their hands as well. Tom Diffely: Okay. And that 40 basis point input cost hit in the quarter. Do you expect that to stay roughly at the same levels over the next couple quarters? Seth Bagshaw: Yes, it’s probably in the, so you’re right, in Q3 probably about 40 basis points is our estimate in the four quarter of the guidance is probably a little bit marginally higher and it’s kind of hard to say when that’ll kind of abate going forward. I did mention earlier kind of answer to a question. We do have a profit and cash recovery process, which again is how we kind of mitigate any major increases on input cost inflationary pressure. So, we’re going lean to that probably a little bit more obviously going forward, but it’s probably a little bit north of 50 basis point in Q4 at this point is our estimate. Tom Diffely: Okay. Thanks for your time. Seth Bagshaw: Okay. Thanks Tom. Operator: Thank you. Our next question comes from Joe Quatrochi of Wells Fargo. Please go ahead. Joe Quatrochi: Yes. Thanks for taking the question, John, curious of your thoughts on the semi cycle typically, you know, MKS, outperforms WFE when things are, and then when things slow you see it a little bit more just from an inventory correction standpoint. But clearly the supply chain dynamics are having inventory levels be much leaner. So, I know it’s hard to predict, but what happens, but I guess how do you think about that in terms of maybe a softer landing for MKS or maybe even to some extent, a bit of an inventory restocking? John Lee: Joe, those are probable outcomes of the fact that we are in a supply constraint environment. So things are pushing to the right for our customers for us. And so logically that extends any kind of cycle for sure. And then to your point, if a downturn comes, then people are going to need to replenish their inventory. There’s not a lot of inventory just sitting out there obviously. And then, when you think about how MKS performs relative to WFE, our model is 200 basis points above long-term WFE. And we don’t like to cherry pick, we like to look at the long term because if you take the last two years 2020 and projected 2021, we will have outperformed WFE by a 1,000 basis points. But if you take it back, five years, six years, that’s the 200 basis points that we have modeled. And we still subscribe that that’s the model that we should – that you should expect from us. Seth Bagshaw: Just want to add one point to that too, is we’ve got about $1 billion run rate in our advanced markets business. So just emphasize the fact that we have worked really hard to be broad based revenue stream and Atotech will add to that dynamic going forward as well. So even though majority of our sales now are seeing the semi market, we do have other areas that kind of balance that out throughout any cycle. And then the service business also has grown substantially as well. That’s a pretty sticky business. So we work pretty hard over the years to make that operating model pretty robust and pretty rock solid, any type of cycles we see. Joe Quatrochi: Got it. And then just, on the advanced market side, you talked about the industrial applications softness just from supply chain dynamics. Does your guide assume a similar level of impact in the fourth quarter or does things get maybe a little bit worse before they get better? Seth Bagshaw: Our guide is flat to slightly up in both markets as we said. So we’re thinking that we could do a little better even with the supply constraints coming up. So I don’t think we’re saying the supply constraints are getting better. In fact, they may be as bad or worse even. But I think our ability to deal with it is better. And our ability to partner with customers is certainly a lot better as I mentioned earlier. So that’s why we’re comfortable with our guide of flat to slightly up in both markets, Joe. Joe Quatrochi: Got it. Thanks. John Lee: Thank you, Joe. Operator: Thank you. Our next question comes from Sidney Ho with Deutsche Bank. Your line is open. Sidney Ho: Thanks for taking my questions. Maybe just a follow-up to the supply constraint question. Looking back third quarter was the total revenue being constrained roughly what you expected and if you kind of look at Q4, see if you can quantify the impact that the supply constraints on both the revenue and gross margin line and specifically related gross margin. I understand you talk about higher input costs, but being down quarter-over-quarter excluding that impact, what would be the reason behind that? John Lee: I think that impact is part of it. And then, there’s probably a little product mix. There’s also a little bit of inefficiency in our factories because the supply comes in, it’s lumpy. But I think that’s kind of in the noise Sidney, so I wouldn’t read too much. We’re not trying to say that gross margins are changing except for these kinds of inefficiencies brought on by supply constraints and the inefficiencies that they cause in our factories. So there’s nothing more to the gross margin guidances than that. And then, other question about, how much of the supply constraints we expect in Q3 materialize? It was probably on that order that we talked about of the $30 million we talked about earlier, plus or minus that was our range and we did better. We did better in Q3 than we guided. And in Q4 we maintained the range plus or minus $30 million. Just as we talked about earlier, we don’t see the supply chain constraints changing much. The challenges are still going to be there. Our ability to deal with it as an industry and as MKS seems to be a little better. And we’ll see how we end up at the end of the quarter. Sidney Ho: Okay. Maybe my follow-up question, on the operating expenses side, you’ve guys done a pretty good job in the past few quarters staying between 140 and 150 range, and keeping incremental operating margin above your target of 40% for a number of quarter snap. How should we think about office trajectory beyond Q4 excluding Atotech obviously, do you think there’ll be some catch up in spending maybe some expenses coming back, maybe you need to hire more people, et cetera. John Lee: Yes. I’ll take that Sidney. So what I kind of think about, if you take the Q4 guidance on OpEx and annualize that starting point and then probably add in, roughly the inflationary piece of on top of that, 3%, 4%, that’s probably a pretty good estimate for next year. We’re still doing the budgeting process right now in the planning process, but I think it gives you kind of a pretty good sense of we’re thinking next year on OpEx. We are going to lean into a number of areas. We do a number of investments in R&D, but again I mentioned we are able to offset that from other cost initiatives as well. So even it’ll be episode inflationary amounts, I believe next year, we’re going to lean into other product development areas that we think are very compelling in the long-term. Sidney Ho: Okay. Thank you. John Lee: Yes. You’re welcome. Operator: Thank you. Our next question comes from Mark Miller from The Benchmark. Your line is open. Mark Miller: Thank you for the question and congrats on a quarter. Just wondering any comments about what you’re seeing in the booking trend? John Lee: Yes. Mark we usually don’t discuss the bookings, but I would comment that they remain very strong, obviously stronger than we can ship as we talked about all quarter. So one of the things we’d look at more in terms of the semi side is the things delivery requests are start sliding to the right, that might be indication of the downturn. We’re seeing none of that. It’s all the other way. We’re also seeing booking windows open up; extend from our customers as they try to get in line further and further out into the future. So it remains very strong, very robust, and we really have no concerns about that. We’re really all focused on getting the supply so we can deliver the products at this point. Mark Miller: Okay. And as a follow-up, several new fabs have been discussed coming up starting next year. What do you expect, you’ll start to be impacted, your bookings will start to be impacted by the ramp in these new fabs, second half of next year? John Lee: If you think about some of the fabs that have been announced, they’re just literally digging the holes right now kind of in Arizona, Austin, Texas hasn’t even started digging the hole to go the land though, right? So these fabs will take at least a year-and-a-half, 2 years to be ready to have equipment put in. Then of course, those companies have to decide that the business justifies that. So I don’t think it’s a second half 2022 for those fabs, but there are a lot of empty shells or fabs with capacity to add. And so I think those new fabs, it’s probably a two-year lead time. And of course I think you can ask the chip companies that they may say similar things or longer or shorter, but it’s at least in that timeframe. Mark Miller: Thank you. John Lee: Thanks Mark. Operator: [Operator Instructions] We have a follow-up question from Jim Ricchiuti of Needham. Your line is open. Jim Ricchiuti: Yes. Just a question on, again going back to the advanced markets, the way you’re characterizing the business in Q4. What I’m wondering is, if we pull out, look at the light motion business and perhaps pull out some of the semi-related portion of that business, I’m curious what kind of trends you’re seeing in that business, just because it is – some of it is a proxy for the broader economy, and there’ve been some pockets where there’s been some slow. Are you seeing any change in order patterns in that Light & Motion business excluding the semi area? John Lee: Yes. That’s a great question, Jim. We actually look at that very carefully. We break out the semi part of Light & Motion, and then we look at the rest. The advanced markets certainly the semi side is growing faster. You would expect that given the buildouts in WFE, but the advanced markets are also growing kind of double-digits. So that’s really a great sign and as you know, it’s different markets. Solar display, its advanced manufacturing and defense even so, but we’re happy with the advanced markets growth of the Light & Motion division. That’s actually been double-digits right now. Jim Ricchiuti: Okay. And you’re seeing that across geographies. John Lee: That’s a good question. I think it’s still strongly Asia focused, but that’s because a lot of our business is Asia focused, more of the GDP type businesses like research, et cetera. That’s probably not geographic it’s everywhere. Jim Ricchiuti: Got it. Thanks a lot. John Lee: Thanks, Jim. Operator: Thank you. At this time, I’d like to turn the call back over to David Ryzhik for closing remarks. David Ryzhik: Thank you everyone for joining us today and for your interest in MKS. Operator, you may close the call, please. Operator: Thank you, sir. This concludes today’s conference call. Thank you for participating. You may now disconnect.

