Ultra Clean Holdings Inc (UCTT) 2016 Q1 法說會逐字稿

Welcome to the Ultra Clean Holdings Q1 2016 earnings conference call. My name is Marcy and I will be your operator for today's call. (Operator Instructions) There will be a Q&A session after the Company has presented its results. Please note that this conference is being recorded.

I will now turn the call over to Sheri Brumm, Senior Vice President of Finance. Sheri, you may begin.

Thank you, operator. Welcome to our first-quarter 2016 financial results conference call. Presenting today are Jim Scholhamer, UCT's Chief Executive Officer, and Casey Eichler, UCT's President and Chief Financial Officer. Casey will begin by discussing the financial results for our first-quarter 2016 and Jim will follow with some remarks about the business.

A few moments ago, we issued a press release reporting financial results for the first quarter of 2016 ended March 25, 2016. The press release can be accessed from the investor relations section of UCT'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 that contents of this call as the Company's official guidance for the second quarter of 2016.

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 discussed 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 Casey will discuss the first-quarter 2016 results.

Thank you, Sheri. Results for the first quarter were on track with the industry-wide semiconductor capital equipment recovery. Revenue was $112.2 million, an increase of approximately 8.5% from the prior quarter and a decrease of 10.4% compared to same period in 2015. The improvement over the previous quarter was due primarily to an increase in semiconductor capital equipment demand from the fourth quarter.

Consistent with our strategy to target opportunities in the semiconductor capital equipment market, semiconductor revenue was 94% of total for the first quarter, an increase of 9% from the prior quarter. Non-semiconductor revenue was $6.4 million for the first quarter, roughly flat with the fourth quarter.

Revenue from outside the United States accounted for 44% in the first quarter compared to 38% in prior quarter. This increase was driven by the ramp in production within Southeast Asia. During the quarter, two customers accounted for more than 10% of revenue.

Despite sequential revenue growth in the high-single digits, gross margin for the first quarter remained roughly flat with the fourth quarter at 13%. This was mainly a result of higher material costs due to mixed products shipped as well as direct labor costs required to meet customer needs. We anticipate returning to our target gross margin range of 15% to 18% for the balance of the year.

Operating expenses for the quarter were $15.3 million compared to $16.7 million in the previous quarter and $17.3 million in the prior quarter. The quarter-over-quarter reduction was due to higher one-time charges incurred last quarter in addition to a lower intangible amortization expense in the first quarter. We continue to look at ways to reduce and be more effectively manage our overall cost structure.

Excluding one-time charges and amortization of intangibles, operating expenses for the first quarter were $13.7 million or 12.2% of revenue as compared to $13.8 million or 13.4% in the fourth quarter. During the quarter, we incurred pre-tax charges of $1.4 million for intangible assets amortization and $100,000 related to the combination of two of our US facilities.

Operating loss was $700,000 or 0.6% before interest expense and income taxes as compared to an operating loss of $3.3 million or 3.2% in the fourth quarter and operating income of $2.6 million or 2.1% in the first quarter of 2015. The quarter-over-quarter improvement resulted from reductions in intangible amortization and one-time costs as well as marginal improvement in our operating expenses.

As mentioned last quarter, we recorded a non-cash charge of $13.9 million for a valuation allowance on deferred tax assets related to the Company's net operating loss carryforwards. During the first quarter, we incurred a charge of $1.4 million related to our valuation allowance position. Excluding the impact of the valuation allowance position, the tax rate for the first quarter would have been 23.8%. For the year, we continue to expect a pro forma annualized rate of 28%.

Interest expense for the quarter was $692,000, an increase of approximately $121,000 and a decrease of $512,000 from the fourth quarter and the first quarter, respectively. Interest expense for the first quarter of 2015 included the write-off of debt issuance costs resulting from the restructuring of our debt facility related to the acquisition of Marchi Thermal Systems.

First-quarter net loss was $3.2 million or $0.10 per share compared to a net loss of $15.8 million or $0.49 per share for the fourth quarter and net income of $1.2 million or $0.04 per share for the first quarter of 2015. The sequential change was a result of a one-time, non-cash valuation allowance expense related to deferred taxes recorded in the fourth quarter. Excluding pre-tax charges for intangible assets amortization and the combination of two of our US facilities, first-quarter net income would have been breakeven.

