Ichor Holdings

Good afternoon and thanks for joining today's second quarter 2023 conference call. As you read our earnings press release and as you listen to this conference call, recognize that both contain forward-looking statements within the meaning of the federal security clause. 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 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 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, Larry Sparks, our retiring CFO, and Greg Spite, our incoming CFO. Jeff will begin with an update on our business, and then Larry and Greg will provide additional details about our results. After the prepared remarks, we will open the line for questions. I'll now turn over the call to Jeff Henry. Jeff?

Thank you, Claire, and welcome to our Q2 earnings call. Our second quarter results came in at the upper end of our expectations. Revenues were $185 million and declined less than expected, primarily due to the acceleration of customer demand for a couple of end markets that are recovering more quickly in the currently soft WFE environment. Our gross margin, operating expenses, and operating profit performance also fell into the upper end of our guidance ranges, and with more favorable tax largely offsetting the higher interest expense, earnings of two cents per share also exceeded our prior expectations of a breakeven quarter. We continue to see the second quarter, 2023, as I-Corps' trough quarter during the current downturn. with modest sequential growth expected as we progress through the year. Our current expectations for the third quarter indicate revenue growth of about 4%, plus or minus, with the only difference compared to our prior outlook of 5% to 10% growth being the stronger second quarter. While our overall outlook for the full year is consistent with what we were seeing at this time last quarter, there is no question that there continues to be a significant amount of variability and customer demand to build schedules. For example, at the same time as Q2 witnessed demand from Q3, we also saw increased demand in a couple of pockets of strength, including increasing investments in the logic and high bandwidth memory. These areas of upside, however, are being pretty equally offset by softening demand in some areas of leading edge logic and slower build schedules in other areas such as EUV lithography. So while we are witnessing some improvement between the quarters, our overall outlook for 2023 is largely unchanged. However, the year is a bit more front-half weighted than we previously thought, given the stronger performance in Q2. Clearly, our expected revenue decline in 2023 is a bit steeper than the overall market decline of 20% to 25% this year due to several factors. First is our relative customer exposure, which is more heavily weighted towards etch and deposition compared to lithography. We estimate that our customer shipments of etch and deposition systems would be down at least 30% this year. Furthermore, the component side of our business, which is largely comprised of weldment and precision machine parts, and which typically represents about a quarter of our revenue, is seeing deeper cuts as our customers work to reduce their inventory levels. The bright spots for us this year are definitely within growing market segments and new customer design wins, and we continue to expect to add a third 10% customer for fiscal 2023. We are also 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. And given the industry environment for memory year to date, we estimate our current exposure to be less than 25%. All of these factors, which certainly are resulting in a challenging year for I-Corps in 2023, are just as strongly indicating the potential for a very strong snapback of demand as the industry recovery accelerates. For example, our outlook for the remainder of 2023 assumes little to no recovery in the memory sector. which is broadly expected to begin to rebound sometime next year, given the recent stabilization in pricing and demand environment. The business model and financial profile tend to generate significant operating leverage as revenues increase. For example, we estimate gross margin flow through to be approximately 25% as we move through the remainder of 2023, which at the midpoint of Q3 guidance will generate a 30% improvement in operating profit on a 4% increase in revenues. A more significant revenue ramp in 2024 could once again lead to very significant earnings growth as we look ahead, which is why we continue to make critical investments in our business in support of future growth. During this period, we are maintaining our focus on driving share gains for our proprietary product and making investments in new offerings that support our customers' long-term technology roadmaps. We are utilizing the slowdown to complete qualifications and new products that will both increase our share of our served markets as well as the internally manufactured content of our existing products. We continue to make good progress on all of our focus areas this year with new customer qualifications for our internally developed machining components, leveraging our global weldment footprint to gain additional share, qualifying our initial next generation gas panels as well as our proprietary chemical delivery systems and the development of new components that address the wet processing market. I'd like to start with an update on our next generation gas panel evaluations. We are now actively engaged with four customers. We have now completed the qualification of two of the evaluation units we ship for two different applications. Our best estimate of when production shipments will begin is mid to late 2024. as they will now move into their customer evaluation stage. Additionally, we also expect to complete a third evaluation this quarter that will also lead to first production units in a similar timeframe as their tool is introduced into the market. These are important milestones for I-Corps, and we are very pleased with the progress we are making with this new product. We have finalized the qualification of incremental machining components and will begin initial shipments later this quarter. These components will be integrated into our existing gas panels that we manufacture today and will be margin accretive. The new gains in our chemical delivery business are progressing, but at a slower pace than our gas delivery product. As a result, we are reviewing our Japan strategy to accelerate our results in this region. We are also developing new components for this market that we expect to begin to release in 2024 as well. And lastly, We reported on our last earnings call that we have completed delivery and customer qualification of our first gas panels for the silicon carbide market and are now shipping production units. We continue to work closely with our initial customer and expect to deliver the first evaluation units to them for their next generation tools sometime in early Q4. In summary, I'll remind everybody here today that our revenues tend to recover more sharply when industry spending rebounds. and our business model enables earnings growth well in excess of revenue growth. In the meantime, we are managing through the lower demand environment by focusing on delivering solid financial results as the business recovers from Q2 levels, improving our operational capabilities, qualifying our internally developed products, and developing new products that align with our needs for both technology and costs. Before turning the call over to Larry, I'd like to share my sincere appreciation for his leadership of the finance organization and across the enterprise over the past four years and congratulate him on his long-awaited retirement. Both Larry and I trace our roots back to our many years at Applied Materials, which is where we also met Greg Swipe. In fact, Greg and I have worked together for the majority of our last 25 plus years in the business. Some of you might remember him from Nanometrics, where he took over for me after I joined I-Corps in 2017. Greg's extensive experience in semiconductor equipment and his deep knowledge of I-Corps finance and operations will make this transition very seamless. But we will all miss Larry. We also know we're in great hands with Greg. With that, I'll turn the call over to Larry to recap our Q2 results before closing with Greg to provide further details around our Q3 financial outlook. Larry?

