ACM Research, Inc.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the ACM Research Second Quarter 2022 Earnings Conference Call. Currently, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, we are recording today's call. If you have any objections, you may disconnect at this time. Now I will turn the call over to Gary Dvorak, Managing Director of the Blue Shirt Group. Mr. Dvorak, you may begin.

Thanks, Carmen, and good morning, everyone. Thank you for joining us on today's call to discuss second quarter 2022 results. We released results before the U.S. market opened today. The release is available on our website as well as through Newswire Services. There's also a supplemental slide deck posted to the investor portion of our website that we'll reference during our prepared remarks. On the call with me today are our CEO, Dr. David Long, our CFO, Mark McKechnie, and Lisa Fong, the CFO of our operating subsidiary, ACM Shanghai. Before we continue, please turn to slide two. Let me remind you that remarks made during this call may include predictions, estimates, or other information that might be considered forward-looking. These forward-looking statements represent ACM's current judgment for the future. However, they are subject to risks and uncertainties that could cause actual results to differ materially. Those risks are described under risk factors and elsewhere in ACM's filings with the Securities and Exchange Commission. Please do not place undue reliance on these forward-looking statements, which reflect ACM's opinions only as of the date of this call. ACM is not obliged to update you on any revisions to these forward-looking statements. Certain of the financial results that we provide in this call will be on a non-GAAP basis, which excludes stock-based compensation and an unrealized gain or loss in trading securities. For our GAAP results and reconciliations between GAAP and non-GAAP amounts, you should refer to our earnings release, which is posted on the IR section of our website. With that, let me now turn the call over to David Wong, who will begin with slide three. David?

Thanks, Gary. Good afternoon, everyone. and work on the ACM research second quarter 2022 earning conference call. Please turn to slide three. Our second quarter results represent a solid recovery following the Shanghai COVID restriction this spring. We deliver strong revenue and profitability as our facility returned to normal operations. As we had expected on the Q1 call, the restriction turned out to be temporary. The China Star facility was reopened on the closed loop production process in later April. As of July 1st, operations in Shanghai were largely back to normal. I want to sincerely thank our employees, business partners, and the customers for their dedication as we navigated the COVID pandemic. Let me share some financial highlights for the quarter. Revenue of 104 million was up 94%. Revenue include the shipment of tools in the second quarter that could not be delivered in the first quarter due to the later March restriction in Shanghai. A strong product cycle from ECT and incremental business from new customers also contribute to their growth. Shipments were $112 million compared to $82 million last year. Gross margin was 42.4% within our normal range of 40 to 45%. Operating margin was 21.1%. We ended the quarter with $469 million of cash, equivalent end-time deposit. For the first half of the year, revenue grew by 50%. cleaning tools grow 27%, while ECP tools grow 490%, and contributed 20% of the sales. Demand from our top China customer remains strong. We believe many of our customers are in the early to middle stage of multi-year expansion plans, and we see good growth of opportunity for the next several years. We had a growth share of China market with our Canadian tools based on our technology, good execution, and new products. We had incremental revenue contributions for ECP product cycle for both front end and back end, and with multiple customers. We are gaining market share in China with both ECP and advanced packaging products. Over time, we target 50% of market share in plating in China and 25% share globally. We target a similar trajectory for our furnace product cycle in the coming years, and we are building a longer-term opportunity with the introduction of two new product categories which are on track for later this year. I will now highlight a few recent announcements. On April 21st, we announced that our 18-chamber 300mm Ultra C6 single wafer tool was qualified for mass production by a mainstream memory chip manufacturer in China. This tool provides 30% more throughput than our 12-chamber tool, but with a similar full printer and is an important tool to support higher volume production line and one of our key memory customers. We expect the 18-chamber cleaning platform to play an important role with this customer and others for 3D net and DREP. On July 12, we introduced a new post-CMP cleaning tool for silicon and silicon carbide wafer substrate manufacturing. This tool expands our cleaning product portfolio by serving as a cleaning step following chemical mechanical polishing CMP is used in manufacturing high-quality substrates. I will now provide some highlights of major customer initiatives. I will start with the U.S. We recently delivered two Ultra-C SAPS-5 12-chamber continuing tools to the fab of a major U.S. semiconductor manufacturer. This is a great achievement for ACM, a testament to our technology and our North American sales and marketing operations. We deliver the first tool in June, which our customer is evaluating based on its unique technology feature. We also deliver a second SAPS5 tool in the middle of July. Our target is to qualify both tools and put them into production by the end of the year. We have staffed a full-size service team in the US and we now have a visiting team of engineering from Shanghai to support installation and evaluation. We believe a success here could lead to follow-up orders with this customer at several sites and perhaps lead to interest from other major customers in US and Europe. Next, we remain engaged at China-based facility of three larger international semiconductor manufacturers. The first is a global IDM with a China-based packaging facility. We delivered the first ultra-CPR wet stripping system in Q4 2021, followed by a second tour in Q1, and we received additional order for delivery later this year. We're hopeful that a success with our first product could lead to a broader adoption other WLP product at this important customer the second is a regional Asia based semiconductor player with a China based fab we deliver ultra ECP map development the tool in q1 and the customer has began his evaluation with our service and process team and the third is a major global semiconductor manufacturer with China fab we deliver ultra and we are moving forward with evaluation. Looking into second half of the year, demand for our tool is strong and we have good visibility through year end and we are starting to receive orders for the first half of next year. We expect solid growth in 2022 and beyond from our core cleaning products. The ramp of our ECB tools, and increased shipment of our furnace products. We are committed to gaining additional share in the 8 billion market addressed by our current products. We have two important new product extensions. In cleaning, we have a supercritical CO2 dry tool, and in furnace, we have ARD. Both are on track to be delivered in the second half of this year. Furthermore, we are on track to double our addressable market opportunity with upcoming introduction of two new product category also in the second half of this year. Now let's discuss our capacity expansion plans. We continue to add capacity to our transit facility. We moved our past inventory to our third building which freed up additional 5,000 square meter as our second building for final assembly. We remain committed to grow our production capacity to 625 million this year, and our Lingdong construction project is on track. We plan to complete the first production building in the beginning of 2023, with initial production to start by middle year. We are also planning R&D center in Wuxi and Beijing to support several key customers. and we are considering a more meaningful investment with a potential production facility in South Korea. We currently have about 100 R&D engineers and supporting staff together with a production facility. A larger presence in South Korea with a meaningful production capacity will establish a local full printer near two major players and provide our global customer with a secondary production center to ensure continuity. Before I provide outlook, I'm pleased with the progress with our new auditor. On May 19, we appointed PCLB compliant auditor Amanino as our independent public accounting firm for our first year 2022 audit. On June 30, this was ratified by our shareholders. Following our 2022 annual auditing and finding of 10K, we expect to be removed from the list published by the SEC pursuant to the U.S. holding foreign company accountable actor. I will now provide our outlook. We have a strong order through year end. Due to a tight supply chain environment, we are keeping our outlook unchanged in the range of 365 to 405 million. The range of outlook considered among other factors, continued expansion of production and shipping operation in Shanghai, the absence of unexpected interruption of a supply chain, and continued demand by our customers. Now, let me turn the call over to Mark, who will review detail on first quarter results. Second quarter results. Mark, please.

