Q1 2020 Earnings Call

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Good afternoon, and welcome to the ultra clean technology q1 2020 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal Catherine specialist by pressing the star key followed by zero after today's presentation. There will be an opportunity to ask questions to ask a question. You may press * then one on your telephone keypad to withdraw your question, please press star into please note. This event is being recorded. I would now like to turn the conference over to Ron Ron Dead oneto with investor relations, please go ahead.

Thank you and good afternoon everyone and thank you for joining us. We hope that you and your families are safe and healthy with me today or Jim Shore Hammer chief executive officer and Sherry Savage Chief Financial Officer dead. Jim will begin with some prepared remarks about the business and Sherry will follow with a financial review. Then we'll open up the call for questions today's call contains forward-looking statements that are subject to risks and uncertainties birth information. Please refer to the risk factors disclosure in our SEC filings. All forward-looking statements are based on estimates projections and assumptions as of today and we assume no obligation to update them after this call a discussion of our financial results will be presented on a non-gaap basis. The reconciliation of gaap to non-gaap can be found in today's press release posted on our website. And without I'd like to turn the call over to Jim Jim.

Thank you, Rhonda and good afternoon everyone. Thank you for joining us.

Today, I will be speaking mostly about the global covid-19 pandemic you CTS response today our current situation and our near-term Outlook. I turn the call over to Sherry for a financial review before opening up the call for questions.

As an essential global company tackling a worldwide pandemic. You see T has done an extraordinary job proactively managing through these unprecedented times.

We recognize the potential impact in Asia early and initiated Global site Readiness and other regions where our facilities are located before the virus spread.

This enabled us to maximize capacity at our factories and manage our suppliers with minimal disruption to meet customer demand.

I say this not in a boastful way and certainly without any complacency but more to explain what actions we have taken and share some insights and how we delivered our highest revenue quarter today with improved profitability and strong earnings.

The first and most important way we measure our success is by the health and safety of our 4,700 employees around the world. We conducted an internal survey earlier this month and among other positive responses. We found that the vast majority of our employees said they felt safe or very safe while working at our facilities. We are considerably grateful for their hard work and dedication and their Relentless drive to deliver the best possible results for our customers suppliers company community and shareholders.

An equally important measure of our success is customer satisfaction, which is only possible with the committed Workforce.

Every significant product and Service customer has provided feedback citing the excellent job. We have done with respect to transparency on time delivery flexibility and the birth of our business continuity planning.

In addition to meeting the majority of the product orders and the quarter some customers has shifted additional work to use to cover shortfalls from other suppliers where possible usage is working hard to help fill those deficits.

This is where you see T is global footprint and ability to flex to meet demand provides a distinct competitive advantage and we are capitalizing on these opportunities.

Our service facilities operated at high capacity throughout the quarter with minimal disruption. We saw an increase in business across the customer base, including an improvement in memory wafer starts off.

All UCT products and services facilities are operational. So how has successfully navigated the crisis today. It started with a detailed business continuity plan already in place designed by a top executive and included a worldwide pandemic as a possible scenario uct's business continuity team is comprised of many uniquely talented people with Decades of experience in all manner of Crisis situations.

Having operations in China helped us understand early the depth of the crisis and we took prescient actions, assuming the virus would spread worldwide.

The business continuity team quickly began to secure the necessary personal protective equipment to ensure the health and safety of our employees.

We were also one of the first to introduce a work from home in travel restriction policy as the virus spread across the globe. We stayed one step ahead utilizing our playbook for each facility off advance of governing body directives.

Our Playbook was so successful that it was cited as a model for other Asian manufacturers do Follow by a prominent Chinese official.

More recently. We secured temporary housing in Singapore for the majority of our Malaysian Workforce prior to Malaysia introducing its new border closures earlier this month the DCP team needs to work diligently 24/7 applying a preventative measures to stay in front of the development that seem to arise daily.

With regards to our supply chain. UCT was prepared with alternative suppliers. Not yet qualified by the OEM

When the approval process was expedited by many of our customers we acted quickly and we were able to Source from a variety of suppliers.

We believe that this initiative will have long-lasting benefits to the health and competitiveness of our supply chain.

