Q1 2022 Ultra Clean Holdings Inc Earnings Call
Good day and welcome to the ultra clean first quarter 2022 conference call.
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I would now like to turn the conference over to round up a nutshell Investor Relations. Please go ahead.
Thank you operator, good afternoon, everyone and thank you for joining US with me today are Jim Shellhammer, Chief Executive Officer, and Sheri Savage Chief Financial Officer, Jim will begin with some prepared remarks, I thought the business and Sheri will follow with the 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 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.
A 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.
Thanks, Rhonda and thank you all for joining us today.
I'm going to start by providing our thoughts on the current demand environment and why we believe 2022 will be another year of growth.
I'll follow that with a high level review of our results, including some insight on current events affecting our business and the industry.
After that I'll turn the call over to Sherry for a financial review then we'll open up the call for questions.
Industry demand remains elevated with appetite for our products and services is growing across all our end market.
Unlike historical semi market cycles, the acceleration of digital transformation. The past couple of years have dramatically increased the consumption of semiconductor content to the benefit of the entire manufacturing ecosystem.
Record multi year capital spending plans are ramping to support industry megatrends, such as five G artificial intelligence.
Electrical vehicles and how.
High performance computing.
We will continue to execute on our long term growth strategy.
Hmm.
And investing alongside our customers gaining share and further securing our leading position is.
Is there a manufacturing partner of choice for years to come.
One of the primary reasons, we continue to increase share with our current customers.
And attract new business is our relentless commitment to quality.
Earlier. This month, we were honored to receive the excellence in quality award from applied materials.
We're consistently meeting and exceeding their expectations over the past year.
I'm extremely proud of our teams, who successfully anticipated and deliver beyond our customers' needs.
While the isn't the only reason our business is growing under challenging circumstances.
Back then we were able to meet our customer schedules also plays a key role as highlighted by Intel's recognition of our ability to deliver on time during the pandemic.
Yeah.
Quality and on time delivery, where the reason Intel chose used T T as a partner for their Ohio, Mega Fab projects reinforcing our partnership to meet the surging demand for advanced semiconductors.
UCT proven ability to continuously challenge the status quo in the way, we think act and drive our business delivering exceptional value to our customers.
One of your city's most compelling value proposition is our ability to provide capacity to support growth in outsourcing.
Optimizing our existing assets infrastructure and adding additional capacity, we enable a deeper collaboration with customers, resulting in a faster response to market opportunities.
From the fab construction phase two building the equipment within the fab to servicing the end products, we're set to capitalize on a broad range of opportunities throughout the semiconductor value chain.
For all the reasons I just mentioned we continue to believe that 2022 will be another year of growth for the Wi Fi market.
In the short term however, we did experience some obstacles late in the first quarter that impacted our financial results.
The Chinese government zero tolerance Lockdown strategy together with the grounding of all Chinese Airlines.
Airlines 737, 800 aircraft in <unk>.
Our production schedule and they interfered with our ability to ship and receive from our Shanghai facility.
With these two events happening simultaneously near the end of March we did not have sufficient time to leverage our global footprint to offset production delay.
The lockdown situation in China remains dynamic and it is uncertain when restrictions will be lifted.
We are working very closely with our customers and suppliers to utilize alternative production and delivery solutions.
For example, we are shifting production to Malaysia, Texas in our Philippines site.
To date, we have not impacted our customer delivery schedules.
In addition, we were able to meet immediate demand.
Some fulfillment has its.
Shifting into subsequent quarters.
We are confident in our ability to navigate and adapt using the flexible operating protocols.
Served us well since the beginning of the pandemic.
Broader macroeconomic and geopolitical instability continues to exasperate issues in an already fragile supply chain.
While we believe that China's shutdown will be temporary in nature.
We anticipate supply chain challenges could persist for some time.
In summary, we will adapt to the short term challenges by remaining operationally flexible and we will drive productivity to meet our growth objectives.
