Gerald Colella - CEO & President Seth Bagshaw - VP & CFO.

Jairam Nathan - Sidoti Krish Sankar - Bank of America Merrill Lynch Chelsea Jurman - Goldman Sachs Dick Ryan - Dougherty Tom Diffely - D.A. Davidson.

Good day ladies and gentlemen and welcome to the MKS Instruments Third Quarter 2015 Earnings Conference Call. At this time, all participant lines are in a listen-only mode to reduce background noise, but later we will be conducting a question-and-answer session, instructions will follow at that time.

[Operator Instructions] I would now like to introduce your first speaker for today, Seth Bagshaw. You have the floor sir..

Thank you. Good morning, everyone, I'm Seth Bagshaw, Vice President and Chief Financial Officer and I'm joined this morning by Gerry Colella, our Chief Executive Officer and President. Thank you for joining our earnings conference call. Yesterday after market close, released our financial results for the third quarter of 2015.

You can access this release on our website www.mksinstruments.com. As a reminder, various remarks that we make about future expectations, plans and prospects for MKS comprise forward-looking statements. Actual results may differ materially from those indicated by these statements.

As a result, the various important factors including those discussed in yesterday's press release and in the company's most recent annual report on Form 10-K, and most recent quarterly report on Form 10-Q which were on file with the SEC.

These statements represent the company's expectations only as of today and should not be relied upon as representing the companies estimates or views as of any date subsequent till t today. And the company specifically disclaims any obligation to update these statements.

With respect to share repurchases discussed in today’s call the timing and quantity of such repurchases will depend upon a variety of factors including business conditions, stock market conditions and its development activities including not limited to a merger and acquisition opportunities.

And such reports that it should maybe commenced, suspended or discontinued at anytime without prior notice. In addition, today’s call also includes non-GAAP adjusted financial measures. Reconciliations to GAAP measures are contained in yesterday’s earnings release. Now I'll turn the call over to Gerry..

Thanks, Seth. Good morning, everyone and thank you for joining us on the call today. In addition to the overview of the third quarter results, my prepared remarks today will include a brief update on our strategic initiatives, a few highlights on the business as well as the outlook for the fourth quarter.

Following these, Seth will provide a detailed review of our financial results and then we’ll open the call for your questions. Sales for the third quarter for $209 above the midpoint of our guidance down 4% from last quarter and up 12% from the same quarter a year ago.

Non-GAAP and earnings were at $31.5 million, $0.59 per share compared to $0.62 per share in the second quarter. As expected, third quarter semiconductor revenues declined somewhat from a record second quarter and were down 7% to $143 million.

We are very pleased that year-to-date semiconductor revenues are up 11% from the same period a year ago which reflects our market share gains in these early stages of 3D NAND adoption. In our other advanced markets revenue increased again to $67 million up 4% quarter over quarter and up 9% from the same quarter last year.

Since taking this position, my team and I have consistently focussed on four strategic initiatives which are to continue to broaden our leadership position in vacuum processing and other advanced markets to aggressively pursue opportunities created by current technology inflections in the semiconductor industry to measurably improve our profitability throughout the cycle and to efficiently deploy capital to increase shareholder value.

We are tenacious and working towards these goals, I’d like to provide a brief update on our progress in meeting them. We continue to make investments in people, infrastructure and products to broaden our position in vacuum and other advanced markets and to address the semiconductor inflection points.

For example, we have expanded the sizes of the sales organization to focus on other markets, implemented targeted compensation plans to drive growth, and initiated investments in critical business development functions.

Additionally, we added resources to technical localization and further aligned our product development spending to align with customer and market requirements. These strategic investments continue to drive results and last quarter marked the eight consecutive quarter of growth in these markets.

We remained focus on managing the business for sustainable and profitable growth throughout industry cycles and continue to execute on our new financial model driven by long term structural changes to support our business.

Despite a slowing in orders late in the quarter, we again achieved the more aggressive model we introduced this year and we expect it beyond our model in Q4. We are also maintaining our strong focus on capital deployment and in the third quarter we paid a dividend and repurchased share with a combined value of $13.6 million.

What sets MKS apart from our semiconductor competitors and customers is the diversity of the markets we serve. We have a unique operating model, we are a market leader in the semiconductor market and we have a strong position in other growing markets.

