MKS Instruments Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2024

There are 10 speakers on the call.

Operator

Welcome to the MKS Instruments Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the call over to Paretosh Misra, Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Good morning, everyone. I'm Paretosh Misra, Vice President of Investor Relations, and I'm joined this morning by John Lee, President and Chief Executive Officer and Michelle McCarthy, Vice President and Chief Accounting Officer. Yesterday, after market close, we released our financial results for the Q2 of 2024, 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.

Speaker 1

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 ks for the year ended December 31, 2023. 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 non GAAP financial measures. Unless otherwise noted, all income statement related financial measures will be non GAAP, other than revenue and gross margin. Please refer to our press release and the presentation materials posted to the Investor Relations section of our website for information regarding our non GAAP financial results and a reconciliation of our GAAP and non GAAP financial measures.

Speaker 1

For a detailed breakout of revenues by end market and division, please visit our investor website. Now, I'll turn the call over to John.

Speaker 2

Thanks, Paretosh, and good morning, everyone. Let me start by welcoming Paretosh to MKS as our new Vice President of Investor Relations. Paretosh brings strong experience in both Investor Relations and sell side research where he covered MKS earlier in his career. I assume a number of you may already know Paritosh. We're glad to have him on board.

Speaker 2

You'll be hearing from him soon. In addition, we are making very good progress on our search for MKS' next CFO. I hope to have news to share in the not too distant future. MKS delivered a strong second quarter with revenue of $887,000,000 at the high end of our guidance and EPS of $1.53 exceeding the high end of our guidance. Our EPS included approximately $0.14 of interest expense benefit from our recent convertible note offering and term loan B pay down.

Speaker 2

But even without this tailwind, we still exceeded the high end of our guidance. Our results reflect the continued excellent financial execution, which positions the company well for the eventual end market recovery. In addition to our revenue and earnings performance, we maintained strong gross margins above 47%, reflecting the value of our proprietary and differentiated solutions as well as our consistent focus on cost control. Our operating expenses were better than guided as a result of lower than expected compensation and benefit costs, primarily related to the timing of new hires and prudent management of 3rd party spend. Our solid execution extended to the balance sheet where we continued our long standing track record proactively managing our leverage.

Speaker 2

During the quarter, we closed an upsized $1,400,000,000 convertible note offering at a fixed coupon rate of 1.25 percent. We used approximately $1,200,000,000 of the net proceeds to pay down our term loan B, which significantly reduced our cash interest expense. The transaction was also structured to mitigate potential dilution to our existing shareholders through capped call transactions, which Michelle will discuss in more detail. The convertible note offering also positioned us to reprice our Term Loan B in July and we made a $110,000,000 voluntary prepayment on that loan in connection with the repricing. While we are pleased with our financial execution, we continue to see muted market demand.

Speaker 2

Given our stronger than expected results in the Q2, we are now expecting second half revenue to be relatively in line with first half revenues. We're very encouraged about our market positioning and we believe we are continuing to gain share within certain product categories. Highlights include a strategic photonics win in our semiconductor market that we expect will ramp over the next several quarters. We also achieved some very early stage revenue synergies and design wins in our electronics and packaging market. The breadth and depth of our proprietary portfolio of products and solutions combined with our strong customer relationships in the semiconductor and advanced packaging markets put MKS in a great position when our markets recover.

Speaker 2

Now, I'll review our performance in our 3 end markets. In our semiconductor market, revenue increased 5% sequentially. Similar to our Q1 results, the higher revenue trend was primarily driven by in quarter demand conversion. The 2nd quarter year over year comparisons are distorted given that the prior year quarter reflects recovery from the ransomware incident in Q1 2023. Starting in the Q3, year over year comparisons should be largely normalized.

Speaker 2

With the exception of NAND, we're seeing early signs of improvement, especially in DRAM and logicfoundry in support of artificial intelligence related investments. As device makers step up investments in key areas such as high bandwidth memory and new logic architectures like it all around, MKS is well positioned to leverage our broad technology capabilities to solve the most difficult challenges. Our vacuum solutions products enable the critical etch and deposition processes that help semiconductor manufacturers achieve high throughput and yield as chip architectures become more complex. In our photonic solutions, we provide key subsystems to lithography, metrology and inspection applications, currently one of the highest growth areas of WFE investment. As I mentioned earlier, we had a strategic Photonics win through our world class optics initiative with initial unit production starting this year.

