萬機儀器 (MKSI) 2006 Q4 法說會逐字稿

Welcome to the MKS Instrument fourth quarter earnings conference call. [OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Jonna Manes, Director of Investor Relations. Please go ahead Ms. Manes

Thank you Eric. Good morning and thank you for joining our earnings conference call. Earlier today we released our financial results for the fourth quarter and year 2006. You can access this release at our website, www.mksinstruments.com. As a reminder various remarks that we may make about future expectations, plans and prospects for MKS 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 today's press release and in the Company's annual report on Form 10K for the fiscal year ended December 20-- December 31st, 2005, and most recent quarterly report on Form 10Q, 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 as of any date subsequent to today. Finally during the Q&A period we ask that you limit questions to two per firm and we will circle back for further questions as time allows. And now I'd like to turn the call over to Leo Berlinghieri, President and Chief Executive Officer, of MKS.

Thank you Jonna, 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 year, the fourth quarter and the outlook. Ron will give a detail review of our financial results and guidance, and then we'll answer your questions.

I'm pleased to report that MKS achieved record financial performance in 2006. We delivered 54% growth year-over-year and 45% growth organically. The sales in the semiconductor and nonsemiconductor markets reached $783 million. NonGAAP earnings per share almost tripled to $1.98 per share from $0.72 per share. Contributing to this increase was an improvement in gross margin from 43.2% from 39.4%. Operating expenses increased as we invested in our organization and infrastructure to shift from a $500 million Company to almost an $800 million Company and to support future growth opportunities. We also generated a record $78 million in cash from operations in 2006.

These results represent new performance milestones in MKS's 45 year history and I want to thank the entire MKS team for their effort and success in delivering an outstanding year. We achieved this impressive growth by leveraging our technology portfolio across diverse markets and focusing on the process requirements of our customers. We grew our sales to the semiconductor market by 52% year-over-year, while our sales to nonsemiconductor markets grew even faster at 57%. Our nonsemiconductor sales represents 30% of our total sales. So this provides an added buffer at [tross] of the semiconductor equipment cycle. In 2006 we continued to provide enabling technology for advanced processes to semiconductor OEMs as our global operations responded to a ramp in demand for semiconductor capital equipment.

We also secured key adoption of process critical technologies such as Ozone generators, RF Power generators and control systems our next generation tools. Our innovative solutions such as the Revolution Remote Plasma Source with its capability to double reactive gas throughput are designed into the latest generation of OEM process tools. Other innovative solutions include Integrated subsystems were we combine technologies for higher functionality and a smaller footprint at lower cost. Our integration strategy and breath of technology give MKS the competitive advantage over the street technology products. Integrated subsystems represented 28% of organic sales in 2006 and 26% of our total sales that included three acquisitions. Our long term goal is to maximize our competitive advantage and achieve 40% of total sales from integrated subsystems.

In addition to major accomplishments with semiconductor OEMs we also delivered on our growth objective with semi-conductor end users. Our objective is to increase our value to semi-conductor fabs as they adopt new processes and focus on continuous yield improvement. We grew our fab sales in each quarter of 2006 and by 61% year-over-year as we provided a range of solutions to improve process performance and productivity. As you know fabs face more challenges as they transition to smaller geometries and new processes to stay competitive. At smaller geometries more process steps increase the risk of process errors and particle contamination reduces yields. Fabs are focused on finding cost-effective solutions to improve yields and we are focused on providing solutions to help fabs achieve their objectives.

For example we gained share in multiple fabs in 2006 with our residual gas analyzers, or RGAs for process monitoring. Our RGAs detect photo resist residue that can damage the wafer and reduce yield. We also expanded our business at major fabs with our process specific thermal management solutions that increased system up time by providing temperature uniformity and control and reducing particle contamination. As we increase our technology integration and provide more turn key solutions we've been getting more fab sales including sales of vacuum products for tool hook up. We also delivered on a second growth objective by leveraging our technology portfolio in nonsell semi-markets that have growing requirements for process control and monitoring.

