Good day, ladies and gentlemen, and welcome to the MKS Fourth Quarter and Full Year 2011 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Seth Bagshaw. Sir, you may begin.

Thank you. Good morning, everyone. I'm Seth Bagshaw, Vice President and Chief Financial Officer, and I'm joined this morning by Leo Berlinghieri, Chief Executive Officer and President. Thank you for joining our earnings conference call. Yesterday, after market close, we released our financial results for the fourth quarter and full year 2011. You can access this release at our website at www.mksinstruments.com. As a reminder, the various remarks we may make about future expectations, plans and prospects for MKS constitute forward-looking statements. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in yesterday's press release, in the company's most recent annual report on Form 10-K, most recent quarterly report on Form 10-Q, which are on file with the SEC. In addition, these forward-looking statements represent the company's expectations only as of today. While the company may elect to update these forward-looking statements, it specifically disclaims any obligation to do so. Any forward-looking statement should not be relied upon as representing the company's estimates or views as of any date subsequent to today. Now I'll turn the call over to Leo.

Thanks, Seth, and good morning, everyone. Thank you for joining us on the call today. I'll give a recap of the fourth quarter and full year 2011, as well as our outlook for the first quarter. Following me, Seth will go through our quarterly and full year results and guidance and then we'll open the call for your questions. 2011 was another strong year for MKS with sales up $823 million. In the first half of the year, we delivered our 2 strongest quarters on record. And even though we saw slow down in the second half we continued to demonstrate the strength of our financial model and our ability to rapidly adjust to changing business conditions. We set a record for sales to other advanced markets at $320 million. Our non-GAAP net earnings were $128 million or $2.42 per share. 2011 GAAP net income was $130 million or $2.45 per share. 2011 marked a major milestone of serving our customers for 50 years. Not everything in 2011 was positive, however, and as we conveyed in the last call, the semiconductor market had been facing headwinds since the middle of 2011 which brought our annual sales to the semiconductor market down 8% to $502 million. We believe that our year-over-year decline in semiconductor sales reflects lower demand by semiconductor OEMs and their contract manufacturers in the second half and the inventory adjustments by these 2 groups as well. Apart from this second-half slowdown, we still expect to continue to outperform our served semiconductor market as we have shown over the last 3 decades. Turning to Q4. Worldwide economic conditions continued to be unsettled impacting capital investment in many markets and our Q4 sales were down 12%, sequentially. They were, however, better than the expected $172 million. As we reported on…

Thank you, Leo. First, I'll discuss the full year results and our fourth quarter results before providing further detail on our Q1 2012 guidance. MKS achieved another strong year financial performance in 2011. Sales for the full year were $822.5 million, a decline of 4% from the record year $853.1 million in 2010. Sales of the semiconductor market were $501.9 million declining 8%, compared to $544.5 million in 2010. Sales in the semiconductor market represented 61% of sales in 2011, compared to 64% in 2010. Within the semiconductor market, sales to semiconductor OEMs were down 13% and comprised 48% of total sales. Sales to semiconductor device manufacturers were up 20% and comprised 13% of total sales and sales to other advanced markets increased 4% to a new record of $320.6 million from $308.6 million in 2010. Sales to our top 10 customers totaled 41% of revenue in 2011, compared to 45% in 2010 while sales for largest customer Applied Materials comprised 14% of revenue in 2011, compared to 16% in 2010. Gross margin for the year was 45.6%, compared to 44.4% in 2010. The 120 basis point increase on slightly lower revenue was primarily due to our continued focus on new product development, continued cost control, favorable product mix and foreign exchange and the impact of the U.S. import duty refund received late in the year. Operating expenses increased by 4% primarily as a result of the annual wage infringe increases, certain project spending and the foreign exchange impact of International locations. Non-GAAP operating margin was 22.6% and non-GAAP earnings were $2.42 per share. GAAP net income was $2.45 per share. Cash and long-term investments net of debt increased by $139.5 million to $571.4 million. In the first quarter, the company initiated $0.15 per share dividend and paid a total…

[Operator Instructions] Our first question is from Krish Sankar with Bank of America Merrill Lynch.