Thank you, David. Good day, everyone. Please turn to slide five. Unless I note otherwise, I will refer to non-GAAP financial measures, which exclude stock-based compensation and unrealized loss on trading securities. Reconciliation of these non-GAAP measures to comparable GAAP measures is included in our earnings release. Before I provide the normal review, I want to address the impact of the COVID restrictions in Shanghai on our business. As a result of the restrictions for the first half of the year, we experienced a negative impact on revenue and shipments, And overall results were below the original plan established prior to the restrictions. In addition, 13 tools that could not be shipped to customers in the first quarter were subsequently shipped in the second quarter. To quantify, these 13 tools amounted to $24 million in shipments and $12.9 million in revenue. Qualitatively, we had higher operational costs and some inefficiencies across different groups during the restrictions. The restrictions did also impact our operating cash flow, primarily with the relatively high percentage of shipments in the latter half of the quarter, our accounts receivables grew. With the easing of restrictions, we are now focused on delivering tools to meet the demands of our customers. I'll now provide financial highlights for the second quarter. Revenue for the second quarter of 2022 was 104.4 million, up 93.8% from the second quarter of 2021. Total shipments were $112 million versus $82 million in the year-ago period. Revenue for single wafer cleaning tools, which includes SAPS, Tebow, Tahoe, and semi-critical cleaning, was $72.6 million, up 59.7%. Cleaning mix of the percentage of total revenue was 69.5% versus 84.4% last year. Revenue for ECP, furnace, and other technologies was $20.5 million, or 19.6% of sales, compared to no contribution in the year-ago quarter. Revenue for advanced packaging, including ECP, services and spares was 11.3 million, up 34.6%, or 10.8% of sales versus the mix of 15.6% last year. Gross margin was 42.4%, up from 40.5% in the prior year, which is in line with our normal expected range of 40 to 45%. We expect gross margin to continue to vary on a quarterly basis due to a variety of factors, including product mix and manufacturing utilization. Operating expenses were $22.3 million versus $16.1 million in the second quarter of 2021. The majority of the increase was from R&D personnel for new product development and other factors and increased SG&A costs to scale the business in China and new global markets. Operating income was 22.0 million versus operating income of 5.7 million in the year-ago period. The large increase in operating income was due primarily to leverage in our top line. Operating margin was 21.1% compared to 10.5%. Unrealized loss on trading securities was 0.4 million in the second quarter of 2022 versus an unrealized gain of 3.8 million in the year-ago quarter. This non-cash item is excluded from our non-GAAP results. Income tax expense was $7.7 million. As described in our earnings release, a change in the U.S. Internal Revenue Code Section 174 that went into effect on January 1, 2022, has caused a meaningful potential increase in ACM's effective tax rate for the full year. We're still evaluating the impact of the new tax provision for 2022, We note that Congress is considering legislation to defer the capitalization requirement to later years. Net income attributable to ACM research was $14.6 million versus net income of $4.1 million in the year-ago period. Net income per diluted share was $0.22 compared to net income per diluted share of $0.06 in Q2 of 2021. I will now review selected balance sheet items. Cash and cash equivalents, restricted cash, and time to was $468.9 million at the end of the second quarter versus $533.1 million at the end of the first quarter. Total inventory was $288.1 million at quarter end, up from $271.5 million at the end of the last quarter. This included finished goods inventory of $103.4 million, work in process of $45.7 million, and raw materials of $139 million. Net cash used in operations was $33.6 million, with net income offset by an increase in accounts receivable and inventory. As mentioned previously, our receivables were higher due to the relatively higher percentage of shipments made in the latter half of the quarter as a result of the Shanghai COVID restrictions. In closing, demand for our tools remained solid, and our operations have returned to a more normal level. We will continue our investments in new products, new customers, and capacity as we continue forward on our mission to become a major player in the global semiconductor industry. Now let's open the call for any questions that you may have. Operator, please go ahead.

