Sheri Brumm - SVP, Finance Jim Scholhamer - CEO Casey Eichler - President and CFO.

Dick Ryan - Dougherty & Company Edwin Mok - Needham & Company Patrick Ho - Stifel Nicolaus.

Welcome to the Ultra Clean Holdings Q1 2016 Earnings Conference Call. My name is Marcy 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 Sheri Brumm, Senior Vice President of Finance. Sheri, you may begin..

Thank you, operator. Welcome to our first quarter 2016 financial results conference call. Presenting today are Jim Scholhamer, UCT’s Chief Executive Officer; and Casey Eichler, UCT’s President and Chief Financial Officer.

Casey will begin by discussing the financial results for our first quarter 2016, and Jim will follow with some remarks about the business. A few moments ago, we issued a press release reporting financial results for the first quarter of 2016 ended March 25, 2016.

The press release can be accessed from the Investor Relations section of UCT’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 call enables the Company to comply with the SEC regulations for fair disclosure.

Therefore, investors should accept the content of this call as the Company’s official guidance for the second quarter of 2016. Investors should note that only the CEO and the 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 first quarter 2016 results..

Thank you, Sheri. Results for the first quarter were on track with the industry-wide semiconductor capital equipment recovery. Revenue was $112.2 million, an increase of approximately 8.5% from the prior quarter and a decrease of 10.4% compared to the same period in 2015.

The improvement over the previous quarter was due primarily to an increase in semiconductor capital equipment demand from the fourth quarter. Consistent with our strategy to target opportunities in the semiconductor capital equipment market, semiconductor revenue was 94% of total for the first quarter, an increase of 9% from the prior quarter.

Non-semiconductor revenue was $6.4 million for the first quarter, roughly flat with the fourth quarter. Revenue from outside the United States accounted for 44% in the first quarter, compared to 38% in the prior quarter. This increase was driven by the ramp in production within Southeast Asia.

During the quarter, two customers accounted for more than 10% of revenue. Despite sequential revenue growth in the high single digits, gross margin for the first quarter remained roughly flat with the fourth quarter at 13%.

This was mainly a result of higher material costs due to mix product shift as well as direct labor costs required to meet customer needs. We anticipate returning to our target gross margin range of 15% to 18% for the balance of the year.

Operating expenses for the quarter were $15.3 million compared to $16.7 million in the previous quarter and $17.3 million in the prior quarter. The quarter-over-quarter reduction was due to higher onetime charges incurred last quarter in addition to lower intangible amortization expense in the first quarter.

We continue to look at ways to reduce and be more effectively managed our overall cost structure. Excluding onetime charges, amortization of intangibles, operating expenses for the first quarter were $13.7 million or 12.2% of the revenue as compared to $13.8 million or 13.4% in the fourth quarter.

During the quarter, we incurred pretax charges of $1.4 million for intangible assets amortization and $100,000 related to the combination of two of our U.S. facilities.

Operating loss was $700,000 or 0.6% before an interest expense and income taxes as compared to an operating loss of $3.3 million or 3.2% in the fourth quarter and operating income of $2.6 million or 2.1% in the first quarter of 2015.

The quarter-over-quarter improvement resulted from reduction of an intangible amortization and onetime costs as well as marginal improvement in our operating expenses.

As mentioned in the last quarter, we recorded a non-cash charge of $13.9 million for evaluation allowance on deferred tax assets related to the Company’s net operating loss carry-forwards. During the first quarter, we incurred a charge of $1.4 million related to our valuation allowance position.

Excluding the impact of the valuation allowance position, the tax rate for the first quarter would have been 23.8%. For the year, we continue to expect a pro forma annualized rate of 28%.

Interest expense for the quarter was $692,000, an increase of approximately $121,000 and the decrease of $512,000 from the fourth quarter and the first quarter respectively.

Interest expense for the first quarter of 2015 included the write-off of debt issuance costs resulting from the restructuring of our debt facility related to the acquisition of Marchi Thermal Systems.

First quarter net loss was $3.2 million or $0.10 per share compared to a less of $15.8 million or $0.49 per share for the fourth quarter and net income of $1.2 million or $0.04 per share for the first quarter of 2015.

