Ultra Clean Holdings Inc (UCTT) 2009 Q2 法說會逐字稿

Good afternoon. My name is Chanel and I will be your conference operator today. At this time I would like to welcome everyone to the Ultra Clean Technology second-quarter financial results conference call. (Operator Instructions)

Joining us today is Mr. Clarence Granger, Chairman and Chief Executive Officer. I will now turn the call over to Mr. Granger. Sir, you may begin your conference.

Thank you Chanel. Welcome to our second-quarter financial results conference call. With me today are Casey Eichler, our newly appointed Chief Financial Officer; and Linda Clements, our Principal Accounting Officer. Linda will begin by presenting the financial results for our second quarter and I will follow with some remarks about the business. Linda?

Thank you Clarence. A few moments ago we issued a press release reporting financial results for the second quarter ended July 3, 2009. The press release can be accessed from the investor relations section of Ultra Clean's website at UCT.com.

In addition, we have arranged for a taped replay of this call which may be accessed by phone. This replay will be available approximately one hour after the call conclusion and will be accessible for two weeks.

The dial-in access number for this replay is 800-642-1687 for domestic callers and 706-645-9291 for international dialers. The passcode is 20630569 for both domestic and international dialers. This call is also being webcast live with a web replay also available for 14 days from the investor relations section of our website at UCC.com.

Together with our recently issued press release, this conference call enables the Company to comply with the SEC regulations for fair disclosure. Therefore, investors should accept the contents of this call as the Company's official guidance for the third quarter of fiscal 2009.

Investors should note that only the CEO and CFO are authorized to provide Company guidance. If at anytime after this call we communicate any material changes in guidance, it is our intent that such updates will be done officially via public forum, such as a press release or publicly announced conference call.

The matters that we discuss today include forward-looking statements as defined in the US Private Securities Litigation Reform Act of 1995 related to matters including our future financial performance, new product orders and shipments and industry growth. Investors are cautioned that forward-looking statements are neither promises nor guarantees, but involve risks and uncertainties that may cause actual results to differ materially from those projected in the forward-looking statements.

Some of those risks and uncertainties are detailed in our filings with the Securities and Exchange Commission, including our most recent Form 10-Q filed for the quarter ended April 3, 2009 and Form 10-K filed for the year ended January 2, 2009. The Company disclaims any obligation to publicly update or revise any such forward-looking statements or to reflect events or circumstances that occur after this call.

Now here are the second-quarter results. Revenue for the second quarter of 2009 was $23.3 million, up 4% from first-quarter revenue of $22.4 million, and a decrease of 66% compared to revenue of $67.4 million in the same period a year ago.

The increase in revenue was due to increased demand for Gas Delivery Systems, reflecting some degree of stabilization in the semiconductor capital equipment industry. We saw a decrease in our non-semiconductor business as an increase in research revenues was more than offset by decreases in other non-semiconductor industry revenues.

Semiconductor revenues increased $2.4 million or 21% sequentially, while non-semiconductor revenues decreased $1.3 million or 12% sequentially to $9 million. We experienced a negative gross margin for the second quarter of 3.7%, a 910 basis point improvement from a negative gross margin of 12.8% recorded in the first quarter, and a decrease from a positive gross margin of 11.2% in the same period a year ago.

The $2 million sequential gross profit increase is primarily attributable to payroll related cost savings. Operating expenses were $5.4 million, a decrease of approximately $1.2 million from the prior quarter, excluding approximately $700,000 in restructure charge and transaction costs recorded in the first quarter of 2009.

The sequential decline reflects cost savings from staff reductions and other cost-saving activities. Net interest and other expense of $228,000 represents an increase of approximately $33,000 from prior quarter, primarily as a result of an increase in interest rates on third-party debt. Our pre-tax loss was $6.5 million compared to a pre-tax loss of $10.4 million in the first quarter of 2009.

Our effective tax rate is 34% and is greater than the 32% previously forecasted, due primarily to the effect of foreign operation. However, our tax benefit for the second quarter was offset by an FAS 109 tax valuation allowance.

In establishing this valuation allowance, the Company is reducing its deferred tax asset value to zero, resulting in a one-time tax expense of $7.6 million. Exclusive of the non-cash tax valuation allowance, the second-quarter non-GAAP net loss was $4.1 million. This compares to a net loss of $7 million recorded in the first quarter of 2009 and a net loss of $200,000 in the same period a year ago.

