Ultra Clean Holdings Inc (UCTT) 2013 Q4 法說會逐字稿

Good afternoon. My name is Jennifer, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ultra Clean Technology fourth-quarter and FY13 financial results conference call.

(Operator Instructions)

Joining us today is Mr. Casey Eichler, Chief Financial Officer; Mr. Clarence Granger, Chairman and Chief Executive Officer; and Ms. Sheri Brumm, Vice President of Finance. Ms. Brumm, you may begin the conference.

Thank you. Welcome to our fourth-quarter and FY13 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. Casey will begin by presenting the financial results for our fourth quarter and FY13. And Clarence will follow with some remarks about the business.

A few moments ago, we issued a press release reporting financial results for the fourth-quarter and FY13 ended December 27, 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 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 regulations for fair disclosure. Therefore, investors should accept the contents of this call as the Company 's official guidance for the first quarter of fiscal 2014. 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 fourth-quarter and fiscal 2013 results.

Thank you, Sheri. Revenue for the fourth quarter was $126.3 million, an increase of approximately 17.8% from the prior quarter, and an increase of 40.2% when compared to the same period a year ago. For FY13, revenue was $444 million, compared to $403.4 million in FY12, an increase of 10% year over year.

Semiconductor revenue the fourth quarter was $118.3 million, an increase of 24.8% from the prior quarter. And non-semiconductor revenue was $7.9 million, a decrease of 36% when compared to the third quarter. Semiconductor revenue was 94% of total revenue for the quarter, and 89% for fiscal 2013.

Revenue outside the US was 29% in the quarter, compared to 33% in the prior quarter and 29% for fiscal 2013. Three customers had revenues over 10% for the quarter. Gas delivery systems represented 64% of our revenue for the fourth quarter.

Gross margin for the fourth quarter increased to 17.1%, compared to 14.8% in the third quarter. For FY13, gross margin was 15.2%, compared to 13.8% in FY12. This is our best gross margin achievement as a public Company, and the first time we been over 15% on an annual basis. The credit for this significant accomplishment is shared by the entire team at UCT, and the result of commitment and hard work. We continue to believe that 15% to 18% gross margin is an appropriate margin target for our business.

Operating expenses were $11.8 million or 9.3%, excluding amortization of intangibles, as compared to $10.9 million or 10.2% in Q3. Our operating expenses as a percentage of revenue will be up slightly in the first quarter of 2014 due to an increase in outside services costs and payroll taxes. We continue to work on driving our operating expenses below 9%.

Operating income was $8.3 million or 6.5% before interest expense and income taxes in the fourth quarter, compared to $3.4 million or 3.2% in the third quarter. For FY13, operating income was $15.9 million or 3.6% before interest expense and income taxes, as compared to $8.3 million or 2.1% in FY12. Excluding amortization of intangibles, our operating income was $9.8 million or 7.8% in the fourth quarter, and $22 million or 5% for FY13.

Interest expense for the quarter was $674,000, an increase of approximately $41,000 quarter over quarter. The effective tax rate for the fourth quarter was 16.3%, or an expense of $1.2 million. Our tax rate for FY13 was 17.3%, bringing the Q4 tax rate to 16.4% in order to adjust for tax expense already taken during the year. The tax rate for the first quarter of 2014 should continue to be modeled at 20%.

Fourth-quarter net income was $6.4 million or $0.22 per share. Excluding amortization expense related to the merger with AIT, fourth-quarter net income was $7.6 million or $0.26 per share, compared to $0.12 per share in the third quarter.

Fiscal year net income was $10.4 million or $0.36 per share, compared to net income of $5.1 million or $0.20 per share for FY12. Excluding transaction costs and amortization expense related to the merger with AIT, FY13 net income was $15.5 million or $0.53 per share, as compared to 2012 net income of $10.2 million or $0.39 per share. The diluted share count was 29.5 million, up 500,000 shares compared to the prior quarter. Non-cash charges for the fourth quarter were $1.2 million related to FAS 123(R), $806,000 related to depreciation and $1.5 million related to amortization of intangibles.

