MKS Instruments at Deutsche Bank’s Conference: Strategic Growth and Deleveraging

On Wednesday, 27 August 2025, MKS Instruments (NASDAQ:MKSI) presented at Deutsche Bank’s 2025 Technology Conference, highlighting its strong Q2 performance driven by semiconductor and electronics sectors. The company emphasized its strategic focus on deleveraging and expanding its market presence, while acknowledging challenges such as tariff impacts.

Key Takeaways

• MKS outperformed the WFE market by 200 basis points annually, thanks to its broad portfolio strategy.
• The company prepaid $200 million in debt, aiming to reach a net leverage ratio of 2 to 2.5 times.
• Strong demand in the electronics and packaging sector, particularly driven by AI applications.
• Gross margin stood at 46.6%, with potential to reach 50% as top-line volume increases.
• MKS plans to resume M&A activity focused on optics, lasers, and chemistry once leverage targets are met.

Financial Results

• Q2 revenue reached $477 million, with strong performance in semiconductor and electronics sectors.
• Gross margin was 46.6%, affected by tariffs but would have been nearly 48% without them.
• Cash flow represented 14% of revenue, and operating expenses were at the low end of guidance.
• The company achieved 18% year-over-year growth in the first half of the year.
• A $200 million debt prepayment was made in the last two months.

Operational Updates

• Inventory levels were reduced as part of operational efficiency improvements.
• The company continues to see demand for NAND upgrades, although it may be inconsistent.
• MKS’s lithography, metrology, and inspection business doubled in five years, from $150 million to $300 million.
• AI is a significant driver in the electronics and packaging market, impacting all PCB technology levels.
• MKS holds nearly 100% market share in chemistry on its equipment.

Future Outlook

• Ongoing NAND upgrades, although they may fluctuate.
• Gate-all-around technology expected to boost performance due to depth etch requirements.
• Long-term goals include developing advanced boards that eliminate the need for a substrate.
• MKS aims to leverage R&D spending in semiconductor and electronics sectors for stable growth.
• The company prioritizes debt reduction, with plans to incorporate M&A once leverage targets are achieved.

Q&A Highlights

• NAND demand is driven by AI data centers and high bandwidth flash.
• The company uses consigned inventory at customers to buffer order patterns.
• AI drives growth in the electronics and packaging sector, affecting all PCB segments.
• The AdaTech acquisition is strategically beneficial, with cost synergies achieved.
• MKS employs strategies like supply chain activities and multi-site manufacturing to mitigate tariff impacts.
• The company aims to increase its gross margin to 50% as top-line volume grows.
• Capital allocation focuses on debt reduction, with a goal of reaching a leverage ratio of 2 to 2.5 times.

In conclusion, MKS Instruments remains focused on strategic growth and financial agility. For a deeper dive, refer to the full transcript below.

Full transcript - Deutsche Bank’s 2025 Technology Conference:

Unidentified speaker: Test. Test.

Ram Mayamparat, CFO, MKS: Test.

Unidentified speaker: You wanna try your microphone? Run. Say

Ram Mayamparat, CFO, MKS: test. Test.

Melissa Weathers, Lead Analyst covering semi cap equipment and memory, Deutsche Bank: Testing. Okay. Do you guys have a safe harbor statement you want to read or disclosures or anything? Okay. Perfect.

Unidentified speaker: Lam does it all the time. I’m like, everybody knows.

Melissa Weathers, Lead Analyst covering semi cap equipment and memory, Deutsche Bank: Right.

Unidentified speaker: Well,

Melissa Weathers, Lead Analyst covering semi cap equipment and memory, Deutsche Bank: we’ll go ahead and get started with the next session. Thanks, everybody, for joining us at the DB Tech Conference here in Dana Point. I’m Melissa Weathers. I am the lead analyst covering semi cap equipment and memory here at Deutsche Bank. And for our next session this morning, we are pleased to be joined by John Lee, President and CEO and Ram Mayamparat, CFO of MKS.