For example, we continue to broaden our leadership position in vacuum processing targeting new customers and challenging new applications in industrial vacuum processes such as coding, deposition and material growth.

Over the past few quarters we have been working with one of the world’s leading aircraft engine and component manufacturers to help solve manufacturing challenges associated with -- producing parts from lightweight composite materials, which contribute to better fuel economy.

This customers experiencing downtime due to unwanted coding and clogging of the vacuum deposition equipment.

Although the process of depositing composite materials behaves differently than a typical semiconductor CBD process and creates 700 times more by-product, our experience in managing the discharge of vacuum processes enabled MKS to solve their problems. We are happy to report we have received initial orders from this customer.

This solution increases our footprint in industrial vacuum applications and open opportunities in advanced composite material manufacturing with this and other potential customers.

In another industrial vacuum deposition application, we received additional orders for our high power switch microwave generators from a customer doing time deposition material growth. Our generators enabled them to regulate the microwave energy to optimize their process, resulting in improved time and production and quality.

Our microwave product line is interesting and that it supports a diverse group of end markets which go well beyond semiconductor and vacuum applications and is a great illustration of how we are leveraging our core technology into other markets.

Microwave energy is used for heating, curing, drying, bonding, cooking, pasteurizing, sterilizing and more. Recently, we have had a number of successes with microwave in the food and beverage market.

For few examples, our microwave generators are used by the leading manufacturers to get the products to dry their pasta before packaging by a major candy manufacturer producing [ph] candies and was even interested from one of the world’s largest food processers to preheat meals, private cooking which is these final cooking and improves uniformity of the product.

MKSs microwave generators are also used in plastic bottle manufacturing where it improves efficiency compared to infrared heating. These are just a few of the recent new application from microwave generators but they help to show the broad range of opportunities open to us.

We continue to achieve additional success in our other targeted market which include environmental and safety monitoring, bio pharmaceutical and pharmaceutical manufacturing, solar, flat panel displays and more.

I have spoken in past calls of our gas analysis technology which is used in environmental applications to monitor emissions from auto motors and other engines.

This quarter, we were in a head to head competition for monitoring project for engine development and testing at a major European truck manufacturer and I am pleased to report that due to our superior performance we were selected.

We also received multiple follow on orders for additional emissions marketing applications with a number of other customers. In another environmental monitoring application, screening for airborne toxic chemicals and has this materials, we received a repeat order from the U.S. government; protect a vital classified government infrastructure.

I spoke last quarter about adding new customers in Taiwan and China for our ozone products in the display market which are used to clean -- displays between processing steps. This quarter, I am pleased to report that we won three additional customers in China with same application.

Moving to our semiconductor market, advanced lithography is at a standstill and the industry is relying on advanced etch and deposition to producing leading etch chips where there is strong alignment with MKS products.

We continue to target and win applications in 3D NAND, multi-patenting and other technically challenging opportunities which require additional etch and deposition stuffs in which demand is superior performance of our products.

This past quarter, a major chip manufacturer used their press release to announce the mass production of their third generation 3D NAND chip.

In their release they said in part, in our third generation the cell arrays [ph] are stacked vertically to form a 48 storey mass that is electrically connected through some 1.8 billion channel holes punching through the arrays, thanks to a special etching technology.

It is rare for device manufacturer to single out technology and I am proud to say that this special etching technology is powered by pulsing our generator from MKS and it cannot be done without them.

In this instance, we have parted with the OEM leading the charge in its most critical aspect of 3D NAND device construction, and in addition to driving incremental revenue in RF, pressure, valves and other MKS products. This opportunity has also provided us with a cycles of learning ahead of our competition.

Addressing these inflection points requires new tools not reused and we are optimistic about the long term viability of and opportunities for numerous MKS products. Electrical connectivity is all around us and applications are growing exponentially, whether in automobiles, appliances, communication or infrastructure and chip use is increasing.

This increased connection of products in the internet of things will propel future semiconductor growth. MKS continues to work with all OEMs and end users as they introduce new tools and optimize processes and we saw review orders in design wins else with this quarter.

We provide necessary and sought after technology just like the removable etch, flowable CBD, ALD and other deposition tools as well as cleaning and surface preparation with our control, power, plasma, ozone, pressure, flow and affluent management systems. We remain confident that the long term future for the semiconductor industry remains strong.

