Good day, ladies and gentlemen and thank you for standing by. Welcome to the MKS Instruments Fourth Quarter and Full Year 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the company’s prepared remarks, we will host a question answer session and our instructions will follow at that time. [Operator Instructions] And it is now my pleasure to hand the conference over to Mr. Seth Bagshaw, Chief Financial Officer. Sir, please proceed.

Thank you. Good morning, everyone. I'm Seth Bagshaw, Vice President and Chief Financial Officer, and I'm joined this morning by Jerry Colella, our Chief Executive Officer and President. Thank you for joining our earnings conference call. This morning we released our financial results for the fourth quarter and full year 2016. You can access this release at our website, www.mksinstruments.com. As a reminder, various remarks that we make about future expectations, plans and prospects for MKS comprise forward-looking statements. Actual results may differ materially from those indicated by these statements as a result of various important factors, including those discussed in today’s press release and in our quarterly report on Form 10-Q for the second quarter of 2016, which are on file with the SEC. 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. Today’s call also includes non-GAAP adjusted financial measures. Reconciliations to GAAP measures are contained in today’s earnings release. In additional, we’ll refer to certain pro-forma measures that the acquisition of Newport Corporation, which closed on April 29, 2016, had occurred at the beginning of the first quarter of 2016. Now, I’ll turn the call over to Jerry.

Thanks, Seth. Good morning everyone and thank you for joining us on the call today. I’ll begin with the results for the fourth quarter and for the full year 2016. Following that, I’ll provide a few highlights on our business and update on our integration of Newport Corporation. Finally, I’ll provide our outlook for the first quarter of 2017. Seth will follow me with further details on our financial results, and then we’ll open the call for your questions. The fourth quarter was another record quarter for MKS in both overall sales, as well as sales for the semiconductor market. Overall, quarterly revenue increased 6% sequentially to $405 million, while sales for the semiconductor market were $229 million, up 9% from the third quarter of 2016. For the full year 2016, pro forma sales for the semiconductor market was $790 million, an increase of 14%, compared to pro forma 2015 sales. This increase is more than twice the analyst consensus view of WFE growth in 2016. Our success in the semiconductor market is a result of a number of factors, our significant offerings at etch and deposition had allowed us to benefit from the continued use of multi-patenting and continued adoption of 3D NAND memory. Additionally, the acquisition of Newport has expanded out SAM to include additional semiconductor market segments including lithography, metrology and inspection. We’ve made a concerted effort to focus on key customers with the combined organization to share roadmap, extend our offerings and cross sell our combined portfolio. Semiconductor growth in Asia, particularly in Korea and China has also created additional opportunities for MKS. Several years ago, we implemented our technical localization strategy targeted at bringing improved technical expertise and support closer to our customers. We made significant investments in Korea including infrastructure, staffing and acquisitions. These…

Thank you Jerry. I’ll cover the fourth quarter and full year financial results, the newly updated 2017 target operating model and discuss our Q1 2017 guidance. Revenue for the quarter was $405 million, increase of 6% compared to Q3 2016 revenue of $381 million, an increase of 25% compared to pro forma revenue of $323 million in Q4 of 2015. Revenues for the quarter was in the high end of our guidance range due to continued strong demand from our semiconductor customers. Sales to semiconductor market increased 9% sequentially to $229 million, which represents a new quarterly record for MKS. Sales for other advanced markets increased 3% sequentially and were $176 million, and shipments into certain of these markets are product-based and can vary from quarter-to-quarter. GAAP and non-GAAP gross margin was 45.3%, which is slightly below our expectations as revenue levels due to product mix and foreign exchange. Non-GAAP operating expenses were $100 million, non-GAAP operating margin was $20.6%. GAAP operating expenses included $12.7 million of amortization of intangible assets, $2.1 million in transaction and integration cost related to the Newport acquisition, $500,000 in debt repricing expenses and $600,000 in restructuring costs. In the quarter, we also recorded an impairment charge of $5 million related to a investment in privately-held company. GAAP interest expense was $10.1 million, which includes $2.4 million of amortization of deferred financing costs and non-GAAP interest expense was $7.7 million. The non-GAAP tax rate was 22%, it’s lower than we anticipated due to the favorable mix of taxable income in the quarter. The GAAP tax rate was 8% and included a tax benefit from legal entity restructuring. GAAP net income was $45.5 million or $0.83 per share. Non-GAAP net earnings were $57.2 million or $1.05 per share. We continue to execute on our financial strategy…

Thank you, sir. [Operator Instructions] Our first question will come from the line of Dick Ryan with Dougherty. Please go ahead.