I want to thank our employees, our suppliers and our customers for their commitment and collaboration.
We have consistently proven that UCP is a resilient company and remain confident that we will demonstrate notable upside for our company.
Financial result, sure.
Thanks, Jim and good afternoon, everyone. Thanks for joining us in today's discussion I'll be referring to non-GAAP numbers only.
China, Covid Lockdown and the grounding of the China Eastern Airlines Boeing 737, 800 aircraft in the quarter and Patrick our production and delivery schedules.
As a result total revenue for the first quarter was $564 $1 million compared to $615 1 million in the prior quarter.
<unk> products Division revenue was $486 8 million compared to $533 9 million last quarter and revenue for our survey services Division was $77 $3 million compared to $81 3 million in Q4.
Total gross margin for the first quarter was 25%.
Compared to 21, 5% last quarter.
<unk> gross margin was 18, 2% compared to 19, 1% in the prior quarter.
And services was 35, 5% compared to 37, 1% in Q4.
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 $54.3 million compared with $54 6 million in Q4.
As a percentage of revenue operating expense with nine 6% compared to eight 9% in the prior quarter.
Total operating margin for the quarter was 10, 9% compared to 12, 6% in the fourth quarter.
Margin from our products Division with 10, 2% compared to 11, 8% in the prior quarter and services margin was 15, 7% compared to.
17, 9% in the prior quarter.
The change in margin was primarily due to lower volumes coming out of our Asia facility due to the China shutdown.
Based on $45 6 million shares outstanding earnings per share for the quarter was 95 cents on net income of $43 $3 million compared to $1 22 on that.
Net income of $55 5 million in the prior quarter.
Our tax rate for the quarter was 16, 4% compared to 15, 8% last quarter.
We expect our tax rate for 2022 to stay in the mid to high teens.
Turning to the balance sheet, our cash and cash equivalents were $367 million at the end of the first quarter compared with $466 5 million last quarter.
Cash from operations was negative $67 4 million compared to $43 million in the prior quarter due to lower production increased inventory due to China's shut down and the timing of cash collections and payments.
We expect cash generation to recover in Q2.
With demand still outpacing what the overall equipment industry can deliver uncertainty around the global supply chain and Covid related interruptions. We are widening our guidance range. We are projecting total revenue for the second quarter of 2022 between 550 million.
Dollars and $630 million.
We expect EPS in the range of 84 cents to $1 20.
And with that I'd like to turn the call over to the operator for questions.
We will now begin the question answer session.
To ask a question you May Press Star then one on your Touchtone phone.
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At this time, we will pause momentarily to assemble our roster.
Yeah.
The first question today comes from Quinn Bolton with Needham <unk> co. Please go ahead.
Hi, guys I wanted to ask you.
Largest customer Lam on their call last week talked about in this supply constrained environment trying to qualify additional subsystem and component vendors.
To try to navigate through the supply chain. So I'm kind of curious what are you seeing in terms of your large customers.
Looking.
Additional major module or gas panel suppliers do you think that's a threat do you think you actually benefit from that trend.
Yes, Hi, Quinn.
Actually I think we benefit from that trend.
We have done really well supplying them, even though we've had some issues at the very end of the quarter, we had been a very reliable supplier.
Actually they're partnering with us as defined.
Help enable.
Suppliers in.
That system themselves.
I think I think actually it's something that.
Thats really going to help us going forward.
Because I think we've been a very reliable supplier to them and I think we're one of the companies that they want to partner with the fine.
Broader solutions.
Got it thank you for that Jim.
I guess for Sherry just just looking at the gross margins down to 25.
In the March quarter, obviously revenue took a step back so I assume that there is some absorption charges as part of that step back, but as you look forward to June and perhaps into the second half of the year what are your expectations for gross margin recovery.
Yeah Quinn. Thank you for that obviously Q1 was definitely affected by by the China Airlines situation as well as the Lockdown, we will continue to be a little bit of pressure in Q2 as well.