Speaker 2

This is a great win for us that highlights how we integrate multiple MKS technologies to create a unique solution that no one else can provide and is an example of how we have continued to outperform WFE in this category. Until we fully ramp production of this product over the next several quarters, we are seeing some slight pressure on our Photonics Solutions division gross margin, which is reflected in our Q2 results. That said, this is an exciting win for us that we believe will drive strong revenue over the long term, It provides a great opportunity to showcase our unique innovation capabilities. In the Q3, we expect semiconductor revenue to be down slightly on a sequential basis. This reflects our continued view that we are bouncing along the bottom of the industry cycle.

Speaker 2

We remain in a very good position for the next industry upcycle given that we are a critical enabler embedded with all key customers and have the broadest exposure of any subsystem provider. Turning to Electronics and Packaging, we saw double digit revenue growth quarter over quarter. Our revenue performance was led by chemistry sales with some seasonal strength relative to Q1, which included the Lunar New Year. Q2 results also included higher equipment sales sequentially. At present, demand is primarily driven by investment in AI servers, which represents a small but increasing proportion of the total server market.

Speaker 2

We are expecting electronics and packaging revenue in Q3 to be down slightly on a sequential basis, while we wait for stronger signs of PC and smartphone market recovery. We are excited by how our combined laser and chemistry capabilities can drive new growth opportunities. We will continue to make good progress in the LEO satellite space, including achieving a synergistic design win in copper plating in Q2. We've also notched an early synergy win in chemistry with a key player in the smartphone supply chain. These are individually small deals from a revenue standpoint, but represent early proof points that our combined laser and chemistry capabilities are resonating with customers.

Speaker 2

We continue to believe that our electronics and packaging business will be increasingly driven by the same trends that drove our semi business, namely miniaturization, complexity and chemistry. At this point, some of you attended a recent visit to our tech center in Berlin to learn more about our optimized interconnect offering that underpins the strategic rationale of our combination with ATOTEC. We are the only player who combines laser drilling expertise with plating tools and chemistries to best enable key technology inflections at the substrate and PCB levels, and we are leveraging our broad combined relationships to increase customer engagement. In our specialty industrial market, revenues decreased about 7% sequentially with softness in vacuum and photonics products for select specialty categories, but stable automotive revenues in our general metal finishing business. As a reminder, our specialty industrial market is comprised of numerous applications, that spans several end markets and leverages our proprietary technologies and related R and D investments within semiconductor and electronics and packaging, providing strong incremental margins and cash generation.

Speaker 2

As we await the broader industrial market recovery, chemistry from our Material Solutions division provides a relatively steady consumable driven source of revenue with strong margins contributing to both our electronics and packaging and specialty industrial markets. It's also an area of innovation for the company as industrial customers increasingly seek sustainable and environmentally friendly solutions. A great example of this is the suite of solutions we have developed in trivalent chrome to provide the automotive market a more sustainable path from the hexavalent chrome has been used in automotives for decades. We believe we are a leader in pioneering end to end solutions for OEMs that deliver sustainable surface processing through cost efficient applications. And we received 2 new orders in Q2 for our trichrome solutions.

Speaker 2

Another innovation in General Metal Finishing is our equipment recycling solutions, where we can extend the equipment life through chemistry reformulations and innovative equipment processing solutions, creating investment savings and environmental benefits for our customers. We have had multiple design wins here in recent months. Looking ahead to Q3, we expect revenue in our Specialty Industrial market to be in line with Q2. Let me wrap up by saying we are pleased with our execution and performance in the second quarter. We are taking the steps necessary to drive profitable growth and improve cash generation as demand remains fairly stable across our end markets.

Speaker 2

Consistent with our historic performance, we're confident in our ability to outperform WFE when the market recovers. We have the broadest product portfolio spanning both the semiconductor and electronics and packaging markets and we leverage our expertise across these markets to solve our customers' hardest problems. Our breadth gives us a unique view into upcoming inflections and that makes us an important resource across the entire Advanced Electronics ecosystem. Now let me turn it over to Michelle to cover our Q2 financial results in more detail.

