Annie Leschin - Investor Relations Jim Scholhamer - Chief Executive Officer Sheri Brumm - Senior Vice President and CFO.

Patrick Ho - Stifel Edwin Mok - Needham & Company Karl Ackerman - Cowen Dick Ryan - Dougherty.

Good afternoon. And welcome to the Ultra Clean Second Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that today's event is being recorded.

I would now like to turn the conference over to Ms. Annie Leschin with Investor Relations. Please go ahead..

Good afternoon, everyone, and thank you, Operator. Thank you for joining us today for our call this afternoon. With me are Jim Scholhamer, Chief Executive Officer; and Sheri Brumm, Senior Vice President and CFO.

Jim will begin with some prepared remarks about the business then Sheri will follow with the financial review, after which we’ll open up the call for questions. Earlier this afternoon, we issued a press release reporting financial results for the second quarter 2017.

The press release information about the webcast and how to access the replay of this call can be found on the Investor Relations section of our website at uct.com.

Before we begin, let me remind you that today’s call may contain forward-looking statements, including the company’s views regarding future financial performance, new products or orders, 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 listed here.

Information concerning these risks and uncertainties is contained in our periodic filings with the SEC, including our most recent Form 10-K and Form 10-Q, and in the press release relating to today’s call.

All forward-looking statements are based on management’s estimates, projections and assumptions as of today, and UCT assumes no obligation to update them after today’s call. Today’s call also includes non-GAAP adjusted financial measures. Reconciliations to GAAP measures are also contained in today’s press release.

And with that, I would like to turn the call over to Jim.

Jim?.

Thank you, Annie, and good afternoon, everyone. Thank you for joining us today for our second quarter conference call and webcast. Our impressive second quarter financial results underscore UCT’s ability to consistently and reliably perform for our customers during this unprecedented ramp in semiconductor equipment.

Clearly, our growth strategy focusing on the fastest growing segments of the WFE market, expanding on our capabilities to manufacture major modules is resonating with our customers. For these reasons we are again able to grow significantly faster than the markets we serve. Total revenues grew 75.8% year-over-year to $228.3 million.

Semiconductor revenue increased 79.6% and revenue from outside the U.S. rose 102.5% year-over-year. Our sharp focus on operational excellence and the flexibility of our model resulted in a meaningful expansion of our bottomline. Non-GAAP EPS grew to $0.62 from $0.10 a year ago, a five-fold increase.

As the industry transforms to meet demand for more advanced semiconductor and display technologies, we are confident in UCT’s position of delivering superior value to our customers as we increase UCT’s content on our customer’s platforms. Currently, there are multiple technologies driving the semiconductor equipment industry at an incredible rate.

Ever higher WFE spend is required to enable emerging and expanding applications in such areas as cloud computing, robotics, autonomous car, artificial intelligence and virtual reality devices amongst many others.

Each of these technological shifts depend on sophisticated advances in semiconductor technology and all are standard around capturing, transmitting, analysing and storing data.

The insatiable appetite for newer and faster devices with enhanced memory, logic and sensor capacity is driving the expansion of the semiconductor and semiconductor equipment markets, and thus we are in a more broad based and continued high demand market.

The complexity of these technologies and the speed at which they are developing is putting pressure on OEMs to quickly ramp capacity to meet demand. OEMs are depending more and more on outsourcing partners like UCT resulting in a tremendous opportunity for growth.

As a vertically integrated supplier, we are focused not just on our core business and gas panels, but also on critical fabrication, integration and assembly. When you combine improving industry fundamentals with our broad capabilities and strong supply chain partnerships, UCT is poised to continue to outperform WFE growth.

The decision we made a couple of years ago to acquire and invest in broadening our capabilities has enabled us to play a more vital role on our customer’s platforms. With our business firing on all cylinders, we are also exploring inorganic ways to add capabilities and to spur future revenue growth.

