Good afternoon. Welcome to day 3 of the 25th annual Needham Growth Conference. My name is Jim Ricchiuti, the advanced industrial technologies analyst at Needham. Pleased to introduce Seth Bagshaw, the CFO of MKS Instruments, as well as David Ryzhik, Vice President of Investor Relations for MKS. MKS, I think as most of our audience knows, has a long history of doing M&A. M&A in the semiconductor capital equipment market and in recent years in laser and photonics, and then in mid-August, completing the largest transaction to date, acquiring Atotech, a leader in process chemicals and equipment for the PCB as well as semi-IC packaging and industrial markets. Before we kick this off with Seth, David is gonna go through some of the usual disclaimer information we need.
Sure. Thanks, Jim. Hi, everyone. Because we're in our quiet period, our comments will solely focus on the long-term growth and opportunities for MKS and will not address results for the fourth quarter of 2022. Any forward-looking statements that we may make today are subject to our risk factors and our SEC filings. You can find the GAAP reconciliation to any non-GAAP numbers that we may talk about on our IR page of our website. To get back to you.
Terrific. Thank you, David. Seth, welcome to the Needham Growth Conference. Happy to have you here today. I wanna know a lot of folks always like to start and ask you where we are in the WFE cycle. We'll get to that. You know, I think we probably should start with Atotech, the Atotech acquisition. You know, for folks who may not be as familiar with the company, Atotech, talk to us about that business. Give us maybe a brief snapshot of the business, talk a little through the financials and really how it complements the legacy PCB drilling business, some of the semiconductor business you guys are in.
Great. Thank you, Jim, and thanks for inviting me here today. As you mentioned, you know, we did the acquisition back in August of 2022. We've been public for over 20 years now. We've done about 24 acquisitions. We do have a long track record of growing organically the acquisitions as well as growing the business through M&A activity. If you go back in time, you know, years ago, we were primarily a semiconductor-levered company in most of our portfolios. That's one of our core competencies. We have technology to innovate advanced semi devices that are foundational to the world we live in. We serve about 85% of wafer fab equipment spending. Any chip in the world's manufactured, you know, we touch at some level, we believe.
We have a track record in the semi market of outgrowing about 200 basis points higher than WFE secular spending. Very strong core competency, you know, very strong growth rate and acquisitions in that industry as well. The key thing there is really miniaturization complexity. We all know Moore's Law very well. Now you get into smaller form factors and new manufacturing techniques, and that kind of brought us to the Newport acquisition in 2019. The next frontier we see, we see from miniaturization and complexity is we call electronics and packaging market. If you look at our consolidated revenue on a pro forma basis, that's probably about a third of our overall $4.4 billion using 2021 for pro forma revenue. That cover advanced PCBs and package substrates.
Those are all the trends that we see in the semi industry that continue to as well. We're seeing more of a blurred line between the semi industry, advanced packaging, critical substrates, and the PC market in general. If you go another extension on that, what we saw was the chemistry portion of these advanced electronics become increasingly important and integrated the overall capability and design process of semiconductors and the whole electronics industry. It's really an adjacency we saw as an opportunity to expand to that market. Same type of challenges, similar type of requirements. It's all focused around miniaturization and complexity. With semiconductor manufacturing design, it's laser-based processing. Now, the chemistry piece, which we call surround or Optimize the Interconnect, the next frontier we see on expanding the opportunities in that marketplace.
With Atotech, we've run about a $5 billion served available market. Atotech is a very unique company. It's a leader in the chemistry market. It's also a leader in cleaning equipment that uses the chemistry design within Atotech's portfolio. It also has a group called General Metal Finishing, which is really levered to general industrial applications, general household goods, but more importantly, to the automotive market, which has EV content as well. We're seeing a lot of the same trends in that PCB advanced electronics market we saw in semi. This is really an extension of kind of that portfolio.