Diluted shares outstanding were 32.3 million for quarter, an increase of 97,000 shares from the prior quarter. Non-cash charges for the fourth quarter were $1.1 million related to stock compensation, $1.5 million related to depreciation, and $1.4 million related to amortization of intangibles.

Turning to the balance sheet, cash on hand was $45.5 million, a decrease of $4.6 million from the prior quarter. The decrease was a result of loan obligations coupled with fixed asset purchases. Outstanding debt was $73.7 million, a decrease of $1.9 million from the previous quarter. Net cash decreased $2.7 million in the quarter. We anticipate net cash will be relatively flat in the second quarter.

Accounts receivable was $66.7 million, up $7.5 million from the prior quarter. Days sales outstanding were also up slightly to 53 from 51 days at the end of the fourth quarter. These increases were primarily due to higher sales in the first quarter.

Accounts payable of $53 million increased $13.3 million over the prior quarter as inventory purchases were concentrated toward the end of the first quarter in anticipation of increased sales in the second quarter of 2016. This resulted in our days payable outstanding increasing to 49 days from 40 at the end of the fourth quarter.

Net inventory was $82 million, an increase of $9.3 million over the prior quarter. The increase in inventory was a result of higher demand in the first and second quarters as conditions in the semiconductor capital equipment market improve.

Looking at guidance, we expect to see a further recovery in the semiconductor capital equipment market during the second quarter leading to a sequential increase in revenue, gross margin, and net income. Our guidance for revenues in the second quarter is between $123 million to $128 million. Operating expenses as a percent of revenue should decline in the second quarter. Earnings per share will be in the range of $0.02 to $0.05. Excluding intangible asset amortization cost of $1.4 million, earnings per share are expected to be $0.05 to $0.08.

Now, Jim will discuss our operating highlights for the first quarter. Jim?

Thanks, Casey. 2016 began what we believe will be a multi-quarter recovery for UCT. Coming out of the fourth-quarter lows in the semiconductor capital equipment market, we saw momentum return, evidenced by the 8.5% sequential increase in revenue.

For some time now as part of our broader strategy, we have been talking about our transition to more of an equipment manufacturing partner offering a broader suite of capabilities. This strategy has begun to play out and we are seeing initial success in winning new business at our customers with new offerings. But there is inevitably a learning curve associated with a transition of this size. While we have made great progress, our profitability did not keep pace with our revenue growth in the first quarter.

In the last year, we have expanded our offerings by way of acquisitions to drive improved financial performance and value creation over the long term. In integrating these new capabilities, we are changing the way we do business.

Part of this process has been optimizing our operations, including implementing new processes and procedures, better utilizing our facilities, and moving manufacturing to more customer-centric locations. While this has been a significant learning curve, we believe it is a temporary but necessary step to drive significant future growth.

Our vision is to be a global leader in the design, engineering, and manufacturing of critical module subsystems and turnkey solutions for the semiconductor capital equipment industry. End-market drivers such as the mobile revolution, the Internet of Things, connected cars, and advanced security coupled with the trend toward Big Data should continue to spur demand for leading-edge semiconductors.

As technologies move towards 3D architectures, more complex deposition and edge processes are required. These trends are driving increased capital intensity in our core product market and enabling leading equipment manufactured partners like UCT to play a more pivotal role in the value chain going forward.

To capitalize on this, we have adopted a differentiated analytical and collaborative approach to working with our key customers. By developing a detailed understanding of customers' individual product needs, we partner with them early in the design process to solve their technical challenges, focus on product excellence, and develop design for manufacturing offerings.

In so doing, we minimize risk and ensure long-term relationships, putting us in a solid position to pursue a variety of business opportunities. Simultaneously, we plan to make select incremental investments that provide the greatest ROI as we scale our business.

In line with our strategy to grow and become a larger more geographically diversified company, one such investment is to enhance our ERP systems. Going forward, it will be imperative that we are able to make fast, informed decisions and remain nimble and flexible to meet our customers' rapidly changing requirements.