The sequential change was a result of a onetime non-cash valuation allowance expense related to deferred taxes recorded in the fourth quarter. Excluding pretax charges for intangible assets amortization and the combination of two of our U.S. facilities, first quarter net income would have been breakeven.

Diluted shares outstanding were 32.3 million for the quarter, an increase of 97,000 shares from the prior quarter. Non-cash charges for the fourth quarter were 1.1 million related to stock compensation, 1.5 million related to deprecation and 1.4 million related to amortization of intangibles.

Turning to the balance sheet, cash on hand was $45.5 million, a decrease of $4.6 million from the prior quarter. The decrease was a result of loan obligations coupled with fixed asset purchases. Outstanding debt was $73.7 million, a decrease of $1.9 million from the previous quarter. Net cash decreased $2.7 million in the quarter.

We anticipate net cash will be relatively flat in the second quarter. Accounts receivable was 66.7 million, up 7.5 million from the prior quarter. Day sales outstanding were also up slightly to 53 from 51 days at the end first quarter. These increases were primarily due to higher sales in the first quarter.

Accounts payable of 53 million, increased $13.3 million over prior quarter as inventory purchases were concentrated towards the end of the first quarter in anticipation of increased sales in the second quarter of 2016. This resulted in our day sales outstanding increasing to 49 days from 40 at the end of the fourth quarter.

Net inventory was 82 million, an increase of 9.3 million over the prior quarter. The increase in inventory was a result of higher demand in the first and second quarters as conditions in the semiconductor capital equipment market improved.

Looking at guidance, we expect to see a further recovery in the semiconductor capital equipment market during the second quarter, leading to a sequential increase in revenue, gross margin, and net income. Our guidance for revenues in the second quarter is between 123 million to 128 million.

Operating expenses as a percentage of revenue should decline in the second quarter. Earnings per share would be in the range of $0.02 to $0.05. Excluding intangible asset amortization costs of $1.4 million, earnings per share are expected to be $0.05 to $0.08. Now, Jim will discuss our operating highlights for the first quarter.

Jim?.

Thanks, Casey. 2016 began what we believe will be a multi-quarter recovery for UCT. Coming out of the fourth quarter, loads in the semiconductor capital equipment market we saw momentum return evidenced by the 8.5% sequential increase in revenue.

For some time now, as part of our broader strategy, we have been talking about our transition to more of any equipment manufacturing partner, offering a broader suite of capabilities.

This strategy has begun to play out and we’re seeing initial success in winning new business at our customers with new offerings, but there is an inevitably a learning curve associated with the transition of this size. While we have made great progress, our profitability didn’t keep pace with our revenue growth in the first quarter.

In the last year, we have expanded our offerings by way of acquisitions to drive improved financial performance and value creation over the long-term. In integrating these new capabilities, we are changing the way we do business.

Part of this profit has been optimizing our operations including implementing new processes and procedures, better utilizing our facilities and moving manufacturing to more customer centric locations. While this has been a significant learning curve, we believe it is a temporary but necessary step to drive significant future growth.

Our vision is to be a global leader in the design, engineering and manufacturing of critical module subsystems and turnkey solutions for the semiconductor capital equipment industry.

End market drivers such as the mobile revolution, the Internet of Things, connected cars and advanced security coupled with the trend toward big data should continue to spur demand for leading edge semiconductors. As technologies move towards 3D architectures, more complex deposition and edge processors are required.

These trends are driving increased capital intensity in our cola product market and enabling leading equipment manufacturing partners like UCT to play a more pivotal role in the value chain going forward. To capitalize on this, we have adopted a differentiated analytical and collaborative approach to working with our key customers.

By developing a detailed understanding of customers’ individual product needs, we partner with them early in the design process to solve their technical challenges, focus on product excellence and develop design for manufacturing offerings.

In so doing, we minimize the risk and ensure long-term relationships, putting us in a solid position to pursue a variety of business opportunities. Simultaneously we plan to make select incremental investments that provide the greatest ROIs as we scale our business.

