Good day, and thank you for standing by. Welcome to the MKS Instruments Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. And I would now like to hand the conference over to your speaker today, Mr. David Ryzhik. Mr. Ryzhik, please go ahead.

Good morning, everyone. I am David Ryzhik, Vice President of Investor Relations, and I'm joined this morning by John Lee, President and Chief Executive Officer; and Seth Bagshaw, Executive Vice President and Chief Financial Officer. Yesterday, after market close, we released our financial results for the fourth quarter and full year 2022, which are posted to our investor website at investor.mks.com. As a reminder, various remarks about future expectations, plans and prospects for MKS comprise forward-looking statements. Actual results may differ materially as a result of various important factors, including those discussed in yesterday's press release and in our quarterly report on Form 10-Q for the quarter ended September 30, 2022. These statements represent the company's expectations only as of today and should not be relied upon as representing the company's estimates or views as of any date subsequent to today, and the company disclaims any obligation to update these statements. During the call, we will be discussing various financial measures. Unless otherwise noted, all references to combined company financial measures reflect the combined results of MKS and Atotech Limited, which MKS acquired on August 17, 2022. Also, unless otherwise noted, all income statement-related financial measures will be non-GAAP other than revenue. Please refer to our press release and the presentation materials posted to the Investor Relations section of our website for information regarding our combined company results, non-GAAP financial results and a reconciliation of our GAAP and non-GAAP financial measures. As a reminder, in the fourth quarter, MKS updated its end market classifications, including replacing advanced electronics with electronics and packaging, reclassifying products and services supporting light emitting diodes, laser diode and solar markets from electronics and packaging to specialty industrial and reclassifying Material Solutions division products and services supporting wafer-level packaging from semiconductor to electronics and packaging. For a detailed breakout of reported revenues by end market as well as Atotech and combined company revenues by end market, please visit the Investor Relations section of our website. Now I'll turn the call over to John.

Thanks, David. Good morning, everyone, and thanks for joining us today. We ended 2022 on a strong note with revenue and EPS exceeding the high end of our guidance range. Of course, the first quarter did not begin the way we expected. On February 3, we identified the MKS have been a victim of a ransomware incident. We took immediate action to contain the incident, which has materially impacted our business systems as well as the operations of our Photonics Solutions division and Vacuum Solutions division, including our ability to process orders, ship products and provide service to customers. The operations of our Materials Solutions division were not impacted. Today, we are well into the recovery phase. And we've begun starting up the effective manufacturing and service operations, and we expect these operations will be restored over the coming weeks. We plan to provide a more complete picture of the costs and related impacts of the incident. On our first quarter earnings call, well we do expect there will be a material impact on our first quarter performance. Our main focus today, of course, is on ramping up our production and service operations to meet the needs of our customers. I do want to take a moment to reflect on how enormously grateful I am for the efforts of the entire MKS team through leadership from all key functional departments in responding to and managing the situation. You always hear that the best proven metal in the toughest moments, but you often don't get to see that. I'm extremely proud of the unprecedented responsiveness, stamina, innovation and resiliency demonstrated by our teams. I also want to thank our customers, suppliers and other business partners for their understanding, patience and support through this difficult period. We're working hard to be fully…

Thank you, John. I'll cover our fourth quarter and full year results and provide some thoughts for our first quarter of 2023, including eliminate impact of the ransomware incident. Starting with the fourth quarter, we did revenue of $1.09 billion, above the high end of our guidance range. Revenue was down $0.05 sequentially and down 6% year-over-year each compared to combined company results for the previous period. Excluding the impact of foreign exchange fluctuations in palladium pass-through, fourth quarter revenue grew 1% on a year-over-year basis compared to combined company results. Turning to our end market results. Fourth quarter semiconductor revenue was $503 million, declining 6% sequentially and growing 2% year-over-year each compared to combined comps result for the previous period, which was better than our expectations. Despite headwinds from continued supply chain constraints as well as newly enacted U.S. export restrictions in the fourth quarter, our team executed very well in delivering to our customers. Fourth quarter revenue from electronics and packaging market was $266 million, a decrease of 8% sequentially and 19% year-over-year each compared to combined company results for the previous period. Excluding the impact of foreign exchange, inflation pass-through, fourth quarter revenue declined 11% on a year-over-year basis compared to combined company results. On a sequential basis, this decrease in revenue is primarily a function of lower chemistry revenue resulting from the softer global electronics demand. Electronics and packaging revenue, we have 25% of overall revenue in the fourth quarter. As we mentioned in our recent Analyst Day, we have a unique opportunity to combine our capabilities to optimize the interconnect as package substrates advance PCBs require greater integration due to trends in miniaturization and complexity. We are very pleased with the initial reaction in the marketplace our combined laser drilling and chemistry capabilities. That reaffirms…

Thanks, Seth. While the events of the last month have been an unpleasant distraction, they do not change the MKS story. Following an important 2022, which we closed our strategic acquisition of Atotech and delivered strong financial performance. MKS is even better positioned for the future. We now address all of the core building blocks of advanced electronic devices from the semiconductor chip, to wafer level packaging to the package substrate to the PCB with enabling technologies that solve for miniaturization, complexity and novel chemistry. And we do so with an enhanced business profile featuring the most comprehensive technology portfolio in the industry, spanning vacuum, photonics and chemistry, market leadership in 20 critical product categories across a balanced end market profile, a resilient business model with a significant mix of consumable and services revenue and a larger addressable market. For all of these reasons, we are confident that we are ready to capture a broader set of exciting market opportunities. Now I'd like to turn the call back to the operator for Q&A.