And I had to remind myself to call it MKS and not MKS Instruments this time. Before we get started, if anyone has any questions from the audience, feel free to raise your hand, and we can get a mic over to you. So I guess to kick us off, gonna keep it a bit more near term focus just to kick us off. You reported earnings a couple weeks ago, a pretty strong quarter in my view, which is very impressive given some of the other trends that we’re seeing in WFE and in the semi cap equipment space right now. So could you just recap us on what are the main takeaways from the quarter

And what are the main takeaways you want investors to have walked away with after that print?

Unidentified speaker: Ram, why you take that? Sure.

Ram Mayamparat, CFO, MKS: So it’s interesting to see what top line can bring to the overall P and L and cash flow, right? So we had $473,000,000 I’m sorry, 7,000,000 to 3,000,000 is top line, and it’s been a while since we saw that kind of a top line. It’s been eight quarters actually. Semiconductor did very well. Electronics and packaging, which is a very profitable part of our business, did very well.

And that speaks for the breadth of the portfolio and the reason why we did that acquisition to take us away from the cycles of semiconductor. The flow through in gross margin was very strong, 46.6% with 115 basis points impact of the tariffs. This is the first quarter we saw the tariff impact. Without that, we would have been close to 48% gross margin. Cash flow was 14% of revenue and OpEx scalability we saw.

OpEx was in the low end of what we guided. So the takeaways are the steady improvements we have made over the last several quarters to the cost structure. And what that has we’ve been running 47% plus gross margin for seven, eight quarters now. Last quarter is the one where we dropped, again, mostly because of the tariffs. And what the current cost structure will help do when that top line comes back to more normal levels.

And the flow through that we saw is,

Unidentified speaker: I would say, the key takeaway. I would add the other takeaway, obviously, is our progress on deleveraging. And so last two months, we prepaid another $200,000,000 The free cash flow is allowing us to And this is, as Bob said, in a very relatively muted market for us. So those of you who have followed MKS know how much it flows through on the top line growth.

So we’re pretty happy with where we are today in controlling the costs and making our progress towards deleveraging and then setting ourselves up for lots of engagements with customers for design wins as well.

Melissa Weathers, Lead Analyst covering semi cap equipment and memory, Deutsche Bank: Great. Maybe let’s dig into that top line performance. The WFE environment has been relatively mixed. I think we’ve seen some mixed prints from some of your customers in the last couple of weeks. Can you just remind us where are we in terms of inventories at your semi cap customers?

And then how do we think about MKS’ performance relative to the broader WFE market, especially in a world where maybe we don’t have as much of an inventory overhang as we have?

Unidentified speaker: Yes. So inventory is burned off. So that’s good. You saw our first half performance versus our first half last year was 18% higher year over year, first half to first half. That’s comparing ourselves to ourselves.

So there was still some inventory burn occurring last year. NAND upgrades happened, whereas last year it didn’t, and that was a part of it as well. So growing 18% year over year is excellent compared to WFE, which is kind of 5%, give or take. You’re right, going out, it’s hard to predict. Some of our customers are saying good and some are saying not so good.

But we always look at long term because quarter to quarter, even half to half, it can vary for sure. But when I look at macro trends or semiconductor equipment, it is more tailwinds for us now. And a couple of them are NAND upgrades continuing to happen. They can be lumpy, but they are going to continue to happen and we have really strong market share there. So remember, when you’re upgrading, you have to upgrade from something that’s already there and we’re it’s kind of been well known that we’re the only ones there, right?

I think also our broad portfolio strategy is to allow us to take advantage of whatever inflections are occurring and how that impacts particular sub segments of critical subsystems. That strategy has allowed us to outgrow WFE by 200 basis points a year for ten years. And if you think about what’s going to happen in the next five years at least, chips are becoming more vertical. Last five years is about litho. EUV came in and we were able to print better.