Speaker 3

Thank you, John, and good morning, everyone. For the Q2, MKS reported revenue of $887,000,000 up 2% sequentially and at the high end of our guidance range, driven by better than expected semiconductor and electronics and packaging revenue. 2nd quarter semiconductor revenue was $369,000,000 up 5% sequentially and well ahead of our expectations, primarily driven by stronger than expected in quarter demand conversion. As John mentioned, the year over year comparison for semiconductor is not meaningful, given our Q2 2023 results include recovery from the ransomware incident in the Q1 of 2023. Year over year comparisons should be largely normalized starting with the Q3.

Speaker 3

2nd quarter electronics and packaging revenue was $229,000,000 an increase of 10% quarter over quarter and 2% year over year. This result was led by seasonal strength in chemistry and higher equipment sales. Excluding the impact of foreign currency and palladium pass through, chemistry sales grew 19% year over year as we are seeing some recovery from industry wide softness in the Q2 of 2023. In our Specialty Industrial market, 2nd quarter revenue was $289,000,000 a decline of 7% sequentially and just below our guidance expectations. Revenue can fluctuate from quarter to quarter as a result of trends within the multiple end markets served, but overall has been generally stable over the last 4 quarters.

Speaker 3

Similar to our semiconductor market, the year over year comparison is distorted as a result of recovery from the ransomware incident. Turning to margins. We reported 2nd quarter gross margin of 47.3 percent, representing the high end of our guidance. Gross margin was down sequentially as expected to favorability from the non recurring items in the Q1 as well as product mix, including the impact of start up costs related to the world class optics win in our Photonics Solutions division, as John discussed. Our margins continue to reflect the strength of our differentiated portfolio.

Speaker 3

We continue to prudently manage our costs with 2nd quarter operating expenses of $227,000,000 coming in well below our expectations. This was driven primarily by lower compensation and benefits expenses, especially with regard to the timing of planned new hires, as well as lower third party spend. We are proud of our long standing track record of managing our cost structure throughout market cycles, which allows us to balance investing in our business with near term profitability and cash generation. Looking ahead, we expect operating expenses will increase from 2nd quarter levels, but remain below our earlier expectations of a $240,000,000 to $250,000,000 run rate for the balance of 2024. 2nd quarter operating income was $192,000,000 yielding an operating margin of 21.7 percent and above the high end of our guidance, driven by higher sales, strong gross margin and lower operating expenses.

Speaker 3

2nd quarter adjusted EBITDA was also above the high end of our expectations at $228,000,000 with a 25.7 percent margin. Net interest expense was $69,000,000 below our guidance of $79,000,000 reflecting interest savings from the May closing of our $1,400,000,000 convertible note offering and term loan B pay down. As a result of entering into capped call transactions, we expect there will be no dilution to shareholders in the event of any conversion of the notes until our stock price exceeds $237.42 which was double our stock price when we announced the transaction. We used $1,200,000,000 of net proceeds to repay borrowings under our Term Loan B facility, which based on current interest rates will save over $75,000,000 of annualized cash interest and reduce our effective interest rate by over 100 basis points. We expect those cash savings will accelerate the deleveraging of our balance sheet.

Speaker 3

In addition, the convertible note offering positioned us to reprice the remaining balance of our Term Loan B in July, reducing the interest rate by 25 basis points and saving an additional $9,000,000 of annualized cash interest. 2nd quarter net earnings were $103,000,000 or $1.53 per diluted share, well above our guidance ranges. These results reflect the strong operating performance in the quarter as well as the $0.14 per share of interest expense reduction from our recent convertible note offering and term loan B paydown, as well as a lower than expected tax rate of 20.5% for the quarter. The benefit from the convertible note offering and Term Loan B pay down represents only a partial quarter given our execution in mid May and is expected to represent approximately $0.27 of earnings per share in the Q3. Free cash flow was $96,000,000 and unlevered free cash flow was $156,000,000 We closed the 2nd quarter with more than $1,500,000,000 of liquidity, comprised of cash, cash equivalents and short term investments of $851,000,000 and our undrawn revolving credit facility of $675,000,000 Gross debt was $5,000,000,000 and our net leverage ratio was 4.6 times based on our trailing 12 month adjusted EBITDA of $904,000,000 We expect to continue to prioritize debt pay down with our excess free cash flow as evidenced by the $110,000,000 voluntary debt pay down made in July in parallel with our term loan repricing.