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the MKS Instruments Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speakers presentation there will be a question and answer session. [Operator Instructions] I would now like to turn the call over to your host, David Ryzhik. David Ryzhik: Good morning, everyone. I am David Ryzhik, and I'm joined this morning by John Lee, President and Chief Executive Officer; and Seth Bagshaw, Senior Vice President and Chief Financial Officer. Yesterday, after market close, we released our financial results for the second quarter of 2021 and which are posted to our website, mksinst.com. As a reminder, various remarks today about future expectations, plans and prospects for MKS comprise forward-looking statements, and actual results may differ materially as a result of various important factors, including those discussed in yesterday's press release and in the most recent annual report on Form 10-K and any subsequent quarterly reports on Form 10-Q. 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. During the call, we will be discussing various financial measures. Unless otherwise noted, all income statement-related financial measures will be non-GAAP other than revenue, please refer to our press release for information regarding our non-GAAP financial results and a reconciliation to our GAAP measures. Now I'll turn the call over to John. John Lee: Thanks, David. Good morning, everyone, and thank you for joining us today. We delivered another record quarter with revenue of $750 million and net earnings per diluted share of $3.02, both above the midpoint of our guidance range. We achieved these results despite facing increasing supply chain constraints of certain components. I have previously highlighted the strength of our world-class operations team and our commitment to our customers, and the second quarter was yet another example of this. We're also very pleased with our gross margin and operating margin expansion in the quarter, resulting in an 86% year-over-year increase in net earnings per share. In fact, to give a sense of how MKS has transformed in the past 5 years, our net earnings in the second quarter was higher than what we delivered for the full year in 2016. Sales to our semiconductor market grew 5% sequentially to a new record and as we benefited from broad-based demand across our vacuum and photonics portfolios. Our Power Solutions delivered another record quarter as demand for our differentiated solutions of high aspect ratio etch applications continues to grow. We believe every single leading-edge 3D NAND application in the world today is enabled by our RF Power Solutions. We continue to invest in our RF Power portfolio to help our customers execute on their technology road maps. Excluding RF Power, the combined revenue from the remainder of our Vacuum and Analysis Division also reached another record, including records in valves and analytical control solutions and strong year-over-year growth in our plasma and reactive gas business. In fact, we secured multiple large orders for our dissolved ozone and dissolved ammonia systems to support 7-, 5- and 3-nanometer foundry expansion plans. This is yet another example of the differentiation of our Surround the Chamber portfolio, which will become increasingly important as the industry needs to solve for increasing complexity and smaller geometries. The investments we have made in our world-class optics initiative are paying off as we secured 10 design wins in the second quarter alone, 8 of which were semiconductor applications. Specifically, we are seeing increased interest in shorter-wavelength applications with a number of EUV design wins in the quarter. We continue to leverage our optical expertise and state-of-the-art manufacturing and assembly capabilities to increase share of wallet with key OEMs. But our photonics opportunity in semi extends beyond just optics. We secured a notable design win for our new picosecond UV laser solution for a back-end semiconductor application. And we received a large gradients order for a lithography application. This is yet another example of the breadth and depth of our critical subsystems portfolio and wide array of advanced semiconductor applications we serve. As we look into the third quarter, demand in our semiconductor market remained strong. However, due to growing supply constraints of certain components, we expect semiconductor revenue to be consistent to slightly up from second quarter levels including revenue from Photon Control, which we acquired earlier this month. Barring these constraints, we would have expected revenue from the semiconductor market to be up more significantly in the third quarter. Revenue from our advanced markets accelerated in the second quarter, growing 13% from the prior quarter and more than 40% year-over-year. The strong results were driven by demand from advanced electronics manufacturing applications as well as a pickup in demand from a variety of industrial applications. We saw strong adoption of our leading-edge capstone flex PCB via drilling solution, as customers continue to meet capacity and technology transition demands associated with new 5G smartphone designs. We also secured our first multiunit capstone order in Korea with an initial focus on standard PCB production, but with a possibility to address more advanced applications. We are pleased with the progress of our HDI Solutions' acceptance in the market. As you may have seen from an announcement last week, we received our first HDI order from TTM Technologies, a major technology leader in the HDI PCB manufacturing market for their facility in Quanzhou, China. We are excited to support TTM and their manufacturing needs and are focused on driving continued adoption with our differentiated Geode HDI drilling solution. We are gaining traction with our picosecond UV laser platform, and in the second quarter, we commenced volume shipment for a meaningful advanced electronics design win that we previously announced. And we also secured 3 new design wins in the quarter. Moving to the third quarter. we expect revenue from our advanced markets to decline sequentially, primarily due to normal seasonality in our flex PCB via drilling business. Even with this sequential decline, we expect revenue from our advanced markets to grow considerably on a year-over-year basis. Before I turn the call over to Seth, I want to share a few thoughts on the closing of the Photon Control acquisition and the announcement that we entered into an agreement to acquire Atotech, Ltd. We are very excited to welcome the Photon Control team to MKS. Photon Control brings to MKS a rich history of innovation in the semiconductor industry. Its flagship fiber optic temperature sensing solutions fit right into our Surround the Chamber portfolio and enable key trends, such as the growing complexity in etch processing. And we believe we can leverage our broad customer relationships to drive cross-selling opportunities for Photon Control's portfolio. From a financial perspective, the benefits are clear. The gross margin profile is attractive and the acquisition was immediately accretive to earnings per share. We have been and will continue to be a key enabler of semiconductor fabrication, which has been a key driver of miniaturization and complexity for the past 60 years. We believe the next frontier to address these trends is optimizing the PCB interconnect, which connects chips, sensors and devices. The interconnect is critical to enabling advanced electronics designs, and that is exactly what we are addressing with our agreement to acquire Atotech. Atotech will bring leading process chemistry and equipment expertise to MKS which will build on our leading via drilling expertise, so we can optimize the via formation workflow to solve challenges for next-generation architectures. We also see attractive cross-selling opportunities given our complementary strengths as Atotech can benefit from MKS' expertise and leadership in flex PCB manufacturing and MKS can benefit from Atotech's leadership in HDI PCB manufacturing. This combination should give a strong competitive differentiation, room to grow with an estimated $4 billion PCB laser drilling and chemical processing SAM. Atotech also brings a robust gross margin profile and an attractive recurring revenue stream to MKS, where we anticipate about 40% of the combined pro-forma company revenue would be recurring in nature. In addition, we expect earnings per share accretion in the first year and strong pro-forma cash generation which gives us the flexibility we like when looking at deleveraging post deal. In