Q3 2021 Ultra Clean Holdings Inc Earnings Call
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Good day and welcome to the UCP third quarter, 2021 earnings call and webcast.
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I would now like to turn the conference over to Rhonda Banesto. Please go ahead.
Thank you operator, good afternoon, everyone and thank you for joining US with me today are Jim Shaw Hammer, Chief Executive Officer, and Sheri Savage Chief Financial Officer, Jim will begin with some prepared remarks about the business and Sheri 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 factors section 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.
Discussion of our 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 thank you all for joining us today.
I'm going to start with a review of our third quarter performance and share my thoughts on the industry and how you see T continues to raise the ceiling on our performance and consistently outperform the markets we serve.
After that I'll turn the call over to Sherry for a financial review and then we will open up the call for questions.
UCT has demonstrated solid companywide execution through this extended expansion wf equal over multiple quarters.
Our Q3 results reflect the strength of our business and the tremendous demand we're seeing from customers worldwide.
Revenue for the quarter of $553 7 million and earnings per share of $1 seven.
Are the highest recorded in Uct's history.
Using the midpoint of our fourth quarter guidance, we anticipate year over year revenue growth for 2021 of approximately 50% and EPS rising by 49%.
The growth trajectory of our end markets is accelerating our customer base is growing and our opportunity pipeline is expanding.
This is shaping up to be a truly extraordinary year of outperformance for UCT.
Technology advances continue to drive the underlying shift in the need for semiconductors.
Because the number of users for chips has increased significantly over the past few years.
And we will continue to evolve we see ongoing strength into 2022.
We believe the long term upward trajectory of the Wi Fi market is sustainable and that high levels of demand for our products and services will continue for the foreseeable future.
Uct's remarkable performance as a result of several competitive advantages one of the most important being that broad diversification of our products and services.
We indirectly touch many of the chips that go into a wide variety of electronic devices.
We make the machines that make the next generation technology and had a notable presence in the most critical elements of the semiconductor production process.
Uct's exposure to the entire pad construction equipment build out and production support ecosystem make us better able to navigate fluctuations within sub segments of the broader semiconductor ecosystem.
Another important advantage is our ability to leverage our global manufacturing network to meet our customers' increasing requirements.
With over two dozen locations worldwide, we are able to scale with our customers and our optimized for business continuity execution.
The timing of our new vertically integrated manufacturing facility in Malaysia is extraordinary as it provides additional capacity at a crucial time for our product customers.
Initial production began all time in early September and we shipped our first product by late September.
We are actively working with our customers to accelerate production and will continue to ramp output and revenue through 2022.
We're also making other strategic investments to support our medium and long term growth strategy.
Semiconductor manufacturers worldwide had plans to break ground in at least 10, new high volume fab to 2022 to meet the accelerating demand for chips.
You see T have never been more ideally situated to increase our capabilities expand our presence.
And even more vital role in our customers' success.
The last accomplishment I want to highlight is our ability to deliver on time and under pressure.
I'd like to acknowledge our employees specifically call out our dedicated procurement team for their ongoing engagement with our strategic partners, who understand the unique requirements of low volume high value high complexity products.
We actively engage with our suppliers using a collaborative planning and forecasting model that has enabled us to maximize our output capability and be recognized by our customers, where our on time delivery across key market.
In summary, it was a truly exceptional quarter for UCT on many levels we.
We are excited about the opportunity in front of us at semiconductors become even more strategically relevant.
UCT is consistent ability to meet our customers' most urgent needs.
Positions us very well for long term sustainable growth as the leading semiconductor manufacturer.
I want to sincerely. Thank every one of our employees suppliers and partners for their partnership commitment and incredibly hard work and we look forward to speaking with you again in a few months.
And with that I'll turn the call over to Sharon to review, our financial activities and performance.
Thanks, Shannon and good afternoon, everyone. Thanks for joining us in today's discussion I will be referring to non-GAAP numbers only.
I'm very pleased to report total record revenue for the quarter of $553 $7 million up seven 5% from the prior quarter.