Turning to our non-semi display business, adoption of OLED technology continues at historic levels. Recent forecast indicate that two-thirds of new smartphones are projected to have OLED displays by 2021 and manufacturers are accelerating their investment plans accordingly.

In parallel, as demand for large screen TVs gain traction, we are seeing investment in new Gen 10.5 capacity resulting in the construction of multiple new fabs. For these reasons, revenue from our display business should continue at around 2 times to 4 times our historical rate depending on the quarter.

We continue to believe that the fundamentals of the semiconductor cap equipment market remain intact and we are well-poised to take advantage of these exciting times in our industry. Before I turn the call over to Sheri, as noted in our release today, I will be taking some time up to address a treatable medical condition.

I expect to be back in Seattle in roughly eight weeks time. In the meantime, I have every confident that Sheri and our strong executive team will keep things running on an even keel. As you saw by the guidance in our press release the third quarter is looking very strong.

The vast experience of our leadership team, coupled with the full support of the board gives me the utmost confidence that the team is more than capable of running our day-to-day operations. I look forward to speaking with all of you on our third quarter call.

Now, I would like to turn the call over to Sheri to review our financial results in more detail after which time we will open the call for questions.

Sheri?.

Thanks, Jim. In today's discussion I will be referring to non-GAAP numbers only. A reconciliation can be found in the press release issued earlier today. Ongoing industry momentum and strong execution by the UCT team resulted in another exceptional quarter.

Once again we met our customers’ increasing demand and by leveraging the flexibility of our operations we exceeded our expectations on the topline and bottomline. Total revenue for the second quarter was $228.3 million, an increase of 11.6% from the prior quarter.

Semiconductor revenue reached a new high of $210.3 million, a sequential increase of 10.1% as customer demand continued to climb. As a percentage of total revenue, semiconductor held steady at 92.1% of total. Leveraging our manufacturing facilities close to our customers in Asia, revenue from outside the U.S.

rose to a record high of $118.6 million, compared to $105.8 million in the first quarter. Our non-semiconductor business rose to $18 million from the previous quarter, accounting for 7.9% of total revenue. The value that we bring to our customers, especially during this high growth period can be seen in our strong gross margins.

Second quarter gross margins increased 70 basis points to 19% from the prior quarter. By keeping a close eye on our controllable costs, while investing incrementally to grow the business, we reduced our operating expenses as a percentage of revenue driving more to the bottomline.

Operating expenses for the second quarter were $17.7 million or 7.8% of revenue, compared to $16.5 million or 8.1% in the first quarter. Operating margins improved from 10.3% last quarter to 11.2%, as operating income increased by $4.6 million to $25.6 million.

Second quarter net income rose 33.8% to $21.3 million from $15.9 million in the first quarter. Likewise, EPS grew 31.9% to $0.52 from $0.47 last quarter. In the second quarter, we generated $11 million in cash from operating activities, compared to $9.1 million in the prior quarter.

We had non-cash charges of $1.4 million related to stock compensation, $1.4 million in depreciation and $1.2 million for amortization of intangibles. Turning to the balance sheet, net liquidity increased $7.9 million and cash grew $4.5 million to $59.5 million. Outstanding debt decreased sequentially by $3.4 million to $60.8 million.

DSO's decreased to 40 days from 42 days last quarter due to timing of collections. Days payable outstanding remained flat at 51 days. While net inventory increased by $16.7 million over the prior quarter to support anticipated demand in the third quarter. That concludes our prepared remarks. Operator, I’d like to open the call for questions..

[Operator Instructions] Our first question comes from Patrick Ho of Stifel. Please go ahead..

Thank you very much. And congrats on the quarter and Jim best wishes to you in your recovery and Sheri, good luck..

Yeah..

In terms of the outsourcing opportunities you're seeing today, where you have the demand environment obviously very high and you talked about additional opportunities that your customers are giving you.