At this point I’d like to turn our outlook to the fourth quarter. Recent reports suggest that the semiconductor industry is facing a slower Q4 and we saw order rates slow late in the third quarter.

We believe the current level of order rates indicates an adjustment in inventory levels by our OEM and customers ahead of a downtick in quarterly CapEx spending levels. In our other advanced markets with the exception of solar which can be lumpy our near term visibility indicates fourth quarter demand or remain steady.

Based on these factors and looking at the current business levels, we anticipate that sales in the fourth quarter may range from $150 million to $170 million and that these volumes are non net GAAP net earnings for the range for $0.21 to $0.33 per share.

At this point, I’ll turn the call over to Seth, to discuss our financial results and expand on our guidance..

Thank you, Gerry. I'll first discuss our Q3 2015 financial results before providing further details on our Q4 2015 guidance. Revenue for the quarter was $209 million, or 4% lower than Q2 revenue of $218 million, and an increase of 12% from $187 million a year-ago.

Our Q3 revenue was toward the higher end of our guidance range due to better than anticipated sales in the semiconductor market and continued growth in our other advanced markets. Our non-GAAP gross margin was 45% as expected.

Non-GAAP operating expenses were $50.6 million which was slightly above our guidance range primarily due to foreign exchange losses. GAAP operating expenses were $52.9 million, including $1.7 million of amortization and intangible assets and $600,000 of restructuring costs.

These restructuring costs related to the initial phase of the consolidation of a select manufacturing site will allow us to further streamline worldwide manufacturing operations. This consolidation is expected to be completed by the beginning of Q1 next year. Our non-GAAP operating margin was 20.8% of sales.

Non-GAAP net earnings were $31.5 million or $0.59 per share compared to $33.1 million in the second quarter and $22.8 million in the third quarter of 2014. Our non-GAAP tax rate was 29% as expected. GAAP net income was $29.8 million or $0.56 per share.

Our financial performance this quarter was also fully in line with our updated financial operating model we outlined in our analyst day in June. Now, turning to the balance sheet, cash and investments increased by $20 million in the quarter to $633 million, or approximately $11.88 per share.

We maintain a strong focus on capital deployment and in the third quarter we paid a dividend of $0.17 per share totalling $9.1 million. Also, during the quarter, we repurchased 129,000 shares for $4.5 million or $35.21 per share. At the end of Q3, we had $154 million remaining on our share repurchase authorization which has no expiration day.

At the end of the third quarter approximately one half our cash investments were in the U.S. and the balance located throughout our international operations. Total book value net of goodwill and intangibles was $901 million or $16.93 per share.

In terms of working capital, day sales outstanding were 50 days at the end of the third quarter compared to 52 days at the end of the second quarter, and inventory returns were 2.7 compared to 2.9 in the second quarter.

Capital additions for the quarter were $3.5 million, depreciation and amortization expenses were $5.5 million, and non-cash stock compensation was $3.2 million. Now we'll go through a more detail regarding the composition of revenue for the third quarter.

Sales to the semiconductor market of $143 million; a decrease of 7% compared to the record revenue of $154 million in Q2 and comprised 68% of third quarter revenues. Sales to semiconductor OEMs decreased 7% sequentially and were $117 million or 56% of total revenue.

In sales to semiconductor fabs with $26 million, a decrease of 11% compared to the second quarter and comprised 12% of total sales. Sales to semiconductor fabs tend to be more project-based and accordingly may vary from quarter-to-quarter.

Sales to other advanced markets were $67 million, up 4% sequentially from the second quarter of 2015 and up 9% from the third quarter of 2014. This increase was the eighth consecutive quarterly increase in revenue in our other advance markets, reflecting the impact of our strong focus and investments in driving growth in these markets.

Sales to our other advance markets comprise 32% of total revenue in the quarter and can also vary from quarter-to-quarter, primarily within the solar and other thin film related markets, based upon the timing of customer projects. Geographically, sales in the U.S. were 59% of total sales.

Sales in Asia were 32%, and sales in Europe were 9% of total sales. Sales to our top ten customers comprised 51% of total sales. Sales to applied materials and land research comprised 18% and 16% of third quarter sales respectively. Our worldwide headcount at the end of the third quarter was 2,303, down from 2,343 at the end of the second quarter.