The five years before that, it was double patterning because litho wasn’t ready, right? So these things always happen. In the next five years, it’s going to be probably more etch depth centric. Now we want to be a foundational supplier to litho and metrology inspection as well as depth etch, and we’ve made some progress there, but we are still stronger in-depth etch. And so I think that’s going to be a relative tailwind for us going forward in the next five years because of an inflection in chip structure.

Melissa Weathers, Lead Analyst covering semi cap equipment and memory, Deutsche Bank: I want to dig into more of that because I don’t think you get quite as much attention on the leading edge nodes that everyone pays attention to NAND and the memory piece. But gate all around, I think, is a, like you said, it’s much more depth and edge intensive, and you guys have decent share there. So, any more color technologically on some of the ways that you’re able to enable some of those critical depth and edge technologies?

Unidentified speaker: Yes. So gate all around is another example of chips going vertical, right? Before, it was just plain or lay down a layer, print it, lay down another layer. Now you’re making gate all around means a tube, and you’re going to surround that tube. And you’re going make a tube, then you’re to get rid of stuff around it, then you go and then put the materials you want around it.

That’s crazy. Right? A lot of that requires atomic layer deposition processes, putting things down one atom at a time in all directions simultaneously. And a lot of the subsystems that we make enable that. So we’ve been in ALD a long time with ozone systems.

And now it’s just a lot more ALD type applications. You can see some of the customers who are have traditionally been strong in ALD have really grown, ASMI, for instance, well as Lam and Applied. And those critical subsystems, we’re seeing that pull as well. And the other thing that maybe gets lost is a lot of cleaning, cleaning of surfaces after you remove some material. Now you’re not cleaning just a surface, a flat surface, you’re cleaning it again three dimensionally.

And that again requires dissolved gas kind of cleaning. And that’s what we talked about in our earnings call, a big pull in dissolved gas for two nanometer applications. And that’s where it’s getting harder. We have had competitors in the past, but over time as things have gotten harder, we’ve been able to invest in making the next generation dissolved gas systems. And I would say now our market share has continued to increase there.

Ram Mayamparat, CFO, MKS: Small sub segment of our business, but when you

Unidentified speaker: add a lot of these things up, that’s how we are able to outgrow WFE by 200 basis points a year.

Melissa Weathers, Lead Analyst covering semi cap equipment and memory, Deutsche Bank: You talked about lithography. I want to touch on your world class optics business and specifically the semiconductor side. I think you had talked about a big design win or some increased momentum at lithography and maybe some metrology and inspection. And then so can you talk about the progress you’re making there and what the market outlook you’re seeing is?

Unidentified speaker: Yes. So it’s something that we started five years ago. We said litho metrology inspection, a great market. We have some capability that limits us in terms of what other things we could do for these companies. They told us that.

They said, you invest in other capabilities, we’ll give you more to do. And so we did, more CapEx, more process engineers. So we’re developing new processes to make advanced optics, and then we’re putting together an optical subsystems. And so five years ago, we’re about $150,000,000 that subsegment, litho, metrology, inspection, now $300,000,000 And by the way, the first three years is just about investing design wins until you see that volume. And in that space, it’s much stickier, okay?

Those critical subsystems stay for a very long time, decades, even longer than vacuum based equipment. It’s a little less lumpy as well. And so we can see ourselves continuing to do this. I think it’s still mid innings, if you will, in terms of our ability to continue gaining share through investments.

Melissa Weathers, Lead Analyst covering semi cap equipment and memory, Deutsche Bank: Maybe let’s go back to the NAND topic. I think when you first spoke, you said that the NAND upgrades happened past tense, but then you said that NAND upgrades are happening. Can you help us understand, at least from your perspective, what kind of buying trends are you seeing? What kind of upgrade trends are you seeing? What are the key drivers of that NAND upgrade cycle?

Unidentified speaker: Yes. So if you step way back up to the highest level, what’s the fundamental need for NAND memory, right, non volatile memory? And if you go back in the 2010s, the reason NAND really rocketed up was because it was replacing hard disks for smartphones and for PCs. That’s kind of done now. So the question is what’s the next big application for NAND?