Thomas Yeh calling in for Krish Sankar. In terms of your 1Q guidance, can you give us some more granularity on how you see the different segments of your business moving to get to that up 8% at the midpoint? And maybe looking at 2012, which segments are the main drivers of growth?

Okay. Well, I think we would expect that the semiconductor business would continue to grow from Q4. We probably would expect our Solar business would have growth in Q1 as well over Q4 and then I think, in general, we would expect the other business to be relatively flat to slightly up. For the year, we don't give guidance, but certainly I think it's pretty clear that we don't expect any significant improvement or change in the LED market or thin film market. I think solar will depend on how things continue to go with the Chinese customer, as well as new customers that we acquired in the fourth quarter. I would expect that the gas analysis business will continue to grow and that some of the other more industrial markets will kind of grow at a pace they normally grow at, unless there's some economic crisis, which we're not predicting right now.

That's very helpful. And can you provide us an update about your view regarding the current inventory levels that your OEM customers?

I think usually when I've commented the way I look at inventory adjustments in general is that as business goes down, they have to consume more of their whip kind of get to the new rates and as business goes up, they tend to add to the whip, to the new rates. And in this business, often what happens it doesn't go down one quarter and stay down, it goes down a little bit each quarter and so there is continuous adjustment and usually the way ordering systems work that adjustment happens fairly quickly, maybe in a quarter or so. And the same thing on the way backup. So if the OEM rates are stable or going up, I would suspect that most of the decrease in inventory is over. We've seen some reports from some of our OEM customers where they've actually decreased inventory quarter-to-quarter. So I don't anticipate anything unusual in inventory changes with a modest increase in the order rates that we've seen.

Got it, got it, thanks very much. And lastly for me, I wanted to talk about R&D and your view on OpEx in general going through the 2012.

Yes, I would think the R&D spending, we relatively consistent with the first quarter, the same in OpEx and I think if you annualize at least the guidance, midpoint of guidance in Q1 of 2012, as they change in the business level, it's probably a good estimate for the year and by category, I think that's up roughly only 4%, 3% to 4%, 5% year-over-year as well.

Our next question is from Jim Covello of Goldman Sachs.

Yes, this is Mark Delaney calling in for Jim Covello. I was hoping first maybe you can help us reconcile pretty solid trends you guys are seeing in solar compared to some of your peers and I understand you had success with the account in China and you're growing some new customers. Do you think the current solar levels are sustainable?

Well, I think -- I would agree that the market in general is down and depressed throughout 2011 and we don't expect it to recover in the near future. However, I think we have demonstrated and we can see that there are pockets of customers that are investing in solar equipment and in solar producing -- production facilities that it's how good we can get that business. We did a good job in China in 2009 securing a competitive win from an incumbent. We did a good job a couple of years before that with the Japanese manufacturer and we got some sizable orders that help offset any changes and sort of the environment. So I guess we'll see how this Chinese customer goes forward next year, but we have over 350 customers. So to give you an exact answer is tough. I think if we don't see some level of repeat business from a couple large customers, it will be hard to sustain that level of business, but right now, we're pretty optimistic that at least in the short term for Q1, we'll be above Q4 levels.

Okay, that's helpful. And then I know you mentioned the LED business being weak currently is there much further that that business can go or are you pretty?

It's hard to imagine it could go down much further but every time I say that, I get surprised sometimes, but I would say that we don't expect it to recover shortly here. We're not -- it's not one of the growth areas for Q1 guidance and I'll leave it at that. But I think there's an oversupply of equipment, there were 2 great years or one really great year and a good first half last year and until the industry can absorb that, I'm afraid that we don't know when that recovery will happen.

Okay. And then just lastly, assuming you're able to grow your revenues in the second quarter what kind of gross margins drop through should we be thinking about?

Well, it would depend on the mix of the product and geographic location. It's really hard to say, Mark.

