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Versum Materials, Inc.  (NYSE:VSM)
Q4 2018 Earnings Conference Call
Nov. 06, 2018, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon and welcome to the Versum Materials Fourth Quarter 2018 Financial Results Conference Call. All participants will be in listen-only mode.

(Operator Instruction) Please note, today's event is being recorded.

I would now like to turn the conference over to Soohwan Kim. Please go ahead.

Soohwan Kim -- Head of Investor Relations

Thank you, Rocco. Thanks, everyone, for joining us today for our fourth quarter of 2018 earnings call. We hope you had an opportunity to review the press release we issued earlier this afternoon. We've also posted a presentation of today's call in the Investor Relations section of our website at versummaterials.com. We encourage you to review these documents.

On today's call, we'll begin with the prepared remarks from Guillermo Novo, our President and Chief Executive Officer; and George Bitto, our Executive Vice President and Chief Financial Officer. Following their remarks, we'll have a Q&A session.

Some of the matters we'll discuss on the call, including our 2019 financial outlook and guidance, are forward-looking and are subject to risks and uncertainties, including those described in today's press release and in our filings with the SEC. These risks and uncertainties could cause actual results to differ materially from the expectations expressed on this call.

During today's call, we'll reference certain non-GAAP financial measures. We include reconciliations of non-GAAP financial measures to that of GAAP in our news release and the presentation posted on the Investor Relations section of our website. Versum Materials assumes no obligation to update information presented on this conference call.

An archive of this webcast will be made available in the Investor Relations section of our website. I would also note that management scheduled to present at the Morgan Stanley Global Chemicals and Agriculture Conference on November 13th in Boston. In addition, management will be hosting investor meetings at the Credit Suisse 22nd Annual Technology Media & Telecom Conference in November 28th in Scottsdale. We hope to see many of you there.

And now, I would like to turn the call over to Guillermo.

Guillermo Novo -- President & Chief Executive Officer

Thank you, Soohwan, please turn to Slide 5. Good afternoon and thank you to everyone for joining today's call. I'd like to begin with a brief overview of our fiscal fourth quarter and full year results, followed by some industry highlights. I will then turn over the call to George for a closer look at the numbers.

We are pleased to report another record revenue quarter, our sixth in a row. Both of our businesses -- business segments continued to deliver strong growth and profitability. For the year, revenue and EBITDA were both up 20%. Materials volumes were up 10%, driven by healthy underlying demand and our strong innovation pipeline.

This volume growth allowed us to deliver another year of excellent gross margin gains and continued EBITDA growth, while increasing investments to support future growth. Delivery Systems & Services delivered a record year of sales and earnings. We have strong positions with the key industry players who are investing in new capacity to support their own growth initiatives.

We achieved a strong financial performance while completing our company stand up activities and ERP implementation without any major disruptions. Most importantly, we're very excited about how we're positioning ourselves to drive organic growth. The long-term outlook for our industry remains robust and we see significant opportunities to accelerate our participation.

We continue to invest to expand our innovation capabilities, add capacity and drive productivity. Given the industry momentum, the strength of our portfolio and our visibility, we are providing guidance for another year of strong growth in fiscal year 2019; the details of which George will walk you through in a few months.

Please turn to Slide 6, why are we excited about the future, because we participate in all three growth drivers of semiconductor materials. The first is the underlying semiconductor growth -- industry growth with MSI or Wafer Starts being good indicators of underlying volume growth.

Semiconductors are growing -- are showing up everywhere. The broadening of the end markets from PCs to mobile to data and many other applications should support more robust volume growth and less cyclicality. Second is innovation. Innovation is critical to the semiconductor industry's continued advancement. Given the higher level of complexity in new structures, materials are now even more essential to enabling the industry's next generation nodes.

Lastly, it is company-specific opportunities that will further drive organic growth. Our strong market position and broad capabilities provide us opportunities that are specific to Versum. Organic growth is clearly our number one priority and we will discuss these initiatives later in the call. Semiconductor materials provide a unique volume-driven opportunity for our investors to participate in this exciting and high-growth industry.

Turning to Slide 7, our business is well diversified, both in our product portfolio as well as our geographic reach. We believe our equipment business is well positioned for the future, given our close alignment with the top CapEx spenders. Our record results in new equipment sales are also a leading indicator for future materials growth.

Included in materials and installation is our parts and support business where we support our installed base of over 35,000 pieces of equipment around the world. We've seen steady growth in our parts and support business over the years and expect this growth to continue with our expanded installed base.

MEGASYS, our customer onsite materials handling service business grew 8% to $63 million as we gain new customers and expanded our presence at existing customers. These services are provided under multi-year contracts with our customers.