Now I'll turn to Q4, 2015 guidance. Based upon current business levels, we estimate that our sales in the fourth quarter could range $150 million to $170 million. Based upon this expected sales range and product mix, gross margin could range from 42.5% to 43.5%. Q4 non-GAAP operating expenses could range from $48.5 million to $49.5 million.

In the fourth quarter R&D expenses could range from $17 million to $17.4 million and SG&A expenses could range from $31.5 million to $32.1 million. Operating expenses at the midpoint of our guidance are expected to drop $1.6 million lower than Q3 reflecting additional controls of discretionary spending and projected lower foreign exchange.

However, we continuing to fund those initiatives within product development, sales and marketing and information technology functions to support a long-term growth strategy.

In the fourth quarter amortization of intangible assets expected to be approximately $1.7 million, restructuring cost expected to be approximately $500,000 and net interest income is estimated to be approximately $700,000.

We expect our fourth quarter income tax rate to be approximately 29%, reflecting the anticipated geographical mix of taxable income.

Given these assumptions, fourth quarter non-GAAP net earnings could range from $11.4 million to $17.9 million or $0.21 to $0.33 per share and GAAP net income could range from $9.8 million to $16.3 million or $0.18 to $0.30 per share on approximately 53.5 million shares outstanding.

As we mentioned in past earnings calls, we always seek to improve our long-term cost structure, while on sharing we fund addition initiatives that support our sustainable and profitable growth opportunities.

All of the hard work that the management team, our employees and Value Partners has completed has significant positive impact on our financial performance. Since the end of 2013, we've updated our financial model fourth times to reflect a cumulative impact to these ongoing efforts addition to our acquisition of Granville-Phillips.

For example, at the midpoint of our fourth quarter guidance, our non-GAAP earnings per share expect to be approximately to be over 50% higher on comparable sales volume to what have achieved with the 2013 operating model. This concludes our prepared remarks. We'll now open the call for questions. Operator, we're ready for questions..

[Operator Instructions] Our first question comes from the line of Jairam Nathan from Sidoti. Your line is open..

Hi. Thanks for taking my question here. So, you quantify customers yesterday seem to indicate that 2016 will be flat to down on a WFE basis. But the inventory connection seems to be a little more than that would suggest.

So, do you expect a quick snapback early 2016 or how should we think about 2016, I know it's early, but if you could give us some indication?.

Sure. I think that this is not untypical things that we see in our industry. I think I remember the last time that we went through little bit of this, I think maybe in the second earnings call, I said we were in a canoe, and I think we’re in a canoe again.

The think I like about where we are in this canoe, and the path we're heading in is the waters are smoother in the future with the transition of 3D NAND FinFET multi-pathing and the transition from 2D to 3D NAND will be great and long and lasting.

So, I get the same input from the most part that every else does and from the CapEx spending where customers are. But our customers are telling now privately to be enthusiastic to be prepared for a rebound in the business and as we always are, we can snap that very quickly.

We're a turn business and so we have to be repaired for the break in the gaps that we've always said, but my guess is that even if its flattish it would mean that it turns back in 2016 and the mix will go right in that direction to 3D NAND and FinFET, so I'm very positive and enthusiastic about what happens.

If these adjusted probation I lift to 32.5 years at this point. .

Thanks.

And just one more on the consolidation industry that's been happening over the last two days, and also Intel's announcement about investing for 3D NAND, what impact do you expect these to have in your business?.

Well, we – first of all, LAM is very well run company and very well respected by MKS and we have a very great relationship with them, right, are collegial and collaborative. And we are doing some work on backend right now through Silicon via. If there is any potential opportunity that we can support further the merger companies we'd be happy to.

So we think that it’s a great opportunity to them and for MKS as any time our large customers get together they are looking for those supplies are, scope and magnitude. It takes a lot of R&D dollars and a worldwide infrastructure to support companies of this size.

And they turned to MKS because of our reliability, our track record and the stability we offer to the industry. And unlike our competitors we have a place to go when the market turns down slightly.

And so, we're very – and our customers admire the fact that we have this other business that supports our invoice [ph] MKS, so we can continue to invest in places that benefit semiconductor. So, I'm excited about their opportunity and we're ready to support them anyway..

Okay. Thank you. That's all I had..

