Sheri Brumm - Vice President of Finance Jim Scholhamer - CEO Casey Eichler - President and CFO.

Edwin Mok - Needham Christian Schwab - Craig-Hallum Capital Patrick Ho - Stifel Nicolaus.

Welcome to the Ultra Clean Holdings Q2 2015 earnings conference call. My name is Katie and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. There will be a Q&A session after the company has presented its results. Please note that this conference is being recorded. I will now turn the call over to Ms.

Sheri Brumm, Vice President of Finance. Sheri, you may begin..

Thank you, operator. Welcome to our second quarter financial results conference call. Presenting today are Jim Scholhamer, Ultra Clean’s Chief Executive Officer; and Casey Eichler, Ultra Clean’s President and Chief Financial Officer.

Casey will begin by discussing the financial results for our second quarter, and Jim will follow with some remarks about the business. A few moments ago, we issued a press release reporting financial results for the second quarter ended June 26, 2015.

The press release can be accessed from the Investor Relations section of Ultra Clean’s website, along with the information for the tape delay and replay of the live webcast at uct.com. Together with our recently issued press release, this conference enables the company to comply with SEC regulations for fair disclosure.

Therefore, investors should accept the contents of this call as the Company's official guidance for the third quarter of fiscal 2015. Investors should note that only the CEO and CFO are authorized to provide Company guidance.

If at any time after this call, we communicate any material changes in guidance, it is our intent that such updates will be done officially via public forum such as a press release or publicly announced conference call. The matters that we discuss today include forward-looking statements as defined in the U.S.

Private Securities Litigation Reform Act of 1995, related to matters including our future financial performance, new product orders and shipments and industry growth.

Investors are cautioned that forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those projected in the forward-looking statements. Some of those risks and uncertainties are detailed in our filings with the Securities and Exchange Commission.

The Company disclaims any obligation to publicly update or revise any such forward-looking statements or to reflect events or circumstances that occur after this call. Now Casey will discuss the second quarter results..

Thanks Sheri. The second quarter was a solid one for UCT. We achieved revenues above our expectations, improved margins due to ongoing cost reduction and the recognition of full-quarter of Marchi Thermal Systems which was acquired during the first quarter.

We generated strong cash flow in the quarter due primarily to the linearity of shipments which drove manufacturing efficiencies. Revenue for the second quarter was $117.5 million, a reduction of 6.2% from the prior quarter versus a $132.7 million when compared to the same period a year ago.

Semiconductor revenue for the second quarter was $110.4 million, a decrease of 2.2% from the prior quarter and non-semiconductor revenue was $7.2 million compared to $12.5 million in the first quarter as anticipated.

Although non-semiconductor revenue has decreased over the last several quarters, we continue to pursue other opportunities outside of semiconductor. We do not anticipate any significant change on our non-semi business over the next several quarters. Revenue outside the U.S. stayed steady at 33% for the quarter compared to 32% in the prior quarter.

Two customers accounted for over 10% of the revenue for the quarter. Gross margin improved to 16% from the second quarter compared to 15.9% in the first quarter within our targeted business model of 15% to 18%. Gross margin was favorably impacted by the mix of products shipped and other operating efficiencies.

Second quarter operating expenses were $14 million or 11.9%, excluding one-time charges and amortization of intangibles compared to $13.6 million or 10.8% in the first quarter. Expenses increased sequentially as we included a full quarter of Marchi Thermal System cost along with higher stock comp expense.

Our goal of increasing revenue and profitability remains a priority, we will continue to look at ways to reduce our overall cost restructure ranging from improving operating efficiencies to lowering manufacturing and overhead cost and streamlining and consolidating facilities worth possible and appropriate.

Operating income was $3.4 million or 2.9% before interest expense, income tax in the second quarter compared to $2.6 million or 2.1% for the first quarter. Excluding amortization of intangible and one-time charges, our operating income was $4.8 million or 4.1% in the second quarter compared to $6.3 million or 5.1% in the first quarter.