In Materials, Advanced Materials is the growth engine for our future. Our business is mostly focused on Tier 1 and 2 semiconductor manufacturers who are driving innovation. With our three major platforms of deposition, planarization and SP&C, we participate in many Process of Records or POR opportunities in any given technology transition.

Our breadth, leadership position, and diverse technology portfolio give us a robust pipeline of opportunities and a higher overall probability of POR wins. Advanced Materials delivered another year of double-digit growth driven by our strong position in logic and expanding position in memory.

Process Materials is made up of a broad and diverse portfolio of specialty gases including NF3, WF6, HCL, high purity ammonia, etching gases and dopants among others. These are critical to the semiconductor industry. These are difficult to handle products requiring a complex supply chain.

Although our two largest products, NF3 and WF6 have been capacity constrained, the other products which make up the majority of our portfolio grew at double-digits for the quarter. WF6 and most of our product portfolio is well positioned for growth. I will provide an update on our NF3 plans later in the call.

Our Materials portfolio represents products that are critical to the industry, high value in use but low cost in use. Given this profile and the complexity of the industry, semiconductor materials provide unique profitable growth opportunities. We believe there are significant barriers to entry as well as challenges for others trying to build global scale. Materials is at the core of the value we deliver to our customers. Our materials provide volume and innovation. Our equipment deliveries materials to the process tools and our services manage materials handling for our customers.

Moving to the right pie chart, we also have good balance geographically. Our business portfolio aligns closely with our customer mix. We are well positioned in all of the key geographies where our customers operate, not only can we support our customers with products where they manufacture, but also, more importantly, we have the capability to collaborate and innovate with them wherever they are. China is a significant growth market for us and the vast majority of our current business in China comes from our multi-national customers.

Turning to Slide 8 to cover industry dynamics and outlook. Starting with Wafer Fab Equipment spending, we believe many market participants are expecting spending to trend down in the upcoming year. Despite some softening, we believe capital spending will remain high by historical standards. We have referred to WFE forecasts in our slides because we believe it can be a helpful -- it can be helpful as a directional indicator of our Delivery Systems business.

Although there is some correlation with WFE CapEx, our equipment sales do not follow the same pattern as the OEM tools, given the different price points and the relative installation costs. We are confident that fiscal year 2019 will be another good year for our DS&S business given our strong order book and potentially strengthening demand in the back end of the year.

Turning to Materials, MSI growth is expected to remain steady, similar to last fiscal year. We've historically enjoyed a very strong position in logic and we expect logic demand to strengthen as customers' ramp new nodes. We have been intimately engaged with our customers and are well positioned with new PORs. Although there has been some softening in the foundry segment, we believe this is mostly a seasonal issue. We're excited around our strong logic and foundry portfolio which should see robust pickup as momentum accelerates in 2019.

Within the memory segment, while the outlook is mixed for the beginning part of the fiscal year, there are signs that memory volume is expected to increase later in the second quarter. We have been expanding our position in memory, which has yielded strong growth in the last few years. We believe our new materials will play an important role in our memory customers' ability to move up the technology curve.

To sum up, the semiconductor materials industry remains healthy. CapEx push outs and customer pricing cycles have limited impact on materials usage. We believe the demand for specialty gases and materials will remain robust.

Now, I'd like to turn the call over to George for a closer look at the numbers, George?

George Bitto -- Executive Vice President & Chief Financial Officer

Thanks, Guillermo, and good afternoon everyone. Beginning on Slide 10, as Guillermo said, we delivered another strong quarter, finishing off second consecutive year of stellar financial performance since becoming a public company.

Fourth quarter 2018 sales were $351 million, an increase of 19% compared to the prior year. This improvement was driven by another robust quarter in Delivery Systems & Services and strong volume growth in both Advanced Materials and Process Materials product lines.

Gross margins were 43%, continuing the improvement trend over the year and up a 100 basis points from fourth quarter last year. Margin improvement in both segments overcame a mix shift to DSS growing to a larger percentage of our sales.

Selling and administrative and research and development costs or SARD were up 12% for the quarter and 13% for the year, as we expanded our commercial and R&D capabilities in Asia and completed our own stand-alone infrastructure. SARD expense as a percentage of sales declined 120 basis points for the year.

Adjusted EBITDA grew 23% versus prior year for the quarter and 20% for the fiscal year. Adjusted EBITDA margins of 33% in the quarter were up a 100 basis points from last year and consistent with our expectation that second half margins would be stronger than first half margins for the year.

