This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Good day and welcome to the Ultra Clean fourth quarter and full year 2022 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Rhonda Bonetto, Investor Relations. Please go ahead.
spk00: Thank you, Operator. Good afternoon, everyone, and thank you for joining us. With me today are Jim Schulheimer, Chief Executive Officer, and Sherry Savage, Chief Financial Officer. Jim will begin with some prepared remarks about the business, and Sherry will follow with the financial review, and then we'll open up the call for questions. Today's 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. Discussion 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.
spk02: Jim? Thank you, Rhonda, and good afternoon, everyone. Thank you for joining us for our fourth quarter and full year 2022 conference call and webcast. First, I'm going to highlight a few financial results that Sherry will expand on in her commentary. I'll follow this with an overview of what we are seeing in the semiconductor market in the near term and summarize our plans as we play a more critical, meaningful role in the value chain. Solid execution from our global teams in 2022 resulted in a record year for UCT, with revenue growing 13% year-over-year and operating income reaching a new high of $260 million. Looking back on this extraordinary three-year industry ramp, UCT's annual revenue grew almost 123%, and earnings per share surged 243%. That's a compound annual growth rate of 31% per revenue and 51% for earnings per share, compared to the industry CAGR of 22% in the same period. Late in the fourth quarter, it became apparent that the industry was headed into a downturn as our customers quickly pushed out and canceled orders in rapid response to their customers doing the same. Reductions in end market demand have been felt throughout the value chain, and has prompted suppliers and service providers like UCT to make immediate adjustments to near-term production, operations, and financial forecasts. Because our customers and their customers are taking actions to bring surplus inventory into balance as quickly as possible, we believe the major step-down of orders are reflected in our Q4 results and Q1 forecasts. We expect the order stream to stabilize around these new levels. We have not changed our optimistic view that the fundamental drivers of our industry will propel significant growth over the long term. Not surprisingly, after three consecutive years of record WFB growth accelerated by pandemic-related demand for technology, we have entered a correction period. Every semiconductor cycle has its own unique characteristics. In this one, in addition to supply, demand and inventory imbalances, Today, the industry is also grappling with lingering effects from the pandemic, inflationary pressures, unsettling geopolitical events, and notable macroeconomic influences, such as trade wars and export restrictions. All of these factors combined, supported by what we've recently heard from IDMs and OEMs and our internal marketing intelligence, we believe weakness may continue through 2023. While the lower equipment investment will primarily impact our product business, there are pockets of opportunities we will be capitalizing on. We will be ramping products in markets like lithography, which are anticipated to grow in 2023, and while not yet at the level to offset declines in other segments of WFE in 2023, over time our position in this space will continue to expand as a percentage of our revenues. In our services group, where revenue is more closely tied to wafer starts, we see a decline in business, but at this point, it is less than what we expect for WFE. While we hope that a recovery begins to materialize sooner, we are restructuring our business to maintain flexibility and optimize profitability, just like we did during the 2018-2019 downturn that lasted five quarters. We are taking immediate action within our variable cost model, including sharp reductions in overtime, a significant decrease of temporary workers, and utilization of normal attrition. To prepare for the next ramp and support our growth strategy, we are consolidating our footprint and making improvements within our supply chain to enhance cost and delivery performance, among many other actions. We are balancing our cost reduction activities with key strategic investment programs, such as proliferating our single ERP solution, ramping Malaysia, adding fluid solutions machining capabilities, and expanding capacity at some of our service sites to support new chip fabs in the U.S. in 2024 and beyond. UCT has a proven playbook to successfully manage through industry cycles and emerge a much stronger, more profitable company each time. While our focus over the past few years was primarily on meeting demand, today we are taking the opportunity to transform our business processes and global operational footprint so we have the services, products, and capacity to scale quickly and efficiently to meet customer demand when the industry rebounds, because the industry always rebounds. In summary, while the chip industry is notoriously cyclical and experiences fluctuations, We view current business conditions as an opportunity to improve our bottom line in the next up cycle while ensuring that we protect our revenues and optimize our capabilities to secure long-term growth. By working closely with our customers today, we are increasing our strategic relevance within this value chain and expect to continue to outperform the market on an average over the long term. I would like to thank our employees and our shareholders for their continued support, and I look forward to updating you on our next call. With that, I'll turn the call over to Sherry.