Speaker 3

This prepayment resulted in an $8,000,000 reduction to our annualized cash interest based on current interest rates. To put perspective around the impact of our debt actions this year, we entered 20.24 with an annual interest expense run rate of approximately $330,000,000 With the actions we've taken year to date and the recent reduction in the year over year rates, that value has been reduced to approximately $240,000,000 During the Q2, we paid a dividend of $0.22 per share or $15,000,000 With that, I'd like to turn the call back over to John, who will review our outlook. John?

Speaker 2

Thank you, Michelle. Let me now turn to our 3rd quarter outlook. We expect revenue of $870,000,000 plus or minus $40,000,000 reflecting the better than expected Q2 and a continued slow path to market recovery as we continue to bounce along the bottom of this industry cycle. We now expect second half revenue to be relatively in line with first half levels. By end market, our 3rd quarter outlook is as follows: revenue from our semiconductor market is expected to be $360,000,000 plus or minus $15,000,000 Revenue from our electronics and packaging market is expected to be $220,000,000 plus or minus $10,000,000 and revenue from our specialty industrial market is expected to be $290,000,000 plus or minus $15,000,000 Based on anticipated revenue levels and product mix, we expect 3rd quarter gross margin of 46.5 percent plus or minus 100 basis points.

Speaker 2

We expect 3rd quarter operating expenses of $235,000,000 plus or minus $5,000,000 As we continue to manage expenses, we believe $235,000,000 is an appropriate run rate for the 4th quarter as well. We estimate adjusted EBITDA of $206,000,000 plus or minus $23,000,000 As Michel mentioned, the recent convertible note offering and term loan B pay down is expected to be accretive by roughly $0.27 per share in the 3rd quarter. We expect a tax rate of approximately 16.5% in the 3rd quarter and we expect to remain on track to achieve a tax rate of 20% for the full fiscal year. Given these assumptions, we expect 3rd quarter net earnings per diluted share of $1.43 plus or minus $0.28 I'm proud of how our team has navigated the cyclical softness in our end markets, while delivering for our customers and our shareholders. This, along with our differentiated product and technology portfolio tied to key secular trends in our end markets, positions us well for the next cyclical upturn.

Speaker 2

With that operator, please open the call for Q and A.

Operator

Thank you. At this time, we will conduct a question and answer session.

Speaker 4

Looked like gross margins in the

Speaker 2

quarter were stronger than we

Speaker 4

expected and your Q3 guidance was pretty good. Can you talk about the puts and takes and what's driving that gross margin improvement?

Speaker 2

Yes. Good morning, Joe. I think the gross margin is reflective of the proprietary nature of our products. I think there was good product mix again, mainly MSD, chemistry revenue remained a good proportion of the revenue. But also gross margin was improving as well in VSD as well service.

Speaker 2

And we did note a little bit of gross margin headwind in PST. So that kind of range of 46 to give or take 100 basis points, 46.5, That's really the right way to think about our gross margin with the current mix that we have today.

Speaker 4

Great. Thank you. And as a follow-up separately, can I ask about on the semi side, are you seeing any indications of NAND spending picking up either second half this year or early next year?

Speaker 2

Yes, I think it's hard to predict that, but I think we have we read the same things you guys read and I think NAND does seem to be pushing out a little bit relative to maybe the industry view early in the year. So I think we're still bouncing along the very bottom for NAND. And as you know, we have some great proprietary solutions there. So when that market picks up, we'll certainly enjoy that pickup. But right now, Joe, I think we're a little more bouncing on bottom a little longer and I think that's consistent with the industry view.

Speaker 4

Great. Thank you.

Speaker 2

Thanks, Joe.

Operator

Thank you. One moment for our next question. Our next question comes from Vivek Arya of Bank of America Securities. Your line is now open.

Speaker 5

Hi, this is Michael Mani on for Vivek Arya. Thank you for taking a few of our questions. First off, I think some of your major customers in the segment market have reported so far indicated relatively strong sequential growth into the second half. So I guess how can we reconcile this with some of the more muted trends you're seeing in Q3? And what signs should we look for at these customers before a more sustained upturn can occur?

Speaker 5

Is it largely a function of utilization or are there other signs we should monitor? Thank you.

