MKSI - NASDAQ

Good day, and thank you for standing by. Welcome to the MKS Instruments First Quarter 2025 Earnings Conference Call. At this time, all participants, they are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Paretosh Misra, Vice President of Investor Relations. Please, go ahead.

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 Ram Mayampurath, Executive Vice President, Chief Financial Officer, and Treasurer. Yesterday, after market close, we released our financial results for the first quarter of 2025, which are posted to our investor website at investor.mks.com. As a reminder, various remarks about future expectations, plans, and prospects for MKS comprise forward-looking statements. Actual results may differ materially as a result of various important factors, including those discussed in yesterday's press release and in our most recent annual report on Form 10-K. 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 sections of our website for information regarding our non-GAAP financial results and a reconciliation to our GAAP measures. Our investor website also provides a detailed breakout of revenues by end market and division. Now, I'll turn the call over to John.

Thanks, Paretosh, and good morning, everyone. MKS delivered excellent results in the first quarter as we reported strong revenues, executed well on cost management, delivered to our customers' production demand, and continued our deep technology engagements with them. First quarter revenue of $936 million and gross margins of 47.4% were both at the high end of our guidance. Net earnings per delivered share of $1.71 exceeded the high end of our guidance. Our performance is a result of outstanding work by our team in a demand environment that has been showing early signs of improvement. The announcement of new and changing trade policies since February has injected uncertainty into our industry and our end markets. Our team is working closely with our suppliers and our customers to mitigate adverse impacts from these trade policies. At present, we do not expect a material impact to revenue, but we do anticipate some near-term impact on margins as we optimize supply chain and manufacturing activities in response to the dynamic geopolitical environment. Ron will provide more details later in the call. I'll turn now to Q1 performance in our three end markets. Starting with our semiconductor market, revenue came in at the high end of our guidance and improved sequentially, driven by modest increases in demand for our vacuum product offerings for NAND. Specifically, our RF power solutions offerings in our plasma and reactive gas businesses performed well. NAND picked up from prior year levels as customer inventories have largely normalized and system upgrades have increased. We also saw notable order activity in thermal sensors for etch applications and reactive gases for advanced wet cleaning applications. In the second quarter, we expect semiconductor revenue to be consistent on a sequential basis, but up low double digits year over year, reflective of an environment that is steadily improving. We are confident in our ability to outperform as the market recovery gains momentum and as our history has repeatedly shown during these upturns. Electronics and packaging revenue were also at the high end of our guidance. Better-than-expected result during a quarter that included the lunar New Year was driven by increased sales of flexible PCB drilling equipment as well as rigid PCB chemistry equipment. Some of our flexible PCB drilling equipment customers pulled forward purchases into Q1. We also saw continued momentum in orders for our chemistry and chemistry equipment for advanced multi-layer boards, high-density interconnects, and packaged substrates related to AI applications. Our products and technologies play key roles in enabling the manufacturing of increasingly complex electronic devices in this era of heterogeneous integration. Additionally, we saw strong orders for laser equipment for low earth orbit satellite applications where we are the process tool record for multiple customers, validating our position as an innovator in advanced laser technologies. Looking ahead to Q2, we expect revenue from our electronics and packaging market to be down mid-single digits on a sequential basis but up mid-single digits year over year. Consistent with prior years, we believe our chemistry revenue will increase sequentially. However, we anticipate this increase will likely be offset by lower sales in our flexible PCB drilling equipment business given the pull forward of shipments I mentioned earlier. Our guidance implies a healthy low-teens, year-over-year growth rate for electronics and packaging the first half of the year. Q2 is expected to be the third consecutive quarter of strong chemistry equipment revenue, which is a good leading indicator for our consumable chemistry products. Our specialty industrial revenue was above the midpoint of our guidance. Within this market, life and health sciences and research and defense end markets performed steadily, but we did see some softness across the broader industrial market, especially with automotive applications. As a reminder, our specialty industrial market consists of a variety of applications across multiple end markets that leverage existing MKS technologies. Looking ahead to Q2, we expect revenue in our specialty industrial market to remain flattish as the broader industrial market remains soft. Overall, we executed well and delivered strong financial results in Q1. Our Q2 end market outlook and overall financial guidance reflect the increased uncertainty of the trade policies against, what otherwise appears to be an early-stage recovery in the end markets we serve. While we are actively working on mitigation strategies in the near term, the situation remains fluid as our customers and the broader electronics ecosystem adapt to both tariffs and their potential macroeconomic implications. That said, we believe MKS is in a strong position to manage through these uncertainties with the industry's broadest portfolio of leading technologies, strong customer relationships, a strong financial operating model, and a team that is battle-tested. Now let me turn it over to Ram to run through the financial results and second quarter guidance in more detail. Ram?