Our ability to accommodate demand resulted in revenues and earnings above expectations. Despite some temporary closures at a few of our sites throughout the quarter.

All of our factories are operational and we are working closely with our customers to understand any changes. They may see regarding demand Outlook and are planning ahead to find Creative Solutions.

Having said that the environment for our guidance as many unknown potential caveat that could impact our end markets are manufacturing capability and our supply chains while I don't know exactly how things will unfold longer-term. We see continued strong demand through the second quarter and are confident that our team will continue to perform at a high level.

Our Hearts and Thoughts go out to all those affected by this tragedy and we look forward to a day when the virus is contained in manageable. We remain ready to react at the situation evolved and are very proud to play an essential role in This Global fight against covid-19.

And with that, I'll turn the call over to Sherry for a financial review and then open up the call for questions Sherry.

Thanks, Jim and good afternoon everyone. Thanks for joining us in today's discussion. I will be referring to non-gaap numbers. Only we continue to see strong demand from ongoing industry wage in the first quarter resulting in record revenue for UCT. Despite some facility disruptions due to covid-19 operational efficiencies together with higher volumes resulted in improved profitability and increased earnings quarter-over-quarter.

Total revenue for the quarter was 320.9 Million up 12% from the prior quarter of our products division grew 12.7% to 259.4 million dollars on increased demand from our largest customers our Services Group contributed 61.5 million dollars up 9.4% as wafer Fab utilization return to more normal life run rates.

Gross margin was 20.9% up from 20.3% last quarter higher-volume brought our products gross margin to 17.4% from 16.4% off service gross margin was 35.9% compared to 36.5% last quarter margins can be influenced by customer concentration GE fee product mix volume and expenses related to covid-19. So you should expect to see variances quarter-to-quarter.

Expenses were thirty five point four million dollars up from 31.4 million and the prior quarter primarily due to the increases typically seen in the first quarter such as audit fees and employee wrong taxes as a percentage of Revenue operating expenses were 11% with a prior quarter despite the 12% increase in Revenue.

Total operating margin for the quarter improved to 9.9% margin from Services was 11.9% compared to 15% last quarter due to higher audit fees long. We anticipate the service operating margin returning to a more normalized range and a second quarter products margin improved 9.5% versus 8% in the prior quarter due to increased volumes.

Based on 47 million shares outstanding earnings per share for the quarter improved from $0.40 to $0.52 on net income of $21 compared to sixteen million in the prior quarter. Our tax rate for the quarter was 18.7% compared to 20.8% last quarter. We expect our tax rate for 20 28 be in a high teens.

Turning to the balance sheet during the march quarter. We increased our cash and cash equivalents from one hundred sixty two point five million dollars to 208.1 million dollars cash. Mom was 15.7 million and we drew down $40 on our revolving credit facility.

Well, we have a very healthy balance sheet and flexibility in our cost structure. We feel it's prudent to preserve cash during this unprecedented unprecedented time.

While the man remains strong in the near-term we are risk adjusting our guidance to account for the numerous uncertainties surrounding the covid-19 pandemic including unexpected changes and demand and supply chain interruptions. We anticipate revenue for the second quarter to be between $290 and $330 and EPS in the range of forty to fifty six cents per share.

And with that I'd like to turn the call over to the operator for questions.

Thank you. We will now begin the question-and-answer sessions to ask a question. You may press the star then one on your telephone keypad. If you're using a speaker phone pick up your handset before pressing the key to withdraw your question, please press * then two at this time. We'll just pause momentarily to assemble our roster month.

And the first question today will come from Quinn Bolton with Needham & Company, please go ahead.

Hey, hi. This is Charles on behalf of Queen. Congratulations on the strong results. I have two questions for now. The first question is about with us again, congratulations on the 13% sequential growth. And I just wonder I think you mentioned that the some of your OEM customers shifted some volumes from your competitors to you. I wonder whether naturally man increase over q and uh, some of the advance purchase may be of use em customers to secure safety stocks could also play a role if yes, and how should I think about which one of these three factors are really playing the bass a contribution here and they all have a follow-up SSP.

Yeah.