In line with our strategy to grow and become larger and more geographically diversified company, one such investment is to enhance our ERP systems. Going forward, it will be imperative that we are able to make best informed decisions and remain nimble and flexible to meet our customers’ rapidly changing requirements.

A modernized ERP system scaled to our needs should allow for greater operational efficiency, improved visibility, decreased lead time, increased throughput and elevated customer satisfaction. This system will act as a platform to allow us to pursue opportunities at a faster rate while continuing to provide quality product on time and within budget.

Looking ahead, we expect steady increases in revenue as a semiconductor capital equipment market begins to rebound from the sharp decline in the fourth quarter. In the near-term, industry sentiment is predicting the biggest contributor to growth will be 3D NAND fabs, foundries and preparation for the ramp of 10-nanometer in 2017.

Additionally, we expect to see all of adaption accelerated in the short term especially in mobile leading to a stronger display equipment forecast for the year. With our exposure to these high growth areas, we expect to benefit commensurately. In summary, we have changed the way we do business.

We have become a more integrated partner, manufacturing entire pieces of equipment and whole modules with the potential of significantly higher revenue growth. Our strategy is playing out as we expand our capabilities, invest for the future, build moment this year and work towards our target model.

With that operator, I would like to now open the call for questions..

[Operator Instruction] So, first question comes from the line of Dick Ryan..

Casey, just a question on gross margins, looking back over quarters where you were kind of in this Q2 guided range, low to mid 120s, you’re north of 15%, pushing 16%, and I wasn’t sure I got your comment of getting back to 15% to 18%.

Do you think you will be back in there in Q2 or is that a blended rate that you would think over time?.

Yes, let me give you some sense on that and I’ll let Jim address a little bit the margin expectations as well. So, what I was trying to refer to is for the balance of the year, we think we will be within our guidance of 15% to 18%, so for Q2, Q3 and Q4. And so that’s the near-term guidance, and so we will be back as best we can see into our range.

But let me, have Jim add little color to that as well..

Yes, Dick. So, I mean we have several moving parts. One of the things that we have been doing is trying to reduce our overall cost structure. So, one of the things that happened in this quarter is we consolidated our facilities in Texas.

And the cost to do that in the long run will be at a lower cost basis but in the short run the cost to consolidate those facilities was higher than we expected. So we expect to return it back to the gross margin model that we have been performing for the last several years..

Okay, great. And Jim, you talked about a rebound off of Q4.

Any early commentary, what you might see in the Q3, Q4 timeframe, what sort of potential rebounding you may be seeing there?.

So, Dick, you know I’ll never comment on Q3, Q4. We expect the overall trends to be very positive. We expect CapEx spending to be in line with what Gartner and others have reported.

We expect that our space in that area will continue to outperform as far as [indiscernible] and what chemistry, and so that we will benefit from the fact that we’re positioned in the whole CapEx equation, better than the market.

But there are way too many -- as you know in this industry, there are just way too many variables as far as global events and world events that it’s very, very difficult for us to predict Q3 or Q4 but we see an overall positive trend that should help us..

And you mentioned -- just one last on OLEDs.

Any contribution you can break out for us on that market and what you might be sort of expecting as far as that opportunity progresses?.

Yes. So Dick, we thought like we should call it out because it’s material improvement for us.

There is every 20, 30 years there is dramatic -- there is an inflection in displays from CRT to PDP to LCD and there is a new inflection coming with OLED, being led by mobile and then quickly pushing its way into televisions, which is a faster trend than ever happened.

So, there is a significant trend and inflection there that we thought should be called out. We have exposure to that industry; it’s not a major part of what we do, but we have a very good position on the display equipment side for OLED, and we expect that to contribute better -- contribute materially to our business but not significantly.

I want to tamper with -- it’s a nice -- it’s a tailwind but it’s not a major benefit because as we are mostly a semiconductor equipment company at this point. .

Your next question comes from the line of Edwin Mok. .

So, first just, I’ll come to the gross margin on the first quarter.

It’s about 100 or 0.1 million of restructuring charge that had impact on gross margin or 100 basis-point impact on gross margin, is that how I ask and is that you answer, Jim?.

Correct..

Okay. But beyond that, if I base on what you guided before, I thought the margin would be a little bit better than that on the last quarter given the increased volume.

