Q1 2022 Ichor Holdings Ltd Earnings Call
Good day, ladies and gentlemen, and welcome to the Ichor its first quarter 2022 earnings conference call.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this call is being recorded I would now like to introduce your host for todays call Claire Mcadams Investor Relations for Ichor. Please go ahead.
Thank you Michelle good afternoon, and thank you for joining today's first quarter 2022 conference call.
As you read our earnings press release, and as 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 which could cause actual results to differ materially from such statements. These risks and uncertainties include those spelled out in our earnings press release. Those described in our annual report on Form 10-K for fiscal 2021.
And those described in subsequent filings with the SEC.
You should consider all forward looking statements in lighting, that's light of 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 Anderson, our CEO and Larry Sparks our CFO .
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 first quarter results and second quarter guidance.
After the prepared remarks, we will open the line for questions I'll now turn over the call to Geoff Andreessen Jeff.
Thank you Claire and welcome to our Q1 earnings call.
Q1 revenues were $293 million within our guidance range and grew sequentially from Q4.
The $7 million or 2% difference compared to the midpoint of guidance was chiefly the result of additional disruptions in the supply chain that emerge since our last earnings call.
At the time of our last call. We have also had expected that the availability of some key components would improve by mid quarter and these did not materialize.
Additionally, we had to manage through some key shortages that emerged in our machining business.
While we are while we now have these shortages largely behind US this had an impact on our machining revenue mix in Q1.
Both factors are indicative of the continued volatile dynamics in our industry supply chain.
Well, we like many others in the industry continue to forecast for improvement in support of the unabated customer demand.
New issues have arisen each quarter that cannot be predicted include.
Including the recent example of the closures of all shipping ports in and out of Shanghai that affected many of us since late March.
Freight logistics factory shutdowns and the costs as well as the availability of labor all continue to be a headwind to output and costs.
At the same time, we are working to increase capacity across our footprint, which.
Which includes adding to our manufacturing head count as well as our physical capacity.
Nearing the completion of our clean room expansion in our Austin, which adds to the clean room expansion, we completed in Singapore last year.
Additionally, we have added a second building to our machining facility in Mexico and are in the process of ramping their output.
Given the continued expectations for strong customer demand and for wafer fab equipment growing to the 100 billion dollar level.
Made the decision to keep hiring to a level, we needed to support the unconstrained demand with.
With the goal of having both the flexibility to burst within the quarter.
To ramp the business as the availability of components and materials and perks our.
Our decision to maintain our plans for a higher level of resources to support customer demand along with a less favorable mix of machine revenues in the quarter resulted in gross margin and earnings below guidance.
However, we fully expect our margins will recover over the next couple of quarters.
We expect Q1 to be the low point for gross margin and EPS performance in 2022, and our forecasting improving trends on both fronts. As we continue to expect we will be able to achieve sequential revenue growth each quarter of 2022 and into 2023.
The expectation for growth does not depend on significant changes in the availability of components and material supply versus what we see today is we are planning for some of the key component constraints to continue into the second half of the year.
Some of the shortages in Q1 have improved and we are shipping at a higher level quarter to date compared to this time last quarter. We will continue to manage these ongoing and unpredictable supply chain challenges to drive increased output as we move through the year as well as align with our customers to support their deliveries.
With our current visibility and the improved shipment levels. We are achieving recently, we are forecasting Q2 revenues to be up around 5% to 6% sequentially.
With a revenue output expected to increase sequentially through the forthcoming quarters. We believe our revenue growth will compare favorably to overall Wi Fi growth this year.
And the level of outperformance vs. Ws. He will also depend on which segments of WMC are able to ramp the fastest in the second half.
Also driving our growth this year will be the addition of IMG, which is still on track to contribute $70 million to $80 million of revenue for the full year, along with increased demand from our customer.
Customers.
The added visibility brought upon by the tight supply conditions bodes well for the longevity of the current demand cycle with our customers planning for continued growth into 2023.
Now I'll provide a brief update on the progress on some of the new products and in particular, the next generation gas panel and chemical delivery systems.
For our next generation gas panel following up on the first beta unit that is currently under evaluation with a new customer.
We are now preparing to ship a second beta unit this quarter to an existing customer for an application that is expected to outgrow the Wi Fi market over the next several years.
Both of these gas panel beta units are fully configured without core content.
Would expect both of these customer evaluations to extend up to a year, particularly given the engineering efforts that are assigned to qualifying new suppliers to address the supply chain challenges in the industry.
