Claire McAdams – Investor Relations Tom Rohrs – Chief Executive Officer Jeff Andreson – Chief Financial Officer.

Patrick Ho – Stifel, Nicolaus Karl Ackerman – Cowen Sidney Ho – Deutsche Bank Graham Tanaka – Tanaka Capital.

Good day, ladies and gentlemen, and welcome to the Ichor Systems Fourth Quarter and Full Year Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to introduce your host for today’s conference, Claire McAdams, Investor Relations Council for Ichor. Please go ahead..

Thank you. Good afternoon and thank you for joining today’s conference call, which will be available for replay telephonically and on Ichor’s website shortly after we conclude this afternoon.

As you read our earnings press release and as you listen to this conference call, please recognize that both contain certain 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 2016 on filed with the SEC 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 and our earnings press release contains a reconciliation of these non-GAAP financial measures to their most comparable GAAP financial measures.

On the call with me today are Ichor’s Chairman and CEO, Tom Rohrs; and our Chief Financial Officer, Jeff Andreson. Tom will begin with a review of the business and then Jeff will go over the fourth quarter financials and outlook for the first quarter of 2018. After the prepared remarks, we will open the line for questions.

I’ll now turn over the call to Tom Rohrs.

Tom?.

Thank you, Claire, and thank you all for joining us today for our Q4 2017 conference call. The fourth quarter of 2017 was another strong growth quarter for Ichor Systems, setting new records for both revenue and earnings per share.

The fourth quarter was our 8th consecutive quarter of sequential revenue growth and our 7th straight quarter of the year-over-year revenue growth. Our total revenue of $183 million reflects a 6% increase for our core business, which is in line with shipments trends of our key customers.

Overall revenues were up 11% from Q3 and up 39% from Q4 of last year. For the full year, revenues were up 62% over 2016 and about 50% growth for our core business. Consistent with our stated objective to grow earnings faster than revenues, our net earnings more than doubled year-over-year with an EPS increase of 89%.

This growth in revenues with expanding margins as evident of our longer-term trend. Since 2014, our three-year compound growth rate in revenues is 38% and our three-year compound growth rate in net earnings is 77%, 2 times our revenue growth.

All of these objectives were clearly laid out during the IPO a year ago and our 2017 results demonstrate that we have executed well against all of our growth and profitability strategies. Our performance as a result of our consistent focus on what we do well.

We believe we are differentiated by our skill set and fluid dynamics and we have expressed this expertise with leading gas and liquid delivery systems today and breakthrough ideas for the future. These gas and liquid delivery systems are used in our customers’ deposition tools, etch tools, CMP tools and lithography tools.

And these processes are differentially benefitting from the semiconductor industry trends towards 3D NAND, multiple patterning and FinFETS. Since our last call, wafer fab equipment spending forecast have improved once again.

With 2018 wafer fab equipment spending expected to be up in the range of 5% to 10%, up from a very strong 2017, which grew 30% from 2016 levels. The incremental growth in 2018 is expected to be led by the memory segment.

However, our bookings this quarter leads me to believe that both foundry and logic are joining the party, which is again good news for our business since our fluid delivery business is proportionally weighted amongst these three major device categories.

In addition to continued strong spending – excuse me, in addition to our continuing strong spending environment providing tailwinds for our business.

We are also executing well against our growth strategies with several specific drivers that encourage us to believe that Ichor can continue to drive revenue and earnings growth at rate faster than the industry. The first strategy communicate at our IPO roadshow was to continually grow our position at existing customers.

This year we have expanded our chemical and liquid delivery businesses as we have taken share from smaller private companies. The second strategy was to expand our position at new semi cap customers. And last year, we grew revenues by more than 100% at our third and fourth largest customers.

Third strategy was to expand our served market through acquisition. At the time of our IPO, we pointed out that we had good opportunities to buy private companies, which would add to our capabilities in fluid delivery systems and move our profitability towards our long-term target financial model.

Our recent acquisitions of Cal-Weld and Talon are evidence that our strategy is working. Cal-Weld has been accretive to our earnings and the acquisition of Talon Innovations is also accretive to both our gross margin and operating profitability. Both acquisitions were strongly supported by our key customers.

These acquisitions expand our capabilities, open up new markets and incremental market share opportunities for Ichor and increased our footprint in gas delivery, bring incremental revenue and margin to our business. These acquisitions combined with improvements in our core business led us to publish an improved long-term financial model last quarter.