spk04: Thanks, Jim, and good afternoon, everyone. Thanks for joining us. In today's discussion, I will be referring to non-GAAP numbers only. As Jim noted, 2022 was a record year for UPC for revenue and operating income. During the year, we paid down our debt, by $40 million and spent $12.1 million repurchasing shares and prudently invested in projects to support our long-term growth strategy. Total revenue for the fourth quarter came in at $566.4 million compared to $635 million in the prior quarter. Products division revenue was $499.5 million compared to $556.3 million last quarter And revenue from our services division was $66.9 million, compared to $78.7 million in Q3. The strong demand we saw in the first three quarters of 2022 led to a record revenue of $2.4 billion for the year, up 13% from the prior year. Products generated revenue of $2.1 billion, up 15% year over year, and services contributed $299.6 million, flat with the previous year. Total gross margin for the fourth quarter was 19.5% compared to 20.6% last quarter. Products gross margin was 17.7% compared to 18.3% in the prior quarter. And services was 33.5% compared to 36.9% in Q3. Margins can be influenced by fluctuations in volume, mix in manufacturing region, as well as material and transportation costs. So there will be variances quarter to quarter. Total gross margin for the year was 20.2% compared to 21.4% last year. Operating expense for the quarter was $53.8 million compared with $56.5 million in Q3. As a percentage of revenue, operating expense was 9.5% compared to 8.9% in the prior quarter. For the year, operating expense as a percentage of revenue was 9.3%. compared to 9.2% in the prior year. Total operating margin for the quarter was 10% compared to 11.7% in the third quarter. Margin from our product division was 9.9% compared to 10.8% in the prior quarter. And services margin was 11.3% compared to 18.2% in the prior quarter. The reduction in margins was mainly due to decreased efficiencies for both divisions on lower volume. For the full year, operating margin came in at 11% compared to 12.2% in the prior year. Based on 45.7 million shares outstanding, earnings per share for the quarter was 93 cents on net income of $42.6 million, compared to $1.06 on net income of $48.6 million in the prior quarter. For the full year, earnings per share We're $3.98 on net income of $181.9 million compared to $4.20 on net income of $186.1 million in 2021. Our tax rate for the quarter was 13.7% compared to 17.9% last quarter. For the full year, our tax rate was 15.9%. We expect our tax rate for 2023 to stay in the mid to high teens. Turning to the balance sheet, our cash and cash equivalents were $358.8 million at the end of the fourth quarter, compared with $453.5 million last quarter. Cash from operations was an outflow of $38.8 million, compared with an inflow of $71.7 million in the prior quarter, due to lower shipment volume and timing of cash collection and payments. For the full year, cash flow from operations was $47.2 million, compared to $211.6 million in the prior year. In the fourth quarter, we made an additional debt payment of $13.4 million, bringing our total debt payments for the year to $40 million. In the third quarter, the board initiated a three-year, $150 million share repurchase program. In the fourth quarter, we repurchased 343,000 shares at a total cost of $12.1 million. Subsequent to year end, we repurchased an additional 389,000 shares at an aggregate cost of $12.9 million, leaving $125 million remaining on our three-year purchase program. Given the current global macroeconomic and geopolitical uncertainty, we are keeping our guidance range wide and including a negative adjustment of 30 million related to a cyber security event recently announced by one of our suppliers. We expect this revenue to flow into the second quarter. We project total revenue for the first quarter of 2023 between 395 million and $445 million. We expect EPS in the range of 12 cents to 32 cents. And with that, I'd like to turn the call over to the operator for questions.
spk01: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. And at this time, we will pause momentarily to assemble our roster. And the first question will be from Quinn Bolton from Needham and Company. Please go ahead.