Thank you. And as a reminder, to ask a question, simply press star 11 on your telephone keypad. One moment while we compile the Q&A roster. Our first question comes from Quinn Bolton with Needham and Company. Please go ahead.

Hey, guys. Congratulations on the nice results and the strong recovery in the June quarter. David or Mark, just wanted to ask my first question around the 2022 guidance. I know you're keeping it unchanged at 365 to 405, but it sounded like you said that Part of the reason you're keeping it unchanged was due to supply chain constraints. And so I guess my question is, do you have the demand that could actually lead to upside, and you're not changing it because of the supply chain? Or did I mishear your comment?

OK, Cleen? Hello? Okay, as we said that, you know, everybody where that is the supply chain still continue, I should say, still very tidy. That's the reason even we have very strong demand and IPO from customer because uncertainty of this supply chain. That's why we're still keeping 365 and 405 of our projection for this year.

But it sounds like, David, you might have actual demand that would allow you to exceed that level, but you're keeping the annual target mostly because of concerns around the supply chain.

Well, as I said, if supply chain, you know, it's really getting better, or if we have a long-term item can be delivered as we expected and probably can reach a high site of our you know, projection, right? And so it's really this moment we still have some surprising, right? Sometimes they say they can deliver next month, but when the time coming, they say delay. So there's a certain part holding us, you know, put this way. That's why we're still keeping this number no change.

Got it. Understood. David, second question for me. You've got a number of new platforms coming out in the second half. You've announced two of those, which are the supercritical dry and the ALD furnace tool and then the complete new platforms. Can you talk to us, you know, as you introduce those tools, when do you think you'd actually be able to start to rev rec those tools? Could the supercritical dry and ALD furnace rev rec in 2023? Or do you think the evaluations for those tools as well as the new platforms that you haven't announced yet. Do you think that RevRec on those platforms really are going to start to kick in for you and more in 2024? Just trying to think about the timing of these additional growth drivers. Thank you.

Yeah, great. Actually, those two, as I mentioned, will come on second half this year. So normally, like Furnace ARD, also we have the supercritical CO2 drive, including also two new category products. And when we put in the customer side, normally take about a year, a year and a half, right, for their fully qualification. So I should say we're probably expecting real revenue come out in 2024. Understood.