And you’re starting to see some of it in AI data centers, right? It’s not as much as DRAM, HPM, but people are starting to talk about high bandwidth flash. Pretty exciting, kind of taking NAND chips and stacking on top of each other. So fundamentally, it’s going to be the market driver that requires us to as an industry to put CapEx into NAND manufacturing. If I look at today, it’s still most efficient for our customers’ customers to upgrade.

But at some point, they’re going to need capacity. And even today, some customers are saying, I just don’t have a fab to upgrade, so I got to build greenfield. But there are not a lot of players in NAND, so that’s why it can be lumpy. Lam has talked about a certain number in terms of the opportunity. Their SAM is some subsegment of that, sorry.

And ours is a subsegment of that because we’re really talking about dielectric etch. But you could see that when it happens, that was the upside surprise in our Q2. And it was significant. And to Ram’s point, it flows through very quickly.

Melissa Weathers, Lead Analyst covering semi cap equipment and memory, Deutsche Bank: And as we think about those semi cap customers resuming now that inventories have burnt down, I think we talked about this on the last earnings call, their order patterns, do you expect kind of a rush back to refill their inventory? Or what kind of rebound do you expect from the purchasing side Yes. From your

Unidentified speaker: Well, I think we’re shipping to end demand. I think that’s the bottom line. And just to give you a little more detail, we have inventory at our customers. We own it, right? It’s consigned.

So they always have some inventory to pull very quickly. And as they pull, then we refill. So there’s a buffer, built in buffer by design, right? Our lead times now are pretty short, back to kind of normal. Now our power decks are pretty complex units, so that those lead times are a little longer than our barotron or flow meters, but they’re back to normal.

So our customers can plan. They know that if they order X, they’re going to get it in that same time period. So they’re able to plan and not need to over order or order for inventory. And so I think we’re in a good spot as an industry and certainly for MKS’ inventory, we’re shipping to end demand.

Melissa Weathers, Lead Analyst covering semi cap equipment and memory, Deutsche Bank: Great. And is that the case across DRAM and foundry logic as well?

Unidentified speaker: It’s the case across all of our critical subsystems.

Melissa Weathers, Lead Analyst covering semi cap equipment and memory, Deutsche Bank: Is there any tightness in particular areas? I know HBM, we can get into the advanced packaging side later on in the Yes. Discussion, but

Unidentified speaker: It’s advanced packaging. It’s got the tightness in the equipment orders, but not in the semiconductor chip manufacturing part for us.

Melissa Weathers, Lead Analyst covering semi cap equipment and memory, Deutsche Bank: Got it. Well, with that, let’s transition over to the E and P side. This has been a nice profit driver for you guys in recent quarters and a nice revenue stabilizer, I think. So I guess, at your twenty twenty two Analyst Day, you outlined a revenue growth target, I think, for this business of GDP plus 300 basis points. There are a couple of different segments within this business that you’ve talked about growing at different growth rates.

So can you just remind us what are the moving pieces within this E and P segment? And maybe we can dive a little deeper into each of those.

Unidentified speaker: Yes. So how we characterize the electronics and packaging market is PCBs, printed circuit boards, right? That industry can be segmented into three thirds. The bottom third, we call multilayer board PCBs. Those are lower technology, if you will, fewer layers, bigger features, think washing machines and dishwashers.

Big industry, though, and we have market share leadership there. The middle third is HDI, high density interconnect PCBs, I think smartphones. More layers, smaller features, more complex, higher ASPs. And then the top third is what we call package substrate PCBs. They’re all PCBs and even smaller features, and that is what you need to connect large chips to large chips.

