Q2 2023 Ultra Clean Holdings Inc Earnings Call

And welcome to the Ultra clean technology, Q2, 2023 earnings call and webcast.

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Please note. This event is being recorded I would now like to turn the conference over to Rhonda <unk> 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 about the business and Sheri will follow with the financial review and then we'll open up the call for questions. Today's call contains forward looking statements that are subject to risks and uncertainties.

For more information please refer to the risk factors section in our SEC filings. All forward looking statements are based on estimates projections and assumptions as of today and we assume no obligation to update them. After this call.

<unk> of our financial results will be presented on a non-GAAP basis.

Conciliation of GAAP to non-GAAP can be found in today's press release posted on our website and with that I'd like to turn the call over to Jim Jim.

Thank you Rhonda and good afternoon, everyone. Thank you for joining us today.

I'll start with a recap of our second quarter performance and provide some commentary on current and long term industry dynamics before turning the call over to Sherry for a detailed financial review.

Then we'll open up the call for questions.

During the second quarter of the semiconductor industry remains challenged in certain segments, while other areas remains strong.

Railing edge server and China ordering I've taken delivery of tools were bright spots. However.

However, D C and consumer end markets that rely on advanced memory and foundry logic spending.

Remained weak headwinds included elevated inventory levels across the supply chain macroeconomic and geopolitical instability, including interest rates, here's the recession inflation and export control.

All of which are likely to influence our industry for a few more quarters.

Product mix and lower utilization at some sites reduced revenue, where the overwriting factors that affected our second quarter results.

Uct's legacy products business performed as expected in this dynamic environment with some adjustments to orders, but no notable push outs or cancellations.

Although a small percentage of our total products revenue our non semi business saw some unexpected volatility in the second quarter.

Particularly at the process technology space, where we supply semi like parts did non semi businesses and display industrial and medical.

And lastly, our services business declined from the first quarter as some customers adjusted their schedules to realign with ongoing end market weakness.

As anticipated the cost reduction initiatives, we introduced earlier this year have begun to materialize in our financial results.

Inventory decreased and Opex trended down resulting in healthy cash flow.

Footprint optimization and site efficiencies to adapt to current demand while preparing for the ramp are on track, but are much larger in scale. So take time for profitability to be fully appreciated.

We will continue to reduce inventory and trim expenses throughout the third and fourth quarters and are being extremely prudent and strategic we're making investments to align with our long term capacity with our customers' roadmaps.

A highlight this quarter worth noting is that U T. T was awarded Intel's Distinguished supplier Award, which recognizes partners that are exempt.

By Intel standard of excellence.

To qualify for an Intel ethical award suppliers must not only exceed expectations, but meet aggressive performance goals.

Leaving this award was a true honor and I want to thank our team for their work World class commitment to continuous improvement, making UCT widely considered the best of the best.

In summary, before turning the call over to Sherry were aligned with our customers and industry sentiment that WMC is at the bottom of the trough and expect our revenue and profitability to bounce around these levels for the next few quarters.

Our view for a ramp in 'twenty 'twenty four remains intact. However, there are too many moving parts today to call the exact timing and shape of the recovery.

Overall based on industry estimates and confirmed by our internal marketing team. We are extremely optimistic about the long term growth trajectory of our industry and do see a clear path to a trillion dollar chip industry by 'twenty three.

I want to thank all of our employees for their relentless drive to succeed in this challenging environment.

I also want to thank our shareholders for their patience, while we adjust our business. During this phase of the cycle to ensure strong stronger growth and profitability. During the next upturn and with that I'll turn the call over to Sherry Sherry.

Thanks, Jim and good afternoon, everyone. Thanks for joining us in today's discussion I'll be referring to non-GAAP numbers only.

Jim noted Q2 remained a challenging period in the semi cycle as companies work to reduce to rebalance inventory levels on weekend demand, while navigating persistent macroeconomic and geopolitical headwinds.

Total revenue for the second quarter came in at $421 $5 million compared to $433 3 million in the prior quarter.

Products Division revenue was $362.5 million compared to $368 6 million last quarter.

And revenue from our services Division.

Well, it's $59 million compared to $64 7 million in Q1.

Total gross margin for the second quarter was 16, 7% compared to 17, 3% last quarter.

Products gross margin was 14, 5% compared with 14, 7% in the prior quarter.

In services was 33% compared to 31, 7% in Q1.

The reduction in margin is due to lower volumes driving decreased efficiencies.

As we continue to optimize our footprint and increase efficiencies, we expect to see incremental improvements in gross margin. However, as Jim noted these initiatives are complex and larger in scale. Therefore, it will take some time for the benefit to be fully realized.

Operating expense for the quarter was $49 4 million compared with $52 7 million in Q1 and decreased as a percentage of revenue to 11, 7% compared to 12, 2% in the prior quarter as some of our initial cost control initiatives began to materialize.

Total operating margin for the quarter was relatively flat from the prior quarter at five per cent compared to five 1% in the first quarter margin from our products Division was four 3% compared to four 1% in the prior quarter and services margin came in at nine 3% compared to $10 eight in the prior quarter.