By applying our technologies in advanced processes we grew our sales to thin film markets by 59% year-over-year and to other nonsemi-markets by 56%. These markets include thin film application such as flat panel, data storage, architecture glass and solar panels and other growing markets such as medical equipment, pharmaceutical manufacturing and energy generation and conservation. For example we increased our penetration in energy conservation markets such as combustion and emissions control and solar sells in 2006. In the growing combustion market we leveraged our infrared gas analysis technology and expanded our customer base. Internal combustion engine manufacturers are investing to meet this year's test requirements in the U.S. and in Europe within the next few years. We believe our market share just in gas analysis products alone could grow from a small base in 2006 to $12 to $15 million over the next few years, as manufacturers design and test new engines to meet stricter pollution control requirements.

Going forward we see more opportunities to apply process control, monitoring and analysis technologies in a range of nonsemi-markets. In 2006 we were successful in closing three acquisitions of yield improvement technology. We acquired multi-varied analysis technology that improves yield by classifying process vaults and ionization and sensor technologies that improve yields by reducing electrostatic discharge and particle contamination. We look for an ongoing contribution to future growth as we integrate these technologies into our process solutions.

Turning to the fourth quarter, our performance contributed to an outstanding year after a record third quarter, fourth quarter sales decreased slightly to $200 million as we expected although sales to semiconductor end users increased. Sales to semiconductor OEMs were lower sequentially reflecting variation in OEM and subcontractor order patterns. We have a strong presence in all major OEMs and because of this our results are less dependent on fab selection or specific OEM tools.

Fourth quarter sales to fabs increased by 17% sequentially as we provide more stand alone point of use productivity solutions that fabs are buying direct. Sales were strong in Asia for 300 millimeter processes and we expanded our penetration at memory manufacturers. Our focus on high growth processes like atomic layer deposition or ALD allowed us to double our sales sequentially to a world class Korean memory device manufacturer who was one of our top 10 customers in the fourth quarter. ALD is moving into production for next generation D-RAM devices and Ozone is preferred precursor for ALD. This memory manufacturer selected our latest Ozone systems that delivered consistent high-- ultra high Ozone concentration for excellent film conformity and faster process. Our Ozone systems and other new products, we expect to continue to expand our penetration in memory and in ALD which is forecasted to grow at 30% rate through 2009.

We also secured an order for a new fab in Malaysia for our RGA solutions to monitor process chamber gases, photo resist contamination and leak integrity. In nonsemi-markets sales to thin film customers were lower while sales in other markets remain relatively steady. For example we gained share in the fourth quarter with our device net capable mass flow controllers for use in optical fiber manufacturing. We are seeing growing opportunities with our multi-varied analysis software in process that range from pharmaceutical and medical equipment manufacturing to oil field exploration. These applications require precise control monitoring and analysis of process variables. Our fourth quarter sales increased as blue chip pharmaceutical companies in the global consumable medical supply manufacturer expanded their adoption of this technology.

Our outstanding results for the quarter and the year demonstrate that we are executing our growth strategies, our integrated subsystem strategy is working and I believe we can achieve our long term goal. We are bringing more value for fabs at 300 millimeter and in high growth processes. We're expanding our penetration in nonsemi-markets that require more and more process control. With these strategies I am confident that we could take advantage of the opportunities ahead of us.

Looking ahead to the first quarter, major semiconductor customers have publicly commented on their expected growth rates. Our sales to OEMs are closely related to their production and shipment levels. We also anticipate variation in major customer order patterns in nonsemiconductor markets. Considering these expected fluctuations we estimate that the first quarter sales could remain stable and range from $195 to $205 million. Now I'll turn it over to Ron to discuss our financial results.

Thank you, Leo, and good morning everyone. As Leo said, 2006 was a record year for MKS and a milestone in our history. Sales increased by 54% to $782.8 million, compared to $509.3 million in 2005. Net income increased 173% to $94.2 million, or $1.68 per diluted share, compared to $34.6 million, or $0.63 per diluted share in 2005. NonGAAP earnings increased 181% to $110.8 million, or $1.98 per diluted share, compared to $39.5 million, or $0.72 per diluted share in 2005. We ended the year with a strong fourth quarter. Sales of $199.9 million were at the top end of our guidance. Sales increased by 55% over $129.2 million in the fourth quarter of 2005, and decreased by 3% from record sales of $205.5 million in the third quarter of 2006.