Thank you. Our next question comes from the line of Krish Sankar from Bank of America Merrill Lynch. Your line is open..

Hi. Thanks for taking my questions. Two quick ones. If I look at your guidance for Q4 it indicates your semi revenue might be down almost 30% sequentially.

Am I in the ballpark?.

Yes. It sounds right. But I think if you assume, the markets are relatively consistent, its about 30%, 35% at midpoint. That sounds right..

Got you. And then, I mean if you back like last time your semi revenues did slowed, somewhere around 2012, it lay low for a couple of quarters before snapping back.

I mean, is that the fair enough assumption this time or do you think it will come back much faster given the fall off this quarter?.

Yes. You are right. You hit that absolutely right question in terms of your analysis. We look at the same thing. And it's really hard for us to say right now, but my guess is, it maybe it's a couple of quarter event at the most. I could say, privately our customers are telling us to be preparing for 2016 and a snapback in the business.

So, for a quarter or two, I wouldn't be surprised by it, but based on our ability to react quickly we're ready for one way or the other. But I'm not concerned about it. It is a canoe..

Got it.

And then, jus a final one, how much of GP in the September quarter?.

Hold on, Krish. I would say roughly $7 million in a quarter..

It's relevant..

Yes. It's about right, $7 million..

Got it. Thank you, guys..

Yes. You're welcome..

You're welcome..

Thank you. Our next question comes from the line of James Covello from Goldman Sachs. Your line is open..

Hi. This is Chelsea Jurman on behalf of Jim. Thanks for letting me ask the question.

In terms of the 4Q revenue guidance, can you talk about any areas or specific types of products within semi where you're seeing weaker demands and inventory correction?.

No. I don't necessarily that there's any specific area that we're seeing a deeper reduction. It's generally consistent..

Yes. I think as you know to is, we shift to everybody in the industry and every type of application, so we're pretty well leverage in foundry and memory, ultimately its very high for us see in our at the customer level to where those our products end up into what end markets, so its kind of hard to tell that.

So it's to us a general slowdown across the broad..

And we have more then two customers that people focus on. And we have tremendous penetration in Korea based on our localization strategy several years ago. And there's lots of OEMs that supply directly to the Korean end users that are also part of our business.

That's a good news, which is great, which means there's more place for us to sell the products, but its spread out where the decline comes from..

Got it. Thanks.

And then as a follow-up you mentioned that future growth could be smoother because of 3D NAND and FinFET spending ramping, and so, can you talk more about when you're expecting spending to pick up or if you expect that's being more of 2016 [ph] dynamic?.

Well, you probably know better than I do, because you guys are really astute at reading CapEx and I read pretty much the same thing that you guys do.

But recent articles I've read about the transition from 2D to 3D NAND being consistent and strong over the next five years or so would tell be that it’s a long term play which is great, but in terms of the timing I really wish I could tell you that. I'm not trying to be evasive, but I just think it's sooner than later I guess the best way.

Someone asked me ones, you know, it's a baseball game. What inning that you want in 3D NAND? And I've said, we haven't finish the top of the first yet, so I think it’s a long-term trend but I really can't tell you exactly when we'll snap that, but we're ready for it. And we're excited about it.

We continue invest and making some great strives with all of our OEM customers as well as end use in this area. It’s a great opportunity for MKS..

Great. Thank you..

You're welcome..

I do want to add one other comment. On Granville Phillips for the quarter, revenue was about $9 million for the third quarter, not $7 million. So, I have to clarify that..

Thank you. Your next question comes from the line of Dick Ryan from Dougherty. Your line is open..

Great. Thank you.

Gerry, with this quarter too slow down, are you doing anything with head count or you keeping it relatively stable?.

Hi, Dick, thanks for the question. Well, as we've always done we have this play book that we take out during the times like this. And we certainly don't want to over react because we believe the long term is solid for MKS.

But we'll make normal adjustments like zeroing over time and looking at areas where maybe we have temporary head count and things go in that line.

So you would probably see us do the typical things that we will do, maybe there'll be consideration for shutdowns as our customers have said, but yes, you would see us adjusting our cost to make sure that we stay on our model..

But probably nothing in the draconian sort of perspective?.