Thank you, John, and good morning, everyone. We delivered strong results in the first quarter, driven by a continued recovery in demand in our semiconductor and electronics and packaging end markets, along with disciplined execution and cost management. First quarter revenue was $936 million, similar to last quarter, and up 8% year-over-year. The result was at the high end of our guidance and reflects better-than-expected trends across all our end markets. Excluding the impact of FX and palladium pass-through, revenue grew 10% year-over-year. First quarter semiconductor revenue was $413 million, up 3% sequentially, and 18% year-over-year. Excluding FX, revenue was up 20% year-over-year. The result was all at the high end of our expectations as our team continued to capitalize on sequential demand recovery in NAND, DRAM, and logic and foundry applications. Compared to last year, we saw strong performance in our plasma and reactive gas and RF power solutions businesses, reflecting benefits of NAND upgrades as well as normalization of customer inventory. First quarter electronics and packaging revenue was $253 million, similar to last quarter, and at the high end of our guidance. The sequential result was led by unusually strong, flexible PCB drilling and chemistry equipment sales, partially offset by normal seasonal declines in chemistry. On a year-over-year basis, sales were up 22%, and excluding the impact of FX and palladium pass-through, sales were up 26%. Chemistry revenue was up 8%, excluding the impact of FX and palladium pass-through, continuing the strong growth trend we have seen from last year. Flexible PCB drilling and chemistry equipment sales also rendered strong growth over the prior year. As John mentioned, we see our strong equipment sales as a positive leading indicator for future chemistry sales given the historical attach rates. In our specialty industrial markets, first quarter revenue was $270 million, a decline of 4% sequentially, but above our guidance midpoint. Revenue was down 13% on a year-over-year basis and down 11%, excluding the impact of FX and palladium pass-through, primarily due to the continued softness in the general industrial and automotive markets. Moving down to the P&L, first quarter gross margin was 47.4%, which was at the high end of our guidance. We are pleased with the gross margin performance, which was up sequentially despite higher mix of equipment. This demonstrates the value our products bring to our customers and our continued execution on manufacturing excellence and supply chain efficiency. First quarter operating expenses were $254 million, near the midpoint of our guidance. We remain committed to managing our OpEx carefully as we balance investing for growth with driving profitability. First quarter operating income was $189 million, with an operating margin of 20.2%. This results in the strong revenue and gross margin that I highlighted. First quarter adjusted EBITDA was $236 million, and at the high end of our expectations, an adjusted EBITDA margin of 25.2%. Net interest expenses was $45 million, just below our guidance of $46 million. The first quarter effective tax rate was 19.9%, which was lower than our guidance of 22%. First quarter net earnings were $116 million, or $1.71 per diluted share, and above the high end of our guidance, reflecting the strong operating performance and lower income tax rates. First quarter free cash flow remained strong at $123 million, which is over 100% of our net earnings and 13% of revenue. We invested $18 million in our capital expenditures in the quarter, or slightly under 2% of revenue. We expect full year CapEx to fall within 4% to 5% of revenue. We closed the quarter with approximately $1.3 billion of liquidity, comprised of cash and cash equivalents of $655 million, and our undrawn revolving credit facility of $675 million. As we mentioned in our last earnings call in January 2025, we made a voluntary principal prepayment of $100 million in connection with the repricing of our term loans, which reduced our credit spreads by 25 basis points. We exited the quarter with a gross debt of $4.6 billion and a net leverage ratio of 4.2 times based on our trailing 12-month adjusted EBITDA of $933 million. Our net leverage ratio improved slightly from the end of prior quarter, reflecting our strong year-over-year adjusted EBITDA results. Also in the quarter, we repurchased approximately 0.5 million shares under our existing share repurchase program. The repurchase was accretive and is expected to offset full year stock compensation dilution. In addition to this, we expect to make another voluntary prepayment on our term loan in the current quarter. We remain focused on executing on our long-term capital allocation priorities of investing in organic growth opportunities and reducing our leverage through principal prepayments and working with our banking partners to reduce our interest expenses as market opportunities arise. Finally, during the quarter, we paid a dividend of $0.22 per share, or $15 million. We are very pleased with our performance in the quarter. The fundamentals of our business remain strong. At our current cost structure, we expect significant improvements in cash generation as the demand environment improves, which would allow us to accelerate our deleveraging efforts even further. Let me now turn to our second quarter outlook. The guidance we are providing represents our best estimates based on the dynamic environment in which we are operating. We expect revenue of $925 million plus or minus $40 million, reflecting our view that underlying demand remains stable despite the trade-related uncertainties. We believe our technology is integral to our customer success, and we are designed into many of the advanced applications our products support. Buy-in market, we expect semiconductor revenue to be $415 million plus or minus $15 million. Revenue from our electronics and packaging market is expected to be $240 million plus or minus $10 million. And revenue from our specialty industrial market is expected to be $270 million plus or minus $15 million. This guidance reflects relative stability in our business, with the exception of slight downtick in flex PCB drilling equipment following the exceptional first quarter results. We are guiding gross margin of 46.5% plus or minus 100 basis points. The guidance incorporates expectations of a certain higher near-term costs related to tariffs. Our current estimate is that tariffs could be up to 100 basis points. We will remain agile in light of the fluid trade and tariff environment to optimize our performance as we implement cost mitigation strategies. We expect second quarter operating expenses of $252 million plus or minus $5 million and adjusted EBITDA of $216 million plus or minus $23 million. We expect tax rates of approximately 18% in the second quarter. Based on the progress we have made on our ongoing tax planning efforts, we now expect our full year tax rate to be in the range of 18% to 20%. We expect second quarter net earnings per diluted share of $1.56 plus or minus $0.28. This includes our estimated impact of incremental tariff costs. We are pleased with the demand trends we are seeing in key areas of our business and the overall encouraging start to the year. Our execution has remained strong and we have a longstanding track record of managing through uncertainty. We remain confident in our position as a key provider of enabling technologies to our customers across the electronics ecosystem and in our ability to help them solve their most complex challenges. With that, operator, please open the call for Q&A.