We are continuing to provide productivity solutions to semiconductor device manufacturers and fourth quarter sales in this market sector increased by 17% sequentially to 13% of total sales. Sales to semiconductor OEMs decreased by 7% to 56% of total sales. Sales to thin film applications including flat panel and data storage decreased by 4% and remained at 8% of total sales. While sales to other nonsemiconductor markets decreased by 1% but remain strong at 23% of total sales.

Looking at the geographic mix, fourth quarter sales in Asia increased by 5% sequentially as a result of increased demand from OEM and fab customers especially in Japan and Korea. And that represented 28% of total sales. Sales in the U.S. decreased by 7% and totaled 62% of total sales. Sales in Europe increased by 4% sequentially and represented 10% of total sales. Sales to our top 10 customers were 46% of total sales compared to 49% in the third quarter and reflected lower sales at U.S. OEMs. Sales to our largest customer [ply] materials decreased slightly to 20% from 21% of total sales in the third quarter. Sales to contract manufacturers of applied and other semiconductor OEMs remained at 7% of total sales. Fourth quarter gross margin was 43.7% compared to 44.1% in the third quarter. The decrease primarily resulted from lower sales volume and a less favorable product mix.

Operating expenses excluding amortization increased by $1.7 million sequentially. The $1.6 million increase in SG&A primarily reflected increased costs to support our new global ERP system and foreign exchange costs. The fourth quarter tax rate was 20.7% and reflected a $3.1 million net tax benefit that was related to the retroactive extension of the R&D tax credit for the first three quarters of 2006, and the reduction of the valuation allowance on state tax credits. Excluding three quarters of R&D tax credit and total valuation allowance, the fourth quarter tax rate would have been 31% as a result of year end adjustments. Our tax rate for 2006 was 28% including discreet items.

Net income increased by 119% to $26.5 million, or $0.47 per diluted share on 56.6 million shares outstanding, compared to $12.1 million, or $0.22 per diluted share in the fourth quarter of 2005, and decreased by 5% compared to $27.9 million, or $0.50 per diluted share in the third quarter of 2006. Fourth quarter 2006 net income included stock-based compensation of $2.1 million or $0.04 per share net of tax. NonGAAP earnings which exclude amortization of acquired intangible assets and exclude tax benefits from the R&D tax credit and reduction of the valuation allowance and stock-based compensation, was 56-- was $0.50 per diluted share compared to $0.22 per diluted share in the fourth quarter of 2005, and $0.56 per diluted share in the third quarter of 2006.

Our worldwide work force decreased to 2,900 -- increased to 2,960 people from 2,865. The increase primarily reflected manufacturing additions to expand our capacity in China and engineering additions including our acquisition of [Novaks] during the quarter.

Now looking at the balance sheet we continued to generate cash from operations which totaled $23 million for the quarter and a record of $78 million for the year. For the third year in a row we generated over $60 million in cash from operations. Cash and investments increased by $24 million in the fourth quarter to $293 million, or $264 million net of debt. Day sales outstanding remain at 56 days in the fourth quarter, and inventory turns declined to three turns and included in inventory increase prior to our moving to a larger manufacturing facility in China. Capital expenditures of $3.6 million in the quarter were primarily from manufacturing and test equipment, depreciation totalled $3.6 million for the quarter and is expected to be $14 million next year. We expect capital expenditures to increase from the $11 million in 2006 to $18 million to $20 million in 2007 primarily as a result of moving a new-- moving to a new larger facility in [Shanghai] China, in the second half of 2007. This facility will expand our manufacturing capacity in China by 35% to approximately 190,000 square feet which will allow us to transition additional products to China and support future growth.

As Leo said, we expect the first quarter sales could range from $195 to $205 million. Based on expected fluctuation in major customer order patterns and in semiconductor and nonsemiconductor markets. On this sales volume we expect that gross margin could range from 43% to 44%. We expect operating expenses to remain fairly stable. R&D expenses could range from $17.6 to $18 million, and SG&A expenses could range from $34 million to $34.6 million. Amortization of acquired intangible assets is estimated to remain at $4 million our net interest expense in the quarter is expected to be about $2.8 million. Our tax rate for 2007 is estimated at 31%.