Excluding one-time costs associated with the final stages of our restructuring and adjustments to the previous accrual for the Tax and Jobs Act, adjusted net income increased 26% to $65 million or $0.60 per diluted share compared to $0.47 per diluted share in the same period last year.

Please note, effective for the fourth quarter, 2018, the company changed its method for inventory costing from last-in first-out cost method to the first-in first-out cost method for inventory in the United States. This was the only geography that was using the LIFO cost method. Both current and prior year financials have been updated for this change which was insignificant for either year.

Turning to Materials segment on Slide 11. Sales, which is driven by semiconductor unit output, increased 8% in the quarter to $234 million and increased 7% for the year. For the quarter, volumes contributed 9% of this growth with strong performance from both Advanced and Process Materials. The impact of year-over-year price mix in the fourth quarter lessened versus previous quarters.

Advanced Materials delivered another year of double-digit volume growth, driven by strong underlying market volumes and recent POR wins. We saw strong performance from all three of our product platforms with particular strength in our planarization products.

Process Materials volumes grew high-single-digits, despite capacity constraints in a few key products. Revenue for the year was negatively impacted by Process Materials price/mix primarily in NF3 and particularly early in the year.

Segment adjusted EBITDA for the quarter increased 12% to $90 million and segment adjusted EBITDA margin was 38%, up from 37% prior year; stabilized pricing and cost benefits from increased loading and lower spending contributed to the margin improvement. For the year, adjusted EBITDA grew 5% despite pricing headwinds, capacity constraints, and investing in resources to drive future growth.

Our Delivery Systems & Services segment reported another stellar quarter, capping off a record performance year. Sales were up 52% for the quarter and 65% for the year. Our innovative products and strong positions with key customers resulted in strong sales across all products and regions, with particular strength from the Korean memory suppliers in both Korea and in China. Segment adjusted EBITDA increased 82% to $33 million. EBITDA margin was 28% up from 23.5% prior year. Product mix, loading benefits and strong project execution drove this increase. For the year, adjusted EBITDA was up 88%.

Now please slide to -- turn to Slide 13 where I will cover our cash flow performance. Fiscal 2018 cash flow from operations was $278 million, resulting in free cash flow of $163 million. As mentioned last quarter, cash flows in the first half of the year were impacted by front end loaded restructuring outflows and seasonable payables timing. Free cash flow for the quarter was $117 million, following stabilization after our ERP implementation.

Total CapEx for fiscal 2018 was $115 million, which included $29 million related to our restructuring initiatives and $50 million from our step-out growth projects in addition to normal growth and maintenance. We increased our dividend 20% during the year, resulting in $24 million returned to our shareholders. And including our recently announced increase, our dividend is up 60% from our initial dividend.

Our cash balance at year-end was $400 million, which increased $128 million from last fiscal year. We believe this financial strength gives us ample flexibility to weather any economic uncertainty, fund organic growth initiatives, pursue inorganic opportunities, and continue to return capital to our shareholders.

Please turn to Slide 14 for a discussion on our guidance for fiscal 2019. While there is some short-term uncertainty about semiconductor industry capital spending and output, we expect our volume driven materials portfolio to continue to provide solid growth in the coming fiscal year. And as noted earlier by Guillermo, expectations are for industry capital spending to still remain at high levels by historical standards. We estimate sales for fiscal 2019 in the $1.425 billion to $1.475 billion range, an increase of 4% to 8% versus fiscal '18.

We estimate adjusted EBITDA for the fiscal year in the range of $475 million to $495 million, which represents a year-on-year increase of 7% to 11% from fiscal year 2018 adjusted EBITDA of $445 million. Given seasonal patterns and what we believe to be short-term variability in memory output, we expect the first quarter to be the weakest quarter for materials, including a potential mix shift in our product lines.

Turning to Equipment, our order book through the first six months remained strong, with the back half of the year less certain, given economic, trade and political uncertainties. We estimate capital spending for the year to be in the range of $120 million to $130 million, similar to fiscal 2018. Guillermo will discuss details of our capital spending plans in an upcoming slide.

For the total fiscal year, we estimate depreciation and amortization to be $60 million to $65 million range; interest expense in the $50 million to $55 million range; and net income attributable to non-controlling interest to be about $7 million.

Our adjusted effective tax rate is estimated to be in the range of 24% to 28% for the year, up from prior year due to estimated impacts from the US Tax Act and rate increases in some of the countries where we operate.

With that, I'll turn the call back over to Guillermo for closing remarks.

Guillermo Novo -- President & Chief Executive Officer

Thank you, George. I'd like to update you on our 2019 priorities as we begin our new fiscal year. Our commitment to environmental health and safety remains one of our top priorities. Our safety performance improved again this quarter and we ended the fiscal year at a 0.46 employee recordable rate. Our goal remains zero injuries.