Is there anything else that contribute to maybe in the margin not as much as -- not as high we expected?.

So, Edwin, I think it’s carefully good intentions right, so consolidating these two sites is going to save us money in the long run. We anticipated that there would be a certain cost of doing that and there would be a certain transition period to do that. And basically our expectation, we ended up having a bit more on that side than we anticipated.

But in the long-run, in the fundamentals everything is found and puts us in a much better position..

Yes. So just to add on to that and Jim I have some follow up to that but as I talked about -- a part of this is always mix right. And so as I said the material costs were up in the mix that we have this quarter.

And as you know that there is always a good and bad mix that happens in this time, the labor component of the mix of products as well as the material were up from where we were forecasting. But again, as you start to see a recovery, what you start to see is churn on the front end of it.

And so what you think you are going to be building at the beginning of the quarter is exactly what you are building at the end of the quarter.

And so that actually plays into the numbers as well for this quarter but the things that Jim is talking about may continue to talk about are really more of a longer term piece that they we’re going to see over the next few quarters as we transition the business..

Since we are talking about cost, so let’s stay with it. Jim, you mentioned that you guys plan to implement I guess improving your ERP system.

How much expense we expect you guys to -- how much would that cost for I don’t know let’s say in the June quarter or for the full year?.

Yes. So, in the next quarter we budgeted a few 100,000 and then for the quarter after that about 400,000 to 500,000 per quarter. And it’s -- we are being very careful in how we invest in this system. And there is a lot of changes as many of you know in the space; with the cloud, you don’t have to buy massive amounts of servers.

With hosted resources, you can variably move your cost up and down. So, we’re taking advantage of a lot of the new -- the new advances in an ERP system and we think it’s going to have a great ROI for us. So, the expenses are manageable within our business model.

And really what it does is sets us up for to growing to two or three whatever, growing our revenue dramatically. And at this point without such a system, it’s very difficult to grow your revenue very efficiently.

So, this is a very metered, very timed and very careful investment but it’s well within the budget of what we can afford and being managed very, very carefully..

So Edwin, again, just to be clear, it’s going to be a couple of hundred thousand in this current quarter and 400,000 to 500,000 in Q3 and Q4 and then obviously as we get out further, we’ll talk more about it.

That’s the P&L impact and so that’s what you will see is in a P&L impact as you know over the course of the project will be capitalizing some of the cost and experiencing some of the cost but we’ll keep you informed as we move forward as to the P&L impact..

So, moving on to business side, I guess I have two questions.

First is, is there any way you can quantify how much of your revenue now is exposed to 3D NAND latest customer equipment, anyway you can give some color on that or your position around the various product as sold into producing 3D NAND?.

As you know, we don’t breakdown our revenue by end technology.

So, what we are talking about is an overall screen effect of 3D NAND, FinFET, 10-nanometer have a higher capital intensity for dep and edge [ph] and clean and web processes and then therefore has a commensurate improvement in where we happen to be the strongest, happens as we are the strongest in that area.

And so, we don’t breakout how much is 3D NAND or FinFET but these are general tailwinds that are really going to help us over the long-term and the short term..

And Edwin, we talked at your conference about being positioned very strong in both deposition and edge. [Ph] Those are the fastest growing parts of the market partly because of this technology discussions that you just had.

And so, consequently, that’s what gives us the confidence that we feel we can have some substantial growth in our current markets as well as some of these other markets that we’re starting to get into with our existing customers.

So, we’re not only doing well in the current markets we’re in, I think we’re growing, but we’re also doing well in capturing a broader section of the markets across our customers and we think that will fuel our growth.

But these infrastructure needs and ERP system that can respond appropriately to our customers needs and needs a distributional of factories around the world that needs where our customers are and where’re they going and so that’s all the balancing and the transition that I think Jim is talking about..

Okay, all right. Last question I have, I think understand you guys have been putting lessons and helping customer design [Indiscernible] making to customers. Anyway you kind of -- or the part of the equipment, anyway you give us some metrics, give us some color where you guys at in that effort.

Can you start to be producing these frontend for customers or for often new design that you guys are working on, any metric or any color you can provide on that?.

