萬機儀器 (MKSI) 2005 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the MKS Instruments second quarter conference call. At this time, all participants are in a listen-only mode and following today's presentation instructions will be given for the question-and-answer session. If anyone needs operator assistance at any time during the conference, please press the star followed by the zero. As a reminder,. this conference is being recorded Tuesday, July 26 of 2005. I would now like to turn the conference over to Jonna Manes. Please go ahead, ma'am.

Thank you Mike. Good afternoon and welcome to our second quarter earnings conference call. By now, you should have received a copy of our earnings release. If you did not, please go to our web site at www.mksinstrument.com, or you can call (978)284-4045 after this call.

As a reminder, various remarks that we may make about future constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements, as a result of various important factors including those discussed in this afternoon's press release and in the Company's annual report on form 10K for the fiscal year ending December 31st, 2004 and most recent quarterly report on form10Q each of which is 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 statements should not be relied upon as representing the company's estimates or views of any date subsequent to today.

Finally, I would like to remind everyone that during the Q & A period, each person will be limited to two questions. We will circle back for further questions as time allows and now, I would like to introduce John Bertucci, Executive Chairman of MKS.

Thanks Jonna, and thanks everyone for joining us. With me today are Leo Berlinghieri, President and CEO and Ron Wagner, Chief Financial Officer. I will give the highlights of the second quarter, which was my last quarter as CEO, Leo will comment on our outlook and strategic direction, and Ron will review the financial results and then we will answer your questions.

Second quarter revenues exceeded the high-end of our guidance and rose to 130.2 million, a 2% increase over the first quarter. Second quarter earnings also exceeded our guidance, primarily as a result of higher gross margin and lower operating expenses. NonGAAP earnings were $0.19 per share compared to $0.15 per share in the first quarter.

Now, I would like to highlight some of our successes in the second quarter. As the leading edge shifts to smaller geometries is that require new processes, demand continues for process control and information management to enhance TOOL performance and productivity. With our broad technology portfolio we are providing higher value solutions that enable precise control and optimization of advanced manufacturing processes. I am pleased with our success in gaining acceptance for our process control and monitoring solutions, which include a range of innovative new products we introduced at SEMICON West this month.

For example, we introduced the new web-enabled 600 C Baratron Capacitance Manometer, which provides best in class pressure measurement accuracy for control of leading edge processes, and digital communications for real-time data logging with embedded diagnostics. We showcased the new TOOLweb Residual Gas Analyzer, which is a sensor automation platform for RGA control and communication. It monitors process integrity and TOOL performance in real-time, identifies process excursions and generates alarms to minimize the cost and yield impact of TOOL downtime. In the second quarter, a major customer in Asia ordered multiple TOOLweb RGAs for 300-millimeter processing, which marked the first adoption of our RGA technology by that customer.

Vacuum Gauging products also continued to generate sales in the second quarter. Our Pirani gauges, were selected by a major European analytical instruments manufacturer for integration into a new system.

We also introduced new RF and DC power generators and New reactive gas generators that are gaining acceptance at customers. For example, the R*evolution, is a remote plasma source that generates ultraclean reactive gas species, and provides high-efficiency, on-wafer processing. It has produced process rates that are significantly higher than conventional sources.

We continue to believe that an increasing percent of the semiconductor capital equipment spending dollar will be invested in process monitoring and control, to improve TOOL uptime yield and throughput. We see opportunity ahead to meet these fab challenges and we believe that MKS is in an excellent position to continue to gain market share.

Now, we would like to comment on our recent management transition. I am pleased that the board acted unanimously on my recommendation to elect Leo, as CEO and president effective July 1. Leo has been with MKS for 24 years. His exceptional customer focus and comprehensive knowledge of the industry, have contributed significantly to our success over the years. This transition reflects a succession plan that began when he was elected COO two years ago and then elected to the additional role of President last year. On behalf of the board I want to publicly recognize Leo's excellent performance.