Turning to the balance sheet, cash was $60.4 million, a decrease of $5.5 million from the prior quarter. Net cash decreased $4.1 million during the period to $5.3 million. In managing our cash balances, we paid down the debt during the fourth quarter by $1.4 million, thereby taking our outstanding debt down to $55.1 million from $56.5 million in the third quarter. We anticipate that cash will be up slightly next quarter.

Accounts receivable was $67.4 million, up $17.7 million from Q3. And days sales outstanding increased to 48 days from 42 days at the end of the third quarter. Accounts payable at $54 million increased approximately $16.2 million quarter over quarter. Days payable outstanding at the end of the fourth quarter increased to 46 days from 37 days at the end of the third quarter.

Net inventory was $63.9 million, an increase of $13.6 million over the prior quarter. The increase in inventory is a result of our first-quarter 2014 forecast and the need for inventory ahead of the start of the quarter. Inventory levels are projected to stay flat to slightly lower during the first quarter of 2014.

In summary, I am exceptionally proud of our entire team for delivering continued improvement in operational and financial performance. Now, Clarence will discuss our operating highlights for the fourth quarter. Clarence?

Thanks, Casey. During the fourth quarter of 2014, we continued to see a recovery in the semiconductor sector of our business, with an increase in semiconductor revenue of nearly 25% quarter over quarter. At revenue of $126.3 million and gross margin of 17.1% for the quarter, we achieved revenue within our updated guidance range of $125 million to $127 million, and slightly exceeded our guidance for gross margin of 16.5% to 17%. As Casey pointed out, this is the highest quarterly gross margin that UCT has achieved in our nearly 10 years of a publicly traded Company, and has been the culmination of an extensive effort by our entire operations team. I am extremely pleased with this result.

Also, as previously stated, our revenue for Q4 was $126.3 million, and our adjusted earnings per share was $0.26, excluding amortization charges. On our previous earnings call, we had guided to Q4 adjusted earnings per share, excluding amortization charges, of $0.18 to $0.22, and revenue of $120 million to $125 million. We were excited that we were able to achieve revenue, gross margin and earnings per share all above our guidance range for the quarter.

I'll now review highlights of our activities for the fourth quarter. The major accomplishment for the quarter was our gross margin achievement. Multiple factors have been favorably influencing this trend for some time. Improved operational efficiency, further integration of AIT into UCT, higher revenues from our Asian factories and overall increase in revenues all contributed to this record.

Our operational efficiency has improved in the areas of output per employee, increased inventory control and strengthening of our supply chain management organization. The integration of AIT continues, with additional new business opportunities in Asia related to AIT, utilization of AIT for manufacturing frames and further combination of Best Manufacturing Practices.

Our Asian factory revenues increased quarter over quarter. And our overall revenue increase improved our factory utilization. As stated numerous times previously, our margin goal is to achieve gross margins in the 15% to 18% range. And we are very happy to have achieved that goal during the fourth quarter and overall for fiscal 2013.

In Q4, the percent of revenue coming from our Asian operations was 29%, as compared to 33% in Q3. This percentage fluctuates quarter to quarter based upon the mix of products going through our factories for a particular period. While on a percentage basis this was a decline, the dollars shipped increased between the third and the fourth quarter.

As mentioned in previous calls, AIT's heavily US-based manufacturing led to an increase in the percentage of our overall US manufacturing shortly after the acquisition. We anticipate that we will continue to see increased manufacturing in Asia through the transfer of existing products to our Asian facilities and through new customer opportunities. We also anticipate this trend to continue having a favorable impact on UCT's margins and profitability.

As we enter into 2014, we see meaningful growth in our industrial business sector. Last quarter we mentioned that we added a new customer whose primary products are crystal growth tools serving multiple markets, including the consumer electronics, solar and semiconductor industries. We generated approximately $1.4 million of revenue from this customer during Q4. We had targeted $2 million in revenue for the quarter, but shipment timing issues reduced the quarterly revenue.

