Q2 2021 Ichor Holdings Ltd Earnings Call

And if anyone should require operator assistance during the call. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I would now like to introduce your host for today's conference Claire Mcadams Investor Relations for Ichor. Please go ahead.

Thank you Melissa good afternoon, and thank you for joining today's second quarter 2021 conference call.

And you read our earnings press release, and and you listen to this conference call. Please recognize that both contain forward looking statements within the meaning of the federal Securities laws. These forward looking statements are subject to a number of risks and uncertainties many of which are beyond our control and could cause actual results to differ materially from such statements.

These risks and uncertainties include those filled out and our earnings press release.

As described in our annual report on form 10-K for fiscal year, 2020 and then.

And as described and subsequent filings with the FCC you should consider all forward looking statements and might have those and other risks and uncertainties.

Additionally, we will be providing certain non-GAAP financial measures during this conference call.

Our earnings press release, and the financial supplement posted to our IR website. Each provide a reconciliation of these non-GAAP financial measures to their most comparable GAAP financial measures on the call with me today are Jeff injuries, and our CEO and Larry Sparks, our CFO and Jeff will begin with an update on our business and a review of our results and outlook.

And then Larry will provide additional details of our second quarter results and third quarter guidance. After their prepared remarks, we will open the line for questions.

I'll now turn the call over to Jeff interesting Jeff.

Thank you Claire and welcome to our Q2 earnings call.

I hope that all of you and your families or having a healthy and safe summer so far.

Today, we reported another record revenue quarter for Ichor and continued strong financial performance.

Revenues grew 7% over Q1 to $282 million, while the demand and by our environment continues to strengthen.

Revenues were slightly below the midpoint of guidance and its output from our Malaysia operation was affected by the movement control order mandates issued and early Jim that limited the number of employees allowed to work to 60% and while we maximized our direct labor and it did have an impact on our revenue.

We are very pleased to report a gross margin increase of more than 70 basis points compared to the first quarter and 280 basis points improvement from the same period last year.

There are a couple of quarters ahead of schedule and our planned margin improvements and as a result, our operating and net profitability for Q2 were at their highest levels and 3 years.

The leverage and our operating model is evident and our earnings growth, We reported <unk> 90 per share and earnings for Q2, and $1.66 for the first half, which represents 57% growth and earnings per share on a 24% increase and revenues compared to the first half of 2020.

This has also been the strongest period of free cash flow generation and the company's history with $82 million generated and the last 12 months equal to 8% of trailing 12 months revenues.

Now halfway through 'twenty, and 'twenty, 1 and the underlying demand for wafer fabrication equipment for W. F. E continues to be very robust and is expected to continue at these unprecedented levels for the foreseeable future.

With semiconductor supply constraints pervasive and ongoing most major device manufacturers have provided multi year visibility into their heightened levels of investments, which are being put into place to support ever increasing demand forecast as.

As a result, wf fee expectations for 2020, 1 have again increased since our last earnings call with expectations of growth and access of <unk> 30 per cent compared to last year.

The strengthening demand environment to date in 2020, 1 is evident and our Q2 results and Q3 guidance with upticks in demand witnessed among each of our key customers and across each of our business units.

Q3 revenue guidance is and the range of 290 million to $320 million or 8% sequential revenue growth at the midpoint.

Companies across the supply chain are working to increase capacity and so are we.

Last quarter, we talked about our plans to increase Capex this year and order to add the capacity that will enable ichor to achieve quarterly revenue run rates and excess of $400 million.

Each quarter, we are achieving incremental improvements and output in order to deliver on continued steady sequential growth and and unabated demand environment.

Our visibility remains very good and continues to extend about 6 months or so which along with the outlook provided by our customers provides us with the confidence to forecast sequential quarterly growth for both Q3 and Q4 with continued strong momentum carrying into 2020.2.

We continue to believe about 2021 and just the second year of a multiyear growth cycle propelled by the convergence of multiple demand drivers such as 5 G. Iot AI and high performance computing and autonomous vehicles, and addition to more recent initiatives to support and support of that.

Domestic semiconductor supply self sufficiency together all of these drivers are resulting and increased capital intensity for the semiconductor industry and higher levels of investment and fab technology and capacity.

And then this extremely healthy business environment High Court plays a critical role.