To kind of wrap up, if you look at the overall, like, pro forma revenue for the combined company using 2021, the last full year available information in the public realm, we're about a $4.4 billion company. Growth non-GAAP gross margin, you know, high 40% range, and EBITDA about $1.3 billion on a non-GAAP basis, just EBITDA. Very broad-based platform, very broad-based size of a company and a very strong financial base to kind of grow off. We're really excited about the acquisition.
Thank you for that. In addition to expanding your served available market, You know, I think you guys have talked about one of the attractions was the recurring revenue stream that it provides MKS, you know, which historically has not had. You've had a service revenue business, but not significant. How resilient, Seth, is this part of Atotech's business, if we are going into a period of economic weakness, how resilient has this been? You know, and certainly with respect to some of the concerns people have about the economy, the global economy in 2023.
Yeah, sure. It. On a consolidated basis, the chemistry revenue that Atotech brought to MKS and the service revenue we have as well as Atotech service revenue, we think that is about 40% of the combined business. Again, if you go back to 2021 on a pro forma basis, it was a $4.4 billion total consolidated revenue. About 40% of that is that more resilient, you know, more unit-based revenue stream. With your point, and we said this on the Analyst Day, it has more resiliency than most of our capital equipment levered type portfolio. It's a more sticky, it's a more integrated business. We've been focusing very heavily in MKS in growing the service business, which has performed very well for us.
Bringing in the chemistry piece kind of gives us that overall 40% of more resilient, you know, again, more unit-based, less capital and capital levered business. you know, that we think will is not immune to certainly macroeconomic activity and certainly headwinds, but it's much more, we believe, more resilient than our existing base business. We acquired Atotech for the reason I talked about from a strategic perspective and growing to these, you know, new trends and leveraging new opportunities. It also gives us that resiliency in our revenue stream as well as our cash flow as well. We think it's more resilient and again, gives a more robust financial model looking ahead for any type of downturn we see in the semi industry.
Okay. I'd like to dig a little more deeply into what you see as this complementary nature of the Atotech business with the PCB, flex and the HDI drilling business at MKS, in the PCB drilling business. You know, I think those folks have known Atotech for a while. And Atotech, I guess, sells to most of the major PCB manufacturers. You know, talk a little bit about what you see as potential revenue synergies from this combination, then, you know, what kind of a timeline would you expect to see this occur?
We see a lot of opportunity to deliver innovation in what we call Optimize the Interconnect. With ESI acquisition, we have a very strong presence in flexible PCB via drilling for laser portfolio. We are a leader in that industry. We see opportunities to develop additional market share opportunities in the HDI market on the laser-based drilling. You can combine that capability with Atotech's plating and chemistry expertise, and you have a unique solution to the industry that no one else can provide. We have the chemistry piece, we've got the chemistry plating piece, both leaders in the industry that Atotech brings to us. We can marry that with our laser-based drilling capabilities in both flexible market and HDI market. We think that can accelerate roadmaps for our customers.
It's a unique value proposition that, again, no one else has in the marketplace. The reality is the lines between the semiconductors, advanced PCBs tend to be blurring over time. We think there's a melding of those opportunities. Again, having that capability I think is again, unique opportunity for us to grow within those markets and solve complex customer problems. It also will help shorten, we believe, product life cycle for customers. Typically when you design a PCB, you have a chemistry application, you have to iterate that through demo tools. You know, do some drilling, create some boards, come back and test that again. That's a pretty complicated, you know, iterative process.
The fact we have that capability to do the laser-based drilling, the plating chemistry in one, you know, product development activity or program, we can definitely shorten that life cycle, and that's very beneficial to our customers. We've already gone out. You know, the transaction closed in mid-August. The last 5 months, we've already gone out and had a number of discussions with end customers.
In fact, we announced the transaction, but before we closed, certain customers had already reached out to us and said, you know, Once the transaction closes, we'd love to talk to you and kind of get a sense of where we can, you know, interact with MKS to develop more quickly on our product life cycles. We've gone out there and actually talked to those customers, been very encouraging and very good feedback. It's really having that capability, Jim, under one umbrella, where you have material processing, laser-based processing, and the chemistry piece all into one solution in one company is kind of the unique value proposition that I think will generate substantial revenue streams in the long term.