Our products Division was up eight 9%.
$481 $9 million, which includes our first full quarter of revenue from omelet and $64 4 million.
Our services Division was down slightly to 71 7 million due to delayed shipments as we were challenged with labor shortages at our Hillsboro site, which have now been mostly resolved.
Total gross margin for the third quarter Rose to 21, 6% and remains at the high end of our model compared to 21, 2% last quarter.
Product gross margin increased to 19, 3% compared to $18 eight last quarter and services rose to 36, 9% compared to 36, 2% last quarter.
Margins can be influenced by customer concentration geography product mix and volume so there will be variances quarter to quarter.
Operating expenses for the quarter was $59 million compared with $48 9 million in Q2.
As a percentage of revenue operating expense declined slightly to nine 2% compared to nine 5% in the prior quarter.
Total operating margin for the quarter improved to 12, 4% compared to $11 seven in the second quarter.
Margin from our products Division increased to 11, 9% compared to 10, 9% in the prior quarter.
Operating margin from our services Division was 15, 4% compared to $16 seven in the prior quarter due to lower volumes.
Based on $45 4 million shares outstanding earnings per share for the quarter increased to $1 seven on net income of $48 8 million compared to 99 cents on net income of $43 7 million in the prior quarter.
Our tax rate for the quarter was 15, 5% compared to 17, 6% last quarter.
We expect our tax rate for 2021 to stay in the mid to high teens.
Turning to the balance sheet, our cash and cash equivalents were $457 million at the end of the third quarter compared to $451 4 million last quarter.
Cash from operations increased by $2 2 million to $53 3 million compared to $51 1 million in the prior quarter.
During the third quarter, we made another payment on our term b loan in the amount of 25 million, bringing our voluntary payments for the year to $50 million.
For the fourth quarter, we anticipate revenue between $590 million is $630 million, an increase of 10, 2% using the midpoint and we expect EPS in the range of $1 12 to $1 29.
Periodically we need to align our fiscal year and with the calendar year and as a result, the fourth quarter will be a 14 week quarter versus the usual 13 weeks.
And with that I'd like to turn the call over to the operator for questions.
Yeah.
Yeah.
Thank you.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
The first question today comes from Patrick Ho with Stifel. Please go ahead.
Thank you very much and congrats on a really nice execution in a difficult environment, Jim maybe first off as it relates to the supply chain. Given your results you, obviously outperformed expectations, but what were some of the key moving parts that one you faced in terms of the supply chain challenges itself and secondly, how are you.
Are you able to react to ensure that you were able to deliver particularly on the product.
You know the necessary parts to customers.
Yeah, Hi, Patrick Yeah, it's interesting a lot of the card.
But our bottleneck one regards different bottleneck in three weeks. So I think you know I think the big differences.
Even such things like cable, sometimes can be troublesome I think the big differences is that we're really working.
We're at as far as we can with our suppliers to give them the best forecast and actually P O.
Long into the future.
To try to help them better with their planning I think that was that was one of the keys I think another key is that we're able to.
You know we have stuff we have.
Over two dozen sites like I mentioned, so we're able to you know what.
We have bottlenecks in one place, we're able to kind of move it around.
Two it to a different site. So I think you know.
Hats off to our procurement our supply chain team and our ops team I think they were really flexible, but they really knocked down multiple different challenges, including freight is another thing.
And they knocked down multiple various challenges throughout the quarter.
Okay.
Great and maybe as my follow up question for Sheri.
Again, you guys performed really well on the gross margin line given the difficult challenges, but the environment is also seen as Jim just mentioned elevated freight cost.
Procuring parts.
Just a lot of these are supply chain.
She is creating incremental costs I guess, how are you able to balance and manage that situation.
To get the gross margins above expectations.
Yeah, I think first off obviously volumes play a big role.
In this as well as the fact that we have quite a few things shipping out of our Asia Asia facilities. That's continued to grow as a percentage of our total revenue we have seen freight costs go up but just as an order of magnitude. It back in 2019, and they were spending about one 6% of revenue on freight now it's upwards of two.
