Good day, ladies and gentlemen and welcome to the Fourth Quarter and Full Year 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference call, Chief Financial Officer, Seth Bagshaw. You may begin.

Thank you. Good morning, everyone. I am Seth Bagshaw, Senior Vice President and Chief Financial Officer. I am joined this morning by Jerry Colella, Chief Executive Officer and John Lee, our President and Chief Operating Officer. Thank you for joining our earnings conference call. Yesterday at the market close, we released our financial results for the fourth quarter and full year 2018. Our financial results and scheduled pro forma revenue by market have been posted to our website www.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 2017 annual report on Form 10-K and 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. Today’s call also includes non-GAAP adjusted financial measures. Reconciliations to GAAP measures are contained in yesterday’s earnings release. Now I will turn the call over to Jerry.

Thanks, Seth. Good morning, everyone and thank you for joining us today. I will tackle the results for the full year and fourth quarter of 2018 followed by several business and market highlights and then I will turn the call over to John who will share additional details on our strategy, customers and markets. Seth will then provide further information on our financial results and first quarter 2019 guidance before we open the call to your questions. Revenue for fiscal 2018 was a record $2.1 billion, an increase of over 8% from $1.9 billion in 2017. Non-GAAP net earnings were $7.83 per share, an increase of 31% from a year ago. Our ability to deliver these record results despite second half semiconductor market headwinds was driven primarily by a balanced exposure to a diverse range of the Advanced Markets, coupled with our longstanding commitment to managing expenses. For the fourth quarter, we achieved revenue of $461 million and non-GAAP net earnings of $1.54 per share both of which were at the higher end of our guidance. I am very pleased with our strong performance in 2018. Despite the slowdown in semiconductor CapEx spending, we continued on our path, sustainable and profitable growth. We have managed through semiconductor fluctuation for many years using a combination of strict cost control, leveraging our flexible manufacturing capabilities and increasing market share with key design wins. We have been clear in our strategy to broaden MKS exposure to customers and markets. The pending acquisition of Electro Scientific industries or ESI, is another significant step in executing this strategy and expand our addressable market by approximately $2.2 billion. We have received all necessary regulatory and shareholder approvals and we anticipate closing on February 1, 2019. We expect the addition of ESI to strengthen our expertise in…

Thanks, Jerry. As Jerry mentioned, we remain very bullish on the long-term trends in the markets that drive our business. For the semiconductor market, our exposure to all device types, including 3D NAND, DRAM and logic combined with our broad exposure to 85% of WFE spend, including deposition, etch, lithography, metrology and inspection positions us well when capital spending returns to normalized levels. We have an industry-leading portfolio and laser-based solutions for advanced industrial manufacturing and we anticipate continued long-term growth in these markets. We are also excited about new market drivers such as the implementation of new 5G technology over the next few years, which will require upgraded wireless infrastructure and new mobile devices. This will require increased data processing and storage capabilities, which is positive for our semiconductor and laser diode testing businesses as well as our pending acquisition of ESI. Our strategic initiatives over the last 5 years has been to broaden our reach into Advanced Markets as well as enhance our strong semiconductor market portfolio. In our Advanced Markets, revenue increased to a record $931 million in 2018 or 14% over 2017. This is on top of the 14% year-over-year growth achieved in 2017 on a pro forma basis, reflecting the full year results of Newport Corporation which we acquired in 2016. In the fourth quarter, we continued to see strong demand for our products across a number of diversified advanced market applications. Our industrial microwave generator, designed in for thin-film bottle coding in the beverage industry. In another microwave application, we received a large order for a synthetic diamond manufacturing application. In the analytical instrumentation market, we had a significant multiyear contract win for our unique multi-filter module that enables a significant improvement in the speed of sample testing. In the photovoltaic market, our new…