Thank you, David. Thank you, Mark.

Thank you.

One moment for our next question, please. Our next question comes from Suji De Silva with Ross Capital. Please go ahead.

Hi, David. Hi, Mark. Congratulations on the execution in a challenging environment. Yeah, so just to kind of maybe elaborate on Quinn's question a little differently, I want to ask about the visibility in the sense that you had backlog you were catching up from in the first quarter that showed up in the second quarter. Is any of that still remain for the third quarter, or have you kind of worked through the tools you couldn't ship during the COVID lockdowns?

Okay, Mark, you want to cover that?

Yeah, yeah, sure do. Hey, Suji. So there were two factors, right, for the first half of the year. I mean, one is, you know, we had so and we did deliver all the tools we couldn't deliver in Q1, we delivered in Q2. But certainly in the first half of the year, our overall production output was impacted. know so so no we have not caught up with the with all all the demand you know for the the tools that we have from our customers you know the lead times for our deliveries are um uh are longer than normal um and so um really if you look at the back half of a year it's going to be about our execution on the supply chain side and and our suppliers um yeah okay thanks mark that helps me in a picture there and then david perhaps um

The foundries in China, SMIC and some others, are starting to be able to deliver leading edge nodes, maybe with or without EUV, and they have obviously a mix of trailing and leading edge they're trying to grow into. Is there an uplift potential for your addressable market as the foundries in China try to target the leading edges more, or is that kind of nascent and maybe less of an opportunity versus what you're shipping today?

Yeah, and actually... You're right, I'm leading as a product, right? And at this moment, I think we're really focused on the 28.9 and above, right? A lot of products were sold right now in the 45 and 28.9. And, you know, put this way, as a larger market exists in China here, you can still use the, you know, 45.9 and 28.9 technology to make the, you know, the product. So we see that the potential is still tremendous right it's including cover our Canadian product for example we're we're announced of auto bench that's mostly using for the 45 not above and obviously 20 the not knowing a lot of our single wave equity right so I still see the potential go in there and you know if there are products you can be you know keep going as this you know fat build up and for those 28 amount and above

Okay, great. Maybe if I could take one last quick question. On your U.S.-based SEMICAP equipment partner, any update there on the, I guess, the development effort you were working with? Thanks.

Yeah. As we said, we have two tools that have been delivered, right, to one of the major U.S. customers, and we're re-expecting those two tools will be qualified probably by the end of this year, which also we're needing additional PO, also additional other kind of product, their interest. And meanwhile, we're also working closely with other customers in the U.S. and also in Europe. I think our goal is really a global market and there is our target. So with our differential product, in the cleaning, in the copper plating, and also in the future furnishings. But especially ARD, we're developing right now. So we see still a lot of potential market, you know, get artificial product and to be, you know, penetrate into the global market.

Okay. Thanks, David. Thanks, Mark. Congrats again. Thanks, Gigi.

One moment for our next question, please. Our next question comes from Donnie Chang with Nomura. Please go ahead.

Hi, David and Mark. Thank you for taking my question. Can you hear me?

Yes.

Congrats on the strong results. I think the first question is still regarding the second quarter result. I think previously our impression is like the second quarter sales may be less than 100 million US dollar or not as high as today. Could you elaborate more on if it was mainly due to just, you know, the tools shipment being postponed from first quarter to second quarter and we probably miscalculated a couple of tools in the second quarter or it's because of like some customers will want to pull in First in the second quarter just want to have an idea. What's the mismatch? In the second quarter sales result in the previous impression.

Thank you And mark you let me cover or yes, I can cover that David yeah, thanks Johnny for this for the question, so Really the you know the upside in Q2 You know, I'd characterize that as just good execution by our factory. It really, you know, as we discussed earlier, it's, you know, the customer's demand for our tools was pretty high. So we quantified how much, you know, put in a move that we couldn't shift from Q1 into Q2. But we had pretty good output. And also on the customer acceptance side, you know, the combination of that, you know, that drove the upside for Q2.

Understood. So it sounds like it's mainly due to demand driven rather than just rather than like a pull-in or... Yeah, Donnie, it really was the demand was there and it's there for the back half of the year.

So to be clear, it was really the execution of our factory and the blockchain.

Yeah, let me add, Donnie, your comment. Actually, we're not pulling in, we're pulling off. We're still not really meeting our demand in Q2 from our customers. Some of these products have really deleted Q3. That's the status. Because we still lost almost April, and even back to the 2.19 production in May, there's a lot of restrictions to happen for their logistic delivery and also their clearance of the customer of the imported parts. So anyway, that's the real still impact in our Q2 revenue and shipment.