Driving organic growth across our portfolio is a top business priority. We are investing in capital as well as in SARD to ensure we have the resources available to participate in new markets and key geographies. Our broad portfolio of products is delivering superior financial returns, and we are redeploying our capital in the following disciplined manner; we are investing to drive profitable organic growth; we are accumulating dry powder for M&A opportunities; and we're increasing our dividend to return capital to our shareholders. Moving forward, we will continue to evaluate our ability to create shareholder value through investments in our business or returning additional capital to our shareholders.

Turning to Slide 17, we continue to invest in our key opportunities to drive organic growth and improve profitability. Starting with a quick recap of 2018 CapEx, we invested a total of $115 million, in line with our guidance. We completed our start-up investments, the conversion of our first NF3 unit in hometown, the debottlenecking of our WF6 plant, as well as several smaller investments to support new products.

Both our WF6 and NF3 units are in operation and the customer qualification process for NF3 is in progress. Stand up and restructuring activities are mostly behind us and we will redeploy this capital toward our step out growth initiatives. For fiscal year 2019, we plan to invest between $120 million and $130 million in CapEx. I would like -- I would characterize them in two buckets.

First; our normal growth and maintenance CapEx that supports and drives the growth of our existing business and normal new products introduction. This bucket will also increase slightly, given the number of new products that we're introducing, but remains in the 4% to 5% of sales range, excluding any new NF3 investments. The second bucket is our step-out growth opportunities, including NF3.

We started several of these projects during fiscal year 2018. These investments are aligned with the priorities we have discussed in prior calls. I would highlight two initiatives in particular; expanding our Advanced Materials position in Korea. We have several unique organic growth opportunities in our deposition, planarization and SP&C businesses with significant incremental growth potential. This includes investments to supply new deposition materials, establish local CMP slurry production and expand our local technology capabilities.

While most of these investments will come on stream in 2019, we already have a number of ongoing POR projects with our major customers. We're extremely pleased with the progress we are making on all fronts. We will also be investing in a new NF3 capacity in Asia. NF3 demand continues to grow at double-digits, driven by VNAND and display. We have been evaluating the conversion of our second NF3 unit in hometown as well as the need for additional NF3 capacity in Asia.

We have decided to bring on new capacity in Asia as a priority. We have completed an analysis of investment options in sites and expect to invest in a 1,500 to 2,000 metric tons of new capacity at our current site in Ulsan, Korea. This investment will allow us to support our customers and maintain a balanced product portfolio. With our low-cost production technology, we expect to generate strong margins and cash flow.

As we wrap up another record fiscal year, we're pleased to have met all our key strategic, operational, and financial objectives. We reported results that are well ahead of our financial guidance -- the financial guidance we laid out at the beginning of the year and we're initiating guidance for another year of growth in fiscal year 2019. We are very excited about the future of Semi Materials. I want to thank all our employees for their hard work and dedication in delivering another successful year.

Operator, we're ready to take some questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Today's first question comes from Laurence Alexander of Jefferies. Please go ahead.

Laurence Alexander -- Jefferies -- Analyst

Hi there. Can we first clarify a couple of things? Where you indicating earlier that you believe that DSS will actually have -- be better than flat in 2019?

Guillermo Novo -- President & Chief Executive Officer

Okay. When we look at our guidance, we obviously model several different scenarios across our business portfolio. Although, if you look at the WFE, it looks to be down from a broad indicator of minus 6% to minus 8%. There is a lot of variation by region. If you look at logic and foundry, the 10 nanometer and 7 nanometer investments are picking up. The outlook, actually, for the US and Taiwan is for increased investment and we're very well positioned in those areas.

So at -- as you break down the different parts of the business, we see some strength in different areas. Clearly, the memory segment in Korea is going to be the deciding factor on overall numbers. So with that context, we're pretty confident that we're going to have a very good year. We have a lot of visibility in the first half of the year. Most of the forecast that people have talked about is about more of the pickup pushed back into the second half of the year, so we're confident that we're going to -- we're very well positioned.

What we said in the past is that if demand stays in the plus or minus 10% for our DSS business, we're going to be in a very good position in our overall portfolio, and that's sort of the context of our outlook.

Laurence Alexander -- Jefferies -- Analyst

And how are you thinking about interest expense for 2019? And then, can you just characterize for the new NF3 investment, just clarify what return on capital hurdle will you use for that?