summary, these acquisitions position MKS to become a driving force for miniaturization and complexity in semiconductor and advanced electronics manufacturing, and we're excited about the opportunities that lie ahead. With that, I'd like to turn the call over to Seth. Seth Bagshaw: Thank you, John. I will cover our second quarter results then provide additional detail on guidance for the third quarter, which will include a partial quarter's results for our recently closed acquisition of Photon Control. Sales in the second quarter were a record $750 million, up 8% sequentially and up 38% year-over-year. Our record performance reflects another quarter of robust semiconductor demand as well a strong acceleration in our advanced markets. Sales to semiconductor market set yet another record at $431 million, up 5% sequentially and up 34% year-over-year, reflecting wide-ranging of demand across memory, foundry and logic applications. Our broad-based product portfolio is leveraged to all of these applications. While growing supply constraints of certain components impacted our second quarter results, we are very pleased with how well our global operations team has responded to the unprecedented effect of the global pandemic. To give a perspective of how our team has executed since the start of COVID-19 disruptions, we have grown our vacuum analysis semiconductor revenue by 75% compared to pre-COVID levels in the fourth quarter of 2019. Not only does this reflect a world-class operational execution, but also a flexible and asset-light manufacturing model. Complementing our strong vacuum analysis results, we also delivered record revenue in our Light and Motion division sales to semiconductor market as we are gaining traction with our photonic solutions for lithography, metrology and inspection applications. As John highlighted earlier, the targeted investments we are making in our world-class optics initiative are yielding results, and we'll continue to leverage our scale and technical expertise to drive additional design wins with key customers. Sales to our advanced markets accelerated in the second quarter, setting a record at $319 million, up 13% sequentially and up 43% year-over-year, led by strong demand in advanced electronics applications, in particular, for flex PCB V drilling systems. We are very pleased with the performance of our Equipment Solutions division with revenue of almost $100 million in the second quarter and is inclusive of the revenue headwind from our discontinuation of low-margin semiconductor market products that occurred late last year. In fact, the disciplined returns-based approach to our portfolio, combined with strong revenue and favorable mix, has led to a record Equipment Solutions gross margin of over 53%. For the second quarter, the revenue split between our Semiconductor and Advanced markets was 57% and 43%, respectively. Second quarter gross margin was 47.4%, up 100 basis points sequentially and up 210 basis points year-over-year. This strong performance was due to higher volumes, product mix and effective cost control. Second quarter operating expenses were $147 million, up $4 million sequentially, primarily due to higher R&D product costs and variable compensation due to our strong financial results. Second quarter operating margin was 27.7%, up 190 basis points sequentially and up 610 basis points year-over-year, which reflects the strong operating leverage in our financial model. Adjusted EBITDA in the quarter was a record $229 million, resulting in adjusted EBITDA margin of over 30%. Net interest expense for the second quarter was $6 million, and our tax rate was approximately 17%. Net earnings for the second quarter were a record $168 million and a record $3.02 per diluted share. On a year-over-year basis, our EPS increased 86%, more than twice our revenue growth rate, exceeding our long-term target operating model that we announced at our Analyst Day. Exiting the second quarter, we maintained a strong balance sheet and liquidity position with cash and short-term investments over $1 billion and $100 million of incremental borrowing capacity on an asset-based line of credit subject to certain borrowing base requirements. Our term loan principal balance was $829 million in the second quarter, and we exited the quarter at $210 million net cash balance, up over $130 million sequentially. In terms of working capital, days sales outstanding were 52 days at the end of the second quarter compared to 55 days at the end of the first quarter. And inventory turns were 3 times in the second quarter compared to 2.9 times in the first quarter. We remain focused on improving our cash conversion cycle. In second quarter operating cash flow was a record $165 million, up 19% year-over-year increase. Free cash flow for the second quarter was also a record $149 million, a 26% year-over-year increase. We increased our dividend in the second quarter by 10% and made a dividend payment of $12 million or $0.22 per share. I'll now turn to our third quarter outlook. Based on current business levels, we estimate third quarter revenue of $720 million, plus or minus $30 million. It's worth noting a few items that are impacting our third quarter outlook. First, due to typical seasonality in the flex PCB market, our Advanced Markets revenue is expected to decline sequentially. However, we expect revenue from our advanced markets to grow considerably on a year-over-year basis. Second, increasing supply constraints on certain components are expected to be a headwind in the third quarter. Excluding the impact of these component constraints and given current business levels, we have expected our overall revenue to grow sequentially. Based on anticipated product mix and revenue levels, we estimate third quarter gross margin of 47%, plus or minus 1 percentage point; and operating expenses of $149 million, plus or minus $4 million. For the third quarter, net interest expense is expected to be approximately $6 million. And our tax rate is expected to be approximately 17%. Given these assumptions, we expect third quarter net earnings of $2.74 per diluted share, plus or minus $0.26. Let's now turn the call back to the operator for Q&A. Operator: [Operator Instructions] Our first question comes from Sidney Ho with Deutsche Bank. Sidney Ho: I have a few questions on the supply constraint side. Can you quantify maybe the revenue impact in the second quarter and how does that compare to your assumption in your second quarter guidance? And for the third quarter guidance, does the revenue impact hits both semis on the advanced market? Or it just sounds like it's just semi. And is there any margin impact that we should be thinking about as part of this supply constraint? And lastly, do you have a guess as to when these supplies constraints start going away? John Lee: Sidney, it's John. Well, welcome back to coverage of us. There are like four questions there, so I'll try to remember every one of them. I think the easiest one to answer first is Q3 constraints, whether that was mostly in our semi market versus advanced markets. We see it mostly in our semi market. So it's pretty clear just because of the high volumes of products going to the semi market. So that's a fairly easy one. Impacts to Q2. There were some impacts in terms of the overall revenue, but we believe we've been working very closely with our customers that we were able to allow them to ship what they needed to their customers. I think the impact in Q3 is a little worse. We're planning on that. We're being prudent in our guidance. But as you know, these things can change quickly. And if materials comes in, we could have a fair amount of upside to the numbers we guided. But want to be prudent. That was electronic components. There's also the outbreak of COVID, again, in certain regions that are quite important to the semiconductor supply chain, as you can imagine, in Southeast Asia. So we're trying to be prudent with our guidance there. And I think your last point was do we have a view of when this might recover? We really don't, Sidney. I think everybody in the supply chain is working very hard to try to recover. There's a lot of demand. You've heard it from our customers and other people in the supply chain. This is really a robust environment for semi, so everybody is motivated to fix these things. And so we look forward to working with our customers to continue to make sure that they can meet their customers' demands as well. Seth Bagshaw: Yes, just to add your question on the gross margin question going forward. So as you know, we've got a pretty robust, we call it our profit and cash recovery program, we've had in place for a number of years. So our G&A is always a kind of work on our cost structure and be more effective going forward. We are definitely seeing some surcharges on some components in the semi side of our house, the Vacuum and Analysis division. But we're working hard to kind of offset that elsewhere. And I think you'll see our Q3 guidance at 47%, plus or minus 1 point, is pretty much in line with our operating model at those volumes. So we're kind of working pretty hard to kind of offset any additional headwinds we see in the on the cost side, which is, again, what we've done for a number of years. But there is some definitely headwinds there we're sort of managing through. Sidney Ho: Maybe a follow-up question is in terms of visibility, how would you characterize your visibility beyond Q3, especially on the semi side? I would assume your backlog is kind of building and getting your supply constraints and order lead times are stretching. But curious some of these revenue that you missed in Q3 and maybe Q2 as well, do they just go away? Or do they just go into the backlog and build better visibility beyond the