A modernized ERP system scaled to our needs should allow for greater operational efficiency, improved visibility, decreased lead times, increased throughput, and elevated customer satisfaction. This system will act as a platform to allow us to pursue opportunities at a faster rate while continuing to provide quality products on time and within budget.

Looking ahead, we expect steady increases in revenue as the semiconductor capital equipment market begins to rebound from the sharp decline in the fourth quarter. In the near term, industry sentiment is predicting the biggest contributors to growth will be 3D NAND fabs, foundries, and preparation for the ramp of 10 nanometer in 2017.

Additionally, we expect to see OLED adoption accelerate in the short term, especially mobile, leading to a stronger display equipment forecast for the year. With our exposure to these high-growth areas, we expect to benefit commensurately.

In summary, we have changed the way we do business. We have become a more integrated partner, manufacturing entire pieces of equipment and whole modules with the potential for significantly higher-revenue growth. Our strategy is playing out as we expand our capabilities, invest for the future, build momentum this year, and work towards our target model.

With that, operator, I'd like to now open the call for questions.

(Operator Instructions) Dick Ryan.

Casey, just a question on gross margins. You know, looking back over quarters where you were kind of in this Q2 guided range, low to mid-$120s million, you are north of 15% pushing 16%. And I wasn't sure I got your comment of getting back to 15% to 18%. Do you think you'll be back in there in Q2 or is that a blended rate that you would think over time?

Let me give you some sense on that, and I'll let Jim address a little bit the margin expectations as well. So what I was trying to refer to is for the balance of the year, we think we'll be within our guidance of 15% to 18%, so for Q2, Q3, and Q4. And so that's the near-term guidance. And so we will be back as best we can see into our range.

But let me have Jim add a little color to that as well.

Yes, Dick. We have several moving parts. One of the things that we've been doing is trying to reduce our overall cost structure. So one of the things that happened in this quarter is we consolidated our facilities in Texas.

And the costs to do that in the long run will be at a lower cost basis. But in the short run, the cost to consolidate those facilities was higher than we expected. So we expect to return back to the gross margin model that we've been performing to in the last several years.

Okay, great. And Jim, you talked about a rebound off of Q4. Any early commentary what you might see in the Q3, Q4 time frame and what sort of potential rebound we may be seeing there?

So, Dick, you know I will never give you comments on Q4. We expect the overall trends to be very positive. We expect CapEx spending to be in line with what Gartner and others have reported. We expect that the -- our space in that area will continue to outperform far as dep and etch and clean and wet chemistry. And so that we will benefit from the fact that we are positioned in the whole CapEx equation better than the market.

But there are way too many -- as you know in this industry, there are just way too many variables as far as global events and world events that it's very, very difficult for us to predict Q3 or Q4. But we see an overall positive trends that macroly (sic) should help us.

And you mentioned -- just one last one -- OLEDs. Any contribution you can break out for us on the market and what you might be sort of expecting as far as that opportunity progresses?

Yes. So Dick, we felt like we should call it out because it's material improvement for us. There is a -- every 20, 30 years, there's a dramatic -- there's an inflection in displays. You know, from CRT to PDP to LCD. And there's a new inflection coming with OLEDs, being led by mobile and then -- but quickly pushing its way into televisions, which is a faster trend than ever has happened.

So there's a significant trend in inflection there that we thought should be called out. We have exposure to that industry. It's not a major part of what we do, but we have a very good position on the display equipment side for OLED. And we expect that to contribute better, contribute materially to our business, but not significantly.

So I want to temperate with it's a nice -- it's a tailwind. But it's not a major, major benefit, as we're mostly a semiconductor equipment company at this point.

Sure, sure. Good; that's it for me. Congratulations on a good quarter and good guidance. Thanks, guys.

Edwin Mok.

Great, thanks for taking my questions. So first, just come back to gross margin on the first quarter. So that's $100,000 or $0.1 million of restructuring charge, that had an impact on gross margin or 100 basis point impact on gross margin. Is that how I understand your answer, Jim?

Correct.

Okay. But beyond that, right, if I [cut base] on what you guys had guided before, I thought margin would be a little bit better than that on that last quarter, given the increased volume. Is there anything else that contribute to maybe margin not as high as you guys had expected?