5% to 7% depending upon the quarter. So those costs have gone up significantly, but I think the volume plays quite significantly into it as well as obviously, our new acquisition of omelet. They have very good gross margins as well so that really helps them. In addition.
Great. Thank you very much.
Yeah.
Thanks, Patrick.
The next question comes from Tom <unk> with D. A Davidson. Please go ahead.
Yes, Thank you and just a follow up on Patrick's question. Sherri is there when you look at that that basis point or 100 basis point increase in the freight costs do you view that as a more mid term longer term permanent increase or is that are you could you consider that just a near term.
I Wonder if that's going to go away at some point over the next few quarters.
I think it will come down a bit over the next couple of quarters. You know system I think we're in the height of some of the supply chain issues that we've seen and I'm. Obviously afraid is one of those key factors. There not is it enough truck drivers and are not enough planes right. Now. So I think I think once that starts to work itself out then we can hopefully see some of those costs come down.
But you know it may not come down to 2019 levels, but I think they they should come down over the next couple of quarters I would anticipate.
Okay, and when and when you have to expedite a ship it to me to.
When customers need them.
Is that reimbursable through that customer or do you have to put the bill.
It depends it depends on whether they are obviously accelerating something for us to actually meet their demand or if for some reason we have an issue with the supply chain that we're managing so it just really is dependent upon the situation, but it's you know one of our customers is pulling something in very quickly. We obviously can be able to.
Get reimbursed for that great.
Great. Okay, and then Jim congratulations on the move.
Shipment out of Malaysia, New facility. There are we have been hearing though from others that there's a labor has been an issue with Covid, Malaysia I'm wondering if that has impacted your ramp all your scheduled ramp yeah.
No it has not always been unfortunate.
You know were in the northern part of Asia, a lot of those COVID-19 issues are related to two of the of the southern region.
Asia. So we've just been very fortunate that that hasn't been an impact to us at this point obviously.
You know it doesn't contribute a significant amount of revenue yet but.
But I think we're going to continue to keep our dexterity in place. So that we can switch between China, Singapore, Malaysia North America.
You bet.
Is.
Neither it because you just never know where.
Where COVID-19 make ware.
Yeah, absolutely, Okay, and then finally when you look at the expansion of the Hamlin business how.
How do you view the rollout of the time it takes to get the tooling up and running and then maybe go through some qualifications I mean, how do you view them.
How quickly you can increase capacity over the next year.
Yeah, mostly for new tooling to qualification and that.
It's a very simple process, though nothing thats delayed by the customer in most cases.
Typically you have a lead time of these tools and installation is around three to four quarters.
We we did approve a batch of investment even before the deal.
Closed in April so we're seeing some of that investment come online.
In the end by the very tail end of this year and then we made a few other investments along the way and we think those will start coming in.
More like the first quarter second quarter next year, but we expect we'll be able to start ramping up in revenue. It's been ramping up very nicely, we've been able to get some efficiency gains and and we squeeze out some more through this quarter.
Expect to see a bigger increase in revenue starting in the first quarter of next year.
Okay, well, thank you and thanks for your time today.
Thanks, Tom Thank you.
The next question comes from Krish <unk> with Cowen. Please go ahead.
Chris Your line is open if you would like to ask questions.
Hi, This is Robert Mertens on behalf of Krish. Thanks for taking my question, maybe just a quick follow up on supply chain issues just in the greater industry at large.
Is there any worry that your customers could be impacted by.
You know ramps at other facilities or that that could have a carry on effect until you're ordering pattern or any sort of inventory builds.
I'm not sure I, followed your question our customers the OEM.
Ramping at other facilities do you mean like a band bringing up.
Malaysia plant or more capacity being added by applied them I'm not sure I followed all of them.
Sorry, if there's any sort of impact to their business from supply chain issues.
That could have an effect on their ordering patterns with your businesses or any sort of worried that maybe customers are building up inventory.
In case, there are any sort of issues with having to be flexible with their supply chain down the road.
Yeah, I mean, the supply chain issues that are affecting everyone.
Our peers are customers.
Everyone's working through those issues.
That's nothing new.
I don't think it typically is more of an inconvenience or a nuisance of delaying shipments.
A few weeks.
It tends not to be a dramatic.
Change, but I don't I think it's kind of stabilize that.
At the level of where you still have to work pretty hard to get.
But you need to get out closer to the date that the customer needs, but I don't think it's getting any worse and I think eventually it should start getting better.
You know, maybe maybe in the fourth quarter and the first quarter of next year.
Great. Thank you I appreciate the color on that.
Youre welcome.
Yeah.
The next question comes from Christian Schwab with Craig Hallum Capital Group. Please go ahead.
Congratulations guys.
Really that execution.
Can you remind us.
Your current visibility.
Supply chain lead times Chi Chi.
Across the board.
Is your visibility.
Materially better than it did it usually is or has it changed in the last few quarters or is it longer than typical.
Isn't that lease.
Yeah No question.
Uh huh.
Very good.
Building.
In a normal environment is around.
One quarter isn't even where the third bumper quarter, although we're looking forward, there's a little bit spongy now.
Now I think we have pretty good visibility through the first quarter, we are seeing.
Continued strength into the second quarter, so our visibility is around.
Getting close to three quarters of a pretty good bottoms up you know.
Purchase orders and.
And a pretty strong forecast going forward.
Right.
Yes.
But it seems it seems like that increased visibility.
Yeah.
Sales per year.
Aggressively with purchase orders.
Your suppliers.
To kind of eliminate some of the bottlenecks.
Yeah.
To say.
Yeah absolutely.
You know we work.
We work hand in hand, with our customers and do it backwards because the supply chain. So you know even when our customers don't have hard orders to us.
Fitment.
To cover our liability as we make hard orders back to working quite changed so that we're covered on areas like forecast, where there's no heart P. O. Yet so I think though yeah are really working pretty smartly to try to help you.
<unk> ability as deep and as far down the supply chain as possible, but they tended to be problems that occur that are three or four layers deep in the supply chain.
Right right.
So could.
Could you just remind us.
Alicia.
Additional facility.
Is it do we play a lot.
Filling that capacity.
Due to W. O N E.
Yeah.
And your ability to be more predisposed to heavier concentrations.
Historically.
As a percentage of WMC.
As you know historically last few years on road.
Right.
Or is it also a combination of line of sight.
Yes.
Market share gains.
Existing customers you might be on sourcing.
You know kind of breathe in our heads.
Silly.
Her time and remind us how much of this.
Sure.
It's around.
600 $800 million in revenue annually of capacity, we're also using part of that too.
To bring over the Hamlin product capacity capability production capabilities that expand because we see a lot of opportunity there when we first built Malaysia.
Thank you know out of the $800 million I think it was maybe half to two thirds, we thought would be filled by transitioning from higher cost regions to lower cost me again.
Outgrown and our share gains.
Especially against her.
Our outsourcing opportunities is where we're seeing a lot of share gains against our customers all fabrications.
You know I think it's probably more like if I were to estimate three quarters or more into the market industry.
Outsourcing growth and the opportunity to actually transition from higher cost regions to lower cost regions.
It's actually a smaller percentage of what we anticipate that plant to be used for.
Great.
No other questions. Thanks, guys.
Thank you Christian drives today.
As a reminder, if you have a question. Please press star then one can be joined into the queue.
Our next question comes from Quinn, Bolton with Needham and company. Please go ahead.
Hey, Jim Congratulations on the nice results I'm going to apologize because I missed most of the prepared comments, but wanted to ask two questions.
Sponsor to the last question you talked about some share gains and maybe you made some comments in the prepared script, but wondering if you can address that that share gain opportunity. If I look at your results versus those of your nearest competitor you're clearly growing much much faster in the near term and I understand that your competitor was.
Strained by operations in Malaysia, but I'm wondering if to the extent that your competitors are constrained how quickly Ken and OEM move a module or a gas panel from another supplier to UCT.
Yeah, the sheer gains I'm talking about are more.
They don't move quickly they're more planned outsourcing moved by our two major customers.
There's not a lot of movement.
I think the issues that some of our peers are having are obviously short term.
It's unfortunate, but I don't think that's really that's not really the.
Share gain all that I'm talking about I'm talking about mostly winning.
Many outsourcing opportunity.
Our two major customers and maybe even some of those go see some of those are intended to go straight into our new Malaysia factories. So that is.
When you look at the Sam the biggest opportunities actually our customers leading to really move more and more of their production out of their facilities as they've grown so dramatically. So that that's the major the.
The major area I'm talking about.
But I mean do you see any opportunity for Oems to kind of shift you know systems from one major.
Module vendor to another or do you think that you know your your big competitors, whether they're yeah.
For our competitors or some of the larger contract manufacturers to the extent that they are constrained.
You think that that demand stays with that supplier and it just pushes from one quarter to the next.
Yeah.
Short term you know they can adjust the ratio how much business they get each of us, but long term share gains are typically done through a long term planning process. So even when one one of our peers struggle or you know if we were to struggle there might be able to.
Kind of a shift to share.
Sure you know.
From 50, 50 to 50, 545 or something like that in the short term.
They tend to move them back to the balance after those issues are resolved. So I think what I'm really talking about it.
The things that don't go away are the cars when they take it out of their own facility closed down their production of a certain modular capability and move it to a two two U P. T. Those those are the real sticky supplies market share wins, and that's really where we were at we focus so there's not a lot of long term move.
Between us and our competitors.
Got it so it sounds like any any share from competitors that you pick up just pretty transitory is what it sounds like you're telling us.
Yeah, and that and offer you got to remember there's a lot of comments that goes on between you.
You know all of us in the ecosystem.
Domestic iron core benchmark jabil.
We're actually all where we're not only competitors go off those customers and suppliers to each other so there's a lot of Congress going on.
Behind the scenes that kind of healthy.
And customer get out what they need so so oftentimes we support each other to you know when we're coming through issues of.
Deliberate we tried to make sure that the customer has met so that obviously you know those pets obviously.
You might see a short term bump in revenue from things like that but long term long term you know the real opportunity is really a huge amount of them.
The in sourcing that still needs to move out sourcing from the Oems. So that's really where we focus.
Understood. Thank thank you for that additional color. So my second question I had was.
I think a quarter ago, you were saying you were holding off on some of the homeless.
Qualifications, especially on your gas panels, given how constrained the homelink business was it sounded like Homewood is still constrained in the near term, but you just talked about some additional tooling coming online by year end and more tooling coming on by the end of the second quarter and knowing that the disqualifications probably take two years to.
Three quarters I'm wondering if you're starting that activity now to try to get components qualified so that by the end of the qualification period, you know that.
Aligns pretty well with that additional tooling coming on for omelette.
Yeah, I think you have to think about qualifications two different ways.
Qualification, but just by adding a new tool and to their factory, but you're making the same product that youre already qualified to make for the customer.
That is a very simple very quick process.
So that that does not take two to three quarters that takes within a quarter within a few weeks.
The qualifications that take a while.
Family components to a customer that hasn't use those components in the past and that's where you have to run a lot of lab tests and things like that that we've started.
While we started we've actually started that before the acquisition because we were working with him.
Key supplier that we wanted to grow.
So that started well over a year ago, and that's going very well.
At this point.
That's cool.
At this point, if we can bring new capacity as fast as we can bring capacity out we can sell the product.
It's a it's a race to to to expand.
Got it okay. That's that's what I wanted to know thank you very much.
Alright. Thank.
Thank you Quinn.
This concludes our question and answer session I would like to turn the conference back over to Jim Shellhammer for any closing remarks.
Thank you for joining us today, and we look forward to talking to you again in the new year 2022, Thank you very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.