current quarter? John Lee: Yes. Sidney, so as you know, we don't guide beyond this quarter. But I would say we are in agreement with the rest of the industry that the outlook over the next several quarters is very robust. So if anything pushes out to the right, I think it just gets made up in the following quarter. The bookings, we usually don't guide that, but they're certainly very, very strong. So we're working hard to try to meet that demand. Operator: Our next question comes from Joe Quatrochi with Wells Fargo. Joe Quatrochi: Just another one on the semi side. Just curious, how do we think about, if you're unable to ship a specific product to one of your customers, their ability to insert maybe one of your competitors' products into that place to get their tool out the door. Is that common? Or should we think about those as being a little bit more sticky in that, if you can't ship, then they kind of can't ship either. John Lee: Yes, it's a good question, Joe. I think the kind of critical subsystems that we've been designed in with our customers, they're very important to how their tools work. And so I think it's very, very difficult for folks to just try to change that on the fly. So it is a very sticky business. This is the legacy of copy exact in the semi industry. Making a chip is 3,000 steps. Nothing can change because all 3,000 steps have to yield. So I think it's a very sticky business, so we're really not concerned about that, Joe. Joe Quatrochi: Perfect. And then just as a follow-up, another quarter of impressive optics wins that you announced. Can you just remind us how big is that business? And how do we think about I guess, the growth profile that looking forward, especially, I think you started to talk a little bit more maybe about some wins in EUV. John Lee: Yes. In general, the semi part of that business, which is where a lot of the world-class optics are focused on, that's well over $100 million to some of the key customers there. We haven't really give you that detail, exactly how much it is. But it's growing. We're really happy with these design wins. As you know, these design wins in these kinds of tools are very, very sticky, even stickier than, I think, in the Vacuum area. These are very, very specific optics and optical subassemblies that are intimately designed into the tool. Operator: Our next question comes from Patrick Ho with Stifel. Patrick Ho: Congrats on the nice quarter. John, maybe just following up on some of the supply chain questions, and I know it's a moving -- there are a lot of moving parts in that dynamic. But can you give, qualitatively, how much of it is coming from the inability to get the required volumes? Given the demand continues to be very strong, it actually is increasing. Versus just the inability to get certain components? And what I mean by that is like you're just not able to get certain parts at this time. How much of it is 1 or the other? Or are there a lot of different factors involved? John Lee: Yes, Patrick, that's a great question. We can add a little more color, for sure. I think in almost all cases, it's about quantity. So the whole entire supply chain for electronic components is constrained. And so there's a lot of allocation going on. And as Seth mentioned, price increases that we're working through. But it's really about quantity, Patrick, not that you can't get any of it. Patrick Ho: Maybe my follow-up question in terms of the advanced markets. Again, a lot of nice wins you've talked about on the PCB side of things and the ESI business is finally starting to show the value when you acquired it. Can you talk a little bit about the Light and Motion side of that business? And what type of recovery you're seeing there? Are we starting to get the economic recovery that drives some of those businesses? Or is that something that we should be looking at more for 2022? John Lee: Yes. No, we're seeing it right now. We saw it -- I think we started seeing the recovery in the Light and Motion businesses in Q4. We talked about the continued recovery in Q1, and it continues in Q2. We see it continuing to be the steady recovery in all their markets. And certainly this quarter, we expect that as well. So we're really happy that those markets of Light and Motion is leveraged, too, have become -- have come back and are growing nicely now. Operator: Next question comes from Krish Sankar with Cowen & Company. Krish Sankar: I actually have three of them. First one, John has said, can you quantify what your September quarter revenue guidance would have been if you had no supply constraints? John Lee: Yes, sure. I thought you're going to ask all three at once and I'd have to remember it. But I think we maintain the guidance range to be a little higher than normal, but the same as Q2 just because of that uncertainty. So we're guiding $720 million, we're trying to be prudent about it. We expanded the range to plus or minus $30 million. So that kind of gives you a sense, I think, of the potential upside if material constraints get relieved throughout the quarter. Krish Sankar: And then just a follow-up on that. Are these constraints that you are seeing, are they more just like a transient issue that should normalize soon? The reason I'm asking is, it is if you look at one of your large customers who guided last evening, their guidance is not as bad as yours. And we're just wondering, are they pulling in from inventory? Or is this just a temporary thing, that it should normalize in a couple of quarters on the constraint side. And then I had one final follow-up. John Lee: Yes. No, I think if you peel back our guidance in this coming quarter, remember, E&S has their normal cyclicality, annual cyclicality. So as you saw, E&S was $100 million in revenue and 53% gross margin in Q2. In Q3, because of the seasonality, that could be on the order of $50 million less. And so if you take that and you do the math, I think we're fairly consistent with other -- some of our customers in the semi space. Krish Sankar: Got And then just a final follow-up. How much in your September revenue guidance is Photon Control? John Lee: We're not guiding by subgroups. But prior to that, Photon Control was kind of in a run rate of between $13 million to $15 million in revenue a quarter. And these are record quarters for Photon Control. And so as you know, they're levered to semi. And so those are the kind of ranges of numbers for Photon Control. Operator: Our next question comes from Scott Graham with Rosenblatt Securities. Scott Graham: Nice print. John Lee: Thanks, Scott. Seth Bagshaw: Thanks, Scott. Scott Graham: I wanted to understand a little bit more on the supply chain, not to beat a dead horse here. But can the fourth quarter, let's call it a gap. Could that be larger than the third quarter? John Lee: Well, the bookings and the demand could lead to that, Scott. I'd just say that. I think it really depends on how the supply constraints get relieved, how fast the industry catches up. But the demand is there for that kind of a scenario. And obviously, we're not giving out that far. But the demand is there for that kind of scenario, Scott. I'd leave it at that. Scott Graham: And then much like Krish's question just now, at least I think so. The demand part of the equation remains quite good. Yet here we are with essentially the IDMs and the people sort of at the top of the rock giving next quarter guidance that just seems to be a little bit better than those of us here in the chain, so to speak. And I guess what I'm wondering is, obviously, you're always putting your best foot forward. Everybody is always putting their best foot forward for their customers and will take on some extra expenses to that end and all that. But at what point do you think that the demand side of the equation maybe starts to run off a little bit? And what I mean is normally, when you have demand that is outstripping supply, that could easily elongate a cycle. And I'm just wondering if there's a situation or if your customers are maybe talking about a little bit of concern about a falloff in demand, which would actually not elongate the cycle. Just -- and the demand might be lost. Are you hearing anything like that? John Lee: Yes. As far as we can see right now, Scott, we don't see any of that. Our customers and their customers, I think, are continuing to pull because they see demand. And we always pivot to the long-term growth of semi. And I think you would agree it's a great market to be in and it's a long-term growth for the semiconductor industry. CapEx intensity is ticking up, still within historic norms, I think, but it's kind of on the high end of it. So I think long term, we're really pleased to be a key supplier in the semiconductor supply chain. And so it's probably best to ask the chip guys, whether they see a demand drop. But from what I've read to your point, they're all up and to the right. Scott Graham: That's fair. I just want to maybe sneak one more in here. So on Atotech, the acquisition, obviously, a very exciting time, I'm sure, inside the company. What's always crucial in these things is like the first 100 days. And I'm just Kind of wondering if you -- I'm sure that you've already mapped a lot of this out. What are your initial points of focus with that acquisition and with its expected closure in the fourth quarter? John Lee: Yes, Scott, we have to be a little careful before close in terms of any commentary. But Atotech is a well-run company. And so our first mantra is do no harm. They're doing well, their markets are growing. And then obviously, we've talked a little bit about the potential revenue synergies of the combination. We talked a little bit about it in the script. We talked a little bit about it in the announcement for the Atotech acquisition. And I think