We remain confident and highly encouraged by the progress, we're making with our customers for these proprietary gas delivery system.
In our chemical delivery business, we have two evaluations underway with a north American customer.
One evaluation unit shipped late last year and another was delivered early in Q1, we continue to work with these customers as we move through the next phases of evaluation for both programs, which are now progressing in kingdom and are expected to complete in early 2023.
As we have noted in the past Japan is the largest market for chemical delivery systems.
We continue to expect first production orders from the initial Japanese customer of this court.
The scale of this is relatively small but it is an important step in penetrating into the Japanese market.
We are now able to travel to Japan with our technical resources and are continuing to quote opportunities at other Oems that are larger in scale.
In summary in a very challenging operating environment. The operations team is doing a very good job of maximizing output to address the customer demand we are experiencing now.
Our current visibility we are expecting to report sequential growth and record setting revenues for the next several quarters.
We are also driving a recovery in positive gross margin momentum we've been reporting for the last few years, we achieved a significant improvement since 2019 and in Q4, we reported gross margins 330 basis points higher than where we were just two years ago.
The setback in Q1 was a temporary one.
Due to the investments, we're making in head count to support future growth as well as the additional inflationary costs and less favorable product mix, resulting from the latest supply chain disruptions.
We are focused on driving increased earnings leverage on the revenue growth forecast for the forthcoming quarters.
Prior to handing the call over to Larry to discuss our financial performance and outlook I'd like to personally thank Kevin Canty, who recently moved into a strategic role reporting to me for his contributions to <unk> over the past nearly five years since joining us in Q3 of 2017.
He was instrumental in managing our operations over this significant growth period in the industry.
Paul Chopra joins US a month ago as our new CFO Paul.
Paul brings a wealth of experience to the role for the last four years. He was vice President global product supply of Franklin Electric.
Prior to that Paul as Vice President Global supply chain for the semiconductor division of applied materials.
And with that I'll now turn the call over to Larry Larry.
Thanks, Jeff first I would like to remind you that the P&L metrics discussed today are non-GAAP measures. These measures exclude the impact of share based compensation expense amortization of acquired intangible assets nonrecurring charges and discrete tax items and adjustments.
There was 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 in the investors section of our website for reference during this conference call.
First quarter revenues were $293 million up 2% from Q4, and 11% higher than Q1 of last year.
Q1 revenues included $19 million of contribution from my M. G for the full quarter compared to $7 million for the partial quarter of contribution in Q4.
While Q1 revenues came in relatively well compared to expectations a quarter ago.
The increase in cost and component supply issues faced in the quarter at the same time as we ramped hiring impacted our gross margin.
Q1, gross margin was 16% down 110 basis points from Q4.
<unk> to the 80 basis point improvement expected in our prior forecast.
The total impact on gross profit was approximately $6 billion about half of this amount was associated with higher cost of direct manufacturing labor.
The other half was pretty evenly affected by three factors first product mix.
Second increased freight and logistics cost and third higher indirect factory costs, such as supplies and utilities.
Q1, operating expenses were $22 $4 million $1 million above forecast, primarily driven by higher than forecast fees related to audit and Sox compliance.
ERP implementation as well as increased investments in R&D, given the progress we are making with our new gas delivery products, the resulting operating margin was eight 4%.
As expected interest expense for Q1 was $1 $5 million and our tax rate was slightly lower than forecast at 12, 1%.
The resulting earnings per share was <unk> 70 cents for Q1.
Now I will turn to the balance sheet.
Like many others in the industry cash conversion of working capital was unfavorable in the quarter with supply and output still constrained in the current environment inventory increased in support of customer demand.
Counts receivable also increase due to the timing of shipments weighted heavily to the end of the quarter, while our payments to suppliers increased driving payables down.
Going forward, we expect these working capital investments will translate to strong free cash flow generations of the quarters ahead.
Now I will turn to our second quarter guidance with revenue guidance in the range of $290 million to $330 million. Our Q2 earnings guidance is 68 to <unk> 94 cents per share.
We are expecting a 30 to 100 basis point improvement in gross margin for Q2 compared to Q1.
Our Q2 operating expense forecast is approximately $23 million consistent with prior expectations that our quarterly Opex run rate would be moving up a bit with incremental investments in R&D supporting our new product development programs for our new gas distribution products. Some additional investment in IMG.
Victor costs higher costs associated with our new ERP system, and overall investments supporting company growth.
We expect our interest expense will be approximately $1.7 million in the second quarter, reflecting the recently announced increases in interest rates are.