On the positive side, during our last conference call, we had guided new orders for this customer to be in the range of $10 million to $15 million for all of 2014. We have now received additional orders from that customer for additional new products. And we now anticipate 2014 revenues from this customer to be greater than $20 million.

As has been discussed in other calls, the combination of AIT and UCT -- we are dedicating more resources than ever to the pursuit of new business opportunities, and our pipeline includes many new opportunities. Of these, approximately 70% to 80% are outside of the semiconductor equipment industry. During Q4, 94% of our revenue came from semiconductor equipment customers. This was up from our more traditional levels, due to customer mix. However, we anticipate an increase in our non-semiconductor revenues during Q1, and anticipate non-semiconductor revenues will be in the range of 15% to 18% in Q1 2014.

I now need to share with you some additional news. Our President and COO, Dr. Gino Addiego, will be leaving UCT in early March to pursue other interests. The operations team, which includes Gino, has been instrumental in improving UCT's operational activity and efficiency over the last few years. And while Gino will be missed, the overall team will remain intact and continue to drive further improvements. I'd like to thank Gino for his efforts at UCT and wish him well in his future endeavors.

Shifting to our guidance for the first quarter of 2014, UCT is seeing a continued ramp, with growth coming in the semiconductor, flat panel, medical and industrial sectors of our business. As a result, we anticipate an overall revenue increase during the quarter. Our revenue guidance for the first quarter is $135 million to $140 million. And our Q1 earnings guidance is for earnings per share to be in the range of $0.28 to $0.31, excluding amortization charges. As Casey discussed earlier, the tax rate for the first quarter should be modeled at 20%.

In summary, during the fourth quarter of 2013 and FY13, we had several major achievements. Our gross margins hit a new record level for the quarter and for the fiscal year. And we anticipate them remaining within our targeted 15% to 18% range for the foreseeable future. We also increased our revenue from our Asian manufacturing facilities quarter over quarter. And finally, we are very pleased with the increased orders from our new industrial customer. And that are new business pipeline continues to be strong and growing.

2014 is off to a good start. Semiconductor equipment demand has been improving. And additional technical requirements point to increased capital intensity in the markets we serve. Overall, we remain confident that UCT's future is very bright, both from a long-term growth and an operational execution perspective. With that, operator, we would now like to open the call for questions.

(Operator Instructions)

Edwin Mok, Needham and Company.

Congratulations on a great quarter.

Thank you, Edwin.

You're welcome. So first question I have -- actually, let's go to the non-semi side. If I look at the December quarter, it looks like it dropped a lot. And in the first quarter, you guys are guiding for a pretty meaningful bounce back.

Did this just come from the lumpiness of this one customer that you mentioned, the one that you raised your full-year guidance to over $20 million? Or was it other customers, also see how these lumpy orders in the fourth quarter?

We saw some declines in some of our medical business that we expect to recover in Q4 -- that we expect to recover in Q1. So that along -- we had seen some decline from one of our other smaller customers, DWFritz, and we're seen some of that coming back. But the bulk of it is the medical and the crystal growth opportunities that we described.

I see. So basically that over $20 million order you expect to start ramping pretty meaningfully in the first quarter, if I take your guidance (multiple speakers) --

Yes, that is correct. It should be meaningful in Q1.

I see. And then, if I back out your 15% to 18% coming from non-semi, I arrive at a number that if I think the midpoint to be a little bit lower than the fourth quarter in terms of the semi side of the business.

Can you give some color around that, what's the trend? There obviously was really strong in the December quarter may some [touch ashan]. Do you have any visibility beyond the March quarter?

I would say that semi is probably a little bit flat, and relatively flat to slightly down in Q1. But not hugely so. It's certainly higher than in Q3. So overall, I would say semi still looks very strong for us.

Some analysts have said that there might be a slight air pocket in Q2. That one shocked me. But overall, our semi demand looks pretty strong through Q2.

I see. That sounds great. And then on the semi side, any kind of incremental share gain that you guys can point to?

And obviously one of your largest customers is doing a huge acquisition. How do you think that will play out for you guys after they've got the deal done?