Great. Thank you. Congratulations on a great quarter guys. Hey, Jerry, can you give us a sense of Q1 expectations on the semi and the non-semi side? What are you expecting? And maybe just a little further out, non-semi expectations, is there any visibility, better visibility you get on that side of the business versus semi, so that if you are looking full year if semi is maybe a little biased first half over second half? How do you think non-semi comparison?

Okay, that’s a multiple.

Yes.

Anyway, first of all, I think the semiconductor business is still strong and if you look at our guidance, it shows that we continue to see good faith in that business. And one of the things I look at beyond all the pundits is really what the projections are for wafer fab equipment spending and I see this year could – 2016 finished off maybe 3 – 33.5, 2017, 35 perhaps on the 4.5% increase, 2018, again, projected maybe 4% increase. There is a prospect of the 20 fabs in China going up between now and 2020 and their total of 62 fabs, 55 volume and 7 pilot fabs going up between now and 2020 and mix of foundry, memory and LED, MEMS and logic. So, and again, our strengthening of what looks like DRAM spending, and for us with a lot of our strength of our Korean OEMs, now that are involved in supporting DRAM spending in Korea, that also looks pretty good for us. Our customers have tested our capacity to make sure that we are well positioned going forward. So I am not really concerned about the second half of the year, I know some people have said, maybe it might drop a bit, but we’ll see. I’ve been in this business long time so I can put on the gas on the brake and right now I've got more on the gas than the brake. We are proud of our non-semi business. We are now essentially a 50-50 business and so if anybody has some concern for the semi side then MKS is a nice place to be, because of the balance that we have in our business. And non-semi is more of a methodical business than it is in semi. It’s a much a different…

Great. Thanks for that overview. So, Seth, you mentioned the SFX impact on gross margin, how much was that in the quarter? And what are your anticipations in Q1?

Yes, so in Q1, we don’t assume any change in foreign exchange. So the Q1 guidance is pretty much assuming current exchange rates. And in Q4, the bigger impact on the gross margin is really probably more mixed with foreign exchange. I don’t have that really at handy Dick, but I would say, probably three quarters of any effect on the margin for the quarter. Revenues were probably more product mix and foreign exchange.

Great. Thank you.

Yes.

Thanks, Dick.

Thank you. Our next question will come from the line of Patrick Ho with Stifel. Please proceed.

Thank you and likewise congrats on the quarter as well as a great first year with Newport. Given the current industry backdrop on the semi side, where there is a lot of high demand, the supply chain is tight throughout the food chain, can you just provide a little bit of color or some qualitative commentary on how you are managing this high demand that’s out there? And basically, meeting your customers’ demand, especially in this tight situation?

Well, thanks, Patrick. That’s kind of a sweet spot to me having come from operations and one of the things that MKS has always made a point of as being strong, good financial stewardship, great customer relationships, significant involvement in technology, but operations has always had a place at the table and that goes back to our Chairman who believes in strong operations, is a strong company. And we converted our factories in the mid-90s to lean and we’ve had a supply chain management program in place as I came to the company in 1983. And so, we do multiyear contracting with our suppliers. We have point-of-view storage of materials throughout lean lines, we run 24/7. We add capacity 90 days before it is needed, so we can go up the training curve. And we have a very strong relationship with our supply chain and if you look at our inventory turns, our inventory turn is like three times something like that. Part of that’s because we believe in storage capacity. So, I don’t see inventory as evil because, one, our products last for long time and obsolescence is less and less of an issue given the strength in the product portfolio. So having some with, having some material, having our supplies maintain minimal three months supply in a rolling basis on a multiyear contract is an easy thing for us to deal with and we’ve won as many awards for operational excellence and rampability, that’s a real word, then, almost as technology. So, I never worry about the operational capability and that’s part of the reason why the company continues to win business because people know the more that give to us, the more likely they will get it on time. And we are also addressing the operational capability of Newport. So, as an example, we had a customer that came to us more in the back-end side of the business. They were concerned about a constraint we had in a particular process in Newport in the first two months they signed off a $0.5 million piece of capital to break the bottleneck and we’ve now ramped the production which, in the past maybe Newport might not have been has focused operationally although great techniques and a good company. I just think that we found operations to be a competitive advantage for the company. So, knock on wood, you never know what can happen, but I never worry about the operational capability of MKS.

Great. That’s helpful, Jerry. And maybe, looking at the longer-term prospects of the company, obviously, you talked about tracking ahead of plan on the cost synergy sides and raising the outlook there, and I know this is in the early stages today, but could you talk about just some of the development work that you are doing on the product side of things where you could realize potential revenue synergies now that it’s been almost a year since you’ve acquired Newport?