Our tax rate in Q2 is expected to be approximately 13% and we estimate our fully diluted share count to be approximately $29 1 million.
Finally, we continue to expect capex to be around 3% of revenues for 2022, which reflects the higher levels of investment required to support our machining business, we expect to deliver improving free cash flow performance as we move through 2022.
Operator, we are now ready to take questions. Please open the line.
Thank you well now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the kit from the queue.
Participants using speaker equipment may be necessary to pick up your handset before pressing the star keys, one moment. Please only poll for your questions.
Our first question comes from the line of Quinn Bolton with Needham <unk> Company. Please proceed with your question.
Hey, guys two.
Two questions first just on the on the sort of annual outlook Youre looking for sequential growth through the year. You commented in the prepared comments I believe that you felt you could grow faster than Wi Fi this year and I'm wondering if you back out the I M. G revenue do you still think the core business can grow faster than Wi Fi given all of the constraints here.
We're facing here at least in the first half of the year.
Well I think Quinn that's a really good question I. So the answer is I do think we can grow faster than the segments that you know, we largely addressed dep and edge.
As you know and I think you know when you look at some of those outlooks now those are a little muted versus the total Wi Fi, but I think we can outgrow.
With IMG outgrowth wf he certainly.
Great and then second question is just on the gross margin I think our prior models probably had you had you know at or above 18% by the end of the year I know you you're facing some near term cost pressures.
Staffing levels and you know kind of an adverse mix, but do you think you can get back towards 18% activity in this year or do you think that some of these higher costs, especially on the hiring side won't get absorb fully in the model until sometime in 2023.
I think we expect that sometime by the end of the year, we should be back on 18% I mean, we definitely have the headwinds with labor and some of the freight cost as you mentioned, but.
We're confident that we'll get back on track so that that range. It also you know Quinn.
We're making the assumption that we're going to grow quarter over quarter sequentially and so we're gonna grow into the infrastructure and the flow through will get US there and then you know, we'll see the mix recover and the machining business that we that we saw a decline a little bit this quarter and so we have strong confidence will be back there by the second half of the year.
Depending on how fast we recover but certainly by Q4.
Got it thank you.
Yeah.
Thank you. Our next question comes from the line of Craig Ellis with B Riley Securities. Please proceed with your question.
Yep. Thanks for taking the question. The first is a clarification on revenue the 7 million variance. It was mentioned for the first quarter was that all related to.
Issues were internal but I correlate with some of that just a core being unable to ship due to component issues elsewhere.
But had customers are having I'd call hold back product.
Yeah, I think that the largest factor was kind of driven by component shortages in our supply base that didn't allow us to build as much as we want so that really affected the integration business, but we also had a lower than expected machining.
Output this quarter, because we had to deal with some delayed raw materials.
We've gotten that all behind us now and will catch up on that demand. So none of that I would say none of that.
Delta to our midpoint is perishable demand, it's all going to get fulfilled this quarter.
Got it and the second question is related to some of the comments on hiring and I think there were comments both in our Cogs.
Cogs and Opex. So maybe you can clarify but the question is this it seems like there's a much greater emphasis on hiring in and the level of hiring in the near term than what we had heard of late so are there things that are happening either with the current environment or.
Just given a different product programs or other issues that would be an opex, that's causing an increase in how do we think about where where productivity is in the Cogs line again.
In Opex relative to where it's been of late.
Yeah, I'll start and then I'll hand, the opex over to Larry but what we did is we did not take our foot off the gas for hiring hiring was as you know we've all talked about how difficult. It is so.
Oh, we wanted to have the people in place as I talked about in my prepared remarks about being able to burst and also kind of ramp I would say, we'll see very little need for incremental head count as we go through the year and at the faster things recover the quicker we can grow our revenue so I think from a Cogs perspective.
<unk>, we're going we were pretty comfortable that we have quite a lot of.
Resources that can address growing demand as we look over the next two to three quarters for sure and so that's a decision that I made because you know as we've talked about hiring stuff I think it's the right thing to do for the industry our customers in particular to make sure that we can burst because supply constraints.
Make it very difficult to be linear and your manufacturing so you're gonna have to burst.
Get as close as we did to the mid point for example, we burst it pretty heavily in the last month of the quarter.
And I think just to add on on the Opex side. Most of the increase in Opex was not directly labor related there was a little bit of.
Labour, but on R&D materials, we brought in Sydney.
Significantly more than we expected to address some of the new products that Jeff mentioned and then we did have some higher costs.