Our next question is from C.J. Muse of Barclays Capital.

This is Olga Levinzon calling in for C.J. Muse. I wanted to talk about your market share expansion within the semiconductor market, I think before you had outlined that your stem was around $17.5 billion as of 2010, could you provide some sort of range as how you think about your stand for 2012 and how much percentage expansion of your revenues we could expect given all of the games that you outlined?

I'm not sure where we said about the $17 billion market, but I think what I would say is that we are the market leader and the product areas that we are involved with, we hold about a little over 30% of the market, somewhere about 33%, 34% of the market. And so whatever you think the math is wafer processing equipment less litho and maybe some wet processes, but in general, for the majority of that, wafer frontend processing equipment, we're about 30-plus percent of the market close to 34%. And so whatever you determine that market is, we should at least be in sort of that range. I don't know what the market will be in 2012.

But I guess, if we circle back to some of the comments that you made regarding gains and LED, etch, clean et cetera, no matter what assumption we make on the underlying market any quantification of the potential market share gains?

Okay, I understand your question better. Sorry. These are design wins. So the 2 manufacturers that we sell and we sell to all of them are constantly designing new tools. So these are gains in designing in getting design wins in the next generation of equipment. The next generation of equipment could replace the last generation of equipment, so that doesn't necessarily mean it's a market share gain. I think what I've commented in semiconductor on market share is that there are very few, I would say, legitimate players in sort of a high end technology area. And the data we have and sort of the technologies we provide there's probably 10 suppliers including us that represent 70% of the market share in those technologies and then there's about 40-plus suppliers that represent the other 30%. What I've said in the past is that there's not a lot of market share changes in semi, but more opportunities in the non-semi areas where there's less of a copy exact, there are more trying to find ways to get cost down. So I think it's the other areas and that the China -- solar order was a good example of getting a large piece of business from an incumbent. But I think in semi, I wouldn't expect any huge swings or significant swings in market share.

Got it. And then given the fact that you really answered the drug discovery and pharmaceutical and emission monitoring towards the end of the year, how do you think about the potential for that to add revenue in the coming year?

Well, there -- it's a number of different markets for us. We kind of put them under medical and pharmaceutical but they represent biotech, biopharm, pharmaceutical, medical, MRI, there's some medical and sterilization. So there's a lot of customers in those areas. When you look at each of those segments, probably the largest one is MRI that we've talked about. I would see MRI has had over the long term a reasonable growth may be somewhere between 7% and 10% and some of the other areas I think in the pharmaceutical areas, we're just in the last 3 or 4 years involved with and we keep adding products I think the largest opportunity is in ozone and that was one of the reasons we acquired the GE ozone product because we also have our own ozone product but we certainly don't have a brand recognition like we do in semi and some other markets in the pharmaceutical markets and food and beverage, so that was important for us so I think that has some potential. I don't see that being a game changer in the next 1 year or 2. I think long-term, as we develop with those customers, we looked at the kind of successes we've had in the markets we've been in. So I would see that longer-term, I think in the filter housings and custom chambers, they're relatively small businesses, but we keep growing them every year, and for us it's a collection of many different product lines that we grow a little each year that contributes to the total and keep having us exceed the previous year in these new markets.

Our next question is from Patrick Ho of Stifel, Nicolaus.

Leo, maybe following up on Olga's question about I guess, the share opportunity on the semiconductor side of things. Can you just give a broad picture of how much the dollar content increases as the semi industry moves from say the 45-nanometer nodes, the current 32 and 28-nanometer node, what kind of dollar opportunity gains that you could see for your product?