My last quarter as Chairman and CEO, coincided with the end of my 35th year at MKS. Beginning my 36th year of my career at MKS as Executive Chairman of the Board, I will continue to be involved with Leo and his team in business, strategy, and technology road map reviews as we build on our strong track record. I will now, turn the call over to Leo for his comments. Thank you John and good afternoon, everyone. I am pleased to have the opportunity to lead one of the strongest companies in our sector. We are well positioned with a broad technology portfolio, a skilled and experienced management team, and a strong balance sheet. As John said, today we are providing higher value solutions as the semiconductor industry transitions to new processes for smaller device geometries. These transitions benefit MKS because more valuable wafers, require more process steps and more process control to prevent yield loss. Our TOOLweb technology suite, is designed to provide real-time management and control of advanced semiconductor manufacturing processes to enhance uptime, yield, and throughput.

We also combine complementary technologies into integrated subsystems for higher performance, which provides us with a competitive advantage and an opportunity for share gains. At SEMICON West, our standalone, integrated, ozone delivery system, was recognized as the best new subsystem by European Semiconductor Magazine. This integrated subsystem combines pressure and flow control with ozone technology, for use in such as atomic layer composition and has been adopted for fabs in the U.S., Asia and Europe.

Going forward, we will continue to work closely with our customers as their technology needs evolve and as their lead times shorten. In the near term, our short lead times limit our visibility, making it difficult to estimate business beyond this current quarter. Based on cautious customer order patterns, we currently estimate that our third quarter sales could decrease by 3 to 8% and range from 120 to 126 million. At these levels, nonGAAP earnings could range from $0.11 to $0.15 per share.

MKS has historically grown faster, than the semiconductor industry and that is still our goal. We are targeting higher growth opportunities within this industry, as well as opportunities outside the semiconductor industry, where we can leverage our technology. We also continue to respond to changes in the market.

As fabs and OEMs shorten their lead times, we intend to maintain our operational excellence and keep our product development processes, robust and inefficient remain competitive. We have strong global manufacturing operations and we continue to enhance our management, service, and application skills in Asia, to support an increasing concentration of customers in that region. I believe these and other efforts will help us take the next step on our road map to continued market share gains and profitability improvement. Now, I will turn the call over to Ron for the second quarter financial results.

Thank you Leo and good afternoon, everyone. Second quarter, 2005 sales, of 130.2 million represented a sequential quarterly increase of 2%. Second quarter GAAP net earnings also increased sequentially and totaled 9.8 million or $0.18 per diluted share compared to 5.5 million or $0.10 per diluted share in the first quarter. The increase included a special tax benefit of 1.9 million resulting from the completion of a federal tax audit. On a non GAAP basis or operating basis which excludes amortization of intangibles of acquired intangible assets and special items, second quarter 2005 earnings grew to 10.2 million or $0.19 per share, which was a 27% increase compared to 8 million or $0.15 per share in the first quarter.

Second quarter sales for the semiconductor market, where relatively flat on a dollar basis, while sales of thin film and non semiconductor markets increased sequentially. Sales for the semiconductor market represented 70% of total sales, with semiconductor OEM and device manufacturers sales at 60% and 10% respectively, of total sales.

Sales for the thin film market, which include equipment for flat panel display and data storage increased by 10% sequentially to 8% of total sales. Sales to other markets increased by 9% sequentially to 22% of total sales, primarily reflecting higher sales for the medical equipment market. Sales to our top ten customers increased to 49% of second quarter sales compared to 47% in the first quarter. Sales to Applied Materials, our largest customer, grew sequentially to 16% from 15% in the first quarter, while sales to semiconductor subcontractors of semiconductor equipment customers decrease sequentially to 5% from 7%.

By geography, U.S. sales increased sequentially by 4% to 62% of second quarter sales. Sales to Asia also increased by 4% to 28% of second quarter sales. After growing sequentially by 48% in the first quarter, sales to Europe decreased by 13% sequentially to 10% of second quarter sales.

