Good day, and thank you for standing by. Welcome to the MKS Instruments Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Ryzhik, Vice President of Investor Relations. 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 2023, which are posted to our investor website at investor.mks.com. As a reminder, various remarks about future expectations, plans and prospects for MKS comprise forward-looking statements. Actual results may differ materially as a result of various important factors, including those discussed in yesterday's press release and in our annual report on Form 10-K for the year ended December 31, 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 2022 combined results of MKS and Atotech Ltd, 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. For a detailed breakout of reported and combined company revenues by end market and division, please visit our investor website. Now I'll turn the call over to John.

Thanks, David. Good morning, everyone, and thank you for joining us today. MKS delivered solid results in 2023 against a challenging market backdrop. For the full year, we delivered revenue of $3.6 billion, adjusted EBITDA of $863 million and net earnings per diluted share of $4.43. Our performance highlighted the resilience of our business. We faced headwinds from a softer demand environment in our Semiconductor and Electronics and Packaging markets, but we generated solid profitability due to a combination of prudent cost controls and the underlying strength of our broad portfolio of proprietary solutions. We appreciate the continued support of our customers, who rely on MKS to solve their toughest challenges, and on our employees who worked relentlessly to deliver on the MKS promise. Our results also reflect our first full year operating with Atotech as a combined, more capable global company. The addition of Atotech's industry-leading chemistry and plating equipment solutions have expanded our broad range of capabilities and provided us with a higher mix of consumables and services revenue. We are on track to achieve our targeted cost synergies from the Atotech acquisition. I'm also encouraged with the progress we made in 2023 in positioning for future revenue opportunities as our Electronics and Packaging teams are actively engaged with key customers on their next-generation designs for advanced package substrates, a critical enabler for new applications such as artificial intelligence. Most industry observers expect a recovery in our end markets to slowly unfold in the second half of this year. We have established ourselves as a critical enabler of advanced electronics, with our foundational solutions for the semiconductor and electronics and packaging markets. By staying focused on our innovation road maps, controlling costs, managing our balance sheet and driving design wins with key customers, we are positioning MKS to…

Thank you, John. Before I discuss our results and outlook, I just want to say a heartfelt thank you to the entire MKS team, as well as our shareholders for their support and partnership in the past 18 years. It has been a privilege to serve as Chief Financial Officer of MKS. I am proud to have been a part of the company's substantial growth and transformation over that period. MKS' strong operating model and unique position to capitalize across a number of attractive secular growth opportunities, leaves me very excited about the company's future and look forward to following MKS' continued success. Let me now cover our fourth quarter and full year results and provide some thoughts on our first quarter of 2024. Starting with the fourth quarter, we delivered revenue of $893 million, above the high end of our guidance range, primarily due to better than expected revenue from a Semiconductor and Electronics and Packaging markets. Revenue was down 4% sequentially and down 18% year-over-year. Turning to our end market results. Fourth quarter semiconductor revenue was $362 million, declining 1% sequentially and 28% year-over-year. Fourth quarter electronics and packaging revenue was $226 million, a decrease of 7% sequentially and 15% year-over-year. Excluding the impact of foreign exchange and palladium pass-through, fourth quarter revenue declined 9% on a year-over-year basis. Moving to our specialty industrial market. Revenue in the fourth quarter was $305 million, down $0.05 sequentially and down 3% year-over-year. Excluding the impact of foreign exchange and palladium pass-through, fourth quarter revenue declined 3% year-over-year. In the fourth quarter, consumables and services revenue across our 3 end market categories comprised 41% of our total revenue. Turning to our margins. We reported fourth quarter gross margin of 46%, exceeding the midpoint of our guidance range. The more favorable gross…

[Operator Instructions] Our first question comes from Joe Quatrochi with Wells Fargo.

Maybe first, just to start, as we kind of think about total revenue and your guidance for the first quarter and think about the seasonality for some of the businesses or in markets, how should we think about, I guess, the rest of the year, do you view the March quarter as kind of the low point of revenue for the year?