Thank you. [Operator Instructions] Our first question today comes from the line of Steve Barger of KeyBank Capital Markets. Your line is now open.

Hey, thanks. Good morning. John, you said system upgrades for memory tools have increased. Does it feel like that trend has some momentum and can you talk about size and timing of what that could look like?

Yeah, good morning, Steve. I would say this, two things. One is that the inventory burn of our inventory for the NAND market looks like it's normalized, so that's one factor. But we are seeing the upgrades for NAND, and that's really where we were mentioning about the improving semiconductor market. In terms of outlook, we kind of expect more upgrades to continue, but certainly that can vary. We can see a quarter out, a little more, and I think really it's going to depend on the NAND customers and what their plans are. But for right now, we're pretty happy with the improvement in NAND year over year and the fact that our inventory has now normalized.

And just in terms of overall size, I know you're incumbent on a lot of the machines that are out there. Is there any way to gauge what the size of it could be for upgrades?

Well, I think the good thing is that upgrades means that you can only upgrade what's out there, the install base, and that is obviously one large customer of ours, and all of that is our RF power. It's hard to gauge the size of that. Of course, we know the install base, but it really will depend on which customers are upgrading. And certainly one customer has said they see a lot of these customers planning on upgrades, but I think they're probably going to have the best visibility.

