Q3 2022 Ultra Clean Holdings Inc Earnings Call
Good day and welcome to the Ultra clean third quarter 2022 conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then one on your Touchtone phone and Swift.
All your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to MS. Rhonda Neto Investor Relations. Please go ahead ma'am.
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 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.
Forward looking statements are based on estimates projections and assumptions as of today and we assume no obligation to update them. After this call.
Our financial results will be presented on a non-GAAP basis reconciliations.
The Asian 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 Yeah.
Thanks, Rhonda and thank you all for joining us today.
I'm going to start with a brief review of our third quarter results and provide some insight into how we feel the rest of the year will play out.
I'll also share our thoughts regarding 2023 M P on and provide some additional commentary on our capital allocation strategy.
After that I'll turn the call over to Sherry for a financial review and we will open up the call for questions.
Solid operational execution and modest supply chain improvements contributed to a strong third quarter.
Although the supply chain continues to present challenges and.
Enhanced collaboration amongst our global teams, our suppliers and our customers has alleviated most constraints and we expect to see incremental improvements in the coming quarters.
While some customers continued to prioritizing reconfigure their delivery schedules, we have seen only limited cancellations relating to the new export regulation for U S semiconductor technologies sold in China.
If we use the midpoint of our fourth quarter guidance, we expect full year revenue to be up roughly 16% over 2020 one.
After several years of unprecedented growth we are anticipating a decrease in demand fundamentals and believe there will be a pullback as chip makers and their customers draw down inventory and realign their investment plans.
UCT is much larger and more diversified now than ever before and our operating model enables us to quickly flex and buffer the effects of a broader industry pullback.
With 30 plus years of experience adjusting to these ups and downs, we are confident in our ability to perform well in a broad range of market scenarios.
Long term, we remain very bullish on the industry as a whole.
Demand for products powered by semiconductors is accelerating driven by multiple and end applications from smart electric cars and mobile devices to communication infrastructure, AI and Iot devices.
UCT has taken deliberate strategic steps to ensure that we are well positioned to outperform as these new applications shift to volume manufacturing.
The expansion of our capabilities with resources strategically close to our customers has deepened our collaboration and will enable us to accelerate production with greater operational efficiency.
Our new Malaysia facility is a great example of how we have become more globally diverse.
Taking our operations to a whole new level in terms of scale efficiency.
Fly chain infrastructure and automation.
Our Malaysia site is ramping to schedule and we are seeing strong engagement as customers look to secure a long term outsourced manufacturing partner.
This site has become another key driver to our share gains and as geopolitical events unfold. It will become even more important as we continue to outgrow the industry.
The extended outlook for semiconductors remains robust and UCT is ideally positioned to capitalize on future opportunities.
In addition to prioritizing investments supporting our growth strategy.
We also recognize our commitment to deploy capital that drive the greatest return for our shareholders.
Given our strong cash flow. We believe now is the time to initiate a share repurchase program.
This new program will enable us to act opportunistically when conditions are right, while maintaining a disciplined approach to capital allocation, including debt repayment, while maintaining our healthy balance sheet.
Our conviction in our growth strategy and business model has never been stronger and this program provides another avenue to return meaningful value to our investors.
In summary, we see sustainable strength in our markets as large powerful trends drive a fundamental expansion and the demand for semiconductors.
In the short term, we will focus on implementing operational efficiencies and optimizing our global footprint.
Longer term, we expect to capture an even larger share of our addressable market.
And with that I'll turn the call over to Sherry for a review of our financial results Sherri.
Thanks, Jim and good afternoon, everyone. Thanks for joining us in today's discussion I will be referring to non-GAAP numbers only.
Solid execution supported by ongoing demand for our products and services resulted in total revenue for the third quarter of $635 million compared to $608 7 million in the prior quarter.
Products Division revenue was $556 $3 million compared to 532 million last quarter and revenue from our services services Division was $78 $7 million compared to $76 79 in Q2.
Total gross margin for the third quarter was 26% compared to 23% last quarter.