So GPUs together or CPUs together or GPUs with CPUs and HPM. And that’s really what’s enabling data centers and AI today. And the top third growth, we think, grows at high single digit middle third, mid single digit and lower third GDP. And we mush it all together, that’s where we came up with GDP plus 300 basis points for the entire slug because we participate in all three. Now we’re not changing our model right now today, but I would say some things for us to consider is we have been getting a lot of orders for equipment for HDI and MLB, those two lower technology levels.

And we ask why, we’re not making more washing machines or smartphones than normal, and it’s all driven by AI. So AI boards, the chips go on that higher level package substrate, but then it’s got to go on to something else, HDI, and then something else, MLB, before it can talk to the outside world. And those HDI boards are many more layers than what you need for a smartphone, so more complexity. And the MLB boards are many, many more layers than you would need for a dishwasher. So AI is actually driving the entire industry from the most advanced to the middle to the lower edge.

And what we’re seeing in terms of constraints is a lot of our customers are ordering equipment for HDI and MLB processes. So they don’t have the capacity. And we’ve had, I think, four quarters now of very strong equipment bookings. And historically, it’s been a very lumpy kind of business, chemistry equipment, but it’s been four quarters of strong equipment bookings. And you could start seeing in our numbers as well.

Melissa Weathers, Lead Analyst covering semi cap equipment and memory, Deutsche Bank: I guess two questions on that. The sustainability of that spending, are you worried that it could fall off? And then second question, how would you characterize utilization levels of the current capacity that’s in place Yes.

Unidentified speaker: Well, the current capacity is very high. Otherwise, they wouldn’t be ordering equipment. Equipment is lumpy. So we come from a semi CapEx world. We just deal with the cycles.

So at some point, the equipment orders should slow down, but we haven’t seen that yet. In fact, after the first quarter of higher bookings of equipment, I thought maybe it’s over, right? And here we are on the fifth quarter, and it’s still looking pretty good. But the most important point is that equipment that we’re selling comes with our chemistry, almost

Ram Mayamparat, CFO, MKS: 100%

Unidentified speaker: market share. And that chemistry is of course much higher gross margin consumables and is always going to be used for the future. Even after five years of running that piece of equipment, we still have 85% market share of our chemistry on our equipment. So the installed base of equipment that we’re putting in now and for the next few quarters, that’s going to portend to great market share gains in chemistry.

Melissa Weathers, Lead Analyst covering semi cap equipment and memory, Deutsche Bank: Maybe let’s just zoom out a little bit on that topic. Adotech, I think it’s now been three years since the acquisition closed. And sorry, Ram, I know some of this predates you. But can you give us a high level review of like how have those three years been? How has the acquisition played out versus what you were hoping for?

Unidentified speaker: Yes, I’ll start and maybe Ram can add. But I think in terms of cost synergies, we got that. That was pretty fast and easy to do. I think in terms of the strategy, like the reason why we bought AdaTech, We thought packaging was going to be more important. We thought packaging was going to be harder to do.

And we thought it was going to be the same movie as semi. That’s all not just been reaffirmed, but even more because when we decided to make the offer to AdaTech, AI wasn’t in anybody’s consciousness. AI just put an exclamation point on that strategy. The other part of the strategy was that having equipment and chemistry knobs was going to be an advantage to gaining market share. We just talked about ordering equipment with all our chemistry.

That’s another exclamation point on that strategy. So I think when we closed AdaTech, the industry went to a downturn. So it didn’t look good, like, well, and of course, interest rates were much higher. So all these assumptions were kind of against us. But now you start seeing the strategy play out, and you start seeing what we believed was the reason of putting AdaTech together with the rest of MKS.

Ram Mayamparat, CFO, MKS: Don’t know

Unidentified speaker: if have anything else to add to No.

Ram Mayamparat, CFO, MKS: No. Thank you, Claudia.

Melissa Weathers, Lead Analyst covering semi cap equipment and memory, Deutsche Bank: As we talk about or as we think about some of those new packaging technologies, that’s I agree with you, it’s some of the most interesting growth drivers in the space right now. As we think about co op, COPAs, some of those new acronyms that we all have to learn what they mean, which one of those makes you the most excited? What should we get excited about for MKS on that packaging piece?