Got it. And then for my follow-up, really great to hear about momentum for the chemistry equipment solutions. Can you frame up what customers are telling you about two-half visibility or what your second-half visibility is there and maybe timing of installation and how that results or flows through to chemistry?

Sure. The chemistry equipment bookings and now the revenue, this is the third quarter of those increased bookings there. We've talked about it in the past. This is tied to HDI and MLB for AI. So artificial intelligence is driving a lot of these new equipment bookings. We see it steady right now. Of course, the bookings that occurred a three quarters ago are going in now last quarter, we will go in next quarter. So that's the kind of lead time you can expect. And this quarter, we also saw continued strength there. And also, as you know, we have a very, very high attach rate of our chemistry to that equipment. And it portends a very good future for that chemistry revenue. Now, of course, chemistry revenue is determined by market demand in the end. But when we start with our equipment, it's certainly beneficial for MKS.

Yeah, thanks. Sounds promising. I'll pass it along.

Thanks, Steve.

Thank you. Our next question comes to the line of Shane Brett of Morgan Stanley. Your line is now open.

Thank you for letting me ask a question. So my first question is on tariffs. So you mentioned that tariffs will have an impact of 100 basis points on gross margins. Could you talk about how you and your customers are looking to mitigate or offset the impact? And have you seen any change to customer order patterns from tariffs? And I'm asking really in the context of whether you see any signs of Poland-like activity? Thank you.

Hi, Shane. This is Ram. I'll take that. We are very closely engaged both with our customers and suppliers to find the best solution. And in addition to that, as you know, we have global manufacturing and multi-site manufacturing capabilities with a very resilient supply chain. So those are our mitigation actions that we are looking at. As you know, the situation is still very fluid. And we're looking at a broad array of mitigation plans, including selective commercial actions when necessary. And on your question on the top line, so far we haven't seen any impact to the top line from the tariffs.

Hey, Shane. This is John. I would clarify, too. We incorporated the effect of tariffs on our gross margin. We did say that that could be up to 100 basis points. We didn't say we incorporated that whole amount. I just want to make sure that was clear to everyone.

Thank you for the clarification. And for my follow-up, this is kind of a big-picture question, but is there any preliminary outlook on the second half? And how has the stronger-than-expected first half possibly impacted your outlook, maybe three months ago?

I think we were happy with our first-half performance, certainly in our semi-market as well as our E&P markets. When you take our guidance for Q2 and add it to our results for Q1, you can see double-digit increases year over year in semi as well as even in E&P. So we're really happy with those developments. I think your question is what will happen in the second half. I think, in general, if all things were equal, we would kind of be happy with a stable demand and potentially increasing demand in those markets. I think the biggest issue now is what will happen with the macroeconomic issues because of tariffs. And so that puts a little more uncertainty into it. But if everything else were the same, we would certainly be happy with these pockets of improvements in our markets and then the year-over-year improvements in our markets.

Thank you. Our next question comes to the line of Krish Sankar of Cowen & Company. Your line is now open.

Hi, thanks for taking my question. I have two of them. First one, John, you mentioned about land upgrades, et cetera, on the trend there. Is that a function of just the overall industry upgrades or is your RF power supply share gains helping incrementally? I'm just trying to figure out, has any share gains helped you or is it just more the industry cyclicality right now? And then I have a follow up.

Yeah, I would say this, Krish. The upgrades are picking up, and that's the real driver, as well as the fact that our inventory is burned off. I don't know how you gain more share when you're at 100%, so I'm not sure that question is relevant at this point. But we know we are 100% market share.

This is on the RF side. Do you have any traction on the pulsed DC side?

Yeah, I think we've talked in the past. Pulsed DC is something we work on, as well, and we're engaged with all the major players in pulsed DC. And pulsed DC is certainly something that may happen in volume production, but right now it has not. So we're working on that with customers. I think depending on the customer and the applications, some may adopt it, some may not.

And then just as a follow-up, John, if you go back three months ago, a lot of your legacy Atotech business is leveraged to smartphones, and there's a view that smartphones are recovering the back half. Now that seems to have been pushed into next year, I'm just kind of curious, does that change the dynamics on how you look into your second half for the Atotech business, or is it too early to make that call?