I Charles yeah, the majority of the increase was due to Natural demand. We don't believe it was Advanced purchases because we saw we saw these home okay, um before a lot of the crisis had basically were able to mitigate a lot of the shortfalls that we had seen as issues when we went into the fourth quarter. So the majority of the increase was was kind of already expected from the ramp that we came out of a Q4.

Got I got I got so maybe let me move to the question on service. I think you pointed out that especially memory summer Fab utilization was up. Sequentially. I wonder I remember we were service business has a large contribution actually also found dead on demand when the ship out new tools. They go through your your service and how do I think about that the contribution of these two factors either the oems and the fact um, um, yeah, if you can get more colors, that would be great. Sure the the the bigger chunk of the increase in certain the Services Group. Is she coming from the Babs. Obviously, we saw continued growth with Intel like we've seen over the past several quarters and then we saw the memory of Babs particularly Samsung really begins continue their wage

Every that we started to see if you floor it and come up with stronger in q1 and the OEM business is up, but that was probably the third level Factor.

Okay. Okay. So regarding the Fab utilization, what do you see if we're going into the next quarter? We definitely understand q1. There are off demand like Datacenter and you do I mean Global work from home kind of initiative. And what's the what do you see going into Q2? How is the Fab utilization a trending trending up or you are do you see any high winds in that? Yeah, it'll be difficult to call it up. I mean they recovered to significant a higher level. So I think they'll continue to be we expect and included in our guidance. Is that for the second quarter that would continue to be at the highest the high level that it is returning to Earth.

But it's very difficult to call whether it's going to continue to go up or or from there. But we we see a continuing strong through the second quarter right now.

Got it again. Congratulations on the strong results and the strong execution, and that's my question for now. Thanks.

The next question will come from Patrick home with diesel, please. Go ahead.

Thank you very much and glad to hear everyone as well and congrats on the really nice quarter Jim maybe first off given a lot of the destructions and a lot of the constraints that are still going on today giving your outlook. Are you still facing any I guess supply chain constraints off customer timing because some of your larger customers are still constrained by their ability, maybe to get parts or or getting tools delivered. How are you balancing the act on your end given that operational you done really? Well, how are you balancing it with your customer I guess issues on their end.

Yeah, so in in our for Patrick and our forecast for the second quarter, we've seen a lot of the that Reflow based on their constraints already dead. I already kind of come through into our bottoms up for cast. So that's that those issues are are contained in the the numbers that we put out for Q2. So I I think that that's kind of where we see it right now. We're we're hoping it will improve if it is we're ready and we're also doing what we can to whether the shortfall that where we can jump off or we have the capability capacity. You know, we're we're certainly coming in to to try to alleviate some of those issues as well. But we we've already built that into the second quarter forecast. I hope of course, we don't know what tomorrow brings but there there there have been new issues that come up on a week-to-week basis and most of them we've been able to mitigate

Right that's helpful and maybe as a follow-up question in terms of you know, the food chain, you're getting inventory building, you know across from the OEM consumers off at the top for the chipmaker's to the equipment companies from your business continuity plans given how well you operated during the quarter. How are you I guess managing inventory home and maybe building some inventory on your end in case there's any future disruption longer wait times the power you managing that.

Yeah, we we definitely still keeping an eye on inventory. It's you know as we should stay at another company one foot on the gas and one foot on the brake. We're definitely off to keep trying to manage our inventory to keep our our liquid assets liquid. But obviously there are there's a handful of certain certain components which are which are constrained and obviously where where we can get, you know, an additional buffer in those constraints, you know, we work to do that while balancing, you know to make sure that we don't tie up too much cash. We did a month a very good job, I think on on managing our inventory returns actually increased in the first quarter inventory went up and not as much as Revenue right and final question for me on your service side of the business, obviously that driven by utilization rates and we have seen waitress starts across the board pickup heading into the June quarter. Are there any other types of a game?

New offerings are services that you can give your customers on that and to keep revenues at a more I guess.

Elevated level given a lot of the uncertainties. There are right now going into the second half regarding demand.

On the short term that revenue is very difficult to replace by being in a flexibility by offering different Services. Obviously, we're always working a new opportunities and and penetrating another area but those tend to be longer terms. So we we still in that business we we we still basically follow away for starts in to a smaller degree wage, you know new equipment shipment so but yeah, it it's not that's not something that we can easily flex and and have our have, you know, a different service offered, you know in the in the immediate future to to fill in any gaps, but we're always working on expanding our presence and and growing that but those are more longer-term programs.