Interest expense for the quarter was $543,000, a slight decrease of approximately $9,000 quarter-over-quarter. Taxes were approximately $860,000 or 28% for the second quarter and we anticipate the third quarter will remain similar. We continue to look at ways to reduce our tax rate and balance our model globally.

Second quarter net income was $2.2 million or $0.07 per share. Excluding amortization expense and other one-time charges, second quarter net income was $3.2 million or $0.10 per share compared to $0.14 per share in the first quarter.

The diluted shares outstanding were $31.8 million for the quarter, which increased 813,000 shares due to annual stock ramp. Non-cash charges for the first quarter were $1 million related to stock compensation, $968,000 related to depreciation and $1.4 million related to amortization of intangibles.

Turning to the balance sheet, the cash on hand was a healthy $76.6 million, an increase of $7 million from the prior quarter. Net cash increased $8.2 million and we anticipate a slight increase in the third quarter as well. This increase was due to better cash generation from efficiencies in manufacturing, product mix and linearity in shipments.

Accounts receivable was $57.5 million, down $12.1 million from the first quarter due to lower sales and timing of shipments. The number of days outstanding increased to 44 -- decreased, excuse me, to 44 from 50 days at the end of the first quarter. Accounts payable of $46.5 million decreased approximately $3.7 million quarter-over-quarter.

These payable outstanding at the end of the second quarter decreased to 42 days from 43 days. Net inventory was $64.6 million, an increase of $4.7 million over the prior quarter.

Majority of the increase in inventory was a result of a large amount of anticipated shipments in July that were delayed at Q2 and the ramp up of shipments from our Singapore facility expected in the second half of the year. Inventory levels are projected to be flat during the third quarter of 2015.

Now, let me shift to our guidance for the third quarter of 2015. We anticipate an increase in revenue between $117 million and $122 million. We expect non-GAAP earnings per share to be in the range of $0.09 to $0.12, excluding amortization charges.

And as I mentioned earlier, the effective tax rate for the third quarter is expected to be approximately 28%. With that, I’ll turn it over to Jim to update you on the operational highlights for the second quarter.

Jim?.

Thanks, Casey. The second quarter was a busy one for UCT. We exceeded our expectations on the top and bottom line and we won important new business with key semiconductor customers. We maintained strong gross margins of 16% within our targeted range despite sequentially lower revenues.

We increased net cash by $8 million, continue to lower our cost structure and improve profitability, all while driving towards our long-term objective.

Our area of ongoing focus include expanding market share in semiconductor equipments with an eye towards broadening our portfolio and winning new business selections with key customers, improving profitability by increasing operational efficiencies and lowering costs.

We have spent a last couple of quarters, since I took over as CEO, introducing new offerings and winning new designs that we believe will begin to contribute to revenue in 2015 and continue to ramp in 2016.

We are creating a number of new opportunities through our integration strategy by introducing new modules outside our gas panels such as transport modules. In addition, our acquisition of Marchi Thermal products earlier this year added profitable thermal solutions, including heaters, sensors and controllers.

With these enhanced offerings, we could further penetrate existing customers and significantly expand our available market for semiconductors. Just recently, we were awarded integration of a new module with one of our key customers, where we previously did not have a footprint.

This is an important milestone that will allow expansion into other similar complex assemblies. In doing so, we are adding a significant [indiscernible] for our future growth.

Another strategic initiative has been lowering our overall cost structure to minimize the impact of a broader semiconductor cycles, while making important investments as we prepare for future growth.

This quarter we made the decision to consolidate several of UCT sites to increase efficiency, select headcount and consolidate certain functions such as procurement and supply chain management. We anticipate other actions as the year progresses. After two quarters as CEO, a few things are clear to me.

First, our customers require the high quality of our manufacturing with a reliability, on-prime delivery and flexibility we provide. Second, our expanding suite of capabilities allow us to increase our penetration at new and existing customers and grow our market share.