Unidentified speaker: Yes. I think they’re incremental tailwinds. So COWAS, we all know, is TSMC’s chip on wafer on substrate. That substrate is the PCB, right, the highest levels of PCB. So that’s good for us.

The wafer, the chip on wafer, that’s redistribution layer of silicon. So we’re not as strong there. So okay, but it’s one layer. CoPOS chip on panel on substrate. Substrate stays the same, chip stays the same, the panel is replacing the silicon RDL and with the PCB.

For us, that’s great. So an incremental tailwind, but it’s one layer versus 10 more layers in HDI or 15 more layers in MLB. And then co WAP chip on wafer on PCB. So the different. That idea there is to get rid of the S, which is also a different type of substrate.

It’s the most advanced S, the PCB substrate. Let’s skip that step. Let’s go right to HDI. If we can do that, it’s cheaper and faster for the integrated server board. But that requires more layers of HDI, smaller features than we’ve ever made.

And I think they’re going to come to technology providers with more knobs in order to do that because if we could have done that, we would have done that. We couldn’t do it, that’s why we went to substrates, a different layer, a different type of PCB. So now the idea is if we can make HDI even better, could we remove that need for a substrate? That’s going to require a lot more development. And we’re, of course, intimately involved with our customers.

Melissa Weathers, Lead Analyst covering semi cap equipment and memory, Deutsche Bank: Maybe if I could squeeze one more in. Glass substrates. Can you remind us how you play in on the glass side?

Unidentified speaker: Yes. So people have talked about a glass substrate. There’s two when they talk about it, there’s two different applications. A glass substrate core, of which PCBs are put on both sides that allows that package of PCB layers to be more rigid. Okay.

That’s a great idea. It’s one layer. We’ve been working on glass for fifteen years. We hope it happens actually and because we’ve been working on it for fifteen years. But if it doesn’t happen, it’s okay too because that core layer just stays at PCB, which we play as well.

The other glass layer potentially is at the chip level. Chips going right onto glass, and that’s probably a little further out,

Ram Mayamparat, CFO, MKS: I would say, a lot more technical problems to solve. So glass is something we’ve worked on.

Unidentified speaker: If it happens, great. If it doesn’t happen, okay,

Ram Mayamparat, CFO, MKS: by us.

Melissa Weathers, Lead Analyst covering semi cap equipment and memory, Deutsche Bank: Okay. I’ll just pause here to see if anyone has any questions. If not, we can keep going. On the specialty industrial side of your business, this, I think, is a less appreciated part of your business. There are bunch of different moving pieces.

It’s difficult to model. If for my first question, what’s the most misunderstood part of your specialty industrial business that you wish investors could appreciate more?

Unidentified speaker: Well, I think we’ve talked about it, but it’s leveraging the R and D we’re spending in semi and E and P. It’s not like we haven’t spent any R and D in specialty industrial, certain areas where we do for sure, but much lower relative R and D percentage for the same revenue and the same profitability. So it’s stable more stable business, many markets. So you’re right, it’s hard to model, but when you push it all together, it kind of is flattish, right? Recently, I think we’ve had some automotive headwinds and industrial headwinds like everybody else.

It’s just gone down a little bit, but it’s a nice stabilizing part of our revenue stream. Now it’s not that it’s not part of our strategy is to buy companies to grow specialty industrials. Our strategy is to grow semi and to grow E and P and it comes with a special industrial component that leverages that technology. It fits the model and it’s good for the P and L.

Melissa Weathers, Lead Analyst covering semi cap equipment and memory, Deutsche Bank: Does it even make sense to a lot of people ask, why not divest the business?

Unidentified speaker: Well, I think part of our strategy is always our responsibility is always to two things. When we buy a company, make everything better, whether it’s in semi, E and P or specialty industrials. It’s also our responsibility to look at each one of our businesses and say, is there a better home for it? And we always do that. We’ve spun out a couple of things over the last ten years, not many, because when you make things better, say, well, why do I want to get rid of this, right?