Speaker 2

Yes, Michael. I think one of the things that's happening now in the industry and with MKS is that our lead times have been pulled in, which is good. They pulled into kind of the normal historically times, which are pretty short and that does limit our visibility a little bit. And as we noted in the call this time as well as last quarter, there is a lot more of the unexpected, if you will, in quarter conversions because our lead times are shorter. And so I agree that some of our customers have indicated that there may be some better second half and we'll see if that happens to us for us.

Speaker 2

But certainly if they do and they need our equipment, we'll see that. But right now, the best we can see is that kind of second half, first half is relatively consistent. And I would note, as we said in the prepared remarks, Q2 was much higher than we had expected coming into Q2.

Speaker 5

Got it. Thank you. And next, could you share any more color on the strategic Photonics win in the quarter? Once this fully ramps over the coming quarters, how much could this potentially contribute to growth next year? And is there any way to frame the long term opportunity in the optics photonics market for VACAS?

Speaker 5

Thank you.

Speaker 2

Yes. I think this is just the latest example of a multi year strategy we've had of investing in world class optics. We believe that we have a unique capability in the industry because of our broad product portfolio and we can integrate many things together that no one else can. And so this is a big win and we're happy to have gotten it. There is always the startup costs, cycle time is longer in the beginning and manufacturing efficiency is a little less efficient in the beginning until you start making more units.

Speaker 2

As you order more parts, obviously pricing of the supply, the parts goes down. So we do have a little headwind on that in the beginning, but that's kind of normalized. So I think it's just part of our bigger effort in world class optics, which I think we'd point out our revenue in lithography, metrology and inspection has continued to grow even during this current down cycle. And that's part of the reason why we continue to believe we can outperform WFE growth.

Speaker 5

Thank you. Thanks.

Operator

One moment for our next question. Your next question comes from Melissa Weathers of DB. Your line is now open.

Speaker 6

Hi there. Thank you for letting me ask a question. I wanted to talk about the Specialty Industrial business. Can you summarize where you think we are cyclically in that business? I think it came in a little bit lighter than what I thought in the recent quarter.

Speaker 6

So how do we think about that business cyclically? I know there are a bunch of different moving parts within it.

Speaker 2

Yes. Thanks for the question, Melissa. I think we look at it as not cyclical. It's made up of a bunch of different markets that tend to sum up to something pretty stable. And we've seen that over the past several quarters.

Speaker 2

It can be lumpy, and this quarter was down a little more than we had expected, as we said. I would look at this. I would kind of look at the longer term revenue for Specialty Industrials. That's why we look at kind of a year at a time. And when you look at it at that perspective, it is still very stable.

Speaker 2

So it can be lumpy depending on some segments, sorry, of the markets.

Speaker 6

Got it. And then on the E and P side, I think last quarter you talked about an uptick in demand for high density multilayer PCBs related to AI servers. How is that business trending? Are you still seeing momentum from AI?

Speaker 2

Yes, I think we do. Many of those customers that are more levered to AI are our customers and we that momentum. And many of them are public companies because so you can see what they're saying. And the good thing is that the proportion of the PCB market that is driven by AI is increasing. But as we noted before, it's still relatively a small proportion of the PCB market.

Speaker 2

PCs and smartphones and non AI servers are still the largest part of it. And as you know, there's still a little bit of muted demand in PCs and smartphones.

Speaker 6

Got it. Thank you.

Speaker 4

Thank you.

Operator

Thank you. Our next question comes from Jim Ricchiuti of Needham and Company. Your line is now open.

Speaker 7

Hi, thanks. Good morning. John, I wanted to go back to the E and P performance in Q2, which was a little better than expected. It sounds like it was both equipment and chemistry related. I wonder if you can give a little bit more color on which was the bigger driver to that outperformance?

Speaker 7

And then I have a follow-up question on E and P. Yes.

Speaker 2

Good morning, Jim. You're right. Q2, the uptick in E and P was driven by both equipment and chemistry, but chemistry is by far the bigger driver, Jim. And as you know, our guidance in Q3 is slightly down, but just to give everybody a little more color, it's really because of the equipment that's slightly down. The chemistry is still, as we expect, Q3 being a little higher than Q2.

Speaker 2

So I just want to give everybody a little color that that's consistent probably with what the industry is seeing.