if you kind of listen to even some large chip companies presentation this week, there was a lot of discussion about advanced packaging, the ability to connect these really amazingly powerful chips to other chips so that you don't have limitations in communication speed. And this is now being enabled by the PCB interconnect. We call it PCB. I think a lot of people think that's the old stuff. It's really high density, very dense PCB. And this is the kind of technologies that large chip companies are investing in. And that is exactly the kind of things Atotech is levered to, in addition to the entire rest of the PCB supply chain. So we're really excited about closing this acquisition. It's a great team. We've met many of them now. And we look forward to integration. Operator: Our next question comes from Paretosh Misra with Berenberg. Paretosh Misra: Can you provide some more color on your RF Power business this quarter? How much were sales up? And what sort of supply chain issues you're experiencing in that business? John Lee: Yes, Paretosh, our power was another record. We don't break it out specifically, as you know. But -- and that's on the growth and market share gain of 10 points -- 10%, sorry, 1,000 basis points, last year, 2020. So we're really excited about this. I think you heard some of our customers talk about how VNAND, vertical NAND or 3D NAND scaling continues. And that's how -- and that's enabled by these really high aspect ratio etch, which is enabled by our RF power. We think this continues. This trend towards verticality is not just 3D NAND. It's actually DRAM. We're talking -- people are working on 3D DRAM. So when that takes off, I think you'll see another step-up in the need for vertical process tools. Paretosh Misra: And any supply chain issues that you experienced in that business this quarter? John Lee: Not any more than all the other instruments and products, critical subsystems that we have. Any product that has electronic components will have that constraint. I think our competitors are seeing that, the rest of the industry is seeing that. So not anything more than just electronic components for everything. Paretosh Misra: And then if you could maybe talk about your laser business within the Light and Motion segment in terms of what are you seeing there. And perhaps any color on the order book and which end markets are driving demand growth? John Lee: Yes. As I talked a little bit about the Light and Motion group growing sequentially quarter on quarter on quarter. Part of that is lasers, for sure. And that's driven by just several industrial applications, but also solar and then advanced electronics manufacturing using -- that use lasers. And then more importantly, we're seeing the first volume shipments that we have in our picosecond UV laser design. We've talked about a lot of design wins over the last 18 months, and some of those are now turning into volume orders. So that's another growth area where we have -- coming from very low share. And we're starting to see that momentum grow as well for lasers. Paretosh Misra: And perhaps the last one for me on your acquisition, Atotech. In terms of closing, any progress on that process since the announcement? And what's your current expectation as to when you think you can close the transaction? John Lee: Yes, Paretosh. Nothing changed at the announcement we said late 2021 give or take, and probably a lot -- and a lot of it depends obviously on the HSR filings and approvals from the various countries. So nothing has changed. Operator: Next question comes from Mark Miller with the Benchmark Company. Mark Miller: Congrats on another record quarter. And just one was -- wanted to talk about some of the DRAM manufacturers are increasing their forecast for capital spending because of a transition to EUV. Are you starting to see that? Or is that yet to come? John Lee: I don't think we could point to specifically EUV causing any kind of uptick in the demand, Mark. I think it's really today really driven by just the need for more chips and more applications and all the things that we've all talked about. Certainly, EUV is a great driver that is for the future and more and more EUV adoption is occurring. We've talked in the past that EUV is an enabler for more dep etch because you're actually able to make the smaller transistors and therefore, shrink everything else. And so more multiple pattern has to occur, et cetera. And then beyond EUV is what I talked about earlier about 3D structures where you're trying to get around limitations on lithography vertical NAND being one of the poster child in the last couple of years. But we think 3D DRAM eventually will also be a driver for that as well. So EUV is a big driver for shrinkage, logic, now DRAM. But there's also the shift toward vertical structures as well. Mark Miller: You guided up by approximately $2 million on OpEx, even though sales will be somewhat lower. Is that coming more in R&D or SG&A or split between them? Seth Bagshaw: Yes. It's Seth. Mark. So it's really more variable compensation. We ran a little bit. I don't think there's really much fundamental changes in our cost structure. And it can bounce around a little bit quarter by quarter. But is probably variable comp is probably the bigger piece of it. And the way that rolls out, it's an annual competition and kind of is based on a year-to-date type accrual-based approach. That's probably the bigger driver. Other than that, there's really no major changes. We are adding a few people, obviously, making some investments in R&D. I might be a little more leaning into the R&D side, I would say, back half of the year. Operator: And I'm not showing any further questions at this time. I'd like to turn the call back to David Ryzhik for any closing remarks. David Ryzhik: Thank you, Kevin, and thank you all for joining us today and for your interest in MKS. Operator, you may close the call. Operator: Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.

Operator: Good day and thank you for standing by. Welcome to the MKS Instruments First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question and answer session [Operator Instruction]. I would now like to hand the conference over to speaker today David Ryzhik, Vice President of Investor relation. You may begin. David Ryzhik: Good morning, everyone. I am David Ryzhik, Vice President of Investor Relations, and I'm joined this morning by John Lee, President and Chief Executive Officer and Seth Bagshaw, Senior Vice President and Chief Financial Officer. Yesterday, after market closed, we released our financial results for the first quarter of 2021, which are posted to our website, mksinst.com. As a reminder, various remarks about future expectations, plans and prospects for MKS comprise forward-looking statements. Actual results may differ materially as a result of various important factors, including those discussed in yesterday's press release and in the most recent annual report on Form 10-K and any subsequent quarterly reports on Form 10-Q. These statements represent the company's expectations only as of today and should not be relied upon as represented in the company's estimates or views as of any date subsequent to today, and the company disclaims any obligation to update these statements. During the call, we will be discussing various financial measures. All of these financial measures will be non-GAAP other than revenue. Please refer to our press release for information regarding our non-GAAP financial results and a reconciliation of our GAAP and non-GAAP financial measures. Now, I'll turn the call over to John. John Lee: Thanks David. Good morning everyone, and thank you for joining us today. We delivered another record quarter with revenue of $694 million, and net earnings per diluted share of $2.56 [ph], both were above the high end of our guidance range. Our strong results were driven by robust demand across both are semiconductor and Advanced Markets. We’re also very pleased with the margin expansion and operating leverage in the quarter leading to a greater than 60% year-over-year increase in net earnings per share. Sales to our semiconductor market strength further in the first quarter, exceeding our expectations, growing 5% sequentially and 32% year-on-year. We saw broad-based demand across our vacuum subsystems portfolio generating record revenue in our pressure, flow and valve solutions businesses. We also delivered another exceptional quarter in our power solutions business, as well as robust sequential growth in our plasma and reactive gas business. We continue to harness our photonics expertise across a number of semiconductor applications. And in the first quarter, we secured multiple design wins in our world-class optics initiative. We also had a meaningful win in precision motion business for advanced wafer packaging application. You have heard us talk a lot about how our broad portfolio, unique innovation engine and operational excellence had enabled us to outperform the markets we serve. Earlier this month, VLSI, an independent market research firm reported that MKS gain more than 2% of share in the overall critical subsystems category in 2020. In fact, I'm very proud to say that VLSI also reported that we gain almost 10% of share in the RF power category in 2020, and are now neck-and-neck with the historic market leader. We also extended our leadership in remote plasma sources by gaining more than 6% of share. Following, we also took share in the pressure gauges and valve product categories. This third-party validation of our performance in 2020 further solidifies our decade-long model of market share gains, and clearly demonstrates strength of our technology roadmaps, the agility of our operational capabilities, and the breath of our