Ichor Holdings

Good afternoon, and thank you for joining today's first quarter 2023 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 year 2022, 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. And I'll now turn over the call to Jeff Andreessen. Jeff?

Thank you, Claire, and welcome to our Q1 earnings call. Our first quarter results were pretty closely aligned with our expectations going into the quarter. Revenues of $226 million were just above the midpoint of guidance, representing a 25% decline from Q4. Gross margin of 15.5% came in at the lower end of the range due to a less favorable mix. We were able to closely manage operating expenses during the quarter and achieved about a 10% reduction compared to Q4. And as a result, our operating margin of 6.1% was right at the midpoint. Earnings of $0.38 per share was well above the range due to a net tax benefit, which as Larry will discuss later, more than offset the greater FX expense in the quarter. So while our Q1 results were consistent with our expectations, the customer demand environment has further weakened year to date. We witnessed incremental push outs and order cancellations for most of our OEM customers as we progressed through the quarter, largely as a result of additional reductions in memory investments, as well as some curtailment of spending on leading edge logic. In particular, the component side of our business, which is largely comprised of weldments and precision machine parts, and which typically represents about a quarter of our revenue, is seeing deeper cuts than we had expected entering the year as our customers work to reduce their inventory levels. This drove the unfavorable mix versus what we anticipated for the first quarter. In our gas panel business, our expectations for the second quarter sales are lower than what we expected at this time last quarter, with the adjustments to our forecast closely mirroring the expected declines in new system builds of our largest customers. With our current visibility, we are expecting a 20% sequential decline in revenues for Q2, followed by a recovery. We believe Q2 marks the trough quarter for our revenues this year, with both the gas panel and the component businesses expected to grow sequentially in Q3 and Q4. Product mix will again be less favorable with the expected revenue profile in Q2. And as Larry will discuss in our detailed guidance, we are expecting gross margins to bottom out in the low to mid 14% level in Q2 before beginning to recover in the second half. We believe it is well understood at this point that the further softening in semiconductor CapEx expectations this year reflects a 20% to 25% decline and total wafer fab equipment spend, and within this range, the non-Litho part of the market is now expected to be down by at least 30%. In the face of these significant market headwinds, during our call last quarter, we discussed a few aspects of our business that could help mitigate these significant declines. These include our growing business in the EUV lithography market, which, while still a small portion of our revenues, is a bright spot this year. We also are less exposed to the memory market today than ever before. Based on our customers' revenues by end market, we estimate that memory WFE investments drove approximately 40% of our sales in 2022. While that marks a significant decline from the 50% to 70% levels seen over the prior few years, this segment of our business is now seeing spending cuts of about 50% this year. On the logic and foundry side, we believe our revenue profile is highly leveraged to the most advanced nodes, and the capital investments in this important part of the market have also witnessed incremental reductions year to date. The non-semi portion of our revenue, which comes from the IMG acquisition, addresses areas such as medical, industrial, and aerospace. With still a small portion of our business, these segments previously were expected to perform quite a bit better than WFE in 2023, and now we've seen some additional softness in these non-semi-markets that reflect the overall weakness in the macroeconomic conditions. In the longer term, we believe that each of these markets, in particular advanced node logic and memory, will provide I-Corps with the ability to achieve a strong revenue recovery when the spending environment improves, which is pretty much inevitable. especially with these unsustainably low levels of memory investments. During this time, we will continue to focus on driving share gains for our proprietary products and make investments in new offerings that support our customers' long-term technology roadmaps. We remain focused on utilizing the slowdown to complete qualification of new products to both increase our share of market as well as the internally manufactured content of our existing product. As a reminder, our areas of focus remain achieving customer qualifications for our internally developed machining components, leveraging our global weldment footprint to gain additional share, completing the qualifications of our initial next generation gas panels, qualifying our chemical delivery systems, as well as developing new components that address the wet processing market, and qualifying our gas delivery solutions with key customers serving the growing silicon carbide market. We continue to make good progress on all these fronts. We expect to finalize the qualification of incremental machining components business by mid-year, and we'll begin shipping