Yes, sure. So there is one – so we have a division that does the emissions monitoring. Stacked emissions monitoring or cement plants and landfills and the optics is an important part of that and laser is a part of that and so we’ve been working with the light and motion team, previous Newport, the vacuum analysis team, previous MKS to actually lower the cost and improve the productivity of our emissions monitoring equipment. And that’s one. Secondly, we have engagements now with wafer fab equipment OEMs for applications that aid lasers and things like dicing in etch processes. We also have other work that we are working on things like dicing and PCB drilling, via drilling, cutting paneling, patenting. So there is a whole bunch of opportunities that we see particularly from the light and motion side. I think that there is untapped opportunity on the Photonics side and on the laser side as well as the optic side. Hopefully, if we see infrastructure spending, we see increase in military spending, see more increase in going after the natural resources in the US. Those all spends look like good opportunities for increased growth in our non-semi side across multiple business uses in the company.

Great. Thanks a lot guys.

You are welcome.

Thank you. Our next question will come from the line of Weston Twigg with Pacific Crest Securities. Please proceed.

Hi, thanks for taking my question. First is, I wanted to come back to the gross margin. You said three quarter of it was probably related to mix impact and it did come in a little below guidance. I am just wondering if there is any more color you can add on why the mix was a little bit below your expectations and why that recovers in Q1?

Yes, this is Seth. So, we’ve got many products and product groups and customers. Really, sometimes once in a while, I’ll call it, Q4 in that category, the mix is kind of moving that direction and it happened, I think a couple of quarters ago and normalized itself. There is really no one factor I can point to as it’s generally just how the flow of products to customers during the fourth quarter. And then in the Q1, we take it back to more normalized levels. So, the expectation is sort of a – kind of a one quarter difference from guidance. Q1 should be more normalized going forward.

Okay, good. And then, just as a follow-up, you mentioned some RF power wins in the commentary. Can you talk a little bit about that and whether you think that that will be noticeable in terms of market share in that segment?

Well, our power business is a real strength of the company in semiconductor. 3D NAND requires pulsing capability for detrench drilling and we continue to see our power business grow and particularly what we’ve done internationally. So my expectation is, you will continue to see over time that we would see share growth in semi overall and – and we feel – what can we look give us in future market share. So our expectation is that power will continue to be a very important piece of our business. We are well respected around the world for it. Our pulsing capability is market-leading and we should expect to see share gains as we continue to execute the way we expect to. We are very confident in that.

Very helpful. Thank you.

You are welcome, Wes. Take care.

Thank you. Our next question will come from the line of Amanda Scarnati with Citi. Please proceed.

Hi, thanks for taking my questions. First question on the new operating model. Revenue is going up and margins are staying where they were. Can you talk a little bit about the puts and takes and what’s going into those margins that’s keeping them similar to the old numbers versus improved revenue base?

Yes, sure, it’s Seth. So, in the existing model we have published in our October and in the model we published this morning, we assume a 50% variable gross margins. No change on that. And so if you look at the 2017 model, Amanda, going from the October model, we’ll pick up that $100 million of revenue, $50 million of gross margin. I see just the rounding in the model itself. So even the margins appear, obviously mathematically similar, there is an uptick in the gross profit dollars in the new model and that flows through to the non-GAAP EPS number.

Okay. And then just on China and the four new semi factor, the new content in China, are those new customers, or is it existing customer? Is it just additional content, can you give us a little bit more color on what you saw there this quarter?

Yes, sure. Actually, three of them are existing customers and one is a relatively new customer. We’ve been working with people like AMEX for a very, very long time going back to years when they first started up. They obviously – we consider them a key customer and we are glad to have them. And then we’ve worked with people like NMC for very long time and then there was a couple others that we’ve added, but more recently a company called Piotech, which is another company in semi that we’ve added to the base. But these are people we’ve worked with for the most part for very, very long time. And then also, what’s interesting about MKS is, a lot of the engineers who are working with in Asia actually either went to school in US and worked in the labs of our equipment or they’ve worked at AMAT or LAM or Novellus or TEL and they became familiar with our equipment. And so, it’s almost like the materials sells itself, we just have to sell the relationship in this support for them. But we are really excited about the expansion in Asia, Korea we are really doing well as you saw in the script. I couldn’t be happy about how well we are doing there and certainly China is an exciting place for us and we said it has great growth potential.

And are you seeing that more on the memory side or the logic side or a little bit of both?

It’s a mix.

All right. Thank you.

Thank you, Amanda.

Thank you. [Operator Instructions] Our next question will come from the line of Krish Sankar with Bank of America-Merrill Lynch. Please proceed with your questions.

Yes, hi, thanks for taking my question. I had two of them, number one, Jerry, can you quantify the March quarter’s trend between vacuum and analysis and light and motion? How much do you expect each of those segments to grow sequentially?

Well, we don’t particularly give that type of guidance by business unit. I would expect that, we would see a balanced growth between the two companies. Obviously, vacuum analysis has more a semiconductor content, so they’ll probably need to have a higher – typically higher level of growth. But certainly we are expecting growth out of the light and motion group as well.

Gotcha. Is this still trying to assume the light and motion is probably like 25% semi exposure?

Yes, they have about 25% exposure to microelectronics mostly towards – it’s all litho, metrology inspection, towards the back-end. They account KLA and SML as large customers who are great customers by the way. I got a chance to meet with most of the customers now. People like Ultratech, but yes, they have about 25% of the business there. We’ve seen some nice growth in that business. By the way, Krish, we took the management of the microelectronics business unit and put it under the vacuum analysis group, because we wanted to have consistency with key account management and semiconductor-related operations. So, it’s still – we see it as like motion, but the management of it at the executive level is under vacuum analysis.

Gotcha. That’s very helpful, Jerry. And then the final question is on the Newport, while I guess, the light and motion synergies of $40 million, is this mostly coming from SG&A optimization? Or is it more outsourcing overseas?

The full $40 million you mean, Krish, or the incremental $5 million?

The full $40 million.

Yes, so the $40 million is probably about half operating expenses, half in gross margin and gross margin was primarily the way light and motion has done the supply chain. It’s been pretty broad based and I call a little bit shallow. There is no effort to kind of call it kind of stand with certain key suppliers as we’ve done at MKS for a number of years. So we will be able to kind of take some of the dollars that is spent now at light and motion across many different suppliers and make it more focused and that will drive cost down over time. That’s a big driver. And then general efficiency gains in how we run our factories and how – factory is kind of a big chunk as well.

Thanks, Jerry. That’s helpful.

Yes, you are welcome.

Yes, thank you.

Thank you. Our next question will come from the line of Tom Diffely with D.A. Davidson. Please go ahead.

Yes, good morning. Thanks for the questions. When you look at China, it seems like it’s a huge opportunity on a go forward basis with the 50 plus fabs you talked about. What is your plan as far as increasing your presence there, and building out infrastructure over the next couple of years?

Yes, so – it was 55 total fabs, it was about 20 in China. We have a pretty good footprint already. We have a large manufacturing presence in Shenzhen. We have sales and service in Shanghai. We have a large distribution and rep firms there. And we expect that the volume that we would see with our infrastructure, we have ample capacity to support the growth in that business, Tom. We make 24/7 utilization in the factories. We outsource things that are non-core to us, such that, we can spread the ramp – to Patrick’s question, he asked earlier about rampability, part of our ability is because we are not vertically integrated, which means you got to hire a bunch of people and train them, put a bunch of equipment in place. So by having the preponderance of our operations outsourced to key partners, it’s really is the final assembly in test which is easily scalable. So we feel pretty good over the next number of years that the infrastructure in terms of factories, equipment are more than capable of handling the increase in China.

Okay, great. And then, Seth, when you look at the – kind of the unknown factors today with the tariffs and taxes, how does that impacts your initial plan to potentially move some of the Newport’s manufacturing offshore?

Yes, good question. So, obviously, a lot information out there is kind of fluid and kind of how this will work out in reality and mechanically. We have looked at kind of the – we’ve got substantial cost advantages in Mexico, in Shenzhen, China or the Wushi facility that light and motion have. And my modeling would suggest that, that’s still advantageous even given sort of what I’ve seen out there about the etch regs, which would sort of make that less palatable going forward. What I’ve seen, I think our caution is still – would that make that performing opportunity going forward. But the actual how that will layout, Tom, and the mechanics of it’s still kind of unknown. But the overall tax plan I looked at, we think it’s pretty favorable to us that that last piece we have to work through.

Okay. All right. Thank you.

Thank you, Tom.

Thank you. [Operator Instructions] I am showing no additional or follow-up questions. So at this time, I would like to hand the conference back over to MKS Instruments’ Chief Executive Officer, Jerry Colella, for closing comments and remarks, sir?

Thank you. I am proud of our achievements in 2016. We set a new record in semiconductor revenue, continue to enhance our organizational strengths, collaborate more closely and effectively with our customers, and added a worldwide leader in Newport Corporation that significantly expands the capability and exposure to new and exciting markets. I’d also like to take this opportunity to thank all of the Newport employees for their efforts and contributions in ensuring its smooth integration and positioning the light and motion division for continued success. Thank you for joining us on the call today and for your continued support in MKS. We look forward to updating you on our continued progress when we report our first quarter results in April. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Everybody have a wonderful day.