I'll now turn to our key strategies to continue to outperform industry growth and in turn deliver strong operating leverage and cash flows.

I'll begin with our strategic focus on some of the strongest markets within WMC and the 3 key markets for our products, our etch and deposition and UV lithography, all of which have been outpacing overall industry growth due to multiple technology drivers.

And and the industry continues to invest and the technology that will take them from 96 layers to 128 layers to 256 layer devices and beyond and.

And at each node the cost per gigabyte declined driving incremental demand for solid state memory, and both Pcs and enterprise storage and as well as increased storage with each new generation of cell phones.

We see this as an elastic market, which will continue to grow with the ever increasing bit growth at each node theres much more etch and deposition capital intensity.

Similarly, with DRAM and does it go from 1 y to onesie nodes to the 1 alpha and the 1 day to note.

There is more need more of a need for etch and deposition and we are the leading provider of fluid delivery subsystems and do these markets.

Additionally, we are seeing and increased utilization of UV tools, beginning and at the 1 alpha and note.

And logic, we are seeing the progression towards the 5 nanometer and 3 nanometer nodes by the largest manufacturers and this will require more complex geometries and more precise control of fluid delivery.

And each case is these geometries become more complex. This drives the need for faster at rates better material cell activity and more precise control of the processes.

The key takeaway has it relates stake or is that these advanced technology nodes capital intensity is increasing and in particular are requiring more etch and deposition as well as and increasing use of UV and all of which drives more fluid delivery systems and total and each of these technology transitions.

Across all 3 device types is driving an increased opportunity for all 3 of our key markets.

Now I'll update you on the progress the team has made on our strategy to leverage our engineering capabilities and IP portfolio to develop new products that will result in longer term expansion of our share of the served market as well as drive the operating model towards increased levels of profitability.

Since our last update we have made very good progress on our proprietary next generation gas delivery solution as well as with our other components that we have developed as part of this program.

We recently shipped our first fully configured and next generation gas panel to our initial beta customer we.

We expect the qualification process to begin soon but it will take at least 6 months to fully qualify.

This is an exciting milestone and our program.

And we look forward to keeping you apprised of our progress.

We continue to work with 2 other customers and expect to ship our second beta system in late Q4.

And our chemical delivery business, we remain on track to deliver a beta chemical delivery system to a north American customer and the third quarter.

We expect the qualification period to extend through this year with first revenues occurring in 2022.

Also we did ship our first evaluation unit to a Japanese customer.

That will begin qualification and the third quarter.

And the scale of this first opportunity is relatively small, but an important step and penetrating this regional market.

We continue to quote opportunities at other Oems that are larger in scale and while we have been delayed by impacts of Covid, our opportunity remains large and we will continue to focus on Japan.

And our precision machining business, we completed the 2 qualifications, we highlighted on the last quarter's call and expect to see a small amount of revenues and the third quarter with the first significant revenues beginning in the fourth quarter. These qualifications will increase both our proprietary content and a gas panel and will be margin accretive.

In summary, the team continues to do a very good job of ramping the business to address the customer demand, we are experiencing and delivered another record revenue record revenue quarter for ichor.

Our third quarter revenue guidance indicates our expectation for continued sequential growth about Q2.

And year over year growth of 27% to 40% versus Q3 of last year.

And as I've mentioned earlier, we have strong visibility for at least 6 months and anticipate another quarter of growth for Q4.

We are also pleased to have delivered gross margin improvements ahead of plan and Q2 due to a combination of cost reductions and favorable product mix and for the second half of the year, we expect margins to remain at similar levels. So we will see solid solid earnings leverage on the revenue growth forecast for the second half.

Which brings us to larry's discussion of our financial performance and further details on our outlook Larry.

Thanks, Jeff first I would like to remind you that the P&L metrics discussed today are non-GAAP measures unless I identify the measure as GAAP base. These.

These measures exclude the impact of share based compensation expense amortization of acquired intangible assets nonrecurring charges and discrete tax items and adjustments.

There is a very helpful schedule summarizing our GAAP and non-GAAP financial results, including the individual line items for non-GAAP operating expenses, such as R&D and SG&A and the investors section of our website for reference during this conference call.

Second quarter revenues were a record $282 million up 7% from Q1 and up 27% from Q2 of 'twenty 'twenty.