And lastly, our ability to generate cash is enabling us to acquire and quickly integrate new manufacturing capabilities in an accretive way that continues to validate our model and add to our financial performance.

All of this should result in improved overall financial performance and continued growth in the semiconductor market this year and into next year. With that operator, we like to now open the call for questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from the line of Ash Bhalla. [ph].

Yeah, hi, can you guys hear me?.

Yeah, we can.

How are you doing?.

Good. How are you? Congrats on a great quarter..

Thank you..

Jim, I wanted to talk to you about new business and design wins that you talked about.

First of all, what are you guys thinking about as far as [indiscernible] and what is -- can you give us some kind of an idea on this new module integration, what kind of dollar figure, what kind of impact that would have for your business in 2015 and 2016?.

Sure. As far as the [indiscernible], we look at it in the way that there is roughly $30 billion to $34 billion of total spend for the OEM equipment customers in the semi-cap equipment space depending on the year. They are spending backwards we believe $10 billion to $12 billion a year into companies like us or their own internal operations.

So if you look at that, we have less than 5% of that whole swimming pool. So as we go forward and we get new products and new capabilities that opens up from less than 5% over time, we are going to grow and have a capability to get into spread across that larger pool.

As far as the new modules and lot of the business that we are winning, as you know, in this business it takes a period of time to feather in the revenue. So we will see some revenue, we will be seeing some revenue in 2015 but the majority of the revenue as time to convert and switch over will happen in 2016..

Sure.

And I mean is that 10%, 5%, 15%, 20% of your business or?.

Obviously right now it’s starting at the very small portion, but that will grow over time. It's a significant amount of spend by our customers in areas like transport modules, front-end modules et cetera.

As we try to -- as we expand outside of the gas panel business, where we have a very large footprint, this will add a significant amount of savings for us..

Sure. So just on that, one of your largest customers talks about 3D NAND, 150000 wafer starts and how there is a big expansion coming.

Can I ask you guys, are you designed into any of the 3D NAND tools for Lam AMAT?.

Yeah, Ash, we don't talk about those types of details with our customer footprint. However, our strong customers where we have a very strong footprint are also the customers that are very strong at 3D NAND and FinFET. So the short answer is, yes, we have a position in that growth..

Okay, that's great. Casey, just one last one.

You are consolidating several UCT sites, consolidating functions, what kind of -- was there any one-time expenses in the second quarter that we missed and is there any dollar amount that you can tell us in cost savings?.

Yeah. No, there really wasn't. We are just starting these efforts, as Jim noted, when he came in, we sat down and kind of looked at our footprints, see what our customers were looking at doing over the balance of this year and into next year and started to make some adjustments to that.

There will be some investment required to do that, but the ROI on that investment will be paying off pretty quick over 2016. So as we get further into it, we will be able to give a little bit better color, but right now we just wanted to make sure that everybody knew that we were looking at our capacity, our overhead and adjusting as appropriate..

Alright, great. I will get back in the queue..

And your next question comes from the line of Edwin Mok with Needham..

Thanks for taking the question and congrats on a good quarter. So first question I have is, I guess visibility. If I look at your 3Q guidance, it kind of imply your revenue you already got back or your semi revenue already got back to your 1Q level.

Is this -- how do you kind of think about your business now, is that mostly driven by the new ones that you mentioned either this quarter or previous quarter, was it just the market recovering or your exposure or your customers buying more? Can you give us some color on that?.

Yeah, we – as you know, between us and our customers, there is a lot of things that cause a delay in revenue, inventory, the way that customers revenue in the service business, the way revenue is recognized, so there have been some pickups and some wins that you’re seeing start to come into the quarter, but there is also a bit of just revenue flow through.

It’s not completely connected to how our customers’ revenue move up or down. .

I see. That’s helpful.

And then I think it was Casey who mentioned that you guys expect your inventory to remain at similar level exiting this coming quarter, or this current quarter, is that sign of confident that you expect your business to be running at a similar – even higher level because I think you also mentioned that, I think, last quarter you had built up inventory as a result of I guess expectation for this ramp? Any color?.