Product gross margin was 18, 3% compared to 17, 8% in the prior quarter.
And services was 36, 9% compared to 37, 2% in Q2.
Margins can be influenced by fluctuations in volume and mix materials, and transportation costs and manufacturing regions, so there'll be variances quarter to quarter.
Operating expense for the quarter was $56 $5 million compared with $55 9 million in Q2.
As a percentage of revenue operating expense was eight 9% compared to nine 2% in the prior quarter.
Total operating margin for the quarter was 11, 7% compared to 11, 1% in the second quarter.
Margin from our products Division was 10, 8% compared to 10, 2% in the prior quarter.
And services margin was 18, 2% compared to 16, 9% in the prior quarter due to reduced spending.
Based on $45 6 million shares outstanding earnings per share for the quarter was $1.06 on net income of $48 $6 million.
Compared to a $1.04 on net income of $47.4 million in the prior quarter.
On our tax rate for the quarter was 17, 9% compared to 15, 2% last quarter.
We expect our tax rate for 2020 to just stay in the mid to high teens.
Turning to the balance sheet, our cash and cash equivalents were $453 $5 million at the end of the third quarter compared with $421.4 million last quarter.
Cash from operations was $71.7 million compared with $81.8 million in the prior quarter due to timing of cash collections and payments.
Made an additional debt payment.
$11 million in the quarter.
During the third quarter, we finalized the divestment of our third noncore non semi subsidiary that came with the Hollywood acquisition, resulting in a $28 million pre tax loss.
The impact of this divestiture is reflected in our third quarter GAAP financial results.
Given the current global macroeconomic and geopolitical uncertainty.
Including the effects of the new export regulations for U S semiconductor technology sold in China.
We are keeping our guidance range wide.
We project total revenue for the fourth quarter of 2020 to between $609 and $650 million.
We expect EPS in the range of 94 to $1.14.
As we announced today.
The board has recently approved a stock buyback program up to $159 over a three year period.
We intend to be opportunistic with our purchases. However, we have not factored this into our fourth quarter guidance.
And with that I'd like to turn the call over to the operator for questions.
Thank you we will now begin the question and answer session.
To ask a question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys and to withdraw your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.
And the first question will come from Quinn Bolton with Needham and company. Please go ahead.
Hey, guys. Congratulations on the strong near term results, obviously, it's a pretty.
Quickly changing demand environment.
2023, one of your large customers last week predicted W. If he could be down.
North of 20% year on year to <unk> 70 billion range and I guess I'm just wondering.
To the extent that WPZ falls in that range. How are you looking at 2023 do you think your revenue would be down at least on the product side in line with WMC do you think you could outperform absent acquisitions.
You know any any guidelines you could give us as youre thinking about 'twenty three.
Yeah, Hi, Duane thanks.
Yeah, I I, we don't see it down more than 20% at this point, but.
To your question about outperforming typically over the last five years or so.
Outperformed in an organic way outside of M&A or an average of five point of WSB and we see that we continue to have good momentum and that's based on winning share in.
Incremental Lee and we see that that should continue.
So Jim if I'm, just thinking about the product side of the business. If WPZ down 20% you guys have performed by five thinking about your products business down in the range of 15 makes.
That makes sense sort of as a as an initial sort of view into the.
So next year.
That's right Glenn that's our view.
Got it and if that's the topline framework, Jim how do you think about managing them.
Opex I mean, you've got a lot of skilled labor that you may not want to let go if you think it's a.
Relatively short duration downturn, but but obviously if you don't cut Opex you know you could see a bigger swing on earnings. So how are you thinking about managing opex.
Through a potential downturn in <unk> and 'twenty three.
Yeah, maybe I'll address the like all spending so a huge part of our cost structure as materials and direct labor in those weekend black it sometimes it takes about a quarter to flush through but we can flex those pretty quickly along with rabbit.
We've done this before after 30 years, we've been through many of these are on the Opex side, you're exactly right.
It's always a balancing act like we did in 2019.