How sustainable do you believe these are once the demand trends kind of abate? So what I'm getting at is, when things kind of return to more normalize levels, are these type of opportunities something that can stay with the company or do they go back to where they have been done previously whether it's in-house or at other places?.

Yeah. Patrick, thank you and thank you again. Yeah, I have got incredible trust. I've got a great team here. So I'm really looking forward to a great Q3. As far as the demand that is coming from our customers moving stuff from in-house to us. We believe this is very, very sticky and traditionally has always been sticky.

It requires a quite an investment to transition product manufacturing from one place to another. And I think the fundamentals of the overall WFE market are such -- are good to go away, and so more and more capacity is, I think, something we will be seeing over the long-term that their customers need a higher capacity.

So we believe what's been move from insource to outsource that is very, very sticky. We expect that to stay with us even through the normal undulations..

Great. That’s helpful. And Sheri, you guys have done a great job in terms of the supply chain, given your revenue results to-date. You've obviously been able to meet the demand that’s out there.

Has anything changed for you with the supply chain and your suppliers where either you are pushing them harder or you're taking some extra inventory to ensure that you meet your customers demand?.

Yeah. I mean, this is always -- this is something that we obviously as part of our DNA in terms of managing supply chain. So we are constantly managing the different suppliers. There are opportunities where we can take on additional inventory if needed, if we see that we need for future use.

But it’s kind of a wack a mole type situation where certain suppliers need extra focus and that’s something that we continue to do as we meet the demand of the customers..

Great. And final question for me, you talk about the OLED opportunity that's emerging for you guys. Again, at the same time the LCD market appears to be picking up steam as well in terms of new fabs for Gen 10.5.

Is there way for you to differentiate between what you're getting from OLED versus traditional LCD, because that market also looks like it’s pretty healthy today?.

Yeah. It definitely and it’s -- I think applied estimated that the market -- equipment market the new norm is now, I think, call $17 billion and as you know, Patrick, it used to bounce around between $6 billion and $9 billion for many years. So it’s nearly doubled.

And the mixture of -- you are right, the mixture of OLED and the Gen 10.5 which is starting up. The OLED is could be a little bit -- it can bounce around from one quarter the other. Displays tend to do that.

So it is nice where maybe an OLED might be down one quarter little bit and the amount of equipment shipping, I think, we will see Gen 10.5 coming in. It’s basically how fast the big five could -- big seven now can really digest that equipment. So you're right there is definitely an impact of Gen 10.5 coming in and smoothing it out.

But we predict for us. It's roughly -- that's why we see it flattening out roughly 2 times to 4 times our historical rate..

Great. Thank you again..

Yeah. Thank you, Patrick..

Thanks..

Our next question comes from Edwin Mok of Needham & Company. Please go ahead..

Hey. Good afternoon, guys. Again also wish you good luck Jim and we look forward to what Sheri obviously next two months. So, first question I have on the margin side. You guys delivered very nice gross margin this quarter and kind of your guidance implied maybe even better margin attrition in coming quarter.

How do you that think about the margin portfolio business, is this kind of new level and the high teen or even opportunity of 20%?.

Well, I think, Edwin, based on the volumes that we are seeing, this is kind of a new norm for us in terms of seeing the higher end of our margin model.

Again, it depends on volumes, as well as where we are actually shipping our revenue out of, add as well as product mix and those three really aligned very well, I mean, this last quarter to beat our margin model. So we are seeing that as something that could continue depending upon the mix of products that we are building..

Okay. That’s helpful. I have a question around kind of the growth and share gain around the outsourcing.

I am thinking is there way to think about are you guys winning share on now larger modules and therefore driving better to sell for you guys, or is it more block and tackle, which is the business that you have as customer ramp that give you more outsource, is there way to try think about can either the size of the module or the capability that you guys are adding into it and your share gain that you guys talked about?.