We have already started to make progress against this model as our gross margin in the fourth quarter improved over 17%. We expect to deliver incremental improvements to gross margin throughout 2018.

Our fourth growth strategy was to expand our product offerings with proprietary solutions, such as the recent win delivering our proprietary liquid delivery module to a key customer. This one will make a meaningful incremental contribution to revenues in 2018.

Consistent with my commentary on prior earnings calls, earlier in 2017, we added capacity to support this new business opportunity. And because we own the IP with this module, we can go after new customers and applications consistent with our strategy to expand our customer base and our served markets.

It is our expectation that the liquid delivery product offering will help us achieve increase business beyond our two largest customers. Along with adding new products, capabilities, market opportunities and capacity, we have been busy adding strength to our organization.

Last quarter, we added Jeff Andreson as our CFO; previously we added Kevin Canty as our COO; and Marc Haugen as a new Board Member. All three of these A-team additions have hit the ground running, and I made significant contributions to our results and our future plans.

We’re extremely well positioned to deliver continued revenue growth and outperformance in 2018, with the year-over-year expansions in both gross margins and operating profitability. 2018 is off to a very good start. As you saw in our preannouncement in January, where we forecasted $240 million to $250 million of revenue for the March quarter.

This growth includes 30% increase in our core business and a full quarter of revenue from Talon, Cal-Weld. This strong quarter-on-quarter growth is consistent with the shipment trends of our core customers, while also showing that both our organic and inorganic strategies are continuing to play out as expected.

It is very important to note that we are continuing to add capacity in all areas of our operations including weldments, precision machining, liquid delivery modules, and gas delivery systems.

In fat, our capital spending for 2018 will be two times our 2017 capital spending, and our current plans will result in an incremental $150 million of annual capacity. It goes without saying that I am very optimistic about 2018.

Q1 looks great and while we do not dive Q2 revenues, I am pleased to report that we see a strong pipeline of business indicating positive momentum going into Q2. And with that, I’ll turn the call over to Jeff to provide more details of our financial results and outlook..

Thank you, Tom. Before I begin my comments, I’d like to remind you the P&L metrics discussed today are non-GAAP measures unless I identify the measure as GAAP based. These measures exclude the impact of share-based compensation expense, amortization of acquired intangible assets, nonrecurring charges and discrete tax items and adjustments.

Fourth quarter revenues were $182.9 million, increase in 11% from the third quarter and 39% from the fourth quarter of 2016. Our acquisition of Talon closed in early December and contributed approximately $4 million to the revenue in the fourth quarter.

Our Q4 gross margin of 17.1% increased 50 basis points from the third quarter, but the increase driven primarily by the higher margin contribution of both Cal-Weld and Talon. Operating expenses were $10.9 million and included $560,000 from Talon. Our tax rate for the quarter was 2.3%.

Our GAAP tax expense includes a $2.3 million favorable impact related to the release of our valuation allowance for our U.S. deferred tax assets. Additionally, we recorded a GAAP tax expense of $318,000 related to the change in the new tax law associated with our deferred tax assets and liabilities. Net income was 10.2% of revenue and EPS of $0.70.

Turning to the balance sheet, cash and investments grew to $69.2 million, increasing $26.3 million from the third quarter. We generated $36 million in free cash flow at a new debt financing of $120 million and used approximately $130 million to acquire Talon. Days sales outstanding of 25 improved from the third quarter of 33 days.

Inventory increased to $150.8 million and included $14.5 million from Talon. This increase in inventory to support the higher level of shipments anticipated in the first quarter of 2018. Capital expenditures for the full year totaled $8.2 million and was primarily related to our capacity expansion projects in Singapore, Malaysia and Portland.

I’d like to provide some additional comments on our guidance. We expect revenue in the range of $240 million to $250 million with earnings per share in the range of $0.90 to $0.97. We expect to improve gross margin by approximately 100 basis points, as compared to the fourth quarter primarily as a result of the Talon acquisition.

Operating expenses in the fourth quarter included the full effect of the Cal-Weld acquisition and $560,000 from Talon. Looking at our new run rate for 2018, we expect our operating expenses to increase to approximately $13 million in the first quarter, reflecting the full impact of the Talon acquisition.

Beyond Q1, we expect to see modest increases each quarter, as we are planning to add limited number of incremental resources to support the company’s growth. Interest expense will increase to approximately $2.3 million a quarter.

The tax rate on an ongoing basis will be in the range of 11% to 13% depending on the level of regional profitability we experience. While this is an increase from 2017, we are benefiting from the lower U.S. tax rates as well as maintaining the benefit of our tax holiday in Singapore. That is in place through 2019.

Our cash tax rate will be approximately 5% in 2018. Operator, we are ready to take questions..

Thank you. [Operator Instructions] The first question will come from Patrick Ho of Stifel, Nicolaus. Your line is open..

Thank you very much, and congrats Tom on the great year. And Jeff, welcome aboard. The first question I have – in terms of the acquisitions you made in 2017 in both Talon and Cal-Weld, I know it’s still very early in the process.

But how do you look at potential revenue synergies between your core product portfolio as well as those that are being added from both of those companies? And what do you see right now in terms of the customer interest? Are they helping you, I guess, develop new solutions that kind of integrate the various product offerings that now your company provides?.

Hey Patrick, hi, it’s Tom. Thank you very much. With regard to the acquisitions, we’ve now owned Cal-Weld for approximately five months, and we are already seeing revenue levels at Cal-Weld that are beyond the numbers that we originally gave you and everyone when we first bought them.

So we’re already in a kind of overachieving mode from a revenue standpoint. But what’s important is, and I think I might have said this a couple of times, both Talon and Cal-Weld are companies that supply, for the most part, just one of our two big customers.

And so right now, we’re seeing ongoing growth in the demand as – especially at Cal-Weld, from that one big customer. However, we also believe that there’s a significant and real opportunity to supply the second big customer, who is now currently a customer, with the outputs from both Talon and Cal-Weld.

So I don’t necessarily want you to think that, that means they can both get twice as big. But I do want you to think that over time, we will be adding capacity to both of those entities and we will be growing the revenues disproportionately as we add capacity.

Bottom line is they both serve underserved markets at this point, and we certainly plan to take advantage of that..

Great, that’s helpful. And maybe as my follow-up question for Jeff in terms of managing both the M&A – the deals that you just have closed as well as the supply chain, I mean, we’re talking about record demand for tool shipments at this time.

How do you manage these different parts and continue to kind of meet these record levels of equipment shipments in terms of your inventory management? Now you’ve got a deal with Talon, what are some of the levers you can pull?.

Well, and specifically in inventory, you’ll see that we invested in inventory to support our customers and the revenue levels. I mean, we’ve done acquisitions with debt and cash flow. Our cash flow generation is going to be stronger in 2018 than it was in 2017, maybe because we’re going to put some focus on improving some of our inventory turns.

But having said that, we’re – we feel pretty firm that we have all the capital that we need. In addition, we’ve – we’re in the process of refinancing the debt and potentially adding some additional dry powder..

Patrick, one thing that I should add, when we bought these companies and also Ajax, which we bought in 2016, we don’t run them as standalone entities. We have a functional organization.

We take their organizations and align their functions with our leadership so that the operations folks at either Talon or Cal-Weld will report in – through Kevin Canty, and the materials folks in both of those places will report in through our VP of Supply Chain.

The R&D folks at both of those organizations will report in through our R&D executive, as with sales and marketing. And by doing that, we kind of almost instantly integrate their supply chain with ours, number one, which serves some benefits, insofar as there are some complementary areas where we use the same suppliers.

But second is, it allows us to put kind of the larger force of, say, our size into the play and their supplier base as opposed to just a smaller size that they both individually represented in. And with that, we’ve had obviously a very good success in terms of not only keeping their revenue stream going but also being able to grow it..

Great. That’s helpful and congrats again. Thanks a lot..

Thanks, Patrick..

Thanks, Patrick..

Thank you. The next question is from Karl Ackerman of Cowen. Your line is open..

Hi Jeff, I want to extend my congrats to you on your new role and opportunity at Ichor..

Thanks..

A question for Tom and Jeff on margins. While I think investors understand how your margins are captured to a degree by virtue that you are a contract manufacturer, I think one of the misperceptions on your stock is the flexibility of your financial model. In the event, we were to see some exhaustion of the shock impacting WC spending.

So could you speak to the flexibility of your labor costs? And additionally, could you remind us whether there are any cost synergy assumptions in your financial guidance from the recent acquisitions you have completed?.

Yes, I’ll answer that one for you. So we continue – there are a couple of things that you should know about our costs overall. And primarily, the – we’ve made a decision, I refer to this at times last year, that we have mostly a variable cost. We haven’t spent a huge amount of capital to automate processes, et cetera. Most of the costs are variable.

And as the volume drops per some outside event, which we all know could happen, we can easily lower those variable costs and proportioned with the drop in revenue and maintain the better part of our gross margins. So we have a lot of flexibility in the downward direction.

Thank God, we haven’t had to exercise that much in the last three years or so, but we definitely have that. And the fact of the matter is we pay a little bit of a price for that because when we see growth in revenue, we don’t necessarily get a lot of leverage through our operations.

But that’s a decision, an operating decision we have made because of the industry we’re in, and we haven’t yet joined the bandwagon that says there will never be another setback or cycle in semiconductor. With regard to the new acquisitions, as of now, there is some but not a great deal of leverage between the operations.

Most of those are in what you would describe as overhead functions. Certainly, materials management is probably the leader amongst those, also in some cases, on the engineering side. And then obviously, there’s some amount of duplication with regard to the customer-facing activities.

We’ve exercised some of those synergies already, and some of them are left for us to still harvest..

Understood. I appreciate that. I guess, as a follow-up, sticking with margins, I know that seasonality is somewhat of a misnomer in semi-cap.

But how should we think about the linearity toward your new target margin model as these recent acquisitions drive a richer product mix for you over the next 12 months to 24 months?.

Hey Karl, it’s Jeff. We haven’t really put "a quarterly or an annual" revenue number on our long-term model. I’d say when you look at the acquisitions we’ve done and the accretion that we’ve talked about, they’re on track. I’d say maybe they’re slightly smaller proportioned versus the other pieces of the business as we continue to grow.

So we might not see 100% of those right away. But I’d say we’re making really good progress. We have good plans in place for 2018. I would say that 2019 is probably the year that Tom and I would expect to try and hit those models, provided that the spending environment remains about the same..

Understood, thank you..

Thank you. The next question is from Sidney Ho of Deutsche Bank. Your line is open..

Thanks for taking my question. The – your optimism on wafer fab equipment market is shared by the public comments from your key customers.

Can you talk about some strong pipelines heading into Q2? Can you give us some color as to what is driving that pipeline? And just a follow-up to that, last year in Q3, you had a quarter where your base business dropped more than 10% quarter-over-quarter.

Do you expect similar seasonality this year?.

Yes. Sidney, hi. Those are good questions. I think I kind of alluded to this in my comments in that right now, we’re seeing continued strength in 3D NAND, but we’re also seeing strength in DRAM. We’re seeing strength coming in on the foundry side and even beginning in logic.

And so I think one of the reasons why our core business is up so high is that they – I’m not going to say we’re hitting on all cylinders, but from a device standpoint, in terms of driving our business, it does seem like a far more even demand across the different device categories, and I’m happy about that.

You know that with both of our big customers, we service, in essence, every one of their platforms in terms of gas delivery. And as a result, for us, we’re slightly agnostic as to whether demand is really being pushed by memory or DRAM versus 3D versus logic versus foundry. We’re slightly agnostic as to how those things play out.

We’re just happy to see them doing really well right now. To your question regarding the third quarter last year, I wouldn’t regard that as seasonality, so I wouldn’t necessarily predict a downturn in Q3. There’s nothing I see right now. And my visibility to Q3, as you know, is not that great.

But there’s nothing I see right now that would lead me to believe there’s going to be a seasonal downturn in Q3. And so I think the concept of seasonality doesn’t enter into the picture.

We keep our eye out, we’re getting a little more visibility than we used to, why – which is why I felt very comfortable in saying I feel very good about Q2 at this point. And we’ll tackle the second half when we get to it.

However, I think you referred to our customers who have kind of given out the signal that they certainly expect this year to be a lot more reasonably balanced than perhaps we thought of 2017 in the first part of last year..

That’s helpful. Thanks. And then, the other question I have, in the past, you have talked about the market size for both gas delivery and chemical deliveries as well as your share within each market.

I know you don’t want to talk about that every quarter, but I was hoping you could give us that kind of data maybe once a year, especially given your new product in the chemical side is supposed to be ramping up pretty aggressively this year..

Yes. I’ll tell you what, Sidney, let’s do this, the – since we talked about that rather openly in the IPO road show especially a year ago in December, all of those markets have grown dramatically. And our share on those markets have also grown.

And so it seems to me like it’s a better idea for us to go back and – I mean, we know those numbers off the top of our head, but to – before getting ahead of ourselves and announcing anything publicly, we’ll do a little more homework and maybe we can tackle that in another call..

Okay, sounds good. Thank you..

You’re welcome..

Thank you. [Operator Instructions] I do show we have another question from Karl Ackerman of Cowen. Your line is open..

Hi, I just had a follow-up question just simply on cash usage.

Now you are busy in the integration process of Talon and Cal-Weld, how are you thinking about prioritizing capital going forward given your confidence of higher cash generation this year? And separately, is there a target leverage ratio you want to achieve before looking at bolt-on acquisitions? Or maybe asked another way, is there a maximum threshold you would not like to exceed in the event you found a highly synergistic asset?.

Karl, I’ll take the leverage question. I mean, I think our comfort level would be kind of in the mid-2s maybe as the leverage, as a percentage, as a multiple of EBITDA. And so I think we would get comfort there. I think we’re pretty disciplined in our M&A. We don’t – we’ve been pretty accretive right out of the gate, so that’s always helpful as well.

And then you’re talking about prioritization of how we invest and our capacity plans. I’ll leave it to Tom to answer that, but that’s a very disciplined approach as well..

Yes. So we continue to remain very acquisitive. Number one, we’re happy with the results. And number two, we think the strategy we’re using works well.

We’ll continue to look for opportunities that will be incremental to our gross margin and accretive to our earnings per share and which will work well with our emphasis on fluid dynamics and the fluid dynamics environments. And we will continue to stay away from using equity at this point.

I am not a big fan of using equity, especially at this point, in what I consider the valuations, et cetera. And so I’m really happy that we are now at a position where even with the ongoing growth, we’re going to start generating quite a bit of cash internally. You’ll see that quarter-to-quarter.

You – it definitely started in Q4 where we generated $27 million of cash. We will use that monies in largely for M&A activities at this point. I don’t foresee share buybacks at these prices and I don’t – I definitely don’t foresee dividends..

Very much, appreciate it. Thank you..

You’re welcome..

Thanks, Karl..

Thank you. [Operator Instructions] And next question is from Graham Tanaka of Tanaka Capital. Your line is open..

Thank you, congratulations on another great quarter. Just wanted to ask about any cost pressures you may see. You’re talking about lining up capacity. I think you’re about – start talking about internally. But I wanted to make sure that you had alternative supply from your suppliers.

And what kind of cost pressure you might see relative to pricing? Thanks..

Yes. We’re growing again this quarter very, very rapidly and obviously with pretty good amplitude. Having said that, I can – I – having gone through very similar kinds of growth quarters last year, I would absolutely say that overall, the supply chain right now is in considerably better shape than it was, say, during Q1 of last year.

And I think a lot of folks throughout the entire supply chain have added capacity and have also added a great deal of understanding and confidence in the market, which is also a very big thing as you attempt to add capacity. So I feel good about that right now, certainly much improved from, say, a year ago.

And I would just add to that, that in terms of our own capacity adds, I think those – that those adds that I spoke to, we’re very confident they’ll all be in place through this year and be ready to – the kind of way we did that last year was we built capacity and immediately put it to use, and I would expect something similar to that.

So that’s in regard to the supply chain.

Could you repeat the second part of your question?.

I just want to understand what – if you’re seeing any cost pressures or anticipating cost pressures. And how does that look relative to your contract pricing? Thanks..

Yes. It’s an interesting thing in that right now, we all are fundamentally working extraordinarily hard to make sure that deliveries are on time, as we just discussed, building capacity.

And I would say, from an overall perspective, within the entire ecosystem, capacity and delivery and hitting ship dates and satisfying customers are probably the higher calling card than cost. There’s always cost in any kind of business with – that has to be somehow contemplated, and we’re no different.

I’m just trying to tell you that the real emphasis right now is making sure deliveries are on time, customers are satisfied and the ongoing relationships both with the OEMs and the OEMs’ relationship with the end users are kept very strong..

I just was wondering if there’s any possibility that component prices might be rising and not reflected in your contract pricing? Or is it the other way around?.

Yes, I can’t speak to that precisely. Maybe I’m not the best person to answer that question..

Great, thank you..

You’re welcome..

Thank you. [Operator Instructions] And there are no further questions in the queue at this time. Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program, and you may all disconnect. Everyone, have a great day..