We continue to focus on gross margin improvement. Second quarter gross margin increased 39.8% from 38.7% in the first quarter. This improvement primarily reflected lower overhead costs, lower purchase material costs and product mix. Operating expenses, excluding special items, we're approximately 670,000, lower in the second quarter. R and D spending increased by 140,000, sequentially and represented 11.3% of second quarter sales. SG and A expense decreased by approximately 810,000, to 17.7% of sales and reflected lower payroll taxes in fringe benefits and other lower administrative expenses compared to the first quarter.

Excluding the 1.9 million tax benefit resulting from the completion of a federal tax audit, our normalized tax rate was 32.8%. Our work force remains stable at 2,270 people, compared to 2,273 in the first quarter.

Now, I will turn to the balance sheet. We we continue to maintain a strong cash position. Cash in investments increased 18 million to 266 million and cash from operations was 22 million in the second quarter. Days sales outstanding totaled 55 days, inventory decreased slightly and inventory turns improved to 3.3 turns. Capital expenditures of 3.3 million in the second quarter were primarily for investment in the new ERP system and in manufacturing equipment for new products. We expect the capital expenditures could total approximately 10 to 12 million in 2005. Depreciation in the second quarter was 3 million. We estimate that depreciation could total 12 million in 2005.

As Leo mentioned, we currently estimate that third quarter sales could decrease by 3 to 8% and range from 120 to 126 million. At these revenue levels,third quarter gross margin could range from 38 to 39%. We expect that operating expenses, excluding special items, could remain relatively stable in the third quarter. R and D spending could increase from 14.7 million and range from 15 million to 15.2 million and SG & A expenses could decrease from 23 million and range from 22.1 million to 22.7 million, primarily as a result of lower professional fees.

Amortization of required intangible assets is estimated to remain at approximately 3.7 million. We estimate our tax rate for the third quarter could be approximately 32%. Based on these assumptions, third quarter GAAP net earnings could range from 3.9 to 6.1 million or $0.07 to $0.11 per diluted share on approximately 55 million shares outstanding. NonGAAP earnings which exclude amortization of intangibles, intangible assets of 3.7 million could range from 6.1 million to 8.3 million or $0.11 to $0.15 per share.

This concludes our financial discussion and I will turn the call back to Leo.

Thank you Ron. Now, we are ready to take your questions.

Thank you, sir. Ladies and gentlemen, at this time we will begin the question-and-answer session. [ OPERATOR INSTRUCTIONS ] Our first question comes from Jay Deahna. Please state your company name followed by your question.

J.P. Morgan. First of all, John, congratulations on a fantastic career. And continuing your role as Executive Chairman. My question is this -- yesterday Ultraclean did their earnings release and they suggested that July and August would be a trough and that their business would start to turn up in September. At least for the third quarter and they didn't really have a whole lot to say about Q4. Are you seeing a similar phenomenon? And if so, does that essentially represent the beginning of starting to fill the pipeline for the next wave? Thanks.

Hi Jay, this is Leo. Thanks for your question. I think where we've given the guidance as slightly downbased on what we have heard from being announced recently from a cautious customer order guidance. So I think at this point, we can say that we expect business that would be 3% to 8% down from our month-to-month basis. It is difficult in a torrents business to be able to tell you exactly what that would be.

Thank you. The next question comes from Philip Lee. Please state your company name followed by your question, sir.

All right, Philip Lee, J.P. Morgan. Hey Ron, you had mentioned before the improvement on the gross margin line. My question is in the second quarter of last year you guys did about 42% gross margin excluding charges, at 152 million in revenues. And I am wondering if in '06, at that same revenue level, how much better can you do - how much better can you do compared to that given a higher mix of integrated subsystems and lower manufacturing costs?

Well, you know, as I said before, Philip, that at approximately 155 million, and our target is to get to gross margins in the 44 to 45% range, and we are working on ways to reduce our product costs as I mentioned before. Reduce our purchase material costs, have a higher mix of subsystems, integrated products as you mentioned and also, as you well know, we are still doing some of our manufacturing in low cost countries, as well, and we are looking at ways to continually look at ways to reduce our fixed overhead costs as well. So it is a combination of things and that is our goal.