Yeah. And I think I can give you little color, Ed. It’s not a haphazard process. Basically, it’s usually pretty well-planned out together with a customer and it’s done over a period of several quarters where there is a decision to move and these are some of the larger modules and there -- this is in the non-gas panel area of the semiconductor tool.

And so typically there's a -- there is kind of a train of moving certain module over a period of few quarters from their internal manufacturing over to one of our sites. There is a program as we ramp up and they ramp down followed by or in parallel with the second module and the third module. So it’s typically pretty well planned out.

And I -- that's why I mentioned it’s a quite a process to do it. It takes some time. I think even a few years ago I talked about these share gains take a while to start to show up, because the transition times are pretty significant. And that's another reason why -- answering that first call from Patrick why they're so sticky.

There is quite a process to do it. So that’s give you a little color. We will feel it is basically module by module kind of a planned work that’s done together with our customers and ourselves..

It is fair to describe that you are winning more business on some of these larger modules later outside gas panel that allows you start to winning spectacular growth?.

Yeah.

As you are seeing us outpaced the industry, even outpaced the Dep & Etch area of the industry roughly in the mid-teens that all -- almost all of that is coming from modules outside the gas panel, we've been winning mostly from the -- customer that are insource moving into company -- moving into us, but we have also won some from some of our competitors in the outside the gas panel area..

Great. Actually that’s all I have. Thank you..

Thank you, Edwin..

Thank you, Edwin..

Our next question comes from Timothy Arcuri of Cowen. Please go ahead..

Hi. This is Karl Ackerman on for Timothy..

Yeah..

First, Jim, I would like to extend my thoughts and prayers to you, and hope that you recover speedily.

If I can just circled back to the gross margin question a bit earlier, clearly, even your last comment would indicate that you potentially grow above your TAM outlooks next several quarters as you continue to gain some incremental share from modules outside of your core competency.

So when I think about the margin outlook for the second half of the year, to me would suggest that margins should inflect higher from here even in September quarter? So the first question is, am I correct in that regard? And then, secondarily, even if in fact you can grow above your TAM, I guess, could you put more pen on paper with regard to how long are sort of these higher gross margin rate sustainable and if they are sustainable for a longer period of time, how should think about more of the longer term opportunity both regarding to gross margins and operating margins relative your current model.

Should we assume more of a much higher model from what is indicated today for the next several quarters and I have a follow-up please?.

Yeah..

Yeah. I can start and Jim can follow on, I mean, obviously, we are seeing higher volume than we've seen in the past, so our previous our model has been 15% to 18%, which we have been very, very comfortable in. So, with the certain volumes you maybe able to see higher margins that you're currently seeing in our current release.

So it really depends on the mix of products. I mean, it can fluctuate from quarter-to-quarter and again because we have so much going out of Asia that's really quite helping us a lot with the structure of costs that we have there. So that’s something that we see is somewhat sustainable if we stay at these volumes.

I think that’s kind of what you're looking at whether it’s continued on going forward. So we see that as a sustainable area for us at the higher end of our range. I’ll let Jim talk about the TAM a little bit..

Yeah. I think we are increasing our SAM in the TAM space and obviously that helps is one of the main causes of us. We have -- recall there is really several vectors causing our growth.

One is the overall WFE growth, on top of that we are very well-positioned in the fastest growing area of WFE Dep & Etch is growing at least 5 points higher than the rest of WFE.

And then the third vector in our growth where we are outpacing is, is obviously, lot of these insourcing, outsourcing and other shares movements that we are making outside gas panel area that I just talked about.

And then also we've had some smaller unpredicted wins which happened because operation we were able to execute so well in the beginning part of this ramp and able to get business from some of the other smaller suppliers that had trouble -- didn’t have really the resources and had some trouble keeping up at least in the ramping part.

So you had several different things. I think except for the last one the first, which is unpredictable, the first three reasons why we're growing we expect to continue..