Understood. And can I have a follow-up on the four-year guidance again? So it looks like we are facing some supply chain constraint or supply chain uncertainties. Does it mainly refer to our component supply or the customer's capacity expansion uncertainties? Just want to have a more clear view on what exactly mean the supply chain uncertainties to have some constraint to our four-year guidance.

Yeah, well, actually, our customer demands, they're very strong, right? And we can see that RPO Fade up, you know this year and some people even go to the Q1 Q2 next year Really this moment is I think their factor real limit us is a You know secure some, you know, some shorting or long leading paths Of course, we're renting our production and we still need to training our staffing and manufacture people Increase our efficiency and then deliver tool, right? So that's a major constraint and for our revenue I call it realization.

Could you let us know what kind of components we are facing maybe have much longer lead time? Could you give us some examples?

Well, I don't really touch that detail, right? I have a vendor, right? Supply, if I mention what's the product, they may be not happy. Anyway, not a lot, you know, a few of them. And so we're still lacking, you know, I call their secure or their fully production capacity either, right? I think they also, you know, supply other customers too. So it's really shortage. So we're still working very close with them. And also, we're also working with second source. Even at some time, we have to change our design and, you know, change the components And that's the strategy we're taking right now.

Understood. And my second question is regarding to our progress with the customer. So it looks like we have quite good progress in different type of equipment. But If we want to focus on the priority of these projects or these customers, could you maybe give us a more clear view on which new equipment or which customers that we are more confident in winning the orders or to see a more meaningful sales contribution in the near term based on the prepared remarks you mentioned about all these projects? Thank you.

yeah okay well obviously you can see we have our first tier customer right obviously you know this moment uh 1tc and uh smic and 6mt and also have another second tier jumping big one is right igpt customer in china um and also have a a bunch of a second tier customer right in there that's probably It's also, I can see they're growing and they're building their pilot line and also their pilot in the production too. So it's a lot of, I call their demand there, but as I mentioned that at the top of the five customers taking roughly probably 65% of our total revenue.

Okay, great. But just, you know, I just want to maybe to see if you could prioritize all the new projects you've just mentioned in your prepared remarks. You know, there are lots of names there, right? Like IDM companies, Asia-based customers, et cetera. So just a little bit distraction. Just want to see if you could kindly prioritize the importance of those projects or where exactly maybe by the sales contribution timeframe, you know, ranked by the timeframe, if you could.

Yeah, as I mentioned, that top customer, you know, take care, I just mentioned already, right? But this moment is too early for us to tell you who is number one, number two, because this is the only Q2 timeline. I will say by the end of the year, we're going to publish, you know, who will be the number one, number two, right? But probably, you know, you can be ranking by the five top, I already mentioned to you, right? And that's either SMIC, WMTC, HWH, and also 6MD, and the SLAT. That's a big top. Maybe top five, top six may change depending on the end of the year. So we have to give you the real number by probably end of this year, which is the Q1 and the Q4 earning connections.

Okay, great. Thank you, David. Thank you, Mark. Thank you. Thanks, Diane.

One moment for our next question, please. Our next question is from Edison Lee with Jefferies.

Hi, thank you. Hey, David and Mark, congrats on the great results. I have two questions. Number one is more about demand. particularly in light of the recent talk by the U.S. government to step up their export restrictions of SPE to China. What do you think is the impact if that step up is going to materialize, particularly on, for example, DUV, which could impact not just 40 nanometer or below, but potentially 28, 40, 55? So that's my first question.

Okay, well, it's a I should say, just by public information, we heard that it's 40 nano and below, right? And I didn't see anybody talking about 28 nano at this moment, right? So you're looking at 28 nano, and for those, I call them, they're not using any UV, they're not using any advanced tool there. So I think 20 nano is still viable technology. and for their, a lot of application, right? Also, if we pack together with advanced packaging together, that's a lot of product can make. So that's why I see a lot of fab still built in China. And most of them is a 28 and also 45 above. And also that's our major revenue come from this moment. Of course, we are also penetrate the market outside of China. And with that in mind, so we want our product, either cleaning, carpet plating, and also their furnace product, we're getting the more advanced application in the market outside China.

But as far as you know, what do you think the Chinese customers, your Chinese customers have started doing in response to this risk of more difficulty in buying SPE from the U.S.? Have you seen any change in your customer strategy? Are they accelerating procurement or expanding faster? What have you seen from your customers?