The Sox compliance audit and a few things around our I T. Because we kind of worked through the implementation of a few of the sites on.
Our new Oracle cloud system, so in general.
Most of what we're seeing there and we do have but as you go forward into the balance of the year. This quarter, we do have our annual merit.
That does directly affect labor costs, but.
And we are seeing some some pressure on the odd labor.
Just general competitiveness in the marketplace, but but most of it.
As related to two R&D investments and investments in it and things that we've mentioned before.
Got it sorry, and I missed what you said about the guidance for Opex in the second quarter can you repeat that and then from the second quarter, what should investor expectations be about the trajectory of opex in the back half of the year.
Yeah, we're looking at around 23 million in Q2, and then I think moving beyond that.
Probably a couple of hundred thousands a quarter as we kind of go through it it'll be.
It'll be dependent on some of the speed of the R&D activities, which are today look very promising but I think that's a reasonable.
Amount to model.
Got it thanks guys.
Thanks, Craig.
Thank you. Our next question comes from the line of Patrick Ho with Stifel. Please proceed with your question.
Patrick.
Patrick any please check to see if your line is on mute.
Is this better.
[laughter] Oh, yeah.
Sorry about that.
Yeah, given the current environment and obviously there are a lot of moving pieces, but you're probably working a lot with your customers in terms of redesigning components you talked about some of the integration work can you just give a little more color or granularity on those type of efforts and what you think some of those can begin paying off.
You know, especially given that the supply constraints and that environment has not really improved.
Over the last few quarters.
Yeah.
No. We are we don't have 100% designed controller, Judy you know I know.
To Brent gas panel business, so, but we do work with our customers to find and help them find is they help us find alternative supplies for some.
Some of our components that just arent scaling them.
So there is a lot of effort going on I would say in the industry to look for new sources of supply where we can obviously some things are very difficult to change because if they affect process in the chamber. It just becomes critically more difficult, but we are putting efforts into that as well as our customers and working with them.
Individually and areas that we think we can.
Our work together on and address there are some things that are design in and and <unk> and their customers actually select the suppliers and so with those we're just working with those suppliers on how we can help with the supply constraints of our customers are getting involved as well if there are semiconductor based.
You know our customers are trying to influence the amount of supply they can get.
Along the way.
Great. That's helpful. Maybe as my follow up question for Larry.
I get a lot of moving parts I understand it it's it's really a challenge right now but for the June quarter.
It's the biggest issue that you're facing is it the supply constraints easiest labor constraints.
What what's the biggest issue and then maybe secondly, what's equal.
Quantifiable impact on the gross margin line, it's a several hundred basis points or less.
Well I think the first one is the supply chain, obviously is impacting us because it's impacting output and I think you know we.
As you know a very strong customer demand and we're.
Driving as hard as we can in spending but whatever money that's available to us here to get the output.
I think if you look at we're showing if you take the midpoint 65 ish basis point improvement in margin, that's primarily driven by.
Some volume leverage as we get some more the volume expectation up and also we expect our machining business, we'll we'll do a little bit better than it did last quarter.
As we you know as we get through some of the supply chain issues that we had I think you know when you look at impacts around freight and logistics those have continued to get a little bit worse than what we had historically.
You can wrap those all up into what we used to call it COVID-19 impacts.
We talked about 50 basis points. So I'd say, it's closer to probably 100 basis points, maybe a little bit less than that but it's it's significant.
We're seeing the inflationary pressures on gases on utilities.
Beyond just labor and other things, we're kind of used to as we go through the last couple of years that there's been a few new ones that have popped up but I'd say, that's probably that quantify it give you an idea. That's that's what we said and then our expectation is as we mentioned as we get into the second half of the year as to you know to get.
Get back up to the.
The 18% level, where we expect to be as these things are hopefully wane as we go forward. Yeah. I think if you. If you were to ask me 90 days ago, we were still seeing some headwinds in our supply chain to get hiring done I think they've.
That's improved it's not perfect. Just like everyone is still has some level of struggling on hiring but largely the components supply are going to be the things that.
Affect us more than anything and we are seeing improvements there theyre just not great improvements at this point so.
Great. Thank you very much thank.
Thanks, Patrick.
Thank you. Our next question comes from the line of Tom <unk> with D. A Davidson. Please proceed with your question.
Oh, yes, good afternoon, and thanks for the question. So I guess first Jeff when you look at the hiring is it focused on one particular region like Malaysia or is it a kind of a global increase in and capacity to handle that burst.