Edwin, I think it's careful with good intentions, right? So consolidating these two sites is going to save us money in the long run. We anticipated that there'd certain cost to doing that and there would be certain transition period to do that.

And basically, there are expectations. We ended up having a bit more on that side than we anticipated, but in the long run, in the fundamentals, everything is sound and it puts us in a much better position.

So just add on to that, and Jim, I have some follow-up to that. But as I talked about, a part of this was always mix, right. So as I said, the material costs were up in the mix that we had this quarter. And as you know, there's always good and bad mix that happens. And this time, the labor component of the mix of products as well as the material were up from where we were forecasting it [in the] beginning.

As you start to see a recovery, what you start to see is churn on the front end of it. So what you think you're going to be building at the beginning of the quarter isn't exactly what you are building at the end of the quarter. So that actually plays into the numbers as well for this quarter. But the things that Jim is talking about and may continue to talk about are really more of a longer-term piece that we're going to see over the next few quarters as we transition the business.

Actually, that's very helpful. Since we're talking about costs, I might as well stay with it. Jim, you mentioned that you guys plan to implement I guess a more global -- improve your ERP system. How much expense do we expect you guys to -- how much would that cost for, let's say, in the June quarter or for the full year?

So in the next quarter, we budgeted a few hundred thousand and then for the quarter after that about $400,000 to $500,000 per quarter. And it's -- we're being very careful in how we invest in the system.

And there's a lot of changes, as many of you know, in this space. With the cloud, you don't have to buy massive amounts of servers with hosted resources; you can variably move your cost up and down. So we're taking advantage of a lot of the new -- you know, the new advances in an ERP system and we think it's going to have a great ROI for us.

So the expenses are manageable within our business model. And it really what it does is sets us up for to growing to 2, 3X, whatever -- growing our revenue dramatically. And at this point, without such a system, it's very difficult to grow your revenue very efficiently. So this is a very metered, a very timed, a very careful investment, but it's well within the budget of what we can afford and being managed very, very carefully.

So Edwin, again, just to be clear, it's going to be a couple hundred thousand dollars in this current quarter and $400,000 to $500,000 in Q3 and Q4. And then obviously as we get out further, we'll talk more about it.

That's the P&L impact and so that's what you'll see is a P&L impact. As you know over the course of the project, we'll be capitalizing some of the costs and expensing some of the cost, but we'll keep you informed as we move forward as to the P&L impact.

Great, that's extremely helpful. Moving on the business side, I guess I have two questions. First is is there any way you can quantify how much of your revenue now is exposed to 3D-NAND-related customer equipment? Anyway you guys can give some color on that or your position around how the various product is sold into producing [for you now]?

Edwin, as you know, we don't breakdown our revenue by end technology. So what we are talking about is, you know, an overall string effect of 3D NAND, FinFET. 10 nanometer has a higher capital intensity for dep and etch and clean and wet processes. And then that therefore has a commensurate improvement in where we happen to be the strongest. Not happen -- we are the strongest in that area.

And so we don't break out how much is 3D NAND or FinFET, but these are general tailwinds that are really going to help us over the long term and the short term.

As you know, Edwin, when we talked at your conference about being positioned very strong in both deposition and etch, those are the fastest-growing parts of the market partly because of these technology discussions that you just had. And so consequently, that's what gives us the confidence that we feel we can have some substantial growth in our current markets as well as some of these other markets that we are starting to get into with our existing customers.

So we're not only doing well in the current markets we're in, I think we're growing. But we are also doing well in capturing a broader section of the markets across our customers and we think that will fuel our growth. But it needs infrastructure; it needs an ERP system that can respond appropriately to our customers' needs.

It needs a distribution of factories around the world that meets where our customers are and where they are going. And so that's all the balancing in the transition that I think Jim is talking about.

Okay, all right. Last question I have. I think -- I understand you guys have been putting more effort into helping customer design [EFIMs] and making EFIM for customers. Any way you can kind of -- or the front-end part of equipment -- any way you can give us some metrics or give us some color where you guys are at in that effort?

Have you started to be producing these front end for customer or of the new design that you guys are working on? Any metric or any color you can provide on that?