Yeah, I would make a couple comments on that, Krish. We actually saw a little bit of improvement in our Atotech business related to smartphone builds and even little PCs. Not a lot, but you can see that in the year-over-year numbers in our chemistry revenue. I think in Q1 of 2025, our chemistry organic growth was 8% over Q1 of last year. So we're seeing some of that. A lot of it also is driven by AI, but to your point, the cyclicality of the consumer product cycle is typical that Q1 is the lowest for chemistry revenue, Q2 starts accelerating, Q3 is the peak, and then Q4 depends, depending on the demand. So I think we still are expecting that kind of pattern for the consumer markets-related part of our chemistry business.

Thanks a lot, John. Thank you.

Thanks, Krish.

Thank you. Our next question comes to the line of Jim Ricchiuti of Needham & Company. Your line is open.

Good morning. John, what do you think drove the pull forward on the flex drilling side of the business? Any anticipation of tariffs, or do you think it was just some real underlying demand? I mean, it sounded like you were seeing some positive signs, which you alluded to in the last quarterly call.

Yeah, that's right, Jim. As far as we could tell, it's really just demand was needed a little earlier than what we typically see in the cycle. You've covered us a long time; you know that cycle. It wasn't because of tariffs, as far as we could tell. It was just a demand pull-in because our customers needed it. So really not tariff-related.

And did that include demand also as it relates to HDI applications in that area for drilling?

Sorry, you broke up a little bit, Jim. Can you repeat that?

Yeah. John, I just wanted to know how satisfied you are with the progress you're seeing in the HDI drilling portion of the business.

Right. Yes. We mentioned, again, that low-earth orbit applications continue to grow. As you know, more and more customers are getting into that market, and being a production tool record is very helpful there. I think, in general, the HDI drilling market still remains a little muted in terms of CapEx. But we have several design wins throughout the year, and so we're still very happy with the progress there. I think the point I would make about the HDI, as we said in our prepared remarks, is that's confirmation for us that the tool we make, some customers definitely think it's very much something that is competitive and maybe differentiating from a cost of ownership standpoint.

And just one quick follow-up. I'm wondering how you're thinking about mitigation actions as it relates to gross margins ahead when you're seeing, if we look after the second half. Do you anticipate having this behind you? I know it could be as much as 100 basis points in Q2, but how are you thinking about it in the back half?

Hi, Jim. This is Ram. Let me start by saying that we are very pleased with the continued strength in our gross margin. Our gross margin has remained well above 47% for about five quarters now. So the fundamentals of our business still remain very strong. As you know, this is a very uncertain time and we are working through mitigation actions, so we are watching the new cycle and the developments as they come. One thing I can tell you is that we are committed to a 47% plus gross margin in the long term.

Thank you. Our next question comes from the line of Vivek Arya of Bank of America Securities. Your line is now open.

Hi, this is Michael Mani on for Vivek Arya. Thanks so much for taking our question. I just wanted to dive a little more into the specific pain points you're seeing with regards to tariffs. So, exactly which product areas, which segments are seeing the most impact? Could you give us a sense of-- I know there's a significant manufacturing presence in China. I mean, how much of that is being exported back to the U.S.? Is it largely serving domestic China customers? And then, conversely, how much of what you produce in the U.S. is being sent to China? Thank you.

Yeah, Michael, thanks for the question. So, I think the short answer is everything is occurring that you just called out, and we're trying to mitigate all of that. We do have footprints in China. A lot of it is China for China, certainly in our chemistry business. So, I would say in the chemistry business, there's very minimal impact from tariffs because of that localization. Most of the issue is coming from the vacuum side because we do have some factories there that ship worldwide. And so, this is the mitigation work we're doing now is to minimize that. Some of it does come back to the United States. A lot of it does not. And we're trying to work with our customers to try to minimize that. We also have, as Rob said, factories all over the world. And so, while not every factory makes everything, longer term, we can also make those kinds of changes. And so, to Jim Ricchiuti's earlier point, I think there's an impact from tariffs in the short term. And that's why we are confident that longer term, if the tariffs stay the way they are, we would be able to have mitigation actions so that we can commit to that 47% plus gross margin long term.