Great. Thanks again and great effort. Thank you Patrick.

The next question will come from Carl Ackerman with Colin, please go ahead.

Hey, good afternoon. Jim and Sherry. Hey girl. Hey congrats on the on the results. I mean clearly first after having healthy, you know, I think largely driven by Foundry and logic spend some memory Investments. Look to be more weighted toward dear am in the first half of the year, I'd love to hear your view on how you see the mix of end market demand in the second half of the Year. Particularly given I think your services business is a bit more lower toward memory. So your thoughts there on to just kind of and market dynamics would be awful.

I wish I wish I had a A View to help you with Carl. I think as you see everyone report including those companies which are even closer to closer than we are. The second half is really unknown. There are winners and losers in in the in the chip areas, you know, depending on whether you're in, you know, the cloud or Telecom Versa or computers versus Automotive or or smartphones, right? There's a there's a whole mixed bag going on and in the second half. We really have no additional money beyond what what you're reading as like Samsung reported this morning, and I'm sure

Got it. No, that's fair. Maybe a different tact your ability to to accommodate last-minute customer demand has certainly been very beneficial took you in the first half of the year, um oftentimes in recessionary periods larger and more Nimble companies tend to outperform peers as as market dynamics accelerate. I'm curious how you feel about your design when funnel for the second half a year on and organic basis and giving your larger liquidity position. How are you thinking about inorganic activities in the current environment toward less financially healthy localized suppliers.

yeah, you know we have a

Lot of organic design when opportunities, you know with with our current customers and and also with kind of new up-and-coming customers. Um, it says well and I think we haven't seen any change to those programs. If anything, you know the programs where which are continuing that at the customer site but are continuing it within the oems walls off. You know, there's a there's a lot of there's a significant ability for them to really work, you know to focus on those right now as a restricted in the field a little bit. So we should we continue to feel really healthy about our Pipeline on those new wins. And and we haven't seen that really get impacted by by the virus pandemic today 8 a.m. As far as inorganic, you know, we're always very opportunistic. Um, but also we're very conservative and so is you saw we drove we drove down some revolver. So without knowing the wage

The macro event might be towards the end of the year. You know, we're we're more leaning towards, you know, being very conservative as far as keeping cash on our balance sheet and and and I'm sure we're ready for or whatever the fall out of the economic Fallout might be but having said that we always keep the process going. We're always looking at opportunities. We're always looking to see you know, that makes sense and we'll continue that process but but definitely with a conservative eyes for it being ready for for any potential macro events, which which which are definitely have a higher chance of becoming the normal.

I appreciate that gym. Thank you.

Thanks girl.

And the next question will come from Christian Schwab with craig-hallum capital, please go ahead.

Hey, congratulations guys on on a fabulous quarter. I just wanted to follow up on the second half kind of Outlook and commentary potentially if we can't, you know, I know the largest memory I said, you know, some unknowns regarding handset demand. Ultimately they still thinks every should, you know be relatively strong again in the second half. So if we get through this on the backside without a real app in the covid-19, can you give us a range of potential outcomes about how strong the secondhand could be from that? Yeah, if he has that would be that'd be difficult. Obviously, if if without the same impact or minimal impact macro economically worth of delays to like the Apple phone and others we would have expected the ram that started in in Q4 of nineteen, you know to can

Continue and that we would we would have continued to see Revenue increases on the order of what we saw this quarter, you know as we go forward quarter-to-quarter so that you think of that as kind of how natural things could have an evolved without impact from the virus on the bottom and I I really really can't say, you know, obviously we've seen push-outs of the Smart Apple iPhone and but we do see kind of a buffer that we see the cloud of the investments in the server and other areas are still continuing and and need to continue to Silver seems like life on another question. We're seeing some Winters kind of buffer the bumper the lower end projection. So I I really don't have a great Insight. I don't think anyone does on the second half of the year long. But if you're optimistic, you could continue imagine that that the things that get back on track pretty quickly you you would have I think you would have continued to see growth rates like what we've seen this place.

