Ichor Holdings

Good afternoon and thank you for joining today's first quarter 2022 conference call. As you read our earnings press release and as you listen to this conference call, please recognize that both contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control and which could cause actual results to differ materially from such statements. These risks and uncertainties include those spelled out in our earnings press release, those described in our annual report on Form 10-K for fiscal 2021, and those described in subsequent filings with the SEC. You should consider all forward-looking statements in light of those and other risks and uncertainties. Additionally, we will be providing certain non-GAAP financial measures during this conference call. Our earnings press release and the financial supplement posted to our IR website each provide a reconciliation of these non-GAAP financial measures to their most comparable GAAP financial measures. On the call with me today are Jeff Andreessen, our CEO, and Larry Sparks, our CFO. Jeff will begin with an update on our business and a review of our results and outlook, and then Larry will provide additional details of our first quarter results and second quarter guidance. After the prepared remarks, we will open the line for questions. I'll now turn over the call to Jeff Andreessen. Jeff?

Thank you, Claire, and welcome to our Q1 earnings call. Q1 revenues were $293 million within our guidance range and grew sequentially from Q4. The $7 million, or 2%, difference compared to the midpoint of guidance was chiefly the result of additional disruptions in the supply chain that emerged since our last earnings call. At the time of our last call, we also had expected that the availability of some key components would improve by mid-quarter, and these did not materialize. Additionally, we had to manage through some key shortages that emerged in our machining business. While we now had these shortages largely behind us, this had an impact on our machining revenue mix in Q1. Both factors are indicative of the continued volatile dynamics in our industry's supply chain, where we, like many others in the industry, continue to forecast for improvement in support of the unabated customer demand, yet new issues have arisen each quarter that cannot be predicted, including the recent example of the closures of all shipping ports in and out of Shanghai that affected many of us since late March. Freight, logistics, factory shutdowns, and the cost as well as the availability of labor all continue to be a headwind to output and cost. At the same time, we are working to increase capacity across our footprint, which includes adding to our manufacturing headcount as well as our physical capacity. We're nearing the completion of our clean room expansion in Austin, which adds to the clean room expansion we completed in Singapore last year. Additionally, we have added a second building to our machining facility in Mexico and are in the process of ramping their output. Given the continued expectations for strong customer demand and for wafer fab equipment growing to the $100 billion level, we made the decision to keep hiring to a level we needed to support the unconstrained demand. With the goal of having both the flexibility to burst within the quarter and to ramp the business as the availability of components and materials improves. Our decision to maintain our plans for a higher level of resources to support customer demand along with a less favorable mix of machining revenues in the quarter resulted in gross margin and earnings below guidance. However, we fully expect our margins will recover over the next couple of quarters. We expect Q1 to be the low point for gross margin and EPS performance in 2022. and are forecasting improving trends on both fronts, as we continue to expect we will be able to achieve sequential revenue growth each quarter of 2022 and into 2023. The expectation for growth does not depend on significant changes in the availability of component and material supply versus what we see today, as we are planning for some of the key component constraints to continue into the second half of the year. Some of the shortages in Q1 have improved and we are shipping at a higher level quarter to date compared to this time last quarter. We will continue to manage these ongoing and unpredictable supply chain challenges to drive increased output as we move through the year, as well as align with our customers to support their deliveries. With our current visibility and the improved shipment levels we are achieving recently, we are forecasting Q2 revenues to be up around 5% to 6% sequentially. With our revenue output expected to increase sequentially through the forthcoming quarters, we believe our revenue growth will compare favorably to overall WFE growth this year, and the level of outperformance versus WFE will also depend on which segments of WFE are able to ramp the fastest in the second half. Also, driving our growth this year will be the addition of IMG, which is still on track to contribute $70 to $80 million of revenue for the full year, along with increased demand from our customers. The added visibility brought upon by the tight supply conditions bodes well for the longevity of the current demand cycle, with our customers planning for continued growth into 2023. Now I'll provide a brief update on the progress on some of the new products, and in particular, the next generation gas panel and chemical delivery systems. For our next generation gas panel, following up on the first beta unit that is currently in evaluation with a new customer, we are now preparing to ship a second beta unit this quarter to an existing customer for an application that is expected to outgrow the WFE market over the next several years. Both of these gas panel beta units are fully configured with I-Corps content. We would expect both of these customer evaluations to extend up to a year, particularly given the engineering efforts that are assigned to qualifying new suppliers to address the supply chain challenges in the industry. We remain confident and highly encouraged by the progress we are making with our customers for these proprietary gas delivery systems. In our chemical delivery business, we have two evaluations underway with a North American customer. One evaluation unit was shipped late last year, and another was delivered early in Q1. We continue to work with these customers as we move through the next phases of the evaluation for both programs, which are now progressing in tandem and are expected to complete in early 2023. As we have noted in the past, Japan is the largest market for chemical delivery systems. We continue to expect first production orders from the initial Japanese customer of this court. The scale of this is relatively small, but it is an important step in penetrating the Japanese market. We are now able to travel to Japan with our technical resources and are continuing to quote opportunities at other OEMs that are larger in scale. In summary, in a very challenging operating environment, the operations team is doing a very good job of maximizing output to address the customer demand we are experiencing. And with our current visibility, we are expecting to report sequential growth and record-setting revenues for the next several quarters. We are also driving a recovery in positive gross margin momentum we've been reporting for the last two years. We achieved a significant improvement since 2019, and in Q4, we reported gross margins 330 basis points higher than where we were just two years ago. The setback in Q1 was a temporary one. Due to the investments we are making in headcount to support future growth, as well as the additional inflationary costs and less favorable product mix resulting from the latest supply chain disruptions, we are focused on driving increased earnings leverage on the revenue growth forecast for the forthcoming quarters. Prior to handing the call over to Larry to discuss our financial performance and outlook, I'd like to personally thank Kevin Canty, who recently moved into a strategic role, reporting to me, for his contributions to ITOR over the past nearly five years since joining us in Q3 of 2017. He was instrumental in managing our operations over this significant growth period in the industry. Paul Chabra joins us a month ago as our new COO. Paul brings a wealth of experience to the role. For the last four years, he was Vice President, Global Product Supply, of Franklin Electric. And prior to that, Paul was Vice President Global Supply Chain for the Semiconductor Division of Applied Materials. And with that, I'll now turn the call over to Larry. Larry?