Thanks, Jeff. I've greatly enjoyed my last four years at I-Corps and getting to know so many of you in the investment community. 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. Second quarter revenues were $185 million towards the upper end of our expectations and declined 18% from Q1. Gross margin of 14.5% was consistent with our expectations of flow through just under 20% on the revenue decline, as compared to our model of 25% incremental margin on increasing revenue. Operating expenses were $21.5 million, and given the upside in both revenue and gross margin, Q2 operating margin was also above the midpoint of guidance at 2.9%. As a result of higher interest rates, net interest expense increased to $5 million, while our non-GAAP net income tax benefit for the quarter was also a bit higher than forecast at $500,000. As a result, net earnings for the quarter were $0.02 per share. Our GAAP net loss included a non-cash $11 million valuation allowance taken on our U.S. deferred tax assets. recorded as a result of our U.S. profits falling into a cumulative three-year loss as of the end of Q2. A large portion of our fixed cost structure, including interest expense, M&A amortization, and stock-based compensation is in the U.S., which does not change with customer volume. As the industry recovers and our U.S. revenue and profitability grows, we will reevaluate our valuation allowance requirements. Now I will turn to the balance sheet. Cash and equivalents at quarter end totaled $85 million, an increase of $16 million from Q2, while total debt declined by $7 million. We generated $27 million of cash flow from operations, and after $4 million of CapEx, free cash flow for the quarter was $23 million. As expected, working capital balances declined across the board, given the current softness in the customer demand environment. Accounts receivable declined by $27 million, and inventory declined by over $5 million. DSO declined a bit to 47, and inventory turns for 2.4. Given the free cash flow generation in Q2, we elected to pay down a portion of our revolver, especially given the continual increases in interest rates. We currently have $95 million available on our revolver, and our net debt coverage ratio is currently about two times. And now I'm pleased to introduce Greg Swythe and turn the call over to him to share more details about our Q3 guidance. Greg?