But we always look at that as an option for sure. And some of the things we’ve spun off have gone to other companies, they’ve grown it. The employees we spun off, there’s 3x more. The revenue is better because they’re in that market, and those companies care about that market more than we would have. So we’ll always be looking at that portfolio management.

Melissa Weathers, Lead Analyst covering semi cap equipment and memory, Deutsche Bank: Well, let’s get Ram involved in the conversation. Ram, I think you’re coming up on your one year mark at MKS. Can you give us a scorecard? How have things gone versus your expectations? What has positively surprised you?

What’s negatively surprised you? This one year anniversary?

Ram Mayamparat, CFO, MKS: That’s a great Yes. So I was I am very impressed with the execution the company has done and if you look at just ’23 to ’24, the top line was slightly down actually, flat almost. So the gross margin grew 190 basis points, operating income grew 180 basis points. OpEx was flat, maintained all inflation, made up for all inflation with efficiency. So the financial acumen of the leadership team and how quickly they get to execution has been very impressive.

As far as it goes back to the semiconductor industry background and the riding the cycles and knowing how quickly to adjust, that’s been very impressive. Agility, the tariff is a good example. How quickly the teams came together to quantify, forecast, identify mitigations actions and implement those actions was very impressive. And as the whole company got together with core team from various parts of the business, because as you know this has been It’s a very fluid environment, right.

So you come up with strategy and next Monday morning it’s old and then there is a new problem. That’s what happened to us in Q2, where China was the biggest impact item identified when we did the earnings call and soon after that it became metals, and that changed the guidance we had given. So being agile to adjust with the changes in the market, tariff being one example, I find it very impressive based on where I have worked before. So the challenges mostly are adapting to a market that’s so rapidly changing and the geopolitics of it. And I’m sure at our cost structure, like we said before, when that top line comes back to more normal levels, you’ll see much more flow through both to the bottom line and cash flow.

Melissa Weathers, Lead Analyst covering semi cap equipment and memory, Deutsche Bank: Let’s dig a little deeper on to the tariff side. You talked about some can you just remind us what are the mitigation measures that you guys are taking? I was very impressed with your ability to continue to optimize gross margins in such a difficult environment. I think a lot of companies have struggled with that. So what are the actions that you’re taking to mitigate those risks?

Ram Mayamparat, CFO, MKS: Yes. There are a broad area of actions we are considering. The good news is that we are having very productive discussions both with our customers and our suppliers. And people are transparent. Nobody is trying to make money off of this thing.

It’s out in the open. And those include those mitigation actions include supply chain activities using bonded warehouses where possible, routing production, the multi site manufacturing capability we have helps us source products from different parts of the world as necessary and some commercial actions and pass through where necessary, right. So there’s a broad range of actions and it’s being addressed very openly with our key customers.

Melissa Weathers, Lead Analyst covering semi cap equipment and memory, Deutsche Bank: On the gross margin piece, you guys have seen a little bit of a boom from the E and P side and that chemistry piece carries a pretty accretive gross margins to your business. It’s gotten me questioning really what is the long term gross margin potential of MKS. Could it have a five handle? Could it be a healthy five handle? So I guess as we think about the moving pieces on gross margins going forward, what are the levers that we should be thinking about in terms of what could drive gross margin upside?

Ram Mayamparat, CFO, MKS: So the gross margin has been it’s something the company has worked on for a while. And like you mentioned, Medusa, and it’s been over 47% for several quarters. Last quarter, like we said, without the tariff, it have been high 47%, close to 48%. The fundamentals of the gross margin and the P and L structure and cost structure is very strong. It’s these superficial things that happen that we need to mitigate and there are actions in place to do that.

