萬機儀器 (MKSI) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to MKS Instruments first quarter earnings conference call. [OPERATOR INSTRUCTIONS] Following today's presentation instructions will be given for the question and answer session. As a reminder this conference is being recorded today, Thursday, April 27, 2006. I would now like to turn the call over to Ms. Jonna Manes, Director of Investor Relations. Please go ahead, ma'am.

Thank you, good morning and thank you for joining our earnings conference call. Earlier today we released our financial results for the first quarter of 2006. You can access this release at our website at www.MKS Instruments.com.

As a reminder various remarks we may make about future expectations, plans, and prospects for MKS, constitutes 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 today's press release, and in the Company's annual report on form 10-K for the fiscal year-ended December 31, 2005, 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 as of any date subsequent to today.

Finally during the Q & A period we ask that you limit questions to to 2, per firm. We will circle back for further questions as time allows and now I'd like to turn the call over to Leo Berlinghieri, Chief Executive Officer and President of MKS.

Thanks and thanks to everyone for joining us this morning. With me is Ron Weigner, our Chief Financial Officer.

I'll give an overview of the first quarter and the outlook, Ron will give a detailed review of the financial results and our guidance and then we will both answer your questions. After we reported stronger than expected fourth quarter results, we went on to achieve significant growth in the first quarter. Sales increased by 39% sequentially to 179 million. Excluding a full quarter of sales from Ion Systems and Umetrics acquisitions, our organic sales growth was 31%.

Our continued focus on just in time manufacturing processes allows us to rapidly respond to significant fluctuations and customer demand. Our orders from semiconductor capital equipment manufacturers increased significantly in January and this momentum was sustained as a high level through February and into March. Sales to semiconductor devise manufacturers and thin film and other markets also increased.

As a result, we exceeded the high end of our first quarter guidance. First quarter GAAP earnings increased sequentially to $0.28 per diluted share which included $0.03 per share in stock based compensation expense. Non-GAAP earnings which exclude amortization, special items, and stock based compensation increased to $0.39 per share.

In the quarter, we saw broad based increase in our sales. Our success in the first quarter reflects our innovation and close customer relationships with world class devise manufacturers who are investing in few fab projects and in capital equipment and with key OEM's, who are supplying them. We also believe our growth strategies are working.

Our strategies for growth are to integrate our market leading process control, monitoring and data management technologies around the chamber to improve process performance and productivity. With our breadth of technology, strong IP and our ability to integrate them, we expect to increase our participation in next generation processes with higher growth rates as the semiconductor industry continues to transition to 300 mm wafers and shrinks to smaller geometry.

We're also leveraging our technology in other markets with growing requirements for process control. In the quarter our sales were very strong in power and reactive gas product which is reflect our market leadership in three areas.

First, remote plasma sources for chamber cleaning and on wafer processing. Second, ozone generators and delivery subsystems for deposition, wet cleaning and resist stripping applications, and finally,RF power for semi conductor and medical equipment applications. Sales of integrated subsystems for microwave plasma delivery, which is used for photo resist removable in semiconductor processing increased substantially in the quarter.

We also achieved higher sales of the new revolution integrated remote plasma source, which generates reactive gas species for high performance on wafer processing. This remote plasma source operates at higher than conventional levels and has been adopted by major Asian OEM for an process. We see more opportunities ahead for this high performance on wafer technology. Sales of ASTRON integrated remote plasma sources were also strong in the quarter. Our newest ASTRON, the ASTRON HFS provides high power levels in flow rates for faster chamber cleaning. When combined with active end point detection, it provides better tool utility and lower cost of ownership.

These factors are important to semiconductor and flat panel display end user who require higher process performance. ASTRON HFS has been specified for process chamber cleaning by a world class devise manufacturer and is under evaluation at several major OEM's. We saw substantial increase in ozone generator orders from a major U.S. OEM.

Our ozone generators which are used in CVD processes will be used in a new SA CVD process at the smallest line width. Our integrated ozone systems are also used in advanced manufacturing processes such as atomic layer deposition. OEM orders for these in integrated systems continue to increase in the quarter as ALD technology moved into production at a world class devise manufacturer. ALD processing precisely controls film thickness so it is effective for memory devices.

Ozone delivers major benefits. It is generated at point of use which reduces the potential for contaminates from prolonged storage and it reduces both storage and transportation costs. Ozone is also a safe and environmentally friendly precursor because it decomposes back to oxygen. With these advantages, we believe that ozone will continue to grow as the precursor of choice for ALD, as ALD processes grow at an industry forecasted rate of 41% through 2010.