On a GAAP basis, the second-quarter net loss was $14.1 million. Our second-quarter non-GAAP net loss per share of $0.19 compares to a net loss per share of $0.33 for the first quarter of 2009 and net loss per share of $0.01 for the same period a year ago. Our GAAP basis second-quarter net loss per share was $0.66.

The second quarter 2009 net loss per share is inclusive of non-cash charges of $800,000 or $0.04 per share related to SFAS 123R during the period and $600,000 or $0.03 per share related to depreciation and amortization. A reconciliation of GAAP to non-GAAP results can be found in the investor relations section on our website at UCC.com.

Second-quarter revenue of $23.3 million and the $0.19 non-GAAP loss per share are above the midpoint of our guidance for revenue of $20 million to $26 million and loss per share between $0.16 and $0.27. Turning to the balance sheet, during the second quarter, cash increased $400,000 to $30.2 million, while third-party debt decreased $1.2 million to $16.1 million. Taken together, cash net of third-party debt increased $1.6 million during the period as working capital reductions more than offset the operating loss.

This brings our net liquidity to its highest level since the first quarter of fiscal 2006. Accounts Receivable of $10.3 million decreased slightly from first-quarter levels.

Day sales outstanding decreased to 40 days from 42 days at the end of the first quarter. Accounts payable of $11.2 million increased approximately $500,000 or 5% due to increased purchases during the quarter. Days payable outstanding at the end of the second quarter increased to 42 days from 38 days at the end of the first quarter.

Net inventory decreased $5.9 million or 15% to $32 million as we continued to consume inventory. On a year-to-date basis, net inventory has decreased $7.8 million from $39.8 million reported at the end of fiscal 2008.

Now Clarence will discuss our operating highlights for the second quarter and provide guidance for the third quarter of 2009.

Thanks Linda. Semiconductor capital equipment demand began to stabilize during the second quarter of 2009. While end-user demand continued to be limited to next-generation technology and maintenance purchases, we did experience a $2.4 million increase in semiconductor equipment revenues. We also completed most of the rework on our customers' existing subsystem inventory.

In this turbulent business environment, our primary focus remains on maintaining a strong balance sheet, while decreasing our cost structure and strengthening our customer relationships. During the quarter, we were able to further strengthen our balance sheet, increasing our cash and decreasing our debt by a combined total of $1.6 million.

This was accomplished through cost reduction activities and inventory reductions. In the second quarter through a focused effort, we reduced our inventory by 15%.

We also exceeded the mid-range of our revenue and EPS guidance on a non-GAAP basis. Additionally, our new supply agreement with the FEI Company is off to an excellent start and a we achieved new business awards with FEI and two other companies.

Finally, during the quarter, we continued with actions to reduce our cost structure. I will now provide further details on these activities and accomplishments.

Due to the unprecedented industry decline, we continued our aggressive cost reduction measures. We had 15 shutdown days in the second quarter and have planned nine shutdown days in the third quarter.

Also during Q2, we implemented across-the-board pay cuts, ranging from 15% to 45%. These pay cuts have since been reduced to a range of 7% to 22% due to improving business conditions. We will continue to align our cost containment actions with changing business conditions in the coming months.

I will now provide an update on our key strategic initiatives -- increasing the non-GAAP delivery portion of our business, increasing revenue in our Shanghai facilities, and expanding our revenue base outside of the semiconductor capital equipment industry.

During the second quarter, UCT was awarded three new business opportunities. Two of these are with semiconductor equipment customers and one is with FEI, which I will discuss later.

The first semiconductor equipment award is a next-generation gas abatement module for one of our largest customers. This module will not go into full production until 2011 but revenues for the prototypes scheduled for production during 2010 are projected to be $1.5 million.

The second award is a process module for one of our existing customers. This module is currently manufactured by our customer and is in volume production. This is the first time this customer has outsourced modules, other than Gas Delivery Systems, to UCT.

2010 revenues for this module are projected to be in the $4 million to $5 million range. Combined with the new business opportunity at FEI, the total projected revenue in 2010 for the three new business opportunities awarded to UCT in the second quarter is approximately $10 million.

As overall demand has begun to stabilize, our customers are focusing more on their efforts at outsourcing. Our pipeline of new business opportunities is at the highest level it has been in several quarters.

During the second quarter, our China-based revenue decreased to 14.9% of total revenue, down from 18.1% of revenue in Q1. This was the result of declines in the solar and flat-panel portions of our business, which are primarily manufactured in our Shanghai facilities.

We remain confident that demand for manufacturing in our Asian facilities will resume its growth pattern, particularly as our customers migrate more of their manufacturing to Asia. Also during the quarter, we continued to make progress on expanding our business beyond the semiconductor equipment industry.

Our hosted outsourcing project with the FEI Company is proceeding on plan. In Q2, shipments to FEI exceeded 10% of our total revenue and we met all of our delivery targets.

We remain on track to have our 2009 revenues with them range between $10 million and $15 million. This will be the fastest ramp UCT has ever experienced with any new customer.

Also during the quarter, we were awarded a new business opportunity with FEI which has projected revenue of $3.5 million in 2010. This new business award is clearly an indicator of a successful business relationship between our two companies.

Overall non-semiconductor revenue declined on a percentage basis to 41.7% of total revenue in Q2 down from 47.5% in Q1. This was due to reduced demand in the solar, flat-panel and medical portions of our business. In Q3 we anticipate increased demand for flat panel and medical equipment.

Next I would like to provide our guidance for Q3. While we remain cautious about the long-term outlook, we project an improvement in industrywide demand during the second half of 2009.

Revenue for the third quarter is projected to range between $30 million and $36 million. Net loss per share is projected to be in the range of $0.09 to $0.17 per share on a non-GAAP basis.

On a GAAP basis, net loss is projected to be in a range of $0.16 to $0.24 per share.

In summary, during the second quarter, UCT exceeded the mid-range of its revenue and earnings per share guidance in another very challenging period for the industry. We continue to strengthen our balance sheet, increasing our cash and decreasing our debt.

We took necessary cost control measures, including mandatory time off and across-the-board pay cuts. We successfully transitioned into volume manufacturing for the FEI Company. And finally, we received three new business awards.

Though industry demand remains weak, we are seeing some signs of improvement and our pipeline of new products is strong. In closing, we are very pleased with our financial stability and we remain very optimistic about our market position and our flexible business model.

With that, operator, we would now like to open the call for questions.

(Operator Instructions) Jay Deahna.

A couple questions. It looks like your non-GAAP loss guidance of $0.09 to $0.17 and $30 million to $36 million after doing $0.19 and 23.3, it looks like your cost structure is coming up or something. There is not a lot of leverage there. I was wondering if you could sort of enlighten me on that a little bit.

I will tackle that one a little bit first, and then I will let other people chime in. What is starting to happen is we are starting to feel the need to take into account some of the personnel-related issues.

So as you heard in my statement, we had a larger pay cut in force. We had a 15% to 45% pay cut in force for all employees.

That turned out to be very draconian and was really long-term unlivable for our employees. So we are really starting to feel the need to reduce that burden somewhat. And on top of that, we had imposed 15 shutdown days last quarter and we are reducing that to nine shutdown days this quarter. So, obviously, some of that is related to improving business conditions, but some of this is also related to the necessity to make sure we have a stable workforce.

Right. So -- go ahead.

No, I was going to say -- did anybody else want to add something?

I think another factor obviously last quarter we did more rework, as you commented on, and that tends to have a little different margin but it's not sustainable for business long-term. So as we transition back to a more stable and normalized business, I think that has some impact when you look at last quarter to this quarter.

I see. So basically is it somewhat correct to interpret this as that you started to see a recovery -- you're starting to see some sort of recovery here, probably a little quicker than you would have expected, maybe 90 days ago when you embarked on these cost cuts and that you need to set a somewhat higher breakeven level than your target in order to put resources in place to start growing again? Is that sort of the way to look at it?

Yes, that is very accurate. Basically what we are saying is we are starting to hire back a few people. We've brought back quite a few people from furlough.

And, obviously, we are conscious of making sure that the current level of employees, the morale in the workforce remains strong so that we don't have a lot of people looking to leave the Company. As a consequence, we feel it is necessary to scale back some of the cuts that we felt were critical at the time we were in a purely survival mode. It now feels like we are moving from a survival mode, maybe not fully to a recovery mode, but certainly heading more in that direction.