I think there are many products that don't change significantly based on node and then there other products that change significantly. So it depends on where we get designed in and how well and how quickly that gets adopted. But typically, I think in general, what we've seen is we've outpaced the semi market. If you go back, there's a chart on Investor Presentation, that probably up on our website that shows probably 7 or 8 years ago, we were a couple of percent of the total front end equipment spending, less again, litho and a couple of things were not in, and if you look at that a year ago, 2010, when we had the data, it was up and it was a nice steady trend, it was up to over 3% of that. So we would expect -- that trend is going on for many years at MKS. And we would expect that to continue because we sell so many products to so many customers. I wouldn't necessarily be able to give you a number on that and there's timing of when things happen, but I would say the best example could be a long trend that shows that we keep adding more MKS content. And I think the charts that we have at the website that I'm referring to pretty much is organic and it's after a couple of significant M&A activity. So it's not going back to like 2000, 2001. I think it starts at 2003 or 2004. So I think that would be your best way to estimate over the long run how we gain, again, when we shrinks to us mean more process control mean more dollars. I think the best way to look at that that I could offer is to look at that long-term chart and what we pick up for share that way.

Great. That leads to my follow-up question in terms of process control and I guess the opportunity there. From your perspective, how much do you see process control intensity growing especially as we go through these technology node changes and I guess the value proposition of process control provides?

I think it's been that way for many, many years. Again, I can only refer back to -- the smaller geometries get I would think it would have a greater impact in terms of process control. And certainly, there's more concerns about maintaining cleanliness in the process. They go to lower processing pressures usually meaning higher cost. Sometimes they try to go to more frequencies of -- there's some roadmaps that show more RF frequencies that usually mean to do that, you need an additional power supply. And so I think in general, I see the trend only the more things get more stringent, the smaller things get usually more process control is needed. I have no way to put an exact number on it. As I said, the trend that we demonstrate with actual results in terms of our content as a percent of front end wafer equipment probably is the best long-term way to project that because it goes through several node changes. So I think that's what you're going to see on that chart.

[Operator Instructions] Our next question is from Tom Diffely from D.A. Davidson.

Earlier I wanted to ask another question about the design wins and at this point, how sticky are design wins and once you win a slot on the tool, are there ever competitive displacements or is it pretty much through the life of the tool?

Tom, with the -- so the way we look at design wins are nothing is guaranteed forever, I guess. But if you work with the equipment supplier to provide all the needs and challenges they have and satisfy them, you get design in on a tool. In most cases, you maintain that design as long as you continue to be cost competitive, as long as you continue to provide them good performance of their tool to their customer then I think you gain a lot of benefit out of that, they become a distribution channel for those products for a number of years. So I mean we look at them as positive. It might also -- it depends on when that tool actually replaces another tool, who they sell it to and so there are factors that we don't control necessarily relative to what the actual success will be in dollars.

Yes. What's your average length of engagement before you get the design win with the customer?

I guess, that would be throughout -- first of all, most of these customers we have really daily ongoing engagements with regardless of the design activity because there's always design activity going on. And so I think if we were talking about some capital equipment to a fab, that would be a little easier to kind of give you some estimate, but I think it really is throughout the development of a process tool by an OEM. There are different stages where we're involved. It could be something that overnight we get because we're -- we have a high market share if they know the product works, there's no question about it. They have spares in their depots. Fabs want them because they have spares. It's an easy decision and then other things might take several months to provide a product that meets all the requirements and the OEM is satisfied and testing could be typically a process that's longer is when you are replacing something on a tool. So you ask me if somebody does have a problem and there is a chance where somebody could be replaced, that process could take a year in the sense of the equipment company has to do some testing and evaluation. They then test it in their lab for a relatively long period of time and then they have to select a couple of customers to selected as well. So that's a long process. In the semiconductor business, people don't want to make changes and geometries get smaller, my guess is they want to make changes less because they're not sure how it effects the device. So I would say that it could be on some products as simple as the stock is available and we have a program with them and we'll get designed in and some it could be 6 months of engagement with the design team to get designed in.

Okay. Turning back into the question of whether or not the slowdown in income might actually give you an opportunity to obtain more design wins when customer has a little more time in their hands to look at new products?