Our liquid ozone delivery systems continue to have success in the quarter. A systems for single wafer wet cleaning was designed into an OEM newest cleaning tool. We also penetrated the flat panel display market with an integrated systems for liquid ozone delivery. It was selected for use in advanced process and we received the first order for multiple systems.

Turning to our integrated RF power systems, we saw sales accelerate in the quarter with particular strength in CVD applications. We're encouraged by evaluations of our new shore power RF generators that are currently under way for several processes at major OEM's. In the medical equipment market, our high power RF amplifier was selected by a major Asian medical equipment customer for leading edge 3 Tesla MRI technology. With this win, we are providing leading edge RF amplified technology to now 4 major MRI equipment manufacturers.

Sales of our high accuracy pressure measurement components increased in the quarter. Ultimately driven by devise manufacturers requirements for higher precision as geometry shrink. We also gained design wins and repeat orders with our latest pressure control valves that feature both sailing and control capabilities. Acceptance also continues to grow for our web enabled mass flow controllers that provide real-time access to process sensor information. Electro static control management systems sales increased in semiconductor or, flat panel display and disk drive markets in the quarter. As fab installation activity continued, sales of our vacuum components increased and we gained new orders for vacuum process solutions that improved fab productivity. We gained market share with new vacuum gauges that increased functionality by integrating multiple digital censors into one package.

We also increased our penetration of the biopharmaceuticals manufacturing market in the quarter. Looking ahead based on current trends and industry bookings, we see signs for moderate growth in semiconductor capital equipment spending in the second quarter. After a very strong first quarter, we estimate our second quarter sales could increase 3-6% and range from 185 to 190 million. Our visibility beyond one quarter is typically quite limited; however some devise manufacturers have recently announced plans publicly for higher capital spending in 2006 and beyond and some upturn and foundry spending may be possible. Despite our lack of visibility, we're optimistic about the market opportunities available to MKS.

More precise process control is required at smaller devise geometries and many of our products and process solutions are currently under evaluation at major OEM's and devise manufacturers. We are participating in high growth, advanced processes for next generation semiconductor and thin film applications. We're also transferring our technology to growing non- semiconductor markets.

Our strategy to integrate technologies is working as we continue to focus on improving process performance and productivity to drive share gains and profitable growth. Now I'll turn it over to Ron to discuss our financial results.

Thank you, Leo, and good morning, everyone. First quarter 2006 sales succeeded our guidance and increased to 179.1 million, up 39% compared to 129.2 million in the fourth quarter, primarily as a result of higher sales to U.S. semiconductor OEM's. Sales also increased to semiconductor devise manufacturers and to thin film and other markets.

First quarter sales included a full quarter of sales from Ion Systems and Umetrics acquired on January 3, which totaled 10.1 million. Excluding these 2 technology acquisitions, our sequential organic growth was 31%.

Fourth quarter 2006 GAAP net earnings increased to 15.4 million or $0.28 per diluted share compared to 12.1 million or $0.22 per diluted share in the fourth quarter. Due to the option of FAS 123 R, first quarter 2006 GAAP net earnings included stock-based compensation expense of 1.7 million or $0.03 per share net of tax.

Fourth quarter 2005 GAAP net earnings included income of 1.9 million or $0.03 per share net of tax from the favorable settlement of a patent infringement lawsuit related to plasma generated products.

First quarter non-GAAP earnings which excludes amortization of acquired and tangible assets, special items and stock based compensation expense increased to 21.3 million or $0.39 per share compared to 12.1 million or $0.22 per share in the fourth quarter. Sales to all markets increased sequentially. Sales to the total semiconductor market increased by 39% and totaled totaled $131 million. Sales to the semiconductor OEM segment increased by 42% and represented 63% of total sales.

Sales to the semiconductor devise manufacturing segment increased by 24% and represented 10% of total sales. In the thin film markets including flat panel and data storage sales increased by 61% and represented 8% of total sales. Sales to other markets increased by 28% and represented 19% of first quarter sales.

Reflecting stronger than expected demand from U.S. semiconductor OEM's an their subcontractors, sales to customers increased by U.S. customers increased by 50% and represented 70% of total first quarter sales. Sales to Asia represented 20% on higher demand from OEM and flat panel display customers, and represented 22% of total sales.