Great. Thank you. And for my follow-up, I just want to think a little more medium term about the recovery we're seeing in semi-market here. So, if I look at where this is running relative to maybe the peak in 2022, you're down around 20%. And I know that last peak included some customers you might have not been able to ship to. Obviously, that was the peak of the last NAND cycle. So, as we think about getting back to that peak over the medium term, would you need a recovery in the NAND market to get back there? Or could the foundry and logic wins and progress in metrology, lithography, these other places, help you get back to the peak? Especially because I know with the NAND upcycle you're seeing, since a lot of that's upgrade driven, while that's still beneficial to you, it might not be as beneficial as Greenfield ads. So, how should we think about getting back to your former rates? Thank you.

Yeah, Mike, I would say that we look at the wafer fab equipment market as a totality. And as we've talked about in the past, MKS is addressing 85% of WFE. And then to your point, there are sub-segments of it, some driven by NAND, some driven by logic and DRAM. And while we have had that headwind of not being able to ship to many of our previous customers in China, and our non-U.S. competitors are, and so that's a headwind to market share just by math, we have taken the actions and controlling things we can, which is to double down on world-class optics and push the lithography metrology inspection, continuing to push share gains wherever we can. And I think then, of course, the natural growth of the wafer fab equipment market will also help us get back to that peak. But to your point, I think NAND won't ever get back to that peak, because that was quite a large peak, but other things can grow. And so, if you think about what people are talking about today get all around and backside power, a lot of that is step-edge centric, and that's still we're more levered versus lithography metrology inspection. I think a lot of the other things that are going on, like packaging or putting chips together or wafers together, that drives backing processes as well. And so you've seen some of our customers talk about that. And then I would pivot more importantly is that with advanced packaging, that's really another area for growth where MKS is uniquely positioned to enjoy both the packaging growth as well as the chip growth.

Thanks so much for the color.

Thank you. Our next question comes from the line of Matthew Prisco of Cantor Fitzgerald. Your line is now open.

Hey, guys. Thanks for taking the question. I wanted to start on maybe the photonic side of the business and just what type of traction are you seeing there today? Any changes over the last three months? And maybe how do you think about the ramp of the major wins here that you've previously announced? Anything around timing or impact of the model would be helpful.

Yeah. Good morning, Matt. And I think for photonics, you're talking about the semi side of it or in general the broader photonics business?

Talking about the semi side specifically.

Yeah. So I would say that the design wins that we talked about in the past, those remain highly engaged technical engagements with our customers. We're continuing to work on new things as well with those customers. We're not immune to the cycles for even lithography metrology inspection, but the lead times are much longer. So those cycles are a little more muted. And you can see that in 2024 that segment of WFE for us was $300 million, which is a much faster growth than the market. I would say this. Some of the things that we have designed in, we talked about in the past some complex integrated subsystems that only MKS can do because of our portfolio, those are going into production on some of the most advanced lithography metrology inspection tools. So we're seeing that what we're doing is incredibly critical to some of the most incredibly critical tools in a fab. So we're really pretty pleased with that momentum, Matt.

And then just a quick follow up. How should we think about your ability and willingness to continue paying down debt within the uncertain backdrop? Maybe if you can update us on a minimum cash balance and the current prepayment strategy. I know normally when you guys report, you've already got the repayment for the quarter in the book. I haven't seen that yet. So what are we thinking for kind of magnitude this quarter and moving forward?