Got it. And I guess this is a follow-up, I was hoping you could apply on your view of the cadence that we will see spending for the next several quarters. I think clearly that would suggest the demand at least for your largest customers even more back half load -- is more even for the back half year.

But do you see they extending further maybe in the first half of 2018 particularly as there seems to be some additional DRAM capacity and OLED fabs are expected to ramp in earnest in 2018, just curious your incremental thoughts there?.

Yeah. Talking about WFE not -- and not predicting that -- predicting out UCT's revenue in Q4, Q1. But we continue to see strength in our -- in WFE being talked about by many our other sources. So I think and by all accounts 2018 looks like the WFE spending is going to continue to be very strong with many predicting actually increases over ’17..

Okay. And I just have one last question if I may, obviously, I think, one of the most interesting aspect of this semi supply chain is the fact that you UCT haven’t sit in the middle, what it’s still a very fragmented market and arguably a lot of consolidation.

Just curious how much cash do you think you need to run the day-to-day operations of your business and with another $30 million to $40 million of free cash flow likely this year. How should we think about your opportunity for shareholder value creation? Thank you..

Yeah. Yeah. Thank you, Karl. Yeah. We have -- actually UCT historically as we've been a very aggressive in M&A activity. Our last two we did in 2015. Obviously in 2016 we shifted our focus towards this unprecedented historical ramp in the business. The organic growth in front of us was rather tremendous.

As we move forward I think that’s definitely an area that we are kind of putting more emphasis on once again is looking at different M&A activity. I think to take about cash I will turn it over to Sheri..

Yeah. I mean, we generated $11 million of cash this quarter. So, clearly, at these volumes we are seeing great cash generation which is great. And we are a low ROIC company, so we are not a heavy capital intensive company.

So I see that cash generation continuing depending upon how much we generate we will use some of that for M&A activity as well as continuing to pay down our debt. So I am hoping that continues for us..

Okay..

Our next question comes from Dick Ryan of Dougherty. Please go ahead..

Thank you. Echo best wishes again for me to Jim. Congratulations on a good quarter and guidance.

Extending the M&A comment, what areas might you be considering, is there any specific targets or holes that you would need to fill?.

Yeah. Thank you, Dick. Yeah. Obviously our strategy that we pivoted to a couple years ago which is an intense focus on the semiconductor and semiconductor like display markets, so obviously we are looking at opportunities in the semiconductor or the display area, that’s our main focus.

As far as the breathe of our capabilities, I think, over the last 10 years UCT has done a tremendous job of filling out, I think, areas from our capability standpoint and we have ability to make almost all the different kinds of parts that are used in most semiconductor tool, the main parts like frames and sheet metal and machine parts and plastic and gas panels and so on involvement.

So I think from the capability standpoint, from broad capability, we are already there. So, I think, we're looking for more specific positions in some of the more sensitive areas of the tool surrounding like the process chamber and other areas.

So, again, the main focus is going to be on semiconductor and display as a only focus and then more looking around different positions on the tool penetrates -- further penetration in the different platforms of our customers rather than just a capability play..

Okay.

And kind of looking at that $240 million midpoint guidance, so you are running into any capacity issues with your CapEx is -- CapEx increases are going to be required?.

Nothing significant, I will barrowed Sheri whack a mole, but there's always issues to tap down.

These are obviously every quarter it’s been a record, upon a record, upon a record and we have more than doubled our revenue in a year, so but most of the issues that we have to deal with this especially in the short and near-term around just managing the supply chain..

Okay..

Yeah. This is Sheri. We made that investment a little over a year ago. I think we talked about in the past in Singapore. So that really kind of set us up for where we are at from a volume perspective right now and like Jim said that, it’s incremental add if we need anything..

Great. Thank you..

Thanks..

Thanks, Dick..

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Jim Scholhamer for any closing remarks..

So thank you everyone for joining us for today's call and I look forward to speaking with you our next quarter’s call. Thank you..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..