Q2 2022 Ichor Holdings Ltd Earnings Call
Good day, ladies and gentlemen, and welcome to <unk> second 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 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 Devin good afternoon, and thank you for joining today's second quarter 2022 conference call.
As you read our earnings press release, 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 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 light of those and other risks and uncertainty.
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 today. 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 Andrey.
And 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 second quarter results and third quarter guidance. After the prepared remarks, we will open the lines for questions.
I'll now turn over the call to Geoff Andres to Geoff. Thank you Claire and welcome to our Q2 earnings call.
Q2 revenues were $330 million at the upper end of our guidance range and were up 12% from the first quarter.
After several quarters of supply chain challenges that limited the industry's availability of components and appreciably constrained or out, but we were pleased to see several areas of improvement in Q2.
These improvements along with strong operational execution and improving factory efficiencies enabled us to achieve record output in very strong financial results.
As expected we saw gross margins bounce bounce back to 17% with the higher revenue volumes now absorbing the investments we've been making to increase capacity across our footprint.
These investments include adding to our manufacturing head count as well as their physical capacity.
Given the head count we have in place today and the sequential growth we see the remainder of the year, we expect to deliver continued gross margin expansion at these revenue levels.
With continued close management of operating expenses, we exceeded the upper end of our profitability targets and reported earnings of 98 per share.
We completed our clean room expansion in Austin during Q2, and we have enough brick and mortar in place in our Weldment business to support the next several years.
Selective expansions of capacity for strategic growth areas continue important as well as in our machining business in Minnesota, and Mexico, all in support of a $425 million level of capacity per quarter.
Compared to a quarter ago concerns about the sustainability of these unprecedented levels of wafer fab equipment spending have increased.
A number of reports since our last call have indicated a slowdown in consumer driven segments of the semiconductor industry decline in memory prices and an inventory correction all ahead of unexpected recession.
Therefore, as a management team, we must balance managing the near term business outlook, while ensuring that we are investing for the future.
We are working.
In lockstep with our customers to plan delivery schedules optimize the supply chain and meet their end customers' demands, but we are all focused on the long term demand signals that will impact our outlook for the next two to three years given our current visibility we expect to continue to achieve sequential revenue growth in the third quarter.
And through the forthcoming quarters as well.
Despite the supply chain improvements and higher factory output levels achieved in the second quarter customer.
Customer demand continues to outpace supply and we expect the unmet demand will continue to carryover into the forthcoming quarters until the supply chain catches up with demand.
Industry forecast recently tempered expectations for <unk> growth in 2022 to now about nine or 10% growth over 2021.
As a result of the limitations within the supply chain.
Now that our output levels that picked up considerably and given the continued increases in output expected in both Q3 and Q4 of this year, we are well on track towards achieving our growth objectives established earlier in the year up around 20% revenue growth for 2022.
Revenue growth for ichor approaching 20% this year would reflect faster growth compared to overall WSB.
Given the relatively strong performance of etch deposition and easiest growth this year.
As well as the addition of IMG I'm very pleased with the performance and growth trajectory of our AMG acquisition, they're seeing growth across their customer base, which includes semi defense and aviation, including commercial space.
We now expect <unk> to contribute between 75 and $80 million of revenue for the full year.
As I mentioned as we look ahead to 2023, we are working in lockstep with our customers and planning delivery schedules through the next several quarters visibility continues to extend much further than historical cycles lead times remain elongated and even with looming recessionary concerns the majority of wafer fab equipment.
Purchases are considered critical investments in technology and capacity and so far while there are some delivery schedule adjustments to align the supply chain. At this time, we are not seeing any push outs of demand.
Therefore, even though we have not experienced any changes in customer demand. So far we have a variable operating model and can quickly adjust should we begin to see any softening in demand or delays in our customers' delivery schedules, we have a number of levers.
We can utilize to adjust to any changes in volume and we have a strong track record of managing the company profitability through periods of lower revenues.
In the meantime, we continue to focus on investing in strategic and gross margin accretive capacity additions in close partnership with our customers in order to expand our share of our served markets demonstrates strong operational leverage and make continued progress towards our long term profitability objectives.
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, we are still in the qualification phase for our first evaluation units that shipped to a new customer we.
We had planned to ship our second beta unit by mid year, and now expect to ship. It by the end of August this.