Fluctuations in margin were mainly due to decreased efficiency on produce volume, partially offset by lower operating expenses.

Efforts are ongoing to align our cost structure with current demand levels.

Based on 45 million shares outstanding earnings per share for the quarter were 16 cents on net income of $7 $1 million.

17 cents on net income of $7 6 million in the prior quarter.

Our tax rate for the quarter was 16%, we expect our tax rate for 2023 to stay in the mid to high teens.

Turning to the balance sheet.

Yeah.

Our cash and cash equivalents were $328 million at the end of the second quarter compared to $322 1 million last quarter.

Cash from operations increased to $36 $4 million compared to 28 million in the prior quarter, driven primarily by the reduction of inventory and management of cash flows cash outflows.

As we navigate through the current cycle, we will continue to manage our working capital to ensure sustained financial stability.

During the quarter, we purchased 337000 shares at a cost of $9 $5 million.

For the third quarter, we project total revenue between 405 and $455 million, we expect EPS in the range of eight cents to 28 cents.

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.

Yeah, that's a good question.

Star then one on your telephone keypad.

Youre using a speakerphone please pick up your handset before pressing schemes.

Is that any time your question has been addressed.

Your question please dive in here.

At this time, we will pause momentarily to assemble like Oster.

Yeah.

Our first question comes from Krishna Shankar with T D calling for at home.

Yeah, Hi, Thanks for taking my question Jim. The first question I had is you know I understand he said.

Revenue profitability to bounce around these levels for the next few quarters. It kind of makes a lot of things I'm just trying to triangulate. Some of your customers has spoken about it do you think that inventory level. So how do you how do we like kind of handicap that given the fact that you know I do.

Inventory level, it's kind of like negative for you in the short term I had a couple of follow ups.

Okay, Yeah, Hi, Krish I'm.

Absolutely.

I think we've been pretty consistent the last few times, we've got on these calls.

There is a significant amount of inventory and also deferred revenue that is between us and our customers. So yeah. We are seeing is as we guided up a bit in the next quarter.

You know, we are seeing a little bit of improvement, but there is still a.

After the great supply chain and you know post Covid crisis, you know, we thought inventory levels that were really a kind of a level.

Levels that we haven't seen a long time. So that is that is the reason why we're.

You know we're kind of.

Being somewhat conservative in our approach and that it's going to take another few quarters.

Two to clear this out however, where I think we're optimistic that you know that things could get will probably get better before they get worse.

Got it got it and then I had one other question for you and then one for Sherry.

The second question for you. So you know I do I'm going to pass you kind of shifted some of the China semi cap companies.

And next well take over with.

Kind of curious.

I didn't see it in August .

But if your customer base.

Any color there would be helpful.

Paul appreciate it.

Yeah, we have been able to ship to them on more of the trailing edge investment that's going on in China. So we have seen some pretty.

Good movement. There you know it actually was relatively strong. So we were initially concerned that it was kind of inventory hoarding because they were afraid of a you know a new new restrictions, but I think we've now confirmed that they are actually just seeing more business at the trailing.

So so we've actually seen our business with a Mac and biotech continue to be strong.

Very helpful. Jim and then a final one for Shelly.

You know you did a really good job at managing the cost during this challenging time.

So that means that these levels, you mentioned, possibly but they should be around this level too.

How easy is that to scale up or scale down if things get worse or better forget onward.

Yeah, No I mean, we you know we have certain cost initiatives in place so for a scaled down where we're ready to go on that and we are continually looking at our cost structure scaling up is sometimes can be actually just as hard because trying to hire people quickly and making sure that we have the enough capacity etcetera in place.

To be able to manage customer.

Customer demand is quite key so we're looking at both really because both Jim and I feel that this could turn on very quickly when it does so and that's what our experience has been so we will we will continue to almost look at both scenarios to make sure that we we can we can react to either.

Got it thanks, a lot. Thank you very much thank you.

Our next question comes from Quinn Bolton.

Please go ahead.

Hey, Jim I guess I just wanted to follow up on Christmas.

Lamb last night talked about canceling P O a certain number of its component vendors and in the near term they were having to take some excess component inventory to cancel those orders, but it certainly made it sound like you'll be on the September quarter. They may be taking significantly lower deliveries from component vendors to try to work down the <unk>.

And I guess, one are you seeing that and two is that sort of incorporated in your outlook for sort of stable revenue through the you know certainly year end and maybe even into early next year.

So so one we have been seeing that actually for Q1 and Q2.

We have been dealing with that and.

You know that.

There there are a lot of puts and takes because you know what they have in inventory isn't always what they need for whatever is being ordered so you know obviously, they're still ordering things.

And that's why when I say you know.

Flattish for the rest of the year bouncing around these levels may be up a bit.

You know we've already taken that to your second question, we've already taken that into account.

But we do think you know there is opportunity for upside as these things start to clear out.

Got it thanks for that additional color and then I guess in terms of.

