Q4 2023 Ultra Clean Holdings Inc Earnings Call

Okay.

Good day, ladies and gentlemen, and welcome to the Ultra clean technology Q4, and full year 2023 earnings call and webcast conference at this time all lines are in a listen only mode.

Following the presentation, we will conduct a question and answer session.

At any time during this call you had acquired immediate assistance. Please press star zero for Dol breaker.

This call is being recorded on Wednesday February for 31st 2024, I would now like to turn the conference over to run that Ben that though we used to 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 then we'll open up the call for questions today.

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.

Session of our financial results will be presented on a non-GAAP basis, a reconciliation of GAAP to non-GAAP can be found in today's press release posted on our website and with that I'd like to turn the call over to Jim Jim. Thank.

Thank you Rhonda and welcome everyone to our Q4 2023 earnings call and webcast.

I'll start by providing a brief overview of our Q4 results that Sheri will expand on in her commentary and also provide our thoughts on the current state of the industry and our plans to capitalize on the significant opportunity we see it over the long term.

Fourth quarter total revenue grew modestly as expected from the prior quarter.

<unk> ability to remain less than ideal with our products as customers continued to shift mix in location to help expedite the normalization of inventory.

Our global footprint and ability to quickly flex to meet demand with an advantage in the quarter.

Our services business stay relatively flat as customers maintain current output level.

For 2023, our revenue and earnings largely reflected the overall decline across the broader semiconductor market.

As we've done in previous downturns, we viewed last year as an opportunity to invest in several strategic actions that best position us to capitalize on growth opportunities that lie ahead.

Optimizing after operations and increasing capacity to support the next ramp where top priority for 2023.

In collaboration with our customers to align with their technology Roadmaps, we enhanced our global footprint and capability with new state of the art manufacturing facilities with added capacity optimize workflow.

<unk> automation and higher levels of vertical integration.

For example in Chandler, Arizona, we've moved six buildings into a single new facility in the Czech Republic.

Located three buildings into one.

These two new cutting edge scalable sites will meet the increasing demands of our growing customer base.

We also expanded our footprint in Malaysia to support future demand from the region.

This lower cost manufacturing center of excellence will have a positive impact on our overall profitability as volumes increase over time.

On the services side, we consolidated a modernized two sites into one in Phoenix and our new facility in Ireland, it's scaling production to meet the demands of our customers in northwest Europe.

With these value add enhancements now in place and more ongoing we have a global presence capacity and efficiency to support $1 billion in revenue and grow profitably on a much larger scale heading into the next ramp and beyond.

And last but not least we expanded our suite of offerings with the acquisition of HII innovations group.

Further expanding our reach into the global market.

<unk> now offers integrated vacuum systems and ancillary equipment solution.

Integrate the sub fab ecosystem in a way that is value add and scalable.

As the demand for next generation devices increases with the deployment of new technologies like.

AI and the Internet of things the need for advanced Fabs capable of producing higher density faster and more power efficient chips will increase.

Uct's broad capabilities in design and manufacturing will enable us to continue to develop solutions that simplify installation support and maintenance of these process tools critical to chip production.

With 2024, and it's early days current demand remains tepid as reflected in our Q1 guidance. However, our internal marketing research is aligned with broader industry sentiment and our customers that overall market dynamics are improving and should help drive a stronger exit to the year.

Looking to 2025 and beyond the business case supporting extensive investment grade WSB is very compelling, but global semiconductor sales widely predicted to reach a trillion dollars by the end of the decade.

Require nearly twice the current capital spend.

We are continuously innovating and introducing new solutions, expanding our market presence and building momentum at crucial technologies turning point.

Specially in the litho space, where we are making great strides with a key customer.

Some of these module types are valued at roughly five times higher than typical module and we are ramping our deliveries over the next several quarters. Our solutions are increasingly gaining attention and will be a significant growth driver in the months and years ahead as many of the market inflections. We are collaborating with our customers are still in the early stages of adoption.

In summary, UCT has emerged as a more valuable stronger company with greater profitability. After each downturn during the past five quarters, we have been busy setting the stage to further expand our leadership position with a broader suite of offerings as a manufacturing partner of choice for our growing customer base well into the future and with that I'll turn.

The call over to Sherry Sherry.

Thanks, Jim and good afternoon, everyone. Thanks for joining us today.

<unk> discussion I will be referring to non-GAAP numbers only.

As Jim noted demand for products improved moderately in the fourth quarter with a dynamic environment as customers adjusted their mix in location to help rebalance inventories our service business remained steady as customers maintain utilization levels.

Total revenue for the fourth quarter came in at $444 8 million compared to $435 million in the prior quarter.

Revenue from products increased to $389 7 million compared to $388 9 million last quarter.