To keep the structure infrastructure in place and the continuous improvement in place.
Through through a downturn, which you know we don't see any reason why it would be extended outside of any large macro events and so we make that balance we did that in 2019.
And we came out even stronger we take that time to really also.
Clean up after a pretty crazy few years, and so we do things like consolidated site.
And then put in things that make us stronger and more.
Nimble and leaner as we go forward so on the Opex side, obviously, we will be adjusting the spending there, but there are some critical programs that we will obviously keep in place for the longer term.
The last one it sounds like from that comment about perhaps optimizing where you're manufacturing it sounds like this.
In turn might be an opportunity for you to bring even more to Malaysia or to continue to ramp that facility as it's it's lower cost and some of the other global facilities in that.
And your footprint.
Yeah, that's exactly right, Malaysia is ramping up pretty much on schedule.
It is our lowest cost.
As well as some of the local geopolitical events I think are going to have.
The entire industry will be looking towards the South East Asia.
Typically so we were really well set up there.
Thank you Quinn.
The next question will come from Chris Sinker with Cowen <unk> Company. Please go ahead.
Hi, Yeah. Thanks for taking my questions guys. This is Steven calling on behalf of Krish.
I guess, Jim My first one for you just in terms of the near term guidance.
Just given some of the comments about improvements in the supply chain I would imagine that part of the cycle times are also improving as.
As a result of that.
It fits it seemed that your customers might also be a.
Where do you think the inventory levels that does he has.
And or do you see any indications from your customers that they're stored in strong and somewhat to maintain.
Some of the buffer inventory that they can maintain in recent quarters.
Yeah, probably a question better suited for them, but I think everyone in the industry is going to be reducing their inventory levels to some extent.
Supply chain prices nearly abated, not only for us but for everyone.
So I think obviously everybody's flushing through their backlog you know in this last quarter.
I'm sure there'll be inventory adjustment.
Due to some short term softening in the industry, but.
But the magnitude of that we haven't seen that yet in the fourth quarter.
Got it Okay. That's helpful and I guess my follow up is on your services business.
I was just kind of tying it into the earlier questions about calendar 'twenty three W. E coming down based on market expectations of 20% if if that'd be if he does come down so much what are the implications to your services business, especially since that's more tied to wafer starts in.
Utilization rates and what have you seen there so far in <unk>.
If the industry was down 15%.
Your services business still grow potentially.
Growth will be a challenge I think we will see some wafer starts off in a lot of what's happened in the wafer starts has been in the memory space that's already happening today.
And with the memory Fabs do not use much in the way of.
Hi, Tech cleaning and coding and analytics, so that that has been a very minor effect for us, but obviously there have been some.
Logic and foundry slowdowns as well.
And one or two of the customers and so I think we would tend to grow a.
Or tend to.
Fallen line, along with wafer starts, but I do expect wafer starts will all of it but the swing in revenue is as you've seen in the past.
Pretty dampened compared to WMC.
Understood. Thanks, so much.
Hello.
Thanks, David.
The next question will come from Hans Chung with D. A Davidson. Please go ahead.
Thank you. This is Linda on behalf of Hans Chung. Thank you Paul I think that's a question.
So first of all congratulations on the quarter and I guess my first question in terms of the China export restrictions.
Ask obviously the entire industry is dealing with the inputs, but I was wondering if you might be able to quantify for us how much revenue might have been affected but in the third quarter as well as any potential impact in the fourth quarter guidance from the regulations.
Yes, Hi, Linda this is Sherry nothing has affected us in the third quarter, but we anticipate around a 15 million dollar impact in the fourth quarter or for the new export.
Legislation.
Okay.
Oh, great. Thank you for the color and maybe my follow up question again for Sherry on the gross margin puts and takes I was wondering from your perspective with I think you mentioned supply chain issues is ink and maybe some inflationary pressures in volume. It shows I guess, how can you can.
You give us so we don't get more color on the plans there and how we should think about it and they'd be impart in four Q and apparel calendar 'twenty three.