The timeline of that could take, you know, one, two or three, you know, three years will be some time to accomplish that. It's a very compelling, revenue opportunity we see with Atotech.
Got it. The Atotech's been around for a while. Again, not everyone is familiar. Talk to us a little bit about market share for them in this PCB market and what the competitive landscape looks like.
Yeah. Atotech is unique. Atotech is the only company in the industry that offers equipment and chemistry and services, again, under one portfolio. The equipment portion of Atotech's business, now Materials Solutions Division, is a critical enabler to pull through the chemistry applications cause we can optimize the chemistry solutions with having that equipment capability as well. Again, no one in the industry has that type of capability, so that is very unique. We also have very localized service opportunities. We've got about, you know, we're in every major geography where our customers are from a service perspective. We have about 16 tech centers that allow us to work very closely with customers. We can help develop solutions that can be done on the ground in any country, that's something I think is unique as well.
I don't believe anybody else has that type of capability. We add in our laser drilling systems, and we can add that type of capability no one else has in the industry as well. you know, if you, if you heard the analyst say, you know, comment from two individuals who, you know, came from our chemistry division and Materials Solutions Division, you know, one of their comments has been it's one of their major dreams to have that capability all under one umbrella. Rather than just have chemistry and plating equipment, now you can add the drilling content, component as well, and you get a more broad-based solution and quicker time to market. That's where Atotech has been unique, and then adding that capability we already have in-house makes it even more unique proposition.
Seth, we know that the ESI business that you acquired a few years back certainly was a cyclical business. I get the fact that there's a recurring revenue stream associated with Atotech. How do we think about that hardware portion of that business? How much and how susceptible have they been to the cycles, that part of the business?
Yeah. You're absolutely correct, Jim. The PCB laser drilling business is, you know, equipment business, kind of capital, you know, based on capital expansions. It has a bit more cycles, you know, than the Atotech business, although those trends are very, very attractive. Atotech's electroplating business is again more of a unit-based and more of a steady consumable driven business. I think there's less volatility there for sure. The fact that we can optimize the chemistry with our own equipment, I think creates a more sticky customer relationship in the long term as well. Fundamentally, it's a more unit-based and much less, I think a volatile business, less cyclical business that we had seen our underlying capital equipment with PCB via drilling.
you know, again, we're very optimistic that's go be a great opportunity for us in the future.
You mentioned, and I didn't, it was certainly discussed in the Analyst Day the tech centers that they have, Atotech has had near their customers and this really ties into the question I have on Geode. We can talk a little bit about Geode is your high density interconnect tool, and you've gotten traction with it, but it seems to have taken longer to really ramp than some of us had expected. You know, first off, talk to us about how, you know, how satisfied you are with the progress you're making in this area, then, you know, to the extent to which, having Atotech as part of MKS, you're going to a be able to potentially leverage it a little more.
In the HDI market, we're on the laser drilling piece. We're very, you know, we like that market a lot. That was the initial, you know, theme in acquiring ESIO back in 2019. We've had some penetration in some major customers. We have a number of tools operating in high volume manufacturing environments. We have had some traction in the HDI market for sure. You're right, a little bit slower than we anticipated. It's primarily due because you've got a pretty large incumbent in that market already. You gotta kind of time some design cycles to pick the right, you know, opportunity to take those design wins and convert to revenue longer term. We still are very optimistic we can do that in the long term.
Now when you roll in Atotech is very strong in the chemistry portion and electroplating portion of the HDI market. They sell to virtually every one of the major HDI manufacturers. Having, again, that capability where they know the market, they know the players, they're very well respected, you know, we are very well respected, and now we can use that opportunity to bring in and leverage some opportunities in the HDI drilling platform. We've already had those dialogues with customers. That's our next stage, if you will, to kind of pull through the Geode tool, you know, adoption process. At the same time, we're also investing in next generation Geode tools as well. Continuing to make those R&D investments and really try to stay ahead of the market. We think the Geode tool has differentiation.