I see. So a quarter or two down the road, if you get to the point where you've normalized your compensation structure and you're open for all the days in the quarter, what should we assume that your GAAP and non-GAAP breakeven levels will be?

The cash flow or breakeven will be somewhere in the low 40s. So it is a little higher than the 38 that we had thought previously and the GAAP breakeven is probably in the low 50s.

Okay and then one more before I hop off here. Casey, what drove your decision to go from being a Board member to being a CFO and what are your thoughts going forward here?

I have been involved with the Company as a Board member, as you noted, since about the beginning of 2004 and have watched Clarence build the team out and also build out the vision from purely a gas panel company to a much broader company with a much bigger opportunity. So as I got involved in trying to help Clarence, I could really see the opportunity in this business, and the opportunity to grow this business, not only as it has been traditionally, but also in some nontraditional ways and felt that some of the things that I can bring to the table along with David Savage, who we have added about 18 months ago, has been a terrific add.

Clarence and the rest of the team here really put a team together that we could really take this Company to the next level, and that is what you look for in a company. So I'm pretty excited to be here.

This is Clarence again. I would just like to add, we are very excited to have Casey, someone of Casey's caliber join our finance organization. Casey obviously has a very strong background as a public company CFO and we are very excited about that. But the fact that he does have five years of board experience with UCT makes him very knowledgeable in our Company and in the overall industry and we are very excited about this addition.

Great. I will hop off for now, then come back.

Edwin Mok, Needham & Company.

Thanks for taking my question and congratulations for having Casey as a CFO. Just quickly, I may have missed it, did you mention how much was your business in medical and how much was it from flat-panel displays?

So we don't give specific breakdowns in those segments. What we said is that overall our non-semiconductor revenue, I believe it is 41.7% of our total revenue and that is down from 47.5% in the previous quarter. What we -- what I did say anecdotally is that we did experience declines in both our flat-panel and in our medical device business in Q2.

I see. Great. I think originally you guys had some guidance on the [FEI revenue] for the full year. Given that it was down this quarter, I have inferred either your medical business was down a lot of your [FEI obviously] didn't ramp as fast as you had thought. Can you help me with that?

Sure. I will respond to that.

So yes, it is not the FEI business. The FEI business came in exactly at what we were expecting.

So what we did see is a greater than originally anticipated decline in the two, the medical and the solar. But what I will say is that certainly -- excuse me -- the medical and the flat-panel. And what I will say is that the medical has come back very strongly and it looks like the flat-panel is going to come back as well.

Clarence, one more question on the Shanghai facility. I think historically you guys reduced your flat-panel equipment there as well as some gas panel for the solar too. Given that the solar piece is slower, any thought about transferring other production to that site?

Yes. So several of our traditional gas panel customers are now looking to have us transition products to China. One of our largest customers is actually opening up a facility in Singapore.

And as a consequence, they are looking to have more production transferred to Asia. So I absolutely believe that within the next two or three years, more than 50% of our revenue will be coming out of our Asian-based operations.

So this slowdown is absolutely a temporary blip and you are absolutely correct. We do expect to transition other products over to China in the fairly near term, in either end of this year or early next year.

Okay, one -- actually I guess two more questions. First just a housekeeping question. How do we look at tax going forward?

Well because of our -- the net operating losses in recent history, the accounting guidance as we -- our income tax provision will be essentially zero. We will have a small credit in Q3 and a small credit in Q4 representing the pieces of the NOL that are available to carry back, but essentially you should assume zero.

Edwin Okay, so if I use that as assumption, it seems like your gross margin seems [to imply to be around] 0%. Is that correct or am I missing something there?

Q3 we are expecting gross margin to be at the 3% to 5% range.

And that means we just come from high volume, is that correct?

Yes.

Certainly, the extra volume -- doubling back on your tax comment, so we are being conservative and we are still booking our tax provision, but we are doing a full reserve against the tax provision in the balance sheet. What that does from an income statement standpoint, as Linda mentioned, is it puts a 0% rate going through the P&L. But we are still calculating a tax provision and when it is demonstratable that we will be able to get that benefit, then we will start treating the taxes back more in a normalized way.