Okay. Do you have a target percentage of revenues from integrated subsystems exiting '05.

Not necessarily exiting '05, but it grew to 25%, total of 25% in 2004 and we raised our overall target from 30% to 40%. As we discussed in the first quarter.

Okay. Thanks.

Thank you. Next question comes from David Belaunde . Sir, please state your company name followed by your question.

Sure. Lehman Brothers. I have two questions. The first one is, are there any particular segments that you are seeing that are particularly weak or strong at this particular time? And then, at least one of the OEMs was - has been suggesting that it is going to exert as much pressure as possible, more than normal, on its subsystems writer's to lower pricing. Are you seeing that? Those are my questions.

This is Leo again, thanks for the question. We always -- there's always pricing pressure. It has been that way, always. And we will - and we continue to apply pricing pressure down the supply chain. I don't think there's anything unusual that is happening. Again, that was the last part of your question. The first part was related to, is there any segment or sector in the industry that seems to be stronger or weaker?

Yes. That is correct.

No. I think we've concentrated - we have mentioned before that we focus on the higher growth applications and ALD is one we have talked about quite a bit as a higher growth application but nothing specific that is higher or lower that is unusual.

Okay. Thank you.

You're welcome.

Thank you, sir. Our next question comes from Stuart Muter. Sir, please respond with your question followed - your company followed by your question.

Great. RBC Capital Markets. Thanks for taking the question. The question on integrated subsystems as you drive to your goal of 40% of sales, do you think that the moving from 25 to 40%, the cost of designing and selling and marketing the subsystems will increase? I guess the question is will marginal costs increase?

Well, the marginal costs should not necessarily increase. As you know, we target higher -- those products can generate higher margins because we are integrating our own types of products and our own technologies together, and it doesn't affect the below the line operating costs because it is sold through the same distribution sales force. I might add, Stuart, that the technologies and integrated projects are ones that we have already invested in and continue to invest in so it is not as if we have to invest in some unusual technology just to do integration. We are leveraging the technology product and product portfolio for integrated products. I don't suspect that will change.

Yes. I guess what I was trying to get at was have you hit the low hanging fruit in the integrated subsystems and now, you know, the next batch of integrated subsystems will they be more complex and would that perhaps drive higher R&D costs?

I don't think we anticipate that to happen.

And if I could sneak a follow-up question in, for Ron, were there any shutdowns in Q2 and you have any shutdowns planned for Q3?

Yes. We did have a partial shutdown at the end of June. At this point, there's nothing planned for Q3.

Thanks a lot.

Thank you. Our next question comes from Tim Summers. Please state your company name followed by your question.

Stanford Financial Group. And John, let me also congratulate you on a terrific career in the industry and at MKS.

Thank you.

I wanted to ask you, your guidance, Leo, for revenue in the third quarter was down 3 to 8%. Is that going to be true as you see it right now, for all of your product lines; semi, nonsemi and thin film?

We don't break the product line out that way but the overall business is projected to be 3 to 8% down.

Okay. Great. Thank you.

You're welcome, Tim.

Our next question comes from Mark Fitzgerald. Sir, please state your company name followed by your question.

Thank you. Banc of America Securities. Could you comment on the DC power supply business and have you guys with the ENI acquisition, made any headway there in market share and what is the pricing environment like there?

Well, I think, as you know, there is an opportunity in her DC, for market share gains. We have continued to work with a number of customers on evaluations and that is all I can comment on right now. The pricing pressure, as I mentioned earlier, isn't much different than it has always been in the industry.

Okay. And then the following question, just if you could make some comment on the outlook for the September quarter, what you are targeting for operating margins.

Well, I gave the guidance on that EPS. Which was - nonGAAP was $0.11 to $0.15.

So is there - can you give what the operating margin is in that assumption for your model?

You mean the gross margin?