<unk> revenue was $55 $1 million compared to $54 1 million in Q3.

For the full year total revenue was $1 7 million compared to $2 4 billion in 2022 reflective of the broader industry downturns.

Total gross margin for the fourth quarter increased to 16, 7% from 15, 5% last quarter.

Products gross margin was 14, 6% compared to 13, 8% in the prior quarter.

Services was 31, 7% compared to 27, 4% in Q3.

Margins can be influenced by fluctuations in volume mix and manufacturing region as well as material and transportation costs. So there will be various this quarter to quarter.

Total gross margin for 2023 was 16, 6% compared to 22% in the prior year.

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Operating expense for the quarter was $51 3 million compared to $48 6 million in Q3.

As a percentage of revenue operating expense was 11, 5% compared to 11, 2% in the prior quarter.

For the year operating expense as a percentage of revenue was 11, 6% compared to nine 3% in the prior year.

Total operating margin for the quarter improved to five 2% compared to four 4% in the third quarter.

Margin from our products Division was four 6% compared to four 5% in the prior quarter.

And services margin was nine 5% compared to three 7% in the prior quarter improve.

The improvement in services margin was due to increased freight and overhead efficiencies.

For the full year operating margin was four 9% compared to 11% in the prior year.

Lower overall revenue levels and decreased efficiencies typical during an industry trough.

Based on $44 9 million shares outstanding earnings per share for the quarter were <unk> 19 cents on net income of $8 $5 million.

<unk> on net income of $2 million in the prior quarter.

Current quarter earnings per share were above guidance from better factory efficiencies and discretionary spending management and favorable other income and expense due to foreign exchange benefits and government grants.

For the full year earnings per share were <unk> 56 on net income of $25 2 million compared to $3 98 on net income of $181 9 million in 2022.

Our tax rate for the quarter was 16, 4% compared to 37, 3% last quarter when our tax rate was chewed up for year to date expense.

For the full year, our tax rate was 18, 9% and we expect it to stay in the high teens for 2024.

Turning to the balance sheet, our cash and cash equivalents were $307 million compared to $342 million in Q3.

We used cash on hand to acquire H I S and make strategic capital investments to support our growth plan into the next ramp.

Cash flow from operations was $35 $3 million.

Compared to $36 2 million last quarter.

For the full year cash flow from operations was $135 9 million compared to $47 2 million in the prior year.

During the quarter, we repurchased 239000 shares at a total cost of $5 $7 million, bringing total repurchase shares in 2020 321.009 million shares at an aggregate cost of $29 4 million.

Leaving $108 million remaining on our three year repurchase program.

We are pleased with the execution of our plan to optimize our capital deployment strategy.

2023.

Fight a challenging environment Gen.

Generating nearly $136 million in cash flow from operations enabled us to invest for future growth.

Pay down $39 million in debt.

Execute on our share repurchase plan and complete the strategic acquisition of <unk> innovations group.

Turning to our guidance we project total revenue for the first quarter of 2024 between 430 and $408 million, we expect EPS in the range of <unk> to 'twenty three.

Reflecting higher expenses, usually seen in the first quarter of every year.

And with that I'd like to turn the call over to the operator for questions.

Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the number one on your Touchtone phone you.

You will hear a prompt that your hand, that's been raised.

Should you wish to decline from the polling process. Please press star followed by the number too.

If you are using a speaker phone please lift the handset before pressing any keys.

Your first question comes from the line of Krish Shankar from BD Cowen. Your line is now open.

Alright, Thanks for taking my question Jim.

A question for you I think in a couple of quarters ago, you said everybody levels, they're going to be bouncing off the.

We are playing and looks like that is coming through I'm, just kind of curious.

Let me, let me kind of complete the thought was spoken about a second half inflection you said more like exiting calendar 'twenty for Mds, and then actually I wanted to make sure that.

So do you think there's more inventory drawdown from your customers. So what you can see the benefits what ultimately.

Speaker Change: Yeah, Hi, Christian Thanks for the question.

Yes, I think there are several factors going on than we do.

Specs.

Some improvement in the second half on the on the chip side.

But very incremental I think the other factors were.

We're hoping for things to improve.

Not just the exit but starting in the second half is that the inventory.

Situation will be better.

As well as the demand is now coming from areas, where our footprint.

Is stronger so 2023, there was a lot of demand in the <unk>, which is mostly 200 millimeter, which is not an area of heavy contract manufacturing.

They're also very strong.

Litho, which although we have a growing footprint there it's still in the single digits.

Total total revenue.

As well as some other factors.

Kind of affecting where the investments are coming so we're still seeing.

Speaker Change: In this last quarter, we are still seeing.

The stability I would say so areas that we thought we would be shipping from some of those orders got pushed around in areas, where we didn't expect.

The orders, we got kind of drop in orders.