Speaker 7

Got it. That's helpful. And there are expectations as you know that we could see a better refresh cycle for smartphones next year. I'm not going to ask you if you agree with that unless you want to offer some perspective. But if that's accurate, I'm curious, which parts of the business are you going to is going to lead that recovery from a booking standpoint?

Speaker 7

Is it going to be the PCB drilling business followed by the chemistry or is chemistry more it sounds like that's more book and ship. And when could you see a possible uptick in orders if we're in that kind of a scenario?

Speaker 2

Yes, it's a great question, Jim. If there was just steady business and people weren't adding CapEx, obviously, the chemistry utilization and the chemistry bookings, which happened right when we shipped by the way. So there's really not a lag would be the first indicator. But you raise a good point. If there was a big upcycle, if you will, in CapEx investments, we would have to see those bookings with lead times that we have on laser systems.

Speaker 2

And we don't report bookings. So I think to your point, you're right. If there is a buildup that requires new CapEx, we should see that in equipment sooner than just utilization rate.

Speaker 7

Okay. Thanks a lot.

Speaker 4

Thanks, Jim.

Speaker 6

Thank you.

Operator

Next question comes from Krish Sankar of TD Cohen. Your line is now open. Hi.

Speaker 4

Thanks for taking my question. I told them, 1, John, you kind of outlook on September quarter, I mean, it kind of jives with kind of what your customers have said also. But I'm kind of curious, the biggest delta between them and now is the fact that Intel cut CapEx. And I'm just wondering how much of that has had any impact if and in the second half of this year and more realistically in calendar 25?

Speaker 2

I think you're right Intel did have their call and did guide CapEx down a little bit in 2024. I'm not sure that really impacted our view of the guidance. Our view obviously is made up of all the customers in the industry. But I think in the when you think about the industry, everybody is kind of thinking 2025 is going to be good, but the time in which it does turn up is pushed out a little bit. I think that's what we're seeing and that's why we're looking at second half kind of being very similar to first half.

Speaker 2

I think coming into the year, Krish, we're all hopeful. We didn't know that there might be stronger hockey stick towards the end of the year. And as the year progressed, I think that has gradually come down. And I think right now, our best view is that second half roughly the same as the first half.

Speaker 4

Got it. I mean, maybe let me ask a question in a different way, John. Intel also gave a calendar 25 CapEx number, which is down 17% year over year. Baking that in, are you still in the camp that WFE will be a strong growth year next year?

Speaker 2

Well, I think that is certainly a headwind to all WFE. But as you know, if someone is not spending on WFE, as long as the chip revenues are needed and the capacity is needed, someone else will be spending the CapEx as well. So I still think that 2025 will be better. And we don't really predict WFE going forward. It's very hard to do.

Speaker 2

And thankfully, you guys have to and we don't. But I still think 2025 will be better. But in terms of an impact on it by a specific customer, I don't think I could really predict what that will be on 2025. Got it. Got it.

Speaker 2

And then

Speaker 4

a quick follow-up on the AzureTech side, John. Obviously, the AzureTech business does have some exposure to Intel, but you also have some exposure to some of these AI chips, which are seeing some delays at COWAF. Kind of curious, has that really changed your perspective on Atrotech's advanced packaging opportunity into next year?

Speaker 2

Yes. No, I think the next generation PCBs and substrate work that we're doing with our most advanced customers, that's still a couple of years out anyway. And your commentary is really about utilization rates today and any impacts from any kind of specific customer commentary. But as we said in the answer to an earlier call, a question, we still see that AI driven chemistry business is good. It's just that we have to put that in perspective in terms of the proportion of AI chemistry relative to the chemistry for the entire PCB market.

Speaker 4

Got it. Got it. Thank you, Joe.

Speaker 2

Thanks, Krish.

Operator

Thank you. Our next question comes from Joe Quatrochi of Wells Fargo. Your line is now open.

Speaker 5

Yes, thanks for taking the questions.

Speaker 2

I just wanted to kind

Speaker 8

of understand the second half versus first half now expecting flat. I think as I think about like the beat the magnitude of the beat in 2Q and then kind of where the Street PRU is modeling kind of a low single digit increase half on half for second half. It seems like flat half on half is a bigger change in the magnitude of the beat in 2Q. So I'm just kind of trying to understand, is there anything else that changed aside from the upside that you put up

Speaker 4

in 2Q, particularly in semi?