[Operator Instructions] Our first question will come from Jim Ricchiuti of Needham & Company.

So if we look beyond the ransomware incident and you seem to be suggesting you think you could pick up a significant amount of that revenue impact in Q2. I'm wondering how we might think about some of the other metrics that you outlined in the Q1 guide prior to the incident. In other words, should we think in terms of those kind of expense levels and margins. And again, I'm not looking for guidance for Q2, but you've offered up this slide. I'm just wondering as we think beyond this into the June quarter, how we might think about some of these other metrics other than interest expense, which you have given some color on.

Yes. Thanks, Jim. This is Seth. I'll answer your question. Yes, I think you'll -- in our view, we gave a little snapshot of the Q2 expected guidance prior to the incident. And so we gave you a metric for how to think of the business going forward. Obviously, we've got a much different platform in terms of more resilient revenue stream from unit-based chemistry and service revenue. We've got many opportunities to grow the business in other multiple markets. And we'll continue to invest in the areas that really drive product investment as well as customer-facing opportunities, like of sales and marketing. So we have a lot of opportunities we want to invest in. And our goal is to exit any cycle, strong worth that we enter that cycle. So really no change in the business. As John mentioned, this is kind of a -- that's what Q1 speed month for us is very important. We continue to get our customers up from operation side, local service side as well. But we're really focused on, again, growing the business in the long term, making those investments.

Okay. My follow-up question just relates to your specialty industrial business. If I heard you correctly, you're talking about a modest, I think, sequential decline. And I'm wondering is that -- we don't have a lot of experience with that part of the business. Is that seasonal? Or is that macro related?

Jim, it's John. I'll take that. There is a little bit of seasonality to the automotive industry, but really it's end demand driven. And I think if you read about supply chain constraints in automotive, you can see that the first half, lease expectations are that it's a little weaker in automotive and perhaps later. Of course, we don't know what will happen later. But really, that's really what's driving most of that.

[Operator Instructions] Our next question will come from Sidney Ho of Deutsche Bank.

I want to start off with the ransom way events. You talked about at least $200 million of revenue impact in the first quarter, and most of that will be recovered by the end of second quarter. If you double-click on that, is that mostly impacting the semi business versus your other segments? And the other part of the question is, do you think any of the revenue is perishable, whether it's potentially losing share to a competitor? Or that's an opportunity for your customer to cancel order based on what's going on in the broader market?

In, thanks for the question. It's John. I would say that a lot of the revenue is, of course, semi based. And that's why, as you know, in the industry, these critical subsystems that we make are co-design with our customers, qualified by their customers. And so really difficult to displace. And we've had relationships with these customers for decades, and they've been very supportive. So we feel that all this revenue is easily recovered in terms of designs. I think that there are other revenue that could be lost a little bit, but those are very de minimis. And we're really not worried about that, and we're going to try to get those back as well.

Okay. That's helpful. My follow-up question is, if I look at the first quarter, you gave some color on -- in the pre-ransomware events, what you've guided $1 billion, down 8%, you give a little comment on semi versus electronics packaging and especially Industrials. Just on an order basis, do you expect first quarter to be the trough for any of these businesses. Maybe you can comment on the kind of backlog or what you're seeing into second quarter Well, that would be great.

Yes, Sandy. So we don't really comment on order rates, but I think that you can surmise that because we would have guided $1 billion, the strength of the backlog is really carrying that, especially for the semiconductor industry, as you mentioned. And so we're really happy with the strength of our backlog that we would have done much better. As I said before, whatever gets lost in Q1 because of the ransomware event we expect substantially will be made up by Q2.

[Operator Instructions] Our next question will come from Krish Sankar of Cowen and Company.

Drove them to first one, John, back to the prior question about pre-runs I would have guided $1 billion, thanks to the backlog. Is it fair to assume if you try to look at the linearity through the year, your revenue should eventually follow the WFE pattern. In other words, your customers are knowing their inventory in theory, semi should start slowing free progress through after Q1 pre ransomware. Is that a fair assumption?

Yes, Chris, I think that's a fair assumption, but I would point out, though, that because we're exposed to 85% of WFE, as you well know, you covered these companies, not all of them are behaving the same way. Some customers of ours in wafer fab equipment are saying they're going to go down in Q1 and -- or first half and some have different rates at which they're going to go down. Some are saying, no, it's still pretty steady in the first half. And some of the saying is going up. for the whole year even. So we're exposed to all those customers. So in general, you're right, if WFE goes down, we'll go down. Our long-term model has obviously demonstrated that we can outperform WFE by 200 basis points. But we're a much broader company now, and we're exposed to different parts of WFE. And so I think that just allows us to be a lot stronger supplier to the ecosystem.

Got it. And then a follow-up for Seth. You said just curious with this random impact on your revenue. How does that affect your term loan covenants?

Yes. As we talked about in the exit in the fourth quarter, our net leverage ratio was 3.4, gives a lot of headroom relative to a 5.25 leverage covenant ratio, which is on the term loan A only, by the way, which is where we paid off the $100 million in the fourth quarter. So that covers only tied to term loan A. That's $90 million exiting Q4. And looking ahead, we see headroom going forward as well. So that's an area we feel very comfortable with, quite honestly. That revenue moving from Q1, we believe entity recover in Q2 will kind of offset that on a 6-month basis. So we feel very comfortable with covenants going forward. But we'll kind of lean into that term loan A as well. It's kind of where we're going to kind of delever more aggressively. And I just want to come back to one comment I had before early on, as I responded to Jim Ricchiuti call, I meant to refer Q1 pre-ransomware information relative to Q2. So I just want to kind of clarify that point as well.

Our next question will come from Joe Quatrochi of Wells Fargo.

I wanted to understand the gross margin guidance or commentary for 1Q. Maybe if you could unpack that a little bit in terms of just like the moving parts there? Because I would have thought that, I guess, maybe it could have been a little bit better than that given Material Solutions should be a higher percentage of the total company revenue. And I believe that has a higher kind of corporate average gross margin. If you could just help us out there.

Yes, Joe, I'll take this, it's Seth. So in the fourth quarter, we talked about a little favorable impact favorable on the mix for the quarter. That's why we're above the high end of the guidance range. And then in the Q1 commentary, $1 billion, most of the impact on the margin is really volume-driven with a slight mix differential there as well. You're absolutely right on the MSD side, those margins a little bit higher than our corporate average. But fundamentally, that $1 billion commentary has quite a bit of revenue in the Photonics Solutions division as well as with the vacuum solution division as well. So really, the Q1 commentary is primarily volume driven, a little bit more normalized mix.

Got it. And then just -- is there any sort of like cash outlay related to the ransomware attack that we should be aware of, I guess, when you think about that kind of back to your estimating the net leverage?

Yes, Joe, I appreciate the question, but we're really not going to provide any details on the ransomware investigation. Certainly, we are hiring experts to help us recover and those are expenses. But in terms of cash outlay, I think there's really no comment here.

Next question will come from Mark Miller of the Benchmark Company.

I just was wondering between the ransomware issue and also the expected macro slowdown, can you discuss how the back -- what happened with the backlog last quarter? And -- are -- does the backlog indicate it's going to be a front end, back end or basically an even year in terms of sales?

Yes, Mark, it's John. I would say that, as I said earlier, the guidance we would have given prior to the ransomware of $1 billion, a lot of that is on the strength of the backlog that we have entering Q1. And so we can't really predict what will happen after that for sure. But certainly, the strength of the backlog allows us to probably we probably would have outperformed many of our peers in Q1 if the ransomware event hadn't happened.

And the margin profile, what's in the backlog, is that similar to what you've been seeing recently?

Yes, I think there's no change there, Mark. Same kind of customers. So no real change there on the margin profile for.

Our next question will come from Steve Barger of KeyBanc Capital Markets.

You mentioned the 4Q Geode order, and I think a separate multiunit order. Can you talk about pipeline visibility into further orders from legacy ATC customers?

Yes, Steve. I would say we were -- we talked about the 4Q order. That was a multiunit order. That was -- that was not with Atotech's extra synergy, if you will. There was another order, which we did call out in Q1, which was a long-time Atotech customer that we really didn't have a relationship with. So that was clearly a synergy. That happened a lot sooner than I was expecting, Steve, so I'll take it for sure. But we have a long pipeline that's reviewed with me every month of other potential synergy opportunities going both ways, areas where ESB could help Atotech and vice versa. And these are -- you got to look at these as multiyear efforts. You talk to the customer, you get qualified, then they ramp -- and that's the kind of time frame that you should think about. And every one while you get a bluebird like we talked about in the call.

Got it. And can you talk about how ATC's recurring revenue stream performed during the quarter versus your model? And is that revenue stream running as expected to start the year?

Yes, it is. As Seth talked about, excluding FX and palladium like everybody else in the industry, we are really pleased with how they did relative to the industry. We believe we maintain share in electronics and GMF. And so that's really met our expectations, and we're really pleased with how Atotech is performing.

Thank you. And that will conclude the Q&A portion of the conference. I would now like to turn the conference back to David Ryzhik for closing remarks.

All right. Thank you for joining us today and for your interest in MKS. Operator, you may close the call, please.

This will conclude today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.