Business conditions continued to strengthen during the quarter and our operations team did an excellent job responding to strong customer demand and a challenging operating environment, which includes continuing impacts from COVID-19.

We achieved a new record revenue quarter and delivered our ninth straight quarter of sequential revenue growth. We also achieved sequential increases in gross margin operating margin and net income gross margin for the quarter came in better than forecast at 16, 8% up 70 basis points from Q1.

And up 280 basis points from Q2, 2020.

Covid related costs continue to impact gross margins by about 50 basis points.

Covid impacts on gross margin are mostly related to higher freight costs as well as higher costs and ensuring the health and safety of our global workforce.

These impacts are expected to persist for the foreseeable future we continue to drive improvements to our gross margin.

Our key strategies to drive gross margins higher or through incremental cost reduction programs growing our share within our higher margin components businesses and increasing our content our proprietary IP within our products.

Our Q2 gross margin performance reflected earlier than planned and impacts of some of the cost reduction programs combined with favorable product mix.

As expected Q2 operating expenses were $16 million operating margin of 11, 2% improved 100 basis points over Q1, and 370 basis points over Q2 of 'twenty 'twenty.

Interest expense for the quarter was $1.6 million down from Q1, as a result of and overall lower effective interest rate and outstanding debt balance.

Our tax rate was a little less and 13% year to date and our planned rate over the next couple of years is expected to be and the range of 12% to 13% with 2021 and expect it to be at the high end of that range.

With revenues just under the midpoint of guidance and gross margin above forecast earnings of 90 cents per share were near the high end of the range.

Now I will turn to the balance sheet.

We ended the quarter with cash and investments of $247 million and increase of $4 million from last quarter, we generated over $13 million and cash from operations and after our capex spend of $10 million free cash flow was $3 million.

Total debt declined by $2 million to $168 million.

Q2 days sales outstanding were relatively consistent with the last couple of quarters at 38 days as for inventory turns of 6.1.

Now I will turn to our third quarter guidance with revenue guidance and the range of $290 million to $320 million our earnings guidance of 90 cents to a dollar and 6 cents per share reflects similar gross margins as Q2.

Our Q3 operating expense forecast is $16.5 million, which reflects the incremental audit fees and associated costs related to becoming Sox compliant. This year. The additional expenses associated with our new ERP system, and the higher level and R&D spending to support new product development programs.

As a reminder for modeling purposes, we will have a 14 week quarter in Q4 of this year.

We expect our interest expense in Q3 will be around $1.5 million, our tax rate to again be approximately 13% and our fully diluted share count to be approximately 29.4 million free.

Finally, as Jeff mentioned, we are stepping up capacity investments this year to support the strong demand forecast for the next couple of years and I expect capex to be around 3% of revenues for 'twenty 'twenty 1.

Operator, we are ready to take questions. Please open the line.

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Our first question comes from the line of Craig Ellis with B. Riley. Please proceed with your question.

And thanks for taking the question and guys congratulate congratulations on the gross margin progress and and overall profitability.

Jeff I wanted to go back to to comments on supply and just try and and put a finer point on things and and understand things a little bit more broadly so.

And the 1 can the company just quantify what the supply impact was in the quarter from the Malaysian issue that you identified.

And 2 just given some of the things that we're hearing more broadly from either larger companies, but our customers are potentially competitors that are speaking to constraint issues, where the what's.

What is the business impacted indirectly by any supply issues beyond the things that you saw in Malaysia.

Yeah, I'd say for this quarter.

Asia had a bigger impact on us than some of the other supply constraints, which we've managed them.

We it's hard to put an exact number on and Craig, but I would probably say kind of high single digits and millions is what we probably could have got out if we.

And our Malaysia operation running.

Full out and so it took us a few weeks to kind of rejigger things and you lose a little bit of time like others. We're seeing some other pockets of supply constraints that obviously have some effect on you, but we're working pretty closely with those suppliers and and honestly our customers to try and manage those as best so that we don't <unk>.

Packed our our customers' customers' needs and so I think we've done a pretty good job, but there are still.

A few other pockets of that debt, we have to work through hopefully through this quarter, we'll be through most of that and.

And I think that's probably as clear as I can can make it without being too specific.

Yeah. That's helpful. Thanks, Jeff and then.