Joe, it's John. I'll take that. As you know, we only guide one quarter out. Visibility is limited as usual. But we certainly read the same things you do, and we're certainly in constant contact with our customers. And I think our view is consistent with the industry, meaning the first half is kind of consistent with current levels, kind of with our guidance. And then certainly, the industry feels that the second half can be a little better. And our focus is really to continue to do the R&D for future projects with our customers. And so as you know, MKS has always been very lean and able to react very quickly to any changes in those assumptions. So we are looking at a first half that's kind of consistent with what we just talked about and guided for Q1.

Got it. That's helpful. And then just as a follow-up, I think in the past, you guys have talked about the number of MKS plus Atotech opportunities in your pipeline. And I think a lot of them have still been kind of driven by Atotech. But just kind of curious just as we turn over the new calendar year, if there's any update there on the number of opportunities there? And then maybe any color on just the number that are being driven by MPS?

Yes, sure, Joe. So we've kind of alluded to double-digit numbers of customer opportunities at different customers, double digit. And that's remains the same. As you know, the development and work with the customers takes time, because we're working on the next-generation package substrates with these customers. As you know, Atotech has leading industry market share in that space and the top 30 customers are their customers. So the majority of it is the synergy of Atotech and those relationships, bringing over the laser groups. But our laser group also has had market share leadership in flex drilling. And there are examples there as well and customers there where the laser group is bringing the Atotech opportunity into that customer.

Our next question comes from Krish Sankar with TD Cowen.

Seth, thanks for all your help through the years. You'll definitely be missed. John, my first question is, last year, your semi business underperformed WFE. This year, arguably, WFE is expected to be flat, although the second half [indiscernible]. Kind of curious how to think about your business? Because historically, it seems like in the years when WFE improves, you should outperform WFE. But how to think about your business in the year when WFE is actually flat?

Yes. That's a good question, Krish. Certainly, we look at our performance relative to WFE over the long term because, as you know, during the cycles, it varies when you're going up or going down. Many industry analysts are thinking of 2024 being flat, as you said, for WFE. I think the only characteristic I'd say that's a little different is when it's flat that long, the inventory burn down eventually finishes. And so even if it's flat, because there's just less inventory burn down, that should be beneficial to those of us in that part of the supply chain. And in our prepared remarks, we did call out that there have been many product categories where inventory burn down has completed, and we're kind of seeing a balance between what our customers are shipping versus what we're shipping to them. But it's not done yet. And we called out that memory specific product categories tied to memory. There's still, we believe, some inventory burn down that has to happen. And that is certainly going to be a function of how fast that part of the semi market turns up.

Got it. And then on the Atotech side, I guess I should say the PCB part of your business. Is this fair to assume that the material side, which is your legacy Atotech business, that is really going to be driven by smartphone volumes? And on the PCB drilling side, one of the questions I get is, even if smartphone units grows this year, they're still below the peak pandemic levels. So there is really no need to buy PCB drilling equipment. So I'm just kind of curious, can you help answer those 2 parts of the PCB question?

Yes. I think there's no real change. The dynamics are very much determined by utilization versus capacity expansion. So no change there. And to your point, as utilization rates increase, we'll see that in the consumables part immediately and first. And just like in semi, once the utilization rates hit a certain level, our customers would then be making plans for capacity additions. And the CapEx then would follow, not just in laser drilling, but also equipment for chemistry plating. So what we're focused on now is making sure that we're designed in. So that when those volumes of CapEx occur, we're going to see that volume. But the characteristics of the consumable part of our business versus the CapEx part haven't really changed.

Our next question comes from Jim Ricchiuti with Needham & Company.

I wanted to go back to the comment about the E&P business and what you described as lumpiness in the laser systems business. So in other words, where did you see some strength? Was it in the -- that legacy flex drilling? Or are you -- did you see some momentum in the HDI laser systems business in the GO 2?

Yes, Jim. Yes, we can give you a little color on that. CapEx for lasers is a little lumpy in the packaging business. And the better-than-expected result in Q4 was really driven by laser drilling for the flex market.

