MKS Inc.

Welcome to the MKS Instruments Second Quarter 2024 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. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the call over to Paritosh Misra, Vice President of Investor Relations. Please go ahead.

Good morning, everyone. I'm Paritosh 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 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 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 sections 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. I'll turn the call over to John.

Thanks, Paritosh, and good morning, everyone. Let me start by welcoming Paritosh to MKS as our new Vice President of Investor Relations. Paritosh brings strong experience in both investor relations and sell-side research, where he covered MKS earlier in his career. I assume a number of you may already know Paritosh. We're glad to have him on board, and 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. MCAN 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 14 cents of interest expense benefit from our recent convertible note offering and term loan B pay down. But even without this tailwind, we still exceeded the high end of our guidance. Our results reflected 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 due hires and prudent management of third-party spend. Our solid execution extended to the balance sheet, where we continued our long-standing track record, 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 reprice our Term Loan B in July, and we made a $110 million voluntary prepayment on that loan in connection with the repricing. 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 and 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 MCAS 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 makers 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 MCAS 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 are 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. It 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 subsystem provider. Turning to electronics and 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 represents a small but increasing proportion of the total server market. We are expecting electronics and package 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 about how our combined laser and chemistry capabilities can drive new growth opportunities. We will continue to make good progress in the LEO satellite space, including achieving a synergistic design win in copper plating in Q2. We've 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 and packaging business will be increasingly driven by the same trends that drove our semi-business, namely, miniaturization, complexity, and chemistry. At this point, some of you attended a recent visit to our tech center in Berlin to learn more about our optimized interconnect offering, that underpins the strategic rationale of our combination with Adatec. We are the only player who combines laser drilling expertise with plating tools and chemistries to best enable 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 span several end markets and leverages our proprietary technologies and related R&D investments within semiconductor and electronics and packaging, providing strong incremental margins and cash generation. As we await the broader industrial market recovery, chemistry from our material solutions division provides a relatively steady, consumable-driven source of revenue with strong margins, contributing to both our electronics and 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. provide the automotive market a more sustainable path from the hexavalent chrome that has been used in automotives for decades. We believe we are a leader in pioneering end-to-end solutions for OEMs that deliver sustainable surface processing through cost-efficient applications. And we received two new orders in Q2 for our tri-chrome 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 improve cash generation as demand remains fairly stable across our end markets. Consistent with our historic performance, we're confident in our ability to outperform WFE when the market recovers. We have the broadest product portfolio spanning both the semiconductor and electronics and 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.