That's that's one of the questions. Thank you. Thank you.

Next question is from David dually with steelhead, please go ahead. Yes. Thanks for taking my question. I think you mentioned that your Global manufacturing footprint allowed you to me that a man from customers that essentially it sound like that was market share games cuz you help us understand which geographic regions helped you achieve that and Lounge areas where you referring to that you might have taken business some other guys that weren't able to fill

Yeah, so in the first part it goes had that because everyone knows had China first. So we were we have a book written in China where a lot of our peers don't have a book in our have a very minimum wage and they were intended to be more in Southeast Asia specifically Malaysia. So we initially got kind of hit early but we were able to recover pretty quickly pack. And and so by the time the the pandemic hit Malaysia, that's a that's a footprint where a lot of our peers our competitors were both were based and we we have some of the fires of Malaysia but we didn't have factories like many of them did so so when it hit China were able to shift a lot of things at Singapore and we have a small site in the Philippines wage were able to flex and then went ahead Malaysia. We were able to move things kind of back into China to Singapore where our peers were struggling in that area. So a lot of those were major modules. Yep.

Those components like well meant and and other areas which uh, which where you have a lot of capability to have a quick turnaround Fordham and wellness our our smaller components them to move in faster. So so it was a kind of mixture of smaller components that we could flex and and as well as the major modules so so having having the site in Singapore in China and what the other thing that China did for us is it gave us kind of an early Playbook to run off of so that as it started to move around the globe. We were kind of ahead of of them on how to how to move where others that weren't in China had didn't have that really bad head start as much as we did that experience on how to maneuver around the product of the supply chain and and and activate that but it was it was kind of a hot potato between are different regions and a little bit of luck when you know by not having that heavy presence in Malaysia like some of birth

Okay, thank you very much. That's great. As far as the OEM business goes, you know, I think you addressed a little bit. But if you could just talk a little bit more in detail, you know, in times of of you know, difficult outlooks, they might build inventory and how do you measure that or do you know if your OEM customers a build inventory wage, you know because they're worried about covid-19 issues or or if you could just give a little bit more color in on this topic, that would be great.

Yeah, I as we were in a ramp there really hasn't been much opportunity for customers to build much inventory. As one point of a second point is is what make is more almost customized rather than standard components like a power supply or a mass flow controller which are kind of more shell type items. So page area, you know the the where we operate in as a contract manufacturer that's less of a inventoriable item if you would so I really don't believe there's any significant loss inventory between us and the oems there were ships and schedule and when they could when they needed the tool based on, you know their ability to get everything else they needed to complete the school, but not not a an exercise where they did really the inventory items, you know between us and and themselves so that that's really not something that we dead.

as much of a factor

Okay, great and just a couple other questions for me as far as I know you ship into the and they ship into the customers, but if you could just comment about what you might be seeing wage in China since that the economy seems to be coming out of the cobit situation, you know, since they went into it first, you know, are you seeing a ramped-up in the domestic Chinese guys? And I I guess the final question would be is I know it's difficult to gauge what the overall wafer Fab equipment business Revenue might be this year. But what what is your range of planning at this point for for that?

Yeah, so on the first question in China, we are we're staying strength continuing one. Obviously. They're they're past most of the wave and most of the Waves. So we see them continue strong and too is I think there's also they have kind of pass have concerns around some of the new export controls that are being talked about in in Washington so long we continue to see the China China Fab continuing to advance as as well as they're trying they're making both technology and capacity Investments where a lot of the other bands are are more relaxed around technology. And that's with assessing the memory space. So we're still seeing strength in China and we expect that to continue especially to do all that talk is going on with you know, the range on w f he's uh, you know, what we're seeing from, you know different pundits is basically, uh Advanced is flat and dead.

at work right now that the worst but a lot of the estimates aren't single-digits inclined and and for the sake of planning, obviously we do you know for the next quarter guidance not looking at be numbers were looking at at real orders and and the situations around those but but as far as the range of where wfp could end up like I said, you know a single-digit, you know exact decline off of 19 to two flat and and then we don't really plan around and you know any jobs that are more extreme than that, but of course, you know, we have plans in place for Windows do happens so that I think that those are reasonable expectations too, especially since the wage has been somewhat

Not immune but less affected through at least the first half of the Year under the belt. So, you know, we'll have to see what happens in the second half.