George Bitto -- Executive Vice President & Chief Financial Officer

Okay, just quickly on the interest expense, we do expect an increase of LIBOR and we do have interest that's tied to that, so LIBOR moving up through the year. I think we have, in the slides, guidance for interest expense to be between $50 million and $55 million for next year.

Guillermo Novo -- President & Chief Executive Officer

And with regards to the NF3 facility, all our investments; if you look at returns in general, our returns on capital invested are fairly high across our portfolio. NF3 is the most capital intensive, but even there, our hurdle rates are always in the high teens to low 20s and this project falls well within our expectations for solid returns.

Laurence Alexander -- Jefferies -- Analyst

Thank you.

Operator

And our next question today comes from Patrick Ho with Stifel. Please go ahead.

Brian Chin -- Stifel -- Analyst

Hi, good afternoon, this is Brian Chin calling in for Patrick. Thanks for taking our questions and congratulations on a very good results and a nice outlook.

Guillermo Novo -- President & Chief Executive Officer

Thank you.

Brian Chin -- Stifel -- Analyst

First question, wanted to follow-up on the comment around, I believe, memory actions impacting Materials revenue in the December quarter, would you characterize these wafer start actions as a single or multiple customers and is this solely occurring in NAND? And also I guess, what gives you confidence these actions will not occur beyond December?

Guillermo Novo -- President & Chief Executive Officer

No, I mean, we obviously are very close to our customers and the outlook that they're giving us in the forecast. I think it's both in NAND -- VNAND and in DRAM. So the expectation is that it will start picking up in our second quarter, so January, February, March timeframe we'll start seeing the pickup. So it really depends on when they start moving.

What it impacts us mostly is because of the mix of different products we've introduced. We've been growing a lot in memory. They tend to be some of our newer products, so they are very well positioned and profitable. But we think that's a temporary step and as that ramps, I mean we just -- if you look at our DS&S investments, there have been significant capacity additions and that'll all be coming on stream, so it should start picking up for us.

Brian Chin -- Stifel -- Analyst

Okay, great. That's very helpful. Maybe swinging over to the DS&S business; again, we seem to get a sense you outperform, maybe, the consensus down mid-single to high-single-digit Wafer Fab equipment environment next year, so call it flat. But just curious, it sounds like you're seeing more of a skew toward the second half of your fiscal year. Just to help put some parameters around it, could we be talking of something like a 55%, 60% revenue skew in terms of the -- that percent of the revenues that might fall in the back half of your fiscal year?

Guillermo Novo -- President & Chief Executive Officer

No, I think like we said, we have a pretty robust portfolio. The DS&S business are -- yes, it doesn't follow patterns, because it's really about projects and the timing of certain initiatives. As you can imagine, some of these are now a few customers. We're really focused around our strategic customers. So depending on how they move, you could have significant timing differences on some of these projects. And depending on what type of orders, if it's bulk handling systems or if it's smaller units, there is some level of variation. Clearly, where we have a little bit less visibility is in the backend. But that tends to be where most of the outlooks are beginning to improve in terms of forecasted build outs starting to build up again.

Brian Chin -- Stifel -- Analyst

Okay, great. Maybe one last quick question, looking at the midpoint of your fiscal '19 revenue and EBITDA outlook, it suggest a very robust 50% incremental EBITDA margin year-to-year. I'm curious what you expect the key drivers of this to be. I imagine mix for one, but can you also help quantify any expected benefits from favorable pricing, perhaps the NF3 productivity improvements, what -- if you're expanding also to two units from one?

Guillermo Novo -- President & Chief Executive Officer

Yes. So if you look at across our portfolio, DS&S will remain robust if it stays in that range, so margins and volumes will be strong. Advanced Materials, we have a very rich pipeline of PORs. So that should be kicking in throughout the year and as we go into the year, even more and more of the ramps will have a bigger impact. So we're very well positioned in that -- those tend to be new products, better margins.

And then, as you said the NF3, WF6, the whole PM portfolio were now unconstrained in capacity for the bulk of our portfolio, plus WF6. So really it's just NF3 that is -- we remain now limited in capacity. And we're not -- in all these numbers, we're not assuming improved pricing. But all trends indicate that pricing is going to be improving. Supply demand balances improve throughout the year.

Operator

Thank you. And ladies and gentlemen, as a reminder, please limit yourself to one question and one follow-up in the interest of time. Today's next question comes from Kieran de Brun of Credit Suisse. Please go ahead.

Kieran Christopher De Brun -- Credit Suisse -- Analyst

Hey, good afternoon and congratulations on a great quarter and a great year.

Guillermo Novo -- President & Chief Executive Officer

Thanks.

George Bitto -- Executive Vice President & Chief Financial Officer

Thank you.

Kieran Christopher De Brun -- Credit Suisse -- Analyst

I was just wondering, I think on Slide 6, you mentioned Versum specific opportunities to participate in new technologies, segments and geographies. Given that you have about $400 million of capital -- of cash on hand right now and you're generating pretty strong free cash flow every year. How do you -- can you just talk a little bit more about what those new technologies, market segments and geographies might be? I mean, specifically, can you comment a little bit on your presence in China and how you think about expanding there going forward? Thank you.

Guillermo Novo -- President & Chief Executive Officer

Okay. Yes. So if you look at our portfolio -- if you look at new products and that's mostly in the AM side of the equation. We are introducing a number of new deposition materials. So our organosilanes are growing very well, especially in the memory side. And we've introduced a number of new organometallics, cobalt products that are also in several good PORs that are gaining momentum in the year.

So it's a pretty broad and rich portfolio. We're the largest player in that space and very well-positioned. In planarization, our products in Advanced Oxide, STI and Barrier continue to do very, very well. Copper is also strengthening with some new product introductions, and we're doing great progress with some of the tungsten work we're doing with our customers. So, again, very rich portfolio.

Over the last year, I think as I've mentioned in prior calls, we spent a lot of time strengthening our toolbox, new abrasive technology, new additives and this is really allowing us to bring to market a lot of big products. This year, planarization was the highest growth area for us, as an example.

And in SP&C, the same thing. I think we're getting benefits both in legacy there, because of just the -- our aluminums business is pretty big and a lot of the automotive and legacy applications have done very well. Now we're bringing in new products into copper and advanced packaging that are doing also very well. So it's a pretty robust portfolio. And also we do a lot of work on the process sides. So, PR has also been very good for us.

From a geographic perspective, when we talk about Korea as being a major initiative for us, it's establishing, not just the manufacturing, but a lot of technology capabilities so that we can collaborate with our customers. We've been traditionally, in AM specially, underrepresented there.

And again, when we talk about getting PORs in Korea, you have to step back and say, that also means China and it also means for one of our customers in the US too. China, as I said, is a big growth market. Multinationals represent a huge part of the business in China today and the memory players, especially from Korea represent a major part of the volumes in China. So these initiatives that we have, should be -- pay off well for us in both geographies.

Kieran Christopher De Brun -- Credit Suisse -- Analyst

Great. And then I guess, just a quick shift over to Process Materials, and NF3, I mean, with the new investment, thinking forward in the new investment into the NF3 capacity. Can you just talk a little bit about the market fundamentals that you're seeing, specifically in supply/demand and is there an opportunity to get price here as we go throughout 2019? I mean, it might not be the base case, but I'm assuming you're seeing improving dynamics which will lead into investment decisions in NF3 and Asia. If you can just talk a little bit more about that? Appreciate it, thank you.

Guillermo Novo -- President & Chief Executive Officer

So, thank you for that question. From a pricing perspective, pricing has trended, as we have said in prior calls, from flattening out to now we're seeing movement up in pricing. In our modeling, we've assumed that pricing isn't moving, but in fact we do see some upside potential on the pricing side. So the supply/demand is tightening up. New capacity won't come on stream for a while.

So, depending on how some of the volumes pick up, it can start to tighten faster and we should see some improved pricing and obviously we're supportive of that. What I would say though is, given our low cost position from our production technology, the returns we're looking are at these price levels, we get very good returns. So as pricing improves, that's all upside for us in terms of the return on the investments that we'll make.

Operator

Thank you. And our next question comes from Toshiya Hari, Goldman Sachs. Please go ahead.

Toshiya Hari -- Goldman Sachs -- Analyst

Great, thank you so much. Can you guys hear me OK?

Guillermo Novo -- President & Chief Executive Officer

Yes. Hi Hari (inaudible)

Toshiya Hari -- Goldman Sachs -- Analyst

Okay, good. Thanks. How are you guys? Congrats on the quarter. I just wanted to follow up on NF3. Guillermo, you just talk about some price increases in the near term. What kind of magnitude are you seeing there in terms of price hikes? And the additional capacity that you announced, when does that come online and what are you seeing at your competitors from a capacity addition standpoint?

Guillermo Novo -- President & Chief Executive Officer

Yes. We -- I would hesitate to really talk about magnitude of increases, obviously just from a customer perspective and all that. I don't think it would be appropriate. But it's starting to move, I mean, we've tended to follow a strategy, we are not the largest market share player. We're one of the core suppliers to our customers with a portfolio of products and that allows us to have a differentiated position in our pricing and our sustainability of our volumes.

So as the market moves, that obviously is something that will support and move -- and push on. With regards to the investments, let me first comment, we finished the investment in North America, that's not going to bring us a lot of incremental volume. But it should impact in terms of reduction in costs. So that's moving forward in terms of the customer qualifications, and that should start impacting throughout this first and second quarter, mostly in the second quarter, but it's ramping well.

And then the new plant would be in Korea, it would be -- not only bring on new capacity because we're going to probably put it at the same sites that we have our existing production. We also expect to get significant productivity benefits and improved cost structure for our overall production in Korea.

Toshiya Hari -- Goldman Sachs -- Analyst

And capacity additions compared to your competitors, are you seeing anything there or are they being pretty disciplined?

Guillermo Novo -- President & Chief Executive Officer

You know what, I think the competitors are -- we're seeing movement in pricing, I think a lot of them have made big investments and didn't get proper returns. So I think that imposes a little bit more discipline. So even for us, I mean, we're putting this capacity on stream. It will probably come -- reality it will become on stream in 2020. So, the supply demand/side of the equation will stay more in favor of the pricing moving up, just because of when new capacity can come on stream.

Operator

Thank you. And our next question comes from Mike Harrison of Seaport Global. Please go ahead.

Jacob Schowalter -- Seaport Global -- Analyst

Good morning. This is Jacob on for Mike, congrats on the results. A peer of yours commented that it saw some specialty gas distributors more aggressively manage their inventories in the quarter. So did you see any of this or are you seeing any sort of movements in inventory levels as customers have sort of maybe some uncertainty creeps into the market?

George Bitto -- Executive Vice President & Chief Financial Officer

Well, we go direct; we don't use distributors for our products. So we are the ones managing our own inventories. So we're in a very different position, I guess. We're focused -- our portfolio, it's a broad portfolio and we focus with our major customers and all the business is direct.

Jacob Schowalter -- Seaport Global -- Analyst

All right, thank you.

Operator

And our next question today comes from Neel Kumar of Morgan Stanley. Please go ahead.

Neel Kumar -- Morgan Stanley -- Analyst

Hi, thanks for taking my question. You still have a pretty positive outlook on MSI growth for next year. And there has obviously been some concern about CapEx investment. Do you expect it to eventually leak into MSI growth? Do you see like CapEx as being sort of a leading indicator for MSI growth?

Guillermo Novo -- President & Chief Executive Officer

I think MSI growth is the core indicator of demand, and I think that is the driver. The CapEx is really going to be how that demand will be fulfilled. So I think long term what excites us about this space is how the demand for chips is changing. There are fundamental changes, you can hear a lot of the comments from our customers and other major players in the industry. As the industry has moved from PC to mobile to now everything, especially in a data-driven environment where AI and memory is going to be growing significantly, that's the fundamental driver.

So what's the big demand? I think the CapEx for us is a leading indicator of where our customers are investing and when they're going to ramp. So how that MSI growth will manifest itself in terms of our volumes and where we're going to sell them and where we need to get positioned. So what we see is continued robust growth in terms of MSI, logic will be strong.

If you look at DRAM, we will continue to be growing strong. On the VNAND side, maybe MSI won't be as significant as in DRAM, but because you move to more -- that's because you move to more layers. So from a Materials perspective, we will see significant growth because the bill of materials will continue to increase in the VNAND side to offset some of the slower MSI or wafer starts. So overall, that's what we're bullish about and I think that will require continued investments from our customers, and the timing of that obviously is something that we follow closely.

Neel Kumar -- Morgan Stanley -- Analyst

That's helpful and then your CapEx guidance for 2019 seems to be elevated primarily due to your capacity expansions. Is the CapEx related to these capacity expansions completely reflected in your 2018 and 2019 CapEx numbers, or could some of that leak into 2020 as well?

George Bitto -- Executive Vice President & Chief Financial Officer

No. So, we have clearly increased our CapEx investment over the last two years. So this year, I think it's a combination of our stand up activities and our growth initiatives, our organic growth initiatives that we're driving. And as I said in the call the -- now that the stand-up is over, we're redeploying that more for the organic growth.

Probably this will be sort of the peak year. Next year, we have a few projects that we can still do. As an example, the NF3 conversion of our second unit in hometown, but we have some other Advanced Materials projects that we can work on, but it will trend down in terms of significant step out organic growth opportunities that are on our radar screen today.

Neel Kumar -- Morgan Stanley -- Analyst

Great, thanks.

Operator

And our next question today comes from Chris Kapsch of Loop Capital. Please go ahead.

Chris Kapsch -- Loop Capital -- Analyst

Hey, good afternoon. So, I had some follow-ups based on your commentary about sort of characterizing the strength in your Materials business and new Process of Record wins in particular. Now you talked a little bit about the products. I'm just wondering, and obviously, in the case of like Cobalt it's implied, but just if you could characterize where you're getting most traction by customer type foundry, logic, memory or is it across the board, and also by node, is it predominantly at advanced nodes or are you seeing opportunities across even legacy nodes as well. And then, I had a follow up.

Guillermo Novo -- President & Chief Executive Officer

Okay. So first, obviously, in the new nodes, it is sort of the core model for the industry for growth and that obviously we're very well positioned in the logic foundry space. That has been one of our core areas and we're very well positioned with our deposition products as well as our planarization and we're seeing the growth there across a number of new products, both in our locate (ph) products in deposition, as well as in our organometallics as I mentioned, and then all the same products that -- especially barrier and copper in the logic and foundry has been very strong.

Over the last few years, we've been pushing and investing to expand our position on the memory side and that's been a major growth area for us. And again, a lot of that is deposition and planarization, layered (ph) planarization on the advanced oxide is obviously very exciting growth that we've seen over the last few years.

But as you said, on the legacy side, we're seeing good progress too. We've launched several new copper products that several of our customers are POR-ing for some legacy applications. In our (inaudible), we've also are well positioned with several products and in the advanced packaging, which are new applications, we're also getting momentum. So it's a pretty, pretty broad based.

I think -- as I've said, one of the advantages that we have is -- given our scale and the diversity of our portfolio, we are probably the largest and more diversified materials supplier in this industry. A lot of other people have different portfolios, but within the Materials segment, we have a unique position and I think that allows us to participate with scale on a larger number of PORs and that obviously allows us to get momentum.

Chris Kapsch -- Loop Capital -- Analyst

Guillermo, thank for that. And the follow up would be, based on what you just described, it seems like the commercial momentum you have across the Materials portfolio is pretty good. And you know it is almost like if you've thought about it in terms of content per wafer or per area, sounds like it's growing. And then obviously you have the added benefit of the migration of VNAND to greater layers, driving more consumption of process gases.

So, I don't know if you think about the business this way, but like is there a way you could quantify like the outperformance relative to MSI that you anticipate like say in '19 versus what you might have done in '18, because it seems like you're out distances -- based on the commercial momentum, seems like you can out-distance MSI growth by a wider margin than you did '18?

Guillermo Novo -- President & Chief Executive Officer

Right. So and I think the way you described it is the right way. I think that we have a number of opportunities. I would qualify, as I did in the prior call, we step-out opportunities. The Korea focus that we have, it's really a memory focus and China, Korea and foundry in the US is a whole market -- just Korea is 25% of the global semiconductor market and we are underrepresented there and we have all the technologies and the positions to really sell there.

So our customers are working with us. There's a lot of excitement, so that presents an upside. We had put an $800 million opportunity just in those opportunities that we're going after. Our objective is to grow at 1.5 times to 3 times MSI and that is basically driven by the diversity of our portfolio.

To do that, simplistically if I look at where we would like to be and where we have been moving is Advance Materials growing at -- let's say if MSI is 6%, advanced materials growing at double digits, our PM business growing at mid-to-high single digits, and then our DS&S business performing within the WFE numbers, which we believe over the next few years will continue to grow, because of just the volume growth of chips. What moves us is the volume of chips and the outlook is pretty, pretty good as this industry touches more downstream industries.

Operator

Thank you. (Operator Instructions) Our next question is a follow-up from Toshiya Hari of Goldman Sachs. Please go ahead. Hello Toshiya, your line is open please. It appears we have lost Toshiya's line. (Operator Instructions) Showing no further questions, I'd like to turn the conference back over to the management team for any final remarks.

Guillermo Novo -- President & Chief Executive Officer

Well, thank you very much for everyone for joining us on today's call. As you can see, we're very excited about a very strong year in 2018. But more importantly, we're extremely excited about the outlook for the industry and for ourselves in the coming year.

Operator

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

Duration: 53 minutes

Call participants:

Soohwan Kim -- Head of Investor Relations

Guillermo Novo -- President & Chief Executive Officer

George Bitto -- Executive Vice President & Chief Financial Officer

Laurence Alexander -- Jefferies -- Analyst

Brian Chin -- Stifel -- Analyst

Kieran Christopher De Brun -- Credit Suisse -- Analyst

Toshiya Hari -- Goldman Sachs -- Analyst

Jacob Schowalter -- Seaport Global -- Analyst

Neel Kumar -- Morgan Stanley -- Analyst

Chris Kapsch -- Loop Capital -- Analyst

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