Yeah, I mean, we're evaluating that right now.
Some of it will depend upon where the revenue is for calendar 'twenty three.
As things go down we do see gross margin going down you can't completely eliminate them all factors, but as Jim mentioned, we will be looking at our footprint and other costs.
With our revenue materials and Labour makeup of direct labor make up about 65% to 70% of the P&L. So that's something that you.
Taking into account right away when revenue comes down so.
So we'll be looking at that as we go across the year, we're not really giving guidance at this point for the full year, but that's something that we're heavily looking out at this point.
That's fair. So lastly regarding the Malaysia facility, if I remember correctly, you surpassed yesterday that the first phase with the facility could do about 200, a year and a buffet 50 million a quarter am I getting the numbers correctly and with that.
What's the what's the revenue run a what was the revenue run rate in <unk> and if you made what do you expecting for acute and potentially 23.
Yeah, that's right phase one.
We mentioned around 200 million run rate or Malaysia, where we're pretty close to that run rate a little bit shy, but pretty much on schedule.
The total capacity of that fab that our factory when it's up and running will be 600 to 800 million.
Probably won't need all of that next year, but it's been ramping pretty well yeah. In Q3 was about 24 million. So we see that continuing to go up in Q4.
Okay.
Great. Thank you.
Thank you. Thank you Linda the next question will come from Christian Schwab with Craig Hallum. Please go ahead.
Hey, Hey, guys. This is Tyler on behalf of Christian Thanks for Thanks want to ask a couple of questions too so.
Going back to the services side of your business. Jim You know the Hamlin acquisition you guys have talked in the past about some share gain opportunities in some some potentially pretty significant ones. You know I was just wondering update on those thoughts you know as the environment here softens does that change your outlook. There does it does it may be even improved the opportunity to pick up some share gains to offset some of the softness.
Any thoughts on that would be I appreciate it.
Yeah definitely market share and the former Hamlin would be call it fluid solutions.
Continued market share improvements are part of that five point of outgrowing the market.
We've you know where I'm coming from a very small market share. So we've made great strides this year, even before a lot of the capital equipment that we've ordered for that business has come in so we've increased the capacity and the output and the revenue from that acquisition.
Substantially.
Over 30 around 30% year on year, and so yeah I'm sorry.
Going into next year, even with the Wip fall and we see a lot of opportunity there.
We've been in a situation, where if we can make it we can sell it and that's where the largest part of our backlog in our business don't reside.
I think you mentioned sorry.
I'm not sure what the question is beyond what I've already answered I think.
Unless you you're talking about service with fluid solutions got fluid solutions as a.
Primarily the majority of the sales are into the products or the equipment side and there is a little bit in the.
Directly to the bathroom and workforce looking too.
To expand that but that's a multiyear program.
That's great that's exactly what that talking about the Hamlin the food session. So thank you. Okay. A lot of questions otherwise have been asked answered. So I thought maybe just big picture you know fundamentally during a downturn like this Jim I know in the past couple of years, you know what when.
When things have been you know pretty robust you've talked about opportunities to gain share to gain new modules.
New nodes with the leading customers. So fundamentally you know what those customers are in a downturn you know what does that look like as opportunity for you to you know better better inject yourself with him and he's out there.
Yeah, I mean, we've been doing a great job of that through the year, it's actually.
What youre alluding to it's been harder with supply chain somewhat seized up throughout the year for those program to them.
Go forward, but certainly.
Certainly in the next year.
There'll be a lot more focus on that I think our customers are going to see it.
And they are expecting in the longer run 24 and 'twenty five.
Another big Hill to climb in Wi Fi and so so yeah 2023 will be the time to to make sure that brought them for our customers to get set up for rebid.
The rebound side after 2023.
That's great that's all for us Thanks, Jim.
Alright, Thank you Tyler.
This concludes our question and answer session I would now like to turn the conference back over to Mr. Chau Hammer for any closing remarks. Please go ahead.
Thank you everyone for joining us today, and we look forward to speaking with you again in the new year.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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