It's a smaller tool, it's a lighter tool. The throughput is very good. It's just a matter of getting that, you know, those design wins from major NPCB manufacturers. Again, what Atotech brought to the portfolio and their expertise and their relationships, I think that'll be beneficial for us as well. We're playing the long game. Again, we're very optimistic. We like that market a lot, and now we have another lever to pull and opportunity to kind of, again, bring more customer value propositions to the marketplace. That's where Atotech can be very helpful for us, we believe.
Okay. Obviously the competitor you're talking about with Geode is Mitsubishi, correct?
Correct.
That's where you think, you might have some more success, as you leverage Atotech.
Yeah.
On the electroplating equipment at Atotech, talk to us a little bit about, I thought it was interesting and there was some data points, some metrics you guys provided in the Analyst Day in terms of how much of that equipment that's out in the market and is using, still continues to use Atotech chemicals as well?
Yeah.
The stickiness to this. There's a stickiness aspect that I guess is what I'm pursuing, so.
Yeah, no, that's a great question, Jim. Yeah. You're absolutely spot on. In the Analyst Day, we talked about how a lot of our chemistry we've developed in the marketplace is optimized to run on our plating, you know, capabilities. Some of these plating production lines are as long as a football field. They're quite complicated. Once they're, you know, once they're in, they're in, and that's the manufacturing environment. Fundamentally, about, I think about 85% of the equipment that we put in the field is using our chemistry. That is a very, again, unique proposition. It's very unique in the marketplace. No one on the chemistry side that we compete with has that type of capability.
That's where we see, again, that pull through with the equipment piece into, again, create that more unit base, that more of a stickier chemistry revenue, in the long term. These plating lines have a relatively long life. You know, once they're in, they're in. They're very large and complicated. We get a recurring service revenue and spare parts off that business as well. Really fundamentally, they're optimized to run our chemistry, and that's where 2+ 2 equals 5. The customer values that quite substantially, and that's why that stickiness and that pull through is high as it really is.
Got it. I know you can't wait to tell us about where we are in the WFE cycle. I promise I'll give you that opportunity, but I want to also talk a little bit about the specialty industrial portion of this business. Level set this in terms of overall revenues, because it is a somewhat newer area for you, for the folks who have known MKS. Talk to us about what some of the bigger end market contributors are and the faster-growing segments of the market.
We broke up our, you know, our market into three categories. You already have the semi, electronics and packaging, specialty industrial. Specialty industrial is roughly about 30% of our combined revenue, depending on, you know, what period of time you're looking at. The biggest piece within that specialty industrial market is Atotech's General Metal Finishing business, which is about a $500 million roughly run rate business. What's also in specialty industrial is, you know, the MKS legacy, you know, general industrial market, life health science, you know, research and defense.
The Newport business. The Newport.
Primarily Newport, correct. A little bit of, you know, legacy MKS, broadcast. What's interesting about that, those markets are, I'll take the GMF off the side for one second. The life health science, the R&D general industrial, typically those products in those markets are leveraging the technology we developed for the semiconductor market as well as electronics and packaging. The beauty is you develop a technology like a Baratron, you know, measuring pressure in a vacuum environment, which is essential to the semi industry. There's many other industrial applications that can also utilize that technology. Same thing for, you know, lasers for research and so forth, and defense. The R&D dollars are spent kind of in the other couple markets, but technology can be ported to these other applications.