spk05: Hey, guys. Congratulations on a record 2022. I know the environment's changed, but great to see those results. I guess, Jim, I wanted to ask your thoughts in your script. You talked about the majority of the step-down in orders you think is taking place in Q4 of 22 and this quarter here in 23. And you talked about seeing or expecting orders to sort of stabilize. And so as you look out to 2023, how do you see the revenue profile for the year? I know you've got that $30 million that comes out of Q1 and likely gets captured in Q2, but should we be thinking about, it feels like the first quarter level without that $30 million impact would be close to $450 million at the midpoint. Is that kind of the revenue level you see where things are stabilizing or Do you see a different level?
spk02: Yeah. Hi, Quinn. No, I think you have it exactly right. Yeah, that's true. It would have been around 450 would have been what we would have been projecting. And yeah, I think we see it stabilizing at that level or maybe slightly higher and being bouncing around roughly those numbers throughout the year. hopeful that, you know, through the second half, you know, could be more positive as some of our customers and peers have commented that they're looking to see if there's something improves in the second half. But our assumption at this time is, yeah, bouncing around the number that you put out there and some recovery in the second quarter, assuming that the supplier that's impacting us and many people right now is able to recover as well. That's exactly the right way to think about it.
spk05: Perfect. You mentioned, Jim, the number of actions you're taking to streamline operations now, including reduced overtime, getting rid of some of the variable employee costs. Where do you see OPEX sort of shaking out in the near term as you take those actions? And then you also mentioned facility consolidation. Is this downturn giving you the opportunity to bring more business into Malaysia from some of the other sites around the world?
spk02: Yeah, I think there's several parts to that, Glenn. Yeah, you know, we've been through multiple of these cycles. And so, you know, taking down the variable costs, especially in the COGS area, we were pretty experienced at that. And I think you'll see us sustain higher gross margins through this cycle than we have in the past, also with our broader company portfolio that we've assembled since the last downturn. So on the OPEX side, there are a few headwinds. I'll let Sherry talk about that in a second. you know, those take a while to really move down. And some of the consolidation actions, of course, you know, those are consolidating where you have two sites, you know, relatively close proximity or businesses move from one region to another and a site is kind of unbalanced as a result of the last, you know, surge of the industry, you know, where we rebalance that and consolidate those sites. Those actions take you know, roughly a year to put in place before you start seeing the benefits of those. So we won't see a lot of that impact, those longer-term cost reductions until next year. But those will obviously help us become, you know, leaner and hit better numbers in the next upturn, just like we did in the last one that, Sherry, maybe you can talk about. Some of the other specifics.
spk04: Yeah. So, you know, we came in at 9.5% for Q4. We will see that go up in Q1 and partially in next year as we move through it. But we do have quite a few reduction initiatives in place, especially surrounding controllable spending within OpEx, whether that be travel or other discretionary spending, as well as looking at our headcount. And obviously looking at footprint does play into that as well. We are continuing to look at that quite heavily and see that cost hopefully come down as we move through the year as well.
spk05: Sure. Should we be thinking maybe up somewhere between, say, 10% and 11% of sales, or do you think it could go even higher just given the magnitude of the quarterly change in revenue in March?
spk04: Yeah, we've seen it. I think in the past, we've gone to downturns anywhere between 10 and 12%. So I would assume that it would be around that, within that range, depending upon the revenue level. So obviously, Q1 has come down some as a result of this cyber attack, along with, you know, just the industry coming down. So I anticipate that it's going to be probably a little higher as a percentage of revenue for Q1. But As we move through the year, I think it'll come up to a more normalized range. Perfect.
spk03: Thank you.
spk01: The next question is from Krish Sankar from Cowan. Please go ahead.
spk03: Hi. Thanks for taking my questions. This is Stephen calling on behalf of Krish. I guess, Jim or Sherry, just a quick question first on Q4 and some of the impact from the I guess, production limitations in China that you guys previously highlighted. I guess, relative to that $60 million delta between what you reported for Q4 and your original guidance midpoint, how much of an impact did production restrictions have, and how is that situation here in Q1 so far?
spk02: Yeah, in Q4, the major impact was actually the industry downturn and a lot of canceled and delayed orders The COVID impact turned out to be much smaller than we first feared. I think it was roughly $8 million or $5 million. And that factory is up and operating normally right now. What was the second part of your question on that?