Sales to Europe increased by 15% and represented 8% of total sales. Sales to our largest customer, Applied Materials, increased by 40% sequentially and represented 22% of total sales. These sales include sales to AKT, the flat panel display division of Applied Materials.

Sales to contract manufacturers of semiconductor OEM's increased by 51% sequentially to 6% of total sales. Sales to our top 10 customers increased by 43% sequentially and represented 52% of sales. Gross margin increased to 41.2% from 40% in the fourth quarter primarily as a result of higher sales volume.

Gross margin for the quarter included a charge of approximately $500,000 related to acquisition accounting and additional cost associated with inefficiencies and overtime as we ramp production to support our higher than expected customer requirements. R & D spending totaled 16.1 million or 9% of sales compared to 13 million or 10.1% of fourth quarter sales. First quarter R & D expense which included acquisitions and stock based compensation was somewhat lower than we expected and reflected the variability of timing and initiating and completing projects in different quarters. SG&A expense totaled 29.8 million or 16.6% of sales compared to 23.8 million or 18.4% of sales in the fourth quarter sales.

First quarter SG&A expenses included acquisitions and stock based compensation and was at the high end of our guidance. The in process R&D charge is related to the 2 acquisitions totaled $800,000. The tax rate for the quarter was 33.8%. The rate for the first quarter reflects revised estimates for higher U.S. taxable income in 2006. The rate also includes the effect of non-deductible in process R&D charges recorded in the quarter.

Our worldwide workforce increased to 2,709 people from 2,270 people in the fourth quarter and included 175 additional people related to acquisitions completed in the quarter. Now I'll turn it to the balance sheet which also includes the effect of acquisitions. Our strong capital structure continues to provide flexibility to grow the Company.

During the quarter we expended 104 million to complete the acquisitions of Ion Systems and Umetrics. As a result, our cash investments decreased sequentially by approximately 79 million to to $215 million. Debt remains stable in the quarter and cash and investments net of debt totaled 189 million. Cash from operations totaled 9.5 million. Day sales outstanding totaled 54 days in the first quarter compared to 58 days in the fourth quarter.

Inventory turns improved to 3.8 times from 3.2 times in the fourth quarter. Capital expenditures of 2.3 million in the first quarter were primarily for manufacturing and test equipment and in addition we acquired 2.3 million of of capital assets related to the acquisitions. Depreciation in the first quarter was $3.3 million.

Looking ahead as Leo said, after a strong growth in the first quarter, we expect moderate growth in the second quarter. Based on customer order patterns, we expect that second quarter sales could increase by 3 to 6% and range from $185 to $190 million.

We expect that stock based compensation expense could total approximately $0.04 per share in the remaining quarters of 2006. The increase from $0.03 per share in the first quarter represents the effect of a full quarter of expense for stock based compensation granted in the first quarter. We expect gross margin to increase to approximately 42% primarily as a result of higher sales volume, more favorable product mix, and some cost reductions resulting from improved manufacturing efficiencies.

As we move through the year we are targeting continued margin improvement. We expect to continue to lower our global material costs, transition products to low cost regions and reduce other manufacturing related expenses.

We expect R&D expense to increase and range from 17.5 to 17.9 million reflecting timing of initiating and completing projects in the quarter and increase and also increase stock based compensation. We expect SG&A to remain essentially flat and range from 29.9 to 30.3 million. We expect additional stock based compensation will be offset by lower payroll taxes and professional fees in the second quarter.

Amortization of inquired and tangible assets is estimated to to be 4.4 million in the second quarter of 2006 compared to 5.3 million in the first quarter as a result of the acquisitions. Net interest income in the quarter is expected to be approximately 1.4 million. As I previously mentioned we have revised our tax rate for 2006 to reflect higher than expected U.S. income for 2006. We estimate our tax rate for 2006 will be approximately 33%, and there for, we'll be approximately 32.5% on a quarterly basis for the remainder of 2006.

Because the R&D tax credit expired at the end of 2005 and has yet to be renewed by congress, our estimated tax rate for 2006 excludes this benefit. Based on these assumptions, second quarter GAAP net earnings could range from 18.5 million to 20.2 million or $0.33 to $0.36 per diluted share on approximately 56 million shares outstanding. This estimate includes $0.04 per share of stock based compensation expense. Non-GAAP earnings which exclude amortization of intangible assets, special items and stock based compensation expense could range from 22.9 million to 24.6 million or $0.41 to $0.44 per share.