Yes, so Edwin, yes, I think there has been a significant change in the transition of our Company as we’ve gone from a gas panel company mostly producing gas panel to now making modules or even complete system. And there has been a significant transition which has already occurred.

So when you look at our revenue, our semiconductor revenue, you’re seeing despite the market ups and downs, you’re seeing a significant increase into revenue start to show up in that especially when you discount the non-semi revenue that we moved out of in ‘14 and early ‘15.

I think if you look the revenue and the percentage of semi or the semi revenue, I think you could see that there has been a pretty dramatic improvement in the product portfolio that we’re offering and we’re starting on that need; that curve and it’s very, very promising..

[Operator Instructions] Your next comes from the line of Patrick Ho..

Casey, maybe just following up on Edwin’s question about gross margin and I’ll take it from a different angle.

Given some of your new opportunities and the new business you have in terms of the system modules you’ve talked about, did you get some of that gross margin impact because they’re kind of just starting up for right now? And what I mean by that is particularly whenever there is new business, the costs are higher initially, but once you get the volume over a couple of quarters, that kind of normalized or so, is that what you’ve experienced or was there something else?.

Yes, absolutely that’s a part of the impact. Some of it what I can was mix wave but some of is as we’re transitioning, some of our business picking up some of these new parts of the business. They’re different than traditionally what we have done. And so, we have had build out different infrastructure, we’ve had to put different things in place.

And while you’re ramping that, building proficiency in that, that’s what gives us the growth opportunity going forward. But while you’re doing that, there is a bit of drag on the gross margin, as you’re ramping that up. But I’ll let Jim talk a little bit more about those products in kind of revision to it..

Patrick, that’s a great observation, that’s definitely a piece of what we’re experiencing. We didn’t become great at breadth cap overnight, it was a learning curve and we got very-very efficient at that. As we bring in new product, we have kind of an expectation of how the cost and price will come together.

And as we learned how to manufacture, to make it and buy the component and to do what we need to, there is a learning curve that’s not always easy to predict.

So, definitely there was an element of part of the gross margin pressure, was based on the fact that we’re doing new things or bringing new products and were in a learning curve, but we’re well up that curve and we’ve resolved many of the issues around that.

And as we view at a temporary learning curve and we’ll continue to commit to the model that we’ve struck by our financial model. So that’s a very true. As you know there is many different pressures on the P&L from one angle or another and that was definitely an element as well besides the consolidation of Texas..

Great and maybe as a follow-up to that on going forward basis. You’re just setting new businesses and new opportunities require cost, I am encouraged this year that your gross margin targets are going to get back to their historical levels.

But what gives you the confidence that you won’t need to add people, other variable type of costs, as you build some of these new businesses with our key customers.

What gives you the confidence that the margin profile will get back to your traditional levels, given that you’re still in that learning curve process?.

The confidence is as I mentioned we’re kind of -- we learned a lot in the first quarter and we’re already seeing a trajectory that’s panning out. We have the capacity that we need, both people and facilities wise. And which is why you’re seeing us actually reduce some capacity which ended up in the consolidation of two sites in Texas.

And so, we have a very clear roadmap on how to control the cost and how to continue our trajectory towards the business models that we have always performed to. And so all the indicators are that we can do this..

Final question from me, just kind of a big picture industry perspective. Traditionally your gas panel products had short lead times, you don’t get a ton of visibility from your customers.

Has anything changed in terms of visibility, lead times that gives you at least a perspective looking midyear into the second half of the year, I think kind of extent which gives you a little bit of confidence that these current trends are sustainable?.

Short answer is yes. Our major customers are partnering with us more than they ever have, as they look to take advantage of the 3D NAND and FinFET and capacity increases that they need. They are also sufficiently concerned and make sure that their supply chain can meet it.

And so they are partnering with us in a level that is not typical, which is great. And so, yes, we have our partnerships with our customers in order to meet their requirements, so the end market is I think is as it’s ever been..

And this concludes the Q&A portion of today’s call..

Well, thank you for joining us today and we look forward to updating you after the second quarter. Thank you everyone..

Thanks a lot..

This concludes today’s call. You may now disconnect..