Speaker Change: Still a bit unstable, but the end result is the end result is we are incrementally seeing a little bit better results. So we are hopeful the effect will start to see it earlier in the second half as these factors come into play.

But I think the safest conservatives assumptions with that.

Chip demand won't really start taking off until near the end of the year.

Speaker Change: Got it got it and I think thats very helpful. It makes a lot of sense when quickie on the EV side, you kind of mentioned so my understanding is you guys have more of the high question part of the EV well, if there's no pressure I'm just kind of CUNY is.

It does.

Speaker Change: Fox with iOS and gaining share in that no question, but are you just.

Speaker Change: Mostly focus on high pressure <unk>.

Hello.

Speaker Change: Okay.

Yes, I think.

Yes, we are in the high pressure side.

Speaker Change: And especially the lot of the new products that they are rolling out and Thats, where were starting to see the volumes ramp we arent different smaller pockets.

I don't know if its low pressure or not but definitely on the cymer side that laser laser areas and some of the older tools. So we have.

It's scattered footprint throughout the ASML tools, but the majority of what we're working on.

Are the new tools.

And that's why we're seeing the large modules start to start to rollout an increasing in numbers.

Got it got it and then just a quick housekeeping question for Sheri.

I understand you said opex would be on the expense side the high end in the March quarter.

Thinking about gross margin in March relative to December.

Yeah, I would say, it's going to be fairly flat, obviously, it's really dependent upon where we ship out as things kind of shifted quite a bit during Q4 and I think it just depends on if anything shifts during Q1, but we still see it being.

The same zone as we saw in Q4 for gross margin.

Okay. Thanks Sherry. Thank you. Thank you.

Speaker Change: Thank you Chris.

Speaker Change: Your next question comes from the line of Christian Schwab from Craig Hallum Capital growth. Your line is now open.

Hey, guys, Hey, Jim on.

With revenue being down.

Christian David Schwab: 27% year over year.

Wip was obviously down.

Christian David Schwab: Much less than that year over year, so I understand the <unk> commentary, but our mature node commentary, but.

This inventory cleans up is there an opportunity for a material ladder step up through the second half.

It wasn't clear to me in the before question or do you just expect.

No.

Christian David Schwab: It is recovery from from where you are in Q1.

Yes.

I think a ladder step could happen, but I think our assumption is that it will be more of a gradual incremental improvement we do not have a lot of visibility in what our customers have an inventory and even their demand is shifting around as we saw in the last quarter.

We know we know the inventory levels are high.

Christian David Schwab: Don't know how much they still have a what we made in our competitors made so it's very difficult for us to see.

The inventory issue that we've had will be completely gone and there'll be a step function up.

Honestly, it's improving.

So we're just assuming kind of some incremental moves up and at some point the court will come off the bottle and then demand will more better reflect the wf fee numbers.

As you mentioned the inventory was a headwind to deferred revenue was a headwind the strong ASML and high caps and MVP with metal deposition was really strong for applied. So those are areas that are not very gas intensive.

And so so those were all headwinds we had in 2023.

Christian David Schwab: As well as dep, and etch and NAND affecting dep and etch quite a bit as well. So why do those headwinds will start to abate, but it's very difficult to predict the timing, but I think we're just assuming incremental improvement as we go along and at some point there will be a step up as things clear out, but it's very hard for us to predict that.

Okay and then.

On the back side of this you know when the inventory correction is over in <unk>.

And you know 25 and beyond would you expect for you guys too.

Outgrow W. B like you did in the previous ups.

Up cycle or do you think that previous upcycle grill.

Growth above WMC.

Some cases double digits was just an inventory built.

No.

In an upturn the inventory disappears pretty quickly as well.

Christian David Schwab: So the inventory buildup only happens when the market is suddenly.

Just shuts down like it did in November of 2022, that's where the inventory piles up.

Everything is a float so yes, we have a lot of factors we've been picking up share at multiple customers. We're doing we're doing very well, especially with these new modules for litho that are starting to ship in larger quantities.

Malaysia factory.

Christian David Schwab: We're putting some new wins into that factory.

Christian David Schwab: So we're still we're still growing share and and I expect we will do what we've done in the last since.

Christian David Schwab: I've been here the last three upturns I will outgrow again.

Christian David Schwab: <unk>.

Fantastic no other questions. Thank you.

Yeah.

Speaker Change: Once again as a reminder, if you wish to ask a question. Please press star followed by the number one.

Yeah.

Speaker Change: There are no further questions at this time I will now hand, the call over to Jim Scholl Hammer. Please continue.

Thank you all for attending this conference call and we look forward to speaking to you again in April.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

Speaker Change: Yes.

Okay.

Speaker Change: Yes.

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Yes.

Sure.

Speaker Change: Okay.