customer relationships. It is a privilege to lead great team that delivered this success. In fact, as I think about the long-term opportunity in our semiconductor market, the following powerful secular trends remain intact. First, the demand of chips will continue to grow, driven by the explosion in data and the need to store, transmitted and process it. Second, it’s not just more chips, but the more leading-edge chips. And that places additional demands on the capital equipment ecosystem to drive technology breakthroughs. And third, these breakthroughs need to occur faster, as product iterations are increasing and development cycles are shortening. All of this equates to a compelling long-term profile for capital equipment spending. But also means that those companies that execute on innovation faster and smarter while staying operationally nimble will outperform. This has been MKS' key to success in the past few decades and will remain so moving forward. In the near term, demand in our semiconductor market remains robust and we expect our semiconductor revenue to grow sequentially in the second quarter. Now, moving to our Advanced Markets. Revenue in the first quarter exceeded our expectations. We deliver strong sequential growth of 6% and year-over-year growth of 27%. Our strong topline results were driven by growing demand in Advanced Electronics manufacturing, which is fueled by precision laser processing. Within Advanced Electronics, we continue to see healthy demand for our Flexible PCB via drilling solutions, as a result of growing capacity needs, and technology transitions associated with new 5G smartphones, which carry higher Flex PCB content. In the first quarter, we secured two design wins for our high density interconnect via drilling solution. One of which is with a large multinational PCB manufacturer. Demand for our pulse nanosecond, picosecond and femtosecond lasers continues to increase. As we are seeing growing interest across PCB, advanced packaging, solar and display applications. We're very pleased with the momentum we are seeing in our Advanced Markets, and anticipate revenue in the second quarter to grow sequentially. Finally, I wanted to share a few thoughts regarding our prior efforts to acquire Coherent. While we believe the combined company would have offered a compelling value proposition. We have always been disciplined acquirers and our M&A strategy will remain rooted in our commitment to shareholder value creation. In fact, we could not be more excited about our current portfolio in photonics, which we are executing well and our position to capitalize on the growing need for miniaturization and complexity. We consider the combined revenue from our laser motion division, and the Advanced Markets component of our equipment and solutions division, best characterize how we think about photonics revenue. This means that in the first quarter, we generated $257 million in photonics revenue, which grew 25% year-over-year, and we expect further sequential growth in the second quarter. Our photonics business with an annualized run rate of over $1 billion will remain an important area of growth and investment at MKS. With that, I'd like to turn the call over to Seth. Seth Bagshaw: Thank you, John. I will cover our first quarter 2021 results, then provide additional detail on guidance for the second quarter. Sales for the first quarter were a record $694 million, up 5% sequentially, up 30% year-over-year and above a high end of our guidance range. Our record performance reflects another quarter of strong semiconductor demand, as well as the continued acceleration in our Advanced Markets. In the first quarter, semiconductor sales set yet another record at $412 million, up 5% sequentially and up 32% year-over-year, reflecting broad based demand for a vacuum photonics subsystems. As John mentioned, we are very pleased to recognize the VLSI, their market share gains in 2020 in the total critical subsystems category, including significant gains in RF power supplies in remote plasma sources, as well as gains in other critical subsystems categories, such as pressure gauges and valves. Excluding our strong performance of power solutions, the combine revenue of our other products in the semiconductor market reach another quarterly record. This strong growth and significant market share gains are a clear validation of our unique Surround the Chamber strategy. Our longstanding successful track record as operational excellence and a deep commitment to market leading innovative solutions, all of which we expect will position us to outperform WFE by 200 basis points, as outlined a long term model we provide at our analyst day. For the first quarter, sales for Advanced Markets also set a record at $82 million, up 6% sequentially, and up 27% year-over-year, led by continued acceleration in Advanced Electronics applications. Demand for our market leading Flex PCB via drilling solutions accelerated further in the first quarter, and this followed particularly strong fourth quarter. Our customers continue to turn to MKS to enable leading-edge Flex PCB manufacturing applications. And this is driven by large part by 5G smartphones. We're also seeing growing interest from wearables in 5G base station applications. Revenue from a MLCC test systems also remain healthy in the first quarter, as our customers continue to expand capacity. Within the HDI market, we completed all shipments and installations of systems from previously announced multi-unit Geode order in December, which are all now operating in high volume manufacturing applications. Additions design win that John referenced, we see increased interest at our demo centers from other key HDI PCB manufacturers. They are working closely with the critical technical teams to transition them to beta customers. In the first quarter, we also saw accelerate demand from our pulsed laser and Surround the Workpiece portfolio for Advanced Electronics applications, largely driven by PCB display, solar and advanced packaging applications. As we've stated analyst day, the trends in neutralization, in complexity and semi that we foresaw decades ago are now driving growth in Advanced Markets, uniquely positioned the broad photonics portfolio across both our light, motion, and equipment solutions divisions. In fact, as John highlighted, our photonics revenue, which is the revenue from a light and motion division, combined the Advanced Markets component of equipment solutions division is now over a $1 billion annual run rate in the first quarter. In the Advanced Markets portion of our photonics revenue now exceed $850 million annual run rate, and grew 30% year-over-year in the first quarter. For the first quarter, the revenue split from the semiconductor and Advanced Markets is 59% and 41%, respectively. First quarter gross margin was 46.4%, above the high end of guidance, up 70 basis points, and up 170 basis points year-over-year. This strong performance was due to higher volumes and improved product mix. First quarter operating expenses were $143 million, up $5 million sequentially, primarily due to higher variable compensation resulting from a strong financial performance. However, remain within our guidance range reflecting continued overall cost control. First quarter operating margin was 25.8%, up 110 basis points sequentially, and up 530 basis points year-over-year reflects a strong operating leverage in our financial model. Net interest expense for the first quarter with $6 million and our tax rate was approximately 17%. Net earnings for the first quarter were record $143 million and a record of $2.56 per diluted share. On a year-over-year basis, our EPS increased 66%, more than two times our revenue growth rate. This strong financial leverage exceeded our long term target operating model that we announced at our analyst day. Actually, the first quarter retained a strong balance sheet liquidity position, with cash and short-term investments of $910 million and $100 million incremental borrowing capacity under an asset based line of credit to certain borrowing base requirements. Our term loan principal balance was $831 million at the end of the first quarter. We exited the first quarter with $70 [ph] million net cash position. In terms of working capital, day sales outstanding were 55 days in the first quarter, compared to 54 days at the end of the fourth quarter. The inventory return were 2.9 times in both the first and fourth quarter of 2020. We remain focus on improving our cash conversion cycle and our first quarter operating cash flow was $127 million, a 69% year-over-year increase. Free cash flow for the first quarter was $100 million, a 55% year-over-year increase. Consistent with prior quarters, we had dividend payment of $11 million or $0.20 per share. I'll now turn to our second quarter outlook. Based on current business levels, we estimate second quarter revenue of $740 million plus or minus $30 million. Based on anticipated product mix revenue levels. We estimate second quarter gross margin of 47%, plus or minus one percentage point. And operating expense is $146 million, plus or minus $4 million. For the second quarter, net interest expense expected to be approximately $6 million. And our tax rate expected to be approximately 17%. Given these assumptions, we expect second quarter net earnings of $2.92 per diluted share, plus a minus $0.26. I'd like to now turn the call back to the operator for Q&A. Operator: Thank you. [Operator Instructions]. We ask that you please limit yourself to one question and one follow up. Please standby while we compile the Q&A roster And our first question coming from the line of Patrick Ho with Stifel. Your line is open. Patrick Ho: Thank you very much, and congrats on the nice quarter. John, maybe