No. I don't think it’s a slash and burn place to be, Dick, I think a slow steady hand recognizing long-term is solid for the company, is the right thing to do. If I saw multiple quarters, quarter-over-quarter and couldn't foresee growth or opportunity, I certainly will take more dramatic action as we have done and I have done in the past.

But I don't think we're at in position where we need to do that. But we will be making some additional adjustments in our cost structure..

We did also say in the prepared remarks two decades. We're still funding some number of longer term initiatives both in R&D, development of products, IT I mentioned, SG&A functions, really marketing and sales functions and those are still fully funded through Q4 and there's no plan changing that if you will.

So we think this is a great opportunity continue to fund those opportunities that really support our long-term growth strategy. But as Gerry mentioned discretionary spending will tighter there, which are breaking some area, this how I kind of characterize it..

We're really proud of use towards financial triage that we did in the first year of this team being together. And seeing the fact that we're 50% more profitable and a comparable sales volume gives me great comfort that we've made the right moves.

And then, we've continue the profit and cash recovery team which we put together two years ago continues to meet and we have continued strategic initiatives throughout 2015 and 2016 some of which set next to about manufacturing consolidation.

So, there'll be other things we're doing that our unrelated to the level of business we see to continue improve our financial picture of going forward. And I hopefully there will be a time where we can update them all, I think we update amount of three or four times over the course of last year..

Four time..

Four times than last year. So I think you can trust that we'll take the same prudent approach of the business on the short term but also long-term looking at cost there on the business, Dick. Thank you for the questions..

Question, Gerry on your commentary on the advance market with the aircraft engine manufacturer, is that still in like a design phase or they commercializing that, is there any way to kind of give a perspective of how big that could be and maybe what markets that you're serving or potentially serve, is that a commercial or business jet or military sort of application?.

Well, it is really relatively in the beginning stages, Dick, we just receive the first set of orders. And I've looked at what the potential could be in the business. Obviously business unit want to really get us excited about of this business opportunity. It looks substantial and right now I'm not really sure of its commercial or where it is.

It appears to be a general application across a variety of ancient [ph] types, so, yes, it could be pretty interesting business for us over the next number for years. But it is really still in the beginning stages of the work. But we've won the design. We've proven the technology out and we're assigned to see the orders.

And the potential is, it could be pretty significant, but it's still pretty early on..

Okay. One last one from me.

Seth, did you talk about the FX impact in Q3 and what your assumptions are in Q4 guidance?.

Yes.

We have a little negative exposure in Q3, I think it was about 300k hit on the OpEx [Indiscernible] behind of the guidance for the quarter and then we do in terms of giving guidance for the follow-on quarter, so the fourth quarter and this example and we sort of look at the current FX rate at the time we let's say last week before we get to the earnings release, we still assume there's no change in those going forward, so making really no assumptions on changes in the fourth quarter.

We just take our current rate and sort of roll that through the P&L. And then, we do natural forward hedges like every other company does and we've had a number of bold frac of things, look at that and its standard process and works quite well for us.

Its really meant to sort of smooth out the impact of foreign exchange, but generally right now we're assuming the rates are relatively flat – we'll stay the same through the fourth quarter. That's how we run the P&L..

Great. Thank you..

Okay. Thank you, Dick..

Thank you. Our next question comes from the line of Tom Diffely from D.A. Davidson. Your line is open..

Yes. Good morning.

First, Gerry, I was wondering in an environment in 2016 where the industry would be flat to slightly down, would you expect to grow in that environment due to your exposure to some of the higher growth end markets?.

I would expect that would be the case, Tom, yes, if they – but what we're seeing, that was like Intel just announced migrating for 3D NAND as one messaging. But yes, I would expect that given the amount of concentration we should see a level of growth in the flat market..

Okay, great. And then, you talk a little bit about having little bit more exposure, are you ramping your sales in some of this non-semi business.

I'm curious is your main focus there in the closely related electronic markets like flat panel and display or is most that forward looking exposure looking towards industrial, medical and really in non-electronics?.

Yes. I know that's good question. It's really looking at deeper into like areas like say, analytical instruments as an example is a good opportunity for us.

We have customers in that market that we sell to, we think there's deeper penetration, there's an opportunity for, and there are other customers that compete with them that we should be calling on and get a deeper understanding of. But it would be more in the industrial markets like coding for where most through an energy efficiency.