Yes. So Edwin, I think there's been a significant change in the transition of our Company as we have gone from a gas panel company -- mostly producing gas panels to now making modules or even complete systems. And there has been a significant transition which is already occurred.

So when you look at our revenue or our semiconductor revenue, you're seeing -- despite the market ups and downs, you're seeing a significant increase and the revenues start to show up in that area. Especially when you discount the non-semi revenue that we moved out of in 2014 and early 2015, I think if you just look at the revenue and the percent semi or the semi revenue, I think you could see that there's been a pretty dramatic improvement in the product portfolio that we are offering. And we are starting on that knee of that curve and it's very, very promising.

Okay. All right. Great, that's fine, thank you.

(Operator Instructions) Patrick Ho.

Casey, maybe just following up on Edwin's question about gross margin, and I'll take it from a different angle. Given some of your new opportunities and the new position you have in terms of the system modules you've talked about, did you get some of that gross margin impact because they're kind of just starting up right now?

And what I mean by that is typically whenever there's new businesses, the cost are higher initially. But once you get into volume over a couple of quarters, they kind of normalize theirself. Is that what you experienced? Or was it something else?

Yes, absolutely. That's a part of the impact. Some of it what I can say was mix related. Some of it is as we are transitioning some of our business, picking up some of these new parts of the business, they are different than traditionally what we've done.

And so we've had to build out different infrastructure; we've had to put different things in place. And while you are ramping that, building proficiency in that, that's what gives us the growth opportunity going forward. But while you're doing that, there is a bit of a drag on the gross margin as you're ramping that up.

But I'll let Jim talk a little bit more about those products and kind of the vision to it.

Patrick, that's great observation. That is definitely a piece of what we are experiencing. As we -- you know, we didn't become great at gas panels overnight. It was a curve, a learning curve, and we got very, very efficient at it.

And as we bring in new products, we have kind of an expectation of how the costs and price will come together. And as we learn how to manufacture it or make it and buy the components and to do what we need to do, there's a learning curve that's not always easy to predict. So definitely there was an element of part of the gross margin pressure.

It was based on the fact that we are doing new things, we're bringing in new products, and we are in a learning curve. But we are well up that curve and we have solved many of the issues around that. And we view it as a temporary learning curve and we'll continue to commit to the model that we've stuck by our financial model. So that's very true.

As you know, there's many different pressures on the P&L from one angle or another. And that was definitely an element as well besides the consolidation of [tech proof].

Great. And maybe as a follow-up to that on a going-forward basis, look, like you just said, any new businesses and new opportunities require costs. I'm encouraged to hear that your gross margin targets are going to get back to their historical levels.

But what gives you the confidence that you won't need to add people, other variable type of costs as you build some of these new businesses with your key customers? What gives you the confidence that the margin profile will get back to your traditional levels, given that you're still in that learning curve process.

Yes. The confidences, as I mentioned, were we learned a lot in the first quarter and we are already seeing a trajectory that is panning out. We have the capacity that we need, both people- and facilities-wise, which is why you're seeing us actually reduce some capacity with -- which ended up in the consolidation of two sites in Texas.

And so we have a very clear roadmap on how to control the costs and how to continue our trajectory towards the business model that we've always performed to. And so all the indicators are there that we can do this.

Great. And final question for me, just kind of on a big-picture industry perspective. Traditionally, your gas panel products have had short lead times. You don't get a ton of visibility from your customers.

Has anything changed in terms of visibility, lead times, that gives you at least a perspective looking, say, midyear into the second half of the year? Have they kind of extended, which gives you a little bit of confidence that these current trends are sustainable?

Short answer is yes. Our major customers are partnering with us more than they ever have. As they look to take advantage of 3D NAND and FinFET and capacity increases that they need, they are also sufficiently concerned to make sure that their supply chain can meet it.

And so they are partnering with us in a level that is not typical, which is great. And so yes, we have -- our partnerships with our customers in order to meet the requirements of the end market is I think the best it's ever been.

Great. Thank you very much.

Thank you, Patrick.

And this concludes the Q&A portion of today's call.

Well, thank you for joining us today. And we look forward to updating you after the second quarter. Thank you, everyone.

Thanks a lot.

This concludes today's call. You may now disconnect.