Nice to see the gross margin and like I mentioned earlier.

It sounds like we're looking at flattish trends over the next couple of quarters. So the guidance. If you could just talk about some of the gives and takes whether theres mix or or other issues that have some upsets and and.

And then.

Staying on the gross margin line, Jeff that you were talking through some of the strategic items. It seems like there's a number of.

Positive things happening with new product introductions that could begin to benefit the.

The model next year, and not looking for guidance, but but what's a reasonable way to think about some of the margin dynamics.

Whether they're tailwind or headwinds as we look out to 'twenty 2 per ichor.

I'll, let Larry answer some of the gross margin stuff and then I'll circle back to the second half of your question I think as.

As we talked about and the last the last call you know we're shooting for around a 20 basis point improvement quarter over quarter.

We were happy with our progress this quarter at 70 basis points I'd say of the incremental 50 about half was was product mix, which is a heavier mix of our components business, which is what we've talked about before and where we're seeing that come through the P&L and the other half was some of our cost reductions that we're able to.

And to execute a little earlier than planned I think when you look at the.

The third quarter and beyond and you've got a few things and play 1 significantly strong business out there. So the you know the.

Mix of gas to our other products, we will have to keep an eye and that it looks like Q3, we have a little bit of a headwind there, but we will continue to improve on the on the cost our cost side. So we expect to you know.

And to overcome.

Some of that impact and then I think if you look at the longer term we.

And we definitely with continued cost reduction programs and with the share gains, we expect and components and then as Jeff talked about.

Some of these products that have more IP content.

And then you know, we'll continue that the trend line going going into 2020.2.

Jeff you want to add to that yeah, and I mean, obviously I'm not going to guide the absolute impact as these new wins start to rollout.

You know a lot of what we've been investing in us and our precision machining and area and components along those lines that carry higher margins. We always say there you know kind of in that low.

Low thirty's or so and so you can just take that differential and you know if you've got $10 million and new wins, you can see it moves the needle pretty nicely.

But having said that we're very early and some of these wins, we have to get through the qualifications and then as we get through those we'll give you a little more specificity around the impacts on the year, but we're really excited about the progress we made this quarter.

Excellent. Thank you very much guys. Good luck.

Thank you.

Thank you. Our next question comes from the line of Patrick Ho with Stifel. Please proceed with your question.

Thank you very much and congrats on the nice quarter and outlook, Jeff maybe first off just following up on some of the commentary you made about qualifications.

And for some of your newest products.

I know qualifications can take time, but given the current demand environment and the extended visibility.

Ty ecosystem machine right now and have you seen any acceleration in terms of qualifications and what I'm kind of trying to figure out is and you look at your customers on the tool and are they trying to heat and the speed to get out some of their new tools because the demand is clearly out there and.

And the industry is moving to the next generation devices have you seen any pick up on the qualification side that could accelerate.

The adoption of these new products.

And I.

I think it's Oh.

I would say it would be marginal that they're accelerating beyond what they have to do to get in and qualified remember most of what we're doing gas flow through for example, where our chemicals. So it has to go through a pre.

Pretty long qualification period huh.

Having said that I think we've taken a step forward I do I do think that there is to your point that there is a demand for more and this is helpful. So we could see some acceleration, but since were just now getting through this first phase and then we just shipped our first fully configure gas panel by the time, we do the next call we'll have a <unk>.

Or feel for how fast everybody's moving versus what we would think normally.

Great that's helpful and maybe as my follow up question for Larry.

And you talked about Capex is increasing for you guys as well.

To add the necessary capacity for future demand if your customers and.

As you look at the margin profile and you add on this capex typically there are startup costs associated with it but again with dish long demand environment.

And the visibility where C. Do you feel as we go into 2020.2 that.

And the new capacity that's been added on that can be absorbed quicker than usual and that'll actually be a gross margin boost but you know and.

And as we head out to 2020, 2 and longer term for the company.

Well Patrick I think the first thing is the bulk of this investment and capacity is in the machining and components area, which for US as you know is the higher margin business. So I think when you look at and even though we've kind of elevated our capex investment.

And does this comes online and we're able to to ship more precision machine parts and a very very healthy environment.

I think that'll be margin accretive to us. So we're very confident that where we're putting the money as needed.