Well, you know, this is daily changing information. I really cannot comment on my customer right now. Maybe too early to say anything right now, right? So, yeah, it's probably I have a real need for information to comment on my customer right now.

Okay, no problem. My second question is about rising cost of materials and components, because obviously given logistics issues, inflation, we think that a lot of components and materials prices have been going up, and your gross margin in the second quarter actually is higher than the first quarter. So we wonder if you have been able to pass on some of these material cost increases to your customers, or how does that work if the material and component costs suddenly shut up?

Sorry, my sound here is not clear. Can you repeat the question?

Yeah, it's about material cost increases and component cost increases. Because we think that because of inflationary pressure and also because of logistical challenges, I think component costs are going up. So we wonder whether you can pass on some of those cost increases to your customers and how does the pricing work?

Great. Okay, so we do see some parts increase price, right? Because our suppliers say components, also their raw materials start changing. We do not, I should say, increase our pricing for the sale yet, okay? But for a certain portion of their product, if it's really increased a lot, we're talking to the customer right now, right? Because the component increase pricing. At this moment, I should say, our major components' pricing is still not changing. You know, we imported some parts from Japan, you know, depreciation with Japanese yen does not include too much pricing of their parts. But we do see some parts from Europe and from the U.S. getting increased, right, because of their strong dollar. Anyway, so we see minor, I mean, there's still minor impact to us. it's not a real much significant to our cost.

Yeah.

Hey, David, if you don't mind, I'd add something here. Edison, David made a good point. You know, the remnant B weakened about 5% during Q2. And so, you know, a lot of our tools are priced in dollars, so you don't see a big impact on revenue. And again, On COGS, the supply is, you know, like as David noted, some of it's in yen, some of it comes from remnant B, and then we get, you know, the Western current, the, you know, Europe and U.S. So there is an impact. But overall, you know, you'd also, the weaker remnant B does help out on our operating expense, right? And so, you know, that's certainly contributed a bit. And, you know, big picture, our Shanghai operation looks cheaper in U.S. dollars, right, than it would if, you know, if the expense was in dollars.

In that case, can I follow up by asking what percentage of your revenue, for example, in 2Q, take 2Q as an example, is dollar-based?

Yeah, it's the substantial majority. I don't think we'd break out the exact amount, but David, yeah, I'd say the substantial majority, but we're not going to give a percentage.

All right. Okay. So basically all your Chinese customers or the majority of your Chinese customers are basically buying things denominated in US dollars from you guys.

Yeah, that's correct.

Okay. Okay, that's great. Yeah, thanks a lot. Okay, yeah, that's it for me.

Thank you. One moment for our next question, please. Comes from Shaolin Seng with Credit Suisse. Please go ahead.

Thank you. This is Shaolin from Credit Suisse. I have one. This is a quick follow-up question to the question that Tony asked. I'm curious, David, that in the case that if SEA has to change some equipment design, partial design or the component, does it take more time for the customers to qualify than the usual case?

Hey, David, are you there?

I think we might have lost David.

Oh, okay.

I see David there.

He's unmuted. Please unmute.

Carly, give me one second.

I'll try to call David on the WeChat just to see if he's... Is it better now?

Charlie, give me one second.

I'll try to call David on the WeChat just to see if he's... Is it better now?

It's better, David, yeah.

Okay. Can you repeat her question?

Go ahead, Charlie. Can you repeat your question? Yeah.

Yes, because earlier, I think when you answered someone's question, you mentioned that in some cases that the company may change a little bit of the equipment design or some components inside because of the component shortage. My question is, in this case, would the customer need to take more time to re-qualify your tools with the new design or component inside?

Can you repeat your question?

Yes, because earlier I think when you answered Donnie or someone's question, you mentioned that in some cases that the company may change a little bit of the equipment design or some components inside because of the component shortage. My question is, in this case, would the customer need to take more time to re-qualify your tools with the new design or component inside?

Yeah, good question. Actually, it depends on the components, what you're changing. If it's a very sensitive component, you have to re-qualify. But, for example, some flowmeters, you've got different vendors, different manufacturers. If the boat is a well-known manufacturer, you can change the flowmeter to another kind of flowmeter. It's not necessary you're changing everyone. However, before you change it, you have to really talk to the customer. And also, customer has also their experience about the components or the parts we're going to change. So when we reach an agreement, then we're going to change it. That's the normal process we're doing.

So actually, before we change, we need to get their kind of agreement.