Yeah, I mean, that’s always the tricky part right, if you get down to the end of the quarter, you don’t know what shipments are going to get pulled and pushed by your customers because of their customer needs and so at the end of this quarter, we have a little bit of a build in inventory, because it went that direction at the end of this quarter.

I mean, we are looking at a quarter that’s going to be slightly up off of our guidance and so when you look it at the end of the quarter, we just – it’s hard to tell right now what the push and pulls are going to be, but we think it’s going to be relatively similar – the inventory level needed exiting Q3 is going to be relatively similar and so that’s why I said, it was roughly going to be flat.

.

I see. Okay, that’s helpful.

And then on the new module win that you mentioned, Jim I just want to clarify I understand the way you have won, I think, your commentary suggest that you are producing or it’s going to be making the front-end part of process equipment for your customer, am I understanding correctly?.

There were several different – the systems are made of several different types of modules, process modules, vacuum transport module, atmospheric transport module, so we are winning business in the vacuum and atmospheric transport module area as well as in modules and some other non-vacuum deposition systems. .

Okay, I see, that’s helpful actually. And then can I ask you a question, Casey, on the guidance? If I take your guidance number, imply that, you either will be lowering costs or lowering your OpEx or increasing gross margin in the coming quarter, just based on I think the midpoint of the guidance that you implied on, right.

So I was wondering if you kind of give some color on that and what is driving the improvements either in gross margin or cost of goods sold?.

Yeah, I mean, obviously it’s always a product mix issue as well, so in the margin side of it, the material content versus the labor content and the mix of the products and so you try to get a beat on that. And as you know, the configurations change and a lot of things change throughout the course of the quarter.

But that’s really the margin side of it. We have got some savings that are coming into the margin side as we – if you go through this process that we talked about and trying to right size the different facilities, but really it’s kind of a mix issue.

We had a pretty good mix last quarter as I indicated, and so you try to take that forward and see where you’re going to end up.

From an OpEx basis, again, we were talking over the last couple of quarters about trying to get some efficiencies and that we have got some things that are just natural that happen through the year like I mentioned the stock expense that comes in that we always obviously have stock grants et cetera. And so that feathered in a little bit this quarter.

When we look forward, I think we are going to have a little bit of opportunity to be able to realize some benefits there as well.

Now remember, we are also still continuing to invest in some new adventures this year, primarily prototyping and 3D printing, so that comes in as well, but a lot of that investment has been done in the first half of the year. .

I see, that’s helpful.

Finally, I know you guys are hiring, is that mostly for the – at least hiring here in the Bay Area, is that mostly for prototyping type applications?.

In the company of our size, some hiring is simply replacing some attrition as needed, but also yes, we have added in the prototyping area. We are constantly adjusting our sites for what’s required.

Some sites we have are going up and we are hiring in those sites and other sites have less business as customers move their business around and so at no sites, we’re reducing our employee headcount. So at net-net, we’re holding our headcount relatively flat, up in the US and increasing more in the Singapore area..

Right. To add to that, what I would say is if you know any good machine set [ph], you can have them give us a call, that’s one of the areas where we’ve been looking for people and we’ve seen some growth and so that’s one area that I think in the local bay area if you’ve been paying attention that we’ve been actively recruiting more..

Great. That’s all I have. Thank you guys..

You bet..

And your next question comes from the line of Christian Schwab with Craig-Hallum Capital..

Congratulations on a good quarter.

As we look on these new modules, was this a new outsource opportunity or do we take this from a competitor?.

It’s a combination of the two..

So one part of the design win was outsourced and the other one you took from a competitor?.

Yeah. There are a few modules that we won in the last quarter and so it’s somewhat split..

Okay. And then, you guys have talked about over the next few years, being able to organically grow the business, say roughly $250 million.