Hi, Matt. In general, you can expect a similar pattern as we did last year with regard to our debt pay down. As we said in the prepared remarks, we will do a prepayment in Q2. Our capital allocation strategy has not changed. After we invest in CapEx and in the business, our priority remains repayment of debt. And we are very confident that we can operate. Our liquidity is very strong. And at these levels of cash, we are very confident given the systems and cash poolings we have put in place. We have a very flexible system to apply cash and there's no need to maintain the levels of cash we did in the past. So at these levels, it frees up a lot more cash for applying towards our debt. As we mentioned in the call, in the beginning of the quarter, we found an opportunity to buy back some stock. Because we have a lot of confidence in our business. It was a modest amount. It was accretive too and also helped offset the dilution in the year. But that does not reflect any shift in our capital allocation strategy. We are committed to paying down debt one more prepayment in Q2. And that focus will continue.

Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Melissa Weathers of Deutsche Bank. Your line is now open.

Hi there. Thank you for letting me ask a question. I guess for my first one on the specialty industrial business, I know there's a couple moving pieces. You guys called out automotive being a bit worse in this most recent quarter. Could you talk a little bit more about what you're seeing in that segment? What are the moving pieces? What kind of growth rate or what trend would we be expecting in 2025? Just because it is so chunky and there are some differing trends by different end markets.

Good morning, Melissa. Thanks for the question. Yes, we called out general industrial as well as automotive being muted and obviously down year over year and causing our specialty industrial markets to be down year over year. Quarter over quarter was actually a little better than we thought. But year over year, it's definitely down. I would say this, even as late as yesterday, a forecast for light vehicle production changed, went down. So automotive is really something that is quite muted. And then I think with the tariff environment that just added just a tremendous amount of more uncertainty to it. You've seen many automotive companies come out with huge numbers of profitability impact because of the tariffs. And obviously, you've seen a lot of folks buy before the tariffs and now they're not going to buy. So I think it's a very volatile and uncertain time for the automotive industry. And that's certainly going to affect our customers who are down the supply chain. So we don't believe there's any share loss. I think it's really just a market driven macro effect. Could it go worse? It could. I think that's the part of the tariffs that could make it worse. And of course, if we get relief from tariffs or some deal is made, then of course that would put the market back into maybe a more normal seasonality. So just a lot of uncertainty right now, Melissa. And I don't know if we could really tell you more than that.

Got it. Well, thank you for attempting to share your crystal ball with us because we all have the same questions. And then as my follow up on the, I want to go back to the chemistries side of the business, specifically within E&P. You walked us through the seasonality in a prior question, which is really helpful. Can you just help us, just remind us how we should think about the growth rate of that business beyond just seasonality? But is that a GDP plus type grower? Is there any content applications? I know AI is a nice driver and you've got the equipment sales that are getting pulled in. But how do we think about the growth rate of that chemistries piece in E&P beyond just seasonality?

Yeah, that's a great question. And I think when you look at the entire PCB industry and the chemistry that goes with it, we have said in our long-term model that it's GDP plus 300 basis points. Now, it's broken up into three segments, the PCB industry. The very difficult high-end packaged substrate segment, that's the PCB right underneath the chips. That is growing at high single digits and maybe even double digits now, low double digits. So that CAGR is an exciting area for growth. And then HDI, that middle layer of technology, is really driven more by things like smartphones. And that has been a little muted, but we kind of thought mid-single digit CAGR. And then MLB, the lower end, we thought was GDP. And I think what we're seeing is that AI is actually even adding some incremental growth to MLB and HDI, as well as the packaged substrate. But overall, I think we kind of still subscribe to the GDP plus 300 basis points that we talked about three years ago. But it's incrementally a little better. Just like AI has driven chips, the trillion-dollar target in 2030 for chip sales, AI has kind of added incremental positivity to that. I think it's also doing the same for the PCB industry.

Thank you.

Thank you.

All right, thank you. Our next question comes from the line of David Liu of Mizuho. I hope I've pronounced that right. Your line is now open.

Hi, thanks for letting me ask a question. I'm on for DJ here. Maybe another on second half, I know a lot of customers and suppliers are pulling their four-year outlook and not providing forecast, but I was wondering on the other side, where are you guys seeing customers maybe more strong and bullish maintaining that four-year outlook? And where is MKSI benefiting there? And also, how that drives the, specifically, maybe how the semiconductor business still growing above 200 basis points, above WFE? Thank you.