Given these assumptions first quarter net income could range from $21.3 to $24.7 million, or $0.37 to $0.43 per diluted share on approximately 57.2 million shares outstanding. The difference in net income for the fourth-- from the fourth quarter of 2006 compared to the first quarter of 2007 on a constant sales volume primarily reflects the lower tax rate of 20.7% in the fourth quarter compared to 31% in the first quarter. Beginning in 2007 we will include stock-based compensation in our nonGAAP net earnings and continue to exclude amortization of acquired intangibles and special items. First quarter nonGAAP earnings including stock-based compensation could range from $23.6 to $27 million, or $0.41 to $0.47 per diluted share. The difference in nonGAAP earnings from the fourth quarter compared to the first quarter on a constant volume primarily reflects the inclusion of stock-based compensation in the first quarter.

As we said in our press release this morning the Board has authorized the $300 million share repurchase program over the next two years. The repurchases may be made from time-to-time on the open market or in privately negotiated transactions. The timing and amount of any shares repurchased under this program will depend on a variety of factors including price, corporate and regulatory requirements, capital availability and other market conditions, and the program may be discontinued at any time. This concludes our financial discussion. Let me turn the call back to Leo.

Thanks, Ron. I would just like to add our results demonstrate that we are expanding our penetration in semiconductor and other key markets by delivering the technical solutions that our customer require. We'll now take your questions.

[OPERATOR INSTRUCTIONS] Our first question is from Brett Hodess, Merrill Lynch, please go ahead.

Good morning and congratulations on a great year. When you look at the 30% of the business, Leo, that's outside semi, you talked about a lot of the different areas and some of the opportunities there. I wonder if you could provide us some comment on which of the end markets will be the fastest growing you think over the next year or so, and maybe some rough kind of sizing of how much impact those particular end markets might have? And also can you comment on how similar the products are that go into the 30% of the nonsemi business are to core business so that you can across leverage the products from the two sides?

Well, yes, Brett, good morning and thanks for your question. As far as the 30% in growth as we talked about the five or six different markets, I mean they're all growth markets and because they're relatively small percentages of the total MKS business, the growth-- they're all high growth markets, the actual growth of the market isn't as dependent on our growth in that market. We have penetration opportunities. So certainly flat panel has been a large market for-- larger market for us and high growth and will continue. That is typically many of the products that we sell into semiconductor we're able to leverage in that area.

In some of the medical areas, we talked about MRI equipment, those are a little more specialized for that particular market. But in other aspects of the medical market whether it be in sterilization or other manufacturing of medical products, those are typically products that we develop for our main markets and are able to leverage into other markets. We've talked specifically about the, in terms of energy conservation and alternative energy and certainly the Combustion market, we see as a high growth market for our gas analyses products particularly. So hopefully that gives you a little picture of some of the key markets for us. But I think in those five or six we mentioned they're all good growth opportunities for us and they either, in most cases use similar technology or the same products that we provide today.

And the follow on to that, is in-- does that mean that as these grow the margins are pretty similar to the overall corporate?

Yes, I think depending on what product lines take off the fastest. And I think I'm not in a position today to be able to predict that.

Great, thank you.

Our next question comes from Jay Deahna with JPMorgan, please go ahead.

Hi good morning, thank you for taking my question. First of all what is the general tone you're getting from your OEM customers this quarter relative to three months ago? Like are they indicating a stronger first half versus first half '07 or kind of how-- what's the general tone you're getting?

Well I think you're probably getting as much of a general tone as we're getting out there. I think we're focused more on, as far as first half, second half, we usually don't get that kind of information in enough detail or enough credibility that I would care to comment on it. But I think based on our guidance we're expecting things to remain relatively stable.

Okay.

And the OEMs are a large part of our business so I think that reflects the tone.

And would you say you're more optimistic than you were three months ago?

I don't think there's any change in that.

And then just secondly, will [Amax] reach a decision to exit the ion implant business affect your business in any way?

I don't see any change there. As you know we're pretty much designed in on most all of the OEM tools. So as I mentioned earlier in the discussion that we're not as dependent on which tool is selected by a fab. So I don't see any significant change there.