It's it's global.
We've got hiring going on in every in every location that we have in certain areas, it's easier to hire than in the U S. Outside of the U S. You know Malaysia is one of the places where we get a much quicker access to incremental resources to those flex up pretty well Singapore.
A little bit tight so all of those reasons is why we didn't take our foot off the gas and obviously in the U S people or people are coming back to work.
Okay. So what do you look at the future or the plan to have enough people to handle some burst capacity from time to time does that change your long term view of what the staffing should be on a permanent basis, where its going to be a higher percentage of the cogs going forward.
Yeah, that's a really good question.
I guess my initial reaction is no I think we've always carry burst, but we've never been this far behind demand everybody's chasing demand you know if we were if you kind of looked at our last month.
Would have equated to a revenue level much above what we actually achieved so as I talked about I think we have enough capacity to kind of burst into wind supply chain recovers fitbit spotty as well as you know kind of support the outlook, we see for the remainder of the year with the with what we've done in hiring to date.
Okay. That's helpful.
And then when you look at the supply chain issues is there some way to quantify how much that was driven by either direct or indirect impacts of the shutdowns in China.
Yeah, I think what what affected us in China. We were we had a few suppliers that got shut down for the first kind of four.
Four to seven days.
Given our inventory positions, we're in pretty good position in those particular ones.
But what happened is as it was difficult to get things transported. So if you had the suppliers that were outside the shutdown lines, but I had to get into Shanghai. For example, we had to find other ports. So we actually it was kind of a cost headwind as Larry talked about is we had to airfreight things out of airports that were open we had the truck things much much.
Further to get the ports that could go in and so most of what we saw was a little bit slow deliveries, but the effect of it I think is something we can handle we're not seeing a huge effect that did have a small effect, though on the early part of this quarter I would say last quarter not much.
Other than the cost headwinds to get the inventory in.
Yeah Okay.
The last question when you look at your gas pedal to the auto.
It sounds like you know the first one's for a couple of very specific applications, but when you look forward over the next couple of years is this a gas panel that conserve a vast majority of gas panel needs out there or is this going to be kind of siloed into certain applications.
No it'll be able to address a wide range of applications and flow rates.
I think as Larry talked about some incremental investments in R&D.
The first ones are pretty specific we know we know the flow rates, but theres a theres a broader range that we can address and those are some of the things that we're still investing in finishing up.
So when you know when we kind of get through this that they'll be able to address.
A very wide range of applications, particularly at you know the etch and dep applications, primarily yes.
Okay, great. Thank you.
So.
Thank you. Our next question comes from the line of Krish Shankar with Cowen. Please proceed with your question.
Okay.
Hi, This is Robert Mertens on behalf of Krish. Thanks for taking my questions.
First could you break out the quarterly sales from.
From the RMC business and then for the year, you reiterated them around the 80 million rather than new level.
Basis points gross margin 40, op margin benefit for the year is that still the correct way to think about the business.
I think I E.
Didn't you broke up a little bit on the first one if you are asking this quarter as we mentioned I M. G was $19 million in revenue.
If you look at the expectation we had for the year of $70 million to $80 million were still holding with that if you look at their overall.
Profitability for that business. They are they are meeting our expectations.
So most of the issues that we're facing today are really in the.
The core business or the business that we had prior to adding IMG.
Okay. That's helpful and then.
Any sort of progress on the manufacturing capacity, there if theres any sort of tightness in components.
Can manufacture I think you mentioned the E beam welding previously about it now.
You're saying or long term.
No.
Yeah. The IMG has capacity that we can utilize to help support some of.
Some of the supply that we supply ourselves internally as well that we need in some of the Weldment sub assemblies that we do so we're working on that in the E beam welding as we speak so those are things that I would think by mid year we.
We will be we'll have.
Ready to go so there's a qualification for both of those but yeah, we're still tracking to that I'll call. It a synergy.
Great. Thank you that's all for me.
Thanks Robert.
We have reached the end of our question and answer session I would like to turn the call back over to Mr. Anderson for any closing remarks.
Thank you for joining us on our call this quarter I'd like to thank our employees suppliers and customers for their ongoing dedication and support as we continue to execute against this historically strong demand environment for our industry.
Coming investor activities include a virtual roadshow with D. A Davidson next week the B Riley growth Conference. Later this month the Cowen Tech Conference on June <unk>, and the CEO summit at Semicon on July 13th.
We also look forward to our next earnings call scheduled for early August .
Operator that concludes our call.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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