And as we continue to move through the rest of the year, we see more acceleration of some of our revenue going out of our Malaysia site as well as shifting to some other sites that we have in the Philippines and potentially Austin.
So we will see distribution across several locations and that will really help us get back into the ranges that you've seen previously from a gross margin perspective.
Great and then just last question for me on the China Eastern Airlines grounding of the 737 eight hundreds are those still grounded or are those now back in the air what what are you seeing on the logistics I know Covid lockdowns are still.
Disrupting the ability for companies to receive or make shipments but.
Are the airlines sort of backup and returning to normal right now or are they still under locked down for that.
37.
737.
Our back up and running and it wasn't just China Eastern It was initially it was all 737, China Eastern obviously is one of the major players, but as far as I'm aware.
They are all back up and running.
Yeah.
Logistic kind of tie all of that happened because of that but I think it's being worked out.
Got it thank you I'll get back in the queue.
Yeah.
Thank you.
The next question comes from Krish <unk> with Cowen. Please go ahead.
Hi, This is Steven calling in behalf of Krish. Thank you for taking my questions.
I guess.
My first thought maybe Jim or Sheri, if you can help help us quantify.
Just in terms of seeing the impact in China during the March quarter, but what was the rough revenue impacts from some of those logistics delays.
During a lockdown.
Local lockdowns are in that region.
Revenues can you help quantify it.
Yeah. We are we anticipated that we would obviously hit our midpoint that we provided some guidance. So there was about.
$41 million that we did not ship out as a result of.
Of the China.
<unk> locked down and grounding of the of the airplanes. So.
About $41 million would have gone out if we had been able to do that between that site as well as our Singapore site that feeds from from our China site.
Okay.
Perfect and I guess, just switching to the to other regions that Europe in particular, just from a logistics standpoint.
Just given.
The geopolitical situation not eastern Europe .
Are you seeing any impact to our cause.
Delivery schedules for any customers out in Europe at this time.
Hey, Steve No we haven't seen anything.
Sorry.
Okay, great. Thanks.
Yeah.
The next question comes from Patrick Ho with Stifel. Please go ahead.
Thank you very much.
Jim I know, it's a very fluid situation as we speak on the supply chain and the higher input costs.
That all companies are dealing with from your perspective for the June quarter, what's going to be the biggest headwind is it your ability to procure parts easy to freight and logistics costs well just give if you can help me in terms of a little color on what the biggest headwind.
When you'll be facing in the June quarter.
Yeah, Patrick So I think there is.
There is two components, we don't think logistics is going to be one of them.
It's going to be.
Round.
Covid Lockdowns are zero tolerance policy in China and.
Being able to bring our Shanghai factory back up from 40% to up to 100%.
That's kind of one.
One major area and then the second area.
Is of course around.
You know multiple supply chain constraints as you're well aware in multiple different areas, but I think thats the biggest variable is around.
Our plant in China.
Being able to continue to come back online and we're taking mitigating measures against that we're moving a lot of that work to our Philippines site, our Austin site, our new Malaysian site. So we have a pretty good.
Solid business continuity plan BCP plan. So so we're mitigating a lot of that but I think you know in our assumptions.
We will.
We're really looking at and.
Continued improvement.
The COVID-19 situation in China.
Yeah.
Great that's helpful, Jim and maybe as my follow up question.
The demand environment as you highlighted remains very strong out there, particularly on the equipment front.
You've also shown a track record of being able to flex capacity, particularly during the pandemic when when things were just as chaotic.
But given that the demand environment remains really high.
The question I'm trying to get at is how much more capacity can you increase by flexing just I'm, assuming your plumbing, you'll probably have very high utilization rates in your existing capacity I guess, what I'm trying to figure out well how much more could you expand if you ship some of that capacity.
The ones like you said in the Philippines, Malaysia Austin.
Yeah I think.
As you know, we're bringing up our Malaysia facility I think in Q4, we did you know single digit millions and now we're doing $30 million to $40 million a quarter out there it will be it will be up to a much higher numbers. So we're ramping that one.