Okay great, thank you.

You're welcome.

Our next question comes from Robert Maire with Needham, please go ahead.

Yes couple questions. The ALD that you mentioned, is that with one OEM or is that with multiple equipment OEMs, and what do you see that opportunity as being over the next year, and is that going to be incremental to other PVD CVD applications or replacement for those applications in your view?

Robert, hi. Thanks for your question. The-- for us I think the key for us as we see high growth, it's a relatively low base so to be able to compare it today with another application is difficult. But for us we've focused on it because of a high growth and we do have higher content on an ALD process. And so with the projected 30% growth on ALD in a higher content with products like Ozone and looking at delivery systems in addition to the standard products that we typically provide for most of these processes, we just see a higher growth. I can't put a number on it. Certainly as the geometries get smaller we anticipate that ALD will grow stronger and so we look forward to that. But I can't give you a number today, although I-- we've seen sizeable orders in Ozone, that's why we talked about it.

Is that just one equipment manufacturer or is that with multiple equipment manufacturers?

No, both with multiple equipment manufacturers and also specified by end users to multiple equipment manufacturers. So we're seeing it both ways, directly designed into the bill of material and then specifically requested by a memory device manufacturer.

Okay and the second just follow-up question, do you expect or are you being guided to by any of your customers any sort of influxion point? We've heard from another sub supplier that some of their customers had suggested that they be ready for a potential influxion point coming up some time in the first half here. Have you had any similar sort of comments or what's your view in terms of tone of business over the next six to nine months? Any particular points that you think there's going to be a turn or are you expecting it to be stable for the first half?

Yes, I don't think that we've heard anything differently than what I've read publicly that they've announced. I mean, I think it's been fairly consistent and reasonably stable and nothing about an influxion point.

Okay. Thank you, congrats by the way.

Thank you.

Our next question comes from Avinash Kant with Canaccord Adams, please go ahead.

Good morning, Leo and Ron. And thanks for taking my question. Two-part question, the first one was, you talked about the three acquisitions you made during the year. Was there a substantial contribution from them in terms of revenues in 2006 and how should we model contributions from these going into 2007?

Well, yes, I think as Leo mentioned that we said that they did represent about $50 million of our business in 2006 and as we've said they've been accretive throughout the year and we expect that those units will grow and continue to add to the value of the solutions that we're providing.

Yes I think the best way to look at that is I think when we reported, we reported the 54% growth and then 45% organically that can give you an idea of what the size of the acquisitions were.

So what I'm trying to get is that I think many of them were partial contributions for the year so how is that -- ?

Well I think that the majority of the difference, I mean is pretty much in January were the two major acquisitions. The one that was in October was relatively small. So I wouldn't worry too much about change in model based on that.

And could you comment in terms of the growth potential for the year at this time, what are you modeling for industry growth in '07?

We're not providing any guidance beyond the first quarter but I think we've listened to what we've heard out there so far and no significant changes it looks like in where we are today so far at least from what's been publicly announced.

Okay thank you.

Our next question comes from Jim Covello with Goldman Sachs, please go ahead.

Good morning, guys. Thanks so much. Just question about inventory levels and their different businesses at your customers, have you seen their pulse from you increasing or decreasing? And how much-- how many weeks of inventory do you think your OEM customers particularly on the semi equipment side have at this point? Thanks.

Thanks for your question, Jim. As far as the inventories go I have a hard time believing there's any significant inventory at OEM customers of our products because most of our lead times are relatively short. They put so much attention in the last few years on cycle time reduction and lead time reduction and also requesting the entire supply chain to do the same. So if we're able to deliver in one or two weeks I can't imagine why they would have more than a few weeks themselves, but I don't have that exact number, but I don't anticipate there's any inventory issues in that. And the pulls and demands I think reflects our results being fairly stable and our projections being fairly stable. So, and you know we don't-- we're pretty much are a turns business so for us to give the guidance we are we're expecting that to continue.

Thank you so much.

You're welcome.

Our next question comes from Vishal Shah with Lehman Brothers, please go ahead.

Yes, hi guys. You talked about moving to a larger facility in China and increasing capacity by 35% through this year. Do you have any margin targets, gross margin targets, if the year is flattish, do you think you'll improve your margins because of that?