The food and beverage market is pretty interesting, we're proud that we're drawing faster in making candy, so we think there's more opportunity there.

And then, again, this oil and gas monitoring we talked about environmental monitoring, things like heat treating, so yes, we think there's a whole coding application, so, yeah, we think that's where a lot of the opportunity comes. Solar is kind of lumpy and the display market little bit comes and goes as well.

But we're pursuing these other ones with great events, so that's why we've added some sales and application people in those markets to look to them..

Okay.

And we take a step back and you look at the other category, what is the outlook over the next year from that big picture point of view?.

The other category being semi..

Non-semi, sorry..

Well, I think we would see – project the same level of steady growth that we've seen. I think we're being far more strategic about it than maybe in past years in terms of -- that's where we put resources in business development, in applications, people in the field.

So, I think we have an internal growth rate, which is significant, but we think the same compounded growth rate 8% or greater would be something we would focus on, but we're actually pushing for more internally..

Okay.

And then, Seth, just final question here on the FX, what is the region that you have the greatest FX exposure right now?.

I would say, Korea and then maybe Japan would be second..

Okay..

Yes..

Thank you..

Okay..

Thank you. Our next question comes from the line of Patrick Ho from Stifel Nicolaus. Your line is open..

Thank you very much.

Maybe a two-part question for you Gerry and Seth regarding the flexibility in your model, maybe for you Gerry, first, in terms of what kind of steps do you take that allow you this flexibility and the ability kind of as you said snapback both on the demand trends and Seth you in terms of the financial model, lot of the restructuring you've done over the past couple of years, how do you I guess adjust quarterly both on the COGS as well as on the OpEx lines?.

Okay. That's great, Patrick. I think one of the things that we have focused on for a long time at probably since the day I walked in was supply chain management, in material management. So, we have a very lean materials acquisition system, lot of things brought in via [Indiscernible] and plenty of storage.

And with our suppliers we have contracts where they have to have at least three months minimum on the shelf on an ongoing basis. And the upside to that is its storage capacity for us. And so thus if we double than in single month, materials does not – we have isolated materials issues now and then, but materials acquisition does not become a problem.

And we do multiyear contracting with our suppliers and we honor our commitments to them. So I think our ability to turn the inventory in materials quickly is one advantage.

Secondly, we run a 24x7 operation and by running 24x7 operation need several things, one, financially it allows you to utilize the assets effectively, that's why we have relatively benign when it comes to capital because we use it 24x7. Now that's a first thing. And secondly, it keeps your lead time short and the cycle time short.

We do use over time as a percentage of our capacity in the company, so we could zeroed out if we needed to or snap it back on immediately if we needed to, and we have a great relationship with our temporary agency that provides high skilled operated for us.

And if you look at what we've done over the last number of years, our operation team has done a great job implementing manufacturing documentation process such that it's very simple to plug and play people in these operations that they come in when they're relatively new, so they come up to speed very quickly.

And then, the critical pinch points in our operation and there are several that if we would not could about managing that labor and the equipment we always keep that on the heavy side, such that we know it’s a little bit of longer training time, its little more setup in the equipment, so we would keep that work force maybe heavier during the time where it slows a bit.

But we've been down this model for a long time. The supply chain starting 30 years ago, but then our [Indiscernible] lean investments from the 90s are continuing to pay dividends today.

So I never worry about snapback, in that effect some of the awards we won in a last couple of years is because people are shocked and are biding to respond to their demand in a single month. So I'm very confident about that. We just want the orders and we'll turn them around..

In fact your question was how do we distinguish between COGS and kind of OpEx in this whole process?.

Yes especially in terms of you know managing I guess the various flow in the cycle, you know I think Gerry’s has proved really good kind of like I guess the outlook on it. I was just wondering on the financial side of things how do you manage the numbers -- quarterly particularly as it relates to your target model..

Sure, sure. Okay so process wise as Gerry mentioned we have a process [ph] and cash recovery team, it’s all the functional executives in that meeting that it cascades down to a number of levels beneath that group.

And -- we look at everything, so it’s going to be COGS consolidation of sites, it could be headcount requirements you know funding additional initiatives. Tax rates have come down quite a bit the last several years and we are working on a number of activities there. So it’s a pretty long list, you know thinking that I can kind of explain in this call.