spk03: Yeah, is there any, I guess you already answered, I guess there's no follow-on impact here in Q1. Is that correct?
spk02: No. The only unexpected impact in Q1 was one of the key suppliers for the industry and the issue that they're having with a cyber attack. Those components are used in multiple areas of the tools by many of us.
spk03: My follow-up question is regarding your memory exposure. I think in your slide deck you show your exposure on a revenue basis from your largest customer is holding steady around 40% in Q4 relative to Q3. I'm just kind of wondering, you know, just given some of the talk in industry over the past couple weeks about memory makers or suppliers potentially not cutting CapEx as significantly this year as originally expected, I guess, how do you see that, if any, at this time, flowing through to your outlook for the second half of the year?
spk02: Yeah, I, you know, it's hard to predict what impacts. I think obviously we're seeing Samsung looking to spend, you know, spend a little bit through the cycle more than some of the other memory or foundry makers as well. So it's really hard to say if that's going to, you know, what that's going to look like or if there are any further cuts from the memory makers. So, you know, I think that's why we're taking the view of, Not expecting a recovery in the second half of the year, but obviously a pleasant surprise, positive surprise, you know, is possible.
spk03: Great. Thank you.
spk01: And the next question is from Christian Schwab from Craig Hellam Capital Group. Please go ahead. Great.
spk06: Jim, after you take the variable cost of COGS out, you know, I'm just wondering, you know, do we, you know, what your utilization rate of labor is? And then, you know, more importantly, as we look to the eventual recovery at a $450 million run rate business quarterly, plus or minus, what is your utilization rate then on tools and facilities?
spk02: Yeah, the utilization on labor with some time lag, We tend to keep up, you know, not at 100%, but pretty close, even through the down cycles. When we're not able to achieve it through normal means of overtime, and we carry a large temporary workforce, sometimes up to 35%, 40% during the upturn. So when we're not able to... to meet those utilizations. And we utilize other things like shutdowns, which we're doing in this quarter, and other methods as well. So we keep the labor utilization very high. So we expect to be able to keep the gross margin up. Obviously, the footprint and the tools and the sunk costs and COD, is harder to cover. I couldn't give you an exact number on the utilization, but I think if you assume we were 100% utilized at the 630 number, just do the math on the number, which is 65% of that, I think you'd be somewhere roughly around there. we were not 100% utilized in the Malaysia footprint, but we were 100% utilized in the workforce there. So maybe put it at around 60% or so. Okay.
spk06: No, that's great. And then can you just remind us, you know, in the product mix, you know, the end markets, you know, that you serve, you know, can you, you know, between memory, mature, advanced logic, where, you know, the vast majority of your, you know, your shipments to your two leading customers, you know, end up being utilized by end customers, fabs. Does that make sense?
spk02: Yeah, it's actually hard for us to track on a running basis. When we ship a tool to our customers, that same tool can go or the same module can go to any application. So it's not something I can I can really forecast, but I think you'd expect it to follow, you know, exactly where the capital is being spent right now. So memory is clearly going to be down. More of the tools are going to, you know, Foundry and Samsung as well. So I think you'll see a shift that way, but I couldn't give you a new pie chart on memory versus logic Foundry at this point, but definitely it's going to be moving towards less memory as you'd expect.
spk06: Great. And then should we assume that gross margins, you know, improve sequentially in Q2 and then they kind of flatline at those type of levels given, you know, labor will be fixed quickly and then, you know, is that the way we should be thinking about that?
spk04: Yes, I would assume that it would – you know, be able to level out at the Q2 level. And then hopefully depending upon what happens in the second half, you know, we would see it stay, you know, around that range as we move through the rest of the year.
spk01: Great.
spk06: And then my last question is, you know, remind us if you could, you know, what lead times were, you know, pre-pandemic or, you know, pre-strong three years, however you want to do it. what they were during the strong three years and what you expect them to be on the backside of this.
spk02: Are you talking about tool lead times from our customers to their customers? Yeah, lead times to customers. From us to our customers?
spk06: Yep.