The only thing you'll see over the next couple of quarters going through there is we are still anticipating the tax refund that Clarence is talked about in Q1 and so as you go through the last couple quarters, there is always a true-up that you have to make in your tax calculation each quarter. So there will be a small number there. But (inaudible) when we have been guiding you I think last quarter to 32%, and putting in a provision, you shouldn't be doing that this quarter.

Correct.

Okay. All right. I will circle back on that. Thanks.

(Operator Instructions) Jay Deahna.

Thanks very much. So if you look at the segments of your business, just give us a sense to what your outlook is for the second half versus what you were thinking 90 days ago, by segment.

Sure. I guess what I would say is it looks like the semiconductor is definitely going to be up in the second half. We are seeing significant demand increases and obviously that is reflected in our projected revenue increase for the quarter.

We are also seeing significant increases in our research portion of our business as we have projected with FEI. We are now seeing significant increases in the medical portion of our business. We are seeing some increases in the flat-panel portion of our business, although not quite the same level as the others are in and at this point in time, we have seen no recovery on the solar side.

Right. Okay. When you're giving this commentary, are you referring to 3Q or are you referring to the second half?

When I'm giving specific number commentary, I am talking about Q3. But in terms of general comments, it appears that Q4 is going to be -- we are projecting -- the general comments are for the entire second half.

Okay. So on the cycle, given that you are -- actually let me go back for a second. You had three new wins that you're projecting can generate roughly $10 million of sales next year.

That's correct.

You indicated your pipeline is about as strong as you have seen in a while. Do you think that that level of new mandates is indicative what you are expecting for the next several quarters or do you see chunkier stuff coming through?

I think we are very confident of the new opportunities being at least that magnitude. There's certainly some opportunities that could be significantly larger.

I don't know that we are inconsistent from what you have been hearing from everybody else. I think everybody is pretty confident in the second half of the year showing improvement, but everyone gets pretty reserved when you start looking out past the end of '09 and I don't know that we are seeing anything particularly different.

I see. Then, Clarence, if you -- if there's a reasonably decent cycle over the next several years, where do you see your next cycle revenue potential versus the last cycle? And you can put that into any perspective that you want.

But basically where I'm coming from is that in the early '07 timeframe when you had your peak for the last cycle, you were very much a gas delivery subsystem company. Now you are very much a lot more than that. So just trying to get a sense as to what your expectation is for peak to peak revenue potential for the business and where you would expect your operating margins to be versus the last cycle.

I will let Linda or Casey talk about the operating margins. If you think about -- and we peeked in 2007. We did just over $400 million and we peaked in Q1 where we did $110 million in that quarter.

At that time over 90% of our demand was in semiconductor capital equipment and the majority of that was in Gas Delivery Systems. We have now almost half of our revenue coming from non-semiconductor and we have also grown significantly our percentage of revenue coming from modules other than Gas Delivery Systems.

So we have maintained our market share in gas delivery. So if we see any significant recovery in the semiconductor equipment side, I would fully expect us to be somewhere at least 1.5 times the size we were at that peak revenue.

So that was 400 -- well $110 million a quarter. I would expect us, should we see another ramp like that or when we see another ramp like that, to be closer to a $600 million a year company than a $400 million a year company.

And remind me what your operating margins were in the (multiple speakers) then and where they can go.

(multiple speakers) Linda?

So we are anticipating at those higher levels that we would -- could get a 10% to 12% operating income.

And gross margin?

And gross margin, probably in the 15% to 18% range.

Obviously, it depends on the mix of revenue that we can do in low-cost regions and how people are willing to move that business over to our China facility, et cetera. So how the mix comes in between semi and non-semi and how the mix comes in in things we can manufacture in low-cost regions obviously drive that.

Traditionally we have been in the 15% gross margin range under good business conditions. We expect that to migrate closer to 18% as we move more of our business to Asia.

And on the operating side? (multiple speakers) 10% to 12%, that is up from where?

I think that I would have to ask Linda to go back and look. I think in the peak we were just around 10. I thought it was --

I think we were in the 8% range.

Yes, we don't have that right at our fingertips. But it is public information.

(Operator Instructions) There seem to be no further questions at this time.

All right, operator. I would just like to thank everyone for participating in our second-quarter earnings call, and we look forward to seeing you either on the road or joining us in our third-quarter conference call. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.