Ultra Clean Holdings Inc (UCTT) 2011 Q2 法說會逐字稿

Good afternoon my name is Kristin 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. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session.

(Operator Instructions)

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

Thank you Kristin. Welcome to our second-quarter financial results conference call. With me today is Clarence Granger, Ultra Clean's Chairman and Chief Executive Officer. I will begin by presenting the financial results for our second quarter and Clarence will follow with some remarks about the business. A few moments ago we issued a press release reporting financial results for the second quarter ended July 1, 2011. The press release can be accessed from the Investor Relations section of Ultra Clean's website, along with the information for the tape delay and replay of the live webcast at UCT.com.

Together with our recently issued press release, this conference call enables the Company to comply with the SEC's regulation for fair disclosure. Therefore, investors should accept the contents of this call as the Company's official guidance for the third quarter of fiscal 2011. 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 information or guidance, it is our intent that such update will be done officially via public forum, 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 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. The Company disclaims any obligation to publicly update or revise any such forward-looking statements, or to reflect the events or circumstances that occur after this call.

Now, here are the second-quarter results. Revenue for the second quarter was $133.7 million, an increase of 6% from the prior quarter and an increase of 26% when compared to the same period a year ago. Semiconductor revenue for the second quarter was $99.3 million or 74.2% of revenue, while non-semiconductor revenue was $34.4 million or 25.8% of total revenue for the quarter. When compared to the second quarter of 2010, semiconductor revenue grew 17% and non-semiconductor revenue grew 63%. Revenue outside the US was 31% in the second quarter, compared to 29% in the prior quarter and 26% in the same period a year ago.

Gas delivery systems were 56% of our revenue for the quarter compared to 58% in the first quarter and 53% in the same period a year ago. Gross margin for the second quarter increased to 14.2% compared to 13.9% in the first quarter and 14% in the same period a year ago. Operating expenses were $9.5 million or 7.1%, an increase of $135,000 from the prior quarter. Our operating expenses as a percentage of revenue should be approximately 8% in the third quarter. Our operating income was $9.5 million or 7.1% before interest expense and income taxes, compared to operating income of $8.2 million or 6.5% in the first quarter and $6.6 million or 6.2% in the same period a year ago.

An income tax expense of $2.2 million was recorded in the second quarter. The tax rate for the third quarter should be modeled at 24%. Second-quarter net income was $7.1 million or $0.30 per share. This compares to a net income of $5.8 million or $0.25 per share for the first quarter and net income of $5.7 million or $0.25 per share for the same period a year ago. The fully diluted share count was flat with the first quarter, at $23.5 million. Non-cash charges for the second quarter were $1.2 million related to FAS 123R and $769,000 related to depreciation and amortization.

Turning to the balance sheet, cash was $37.6 million, an increase of $2.4 million from the prior quarter. Cash, net of third-party debt, was $11.4 million, an increase of $3.4 million during the period. Accounts Receivable was $57.8 million, down $223,000 from Q1. Day sales outstanding decreased to 39 days from 41 days at the end of the first quarter. Accounts Payable of $48.9 million increased $176,000. Days payable outstanding decreased to 38 days from 40 days at the end of the first quarter. Net inventory was $69.8 million, an increase of $4.7 million over the prior quarter. Inventory levels were projected to decline during the third quarter of 2011. Now, Clarence will discuss the operating highlights for the second quarter. Clarence?

Thanks, Casey. This year marks UCT's twentieth anniversary. Over that time, while we have seen some challenges, the Company has experienced great success. In 1991, UCT was founded on the idea of bringing state-of-the-art gas delivery technology from Japan to the United States. Today, we have evolved into a Company of 1,300 employees manufacturing products for 5 different industries at 7 manufacturing locations in 3 different countries around the world. And while the third quarter will be more challenging, I am very pleased with our results for the second quarter of 2011. During the quarter, UCT achieved all-time high revenue, earnings, and earnings per share. And our balance sheet is the strongest it has ever been.

As Casey stated earlier, the second quarter saw an overall revenue increase of 6%, and gross margins increased from 13.9% to 14.2% when compared to Q1. In addition, revenue from our Asian operations increased from 29% of total revenue in the first quarter to 31% in the second quarter. And revenue outside the semiconductor industry increased from 20% of total revenue in Q1 to 25.8% of revenue during Q2. I will now review highlights of our activities and accomplishments for the second quarter. As stated in previous quarters, our biggest near-term growth opportunity by far continues to be in the high-brightness LED market.

During the second quarter, UCT met our stated goal by shipping multiple orders for LED-related gas delivery systems to multiple customers for a total of $14.6 million in revenue, up from $11.3 million during Q1 and $6.1 million in Q4 of 2010. The $14.6 million in LED-related revenue that was shipped during Q2 beat our $14 million target for the quarter, which was established during our last quarterly conference call.

We continue to receive additional production and qualification orders from multiple LED customers. We anticipate that this will result in LED-related gas delivery revenues of approximately $17 million during the third quarter of 2011. While some analysts are projecting slower growth in LED in the second half of 2011, we are still anticipating increased demand for UCT gas delivery systems as a result of our relatively strong position with the newest generation products. In general, our relationship with all of our customers remains strong, and we continue to improve our operating efficiencies.

As mentioned earlier, revenue from our Asian manufacturing operations increased from 29% of total UCT revenue in Q1 to 31% in Q2. We anticipate continued ramping of production in our new Singapore facility during 2011. Also, we anticipate additional growth in the percentage of revenue from our other Asian facilities later this year, with the continued transfer of US production to China and Singapore in support of the activities of our key customers. This migration of manufacturing to Asia is consistent with the long-term plans of several of our major customers to migrate more of their supply chain to Asia.

Another key strategic initiative for UCT is the effort to increase the percentage of overall revenue coming from the non-semiconductor portions of our business. As mentioned previously, UCT's revenue outside the semiconductor industry increased from 20% of total revenue in Q1 to 25.8% of revenue during Q2. In Q3, while we are projecting a significant decrease in semiconductor-related demand, we are projecting a small increase in non-semiconductor demand. This should lead to greater than 30% of our revenue coming from non-semiconductor sources.

I'd now like to shift to our guidance for the third quarter of 2011. In the third quarter, we anticipate an 18% to 22% decline in overall revenue, with a decline in semiconductor equipment demand partially offset by our other served markets. This is consistent with the forecast that we are receiving from all of our major semiconductor equipment customers. As a result, we are projecting a decrease in revenue and EPS. Our revenue guidance for the third quarter is $105 million to $110 million, with earnings per share in the range of $0.14 to $0.18. As Casey discussed earlier, the tax rate for the third quarter should be modeled at 24%.

During the quarter, we will be taking the actions necessary to realign our cost structure with these new levels of demand. One final update. Our new President and Chief Operating Officer, Dr. Gino Addiego, has now been at UCT for over 4 months. He is doing an excellent job, both with the UCT team and with our customers. Moving forward, Gino's technical, manufacturing, and leadership skills will be instrumental in achieving our long-term operational and strategic goals. I continue to be excited about having him on the UCT team.

In summary, during the second quarter of 2011, UCT continued to experience growth, which helped us achieve record revenue and earnings. In addition, we continued to experience growth in revenue within our Asian facilities and diversification into non-semiconductor customers. Looking forward, we are excited about further growth in Asia and anticipate an increase in significant new business opportunities, particularly in the high brightness LED market during Q3 and beyond.

In closing, while we anticipate industry-wide reductions in demand during Q3, we are very familiar with this type of slowdown, and will take appropriate action to deal with it quickly. We are confident that 2011 will be a year of excellent revenue and profitability for UCT. With that, operator, we would now like to open the call for questions.

(Operator Instructions)

And your first question is from the line of Edwin Mok.

Hi, thanks for taking my question and congrats for a great quarter. So, first question on non-semi, I noticed that excluding the LED piece, you actually grew the non-semi revenue by you know $8.9 million. Just wondering what else was driving growth in the non-semi side?

Edwin, this is Clarence and thanks for the kind remarks. We actually saw some pickup on the research side a little bit. But that wasn't necessarily associated with a market share gain. I think our market share is relatively stable and strong there.

There was a slight slowdown on their part in Q1, and a slight pick up in Q2. So, overall, the biggest increase came from the research segment. Beside the high-brightness LED segment.

I see. And then on the third quarter guidance, it would suggest that your other non-semi piece excluding the LED are probably relatively stable at least, probably not declining like semi. Are you confident that pickup results from the research side is going to stay there at that level in the coming quarter?

Yes Edwin, your comment is exactly correct. So, we are expecting on the non-semiconductor side a slight increase -- an increase in the high-brightness LED market, and the rest of the non-semi is going to remain relatively stable and yes, we are pretty confident about that at this point.

Great, one more question on non-semi and I will jump to the semi quickly. On the non-semi side on the LED side, obviously we refer to potential for moderation on the LED space because of falling prices. Are you guys starting to see impact of that or are you are worried about that potentially causing that business to start to come down given that your now at $17 million which is pretty meaningful percentage of your total sales right?

Sure. I tried to address that in my prepared remarks. What I try to say is that the majority of our business at on the LED side is coming associated with newer products. And so as those products continue to gain acceptance in the marketplace, we think we will still see growth in the high-brightness LED side, even if that industry were to moderate a little bit.

I see, great helpful. And then on the semi side if I just come back from your commentary's you guys are expecting kind of the mid-20s have declined sequentially. How do you look at your business now? Do think -- are you worried that there's going to be a multi-quarter decline or just think customer is dialing back because they want to cut back on inventory of the company too that they built? How do you not think about adding? Do you have any kind of visibility going through the December quarter?

Yes, again Edwin this is Clarence. You know, our visibility into the December quarter is pretty limited. I mean we do in many cases have access to our customers build plans even as much a six months out. But those plans are pretty fluid at this point in time. I would say that we are more confident about our visibility near term, and so it's just difficult for us to say you know where that's going to be headed.

I see. Okay, helpful. Two questions for Casey. I can't leave him alone right, so. First one is on margin, seems like your guidance implies lower operating margin, is it just from basically fixed costs absorption coming from the lower revenue level? Is that the main driver there?

Yes, that's a fair way to think about it.

I guess the other point that I would add Edwin though is that we are not it in experience with these kinds of slow-downs. So, you know, obviously there will be a reaction time, but we are pretty good at reacting fairly quickly. So we think we will address that -- the impact on margins very quickly.

Your interestingly hopefully your kind of incremental margin being at revenue level actually implies a higher incremental margin. So would that come from just higher Asia or am I just extrapolating too much from the data? Maybe a better question to ask is do expect Asia mix to continue to increase in the second half or now that semi cap is moderating?

In the second half, it might increase, but not likely in the third quarter. It should be relatively flat or even slightly down as a percentage of revenue in the third quarter. So, any projection that we have in incremental margin increases associated with improved operating efficiencies and performance as we continue to move forward and stabilize our leadership teams.

Great, very helpful. Just one last question on tax. So what caused the change in tax rate?

Again, it's hard to project tax rates exactly. We had talked about 26% at the beginning of the quarter and we came in around 24%. We're going through as you know doing some structural work because of our increased business in Singapore, and so that's affecting the blend.

We also from quarter-to-quarter continue to look at the deferred tax asset that you know we wrote off I guess almost 2 years ago now. And we continue to analyze whether or not it makes sense to reverse that as well. Taxes is as always a kind of a tricky area, but to have you move a percent or two, a lot of times that can be mixed and/or just some of the restructuring work.

Great, that's all I have. Thank you.

Your next questions is from the line of Dick Ryan.

Clarence, on the LED side, you know you have positioned us to be kind of $120 million -ish run rate or business opportunity and kind of expecting that run rate to be consistent with exiting Q4. Are you still thinking along the same lines?

Eventually yes. You know I think we're still confident that we will get to the $30 million a quarter run rate. The issue is are we going to make it in the Q4 number or are we going to make it exiting Q4.

Obviously going from $17 million in revenue in Q3 to $30 million in revenue in Q4 is likely to be a challenge. But I feel that I think the trajectory is in that direction. Whether we can make it in Q4 or Q1, I don't know. But I do think we are still moving upward, and I would still expect to see growth in Q4. Again, largely based on the fact that we are primarily being qualified on newer tools that are just starting to get acceptance in the marketplace.

So, more of a timing issue rather than anything changing with the customers that you're serving?

That's correct.

Okay. I'm not sure that you're suggesting this, do you anticipate any kind of charges in Q3 or Q4 given the downturn here?

No, we are not guiding to any specific charges. I think what Clarence is talking about, is obviously when you hit a decline in revenue or an expected decline in revenue, you have to look at all of your costs built into that, see what's controllable and not controllable and act pretty quickly on the things that are controllable. I think the team has demonstrated they can do that in the past and I think you'll see us doing that currently as well.

Okay. Back on the LED side, are you doing any manufacturing over in Asia yet Clarence or is that still -- ?

Yes, we are doing some manufacturing in Asia but the majority of the manufacturing is still coming out of the United States, and will throughout the balance of this year. A transition to Asia is likely to be a 2012 event. But our customers are very interested in seeing a migration to Asia at some point in time.

Okay and I think one of Gino's initial tasks was the kind of the supply chain issues how do think you are making progress on that front?

We think we made pretty good progress there. Again, we've seen a margin improvement and as Edwin observed, the margins that we're projecting in Q3 other than the associated with the fixed cost, we are projecting still continued improvement in our materials cost.

Okay, great. Thanks guys.

Your next questions is from the line of Krishna Shankar.

Yes, congratulations on a good quarter. I have a couple of questions, with the sort of slowdown in business was related to any one customer or was it sort of a broad-based slowdown? And secondly, what is the opportunity to increase the level of outsourcing from some of these customers, especially for example the AMAT merger with Varian and other areas for outsource manufacturing? Can you talk about sort of secular topic needs, which might outweigh the secular -- the cyclical sort of cutbacks in capital spending that we see near term?

You're straining my memory their Krishna, but thanks for the question. So, in terms of the slowdown, we have seen it -- first of all, it was relatively minor in Q2. So we did see a small slowdown in Q2 associated with semiconductor but, along the lines of what we had expected.

But in terms of Q3, the slowdown that we are seeing on the semiconductor side is almost universal from all of our major customers. And so, I don't think there's anything abnormal there, it's an industry wide slowdown that we are seeing.

In terms of the additional outsourcing opportunities, there's always additional outsourcing opportunities, and we are always continuing to drive those. But relative to the specific comment you made with regard to AMAT and Varian, both AMAT and Varian are already significant customers, to UCT so at least near-term, I don't see that changing much of the business opportunity climate for us. I think we are well respected with both companies and I think we will continue to have good business relationships as they combine into one entity. But I don't think in the short-term that will have an impact on our additional business opportunities.

Okay.

(Operator Instructions)

And your next question is from the line of Gus Richard.

Thanks for taking the question. You mentioned you know you guys have prepared -- have prepared for downturns before like this. And I was just wondering you know when you say like this, are you preparing for nuclear winter or is this just a long winters night? In terms of you know the actions you are taking?

Yes Gus thanks. This is definitely not a nuclear winter from everything we've seen and everything our customers have guided us to. This is I guess what you would call a long winters night.

Typical actions that we take and we have already started to take them as we have reduced some of our temporary work force we are obviously exploring other elements of our workforce. We've already started scaling back on all of our expenses, travel, et cetera. Again we will be requiring people to take mandatory time off during this quarter. But that tends not to be a huge hardship and since most people take time off during the summer quarter anyhow. But these are the kinds of things that we typically do when we see a downturn that is consistent with what we have seen in normal cycles, not a nuclear winter.