Yes. We have to tell the customer, right? We tell them, hey, if this component you wanted, it'll take a more long time. And then if we give this component, we give you a spec, all the detail, I call it functionality, all the description. And when we got permission from the customer, then you can change it. Of course, we do some internal tasks first, too.

Got it. Thank you, Debbie. And my next question is, I'm quite curious that for the second quarter finished goods, about how much for that is clean furnace versus ECP IP?

You mean the components in the clean or ECP?

For the inventory finished goods? So for those two customers already, but we have a good revenue. I'm just curious about how much is for clean furnace ECP and advanced packaging.

I think most of our inventory or finished goods is still most, you know, Canadian tool, right? Almost close to the percentage of revenue wise, you know, probably, you know, close to 70% is Canadian product and also still 20%, you know, our ECP. Of course, they have 10% of packaging, roughly like this. Of course, we have some other new product, which is furnace, right? We're not calculating the revenue yet. So some portion were also into their finished goods inventory. Okay, yeah.

And Debbie, yeah, my next question is on the furnace side because that's something we've been quite looking forward to since last year, early this year. So first, would you mind sharing with us how many furnace and copper plating tools were shipped in the second quarter? And first, second half of this year, about how many furnace tools would you expect to book in our revenue?

Oh man, I probably cannot give that detailed number right now. But I'll tell you what, last year, 20 pleading to ship, right? This year, I think we are project total anywhere between 30, around 30 number range. Total, this year.

And by now, I know there's the COVID lockdown impact in China, but I'm just curious that by now, because it's kind of early August already, do you feel the furnace progress with multiple customers are kind of on schedule, within expectation, or do you feel there's kind of a little bit of a delay?

Hey, Mark, can you answer?

I'm sorry. Yeah, Caroline, if I understood your question, we answered that on a couple of the other previous questions.

The demand is still, there's some catch-up for us, right? There's more demand that customers, so really we need to catch up on them. relative to the customer demand. We certainly didn't fully catch up in Q2, and so we've got more work to do.

Oh, yes, Mark, I understand that, but I'm just curious on the furnace side.

Oh, on the furnace side. Please go ahead and ask your question again, Chaleon, to make sure we understand.

So I'm just asking about furnace. So for the furnace qualification, testing, acceptance, whatever, with our memory or logic or function customers. So I'm just curious about furnace. Do you think so far everything is on schedule, or do you feel there's a little bit of a delay with one or more customers?

I see. David, did you get the question? She's just asking if... Oh, yeah.

I think we're voice here very weak. I don't know. Can you repeat his question?

Yeah, I'll repeat if you can hear it. Can you hear me, David?

I can hear you very well.

Okay.

So, yeah, what she asked, she asked if the restriction caused any delays on the qualification of our furnace tool.

You mean the restriction for the components?

No, no. The COVID-related Shanghai restrictions.

Actually, not really much because at this moment, our furnace and most portion was made in Korea and some portion made in China. And also volume not as big as Canadian tool, right? So it's some impact, but not really much.

Maybe, David, I think really she was more asking about just the evaluation, our ability to have our services team and our customers at our customers to help them with the evaluation of the furnace.

So you're saying how we evaluate the tool?

Yeah, as I understand, she wanted to know if the restrictions during Shanghai interrupted our ability or our customer's ability to evaluate. Yeah, okay, got it.

You have your engineer, or that is their, you know, to their, I call it their comfort side, right? So they're not familiar in the last few years, and not familiar online as a customer. And also there's some components and a shift from time to time. So that's something that you guys should look at.

David, we lost your voice a little bit there. Sorry about that. Maybe, Dave, could you answer again?

Okay, now it's better.

That's better.

Yeah, now clear.

Do we continue?

i think that's it but but david maybe just answer her question um one more time because your earlier answer didn't come through clearly okay i said uh during the kobe 19 restriction period and our process the end of 17 year cannot free travel right from shanghai and also some components we're going to ship from shanghai that's why we'll impact some of our tool our furnace evaluation in husband's life got it great okay yeah that's clear

Operator, it looks like there's no more questions. Do you want to poll one more time?

Certainly. And ladies and gentlemen, as a reminder, to get in the queue, simply press star 1-1. We have one moment. We have people in the queue. One moment for our next question. We have a question from the line of Charlie Chan with Morgan Stanley. Your line is open.

Hi, David. Hey, Mark. Hey, Charlie. And hey, congrats for the strong recovery, not just the revenue, but also the stock price. So my question is about your view about the future China CapEx sustainability. I know you have a very high backlog to digest, but some, you know, memory fab or foundry fab start to cut their capex recently, right? So do you expect your new booking to slow down in the coming quarters? And what would that mean for your maybe coming year growth? That's the first question.