Okay. And John, how would you characterize what you're seeing for the HDI portion of that business?

Yes. I think it's still muted, Jim. I think you can see the utilization rates of many of our customers. And as you know, that's driven a lot by smartphones, PCs and servers. And so some of our substrate customers publicly -- public companies have been down 30% year-over-year. So when those utilization rates pick up, then as my answer to Krish's question, we'll see that chemistry go up. And then as that continues, we'll see that CapEx investment happening. But right now, HDI CapEx seems still a little muted.

Got it. Just a follow-up question. On the Photonics Solutions division, the PSD, we saw some a little bit more of a sequential decline in Q4. I'm trying to understand that a little better. Is that the semi portion of that business may be catching up with some of the weakness you've seen in other areas in semi business? Or is it just possibly a case of weakness in some of the other markets that's overall impacted the Photonics PSD revenue?

Yes, that's a good question. The PSD division, the semi part of PSD, that has continued to be strong as we -- as we mentioned in the prepared remarks. And that's, as you said, is going to be one of the bigger long-term drivers of our outgrowth in market share in WFE because of the exposure to lithography, metrology and inspection. And so the slight downtick in PSD was really some muted demand in research and defense relative to what our expectations were.

But that's not suggestive of any, maybe change in the market in that non-semi evolution of the business? Or do you think it's -- is it more of a timing issue, Joe? Have you seen any change in dynamics in the market?

No. In fact, -- we -- the specialty industrials is made up of many markets, and some can be a little lumpy up and down. But in general, it's been a pretty steady business. And some of the industrials, for instance, like automotive, have actually been very, very steady. So this particular quarter, we're just calling out a little bit of research and defense. That was a little lower than our expectations. But the rest of the specialty industrial markets were very steady, actually.

Yes. And I just actually segue to the last question about automotive. Are you seeing any impact from all of the headlines we're seeing in automotive as it relates to the Atotech business?

Yes, we see the same things you see a lot of the chip companies, right? That is playing automotive guiding down. But we really haven't seen that, Jim. It's been a very steady, steady business throughout the year. And kind of our expectation, at least in Q1 as well.

And our next question comes from Steve Barger with KeyBanc Capital Markets.

My first question is related to the cycle. In the past, you've talked about how semi and E&P are likely to recover in a similar time frame, but at different magnitudes. Do you still expect a more or less simultaneous recovery? Or is there any scenario where one segment or the other would lag or not participate as the market recovers?

Yes. Thanks, Steve. It's a good question. I think in general, they are correlated. Because if you're making more chips, you're going to have to package them. I think -- so our view is that they are continuing -- going to continue to be correlated. The difference for MKS is that our exposure to semi is really about CapEx and our exposure, most of our exposure to E&P is consumables. So as we talked about earlier in the earlier question, we'll see that sooner E&P just because of the consumable nature of the business. And then CapEx there would follow as well.

Right. Got it. And free cash flow has been in the $140 million range in the last couple of quarters. Do you feel like that’s stabilizing to the point where it could be more predictable around these levels as you go through the year and think about working cap and inventory?

Yes, Steve, this is Seth. I’ll take that question, obviously. So I think the – it’s hard to get cash flow in any one quarter. But the inventory levels, as we talked before, has been really sticky because of the supply chain constraints. So we started to see image level sort of peak in the last quarter, that will be helpful going forward as well. But fundamentally, as you brought – outlined here, at certain revenue levels, which we’re hitting right now, the cash flow becomes quite robust. Q1 is a little more working capital requirements because of variable compensation payments. But Q4, we’re very pleased with cash flow, very strong execution on margins and on OpEx. That continued through 2024 as well. So it’s hard to be exactly cash flow each quarter. But I would expect cash flow to be more robust going forward as the revenues pick up.

Thank you. I'm showing no further questions at this time. I would now like to turn it back to David Ryzhik for closing remarks.

Yes. I'd like to thank everyone for joining the call. And operator, you can close the call.

This concludes today's conference call. Thank you for participating. You may now disconnect.