Malaysia as quickly as possible.
You know part of the issue is as we won we won a lot of market share. So a lot of new products went into Malaysia, So actually got filled up with with market share wins, along the way but.
Think of it.
And a rough.
And you know there.
And within within a very short period of time, we can certainly do that.
Six seven and $800 million a quarter.
What happened to us in China was in the last few weeks I mean, when when the Covid restrictions came to two to three weeks left in the quarter.
Really difficult as nimble as we've been then it was really difficult to manage within the border and it's having some impact on our second quarter guidance, but we certainly know how to do this and I think we're going to see some pretty strong growth.
Through the second half of the year.
Yeah.
Great. Thank you very much.
Yeah.
Your next question comes from Christian Schwab with Craig Hallum Capital Group. Please go ahead.
Thanks for taking my call Jim.
How big of a recovery do you expect it to your quarterly revenue.
And in the second half of the year should we not have any you know further you know COVID-19 related factory issues in Shanghai.
You know the Wi Fi growth expectations for this year as you know are extremely strong and new.
Historically about growing that.
You know by 10 points or more so do we have the capability for for a very meaningful ramp and when you talked about growth expectations or growth for 'twenty. Two you know would you expect strong double digit revenue growth still for the year.
Yeah, and I think.
And most of the analysts have estimated.
Members roughly.
We're up around $2 5 billion or so.
So we're still pretty confident that we can.
Through a very strong second half kind of hit the numbers that the.
The goalpost that you have all put out there for us and ourselves as well.
Okay Fabulous and then as we you know given you know the you know the design wins that you've talked about.
You know that.
Kind of ramping up in the Malaysia facilities as well as being you know chose and you know by Intel.
How big can that business within Intel ramp up to on a yearly basis.
Yeah I think.
On a yearly basis is maybe a yeah.
Difficult forecast to give I think you've you been Intel seems to be announcing a new fab.
Somewhere.
Right.
Locally with them to support that growth.
They are also working but.
We're also partnering with us so I think the you know the Intel you know obviously from announcing a new fab two holes in the ground to getting the fab that's a several year cycle, but we obviously want to.
Support you know that valuable customer and and be there for them and help them get successful on some pretty dramatic growth plans that they have so we believe we can grow.
No.
With and maybe above Intel as they go forward it would be hard to give a projection to that but.
It's definitely assuming success.
And moving forward with their new Mega Fab in Ohio with Fabs.
In Ireland and in Arizona in Germany.
You know we definitely.
The over the next two to three years of very strong growth for us. So I think if you look at Intel's growth and our growth we should outpace that.
Okay, Great and then just my last question you talked about the the Shanghai facility being at 40%.
What kind of capacity utilization, you know, obviously, well shy of 100 or approaching full capacity whatever that number may be is that is there a return from 40 to full capacity utilization is that an incremental $40 million a quarter or is it actually a bigger number than that.
Matt.
That's a difficult rich to make so.
Maybe I'll give you some of the background. So we're at 40% because those are the local employees that can come into the factory and then our assumptions are that in may we're going to be able to bring you know 100% of our employees back from other.
Other regions that are currently in the lockdown and that looked pretty positive right now.
As far as the bridging what the revenue means I think for the second quarter. We you know we have our guidance.
Around that assumption.
Certainly there is a lot more demand than what we're guiding to and so if things.
Pick up and do better we would hope to.
Overachieve and do better than that.
The guidance that we've given for the second quarter, but I think.
I think we've put a pretty.
Solid plan in place given what we know today.
Okay, great no other questions. Thank you.
Thanks Christian.
The next question comes from Hans Chung with D. A Davidson. Please go ahead.
Yeah. Thank you for taking my question. So I think I only are here you quantified the China related impacts of about 41 million first quarter and how is that remember fourth quarter Hum and then and that also can come in and the demand trend from that.