first off on the semiconductor side of things. I know you don't want to give guidance past the June quarter. But qualitatively, can you discuss the visibility you're seeing in today's demand environment? And what type of, I guess, outlook you would have for the second half of the year, given the strong demand trends, some of your customers have already outlined? Does that change any of the planning, especially on the procurement side, given the potential expectations of a strong second half of the year? John Lee: Hi, Patrick .Yes. Thanks for the question. I think, we certainly have read all the various industry analysts views of the second half. And I guess, we tend to agree that the second half is now marginally stronger than just three months ago. So I think we agree with that. And of course, our revenue is a little correlated to it over the long term, but short term can be lumpy. And we're certainly taking all the necessary actions to expand capacity and pull the materials to deliver, then, as you've seen, we've done that pretty well over the last several quarters of the ramp. Patrick Ho: Great. That's helpful. And maybe as my follow-up question on the Advanced Market side. You posted very strong results. You've talked about some of the marketplaces that are starting to pick up momentum. Can you discuss again, qualitatively, whether you've seen any synergies in terms of your light and motion, and ESI businesses. Because you didn't mention strength in the Flex PCB, but there's also opportunities on the PCB. And for your light and motion business, are you seeing any of the synergy start, I guess, appearing? And is that giving you the confidence for some of the growth prospects you talked about in the prepared remarks? John Lee: In fact, certainly, we've been working to unlock all the synergies between the light and motion division and the E&S division over the last year and a half of the acquisition. And so, we already have laser design in the E&S tool. There are other areas that we're working on with respect to future tools as well. So, I think we're getting the synergy -- developments synergies that we expected from the acquisition. Patrick Ho: Great. Thank you very much. John Lee: Thanks, Patrick. Operator: And our next question coming from the line of Krish Sankar with Cowen. Your line is now open. Krish Sankar: Hi. This is Chris. Can you hear me? John Lee: Yes. Krish Sankar: Great. I two questions. First one either for John or Seth. The gross margin came in much better than expected. And it looks like it's probably the upper end of your long term target models do so. Is this 47 or high 40% [ph] the right number to think around these revenue levels? Are whether any one-off things in the quarter that actually like was a tailwind for gross margin in June? John Lee: Yes. Seth, I'll take that question. So we've said obviously in the analyst day and other earnings calls of the 50% variable gross margin, how we look at it internally. And so the question is, what's the jumping off point. So in the first quarter, the margin was a little better we expected, a little better mix. And then, we're kind of forecasting civil and mix in the second quarter as well. So really the variable margin in Q2, I think it's a little bit above that target model at the midpoint of guidance. But to answer your question, there's nothing unique or one-off in either quarter that is driving up the higher margins. We've said in the past, the volume is the biggest piece of it in the operating. So team is managing very well through normal COVID headwinds. Yet we have some higher logistics costs. Those have been managed very well in Q1 and Q2. But there's nothing in the first two quarters, the guidance in Q2 or Q1 actuals that call one-off that unique. Krish Sankar: Got it. Very helpful. And then a follow up for John. It's nice to see the Advanced Markets recovering and looks like you got getting traction HDI PCB. I'm just kind of curious. How big is that market today? And can you also compete in the SLP side, the substrate like PCB side? Or are you more focused on HDI at this point? John Lee: Yes, Krish. These markets are very large, and we're just entering in HDI. But substrate, like PCBs are also within the realm of our tools and certainly future tools that we have in mind. So, it's a great market. I think, it goes to our concept of miniaturization and complexity that's being now realized in advanced packaging. So we're really happy about our position there and the momentum we started to gain in HDI. Krish Sankar: Thanks, John. John Lee: Thanks Krish. Operator: And our next question coming from the line of Paretosh Misra with Berenberg. Your line is now open. Paretosh Misra: Hey, good morning. Thanks, everyone. Just on the question on your electric vehicle exposure, what are you seeing in the cutting and welding applications in that market? And do you think you have the full portfolio of products, laser products to serve those emerging opportunities? John Lee: Yes. Paretosh. Thanks for the question. So EV laser processing, there are some pulsed laser applications. But there are a lot of fiber laser, continuous play fiber laser applications. So as you know, we participate in pulsed lasers, but not in fiber lasers with the laser. But we certainly have a lot of exposure with the Surround the Workpiece portfolio that would support the fiber laser manufacturing process such as power meters [ph] and beam profilers. Paretosh Misra: Got it. And so these pulsed lasers are used for both cutting and welding or only welding? John Lee: Mostly cutting for pulsed lasers. Paretosh Misra: Got it. And then maybe as a quick follow up also on the electric vehicle. Do you see opportunities for your power business? Or I guess, are those opportunities like differentiated and value added? Or you think those are more commoditized product? John Lee: Are you talking about like RF power business? Paretosh Misra: Yes, that's right. John Lee: No, I think, electric vehicles really don't have a lot of the kind of needs for our power that we participate in, which is the higher power, very precise kind of power that it needed for semiconductor etching and deposition. Paretosh Misra: Got it. Thanks, John. John Lee: Thanks, Paretosh. Operator: Our next question coming from the line of Tom Diffley with D.A Davidson. Your line is open. Tom Diffley: Yes, good morning, and thanks for the question. John, wondering if you're seeing any impact from the chip shortage on your electronics customers. And how that might work through to you? John Lee: Yes, Tom. Certainly, our customers are pulling and trying to add capacity. It's well publicized. I think chip shortages are something we're seeing like everybody else within our supply chain. And so, many of our products have PCBAs. And here they're, they're spot shortages. I think incrementally that's gotten a little more challenging over the last several months. But I think that's what everybody's seeing. And MKS has done well so far in dealing with those kinds of shortages and getting those materials in. And we'll continue to make sure that we meet our customers’ demands. Tom Diffley: Okay. So that you haven't really seen chip shortages kind of throttle your customers demand for your products, because they can't get chips for other portions of their products? John Lee: We haven't really seen it, Tom. But I would also say, we don't really have that kind of visibility in terms of a customer may be having some kind of limit to their production because of chip shortages. That'd be a little difficult for us to say. So, if it's happening, it's probably very minor. Because we're not seeing any kind of large changes. Tom Diffley: Okay, great. I can't complaint with the results, that's for sure. All right. And then on the flex circuit drilling business, historically, it's seasonally weak. But you had a very strong quarter. I'm wondering, was this a slugger business? Or do you think there's a new level of activity that's going to be prolonged just because the 5G rollout over the next few years? What's your view on PCB drilling? John Lee: Yes. I think we have a long term view of PCB drilling, Flex PCB drilling. And we've talked about that drivers for that 5G phones, having more flex circuits, wearables and even moving into mobile types of devices. So that's the long term view. And as you know, it can be lumpy. But I think the levels we're seeing now feel like it's meeting the demand rather than any kind of overbilled. Tom Diffley: Great. Thanks for the question. John Lee: Thanks, Tom. Operator: And our next question coming from the line of Scott Graham with Rosenblatt Securities. Your line is now open. Scott Graham: Yes. Hi. Good morning. Thanks for taking my question. Terrific quarter, guys. I do have a couple of questions for you around materials. This chip shortages thing has raised sort of the specter, at least for me in combining that with commodities prices being higher. How are you handling that? Could you tell us how pricing was in the quarter? Have you announced the price increases? Have others announced price increases to you? How are you sort of handling that price cost right now? John Lee: Yes, Scott. Certainly, we're probably not going to give you that kind of the color. But I would say, in general, Scott, if there are chip shortages, or any kind of commodity shortage, prices tend to move up just because of supply and demand. And I would say broadly, we see areas where that's happening with respect to electronic components. But really, it's really about trying to get the electronic components, because as a percentage of our BOM, our capacitor or resistor is really not that large. It's really all the other stuff that goes around it. It's a big part of the BOM. So I think in general, there are going