This unit is shipping to an existing customer for a new application that is expected to outgrow the Wi Fi market over the next several years as a reminder, both of these gas panel beta units are fully configured with eye core content. We would expect both of these evaluations to extent up to a year.
We remain confident and highly encouraged by the progress we are making with our customers for these proprietary gas delivery systems and.
In our chemical delivery business, the TUI evaluations remain underway within North American customer, we continue to work with this customer as we move through the evaluation phases for programs as we said on the last call. These evaluations are expected to be completed in early 2023.
In summary.
Every challenging operating environment. The operations team did a very good job of maximizing output to address the customer demand. We are experiencing with our current visibility we are expecting to report sequential growth and record setting revenues for the forthcoming quarters.
For the full year, we are well on track to deliver on our objective to outperform industry growth and deliver record results for both revenue and earnings per share.
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 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 in the investors section of our website for reference during this conference call.
Second quarter revenues were a record $330 million up 12% from Q1, and 17% higher than Q2 of last year revenues increased in every business segment and with every key customer both sequentially and year over year with.
With revenues at the upper end of expectations gross margin of 17% also reflects the higher end of our guidance and 100 basis point improvement over Q1.
Q2, operating expenses were $22 $9 million in line with our forecast and up about 2% from Q1.
The resulting operating margin was 10% up 160 basis points from Q1.
Interest expense was $2 $1 million largely as a result of higher interest rates and the increase was partially offset by positive foreign exchange adjustments as a result of the strengthening U S dollar.
The total interest and other expense was $1 $5 million.
Our tax rate was 10% for the quarter lower than forecast, which drove upside in earnings per share above the high end of our guidance range. The resulting earnings per share was <unk> 98 for Q2 four cents above the high end of the guidance range.
Now I will turn to the balance sheet.
As expected cash conversion of working capital improved in the second quarter compared to Q1 inventory turns were flat quarter over quarter and receivables DSO improved four days to 44.
We generated $9 $4 million in cash flow from operations.
With $11 million of Capex in the quarter free cash flow was slightly negative.
We increased borrowings on our revolver and a net increase in total debt was about the same as the net increase in total cash at $13 million and $12 million respectively.
Going forward, we expect strong free cash flow generation, given the revenue forecast along with the working capital investments we've made year to date.
Now I'll turn to our third quarter guidance.
With revenue guidance in the range of $320 million to $360 million. Our Q3 earnings guidance is 85 cents to $1 11 per share.
At the mid point of $340 million in revenue, which is up 3% sequentially and up 29% year over year, we are expecting gross margin improvement of about 30 basis points compared to Q2 <unk>.
Our Q3 operating expenses are expected to be approximately $500000 higher than Q2, consistent with prior expectations that our quarterly opex run rate would be moving up a bit with incremental investments in R&D.
Got it and I T.
We expect our interest expense will be approximately $3 million in the third quarter, reflecting the recently announced increases in interest rates are.
Our tax rate in Q3 is expected to be in the range of 11% to 12% 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 investments required to support our machining business we.
We expect to deliver improving free cash flow performance as we move through 2022.
Operator, we are ready to take questions. Please open the line.
Thank you we will now be conducting a question and answer session. If he 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 he would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from the line of Tom definitely with D. A Davidson. Please proceed with your question.
Okay. Thank you I appreciate the chance to ask a question today.
So let me maybe first on the guidance so.
Obviously revenue up 3% or so quarter over quarter EPS flat. It looks like that's a combination of slightly higher expenses and slightly higher tax rate are those are the main drivers.
That and also the interest expense is up approximately 900 K quarter to quarter Oh, Okay.
And then what's driving the increase in the margin itself is that mix or is it efficiencies.
There's a little bit of efficiency, there a little bit of volume and also mix as we continue to drive our machining revenue higher great. Okay.
And then Jeff.
And then maybe just a clarification first you gave guidance for hitting the 20% bogey for this year's revenue growth ahead of the industry does that include the <unk> $75 million to $80 million or is that excluding that.
Yeah, Okay and.
Yes.
I mean, obviously, we're dealing in a constrained environment and stuff. So I think those results are actually pretty pretty good but yeah AMG, we're really happy with what's going on there and they are they're kind of at the upper end of our expectations now are what we set kind of going into the year.
And are there.
Are there particular capacity constraints there.