Operating margins.

The operating margin is approximately 10%.

Okay. Thank you.

Plus or minus.

Thank you, sir. Our next question comes from Brett Hodess with Merrill Lynch. Please go ahead with your question, sir.

I just wanted to ask a question relative to your business relatives. Your large OEMs at this point. Are you seeing the the lead times that you're getting from the OEM's change at all relative to the past? Are they getting shorter? Are you getting shorter forecasts, longer forecasts, or is it similar to the past?

Brett, I would say that the forecasts we get are similar but I think the entire industry continues to work at cycle time and lead time reduction.

And does that require you to make any changes to your - further changes to your infrastructure in terms of how quickly you are delivering subsystems and perhaps what that means relative to your, you know, the infrastructure that you have close to your OEMs?

No. I don't think that is so of significant. We have - you mentioned, I think, the larger OEMs and we've been doing just in time manufacturing deliveries for quite a while with those customers. So I don't anticipate anything unusual there.

Okay. Thank you.

You're welcome.

Our next question comes from [Steven Weiss]. Sir, please state your company name followed by your question.

Yes. Thank you very much. [Mindflow Capital Investments.] A couple of questions for you. Over the past year, a lot of your competitors have recently been implementing some new strategic initiatives to reduce the raw material and commodity costs by establishing a better line of communication with their supplier base. Leo, if you could provide some color tests on the call today, on what you plan on doing and in order to reduce overall raw material and commodity costs by opening a better line of communication with your suppliers.

I guess I am not sure what you mean by an open line of communications. We have worked pretty diligently for a number of years on supply-chain management. If that is what you mean.

Correct.

And feel that we excel in that area. We have worked with low-cost regions sourcing and we have talked about the fact that we would continue to do that, so I don't know if there is something else that you are referring to or not but our intention is to continue to work with low-cost regions sourcing and with our suppliers.

Well, in terms of what I mean by supplier base, unless you're planning on consolidating supplier base, you have a lot of alternatives, are you letting your suppliers know that you have more than one alternative for a particular commodity and so they, kind of, know their squeeze, with making sure that their living up to your quality standards.

We have been partnering with suppliers for a number of years. I don't think -- I don't see any issues there relative to that. We work with suppliers, they understand what the objectives are , they have been part of the industry, in some cases for 20 plus years, as we have been supplying it much longer than that. So I think they understand what the requirements of the industry - we communicate with them pretty regularly. I don't anticipate any issues being aligned with the supply base.

Okay. All right, thank you very much.

You're welcome.

Thank you, sir. The next question comes from Avinash Kant. Please state your company name followed by your question.

Good afternoon, this is Avinash, from Adam Harkness. Quick question though. Do you see any difference in your marginal structure when you sell to the OEM's or when you sell to the IDM's?

Well, certainly volumes can be significantly higher to an OEM, so it may be issues related to - we're not going to reveal pricing structures but certainly the volumes are much higher with the OEMs that could have an impact on pricing.

Okay. Thank you so much. And John, best of luck for your career.

Thank you.

We have time for one more final question, the last question comes from Tim Summers. Please go ahead with your question, sir.

Yes, hi. Ron, can you give us an idea of what we should be using for the calendar '06, tax rate?

We really haven't given that out at this point. We would have to review that at a later time because that would be dependent upon our forecast for '06 and geographically where that -- forecast - where those sales would occur because that would affect the rate. But it could be - it could be approximately 31% or so.

Okay. Great. Thanks.

Thank you sir, please go ahead. Sir, that was the final question. Please go ahead.

Are there any other questions? I guess that will conclude our comments and thank you for joining us on the call today and for your continued interest in MKS.

Thank you. Ladies and gentlemen, this concludes the MKS Instruments second quarter earnings conference call. If you'd like to listen to a replay of today's conference, please dial 303-590-3000 with the reservation number of 11034204. Once again, that number is 303-590-3000 with the reservation number of 11034204. You may now, disconnect. Thank you very much for using ACT teleconferencing.