And so what we do is, we manage that very closely and we know exactly our existing cost structure will continue its rolling are called multi quarter look on the world and we layer in these additional opportunities as well as things such as wage inflation -- cost inflation, it’s kind of dynamic model if you will.

And you know, we likely kill a few trees every quarter but we do a very good close -- very tight view on that and very close net net involves all the executive team.

And what we do is we really and when the mall is in place, the structure is in place gets relatively easy for example, for us in the fourth quarter to roll out what the actual forecast was and the guidance.

And then we look at the model and you can do everything right on the front end on a regular basis it should all roll together quite seamlessly and it’s exactly what happened in Q3 and Q4. And you know we split the uprights on our models on both those quarters.

So if you do all the detailed work and make sure that everybody’s engaged and do all the right level of engagement and modeling.

The actual has become just a confirmation of the work you have done and that’s how it’s been done for frankly 18 months now or 24 months and it’s a very big team effort, a lot of people were involved in it and you know it’s a lot of elbow grease but I think we got a pretty good process going forward.

And as Gerry mentioned, we think we are never right down with the model.

We think there is always ways to streamline functions we’re doing work and the manufacturing site by this quarter and through the end of the year that will make us a little more flexible, little more able to meet customer requirements and manufacturing as well as being more cost sensitive.

So it’s a pretty robust involved process and everybody who is engaged with the company is both feed in and really helping work it which has been great..

And to amplify it, add a couple of additional things. One of the things that we look at everyday, myself and my direct reports is bookings and shipments every single day. That’s the first thing I look on at everyday when I come into the business. And we make sure that we don’t panic but it allows us to keep a pulse on the business.

We don’t wait till the end of the quarter to look back and see what happened to make adjustments going forward. This is a daily event for the last 32.5 years at least for me. And we have business reviews every single month, so don’t wait till the end of the quarter to have a business review.

So we are looking at a complete business top to bottom every month on a monthly basis. So beside the profiting cash work which is long term structural changes there is also containment in three hours if necessary during the quarter because one, you also want to be able adjust things up quickly.

Never mind you watch things that need to be adjusted down, so it’s a pretty good playbook that the company has been most proud of I think. You know we’re -- we are held in high regard for our operational capability, its because everybody is a business person and understands and run the business in addition of being a technologist..

Great. Thank you very much..

You’re welcome Patrick [ph]. Take care..

Thank you. Our next question comes from the line of Shawn Evan [ph] from RBC Capital Markets. Your line is up..

Hi, thank you for taking my question. And I only have one question regarding 3D NAND. One of your largest customers said yesterday that they expect NAND to be up maybe probably in the next year. And I think he also mentioned that they told you properly to be prepared for this.

I wonder is this just comments from this specific customer or you know the same conversation happened between you and the others and your OEM customers.

I understand it’s difficult to predict the timing of the snapback, but I just wonder if you can share with us your dialogue with the customers so that we can kind of estimate the time and the magnitude of the rebound..

Yes sure. No I think it’s a general -- I mean that customers always want us to be prepared and ready. That’s a general statement they have. They never want you to go and retract your resources such you can’t respond.

But, I think we’ve had a general feedback from the industry as well as things I read that I’m encouraged by that says, look we -- they think 3D NAND is the what’s going to drive growth for the industry going forward.

So, we take that, we see the design wins we have, we see what tools are on, we know where they apply so we feel very comfortable that it’s a good place for us going forward..

Great. Thank you..

You’re welcome. Thank you for the question..

Thank you. That is all the questions that we have in the queue at this time. So I’d like to turn the call back over to management for closing remarks..

Thank you. Currently we are seeing a softening of our semiconductor business, but we’ve been through this before and we will manage as we always have with prudence. We are confident that the long term secular trends which drive the industry are intact.

And we are actively leveraging our technologies into other advanced and growing markets to open additional opportunity. We work closely with our customers to solve their problems and we continue to invest in developing new products to them.

We are fully funding our strategic initiatives and we will continue to drive improvements and make necessary adjustments as we manage our business.

These swings and our semiconductor business are not new to us and we anticipate that our financial model will remain intact for the fourth quarter beyond and we are working towards further improvement in the future. I look forward to updating you again after year end. Thank you for joining us on the call today..

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program and you may all disconnect the telephone lines at this time. Everyone have a great day..