Well first of all that-- as I said that move won't happen to the latter part of this year and primarily gives us more expansion for the future. That's not inferring that we're going to increase our manufacturing over there by 35% immediately. As far as looking at the gross margin for the year, we still have a lot of initiatives on to improve gross margin like by looking at outsourcing more products to either China or Mexico and also procuring more raw materials from low cost countries and other initiatives.

But kind of the wildcard for '07, is as you know a lot of metal costs increased substantially in '06, and that's stabilized a little bit right now and it's kind of unclear how that trend will continue in 2007. So as a result of that I would be a little more conservative on our improvement in gross margin for 2007 and maybe target over the within, by the end of the year could be on the same volume and improvement of about 100 basis points. But it's unknown at this point because of the metals.

Great. And then can you talk about your guidance, in your guidance how can you break down the different businesses, IDMs, OEM, revenue levels, are they going to increase, decrease, can you just provide some color on that, please?

I'm sorry that I can't provide more than that. It's very difficult because of the number of customers we have. We have about 4,000 active customers and as I mentioned we're pretty much designed in on every OEM tool. The sales to fabs have been increasing. So to know exactly when someone's going to purchase and exactly what they're going to purchase, we are not just looking at sort of a capital equipment buy where you are track a number of orders and know when they're going to be placed. So it really is difficult to give you that by market or by customer base. And so I can't comment much further on that. But I could say this, we don't expect any major change in the-- in that mix over the next quarter.

Great. Thank you.

You're welcome.

Our next question comes from Tim Summers with Stanford Financial Group, please go ahead.

Yes hi, thanks for taking my question. Just a couple of things. In your first quarter guidance you referenced variations in OEM order patterns. I'm curious are you seeing greater variations between OEMs as we go through the first quarter and then into the second quarter?

Tim, Leo, I'll answer that one. I think when we mean variations, I think that's pretty much a standard term that we don't get a consistent order pattern as we anticipate. There's no way to anticipate it, almost the same answer to the last question. One OEM may buy a little more because the cycle of when they buy is different or one OEM may get an order and that's where we get orders from. So it's-- I don't-- I wouldn't interpret that as we're expecting some different variation. I would just interpret it that we get throughout a quarter and over quarters variations in the way they order.

Or even the mix of the products that they order. So it's hard.

So I don't-- again, I don't anticipate -- we anticipate things to be relatively stable. That's across customers and that's across markets.

Okay and then as a follow up on the buy back is there a price threshold which would trigger this? And also is [John Bertouchey] interested in sharing some of the shares?

Well as we said in the press release that we have the opportunity to purchase shares on the open market or privately negotiated transactions and certainly we have substantial cash balance on hand and we're expecting good cash flows in the future that would allow us the opportunity to fund this over a couple of years. And certainly we have a strong balance sheet that we could leverage if needed to continue our acquisition strategies or to fund the program like this as well. So we have a lot of options to get a little more leverage on the balance sheet.

Yes and I don't, I think you have to ask [John Bertouchey] relative to your second question.

So there's no specific price threshold which would trigger this?

Well certainly we would only want to do it if it were accretive.

Okay great. Thank you.

We have time for one final question. Our last question comes from Jay Deahna JPMorgan, please go ahead.

Hi, just one follow up, I think you were touching on it earlier, I just noticed there's been a lot of insider selling lately. So I was wondering how much that was going to continue or kind of was there anything in particular going on there, can you give us some color or anything that you know about?

Well, certainly on the insider trading I know you noticed that Emerson Electric had continued to sell some of their shares, as you may remember they initially had 9 million shares as a result of our acquisition of the E&I, and they just recently publicly reported that at the end of January they had approximately 2.7 million shares remaining. So their holdings have gone down substantially. For other people in the Company they have obviously different reasons why they sell and so I can't comment on that.

Okay great. Thank you.

That does conclude our question and answer session. Please go ahead with your presentation.

Great thank you. That concludes our comments. Thank you for joining us on the call this morning and for your continued interest in MKS.

Ladies and gentlemen, this does conclude the MKS Instruments fourth quarter earnings conference call.