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

Thanks, Ron. Based on the positive long-term outlook for capital equipment spending our successes with key customers and our strong technology portfolio, we're encouraged by our opportunities for growth. We will now take your questions.

Thank you. Ladies and Gentlemen, at this time, we will begin the question and answer session. [OPERATOR INSTRUCTIONS] One moment for our first question. Our first question comes from Brett Hodess. Please state your Company name.

Merill Lynch. Good morning. First, I wanted to ask if Ron, if you could provide a little bit more color on what the margin goals you said gross margins would continue to improve throughout the year and perhaps how we might want to model that what your goals will be on that? And then secondly, Leo, given the high rate of growth that you had sequentially, and given that your customers have announced already shipment rates are a little bit higher growth for Q2 than what your revenue guidance is, do you think the customers rebuilt a little bit of whip perhaps in the quarter that, explains a little bit more moderate growth in 2Q?

Yes. First of all, Brett, on the gross margin goals, they're still the same as I mentioned in the first quarter and that is, you know, assuming a fixed volume of around 165 million. Our goal is to achieve about 200 to 300 basis points in margins based on that volume. So that will happen gradually throughout the year so that we expect to achieve that by the end of the year. And you know that results from, you know, us transitioning more products to low cost countries. There's still a good opportunity for us to reduce purchase material costs and there are other possibly fixed manufacturing costs that we can reduce that would lead us to that goal.

Good morning, Brett. I'll answer your second question there. I think as far as pipe line that you mentioned, typically we've mentioned this before that the whole supply chain sizes the pipeline for the higher production rates. I don't think that there's anything unusual there. It's just the right size for higher volumes that we've seen in the quarter and the equipment companies announced. And the other piece of I think our estimates are that a percentage of the business is semiconductor but we also had strong growth rates in the first quarter in non-semi and so a percentage offer that is explained by the non-semi business as well so we're confident in the second quarter.

Great. Thank you.

Thank you. And our next question comes from Jay Deahna. Please state your Company name followed by your question.

JP Morgan. Congratulations on a nice quarter. Leo, you made some comments in the beginning about the possibility of upside spending from foundries in the second half. You said visibility beyond 2Q is limited. I was wondering if you could give us a little more detail on that. What do you mean exactly by the foundries and how does that feed back into your business or the comments that you made?

Thanks, Jay, for the comment on the quarter. I appreciate that. As far as the comments on being optimistic, I think that we've seen in the last few months certainly public announcements of increase in capital spending by devise manufacturers and as you know, I think we've been waiting awhile for the foundries to turn back on and we're just optimistic that that will happen at some point and may happen and we would see benefit so that was all I meant by that.

Now, if you look at your forecast that you get from your customers, have you seen any changes in the third quarter forecast recently that would give you some level of optimism because I know that they said they expect their orders to be up in Q3 and I think some people viewed that as optimistic incremental comment and then secondly in terms of your business, where do you see the most upside percentage of share by-product line?

Well the first questions, we don't typically comment on our customer forecast. One because they're forecasts and I think you can imagine that they are only good probably worth the paper they're on. So we're comfortable with what we see in general out there and I think I would be more surprised with things changing than they would be continuing, I Guess in that sense.

As far as market share gains, we've seen a lot of good results in the power and reactive gas products that we've spent a little time clarifying those wins but also we're seeing it across the business units and we're seeing it in the process control information technology area. We're seeing it in mass flow control as digital mass flow control is in our indirect gauging so I think it's really across-the-board that we're seeing strategy work.

Great. Thank you.

You're welcome.

Thank you. Our next question comes from Jim Covello. Please state your Company name, followed by your question.

Good morning this is Amanda Hinsley from Goldman Sachs. My question is actually along the same line as Jay's question. I certainly understand your positive view on the foundries over the coming quarters but a lot of your semiconductor companies over the past few weeks have reported pretty meaningful increases in inventories on their balance sheets and I'm wondering if you're looking at this at all and if that gives you any concern about how this may impact your business later in the year.

You know, I think most of the equipment companies have done a good job at reducing cycle time and I think that helps, you know, keep the inventory at the right levels. I don't see any excess inventory buying or at least we don't anticipate that that's what's happening but there is a natural resizing of the pipeline as the volumes increase, so I think that we've commented on that several times both on an upside and a downside. There's a resizing of the work in process in pipeline inventory to reflect the volumes more than anything else so there's nothing unusual from that comment you just made.

And also don't forget at the FAS, there's still a lot of recycling of older equipment into new equipment so that will still go on, you know, regardless of the demand for chips.