We have made some investments and the integration side, but those and in absolute dollar basis is less than what we're making on the machining and component side. Yeah. We don't think the integration investments will pull us off kind of our business model because as you know the volumes are going up and they'll they'll carry some of the overhead anyway. So.

Yeah, I think at the end of the day, we would expect margin accretion out of these invest.

The investments as Larry said largely around the component side of the business.

Great. Thank you very much.

Thank you Patrick.

Thank you. Our next question comes from the line of Krish Shankar with Cowen and company. Please proceed with your question.

Yeah, Hi, Thanks, and thanks for taking my question 2 of them close 1 lease up and just for Lori.

You mentioned that there's somebody should be up sequentially and Geely WK has grown and at least 30%. This year. If I do the math is it fair to assume that December quarter revenue should grow at least 10% sequentially from the September quarter.

2 follow ups.

Yeah, well I'll take this 1 krish I I think some of the just a really couch. It at some of the upside to Wi Fi has been and D. UV lithography and and optical I would say you know, we're not going to guide that.

Specific to <unk> and.

And that but we think we'll be pretty close to the overall growth rate of <unk>.

<unk> if that helps you.

Got it and you got it that's Super helpful. And then next question and maybe for Larry.

And you said that December was a 14 week quarter.

And the implication is not going to be a whole lot of upside to revenues, but your opex could be higher than December versus September is that the right to be true.

Well I think that.

And having an extra week does help the revenue picture. So I think we you know just having those extra days, but yes, it will translate into higher Opex and you could assume you know things like labor and some of our depreciation and other things will scale at 14 weeks versus 13 weeks and I'm only.

And we get closer we'll have a better feel for it to its highly you know you get a lot of holidays and people taking time off so it's not and it's just not a divide by 13 and multiply by 4 days.

It'll be a subset so.

Got it got it and then just a final question all of the eval tools.

But like you know a while ago, you said that from other eval got delayed because of Covid no debt and like you got a Anthony and thank you.

And my money.

And these are amazing 1 year eval that is the case.

Do you have costs associated with it but not a lot of revenue and killed customers effectively qualify. It. So yeah is it fair to assume that all.

And I think the 2 things Krish I think the 1 that's been delayed by Covid as an opportunity, we still have and Korea the.

<unk> and Japan are new and the North America customer will be a new eval.

These probably take somewhere between 3 and 6 months before revenue and there's a very little cost associated with.

These particular units as they put them on their tools and run. It. So you won't you won't see it will have some incremental costs, but I mean, it's kind of in the noise I'm at this stage. So and then the first generation gas panel, obviously as a new new 1 as well.

We're pretty we're pretty happy with our progress and the third quarter and our second quarter zone.

And you just talked about.

Thanks, Chris Thanks.

Thank you. Our next question comes from the line of Tom definitely with D. A Davidson. Please proceed with your question.

Yeah, Good afternoon, and maybe a first quick question for Larry on the margins. So obviously and we talked a lot about the gross margins, but wondering over the next couple of quarters. If you expect some nice flow through for nice acceleration of the operating margins or.

And there can be some expenses coming back in terms of maybe returned to travel or new R&D programs that might offset that a bit.

Well, we'll see we'll.

We will see a little bit of travel, although most of that shows up and Opex. I think you know we do have COVID-19 I would say.

[laughter] everybody was hoping this this COVID-19 and go away and it's just not going away and Youre seeing it and freight and we're definitely seeing it and a couple of the.

And Malaysia, and a few even the delta variant and the states here, but so that's sort of and unknown, where we're sort of just projecting that that's going to impact us and a similar fashion going forward. So that's a little bit of a headwind I think you know looking at product mix for US, we'll we'll expect gas to bump.

Up a little bit, but I really do think and the components business and and the machining business in particular, you will see.

<unk> share gains, there and and continuing improvements and the margin profile. So you put all that together and we've said 20 basis points. We did have an acceleration this quarter and and I'm, hoping that we get into Q4 and beyond and we can get back on the.

Back on that train as we.

As we kind of go into the early part of 'twenty, 2 but we are definitely I think very.

And I'm optimistic as Jeff mentioned on some other new qualifications and things and where we're adding capacity and that's all starting to come online.