Your services business, you know revenue looks like it was weak just as utilization rates have been throttled back you know based on the latest information you have do you think those utilization rates are now at sort of a trough level and the services business may start to see a rebound in the second half of the year.

As utilization rates begin to recover or do you think we're going to stay at this lower utilization rate in there, they're forced or services revenue in the second half is probably going to be around that 59 million level in yet that you started Q2 for that for the rest of the year.

Yeah Quinn so.

I would say I would characterize it as.

We don't imagine them going any lower we've certainly seen weakness in Korea.

Which we hadn't seen until the second quarter Korea had remained strong in the first quarter.

We've seen a lot of delays.

No changes overs in North America.

And.

And if I were to characterize that.

Assuming we are assuming it doesn't move would definitely we can't see it moving down from this level, we're assuming it's going to be flat, maybe slightly up but we you know we think there might be some potential for it to move up a.

A little bit more by the end of the year.

Excellent and then Sherry that the gross margins at 16, seven seem to be a little bit lower than what we were thinking you know without it.

Meaning full change in in the revenue you know so so I guess you know any.

The thing in particular to call out was there a particular.

Particular mix shift Oh, it looks like both both product and service margins were where were lower this quarter I'm just wondering.

When do you think do you think margins kind of stay at these levels to the extent that that revenue is flattish is sort of a flattish gross margin the right way to be thinking about.

Our gross margin until revenue recovers.

Yeah, we I think the key thing that affected this quarter. It was really the services side as you mentioned earlier, obviously that has a.

Very nice margin profile. So as a result of that that are really.

Assisted with the margin coming down a little bit as well as our how much fluid solutions business was also lower than anticipated. So those you know feed into the overall margin on the product side the fluid solutions Slash harmless and then obviously services. So I think as we start to see those recover over the course of the year.

As Jim mentioned surrounding services, we should be able to see some of that margin come up as a result of that along with the fact that we have cost initiatives in place that where we're looking at as well to hopefully affect that depending upon how long. This cycle goes so that we can ensure that we are we manage our margin as we move forward.

Perfect. Thank you very much.

Thank you.

Our next question comes from Christian Schwab with Craig Hallum Capital Group. Please go ahead.

Thanks for taking my question I guess, one of the more optimistic side.

We come out of this.

Uh huh.

Large footprint.

Let you expand in Asia.

Sure.

Should we assume that you're out there aggressively looking.

So to capture market share.

The order too much we would take a pause and then all of a sudden as you talked about.

It turns out faster than people think and everyone's scrambling.

Correct.

So.

Should we assume on the back side of this.

Aggregate.

More market share.

Ed.

Sure.

Yeah Christian Yeah. So yeah, you followed us a long time, so we've we picked up market share in both the upside and the downside and I could say in almost all accounts, we're holding share or improving share even during this down cycle and I think a bit.

Part of that is many of the Oems are making a much stronger moved to South East Asia, where we've really set ourselves up really.

Really well so.

We're seeing a lot of new program wins that were you know and these things take you know two to three quarters for you know for a program went to just show up as revenue as you move these things over two to those sites. So we we are where we're doing really well in that stage, where a little bit.

You know, we're kind of heavier in etch.

Heavier in CMP and other areas.

You know, we're doing well with though which is doing really well as you know for Wi Fi, but we don't have the biggest footprint there yet so we're a little bit just think advantage right. Now of course, you know when you look at total Wf P. Because.

Segments, where we're stronger are down a little bit, but if you look at program and market share wins, we're actually doing doing very very well and I think one other point you know not to run on one other point to make is as part of the cost reductions that we're doing is we're consolidating and moving factories that are that we're kind of do.

To think that once this has been our playbook for many years. So we're moving factories into like one larger.

One larger.

Location, so that will actually end up with more capacity, but more efficiency by by moving these factories together.

And then and in Arizona as well as in Malaysia. So so we're kind of got a double playbook of like.

Oh getting more efficient in our factory.

At the same time, increasing our capacity for the.

The next big run up so so yes, I mean in short answer to your question is we're doing really really well in our accounts.

Great and then Jim you know.

Well he does he uttered in the chips out here in the United States and in some of your very large customers expanding manufacturing capacity here.

Do you think you'll get any.

Government funds to help you.

You know in an expanding and growing.

Facilities, where the customers want them.

Oh yeah.

Yeah, not in the near term the money.

Hasn't really been you know we have people working on this but the money has not been allocated towards the supply chain, yet in those investments and spend more R&D or large fabs.

So we have not been able to.

Any of that but.

I think downstream.

You know when Intel goes into Ohio, and we build a fab you know 25 or 26 two to service them.

For example, I think that will be where our opportunity is the right now the chips Act has not.

Benefiting our sub suppliers in any way.

But definitely something we are looking into it.

Great no other questions. Thanks, guys.

Yeah.

This concludes our question and answer session I would like to turn the conference back over to Mr. Shaw for any closing remarks.

So thank you everyone for attending today's conference call and we look forward to speaking to you again next quarter.

The conference is now concluded. Thank you for attending today's presentation, you may now be small.

Okay.