Speaker 2

Yes, Joe. I don't think there was a big change. We kind of looked at every quarter through the year as kind of bouncing along the bottom. As I said earlier, coming into the year, we kind of expected with the industry that there would be more of an uptick in the second half, but slight as we said. And now I think most of the industries have said that there is a bit of a push out.

Speaker 2

And so whatever the consensus had for us and for the industry in Q3 and Q4 is probably more muted, that's for sure. And this is our best view right now. So I think not much change. I think we're just bouncing on the bottom. I think the only change is we're probably bouncing along the bottom a little longer than we thought we might at the beginning of the year.

Speaker 8

Got it. And as a follow-up, can you talk a little bit about the early synergistic plating and chemistry design win that you saw in the quarter? Was that and does that include NKS like laser drilling as well or is it just on the ATA Tech side?

Speaker 2

Yes. We've talked in the past about laser drilling wins as synergistic. The ones we mentioned this time were ATOTEC wins synergistically. And as you know, as we've said before, if ATOTEC and MKS were already in that customer and we both won, we don't count that as synergy. It's really the case where either the legacy MKS laser guides were in and Atotech wasn't and if Atotech wins then we count that as a synergy.

Speaker 2

And that's really what we're talking about with these two wins we called out.

Speaker 8

That's helpful. Just to be clear, is that one of the first kind of MKS led win then?

Speaker 2

It is. It is. The other ones we talked about in the past, as you know, were the Atotech bringing in the laser group. So these are the first 2. Now remember, it wouldn't take a while, right, because you're qualifying, you're testing, etcetera.

Speaker 2

So we have been working at this for multiple quarters and we have other things we're working on right now that hopefully in the future will turn into wins as well. So yes, these are the first two Additech Chemistry wins because of the Laser Group.

Speaker 8

Helpful. Thank you.

Speaker 2

Thanks, Joe.

Operator

Thank you. Our next question comes from Steve Barger of KeyBanc Capital Markets. Your line is now open.

Speaker 9

Thanks. I know there's a lot of variables to this question, but in general, if you sell a new plating system and it gets to full run rate, how can we think about what that adds to consumables in terms of percentage to the base chemistry business or maybe you can talk about it in terms of dollars per system? I'm just trying to understand the relationship between new equipment installs and consumable uptake. Yes, Steve. Thanks for calling.

Speaker 2

Of the equipment, the CapEx, depends on how big it is, number 1. But if you take one maybe one of our biggest plating tools, and we're talking electronics versus GMF, it could be a couple of $1,000,000 or so. Now the chemistry is, I would say, think of it as an order of magnitude less per month. And so there's chemistry in all these tanks, but that chemistry lasts forever. So that's kind of the way we think about it.

Speaker 2

We can give you a little more color on that going forward. I just don't have off the top of my head because it does vary by the chemistry, by how much of the chemistry we have. And then of course, the gross margins could vary slightly depending on the chemistry. So I think when we get to CapEx in, we're just really happy about the longer term prospects of that chemistry and that could be 30 years of chemistry revenue.

Speaker 9

Right. Yes, great. That's a good start. And a lot of industrial end markets are soft right now. But are you seeing opportunities outside of automotive and the other established end markets in specialty that could give you a little revenue leverage to the cycle when it does improve?

Speaker 2

Yes, I think it is lumpy. And I would say you're right, some of the industrial customers outside of automotive seem to be a little more hesitant, if you will. But I would say in one of the specialty industrial markets that seems to have been doing a little better was defense. And we probably mentioned that a couple of times over the last couple of quarters. But as I said, that's a small percentage of our business, but it has been doing well in the last couple of quarters.

Speaker 2

So that's one I would call out. But as again, it's really made up of multiple, multiple markets, our specialty industrials revenue.

Speaker 9

Understood. Thanks.

Speaker 2

Thanks, Steve.

Speaker 6

Thank

Speaker 2

you.

Operator

This concludes the question and answer session. I would now like to turn it back to Paretosh Misra for closing remarks.

Speaker 1

Thank you all for joining us today and for your interest in MTS. Operator, you may close the call, please.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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Earnings Conference Call
MKS Instruments Q2 2024
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