Ultra Clean Holdings Inc (UCTT) 2013 Q1 法說會逐字稿

Good afternoon. My name is Matthew, and I will be your conference operator today. At this time I would like to welcome everyone to the Ultra Clean Technology first 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 Ms. Sheri Brumm, Vice President of Finance. Ma'am, you may begin.

Thank you, operator. Welcome to our first quarter financial results conference call. Presenting today are Clarence Granger, Ultra Clean's Chairman and Chief Executive Officer and Casey Eichler, Ultra Clean's Chief Financial Officer. We will begin by representing the financial results for our first 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 first quarter ended March 29, 2013. 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 the replay of the live website at www.uct.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 second quarter of fiscal 2013. Investors should note that only the CEO and CFO are authorized to provide Company guidance. If at any time 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 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 events or circumstances that occur after this call. Now, here is Casey to present the first quarter results.

Thank you, Sheri. Revenue for the first quarter was $100.5 million, or an increase of 12% from the prior quarter and a decrease of 9% when compared to the same period a year ago. Semiconductor revenue for the first quarter was $85.6 million, an increase of 12%, and non-semiconductor revenue was $14.9 million, an increase of 9% when compared to the fourth quarter. Semiconductor revenue was 85% of total revenue for the quarter. Revenue outside of the US was 21% in the quarter compared to 18% in the prior quarter. Four customers had revenue over 10% for the quarter. Gas delivery systems represented 54% of our revenue for the quarter.

Gross margin for the first quarter increased to 13.8% compared to 12.8% in the fourth quarter. Operating expenses were $13.2 million, or an increase of approximately $240,000 from the prior quarter due to higher audit fees and less mandatory time off. Our operating expenses as a percentage of revenue will be in the 11% to 12% range in the second quarter, but our long-term target remains 9%. We had operating income of $621,000, or 1% before interest expense and income taxes, compared to an operating loss of 100 -- $1.4 million or 1.6% in the fourth quarter. Excluding M&A related costs and amortization of intangibles, our operating income was $2.2 million, or 2.2% in the first quarter. Interest expense for the quarter was $588,000, a decrease of approximately $128,000.

An income tax benefit of $25,000 was recorded in the first quarter. The tax rate for the second quarter should be modeled at 24%. First quarter net loss was $311,000, or $0.01 per share. Excluding transaction costs and amortization expense related to the merger with AIT, first quarter net income was $1 million, or $0.04 per share compared to $0.00 per share in the fourth quarter. The basic share count was 27.9 million, flat with the prior quarter. Non-cash charges for the first quarter were $1.3 million related to FAS-123R, $800,000 related to depreciation and $1.5 million related to amortization of intangibles.

Turning to the balance sheet, cash was $64.9 million, an increase of $10.6 million from the prior quarter. We are very pleased that our cash balance is at an all-time high for UCT. Net cash increased $15.5 million during the period. We anticipate that cash will be relatively flat next quarter. Accounts receivable was $49.6 million, down $500,000 from Q4, and days sales outstanding decreased to 44 days from 50 days. Accounts payable (technical difficulty) million increased approximately $11.1 million quarter over quarter. Days payable outstanding at the end of the first quarter increased to 36 days from 27 days at end of the fourth quarter.

Net inventory was $51.2 million, a decrease of $2.8 million over the prior quarter. The reduction in inventory as revenue increased 12%, reflects our continued focus on operational efficiency. Inventory levels are projected to stay flat or slightly decrease during the second quarter of 2013. Now, Clarence will discuss our operating models for the first quarter. Clarence?

Thanks, Casey. I'm pleased that during our first quarter of 2013 we saw some recovery in the semiconductor capital equipment industry. Total revenue coming from semiconductor equipment sales increased greater than $9 million quarter over quarter, yet the percentage of our sales coming from this industry stayed fairly flat with Q4 2012, indicating growth in our other served markets as well. As Casey previously stated, our revenue for Q1 was $100.5 million, and our adjusted earnings per share was $0.04 excluding merger and amortization charges. On our previous earnings call we had guided to Q1 revenue of $96 million to $101 million and $0.02 to $0.06 adjusted earnings per share. Along with increased revenue, we were able to increase our margins a full percentage point from 12.8% in Q4 to 13.8% in Q1. Additionally, UCT's cash balance was at an all-time high.