Okay, actually, we didn't see any impact this year, right? As I said, even some POs seeming for the Q1, Q2 next year. And even with that, we're still talking to their key customer in China, and even the next year's PO. So as I said, the key customer, our customer in China, they're seeing a multi-year expansion. Probably they're another, I should say, They're in the middle, right? They cannot stop this way. Of course, they'll have the timing, their technology, make sure their yield and their technology is advanced to the certain point and expanding faster. But that expansion trend actually is still not changing. So we have to say, the obvious cycle is coming, right? You can talk about cycle probably next year or start to, decline and but I should say the property cycle in China will be delayed than the water cycle. So I would say a year or two, I feel still pretty comfortable, even three years from now, right?

Okay, since David, I kind of agree, because it's a local sufficiency driven, right? But one said, you know, capacity expansion plan gets completed, I think, you know, the cycle impact will still be there. But I agree with you, it would be one or two years later. And my next question is maybe to Mark. It should be simpler. How soon can you be removed from the provision list from U.S.

SEC?

I know you have changed the accountants, but just want to make sure has it to be the next 10K, 20K, or, you know, from the quarterly reporting, you can be removed from the provision list?

Yeah. No, thanks for asking. So, as you know, we were put on the list, the conclusive list, actually, following the filing of our 2021 10K. And so, we showed up on a list for the first time as a result of that. Now that we've appointed a U.S.-based auditor, PCOB compliant, after we've completed our 10-K filing for 2022 and they're signed as the principal auditor, I guess the way it would work is we would not show up on the list again in 2022. We can't get removed from the list that we were put on in 2021, but we wouldn't show up on the list for a second time. And that's the way it would play out. So we would not expect to be added to the list for a second time. And therefore, we don't expect our US stock to be subject to the delisting that could occur if you're on the list for three consecutive times.

Okay, so that event will happen maybe next April or May when you report that 10K?

That's right. It would be more likely, I guess, for us, accelerated filer. The 10K would expect to come out in March. And so the list would come out. Folks would show up as a second time on the list following that. So we just simply wouldn't show up a second time on the list.

Hmm.

Okay.

Yeah. Maybe just a one, one, a small follow up about your new product line. Is that a post a CMP coin in is the circle, the new product line, or just a kind of a appendix over your current coin in tool?

Yeah, actually that's the tool I web for their data variable for their substrates or manufacturer company. Right. And what do that is normally they have a CMP. of the wafer, and however, cleaning performance from the typical CMT machine, not a satisfied customer requirement. So what they do is they probably do their just simple cleaning either in the dry or in the wet, and we're connected to the cleaning door. So then further, we clean the wafer and then the dry or the wafer out. That's a possibility. Obviously, we're also designed for this 12-inch standing in the substrate and also sitting carbide substrate, right? 6-inch, 8-inch. That's our product, you know, in the market.

So it doesn't belong to the two new power lines?

No, no, no. That's just a real expansion of our Canadian portfolio. Okay, great. It's not CMP, only Canadian. We call it a post-CNP Canadian application. So it belongs to Canadian partners.

Yeah, just that wish, right? I mean, management has been saying that in the second half, you will announce two new power lines. We're literally in the second half. So do you think the next quarterly result, meaning three months later, you will announce them? Or in between, you probably will announce at least one of the new power lines?

Yeah, well, I mean, we really have a lot of product development, right? I just make sure, so I couldn't really tell you who announced it first. But, you know, we have about four parts, right, on the line. And one, let me go back again, one is the supercritical CO2 clean, right? That's the one critical for the DRAM, I mean, the capacitor cleaning process. And second one is really ARD, furnace, right? Vertical furnace ARD. Then we also have a two new category as we you know, I'm not a given in yet but there's a you know market there addressable market a billion dollar as a New completely new category product and that's what is going to have this year So, okay.

Yeah, it's a real, you know exciting moment Okay, okay, yeah, we will be patient to that and also looking forward to the announcements So I will leave that some detailed housekeeping stuff in our follow-up call. Thank you for your time today. Thank you. Thank you. Thank you.

And thank you. And that would conclude Q&A for today. I will turn the call back to David Wang for final remarks.

Okay. Thank you, operator, and thank you all for participating on today's call and for your support.

And with that, we conclude our conference. Thank you for participating, and you may now disconnect.