to be these pressures to increase prices. While we have the shortages. Scott Graham: Got it. Thank you. I guess the second question would be, along the lines of your balance sheet with all that dry powder. And maybe if I could just two questions there. Number one, what kind of stopped you short of continuing to move higher on your bid for Coherent? I don't blame you for the numbers came in pretty high. But I mean was there something that you just said, okay, enough is enough? And then going forward, can you maybe take us a little bit through whatever you're seeing in your funnel? I mean obviously, Coherent was certainly much larger than you've done in the past. Is that type of --is that size acquisition is still on the table or you're kind of maybe thinking more back to what you've done in the past on M&A, the several hundred million dollar type of sales deal? John Lee: Yes. Scott, thanks. Yes, I think we are certainly disciplined acquirers. We had a very precise view of how we could add value at what price with Coherent and we stuck to it. Other companies obviously thought they could get more value and they went up almost $1 billion over what we should see for ourselves. So I don't want to judge what their views of the value creation is. It certainly can be different than ours. But we have our view and we're going to stay disciplined to it. And in terms of the pipeline, we have a very broad pipeline of both Advanced Markets types of targets as well as outstanding. And also a range of sizes. And so we'll have lots of opportunities for tuck-ins, some 100 million, some middle-sized deals and the couple hundred millions, and then a couple of these larger opportunities where we're talking about billions. So that whole range of opportunities still exists, Scott. And we're looking at all of them as well. Seth Bagshaw: I just wanted to add to that too, Scott. We've grown organically the market share as we made as well. So we've grown M&A, we've also grown organically and it's been one of our key pillars for a number of years. Let's go back to the Analyst Day. We announced really seven product categories the number one or two back in 2015. In 2020, we have 15 of those categories. So we've done the M&A, we've done the organic growth rate, we've gained market share. So lot of levers to kind of pull, if you will. So, we're very bullish on the space, very bullish on the opportunities ahead of us. And as John mentioned, we're disciplined in how to look at the acquisition pipeline. Scott Graham: Would you guys be disappointed if you didn't transact something this year? John Lee: Scott, it's certainly something that may or may not happen, but I think it really depends on the opportunities that come up and we're going to stay disciplined. Scott Graham: Got it. Thank you, both. John Lee: Yes. Thanks, Scott. Seth Bagshaw: Thanks, Scott. Operator: Our next question coming from the line of Jim Ricchiuti from Needham & Company. Your line is now open. Jim Ricchiuti: Hi, good morning. Maybe just along those lines of the prior question. I'm just wondering does the M&A focus perhaps evolve at all? Or are you looking maybe opportunistically at other market adjacencies that perhaps weren't on the radar a year or so ago? John Lee: Yes. To answer the question, we certainly have been focused on Advanced Markets lasers photonics as we've talked about as well as Semi which is our historic market, but we've always looked at adjacencies that we have other markets like life and health sciences, defense, industrials. And every once in a while, some company there could make a sense for us. And so, we would always consider that as a potential third leg of growth, if you will, in addition to semi, photonics, and some other market. Jim Ricchiuti: Got it. Thank you. And just with respect to the Light & Motion business, yes, I'm wondering, are there any areas at this point in the business where you have not seen the recovery back to pre-pandemic levels? John Lee: I think research is still a little -- still has a little headwind, Jim, and that is really COVID-related. I think as you see, different regions have reinstituted their COVID protocols. But we saw a pickup in the end of the year 2020, which is the normal quarter for pickup and it's kind of reverted back to a seasonal Q1, Q2. But overall, I think there's a bit of headwind in the research market as we see it well. Jim Ricchiuti: And presumably, I guess the stimulus bill could help down the road in that area of the business? John Lee: Yes. Sure, great. Jim Ricchiuti: Infrastructure, I'm referring to? John Lee: Right, right. Jim Ricchiuti: Okay. Thank you. John Lee: Thanks, Jim. Operator: And our next question coming from the line of Joe Quatrochi with Wells Fargo. Your line is open. Joe Quatrochi: Yes. Thanks for taking the question and congrats on the results. On the Semi side, there is clearly a funnel of pretty strong demand, as you look out in the second half of this year and even starting to talk about next year. I guess, how do we think about your manufacturing footprint or capabilities to support just the level of demand that we're currently seeing? John Lee: Hey, Joe, it's a good question. One of the things that we pride ourselves in MKS is trying to get ahead of those kinds of increases in the market. Multiple investments were made even three years ago with some product lines that right now we have planned capacity for. We continue to look at this modeling what just a year ago was $70 billion WFE might look like for us in terms of a factory footprint, now it's more like what's $100 billion WFE look like for us. And when we do these models, Joe, we certainly look at burst capacity, because on average $70 billion as you know, the piece can be close to the $100 billion today and we're handling that pretty well today. But when it gets to an average $100 billion as you can imagine, those peaks would be well over $100 billion because of the nature of where we are in the supply chain. Seth Bagshaw: We also keep a fairly asset light model, Joe. So we don't really need a lot of capital per se. The buildings we have plenty of footprint around the world, low-cost country and obviously elsewhere, but we do try to look at the value in the manufacturing process and file test assembly we kind of leverage the capital. And again, you could bring that capital on relatively quickly. And I think the key point as John mentioned is we do have the high beams on this. And we've made some investments back in 2017 to expand the pressure group quite dramatically. And that's been extremely helpful in this environment. Joe Quatrochi: That's really helpful. And then, I appreciate the calling out the photonics revenue. I guess if we go back to the Analyst Day and just think about the growth rates that you talked about, is this something that we should think about following into maybe more like the Advanced Manufacturing bucket in the kind of low double-digit CAGR growth range? Or is there something else we should think about? John Lee: Yes, Joe. That's exactly how we look at our photonics business. Today, it's made up of the Advanced Electronics, which is probably half of Advanced Markets and the other half is life and health sciences, defense and industrials. So, over time, we expect that Advanced Electronics part of it to grow that low double digit. And then it becomes a bigger and bigger part of our photonics revenue. So that's how we look at it. Joe Quatrochi: Perfect. Thank you. John Lee: Thanks, Joe. Seth Bagshaw: Thanks, Joe. Operator: And our next question coming from the line of Mark Miller with Benchmark Company. Your line is open. Mark Miller: Hi. Thank you for the question. Congratulations on another strong quarter. The natural tendency of some is to worry about picking results, but we have four new major fabs -- at least four new major fabs planned for next year and beyond. I'm just wondering when you think order flow will start to occur? And will it last through 2022 for these fabs? John Lee: Yes, Mark. That's a great question. I think we have better minds in us to predict that. But we can certainly see long-term, Mark. We agree with you with all these new fabs being built just within the U.S. and other regions also compensating that. We think the long term, this is just going to be great for the semiconductor equipment industry. So it will be hard for us to predict quarter-on-quarter where the peak is, for sure, but the long term is something that we're really very, very bullish about. Mark Miller: Are you planning to add capacity to address maybe another wave of major orders in certain? And if so, in which areas? John Lee: Yes. No. As I said to the previous question, we are looking at that continuously and continuously adding capacity where needed. Certainly, our RF Power Supplies, we are now tied with the historic market leader. And that's been an area where we've invested for the last four, five years in terms of capacity. And where we see future capacity needs as well. So that's one area that call out. But even in our pressure business, we sense it. I mentioned three years ago -- or four years ago, we added capacity, we continue to look at that as well, because that capacity is really helpful in this environment, but we have to look at what it would look like when WFE is 100 billion [ph]. Mark Miller: Thanks again. And congratulations again on another strong quarter. John Lee: I appreciate it, Mark. Operator: [Operator Instructions]. And I'm showing no further questions at this time. I would like to turn the call back over to David Ryzhik for closing remarks. David Ryzhik: Thank you, Olivia. Thank you, everyone, for joining us today and for your interest in MKS. Operator, you may close the call please. Operator: Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.