As we look at increasing the revenue and market share and broadening the product portfolio, do we have the product portfolio currently to go do that or we’re going to have to make some acquisitions, not necessarily acquisitions that give us revenue growth, but acquisitions that would actually broaden the product portfolio that would cause us to be able to take more share.

Does that make sense, Jim?.

Yeah. We definitely are looking and planning on broadening our capabilities across the spectrum and areas that make sense for us and that bolt-on to our business and we’re looking at how to do that organically and also inorganically.

So organically, there are simply things, CapEx spending that can be spent a relatively small amount and/or just bringing on the capability, investing in new capabilities that we don’t currently have. So we’re looking at both opportunities on how to expand our footprint..

Did you -- so I guess lastly the follow up on that, do you have the product portfolio in hand today, to go with the other $250 million worth of business over the next few years?.

No, not yet..

Not yet. Okay. Perfect. Thanks guys. Good quarter..

Thank you..

And your next question comes from the line of Patrick Ho with Stifel Nicolaus..

Thank you very much.

Casey, maybe first in terms of your comment about linearity during the quarter, given the volatility and a lot of times with very back end loaded type quarters for your type business, one, can you explain why you think there was greater linearity this past quarter and secondly, I know it’s early in this quarter, how does it look like it’s shaping up for the current September quarter?.

Yeah. It’s always a tricky business to try to understand how the quarter is going to roll out from that standpoint. I don’t know, I can’t point to anything in particular that says why we were more linear this quarter.

We probably had a little less churn as you know in configuration some of that, which tends to allow us to have things a little smoother in the quarter and the other thing is we didn’t have a huge revenue move up or down and so that again also tries to bring a little linearity in to it.

From our standpoint, on a manufacturing standpoint, it’s helpful and makes us more efficient, but the other point I was trying to make is it also really helps us generate cash and that’s one of the reasons we had such a good cash generation quarter is because when you’ve got more shift out or at least more linear shipments, it helps generate cash.

So it’s a good thing, I wish I could tell you how to predict it exactly, but it really is a tough thing to do..

No, understood.

Maybe going to the gross margin line, you guys did very well this past quarter, given some of the restructuring efforts that you’re talking about in the consolidation of sites and functions, going forward over the next several quarters, what’s going to be I guess the bigger influence on the gross margin movements, is it going to be these efforts that you’ve taken or is it still going to be primarily product mix?.

Yeah. I think we’ve talked over the last year or so about some of the things we’re doing to get more efficient and I think a lot of that we brought into the margin line, we struggled for years to get to the 15 to 18 and we've been 15 to 18 over the last couple of years.

So, we still work efficiencies but we've built out the global supply chain and a lot of the other things that I think really bring in some margin for us.

So right now, there would be some of it from that but a lot of times it is the mix and it's two things right, it's obviously the different products and customers that we have but it's also whether we're doing things in low cost regions versus in the U.S.

so that's primarily China for us, we also have facility in Cebu et cetera, but that kind of mix helps as you can see, we picked up a percent in Asia, so there wasn't a big move there this quarter but I think it was favorable..

Great, question from me in terms of semi and non-semis business. I know you've talked about, in fact, that's primarily a 2016 story.

As you're going through a lot of these, I guess qualifications with customers, what's the typical turnaround time from when you begin this type of qualifications to when these customers then start ordering I guess the solutions that you’ve qualified for?.

Yeah, this is Jim, it's a great question, actually they fall into two buckets; one is when you’re winning business from a competitor and then the time to switch over, which takes three to five quarters until you see the full revenue start to come through.

The other bucket is when you're winning a new design or a new product area and that can take anywhere from four to eight quarters before you start to see that revenue flow through significantly..

Great, thank you again, nice quarter..

Thank you..

Thanks Patrick..

Thank you ladies and gentlemen, we have no further questions at this time, this does conclude today's conference call, thank you for participating, you may now disconnect..

All right, I appreciate it and look forward to seeing all of you over the next quarter. Thanks a lot..

Thank you..