Our booking and backlog perspective.
Yeah, I I didn't hear the second part of your question that from a from a revenue perspective for the next quarter.
I would assume that.
<unk> $25 million would be coming out of them back into that factory at least from what we.
Had not shipped from the previous quarter.
So that's that that impact can you repeat the second question.
Oh, Yeah second question is that.
Coming on the trend in our in our booking or the backlog.
During the quarter.
Do we see these trends continuing to increase or will it kind of a flat or whatever.
Any color would be helpful.
Yeah, absolutely. So you know obviously, we've been talking about having approximately $30 million to $40 million of backlog in the last couple of quarters that we would have liked to ship. It didn't have enough parts. So that obviously rolled forward, we're seeing that start to.
Be sprinkled into.
Q2, Q3, and Q4, so as a result of that we're going to see hopefully that revenue ship out as Jim mentioned, we do see very high demand over the course of this year and hopefully we'd be able to ship more but basically that that demand that we've seen that has rolled over from quarter to quarter will definitely.
It likely move into Q3, and Q4 forecast when we get to that point.
Got it that's helpful. Thank you.
Thanks.
As a reminder, if you would like to ask a question. Please press Star then one to enter the question queue.
The next question comes from Quinn, Bolton with Needham and co. Please go ahead.
Jim or Sheri just curious I.
I guess a follow up question on Shanghai, just just sort of trying to get my hands around that the size of that facility.
Shanghai was shut down couldn't ship in the last two three weeks and that had a 40 million dollar impact on the quarter should we be thinking that about 150 to 200 million of revenue flows through Shanghai and.
Again, just trying to get some sense of how large that facility is.
Yeah, So hi plan so.
No no you can't extrapolate the last three weeks.
Because I.
I don't know why but the industry has always been this way everything ships.
Three weeks of the quarter.
And so.
And so the last three weeks tend to be critical.
It comes from our customers it comes from their customers there tends to be that.
Last minute cramming for the homework in the exam, so that tends to be a very heavily weighted effect on the last two to three weeks of a quarter.
We do a Shanghai as are we.
We do about a 100 million or so.
Out of out of Shanghai, So, it's obviously one of our bigger <unk>.
Factory.
But you really can't take the impact of the last three weeks and extrapolate linearly extrapolate that to the impact. So I think the main point is as we think we're going to.
We're pretty confident between our business continuity plans and moving production to other sites as well as the fact that things are loosening up.
Uh huh.
The area right now.
That will start to make headway on that in the second quarter.
I think by the third and fourth quarter will really really gained a lot of momentum.
And we often get the question is this demand perishable.
Favorite Investor question It is not.
We are we are fulfilling the customers many of the customers are affected by the same exact things and so even if we weren't impacted it.
The whole ecosystem has been impacted so we are not causing customer issues with this so.
But we believe that the whole ecosystem will really start to come back in the second half and we'll start to see some improvement in the second quarter.
Okay and then my second follow up was just on the Malaysia facility. I think you said you were doing sort of 30, maybe $40 million of that from that facility in the March quarter I just want to make sure is that a quarterly run rate I believe in the past you've said that that the first phase of that facility could do about $200 million, a year or about $50 million a quarter. So it sounds like that.
That's ramped pretty quickly if ive got the numbers correct.
That's correct that that is a quarterly number.
And we are ramping it and we are accelerating the ramp given you know given the demand environment and the different issues.
Issues that we're facing so we're accelerating that as fast as possible, but we're really proud of that Malaysian facility they've done an amazing job.
And as I've mentioned before and we're bringing that up very quickly and absolutely. We expect to do you know.
Somewhere you know somewhere in the next year or so you know ramp that up to about a 200 million a quarter 150 to 200 million in Florida.
Got it thank you.
This concludes our question and answer session I would like to turn the conference back over to Mr. Schall Hammer for any closing remarks.
Well. Thank you all for joining us today and when we look forward to meeting with you again next quarter.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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