That, that was what I was kind of expecting. And then in terms of the you know quarter-to-quarter margin decline, in Q3, you know I would assume that how you guys are managing the business is you've you know got some inventory you're going to work that down which will drive some under absorption. And then as revenue levels stabilize, your production levels will come up after coming off a depressed space. And even if revenue growth is plus or minus a little bit in the fourth quarter, you are still going to get revenues starting to trend higher in the fourth quarter. Is that the right way to think about it?

Well, we are not guiding to revenues in the fourth quarter, so the trending higher revenues I won't comment on. I think the rest of your analysis is fairly accurate. And there isn't anything that's going to happen unusual here from what you have seen or described in a situation where you're going down quarter-on-quarter. I think the rest of it is pretty accurate.

Okay. Just for arguments sake, pretending revenue in the fourth quarter is flat, I would expect to see, a 50 to 100 bip increase in gross margin all the things being equal?

Again, not guiding to the fourth quarter but that is another reasonable assumption in a situation like this. As Clarence also commented, I think Gino and the team is doing a lot of work to continue to get margin in other places and so we are continuing to push on the margin issues, not only just related to where the cycle is or what's happening over the next couple quarters, but also on some of the opportunities that we have to improve upon what we've done in the past. And so we feel pretty good about what he's got in motion, as Clarence mentioned.

Got it, alright that's very helpful, thanks.

Your next question is from the line of Dick Ryan.

One follow-up Clarence, with some of the new business opportunities you are looking at, should we be you know looking at you know something near term or is it further out on the time horizon, do you think?

I think we've tried to be as descriptive with what we are aware of on the near-term time horizon. I think I mentioned last quarter that we had some additional solar business that we had won was on the order of $3 million to $5 million in business in 2011, and could double in 2012. I think those are the kinds of things that we are looking at. I don't see anything at this point in time that is nearly as big as the high-brightness LED opportunity. But I do think that we will still see significant growth in the high-brightness LED opportunities into 2012.

Okay, thank you.

(Operator Instructions)

And we do have a question from Edwin Mok.

Hi. Just one quick follow-up Clarence. If I look at you know last, next quarter, look back like cycle, on the first quarter you guys did $101 million and that was -- $101 million semi revenue. And that was obviously the strongest revenue over last few quarters. I was wondering, do you see that potentially as kind of a near-term peak and were your customer may be over building a little bit the inventor at that point in time? Just kind of wanted to get a gauge in terms of your customer buying pattern there.

Sure. Obviously, it is a peak at this point in time. But we didn't see a significant falloff in Q2, it came down to roughly $99 million. So I don't think our customers were over stocking in Q1 significantly. I think we saw a gradual increase that brought us up to that $101 million in revenue in Q1 for semiconductor.

And I think you know obviously we've seen a dramatic pullback. I think we will start to see a gradual recovery as we move forward. In our case too, we still do have some situations where maybe the Q3 number in terms of semiconductor is a little bit of an over pullback. But again, I'm not trying to predict into Q4 yet. It's just too early for me to tell and I really don't have that kind of visibility.

Sure, that's fair. So, is it fair to say that you don't believe your customer pull into the inventory that they've built before and ship to customer and therefore shipping below their level or do think your shipment roughly at that level?

I would say Edwin, in any situation like this, our customers first look to their inventory but I don't think it was because of what we build is so highly customized, they tend not to have much in inventory that they can pull-down on. So, I would guess that maybe you know a couple of percent of what we are seeing in Q3 is related to them consuming inventory. You know, so I would expect that part to bounce back in Q4 as they pull-down their inventory as much as they can. But I don't think it's a huge amount.

Great. Just one more question. You haven't talked about the flat panel and also the medical market. Do you see any change from first have to second half in those markets?

Not of significance. Flat-panel is ironically pretty flat, and so is the medical.

Great, that's all I have. Thank you.

And I'm showing their are no further questions at this time.

Alright, well I appreciate everybody dialing in today, and look forward to talking to you out over the quarter and on the next call. Thank you Kristen.

Thank you. This does conclude today's conference call. You may now disconnect.