You look at the General Metal Finishing piece of the Atotech business. About $500 million of revenue run rate, about half of that is in the auto industry. What's interesting is the Atotech's electronics business was actually initially came out of the GMF business, you know, years and years ago. There's a lot of cross-pollination in terms of R&D dollars and the chemistry side between GMF as well as with electronics and business of Atotech. In general, that collection of markets and products we believe is more of a GDP plus grower type business. You know, attractive margin, attractive EBITDA margins.
you know, it's got some good opportunities as well in terms of growing in different categories. When you step back on the automotive piece, which again is about $250 million of that overall, especially industrial market, the migration from internal combustion engines to EV vehicles creates about a 50% additional content for GMF technologies. Auto is actually a great place for us to be 'cause the EV content going forward. These are nice markets, a nice collection of businesses. Again, most in many cases, some of the R&D dollars are spent in the other markets and port of those products. Then the GMF piece of the Materials Solutions Division, you know, acquisition is really probably the biggest single piece of that overall specialty industrial market.
Chip, can I ask you a little bit more about that auto? It wasn't obvious to me until actually we went to the Analyst Day. you know, I think some of us were a little surprised when we heard that 50% additional content related to EVs. Can you help some of our audience understand why that is?
There's a great slide. You can pick up the Analyst Day slides on our website. There's a good slide that kind of gives you a diagram of an automobile and kinda like when you go from a, you know, ICE internal combustion to an EV vehicle. You know, what parts go away. Obviously, the engine goes away. What parts come in that require some unique tuning capabilities. The parts that are kinda unique that come into an EV vehicle that wouldn't be necessarily there in a internal combustion engine is, you know, battery, you know, coatings, really things that are really required the electric drivetrain, which requires special coating.
You've got things like, you know, heavier shock absorbers, different types of support structures, cause the vehicle is heavier with the battery in certain cases, and then new material requirements as well. It's a nice little diagram we have on the website. That'll kinda give you an illustration there. When you kinda step back, it's about a 0.5x multiplier, more content for the EV vehicle, primarily cause of electronic components and the drivetrain required.
The, the legacy GMS industrial business that's sold into automotive, it's, how would you characterize their market position in auto?
I don't think I know off the top of my head, Jim. We're definitely a leader in the industry. We've got strong content. I don't know if, David, you recall.
Yeah, I think. Yeah, Jim, I think they're, we're number two in the GMF category overall. We haven't disclosed specifically with regards to Atotech where we are.
Okay.
Certainly one of the top providers of GMF.
I guess where I'm going with this, it seems like you're already in this market, and the customer base knows GMF industrial. They've been working with them. As they transition to EVs, it would seem like they would be somewhat of a logical partner to work with.
Yeah, I think it's a, it's a fair view. The, you know, we are well-known in the industry. Again, we're number two in that space, as David mentioned. We have that relationship, that capability, and that gives us a ability to take a, you know, next step and drive those solutions, hopefully gain share in that marketplace. Absolutely.
You know, talk to us a little bit about the margin profile of the way the business, the way you're presenting the business to us now in terms of electronic packaging, specialty, industrial. How do they compare?
you know, overall, you know, consolidated margins, you know, we saw in the, you know, the model we published in the Analyst Day. Think of that, you know, mid 40% gross margin level and kinda low 20 points of operating margin. It depends on where we are in terms of cycle and revenue. We haven't broken out the margins by, you know, those type of categories, you know, semiconductor and, you know, electronics and packaging or specialty industrial. If you look in the SEC filings, you'll see it at divisional level. The Vacuum Solutions group is primarily semi. You know, Photonics is mostly advanced electronics and semi with a little bit of specialty industrial. Materials Solutions we've talked about is primarily advanced electronics and specialty industrial.
In those margins you'll see by division, it gives you a good snapshot. You know, roughly, you know, around that mid-40% range. Material Solutions if you're talking gross margins on non-GAAP basis, Material Solutions a little bit north of that. Again, that's the chemistry component we like a lot. The Photonics is probably a little bit north of Vacuum as well. They're all kind of in that, you know, mid-40% gross margin, you know, category. The cash flow, EBITDA margins, you know, are also pretty much around the corporate average, give or take a little bit 'cause of gross margin differential. They're all very good markets and very good profile. It makes my job a little easier to try to model the business because.