these shortly thereafter. These components will be integrated in our existing gas panels that we manufacture today and will be margin accretive. The next generation gas panel evaluation units that we have shipped are progressing well. We now expect to ship two to three additional evaluation units in the next several months. Once these ship, we will be actively engaged with three customers. With the successful completion of each of these evaluations and expected subsequent qualifications, we expect initial revenues for our next generation gas panel to begin in the first half of 2024. The new gains in our chemical delivery business are progressing, but at a slower pace than our gas delivery products. We remain confident that our new chemical delivery module will gain additional traction later this year. And finally, we are pleased to report that we have completed delivery and customer qualification of our first gas panels for the silicon carbide market and will begin volume production by mid-year 2023. Before turning the call over to Larry, I'll remind everyone here today that our revenues tend to recover more sharply when industry spending rebounds. As I mentioned, with our current visibility, we see revenues bottoming out in Q2, followed by the beginning of a recovery. Depending on the slope of the recovery, we see a material improvement in customer demand for GRN. In the meantime, we are managing through the lower demand environment by focusing on delivering solid financial results as the business recovers in the second half, improving our operational capabilities, qualifying our internally developed products, and developing new products that align with our customers' needs for both technology and cost. 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's 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 $226 million, slightly above the midpoint of guidance and down 25% from Q4. Gross margin of 15.5% was at the lower end of the range due to the less favorable mix of revenues in the quarter. As expected, gross margin flow through improved to 20% compared to approximately 25% in the prior quarter as a result of the cost reductions implemented over the last two quarters. Q1 operating expenses were below forecast at $21.2 million and were down approximately 10% from Q4. The resulting operating margin of 6.1% was at the midpoint of guidance. As a result of higher interest rates, net interest expense increased to $4.6 million. Other income and expense was much higher than average at $0.8 million due to unfavorable foreign exchange. We ended up recording a net tax benefit rather than the 10% expense included in our forecast, and this benefited EPS by approximately 12 cents, driving our earnings above the high end of the guidance range at 38 cents per share. Now we'll turn to the balance sheet. Total cash and equivalents at quarter end were $68.8 million, and total debt was just over $300 million. We currently have $90 million available on our revolver. Our net debt coverage ratio remains below 1.6 times, and we have no exposure to any liquidity risks with our bank financing. Free cash flow for the quarter was a negative $17.7 million, which reflects a use of cash from operations of $10.9 million and $6.8 million of CapEx. In working capital, We reduced balances of both receivables and inventory during the quarter, but days were modestly higher due to the faster drop in revenue. Notable in our cash flows in Q1 was the use of $43 million to reduce accounts payable, which was a result of a highly front-end weighted quarter for material receipts. Now we'll turn to our second quarter guidance. With revenue guidance in the range of $170 to $190 million, our Q2 earnings guidance is approximately break-even, plus or minus eight cents per share. The midpoint of revenue guidance at $180 million reflects about a 20% decline from Q1. At this revenue level, we are expecting gross margins in the low to mid 14% range, which incorporates our cost reduction actions and continued improvements in flow through to just under 20%. At this time, we expect operating expenses to remain relatively flat to Q1 levels of $21.2 million as we continue to prioritize our R&D investments in support of new product programs and maintain the critical infrastructure that will enable us to quickly respond to customer demand when the spending environment recovers. We currently expect our quarterly OPEX run rate to be up slightly in the second half of the year to support the expected recovery in revenues. We expect our net interest expense will be $4.9 million in the second quarter, reflecting the continued increases in interest rates, and with break-even earnings, we anticipate no tax expense recorded for Q2. Our guidance on taxes as we move through 2023 will reflect the expectation of a net tax benefit to be recorded for the full year. Although we are expecting pre-tax income globally for the year, at this time, we expect a full year pre-tax loss in the U.S., resulting in an expected tax benefit in the range of $5 to $6 million. A significant amount of this benefit was already recorded in Q1. A large portion of our fixed cost structure, including interest expense, is in the U.S., which does not change with customer volumes. We expect to be able to utilize these U.S. tax credits as we return to more normalized revenue volumes in 2024, and therefore your model should reflect the 10% expense returning starting next year. Operator, we are ready to take questions. Please open the line.