spk02: Okay, yeah. Depending on what part of our portfolio you're looking at, you know, the fluid solutions, you know, the former Hamlet, you know, those lead times are relatively, have been relatively short, and a lot of that is vendor-managed inventory. If you're talking about some of the other, like, let's call it integrated module a piece of our business, that was stretching out to two to three months in many cases, and sometimes even longer during the upturn. And obviously, they're a lot faster now or, in some cases, immediately ready for shipment should the customer require them. Fair.
spk06: Okay. Okay. So, as far as, you know, since the lead times are relatively short, you know, kind of what you implied, you know, your visibility of of when, you know, how many ever quarters of digestion at these type of levels. Last cycle, I think you suggested it was, you know, five quarters. You know, really will be determined by the dialogue and the direction that we hear from, you know, AMAT and LAM. Is that fair?
spk02: You know, for years leading up to this last up cycle where, the demand without stripping the supply for everyone in the industry. That's when we were seeing a very unusual four-quarter, you know, bookings that was pretty easy to forecast. We're more back in the normal state where we can see one quarter out relatively clearly, except for certain force majeure events like we have been experiencing, like COVID and cyber. So I think we're back to kind of seeing one quarter out and with a little bit even more blurriness because you know, we have to keep track of, typically there's not much inventory between us and our customers, but as the orders fell off pretty sharply at the end of 2022 and further into the first quarter, some inventory built up between us and our customers, which is not a typical state. So, we also have to try to figure out what, you know, you know, even when we look at end demand and what's going on there, we have to also try to piece together, you know, what will actually reach an order book for us.
spk06: Yeah. And then just to follow up on that, it'll be my last question. Um, you know, do you have an idea of how much, you know, aggregate dollar amount of, of inventory, um, is sitting between you and the customer that historically is not there?
spk02: Um, no, uh, we don't, we don't, um, Again, many of the things that we make, we don't own 100% share of that module. Sometimes we're 50% or 60% or 70% share, so we don't know what they're holding of the same type of thing that we make that maybe a competitor made as well. All we know is that the warehouses of many of our customers are very full to the point where even in the case here or there, we may have to even hold on to something for them. It's pretty big right now, and that's why That's why you might see when they report less dramatic drops in revenue. There's a couple of factors there. One is they're working through their deferred revenue for things that they've already shipped. And two is because they do have a lot in their inventory right now. But I think that will burn off at some point. But I think we're pretty confident when we put all those different pieces together, the headwinds and the tailwinds, You know, the numbers that I think Quinn was talking about make a lot of sense.
spk06: Yeah, that's perfect. Great. No other questions. Thank you.
spk01: Thank you, Christian. And the next question is a follow-up question from Quinn Bolton from Needham & Company. Please go ahead.
spk05: Sherry, just a quick follow-up for you. If we're thinking about, you know, revenue, you know, down roughly 25% or about $600 million year-on-year, and I'm getting to that $1.8 billion just by annualizing the $450 million quarterly rent rate we've been sort of speaking about. Can you give us some sense, what do you see the incremental margin fall through on that lower revenue? I mean, should we be modeling like a 25% incremental margin, or is there a better figure to be thinking about just as we think through the gross margin trend for the year?
spk04: Yeah, I think, I mean, the gross margin trend I don't see major decline in gross margin. I mean, there's going to be a point or two, but it's not as much as what we've seen in previous downturns because I think, first off, I think the mix might be a little bit different, but also we've done a very good job of making sure that we could shift certain assemblies to lower cost regions as well as bringing our direct labor down very quickly. So that one's not as much of an impact. I think, you know, obviously making, making adjustments to OpEx is harder because there's more fixed costs there. But we see that as, like I mentioned before, leveling out to some degree. And obviously we want to make sure that we're ready for the next upturn is the key thing for all those categories.
spk05: Okay. So a trough gross margin in the 17.5% range feels like a decent place to be?
spk04: Yeah. I think that's probably a low point probably.
spk05: Perfect. Thank you.
spk04: Thank you.
spk01: Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Mr. Schulhammer for any closing remarks.
spk02: Thank you, everyone, for joining us today, and we look forward to speaking with you at our next earning conference next quarter. Thank you.
spk01: And thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer