Q2 2020 Ultra Clean Holdings Inc Earnings Call
Good afternoon, and welcome to the Ultra clean second quarter conference call and webcast.
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I would now like to turn the conference over to Rhonda Bennetto Investor Relations. Please go ahead.
Thank you operator, good afternoon, everyone. Thank you for joining.
Today, our Jim Scholhamer, Chief Executive Officer, and surety shot <unk>, Chief Financial Officer, Jim will begin with some prepared remarks about the best nurse and Sherry will follow with the financial review and then we'll open up the call for questions.
Today's call contains forward looking statements that are subject to risks and uncertainties for more information. Please refer to the risk factor disclosure in our FCC 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.
Question about financial results will be presented on a non-GAAP basis, a reconciliation of GAAP to non-GAAP can be found in today's press release posted on our website and with that I'd like to turn the call over to Jim Jim.
Thank you Rhonda and good afternoon, everyone. Thank you for joining us.
I want to start the call today by fairly thinking every one of our worthwhile.
Employees around the world for their commitment flexibility and cooperation during this unprecedented situation.
The relentless drive to succeed our entire workforce resulted in record revenues and profitability in the second quarter.
Demonstrating the strength in resiliency of our business model.
I'm going to man driven primarily by foundry and logic resulted in revenue from our products did this is exceeding our expectations.
The recovery or wafer starts drove our service business revenue to new quarterly high.
These higher volumes, coupled with a focus on operational efficiencies and a favorable product mix spurred probability to levels not previously seen.
The pandemic has prompted a company everywhere to realign how they do business and you see T has risen to the challenge across the board.
I continue to be impressed by the ingenuity and innovative ways, everyone hold together to ensure business continuity well working safely and productively.
Our business continuity team has done an extraordinary job remained a heightened state of readiness and some countries grapple with the second wave of the virus and others struggled to contain the first wave.
Every safety protocol outlined in RBC playbook remains in place at each site.
Oh, you see people still these remain operational and we are grateful that we have no known employee to employ transfer to the virus.
We remain thankful to every one of the frontline fighting with pandemic and look forward to a day when the virus is contained.
We are working closely with our customers to meet their needs and we'll continue to leverage our global footprint and optimize our supply chain to ensure our customer success.
The supply chain as a critical part of our business in operations and I would like to thank our suppliers, where their diligence, which enabled us to the to deliver on time.
We are dedicated to continuous improvements in a high performance culture and have been evolving our procurement and supply chain functions.
Hi chain resiliency is about more than speed of operation adjusted time delivery, which is why we are proud to be partnering with applied materials and their success 2030 sustainability initiatives announced during semicon last week.
The tenure program aims to optimize material one parts washer procurement packaging warehousing transportation and recycling to reduce energy any mission and conserve resources.
The project also aims to promote ethics human rights diversity and inclusion throughout the supply chain.
We recognize we have a shared responsibility as environmental steward and we think applied materials for leading this effort.
We believe we can drive progress on social and environmental issues, while improving our efficiency and effectiveness as part of our overall growth strategy.
And that no and in response to construct a customer demand I'm excited to announce that we are extending our global footprint into Malaysia.
Having operations in close proximity to our customers and suppliers in the region will help expedite our growth plans.
Leasehold improvements on the 340000 square foot data the our facility in Penang are scheduled to begin in the fourth quarter. This year with initial production slated for the second half of 2021.
The facility will increase our total capacity by approximately 50% improve our cost profile and position us well for share expansion as the industry continues to grow.
For the third quarter, we expect demand to remain around the current level. It's technology leaders continue to invest in node transition and leading edge capacity despite pandemic concerns.
It is possible that economic fallout from the global health crisis could disrupt disrupt our end markets.
Our manufacturing capability our supply chain.
Well, we don't know exactly how things work polled our increased diversification strong operating fundamentals enable us to withstand I'm certain periods and will serve us well as the global economy recovers.
With that I'll turn the call overly Sherry for a financial review and then open up the call for questions Sherry.
Thanks, Jim and good afternoon, everyone. Thanks for joining us and today's discussion I will be referring to non-GAAP numbers only.
Ongoing industry demand drove U see TV total revenue to another record quarter.
Higher volumes favorable mix and operational efficiencies and profitability to new highs and increased earnings quarter over quarter.
Total revenue for the quarter was $344.8 million up 7.4% from the prior corridor.
Our products Division grew 7.1% to $277.9 million.
On increased demand from our two largest customers.
Our service business contributed to a record $56.9 million up 8.7% as wafer fab utilization returned to more normalized run rate across the customer base.
Total gross margin was 22% up from 20.9% last quarter.
Higher volumes from both business units favorable movement in factory efficiencies all contributed to the increase.
Product gross margin was 17.8% compared to 17.4 last quarter.
As a service margin was 39.3% compared to 35.9% last quarter.
Martin can be in fluid influenced by customer concentration geography product mix volume and expenses related to cope with 19. So you can expect variances quarter to quarter.
Operating expenses were $35.4 million flat compared to the prior quarter.
As a percentage of revenue operating expenses were 10.3 per cent compared to 11% in the previous quarter.
Total operating margin for the quarter improved to 11.7% from 9.9% and the first quarter.
Margins from the product divisions improved to 10.5% person is 9.5% and the prior quarter due to increased volumes improved factory efficiencies and favorable product mix.
Margins from the services Division was 17.1% versus 11.9% last quarter due to increased volumes coupled by improved factory efficiencies.
Based on 40.8 million shares outstanding earnings per share for the quarter Rose to 75 cents on a net income of $30.5 million compared to 52 cents on net income of $21 million in the prior quarter.
The increase in earnings per share resulted from higher revenues from both business units and included approximately 2 million of subsidies from the Singapore and Chinese government, primarily related to the cobot 19 situation.
Our tax rate for the quarter was 18.8% compared to 18.7% last quarter.
We expect our tax rate for 2020 to remain in high teens.
Turning to the balance sheet during the June quarter, we increased our cash and cash and equivalents to $214.4 million.
From 208.1 million.
Cash from operations was 17.5 million up from $15.7 million in the prior quarter.
Subsequent to quarter end, we made is 7.8 million dollar voluntary principal prepayments on our term b facility.
Along with our regular 2.2 million dollar principal payment for the quarter, reducing our term bone term b loan balance.
By $10 million for Q3.
Well demand will remain steady for the near term we are risk adjusting our guidance to account for the numerous numerous uncertainties surrounding the cobot 19, pandemic, including unexpected changes to demand or supply chain interruption.
We anticipate revenue for the third quarter to be between 320 million and $360 million an E. P. S. In a range of 50 60 to 72 cents.
And with that I'd like to turn the call over to the operator for questions.
We will now begin my question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you're using a speakerphone please pick up your handset before pressing the key.
To withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble the roster.
[music].
And our first question comes from Krish Sankar of Cowen and company. Please go ahead.
Yeah, Hi, Thanks for taking my question Ive, a few of them first one I'm just trying to look inside the guidance given the you know in person numbers in June and the fact that money. It's your customers are guiding.
Number up sequentially you got the guiding last week slot.
The underbody. This is almost it does something else going on in terms of the September guide them at a few other question.
Yeah, Chris I'm Jim.
Yeah, I've obviously, it's.
Jerry mentioned, we it is somewhat risk adjusted and I think it's very difficult to bridge, especially from one customer alone.
From quarter to quarter, there are definitely differences and the timing between us and and and our customers as well.
So I think at this point you know our guidance it it's flattened and that's as.
In addition, that's roughly a you know where we're confident where we well we won't be.
Got a gym that's helpful and then.
The guidance aside do you think that given what happened in Q2 with the fact that no supply was obstructed due to cold. They do you think you'll custom looks much started building inventory just to be able to see for side or have you seen any such indication yet.
Oh, no we haven't its <unk> I think [laughter] I you know, it's been obviously, a pretty bunch about mad scrambled. The last that's the last few quarters and another you know factors. The majority of the thing that we do aren't really inventory of all right. That's a word a they're not really shelf items you know they're very specific.
Module thing and components, which are great depended on their their particular customer as well. So on typically a there is not a lot of inventory between us. So we do not believe we do not believe that the majority of what we're making is is doing anything but continuing onto that.
Customer.
Got it just a final question on the on the militia facility is the functional decide that your two largest.
Customers have like a multi shanda Singapore facility is the reason for it or was there any of the well specific reason for the militia plant.
Yeah, well enjoy great.
Yeah recall, we habit, Singapore facility as well yeah. We are actually it turns out that apartment building will be within a stone's throw a glance facility that was that that was unplanned we've been standing that's for some time, there's a lot of rig or were you know we see a lot of continued growth of abuse.
The t. over the next several years and so we needed to add capacity. There's also been an overall shift year after year or more.
A higher percentage of what we building Oh, which requires you know Asia pick up or you know in Asia destination. So we've seen a higher percentage of Asia sales versus North America as well, but and then also continues to put us in a robust low cost low cost supply chain and manufacturing infrastructure.
And and you know a lot of other advantages as well. So you know I think it puts you see T. In a in a very good cost position as well as you know supports our future growth, but as we as we see WFP continue to grow in our share of WFP continue to grow.
Got it got to Jim I mean, if I can just squeeze in one last you know with the well publicized or push showed up until seven out of me to.
How does that impact youre or you know, but that's just be business.
Yeah, I you know.
The push out with obviously, you're talking about the $1 billion in capex cuts or.
Oh I was looking at more like the seven nanometers pushed I'd like six months, we go Uh huh.
Yeah, I think that away.
I think that will kind of impact you know maybe.
Maybe a delay I'm down the road it in their expansion and Fabs for seven nanometer. So that's something that I think we'd see.
Maybe a two quarter you know push out of about <unk> of their you know their new fab.
You know their new fab investments, so that would be I think it has an impact not reducing I'm not reducing their current spend with us I'm, we're continuing to see that grow.
But maybe pushing pushing out a few quarters that step function increase in service revenue about me, but we would see from their new investment in seven down I mean.
Thank you very much in.
Yep.
[laughter].
Our next question comes from Quinn Bolton of Needham and company. Please go ahead.
Let me Oh.
Oh for my congratulations nice results well I guess the first question just just looking at the guidance and I know you're building some levels conservatism in here, but when I look at the E. P. S. A 50 60 72 cents.
That's down from 75 cents you just reported so wondering if you're anticipating any increase in opex your lower gross margins. It is there something that's that's affecting the.
Profitability in the third quarter.
Hi, Quinn yet this is Jerry I'm you know, we did see a very favorable mix come through the Q2 financials with but more weldment shipment as well is additional heater on some of our higher margin products. So we're not seeing that makes right now go through our Q3 to the same.
Level. So that's why the margins or the P. S is a little bit lower as well as we did have as we mentioned in the call a 2 million dollar a subsidy from China, and Singapore, and we don't have that level of subsidy flowing through the p. at all in Q3 as well.
Yeah, sorry is that subsidy was that more of a cost of goods or was that an opex. Just just so that we can modeling appropriate.
Yeah. It was in both I can get you the specific numbers, but they are a majority of it went through cost of goods sold to deal with a direct labor costs associated with the cobot situation with a small portion going through opex.
Got it got [laughter], a second question just I'm looking at utilization you saw record service revenue.
Can you give us any comments on how you seen that.
Utilization rates trending both on the logic and memory side into third quarter here.
Yeah, I think you know logic memory foundry walk ins and you obviously have better finger tips, the exact utilization numbers, but they've all continued to grow, especially I think the biggest or your growth with a memory utilization, which you know it had been surprised through 19 and started to recover in 20 and we saw.
Not really accelerate the utilization rates and not in the memory really really move in the last quarter.
Oh, and then last for me just as you think about the mix shift and it's maybe hard for you but.
Do you sort of expect a sort of it makes your from your logic and memory based on the book business you see for the second half.
Second yeah.
I don't think the mix is going to shift that much I think as we look into 21, I think where we see 21 continued to be pretty strong and continued growth in WH being I think that's gonna be.
Based a pretty heavily on memory I think memory is going to [noise].
Kind of be cycling out at full speed, then next year and so I think that will be where we see the mix mix start to move I think they'll continue to be strong investment and what logic and foundry, obviously logic, maybe pushed out a little bit.
But I think man I think that makes will move more into next year as memory really best beyond just filling out current fabs and we started to see a you know new fabs below.
Got it great. Thank you very much.
Yeah.
Our next question comes from Patrick Ho Stifel. Please go ahead.
Oh, Thank you very much and congrats on a nice quarter, Jim maybe as a follow up on the last question about their services business and the break down between cloud foundry logic and memory, maybe as you look longer term can you discuss the growing intensity or the opportunities on the memory side, especially.
For your parts cleaning business can you detail, maybe qualitatively how some of the changes on the memory side of things are driving an increase in a the use of parts cleaning and the growth in that area for you see cheap.
Yeah.
You know, we have a very strong position with Samsung and so.
Oh, we obviously see there you know Samsung as started doing that's quite a better and filling out there Joe talked fab and I think there or is it new investment going into into she on where our joint venture or we have a position there as well. So I think we're set up pretty well in that side I think men.
Murray overall it.
The it's following the same trend, obviously, a little bit behind Oh, you know logic foundry and logic, where where the big cleaning intensity is going up is that as the that dimensions are getting more and more challenging. So I was getting I think they do requirements and the I guess the cleaning.
It cleaning value per part are starting to increase in memory as well, which is you know we saw that moved pretty dramatically through logic over the last the last year trends from foundry.
And now we're starting to see that happened in memory as well, where there's a lot lot of things that require.
Pretty high level cleaning and pretty complex cleaning in the memory space that that didn't require that in the past.
Right and maybe as my follow up question on on the product side of things I, you, obviously have odd the multiple business on the products and all but you're also seeing you applications and you process sees a both on the etch and deposition side, where you're seeing selective batch in selective deposition, you're also seeing an increase.
And he will be adoption can you again, maybe just qualitatively describe how some of the growth in those quote new applications you processes are driving growth for your products business.
Yeah.
Especially you know the I'll be application, but but also you know the data match.
Some of the new products coming out you know, we're pretty we're very heavily involved with our with our customers there and those developments and so there's I think there's a lot of.
New generations of products coming out so I think that's why we continue to see our gas gas panels side of our business remained very very strong, though so we definitely we even though a aldi is become more productive its definitely an application, which is very gas, yes panel having versus the wafer output.
Looking back the application that reach year on you know continued adoption.
In the fab so is definitely a positive trend.
Required require more out of that section of our business in those two areas.
Right and just a final question for sharing in terms of the prepayments.
And your improved cash flow generation should we look at additional types of prepayments as.
The primary use of cash, particularly in this environment when a your cash flow generation is that more elevated levels.
Yeah, absolutely we are going to continue paying down our term b that as we move forward. So yes, absolutely. We do plan on doing that periodically has been about four.
Great. Thank you very much.
Thank you Patrick.
Our next question comes from Christian Schwab of Craig Hallum Capital Group. Please go ahead.
Great Congratulations guys on the other great quarter and outlook <unk> can you.
Walk us through what you believe your aggregate revenue capacity is today before we any expansion in Malaysia.
Yeah. It's a it's obviously, it's a it's a moving target at the you know with the Koby, we've had to spread out.
Sure.
Just did in order to keep spacing and things like that but I think burst capacity you know we could.
We could cover a few burst capacity through extended shifts and days and depending on the different plants. You know we definitely can proceed.
Covering you know 30, 30% or so you know additional output without without.
Doing too much on acrobatics, and then there's always a well there's always away. So in the short term I think you know I think we'll be well set by in the longer term you know by by the end of next year.
A significant new capacity coming on board. So are we don't see any restrictions or any is any feeling that will bump into on being able to support the industry our customers.
Great and then that leads to my follow up so the movement to Malaysia, you talked about kind of obviously low cost supply chain and manufacturing infrastructure.
I would assume a favorable lower cost region, but when you're adding capacity in the new Malaysia facility I guess I'm trying to figure out yeah are you, adding incrementally more capacity or will you be moving capacity from facility the facility.
He to this lower cost is this you know should we be thinking about this is aggregate brand new capacity well, it's fully built out.
Or will they be puts and takes between the different facilities.
It's actually going to be a combination Christian I mean, there obviously, obviously, we do need to do we see the need of of additional capacity. You know we see you know next year's WFP, I'm, probably roughly 10% higher than where we currently are.
And every year, we see one or two points Oh.
Of difference between North American AJ, and obviously the Asia you know what's required to be built major increase if you present and that's been happening you know your prime here and I think those are starting to accelerate especially you know during the call. The crisis I think logistic then.
Logistics roots became kind of heightened goes as ER and the supply chain got is constrained I think we all realized you know.
You know the extensive logistics involved and so getting closer to the endpoint became more important for our customers as well.
So it's really a combination, though you know adapting the share gain the WFP growth and the continued shift towards Asia.
And so you know so there would be some you know reduction in capacity in North America kind of the correspond with that as we go but it's also the Malaysia is a is also a.
Measured a measured addition, obviously the initial initial building will well animal a pretty high cap capacity you know roughly good overall at the end of the day increased by 50%.
Our capacity overall, but I think we're gonna obviously it'll be a stage you know staged increase in what we add there.
Right and then and then lastly, I would assume it'll take a modest amount of time before you would actually be producing should we kind of be thinking kind of Oh, you know fall of 2021 for that facility to be ready and ramped in and ready to go is that the right.
Hi, framing and can you just tell us what do you think.
If I might have missed it but you know what it what is the capital required to get that facility going.
Yeah. The yeah, I think yeah that second half a 21 is definitely our plan and we are you know we have our factory in Singapore as well. So we already have a supply chain in that region or kind of.
Established obviously, we're going to we're gonna grow that but yeah. That's that's about the right timing for initial production and will be ramping a ramping over time from from the initial production. The overall cost you know this is a building that we're going to end up but you know leasing so our capital cost our cash outlay, we'll just before the leasehold.
The improvement than the equipment that we need inside the building to operate so that's a total of around $17 million on it.
Okay, Great Alright, and that's it I have a I have no other questions. Thanks.
Thank you Christian.
Our next question comes from Dick Ryan of Colliers. Please go ahead.
Great. Thank you and congratulations on a strong performance.
So Jim with your size when global footprint, where there any supply chain disruptions in the quarter that.
You are able to benefit from that you know might stick longer term.
Yeah over the last few quarters, we we've had.
Several opportunities where we were brought into the second source where are the initial suppliers are we're struggling.
Yeah, there are not dramatic changes and they tended to be some of the smaller and smaller items you know needed.
Oh by the customer on the tool. They weren't you know major major market shifts, but yeah, we definitely benefited over the last few quarters as as we stepped into yes, you're not to cover some of them or kind of Greenfield things that we had never viewed before and some of them are just does share shifts and are we expect the majority of that that's to stick.
Okay great.
You mentioned.
Applied is sustainability presentation, and then that they talked about a more sustainable and just supply chain what in particular, if it can be defined at this early stage what does that mean for you guys.
And you know actually there's a lot of.
There's a lot of things that they can be done that but that they don't necessarily they're good things for the environment and they're also in the long run there you know there and even in the short run there they are actually more efficient.
I'll give you. An example, there's a tremendous amount of crepes used in this industry having to them. The voluble material that we're moving around as pretty it's pretty dramatic so reusable reusable, creating and Oh logistics applies when packaging that you know that's the kind of a simple one right that you know right. There. So I think there's.