The product cost structure work we are doing, in terms of identifying manufacturing excellence programs, procurement savings and design improvements will continue to improve the margins. But the step change is going to really come from volume as that top line comes back. And I always say that the road to 50 goes through ’48 and ’49. So hopefully, you’ll get a

Melissa Weathers, Lead Analyst covering semi cap equipment and memory, Deutsche Bank: getting greedy. On the OpEx piece, can you talk about where is where are your incremental OpEx dollars going through? You’ve kept it pretty tight in the most recent quarters, but there also are a lot of organic growth opportunities for you. So where is the OpEx priority at this point? And how are you thinking about the trajectory?

Ram Mayamparat, CFO, MKS: So when the revenue was not growing in ’twenty three, ’twenty four, we held OpEx flat. It’s something which we focus very carefully. And as you saw in our Q2 numbers and Q3 guidance, we are at the bottom end of that range, the February to February. The investments we are making are in people mostly, and some infrastructure, but mostly to retain talent and help with long term growth. And going back to the discussions we have had on profitability and cash flow, the improvements we have made is not by starving the business.

We have invested in business in the P and L and in CapEx. Our CapEx is 4% to 5% this year. The debt repayment we have done is after making the necessary investments. So the careful investment that you initially look for always reallocating resources before we look for new dollars. But the investments we are making in OpEx is tied to retaining talent and driving growth.

Melissa Weathers, Lead Analyst covering semi cap equipment and memory, Deutsche Bank: Maybe as a final wrap up question for both of you. On the capital allocation piece, you are highly levered, and I know that’s a priority, to bring down that leverage. First, can you remind us where you are in that journey? What are your expectations or goals in the next eighteen months on the leverage side? And then second, I’ll be greedy again, but you have a very strong history of M and A and inorganic growth at the company.

And so how are you thinking about further inorganic growth opportunities and maybe some of the holes in the portfolio?

Ram Mayamparat, CFO, MKS: Why don’t you start first, Ram, and I’ll follow-up with the strategy going forward. Sounds good. So you’re right. So the capital allocation priorities are first invest in the business to support growth and business continuity, and then focus on strengthening the balance sheet, is lowering our debt. We are at net four times leverage now.

Our goal is to get to two to 2.5 over the last in a period where demand has been pretty flat. In the last seven quarters, including the one we are in now, we paid down $800,000,000 towards our term loan. So that remains our continued focus. And with our cost structure today, as that top line again comes back to more normal levels, we can accelerate that payment quite a bit.

Unidentified speaker: Yes. I think once we get to that 22.5% net leverage ratio, M and A will always be part of our strategy. I don’t think big M and A makes a lot of sense anymore. We just did one. So we have the foundations for our strategy, is advanced electronics, semi advanced packaging to make advanced electronics and be foundational to that.

Ram Mayamparat, CFO, MKS: But there are a lot of tuck

Unidentified speaker: ins that make a lot of sense. Fewer in the vacuum equipment side because legacy MKS did a lot of that consolidation, probably more in optics and lasers because it’s still a disaggregated market, some in chemistry, but not much because AdaTech is already market share leader. So but our standard for acquisition is higher now, the bar, just because we have made some big bets in the last ten years that have paid off. And the reason you do M and A is to get there faster. And some of these big bets, though, are certainly a lot cheaper than buying somebody, but we’re getting there almost as fast.

And so I think a bar is going be a lot higher. Why should we buy this company? If it’s such a good idea, why don’t we invest? Why don’t we do it ourselves, right, especially if we’re already halfway there? So I think tuck ins might make sense, Amy.

As we’re waiting for Aditech to close, we did filter on control. We didn’t do it. It’s perfect, surround the chamber, same sales channel, great technology, differentiated, same sets of customers. So those things we’ll do all day.

Melissa Weathers, Lead Analyst covering semi cap equipment and memory, Deutsche Bank: Great. I think that’s a great place to end it. Thank you guys so much for joining us, and enjoy the rest of the conference.

Unidentified speaker: Thanks, Melissa.

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