Thank you, John. I will cover the fourth quarter and full year financial results and discuss our Q1 2019 guidance. Revenue for the quarter was $461 million, which is slightly above the high-end of our guidance range primarily due to stronger than expected sales from semiconductor customers. This compares to revenue of $487 million in the third quarter of 2018 and revenue of $512 million in Q4 of 2017. Sales to semiconductor customers were $235 million, a decrease of 10% compared to the third quarter of 2018 and sales to Advanced Markets were $226 million at the end of the quarter consistent with the sales in third quarter driven by continued strength in our Light and Motion division. Our mix of revenues was approximately evenly split between our semiconductor and advanced markets in the quarter, reflecting on balanced end market exposure. Sales in the Vacuum and Analysis division were $258 million and sales in Light and Motion division were $203 million. GAAP and non-GAAP gross margins, approximately 46%, slightly below expectations we have at this volume due to product mix and lower factory utilization. Non-GAAP operating expenses were $101 million, which is favorable to the low end of our guidance range. We continue to undertake cost containment actions throughout the quarter as well as adjustments to the variable compensation plans. Acquisition costs related to ESI acquisition are excluded from non-GAAP operating expenses. Non-GAAP operating margin was 23.7%, slightly favorable to our expectations with revenue level due to lower operating expenses. And the non-GAAP and GAAP tax rates were both approximately 21%, slightly above our projected rate of 19% due to the geographic mix of taxable income. GAAP net income was $72 million or $1.32 per share and non-GAAP net earnings were $84 million or $1.54 per share. At the end…

Thank you. [Operator Instructions] And our first question comes from Sidney Ho with Deutsche Bank. Sir, you may proceed.

Great. Good morning, everyone. Thank you for taking my questions. Maybe just to start off, what’s your assumptions in your guidance for – between semis and other Advanced Markets for revenue growth of revenue?

Yes, this is Seth. Yes, I would assume that the – again, we don’t really guide by market, but I think a good assumption, I think we would expect that Q1 guidance would assume that the Advanced Markets are relatively steady from the fourth quarter.

Okay, great. So I guess well, if you – if all the declines in revenue is coming from the semi side, my rough math would tell me down around 15% to 20% quarter-over-quarter. You started to see weakness about the same time as one of the biggest customers. But your revenue outlook, including guidance will be down like 40% from peak level versus for them, it’s more like down 20%, 25%. Do you think you are at a level that should start growing in line with your customers or WFE starting say in Q2?

Well, it’s a little difficult for me to project where an upturn comes in the business. I think I have been quoted to say – it’s Jerry. But I feel like we are in a canoe which we have been in before that the length of the canoe is the determination. As far as the difference in guidance, business at this – when you hit this level assuming things can be a bit lumpy. In Q4, as an example, we had customers that want to pull orders in from Q1 into Q4, so it looked like there is an imbalance between Q4 and Q1, because we had allowed them to take order in early because they had some opportunities for revenue. And so that obviously affects what happens in Q1 and Q2, but we think the business is consistent from here. The order rate is consistent. And what’s really great is we are seeing a lot of opportunity with design wins. And frankly, I know this may seem odd, but we look at these downturns in our business as an opportunity to gain share. People want to do business coming out of these things with larger companies gives us an opportunity to reassess our structure of our company, what our costs look like. So, we are actually – we have been through this for – well, 35.5 years now. So I have been through more of these than I care to count, but it feels consistent now. Like we said before, the business looks pretty steady. And I am not going to predict what Q2 or Q3 or Q4 looks like. I have my team prepared. We are a Lean company. Lead times are short. We have to build their supply quickly and we have inventory a little higher, but we consider that store capacity that’s why we can outpace the ramp of other people so we feel pretty consistent with the business and when it comes back, it’ll come back and I’ve never been one to worry about the forecasts when I ran operations I told my team to forecast it wrong, get over it, get fast and that was 30 years ago, and I feel the same way now but it feels consistent and what I’m really pleased with is the Advanced Markets are so strong we are really grateful to the Newport team for the and Light and Motion now, what they’re done to increase the stability of this business and give us another place to go, and that business will continue to grow so I’d leave you with the thought that I think it’s consistent for now and I can’t predict what the future looks like, but I’m very positive over time it’ll improve and we’ll be the first ones to recover quickly.