No we're doing pretty well there I think we have some more capacity to get there. We've added some capacity also.
In there as part of our investments this year as well.
Right and then it has.
Final question when you look at the data system shipping here, though I guess, they're later in August does that system reflect kind of the full core content over time or will it continue to rise as you add developed individual components.
That particular, the first to have about as much components as we're going to drive to.
You know in most of the I'll call it the higher IP value added.
Parts or things that we've designed and flow control valves and things like that the blocks.
So great.
Okay.
Nice to hear it and he said, it's going to take about one year you thought for the beta sites takeout.
As you know you put them on a lab tool and they've got to run for you don't want to wear a year as long as they need to run them across different processes and things like that and we'll keep you up to date as we progress through those.
Great. Thank you very much.
Thanks, Tom.
Okay.
Thank you. Our next question comes from the line of Patrick Ho with Stifel. Please proceed with your question.
Thank you very much and nice work on the good quarter, Jeff maybe first off in terms of you know.
Some of the moving pieces in the demand environment.
As well as supply constraints.
Would you I know you said in the prepared remarks that it's the supply constraints that are limiting deliveries from your perspective from your angle and I caught you know how much do you believe supply constraints are limiting you in terms of potential revenue output that you can't do in 2022 because of the supply constraints.
Well I mean, we haven't actually put a number on it but you know it's.
It's a large enough number that it's going to take us a few more quarters of supply increasing I think the supply constraints of kind of greatly narrowed down to kind of I'll call. It electronic components largely.
We still are.
Fighting some of those types of things, but I havent really put a number on it other than to say that I think will be pretty close by year end, if we continue sequential growth.
Barring no significant changes that we see today, we're not expecting as we've looked at it today.
But that's you know what.
World is a little different now but.
Anyway so.
It may take into the first quarter of next year all depends on how quickly some of these other suppliers go.
Great that's helpful and maybe as my follow up question.
So in.
In terms of the supply constraints and the moving pieces with gross margins.
What would be the biggest variables are the biggest impactful continued improvement through the rest of this year is it simply the efficiencies.
Really coming into play or arguing absorption.
Benefits, what's going to be the biggest influence to potential.
Your gains through the rest of this year.
I think it's a combination of of volume efficiencies and leverage we should see that as we continue to go as Jeff mentioned, our through the coming quarters and also I think the logistics costs, which are probably the largest you can call. It COVID-19 you can call it some.
Fly chain related.
I would say that that looks like it's getting a little bit better. So I think when we look at where we are today and kind of the outlook and some of the comments cause also with the supply chain issues. We do a lot of expediting some of which we can recover with our customers, but some of it you know we share so.
I'd say those are probably the largest components of what we see is an improvement along with are continuing to drive the components and machining business higher.
Great. Thank you very much thanks.
Thanks, Patrick.
Thank you. Our next question comes from the line of Trevor to Natzke with Needham. Please proceed with your question.
Yeah, Hi, guys. This is Trevor janovsky on for Quinn Bolton and thanks for taking my question I wanted to clarify the outlook for the second.
<unk> growth in the coming quarters did you mean fourth quarter greater than third quarter and first greater than fourth how far out does that does that comment extend.
Well I'll give I'll give you our view you know as we look at it here today, but we're seeing sequential growth through the end of the year.
2023, obviously theres a lot of news out there right now, but as we look now that is they have some sequential growth I wouldn't say, there's a big step function in there anywhere, but we're seeing sequential growth and outlook.
Our outlet.
Okay. Thank you and as my second question I'm wondering its recent conversation point towards your customers, becoming more cautious with respect to the current memory spending outlook.
I think I think the way you think about the memory spending outlook is is that yes. There. There's some caution there but there's also a lot of this unmet demand is in other segments.
And so as we kind of look at it if there's a little bit of softening in memory and obviously you know we.
We listened to the micron.
Our call today and everybody on this call I am sure as to so we know that some of the DRAM pricing in memory is clearly softening, but there's strength in other areas and as we kind of said in our prepared remarks, a lot of this is being driven by both incremental demand in foundry and logic, which is just remaining very very soon.
Wrong as they kind of migrate down the node to node.
And you're seeing.
The increases in the total amount of equipment they need to put out the same wafer. So theres still a lot of things moving way too early to tell you about 2023 much other than if my prior comments to two.