Very much. Appreciate the perspective. Thank you.

You're welcome David and the next question will be from dick Ryan with Doherty, please go ahead.

Thank you. Say Jim one of your longer-term goals has been to increase contributions from other key customers is the current environment, you know shifted any of that potential, you know sorts of market share gains your ways or is it still too early to to tell on that?

No.

Today today, especially, uh, you know, our our effort to grow as you're right our effort to grow like a Third customer at 10% reporting those that continue to go very well. We've done some we've had a series of very nice wins with one of the oems who's not in our top to Thursday. We continue to see a lot of success and that and and a lot of those are projects and products that are coming out in next year and those those tend to continue regardless of of what's happening in Iraq. Those are their their new product line up. So we continue to see great success in winning some programs and projects in that space. And so today we haven't seen any any impact on our road map to you know, as we expand their share.

Okay, and I heard the guidance for Q2, but did you I may have missed it. But you talked about what your expectations are for, you know, each of the segments the product services for Q2 kind of a mix know we we didn't break out my by product line, but I think as you can see the revenue is is near nearly flat that we're projecting so you you can expect a similar thing.

Thank you. And congratulations.

The next question is a follow-up from Quinn Bolton with vitamin company, please go ahead.

Hey, thanks for taking my follow-up question regarding the some of the OEM shifting some volumes to you to your way in the first quarter. Let us know whether those Maca shipped are they permanent or you think they will go back to the original supplier just need to understand how we understand this apps and flows in terms of sheer Dynamics. But but the what's already shipped to your way would they go away or they will stay with you?

Yeah, sure. Obviously some of them are clearly temporary shifts just around the situation, but I think we I think it would be reasonable to expect some of the ships, you know would continue based on continued uncertainty around supply chain and our strong performance that we've had today that we didn't see a portion of those continue off. It's always difficult to predict, you know, long-term how that way out that becomes normal the normal battle, but definitely some of them are are just temporary filling that gap of them. Some of them did did that play into a more permanent, uh a more permanent situation based on how well we've been able to how reliable we been to our OEM

Got a garden. So so basically I think it'll

Quarter, I mean first quarter twenty you guys or guided. I mean you guys talked to go high end of a guidance and basically like 5% something higher than the Mekong and you were guiding like five to ten per-cent of the impact possible impact from covid-19.

Praying or supplier chain and network. I know this is a long-term question. But any color would be great. Yeah on the first point, you know, we did see some of the month we had factored in some pushing out into Q2 and that did happen due to both customer customer date shifting on us as well as some areas, you know, we weren't able to keep to suck additional take the original date. But in many cases we were able to mitigate it and and deliver what we we wasn't clear we could deliver in q1. So Q one was a mixture of either getting more of a push-up than we anticipated as well as additional revenue from products that we responded to in the moment to provide that we weren't expecting into one because you know, there there was a demand and and we were jumping in to help out where where others weren't able to deliver. So it's difficult to bridge but it was kind of a khong

Nation of mitigating some of the original push-outs, uh, and some of the constrictions that we had as well as picking up is the last minute some some business to fill it off as lamb moves more towards Asia being our largest customer than you I think you'll continue to see us shift more and more of our manufacturing to Asia. We've been on a steady in countries over the years. We've seen more and more moved from our North America plans to our Asia plans. And so we will definitely continue to match that and I think you know, especially I think you you could see Singapore Singapore facility group over the last three or four years from only a a few million dollars a quarter, you know up to a significant, you know at some points around a hundred million a quarter or so. So so we're definitely growing Asian will continue to grow Asia that may accelerate it when they're plant is up and running we might see a further chef.

We'll definitely you know, we'll definitely accommodate that to make that happen and we are well set up to do that.

Okay Charles. Thank you.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Jim show hammer for any closing remarks. Well, thank you for joining us today, and I hope it stays safe and healthy until we speak against the second quarter. Thank you all.

The conference has now concluded thank you for attending today's presentation. You may not disconnect.

dead dead

Great. Thanks.