Great. Just to clarify that so the upside in Q4, about $20 million, seems like it’s all coming from semiconductors and so that’s the pull-in that you talk about that potentially should happen in Q1?

That’s a mix, yes so but it’s all it’s pretty much all semi and there’s the opportunity to provide customers product faster than they originally had expected and they asked for that’s correct.

And you also mentioned that can the - your order has been consistent, I think, sometime in Q4 and that hasn’t really changed.

Yes, it feels pretty consistent it does I watch and every as you know, I watch them every day so yes, it feels pretty consistent.

Okay. And I mean, switching topics to the Advanced Markets side it’s great that you gave some background about how you think about that market but if you look at the revenue from that those markets, I would it’s been slightly down slightly for 4 consecutive quarters, including the dye are you concerned that this market may be a little so is there anything beyond just the normal business environment getting a little softer? Or do you think the growth rate is not as strong as maybe you had expected before?

It’s John. I could take that one. So, we do see a little bit more caution mostly in Asia. And so it doesn’t change our ability to win designs but certainly, spending is a little more muted there and it has been maybe last year but I think that’s really part of the macroeconomic issues and perhaps some tariff issues so I don’t think it’s endemic about our ability to grow that against market going in the future.

And that’s after two consecutive years of 40% growth the average growth rate of those markets, Sidney, on an annual basis is 4%. So if you consider what we have done in the last 2 years, we think there is continued opportunity there and if you listened to the amount of design wins that John talked about, it was very wide and deep in terms of packaging, agricultural, synthetic diamonds, multiple solar opportunities and more thin film applications or industrial coding applications. So it’s a wide swath of opportunities. So we feel very confident that projected growth with those markets will be consistent.

Great. Thank you very much.

You are welcome.

And our next question comes from Amanda Scarnati with Citi. You may proceed.

Can you just clarify where the inventory levels are at customers? I know last quarter we talked about Christmas in every quarter, so for the burnout to continue but if you saw pull-ins this quarter, is some of that inventory already collected at your key customers?

Yes, Amanda, it’s Jerry. So it’s little difficult for us to really project what the inventory level is by customer end customer and oftentimes, they’ll get some unique opportunities on a specific line to pull a product in more than they had expected typically, when we see these types of downturns the last four quarters or so, people go to their inventory burns, I mean, I can’t project what it is this time, but it does appear right now that there’s a stabilization, what we see in terms of people, build schedules and what our inventory position is with them so I think we’re at a good place as far as a stabilized business is concerned but I really can’t see it in their inventories and during these times, too, you’ll have mix changes, which affect sometimes what the inventory position looks like and the amount of revenue but I’d say we’re in a very good, consistent spot at this point.

And then can you just talk about the geographic split in revenue in the Advanced Markets? Is it more heavily weighted towards Asia? Just kind of continuing on the conversation from the last question or is it more kind of heavily weighted to the U.S.? Just kind of trying to gauge whether or not if macro condition is weak or that we should see some continued weakness?

Hi, Amanda. Yes, won’t give you the exact percentage, but most of the advanced market opportunities are Asia China is a big market for us but as well as Taiwan and Korea and Japan so those are the major markets as well.

Right. And then you mentioned that design wins are still relatively strong in that market.

Yes, in certain markets, yes for instance, in certain markets like solar, it’s still very hot and still lots of opportunities and demand for new design wins.

And just to give some additional color, all of the design wins that John just talked about, Advanced Markets, 90% of them came from either Europe or the United States.

And then just the one question I have is do you expect to update any sort of guidance next week once the ESI acquisition closes? Or is that just we’ll hear about that more next quarter?

Yes, this is Seth. I mean, yes, we will try maybe next quarter so again, when it closes on Friday so we will time you know that company worked well, the team there integration has gone very well we will make sure we get in there for a while at the of the day to before we update the guidance, which is what we did with Newport as well so I’m pretty scare of procedure, so.

Great. Thank you.

Thank you, Amanda.

And our next question comes from Tom Diffely with D.A. Davidson. You may proceed.

Yes, good morning. Couple more questions on the Advanced. Okay, on Advanced Materials side, so I guess first of all, when you look at your laser business and the kind of the flattish environment we’ve been in for a while, that’s much better than most of your peers that are calling for pretty big sequential declines is it just because you don’t have as much exposure in the that market? Or do you think its geographic exposure? Or is it share gains? How do you think you guys are performing?

Yes, Tom, so I’ll talk a little bit about the growth rate so we saw our laser revenue grow over 24% year-over-year on a full year basis and it’s there’s multiple applications so we were really happy with the strength and then what that does is that pulls along with it other opportunities for optics and motion, beam profiling so things on that line so we’re really thrilled about how we’ve seen the growth in that business and John would like to talk a little bit about the applications and the difference.

Yes, Tom, I think we’ve mentioned it before the difference really is the high-power industrial type of laser applications versus the lower-power pulse micro-processing laser business and so we’re exposed to the latter much more than the former and I believe some of the tiers that we have that have seen headwinds are really because they’re exposed to that high-power market.

Okay. And then at this point, are there certain seasonal trends that you’ve seen in advanced packaging that have changed over the last couple years as you’ve gotten more exposed on the laser side?

Yes, there is a bit of a cycle in terms of consumer products, right? So, there’s a component of the business that we’re starting to see a little bit going back where in the spring, they kind of decide the big consumer products people decide what their likely volumes will be for Christmas, which then backs up the chip guys and the packaging guys and all that but as Jerry mentioned, there are many other markets, so that aren’t cyclical in that way.

Okay. And then just finally, shifting over to the semiconductor side of the business when you look at the different OEM customers, is there a difference in ordering patterns based on geographic locations where your customers in Korea order in a different pace or rate than the ones in the U.S.?

It actually comes down to their operational confidence and capability there are customers that still stick to the old MRP process where they might have built a schedule, load it in MRP and they place blanket orders there are customers that we have Lean arrangements with where as they build and pull our equipment, we stock it and then there are some hybrids between it there are some people that buy inventory in advance of their ramp and stock their shelves until they’re bulging and there are other customers that keep their inventory lean it depends on how short lead times and cycle times to replenish it so really, it’s really all over the map and I think we see with some customers we can sell what they appear to be, but we can’t quite calculate a little heavier inventory because of their ordering patterns versus what their revenue appears to be and others that appear to be consistent, but it’s really all over the map, Tom. We’ve tried over the years because we’re a Lean provider. Our short times are very quick. And we have all lean factories and just-in-time delivery systems from our suppliers. So, we have Lean material acquisition systems. And we have tried for years to convince our customers to move away from MRP and long-term contracting and schedule deliveries to line-side supply because it just is consistent and just it takes all the forecasting concern out of it. And we’ve converted probably half our customers to see it that way and the other half remain with old line production problems. So, it’s really a mix.

Okay. That’s helpful. Appreciate it.

And our next question comes from Patrick Ho with Stifel. You may proceed.

Thank you very much. Jerry, maybe first off, in terms of some of the design wins and the share gains you’ve talked about in your prepared remarks, are they all coming from the Advanced Markets side of things, or are you also seeing gains and new opportunities on the semiconductor side? And if so, on the semi, is it more in your core back-end analysis or on the Light and Motion side that you acquired from Newport?

Yes. So, Patrick, I’ll split the question with John. But yes, the proponents of the design wins we mentioned in the script are all from the Advanced Markets. So thin film for beverages, synthetic dye manufacturing, and it’s across a number of different applications, whether it’s power, microwave power or lasers or pressure control or mass flow control. So, it’s really nice to see that it’s a wide swath of technology across multiple divisions and for multiple long-term applications. It’s really widespread. So, I’d say, V&A and L&M are enjoying almost equally the opportunity. We did talk about over $50 million of Light and Motion semiconductor design wins in ‘18, and those were our cross-sell opportunities from the V&A Group. So, the old MKS of Vacuum and Analysis Group, our sales team worked with their customer base in semi to introduce the Light and Motion product portfolio, whether it be lasers or motion, and we saw over $50 million of cross-sells in that case. As far as the design wins inside semi, I’ll turn it over to John to give you a little more cover about that.

Yes, Patrick. So, the answer is, we’re seeing both the Light and Motion and Vacuum and Analysis divisions get semi design wins. And we didn’t mention a lot about the semi design wins, but they continue to be very strong in power and plasma, as well as in some of our gas analysis business groups.

And I know it sounds crazy for me to say we – there are parts of downturns we like because nobody likes that. But over my career with the company, we have always emerged stronger and larger out of a downturn because of the design opportunities. And customers continually want to see larger, stronger, global footprint of suppliers that they can depend on that are financially stable. And our ability to increase the revenue in Advanced Markets makes us even more attractive to our semiconductor customers because they know we have the capability to invest in R&D, in infrastructure and inventory because we don’t suffer the same concerns as somebody that’s so semi dependent. So, we’re really looking forward to more market share gains from this – the design win. And I make our sales people get on the road even more so on the design win side and maybe just get another order.

Great. That’s helpful. Maybe, Seth, as my follow-up question in terms of the gross margins, I think you mentioned in your prepared remarks that it was primarily absorption. Were there any other variables that impacted gross margins both for the December quarter and your March quarter outlook, or is it primarily just the lower revenue levels that are impacting that metric?

Yes, Patrick. So yes, the bigger driver is lower volumes driving book incomes higher when the factories aren’t running at full capacity. So that’s the big – that’s the biggest driver. A little bit of mix there too in Q4, just sort of forecast to continue in Q1 as well. But I would say that the factory utilization and mix are the two biggest drivers for sure.

Great. And good luck to you guys this Sunday in Atlanta.

Thank you.

Thank you.

And our next question comes from Krish Sankar with Cowen. You may proceed.

Hi, this is Robert Mertens on behalf of Krish. Thank you for taking my question. First question, just sort of around your semi customers’ inventory, I know you mentioned that it’s very hard to gauge and there’s a whole lot of moving pieces of the puzzle there. But for these customers that are sort of on the older inventory systems that tend to run higher inventory levels, do you expect a bigger bounce back in demand once they run through this inventory and the semi market starts to rebound a bit? Is that the correct way to think about it?

Yes. Actually, they’re counseling us to don’t go away, keep your particularly inventory high, keep your people in place. We want you to respond. And so look, we won more awards for ramping ability than almost technology wins. So, have no fear. We manage the expenses appropriately, but we’ll be prepared and that’s absolutely what will happen. Sometimes, people drain their inventory too low and then they go, oh no, okay, we drained too low, can you respond quickly? And we’re like, sure, we’ll take any order and we’ll turn it within a quarter if necessary. So that we expected to happen. Some people come back consistently and other people just panic and place a bunch of orders and we have to turn around quickly and we’re used to that. We’ve built a machine that can respond to anything.

Great. Thank you. And then just as a follow-up, turning to the Advanced Markets side of things. It looks like that you’re seeing strong steady demand, but maybe a little bit of a moderation in the second half of this year and coming off of this high – or this double-digit growth into maybe a softer macro demand environment. How should we sort of think about that throughout this year? I know you’ve mentioned a lot of design wins in a lot of different areas, which is great, or is there a timeframe that a typical design win goes into a revenue recognition, or is it all over the place instead of pretty specific applications?

Yes. It really varies in terms of the duration. Some can be almost immediate and some take 1-year or 2-year to come to fruition. The industry average for our Advanced Markets is 4%. So, the fact that we grew it 14% 2 consecutive years tells you about our design win and caption share. And we expect – and our internal goal is always to be twice what the industry average is. And so, we’ll do whatever we need to do to get share because we don’t have 100% market share. So, you will have the growth rate in the year moderates, our expectation is to get out in the street with our salespeople and our capability and products to take share. So, we still see the industry average as 4%, and that’s growing at least twice that over time. But you’ll see these – you may see a bit of a moderation due to tariff concerns or whatever the issues that may impact us, but over time, it’s pretty significant. And again, one of the things that I reiterate, over 90% of the design wins John mentioned in his portion of the script were in Europe and the United States, which he talked about a nice opportunity outside of Asia for growth of the business. So, John, do you want to comment on anything else on Advanced Markets?

Yes. I think we were always targeting that 2x the monthly growth rate, as Jerry says, that’s 8%. And we just overshadowed obviously for 2 years in a row. Our plan is to – we expect to go another 8% this year, but we have a history of overshooting. And so that’s what we’ll strive for internally.

Okay, great. Thank you. Appreciate it.

Thank you.

[Operator Instructions] And our next question comes from Mark Miller with Benchmark Company. You may proceed.

Just was wondering if the Chinese New Year along with the government shutdown, especially for your research lasers for like NIH, do they have any impact on your guidance for the third [ph] quarter?

No. Not – no, not at all.

Okay. I just was wondering about ESI. How exposed are they to the smartphone market?

Hey Mark, this is John. Flex PCBs are used in the mobile smartphone market quite a bit, as well as other kinds of devices. So, they have a fairly significant exposure to the phones, which is good and bad. But the way we look at it is mobile has been very strong over many years. It was not as strong as past year for sure. And in fact, I have one customer. I think it’s just the macro smartphone market, but we expect the content of flex to increase per phone going forward. So, we still look at that exposure to mobile as a good thing from an ESI perspective.

Plus the application in things like automotive. If you think about dashboards on cars today, there’s more – anywhere where you have to twist and turn for some type of illumination or read-out, there’ll be a need the Flexible PCB application, the growth of 5G over time, which John mentioned about. So, we’re very excited about – beyond mobile and peripheral devices, the application of their product.

Yes, Mark. The other – I think you know that ESI had released a new via hole drilling, a tool addressing the high-density interconnect market, so not flex and so that’s the whole market opportunity that is another growth driver as well, but not as tied to phone.

And that’s all upside for them.

Right.

All upside.

They had a strategic position of starting to develop their own lasers for some of their products. How has that come along, or will you be supplying some of the lasers for them?

Hey Mark, it’s John again. So, we had mentioned in the past we actually won our first laser for their tool. And that was before we talked about buying them though, so it was legitimate. But you’re right. Historically, they have had their own laser division that has supplied lasers to some of their tools. But historically, they’ve also used other people’s lasers at the same time. And so of course, as we put ESI into the family, we’ll look at our laser division and it may add to our laser portfolio if they stay do some unique things there as well.

Thank you.

Thank you.

Ladies and gentlemen, that concludes our Q&A portion of today’s conference. I would now like to turn your call back over to Jerry Colella, Chief Executive Officer, for any closing remarks.

Thank you. We’re pleased with our results for fiscal 2018. Despite the slowdown in semiconductor CapEx spending, we delivered a record year for both revenue and non-GAAP net earnings. Our significant exposure to diverse end-markets to my global leadership position in the semiconductor market will continue to drive sustainable and profitable growth. I’m more confident than ever that the strategy we have put in place have positioned us for the long-term outperformance. Thank you for joining us on the call today and for your interest in MKS. We look forward to updating you on our progress when we report our first quarter 2019 financial results. Thank you.

Thank you. Ladies and gentlemen, that now concludes our conference call. Thank you for attending, and have a great day. You may all disconnect.