You said one of our largest customers is doing a huge acquisition. I think that's pretty obvious that you must be referring to [AMAT & TEL].

Yes.

I would not anticipate any near-term impact associated with that. I'm sure there's going to be a long-term digestion associated with that. We hope that, that could lead to some eventual new business opportunities.

We have a strong historical relationship with AMAT. They've been one of our greater-than-10% customers for many years now. TEL is not a significant customer to UCT.

So who knows in the long-term? There could be some opportunities there. We certainly aren't counting on anything for 2014.

But we have seen stability in terms of the overall structure of the customers related business activities. For a while there, there was a lot of concerns as companies combined, what the impact would be on pricing pressure and other activities. And that now seems to have stabilized.

So it feels like we're in a pretty good situation from our existing customers. And hopefully there's some opportunity from new customers, or new customer potential on the semiconductor side, as some of those combinations occur.

Great. That's really good color. On the gross margin front, with the mix shifting towards non-semi in the first quarter, do you expect gross margin to remain in this pre-elevated level that you did in the fourth quarter?

And as you mentioned that your Asian revenue -- while increased, the mix actually declined this quarter, right? Do you see that also have an impact on your gross margin as we look at the first quarter?

Sure, Edwin. All of those play into it, as you know. It isn't necessarily a mix between semi and non-semi. We tend to get the same general margin profile from all of our customers, whether it be semi or non-semi.

But even within customers, there is product mix. And then as you mentioned, there is mix between more low-cost region and in other regions. And so all of that plays into the margins.

I don't see an unusual pressure one way or the other. Just like I think I made the comments earlier that there wasn't anything that was unusual in the quarter, that was kind of a one-time thing.

Mix is always an issue, as you know. And sometimes it works for you, and sometimes it can work against you a little bit. But there's nothing unusual that I see in the current quarter or the quarter we just finished.

Great. One last question and I'll go away. On the expense side, do you a need to increase expense in the current quarter or the current year, as your business seems to be growing pretty well this year?

Certainly we're going to have to -- from a direct labor standpoint -- support the volume of business that we have. And so that will flex, depending on what we see in front of us.

From an OpEx basis, I think again, I made the comment that Q1 always has the ramp-up of payroll taxes after the first of the year. And outside service fees -- most of the audit, et cetera, expenses hit in Q1.

And so you always have a little bit of that. But again, it's not unusual to this year. It's just the way it's treated.

Although I referenced, I think, that the OpEx will be up a little bit, it's not necessarily a trend. And I think we've got the factories we need, the people we need and the infrastructure we need to continue to handle the increased revenue that we've been talking about.

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

You're welcome.

Patrick Ho, Stifel Nicolaus.

Congratulations as well, in the quarter and the year.

Thank you, Patrick.

First off, in terms of the adjacent markets, maybe just looking big picture for 2014 as a whole. At this point in the game, which of the semi-markets that you participate in do you see being the biggest of getting you to that 15% to 18% percentage for 2014?

Patrick, 15% to 18% gross margin, is that what you're talking about?

15% to 18% on semiconductor.

The non-semiconductor, I'm sorry.

Oh, okay. We do expect medical to be a key factor in that, probably the largest factor. And then this growth that we've got in the crystal growth customer. I think those two together, along with some other smaller opportunities we talked about -- DWFritz in the $5 million to $10 million range.

And we've got a couple other smaller players that we can't name that are in that range. I think those are probably the primary candidates -- the medical, the crystal growth, and some in some of these other small industrial consumer products customers.

Great. Obviously the gross margin improvements have been significant over the past couple of cycles. Casey, maybe remind us, from the last cycle when you started making these improvements, what kind of lessons have you learned or drawn from that have helped you to flex labor and capacity this time around to help you maintain both gross margins at these higher levels, as well as on the OpEx line?

I think certainly that we put in some different disciplines around purchasing. We put in global supply chain that we talked about in the past. We put in certain inventory discipline around our business that's been very helpful.

Probably the key thing is, over the last year to two years, we have strengthened the team. And the team has grown substantially in their ability and their maturity and their experience in dealing with the ramp, and then, as you know, the ups and downs of this business.

So it really is a broad team effort, where I think we've got the bench strength across the board that we've never had as a Company before. And then we've done some things like building out the global supply chain, doing different inventory techniques and operational techniques that have been added to that.

But as you know, in almost any business, it all starts with good people and getting good people in the right place. And I really feel that we're about as bench strength and deployed appropriately as we've ever been.

Also I'd add, Patrick -- this is Clarence -- that the integration with AIT has been very helpful. So they've added some additional customers for us in Asia. But they've also added additional capabilities in frame manufacturing. And we're starting to integrate that into some of the UCT applications.

We've also-- utilizing some of the supply chain expertise in the UCT side, we've helped drive down our overall costs associated with AIT, as well. So overall, the AIT combination with UCT has worked out very well for us.

Great. Final question for me in terms of semi. You mentioned some of the increase in capital intensity in the process segments that you participate in, most notably etch and deposition.

Aside from just seeing the increase in capital intensity, do you see additional business opportunities with those customers? Whether it's broader substance for those gas delivery systems, particularly as they go to next-generation systems serving those customer needs?

Yes, I don't think we're going to see anything specific. It does add more complexity to the gas delivery subsystems than some of the other process modules we make. And in some cases, AIT even makes complete tools for some of our customers.

So some of those are adding more complexity to those tools, and hence, a little bit more revenue for UCT. But we would expect to be a beneficiary as those tools increase their complexity.

We're also looking into expanding into other areas. I've mentioned before that we're now doing atmospheric robots for some of our semiconductor customers. So that's bringing us some new opportunities as well.

Great. Thank you very much.

You're welcome, Patrick.

Thank you, Patrick.

(Operator Instructions)

Dick Ryan, Dougherty.

Good job on the quarter and strong guidance for Q1, guys. I might have missed your comments, Clarence, on Gino's departure.

Did you say he -- is that a position that is going to be filled? Or could you talk a little bit more about what his efforts were? Were they more on the operating side? Or new business development side?

No, Gino's efforts were -- well, Gino did have both groups reporting to him, the operations groups and the new business development group. But I would say Gino's greatest strengths have historically been on the operations side, and he's been very effective at that.

In terms of how we're going to structure moving forward, we will initially look to internally structure that. And then consider what we want to do longer-term. But we've now got a very strong internal team in place, partly associated with Gino's activities and recruits. And we're very pleased with our operational team.

So we're not looking at making any major changes. We're looking at finding ways to continue what we've got in place and continue the extrapolation of that.

Okay, thanks. And your new business development team -- I think earlier in your comments you mentioned you also saw some strength or an improving market for flat panel. Can you talk a little bit about that?

And can you give us a sense of how the new business pipeline has changed over the last quarter or two quarters? Any quantifiable look at that pipeline?

Sure. First of all, with regard to the flat panel, that's not really new to us. We've had a major flat panel customer for many years. So it's just a question of how their business does, and we already have a very strong position with them.

So as they grow, we will see growth in the flat panel. That looks to be a good market for us in 2014. And so we are seeing growth in that sector. We would expect to see that continue to grow.

But the new business development team that we're talking about -- we have existing accounts teams. And those teams are focused on how they can grow business within existing accounts.

But for the first time, we've got a completely new business development team that's totally focused on going after opportunities outside of our traditional space, outside of semiconductor. And that team is a totally separate team, roughly six employees, six account managers in that team, and driving new business opportunities.

They're the ones that are bringing in these DWFritz's that we talked about, and the crystal growth opportunities. And we think there's more out there. They're also going after new medical opportunities, which we see as a good growth area for us as well.

Okay, thank you.

You're welcome, Dick.

(Operator Instructions)

And we have no further questions in queue at this time.

Great. Well, I appreciate it, appreciate the support and interest in the Company. And feel free to contact us if you have any other further questions. Thanks a lot. Bye-bye.

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