Yeah.
you know, they're all pretty good places to, you know, to be in, good markets and, all pretty consistent, actually.
You know, on the legacy semi business, you get the question quite a bit. We do as well. When you guys have talked quite often about being your expectations to grow 200 basis points above WFE, you know, the question always comes up about how, you know, how confident are you that that's really sustainable longer term? Because the business is bigger, it's harder to take share. You haven't always grown 200 basis points above. Talk to us a little bit about why you still think that's the case when, you know, depending on wherever we are in the cycle, obviously.
We looked at the, you know, for us it's over the longer term, so any 1, you know, any 1 quarter, 1 year, you're gonna have different parts of the cycle. We've kind of taken a view over, you know, multiple-year period. Again, it's all in the Analyst Day. We've got a nice slide that kind of shows our outperformance. We feel very strongly about that going forward the next, you know, 5 years for sure. That was in our published model, outperforming the overall market. You know, fundamentally, you know, why is that? This is organic, by the way, you know, We've identified good places to be. You know, the etch and deposition with more process steps is a good place to be. We gained share.
We've talked about in calendar year 2021, you know, external data came out with market share data and, you know, we grew share in our power supplies, our matching networks, remote plasma, you know, pressure sensing and a couple other markets as well. Have identified, you know, as we all well know, a inflection point with 3D NAND as well. We have a lot of views out there to look around the corner to see where the market is moving and try to, you know, skate to where the puck is. That's been our playbook for many, many years. It's been very effective for us as well. The more process steps help us, the more complexity, you know, all the Moore's Law capabilities and requirements, you know, we like a lot.
You know, with Newport, we brought in photonics applications, and so now we serve all major OEMs in the industry. We talked about in the last earnings call, the world-class optics group, which is, you know, Photonics Solutions Division, you know, levered to KLA and to ASML and others, due to design wins we put in place for 1 years ago and efforts we've done years prior, you know, grew 30%, you know, year-over-year. We've got a lot of chips on the table, a lot of ability to, you know, lever our expertise. We've got great rapport with our customers. We really wanna be involved in the most critical and difficult process steps. That's been our track record for years. There's no change in how we run the business or how we view that opportunity.
The last piece I'll mention is we did acquire a great company in 2021 called Photon Control, which is a public company in Canada. Great in temperature measurement in the semi industry, and we give them like instant access to a worldwide, you know, sales channel that they wouldn't have had on their own because of their size. We will pull them along and just, you know, continue to grow that business as well. That's why we feel very strong about that model going forward, and our track record kind of demonstrates we've done that. We. You know, that is our core competency, and we're very, very optimistic going forward.
You know, coming out of the Q3 call, you guys provided a little bit of color in terms of how you were thinking about the U.S. Export Control Restrictions on China. You know, what you were saying struck people as a little bit more cautious relative to some of your customers.
Mm-hmm.
I'm wondering, you know, how we should be... How do we reconcile some of that, Seth?
Yeah. You know, obviously we follow all of the, you know, export control restrictions in any country we operate in. You know, relative to whether, you know, we're cautious or not, I think what is kind of important to understand is, you know, a lot of that exposure to the end semiconductor market in China, you know, goes through our OEM channel, right? Indirect exposure. You know, Lam and Applied and so forth as well. We have direct sales as well to some of the domestic China OEMs. We've got a little more complicated model than maybe some of the OEMs do because we don't have complete visibility on the OEM side, how much of their revenue might be affected by this, these new regulations.
I think we're still doing a fair amount of, you know, due diligence on this and really looking at customer end-use statements and determining the impact on our business. These regulations came out right, you know, the time we did our call, so we had, you know, not a lot of time to kind of digest it. We had what we thought was a pretty thoughtful view on it. We wanted to kind of be as transparent as practical, and that was certainly our, you know, our estimate at that point in time. We'll probably update in a couple, you know, weeks on our fourth quarter call. Having said the China impact of anybody's business, you know, we still believe that the chip revenue will increase over the long term.