Thanks, Jeff. First, I would like to remind you that the P&L metrics discussed today are non-GAAP measures. These measures exclude the impact of share-based compensation expense, amortization of acquired intangible assets, non-recurring charges, and discrete tax items and adjustments. There is a very helpful schedule summarizing our GAAP and non-GAAP financial results, including the individual line items for non-GAAP operating expenses, such as R&D and SG&A, in the investor section of our website for reference during this conference call. First quarter revenues were $293 million, up 2% from Q4 and 11% higher than Q1 of last year. Q1 revenues included $19 million of contribution from IMG for the full quarter compared to $7 million for the partial quarter of contribution in Q4. While Q1 revenues came in relatively well compared to expectations a quarter ago, the increase in cost and component supply issues faced in the quarter at the same time as we ramped hiring impacted our gross margin. Q1 gross margin was 16%, down 110 basis points from Q4, compared to the 80 basis point improvement expected in our prior forecast. The total impact on gross profit was approximately $6 million. About half of this amount was associated with higher costs of direct manufacturing labor. The other half was pretty evenly affected by three factors. First, product mix. Second, increased freight and logistics costs. And third, higher indirect factory costs such as supplies and utilities. Q1 operating expenses were $22.4 million, $1 million above forecast, primarily driven by higher than forecast fees related to audit and SOX compliance, ERP implementation, as well as increased investments in R&D given the progress we are making with our new gas delivery products. The resulting operating margin was 8.4%. As expected, interest expense for Q1 was $1.5 million, and our tax rate was slightly lower than forecast at 12.1%. The resulting earnings per share was 70 cents for Q1. Now we'll turn to the balance sheet. Like many others in the industry, cash conversion of working capital was unfavorable in the quarter. With supply and output still constrained in the current environment, inventory increased in support of customer demand. Accounts receivable also increased due to the timing of shipments weighted heavily to the end of the quarter, while our payments to suppliers increased, driving payables down. Going forward, we expect these working capital investments will translate to strong free cash flow generations in the quarters ahead. Now I will turn to our second quarter guidance. With revenue guidance in the range of $290 to $330 million, our Q2 earnings guidance is 68 to 94 cents per share. We are expecting a 30 to 100 basis point improvement in gross margin for Q2 compared to Q1. Our Q2 operating expense forecast is approximately $23 million, consistent with prior expectations that our quarterly OPEX run rate would be moving up a bit with incremental investments in R&D supporting our new product development programs for our new gas distribution products, some additional investment in IMG infrastructure costs, higher costs associated with our new ERP system, and overall investments supporting company growth. We expect our interest expense will be approximately $1.7 million in the second quarter, reflecting the recently announced increases in interest rates. Our tax rate in Q2 is expected to be approximately 13%, and we estimate our fully diluted share count to be approximately $29.1 million. Finally, we continue to expect CapEx to be around 3% of revenues for 2022, which reflects the higher levels of investment required to support our machining business. We expect to deliver improving free cash flow performance as we move through 2022. Operator, we are now ready to take questions. Please open the line.