Well, okay. And then I guess the next question is you know, obviously you mentioned the semi business is still growing but slowing down a little bit in Q2. What are the other businesses doing?

Well I think Ron had reported in his detail that we had strong growth in the quarter for the non-semi business. It was in the high 20s I think.

That's right.

The percentage of growth around 28% so I think that we just see continued growth in that area. It doesn't always grow at the same rates. Obviously it's not tied to semi in growth rates.

Thin film has been very strong and we continue to focus on that market as well.

Great. Thank you.

You're welcome.

Thank you. Our next question comes from Michelle Shaw. Please state your Company name followed by your question.

Yes, high. This is Michelle Shaw from Lehman Brothers. I wanted to ask you along your flat panel and data storage business outlook for this year, do you think those businesses are also going to see similar growth patterns as the semiconductor business or do you think there's more opportunity there? Thank you.

Thanks for your question, good morning. I think Ron reported significantly high growth in those areas for us in the quarter and we still see that very strong.

So do you think that, the second half outlook in that segment also looks pretty good?

Well it's hard for us to comment beyond the next quarter right now, but I think in general, overall we're optimistic about the industry.

Certainly was very strong in this quarter as I mentioned.

Okay. And then you said that there was some additional costs related to some inefficiencies and overtime in the quarter that resulted in slightly lower gross margins. Do you expect them to continue in the second quarter?

I would expect that certainly they would have a lesser impact in going forward in the second quarter. Especially with, the increase in volume being a little bit more modest.

Great. Thank you.

Thank you. Our next question comes from Stuart Muter. Please state your Company name followed by your question.

Yes, thanks good morning. RBC Capital Markets thanks for taking my question. Ron and Leo, just focusing a little bit more on the gross margins. Could you talk a little bit more about what are the actions that you have to take between now and the end of the year to achieve that 200 to 300 bit increase? Thank you.

Well, Stuart, as we said, there's still opportunity to reduce our purchase material cost through global sourcing. We are still in the process of relocating some products that are made to low cost regions and third, there are other areas of fixed manufacturing costs that there are opportunities to reduce those costs going forward. So those are the three main areas.

Okay, thanks and question for you, Leo. You mentioned you know, a fair bit of commentary on power this morning. Do you expect that you increase your market share in 2005?

Certainly in the areas that I just talked about, yes. We're expecting to do that. We talked about the revolution product. That's a new product for on wafer processing and we would expect that that will continue to grow.

Great. Thank you.

You're welcome.

Thank you. [OPERATOR INSTRUCTIONS] And our next question comes from Daniel Barenbaum. Please state your Company name, followed by your question.

Yes, high, Susquehanna Financial Group. Question on the R&D line. It looks like you reported significantly lower than your guidance but also next quarters guidance is also even a little bit lower than what you had initially expected for this quarter. You talk about timing of projects. Is it projects slipped even further out into the year or have some projects just sort of fallen off the table and then how should we think about that moving forward into the out quarters maybe as a percentage of revenue.

On the first part of that question, the reason that the aggregate is a little bit lower than originally I said in the last call was because it includes the impact of looking at what our acquisitions are going to be spending in R&D going forward so it's a little bit better estimate right now of what we think our R&D spending will be on a run rate going forward. Now, it's not really the change in the R&D expense is just related to the timing of when we get certain projects done. It's not that we're discontinuing certain projects. It's just related to when we go out and actually buy prototype materials, when that project gets complete, and so fourth.

So there might be slight variations of even a month or two in that schedule that can cause the fluctuation in the project materials costs from one quarter to another. So that's where we are in that. I don't know if you had anything else on that.

How might we think about that maybe as a percentage of revenue moving forward since you now have better visibility from what the acquisitions are doing?

Well we certainly look at our return on investment on R&D and not so much as a percent of sales. Obviously you want to maximize that investment and that return, you know, looking looking toward future and what is needed in technology for future generations of equipment.

Okay, great. Thanks.

Thank you. And at this time I show no further questions.

Well that concludes our comments and thank you for joining us in the call this morning and for your continued interest in MKS. Thanks, everyone.

Thank you. Ladies and Gentlemen, this concludes the MKS Instruments first quarter earnings conference call. If you'd like to listen to the replay of today's conference, you may dial 303-590, 3000 and you'll need to enter the access code of 11058544 followed by the pound sign. Once again thank you for participating in today's conference. At this time you may now disconnect.