I'll now review highlights of our activities for the first quarter. One of UCT's key accomplishments for the quarter was related to cash. Our cash balances were at an all-time high for the company. We had a cash level of $64.9 million, while at the same time reducing our debt by nearly $5 million. We feel that this is a great accomplishment in light of the decline in demand seen over the last several quarters. One of the main reasons that we've been able to generate such cash level is that we're concentrated heavily on operational execution. Among other accomplishments, operations has increased our gross margins and reduced our inventory. Over the last three quarters, we have achieved inventory reductions of over $12 million, and we believe there are still opportunities for further reductions. We're very confident that as a result of our operational execution we will continue to generate cash and reduce our debt.

In Q1, 21% of our total revenue came from our Asian manufacturing operations, an increase from 18% of total revenue in Q4. As a result of the AIT acquisition, we increased our percentage of manufacturing within the US. While we expect the majority of manufacturing to remain US-based during 2013, we expect to resume our trend of increased manufacturing presence in Asia. This is consistent with our customers' plans, and will continue to have a favorable impact on UCT's margins and profitability.

The first quarter continued to be a period of transition as we moved forward with the merger between AIT and UCT. Although we have been combined as one Company for over nine months, we're still in the early stages of implementing cost savings between the two entities. We completed several cost reductions shortly after the merger and have been reviewing the appropriate synergies between AIT and UCT over the last three quarters. We anticipate further savings during fiscal 2013, including synergies in both our operations and operating expense categories. We continue to be very excited about the new potential that the addition of AIT brings to UCT.

In the area of new business development, during the first quarter, we completed the consolidation of the UCT and AIT business development teams into one team. Not only did we combine the two existing teams, but we also added additional UCT resources to the group. This will give us a much larger new business development team than we have ever had before. It will take several months to see the full benefits of this new team, but we are confident that it will broaden our reach into targeted customers and markets. In addition, we are continuing current work on many new opportunities with existing and new customers.

This quarter we added one new smaller customer whose primary product is automated visual inspection equipment for the consumer electronics industry. This customer will generate approximately $2 million of revenue for UCT in Q2 2013. One of the business opportunities that UCT has identified is with relatively small customers who experience very steep swings in demand for their products. Customers like this have relatively strong demand for one to two quarters followed by almost no demand for some period of time, then followed by another strong ramp. For these companies, outsourcing is ideal and UCT, with its expertise in quickly ramping manufacturing both domestically and in low cost regions, is an ideal partner. We will continue to seek out companies like these in addition to our traditional larger customer partners. We're confident that with our newly combined business development team we will be able to drive more business opportunities than ever before.

I'd now like to shift to our guidance for the second quarter of 2013. We anticipate seeing a further recovery during the quarter within the semiconductor equipment space. Our revenue guidance for the second quarter is $106 million to $111 million, and our Q2 earnings guidance is for earnings per share to be in the range of $0.07 to $0.11, excluding amortization charges. As Casey discussed earlier, the tax rate for the first quarter should be modeled at 24%.

In summary, during the first quarter of 2013 we began to see a recovery in overall business conditions. Our cash balances were at an all time high, while reducing debt by nearly $5 million. We also continued integration activities related to combining AIT into UCT. This integration is proceeding as planned and we continue to identify cost savings opportunities. Our gross margins improved by a full percentage point quarter on quarter, and our inventory levels continue to decline with increased operational focus. We are excited about the consolidation of our new business development team, and are pleased that our new business pipeline continues to be strong and growing. In closing, we remain confident that 2013 will be a year of growth and further margin improvement as we continue to manage our business. With that, operator, we would now like to open the call for questions.

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

Hi, guys. Thanks for taking my questions. I have a few questions.

First one is for the first quarter, not only in semis you guys saw a rebound, but even on non-semi area. Can you give us more color which end market or what is driving that? Is that the new wins that you guys talked about that was driving the growth or is it end market? Anything would be helpful. Thank you.

Yes, Edwin. This is Clarence. Ironically, we've actually started to see a little bit of a pick-up again in the flat panel market, so I would say that's probably the area outside. Medical continues to be a good market for us, but we're starting to see a little bit of a rebound in the flat panel market.

And then what about the other wins that you guys talked about like the robotic business that you talked about last quarter? Are those starting to contribute to the top line as well?

Yes. We're starting to get some of that business. I said we would be ramped on the robotics side.

That is semiconductor business, so that is part of the growth in semiconductor, but we are still shipping in relatively low volumes. We anticipate reaching, what I had said is around $2 million a quarter and $8 million to $10 million a year run rate on that new robotics business. And we expect that to start to kick in towards the end of Q3 and fully kicked in, in Q4. We also think there's some further growth opportunities within that market.

I see. That's very helpful. And then on this new consumer electronic win, when you say automation for that, I assume you are referring to manufacturing on consumer electronics product and some automation equipment related to that. Am I correct in that?

That is correct, yes. it's an automated inspection system, and we're manufacturing it for them (multiple speakers).

I see, I see. And it sounds like business could be a little lumpy for that business, but $2 million is actually a pretty decent -- a good size business for a quarter. Was wondering, any way you can quantified -- is this something that you think you can see a lot more of those type of customer come in? Is it something that you expect to get (multiple speakers) at the quarter, or how do you think about that over the long term?

Yes, again, this is Clarence. The way we feel about that -- so we think this is kind of an untapped market. Obviously, our primary focus is going to continue to be on our large customers and potential large opportunity, business opportunities.

But we also see a fairly significant segment of relatively small companies that are selling typically manufacturing equipment of some kind into a market where they get big demands for tools. And then once that demand is satisfied they have a lull period and then it picks up again maybe six months later. And so we've identified at least two or three customers that are now -- that we're now supporting, and we think there might be quite a few more out there, might be smaller companies, might be startup companies. But we think that's kind of an untapped market and we think we can do well at that.

And do those businesses, do you expect to have a similar margin structure as recurring business?

I would say at least as good as our current margin structure, maybe a little better because there's more complexity.

But generally, yes.

I see, great, helpful> And then I guess last question and I'll go away. On your guidance, if I take what you said, Casey, which is OpEx remaining at this 11% to 12% range, which is what you did in the first quarter, and I take your top line guidance it would imply actually still pretty meaningful gross margin improvement in the coming quarter, right?

So, I'm just curious, is that all just volume, or is it more work that you guys are doing on the gross margin front to drive that improvement? And how do you think about that also in terms of further improvement? Is it all just going to be driven by volume, or is it other stuff that you guys are doing to improve that?

Yes. I think the natural drivers as you mentioned are volume and also mix between low cost region and the US. Those are the natural drivers from quarter to quarter, but there is also continued margin improvement activities going on that we think will continue to nick away and drop more through. So, those are the biggest drivers of that.

Okay, great. That's all I have. Thank you.

You're welcome.

And your next question comes from the line of Iyer, Jagadish.

Hi, Clarence, thank you. Two questions, first on your semi business. As you look out the remainder of the year, how should we be thinking about your semi business? I know you have very little visibility sometimes, but as you see that evolving, any granularity in terms of the first half versus second half? And then I have a follow-up, please.

Sure, Jagadish. This is Clarence.

I would say at this point in time it remains pretty cloudy about what's going to go on in the second half in the semiconductor side. I don't see any huge swings one way or the other. But we're getting conflicting information from analysts and customers. So right now I would say it probably looks pretty flat, maybe slightly up or down, but not significantly either way.

That's only into the third quarter. I have zero visibility into the fourth quarter. And was there another part of the question?

Yes. So, how do you kind of plan out your operations for the remainder of this year? Do you still have shutdowns and other things that you've planned out just to manage your expenses?

Yes. Again, we are not planning any shutdowns in the second quarter. So, based on increased volumes we think we can achieve these performance metrics that we've outlined without any shut-downs. It's really going to depend on what happens in business condition swings.

The other thing that we're primarily focused on right now is combining UCT and AIT successfully and efficiently. In Q1, obviously we took some big steps by combining our new business development team and refocusing our overall sales force to get the team better focused on the future and consolidated and coordinated, and we think that will do a lot of good for us.

We still think our primary focus at this point in time on terms of business activity and business opportunities is still focused on the consolidation and combination of UCT and AIT. I think there's lots of things that we can continue to do here that will make us a more efficient and profitable Company as we fully digest combining the two businesses.

Good enough. This is a question for Casey. Just wondered, Casey, did you call out what was your cash flow from operations in the quarter, please?

Again, I called out the non-cash items that contribute to that. So, it was the FAS-123R calculation. Did you want me to walk right back through that?

No, no. I just want the number on that one.

It was $1.3 million.

Okay, okay. And as you start to pile up more cash, is the strategy going to be just to pay off those long-term debts, or are you going to keep some dry powder for any acquisitions? Thank you.

Yes. Certainly, paying down the debt is important, but we also want to have the flexibility to take advantage of opportunities as we would see them. And so we do want to have some powder, as you say, for that type of opportunity and also make sure that we have the appropriate level of operating cash. But certainly, we've been paying the debt down and will continue to pay the debt down and that's an important thing as well.

We wouldn't walk away from a really good opportunity. On the other hand, we still have a fair amount to digest in combining the two companies, so unless something extraordinary came along, I think our near term primary focus is to successfully combine the two companies. And then longer term we have had success with acquisitions and we do believe in that strategically. So at some point in time we would expect to do that again.

Okay. Casey, what kind of cash levels will you be comfortable kind of maintaining some level of threshold?

Well, certainly, again, we've run this business with net cash balances around $10 million or $11 million. And so it doesn't take a huge amount of cash to run the business, but I think to have the cash and the operating flexibility to take advantage of opportunities, I think you'd want to try to have a net cash position probably closer to $20 million to $30 million.

Okay, fair enough. Thank you so much, gentlemen.

You're welcome.

And your next question comes from the line of Dick Ryan.

Hi. Good afternoon, guys.

Hi.

Clarence, on the AIT you talked about the cost savings and the efficiencies you're starting to see there. How about top line, any success getting any cross-selling opportunities going?

We do anticipate that those kinds of things will happen. One of the things that we've talked about -- or some of the things that we've talked about are the strengths of AIT has been their complete vertical integration in making complete turnkey tools, their ability to make sheet metal and frame assemblies, their ability to control panels. So, we think there's some opportunities there.

And on the UCT side, we have an international presence and they had a relative limited international presence. It wouldn't surprise us at some point in the near future to see something that might combine some of the strengths of both of those companies. But we're not in a position to discuss anything right now.

Okay. On the automated inspection customer, was there any contribution in Q1 from them, or did this start just with Q2?

No contribution in Q1. It will all be in Q2.

Okay. And is that kind of a high or low watermark, if you can kind of (multiple speakers) look out over the Horizon?

I think that's kind of their run rate. I don't -- when they get orders, they seem to be in that kind of magnitude. I think we'll see -- what I was implying is I think we'll see a roughly $2 million quarter in Q2, maybe slightly higher than that, and then probably one or two quarters with nothing and then probably another $2 million pop as they secure another customer, major customer.

Okay. In your comments about the semi recovery, what are the tone of the conversations across customers? Is it pretty solid across customers, or is there some spottiness that can give you some -- you talked about the cloudiness in Q3, but how uniform are those comments?

Yes. I think most of -- a lot of what we're seeing is rumors about end users and what they're doing and what they're planning and are they going to scale back or increase their commitments. And so I would say from our customers, it seems to be fairly consistent and relatively flat. It's really hard for me to -- and then we hear all these anecdotal inputs from analysts and various other sources that we really can't tell how factual based they are.

Okay. And LED obviously a small contributor --.

LED continues to be a very small contributor and on our side, at least, we have not seen an increase of any significance in that.

Okay. That's still less than $1 million?

Yes. On that order -- that order of magnitude, roughly 1% of sales.

Great. Thank you.

You're welcome.

(Operator Instructions)

And there are no further audio questions at this time.

Great. Well, I appreciate it. Thanks, everybody, for joining, and we look forward to talking with all of you over the course of the quarter. Thanks a lot. Bye.

This does conclude today's teleconference. You may now disconnect.