A lot of lot of low hanging fruit, where are you know working together on those kinda requirements. You can you know we can reduce our footprint there's things in the cleaning process, where you can add a where you can re circulate some of the chemicals or rather then then are you know dumping and and and dispose.
<unk> and buying going once in southern certain technologies, you're going to invest in another these take large capital. So there's a lot of.
If your focus did you put a little bit a focus on these things you can save time, and the and money and not time, you can save money on the environment at the same time. So these DST requirements are becoming obviously more important you know for our customers for investors and for everyone. So they are just like I said, there's a lot of low low hanging fruit in this area.
Sure Okay, great. Thank you.
Yep.
Our next question comes from Tom Diffely of D.A. Davidson. Please go ahead.
Yes, good afternoon Construe, let me ask the question. So I'm following up on Patrick Silly question. When you look at the chemical cleaning bark etch what is the long term growth do you see there and how's that.
Hi cheaper counter.
Clean in country going up over time, it's the bigger driver.
It's a you know time, it's driven you know the first order of importance as you know wafer starts.
But all but a wafer start and they are and the leading edge you know seven nanometer you know processes.
Definitely a higher cleaning intensity or dollar for dollar value intensity, you know that then something more on the trailing edge. So I think obviously you know we see that that business typically grows in the mid to high.
Single digit year on year, Yeah, we had a kind of up an odd middle of the year last year, where memory was slightly you know utilization dropped in the middle of the year, but but typically it grows we at least that wafer start and as and those Fabs go more do we leading edge, we can expect that even increase from there.
Okay that helps and then I'm just curious you shouldn't be activity on the outside of the sport.
Its you know that that business for US you know this one's from.
You know seven seven or 8 million a quarter to 15 thing it was at the low and a low and this quarter I think our overall non semi was around 13 14 million.
Dollar so its actually in its still a relatively quiet as Ah I think.
You know the all led Oh, let adoption on phones have been slower than than anticipated.
Yeah, I expect that to pick up next year or is it optical.
It's tough to call you would have asked me a few years ago I would've thought that penetration rate would have been a lot higher but I think it was <unk>.
Kind of an.
Uh huh.
Situation happened, where China over invested in all that had relatively horrible yields so it and they finally, our improved the yield they actually you know they got free capacity at the same time.
So as well as you know the prices remain kind of a heightened adoption rate phone remained lower than expected. So I think all of that kind of put the adoption rate back a year or two but I I think by maybe middle end of next year might start to see that recovered, especially with a bogey handsets coming on the high end smartphones.
Okay I appreciate the time today.
Thank you though.
Our next question comes from Colin do have Mckenzie investments. Please go ahead.
Hey, guys. Thanks, a question because I got congratulations on a corridor.
Two questions for me I could you confirm your current outstanding balance on your revolver and a terminal.
And secondly.
What I see current capacity utilization.
Yes, I can start with the revolver. It's currently at 40 million a we took that down during the Q1 timeframe.
And leads kept it just in the current environment that we're in so 40 million.
Jim do you want to come to the other question.
On capacity is the loan capacity or that you mean the overall.
Operational capacity operational capacity.
Oh, Oh, you know we don't have you not an exact match measure on that or not a you know a line of widgets coming out [noise].
You know I I, obviously, you know where we're near the high end, where we are where we are you know where the high end of Oh, our capacity burst capacity as I mentioned Weve. You know we can accommodate you know more and how many what we see you know coming into next year about that that's obviously one of the main drivers for us to build.
Additional factory in Malaysia.
Okay.
And just get on to determine them down so post the add more and the voluntary pay down you guys would be at 290 outstanding.
First the somewhere around that we paid off yeah, we paid off 50 million last year and then we paid out for 12.2. So far this year, so it'd be a little bit less than that but yeah close to 290, okay. Great. Thank you.
Thank you.
Hi, Thanks.
This concludes our question and answer session I would like to turn the conference back over to Jim Scholhamer for any closing remarks.
Yeah. Thank you for joining us today, we look forward to speaking with you next quarter.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.