Hey, David, thanks for the question. I guess the way we would think about it is we're very engaged with all of our semi customers for sure, as well as E&P customers. And in general, I think the def-etch customers in semi are relatively more positive, I think, for the second half. There's puts and takes. There's some constraints because of restrictions. And then there's some backside power and get all around that are tailwinds. So, there's some puts and takes. But in general, I think most people are pretty positive on the year-over-year growth. And certainly, many analysts think that 2025 is a slight growth year relative to 2024. Now, of course, we don't know if that's going to work out or not, but that is what we're hearing from our customers. And, of course, that is what they're ordering. That's the order pattern we're seeing. With respect to packaging, we've talked about these equipment orders for three quarters in a row now tied to AI applications. And these equipment orders are for MLB and HDI, very thick MLB layers, many layers. And the reason I think we're getting a lot of those equipment orders is, in the equipment industry for chemistry, our equipment is on the high end. We do the most difficult types of equipment. And so, when you're doing the most difficult kinds of packaging, you need our equipment. And so, that's why I think we're seeing a little tailwind there. So, those customers are very bullish, obviously. They are investing very quickly. They're pulling as fast as they can so that they can put that capacity in so they can either grow their share or compete for a share to support the AI industry.

Thanks. And can you give us a review on ‘25 or ‘26 WFE globally? Thanks. That's it.

Yeah. As I've said many times in the past, if I could do that, I don't have to do this job. But I would say this, we always pivot back to longer term. The wafer fab equipment industry is a great neighborhood that's getting better. And that's because it's driven by continued need for more semiconductors, more complex semiconductors that require more steps and more equipment. You can see CapEx intensity trending over the decades in a direction where it's now maybe in that 15% range in terms of CapEx intensity. And so, at a trillion-dollar chip industry, that's $150 billion WFE, which is 50% more than today. And so, I think longer term trend, it's a great neighborhood. We're incredibly proud of the fact that we are the market leader in terms of addressing 85% of every piece of equipment out there.

Our next question comes from the line of Steve Barger of KeyBank Capital Markets. Your line is now open.

Hey, thanks for the follow up. $123 million in free cash flow is the best first quarter I can see in my model. And it looks like working cap was a smaller use than normal. Is that just timing? And do you expect a normal kind of low double digit or low teens free cash flow margin this year?

Well, I can comment on the Q1 cash flow, Steve. The improvements we have made to working capital through last year clearly has helped. We are able to operate at a much better level now. In addition to that, we also had a strong top line and good margin here. CapEx was a little light in Q1, but that's purely timing. That will come back up. But we do see, we are very happy with the strength of our cash flow and where we are positioned.

Do you see anything unusual for the remainder of the year that we should be thinking about? Or would this be kind of a normal year in the context of whatever the top line does?

That's correct. That's what I was going to say. It really goes back to the top line discussion, right? Outside that, we don't see anything abnormal this year other than CapEx ramp up in the coming quarters. I was going to also comment that we did guide a little bit of an incremental improvement in our tax rates too, which is helpful as well.

I know your primary focus is debt reduction, as it should be, but with your strong free cash flow and the recent downside volatility in the stock, why not be opportunistic when shares are trading at a sizable discount to however you calculate intrinsic value?

We did that.

It was offset dilution, but would you remain opportunistic going forward?

It's something which we look at. It's a fair question. It's something which we look at, and when it's accretive, we certainly take that into consideration. We still have a little under $30 million left from our existing authorization, so it's an evaluation that we do internally. Debt repayment is strengthening the balance sheet. It's our primary focus, but it's an analysis we do internally.

I would also add that debt reduction through paydown is one avenue. Certainly, we're always looking at portfolio and staying focused on our main markets. It's strategic planning season. It's the time where we refocus on that again. I think there are other ways to accelerate debt repayment, and we're looking at all those ways.

Good. I would just urge the board to really consider that as an option, given some of the volatility we've seen. Thanks.

Thank you. [Operator Instructions] I am showing no further questions at this time. I will go ahead, and I will turn it back to Paretosh Misra for closing remarks.

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