Any chip in the world that is manufactured, no matter where it resides, will require our technology and our expertise. You know, if that capability moves to other countries or jurisdictions, you know, we think we'll be well positioned to continue to serve those, you know, existing and newer customers, no matter where that fab resides. For us, we're optimistic in the long term we'll be well positioned no matter where that production ends up. Right now, you know, you're right. It's a little difficult to get a complete, hard, you know, good view because a lot of moving pieces. That was our best estimate back in the, you know, end of the third quarter, third quarter earnings call.
Yeah. Just switching gears for a second. You gave us some targets at Analyst Day, including one around non-GAAP gross margins, which I guess you're targeting around 47%. You were kind of at that level in 2021. Atotech has higher gross margins. Is there something we're missing? Or is this just MKS conservatism?
Well, I think it's basically, you know, we believe it's important to set, you know, achievable targets. Our goal obviously is to, you know, meet those targets and hopefully overachieve over time. You're right. Back in 2021, the margins, the gross margins were in that 40% range and, you know, midpoint for Q2, which included Atotech, was 44.5%. What's, you know, what's affecting that at this point is, you know, like other companies, we're not immune to inflationary pressure in the marketplace. We're incurring, you know, higher input costs from manufacturing, certainly higher labor costs, so forth and so on. It's kinda has had probably the biggest impact on the potential results through the end of 2022.
I think, you know, 2023 is the SoC year will, you know, obviously, have an impact on potential revenues going forward, but we'll see how that rolls out. I think what's most important is we wanna make sure these targets were again reasonable and achievable and something that we felt very good about. On the inflationary side, we're working very hard both with the Materials Solutions Division and our other two divisions to really get back to those, I'll call it pre-inflationary and, you know, pre-pandemic, operating profit levels. We've had in place a number of activities for years to continue to challenge the P&L and find more ways to be more efficient and more profitable. We saw inflationary pressure occur in 2021. We leaned to that, you know, pretty proactively.
It's gonna take a while, I think, to really offset some inflationary pressures. That's definitely our goal going forward. That's kind of our thought process there. Again, these five-year goals, we thought they were just something we just thought they would be quite, you know, would be achievable over time.
Okay. We're running close to the end of this. I wanna ask a last question just in terms of the environment is certainly a lot more complex. Rates have moved up pretty sharply since you first announced the deal. You know, talk about capital allocation, how to what extent that's become a little bit more complex and the priorities. You already talked at Analyst Day, it looked like a pretty good slug of debt was paid down already. Talk to us about that.
Yeah. I think the capital allocation, you know, fundamentally, the race is certainly higher on the debt side for sure, but the fundamental capital allocation is pretty consistent. We always focus on what drives long-term shareholder value. I think, you know, in 2023, I've been pretty transparent. We do wanna delever the balance sheet. That's kind of primary focus. We always look at, you know, dividend growth. We look at share buybacks. We think right now for certainly this next calendar year is deleveraging is kind of the right approach for capital allocation. The thing that's also worth noting too is we're a much larger broad-based company today with a bigger financial footprint, you know, more resilient revenue. Much different now than we were, you know, 5 years ago.
It gives us confidence that we can delever the balance sheet and generate, you know, free cash flow to, you know, again, long-term shareholder value in terms of M&A or share buybacks or have the best use of capital. If you look at our long-term model that we published in the Analyst Day, that model has about 2 times gross leverage in 2027, and there'll be a fair amount of cash available in that timeframe to have other optionality, again, to do things that really drive long-term shareholder value. It's really fundamentally nothing's changed. We're just a larger, more, I think a bigger footprint, a bigger financial profile. Again, delevering the balance sheet and delivering the debt on the balance sheet is really where we're focused now, certainly the next 12 months.
It might be longer, we're gonna at least the next 12 months then reassess.
Got it. I think we're going to end it there. Seth, thank you. Thanks for joining us today.
Great. Thank you, Jim. Take care.
You too.