Well, certainly I think with the success we've had over the years is that when there are generally slowdowns and I can relate more to a semi because we know about those cycles more than an LED cycle, but in the semi cycles, I think those that continue to come out stronger in semi cycles are usually good at investing in down cycles wisely. The equipment companies are investing in tools and we're investing in getting designed in. And so I think you're right that, that's how you come out stronger out of those cycles. I would imagine it's exactly the same in LED, but we don't necessarily look at a down cycle. I mean the engineering people are there up cycle or down cycle. I think you just keep on working hard during the down cycle, even harder to get those wins.

Okay. And then changing gears here, when you look at the taxes for the full year, if we were to see the R&D tax credit would come back, what kind of an impact would that for the tax rate for the full year?

That would probably drop at a rate by about 1%.

So without that looking about 34%, so 33% we think with the -- if they reinstate the Research and Development credit it will be down probably 33%.

Okay, and do you have any opinion on whether that's likely?

No, I don't.

It's interesting, but it's been almost all -- every year, we always have this question and so far, they've been pretty consistent at reinstating it, but nobody ever knows until the figure is stated. I think the election year, [indiscernible].

Our next question is from Dick Ryan of Daugherty.

I'm not sure if I caught it, but did you give a CapEx number that we should consider for 2012?

No, I didn't. I think for the full year, we're planning about $18 million. $17 million to $19 million probably full year.

Okay, and refresh me. What was 2011?

Let's see. It was $15 million.

Okay. Leo, with the order trends that you've seen it sounds like you cut workforce and then workflow coming out of Q3, have you reinstated any people or more hours in your workflow process given the orders that you've seen or is it still pretty early?

What we normally do, Dick, is probably [indiscernible] the first thing we do is we cut over time in a downturn. So the first thing we would -- we obviously, had some time off in Q4. So we would reinstate the time so we don't have any plans for any shutdowns in Q1. We would then add overtime back in and then the third thing would be to add resources. So we're not anticipating any significant changes in that area. And adding, we probably would work more overtime and we certainly will work, no shutdowns in the quarter.

Our next question is from David Traussman [ph] of MTD Investment [ph].

Some of the semi-OEM customers have been talking about stepped up and higher investment levels to help the industry get to some of the big technology changes of 450 and 3D structures and I'm referring mostly I guess to what I hear [indiscernible] Novartis merger commentary. So I'm wondering if you expect that kind of stuff to trickle-down to you guys? Do you expect any stepped-up or higher levels of R&D out 12 months from now than you've had in the past? Or do you think that will you guys hit the industry you can continue contributing at the levels that you've been contributing?

Yes, good question, David. You're right in the sense of there will be a stepped-up investment with the number equipment companies probably at least the focus will be on 450 and I don't know what that means in terms of total investment, but there'll be 450 investment. Some of our products wouldn't be affected necessarily by a 450 investment in terms of same product would be used in the same application for a larger wafer. In some cases, we would have different products or have to do some modifications. So I guess, it depends ultimately on the node they implement at and it could be some increase over time but I wouldn't see anything drastic. We are in order for us to participate in 450, we need to make a drastic change in the R&D investments. We've gone through 300-millimeter that way. We've gone through twice on 300-millimeter. So I don't think that made any major change, but it wouldn't surprise me over time that there are opportunities that we might do some investment in R&D as you look out.

Thank you. I'm showing no further questions in queue at this time. I would now like to turn the call back over to Mr. Berlinghieri for any further remarks.

Thank you. Well, 2011 was our second largest revenue and earnings year in history despite the second half slowdown in the marketplace. As we noted in Q4 we saw improvements in our order rates just after the call. And as a result of this, in recent customer announcements as well as capital spending forecast, we remain cautiously optimistic about the recovery in the semiconductor market. We plan to continue to work closely with our customers, identify new opportunities and gain design wins, develop new customers in the advanced markets as we have been, maintain cost control and prepare to respond as the business improves. We remain very positive about our future opportunities in the critical high-technology markets we serve. I'd like to thank you for joining us on the call today. Thank you.

Ladies and gentlemen, thank you for your participation. That concludes the presentation. You may now disconnect, and have a wonderful day.