And that'll put us in a good position, yeah, and you'll see you'll see leverage for the operating margin clearly because our opex, even though we've guided a little bit of an increase from the Sox, it's still well well within the range. We have and then you've got the revenue growing and the margin staying at similar levels. So you will see operating margin.

And Bruce.

Right, Okay and then.

Jeff you talked about 6 months of visibility, which is kind of unheard of in this industry.

Has that changed your you're planning at all your operations your inventory levels and anything like that on a go for them.

And its ability I think the answer is yes, I think that.

With better visibility, we get better forecast, we get really pretty good forecast, we have more confidence to lay out our our procurement plans and pose to our suppliers our customers are being very.

And cooperative and ensuring that we get as much visibility as possible. So that helps all the supply chain and know what to do obviously, we've talked about a few challenges, but I think and in general I think things are starting to improve and we will see continued progress bar.

Barring the.

And the Covid impact that we ended up having and Malaysia I think is little literally unique to a few of the sub tier suppliers, but I think we've managed through that and rejiggered within our network and with other partners to kind of replace that so we're but we still got some catching up to do.

Alright, and then finally when you look at the next generation gas panel that you said your first paid out on is that a gas panel and that's applicable to all of your end markets or is that just for a very specific end markets or applications. This. This particular, 1 is focused on a particular application and as we continue with the program development and it'll be able.

And to apply to all our markets, but we need a few more months to get.

Some other.

Flow control.

Volumes kind of through <unk>.

R&D and onto the under the next gas panels. So that the next phase that we talked about we will will actually address the different application.

Great. Thanks for your time.

Beth.

Thank you. Our next question comes from the line of Quinn Bolton with Needham and company. Please proceed with your question.

Hey, guys, let me Echo my congratulations on the nice margin performance from Jeff wanted to start with with OPM parts availability..1 of your peers last night cited that as a constraint doesn't sound like you've seen a dramatic effect, but but wondering if you could just address you know kind of.

Supply of flow controllers power supplies other types of components going into the systems and do you think supplies you know kind of getting better getting worse, just just your thoughts going into the second half you know given how strong and the demand environment is.

Yeah and just.

Just to be clear I mean, what we manufacture and obvious.

And I know you're talking about but we don't have the semiconductor kind of content that some some other people have so we don't get much of that impact at all we've done as much as we can we've tried to secure anywhere where we think it's risky and we tried to secure incremental inventory much to the last.

Gentlemen, comments around supply chain and stuff, but where it.

It's getting better there is still some pockets obviously.

And then when you go through any kind of these ramps you always get a 1 or 2 suppliers that has to catch up and then that affects us to some degree and and.

And.

And we've maintained our broader range of revenue guidance, obviously with a quicker recovery probably moves us up but at this point, we've given you our best visibility visibility with what we see out there, but I'd say in general it's not.

Through our entire supply chain, it's very localized to a few a few areas and we're working really well with those suppliers to kind of get through this and.

And get back on.

On track, but this has been pretty unprecedented growth for <unk>.

Lot of us and the industry and I'd say and general Theyre doing remarkably well.

Got it and then just just sort of looking at 2020, 1 and obviously W. P mix shifting I think to foundry and logic and DRAM, perhaps a little bit away from NAND.

You have any thoughts on whether etch and deposition segments and Wi Fi can grow in line faster or slower than the overall market. This year and you know how does that how does it affect your outlook your growth outlook for the year.

Yeah, I mean, obviously, we're once removed from that but I mean, you can see some of our customers' progress. So I think it's growing maybe a little closer to in line to the market this year, but not not like it did maybe last year obviously.

But you know NAND NAND demand for equipment, I think is still pretty strong and the second half, but obviously with logic and.

And you do see you know more.

Deposition and things like that and that so, but I think it will grow pretty closely in line with the market is kind of arete.

Great. Thank you.

Thank you ladies and gentlemen, this concludes our question and answer session I'll turn the floor back to Mr. Anderson for any final comments.

Thank you for joining us on our call this quarter I'd like to thank our employees suppliers and customers for their support and strong execution and this historic demand environment for the semiconductor industry.

We look forward to updating you again on our next earnings call in early November and the meantime, we hope to see you at 1 of our Q3 investor conferences, such as those being hosted by B Riley and Needham and August.

Operators that concludes our call.

Thank you ladies and gentlemen. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.