To the outlook that I just mentioned so you know what I think through this year, we'll see sequential growth right. Now we believe that Q1 will be larger than Q2.
Q4, but things can change between now and then so I'm not ready to guide all of 2020 Three's outlook.
Okay very helpful. Thank you.
Thanks Robert.
Thank you. Our next question comes from the line of crush sand car with Cowen. Please proceed with your company question.
Hi, This is Robert Mertens on behalf of Chris. Thanks for taking my questions. I guess, just first could you provide an update on the IMT business did you.
Mentioned, what that contribution was in the quarter I'm, just trying to break out away from the 70 to 84 year and call. It.
No what I did mention was that we thought the revenue would be kind of in the $75 million to $80 million range now which is in the upper upper half of what we thought entering the year, we haven't talked specifically about breaking out that specifically.
From a profitability, but you can assume it's about the same as we talk about in our machine business you know so.
Which is kind of high <unk> to low <unk>, depending on the product and the mix and all that stuff.
Okay. That's helpful. And then just in terms of the margins the target getting back towards the 18%.
Sort of exiting that year is that still.
Sort of how youre thinking about it.
Well, obviously, that's what we're driving to I think.
When you look at a lot of what we see as the unfulfilled demand.
That is in the gas integration space.
And so those carry kind of lower margin. So mix will have an impact if we kind of see our revenue continue to grow as Larry alluded to on the machining business, we could get there, but I think.
At this point it might be a bit of a stretch given just some of the constraints, we see and as they improve we're just going to catch up on the gas box. So that the mix might hurt us a little bit, but it's not out of the question.
Okay.
That's helpful.
Thank you I appreciate it.
Thanks Robert.
Thank you. Our next question is a follow up question from the line of Tom definitely. Please proceed with your question.
Oh, yes. Thank you so Jeff quick question, if memory does slow and demand shifts from memory to logic next year.
I assume you're you know combination of inventory and capacity are pretty fungible, but I wanted to double check and see if that was indeed the case.
Yeah, It's it's absolutely fungible, depending obviously every site can support at all.
Out of each one of the areas I would say.
Singapore has got kind of a larger or what I would call hedge component than some of the other sites, but I think it's largely all fungible.
No.
Okay, and then finally, when you look at the chipset.
Is there any direct assistance to you or is it going to be indirect through your customers.
Well you know that's a good question I havent dug through the specifics of what might be available to us we'll be doing that now that it's been signed and passed I think that in general you will see a bit of a tailwind how big it will be and over how many years I don't know, but I think it's just additive.
To to what we're seeing today, so it's a good step forward.
And it's not not going to have any negative impact on us either way, we're going to end up with some favorable tailwind out of that.
Okay. Thank you and congrats on the continued growth in the quarters ahead.
I appreciate it Tom.
Okay.
Thank you. Our next question is from the life mine of Michael Manny with B. Riley. Please proceed with your question.
Hi, This is Michael Mani on for Craig Ellis, Thanks for letting US ask a question. My question is on your capacity increases.
A couple of quarter.
No I think you've mentioned that you were targeting $425 million quarter in terms of capacity could you just walk us through when when do you expect a timing around that goal and maybe what milestones are needed to get there in terms of Oh with all their.
<unk> in Mexico and elsewhere. Thank you, yeah, I mean, I think that.
When a when you look at kind of the footprint most of the brick and mortar plans are kind of in place. So now it's about fit up and fill up and.
And so those can be toggled with the outlook, a faster or slower and that's how we kind of think about it we want to we want to look at the brick and mortar and make sure. It's there.
A great example, as you know in the last downturn, we did a bunch of the facilitation of an incremental floor in our Singapore facility and then as we needed. It we turned it on so that's kind of how we approach our capacity and so to give you a specific time is probably middle of next year is probable.
As fast as we can move to get all of that in place and it'll be coming.
Coming into place as we go along so.
Okay.
Okay.
There appear to be no further questions at this time I'd like to turn the floor back over to Jeff Jeff Anderson for 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 its historically strong demand environment for our industry.
Coming investor activities include the D. A Davidson Big Sky Summit on August 22nd the Needham virtual semi cap conference on August 25th.
And the Jefferies annual semiconductor conference in Chicago on August 30, 30th we also look forward to our next quarterly call scheduled for early November operator that concludes our call.
This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.