Annie Leschin - Investor Relations Jim Scholhamer - Chief Executive Officer Sheri Savage - Chief Financial Officer.

Arthur Su - Needham & Company Karl Ackerman - Cowen Christian Schwab - Craig-Hallum Group Brian Chin - Stifel Dick Ryan - Dougherty.

Good afternoon and welcome to the Ultra Clean Technologies’ Third Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Annie Leschin. Please go ahead..

Good afternoon, everyone. Thank you, operator and thank you for joining us today for our call this afternoon. With me are Jim Scholhamer, Chief Executive Officer and Sheri Savage, Chief Financial Officer.

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

This press release information about the webcast and how to access a 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 the 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 results 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 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 third quarter conference call and webcast. Before I begin, I would like to let everyone know that I resumed my role as President and CEO on October 2 after a short medical leave.

I am very happy to be back and I want to take a moment to thank Sheri and the entire UCT team for the excellent job they did executing on our strategy and maintaining momentum during my absence. We are moving forward at even better shape due to their combined efforts.

Our ability to innovate, collaborate and deliver in partnership with our customers during this unprecedented ramp in semiconductor capital equipment demand led to another very strong quarter for UCT.

Our expanded capabilities are enabling the manufacturing of additional major modules further increasing our critical content on our customers’ platforms. Leveraging our world-class operations to meet demand in key locations, we continue to perform at the upper end of our target model and grow faster than the markets we serve.

For the third quarter, total revenue grew 66% year-over-year to $243 million. Our semiconductor revenue increased 72% and revenue from outside the U.S. rose 82% year-over-year. Non-GAAP earnings per share, was $0.62, more than 3.5 times from third quarter of 2016.

The semiconductor industry continues to expand beyond traditional technologies to new computing environments like solid-state architectures, software-defined solutions, the cloud and a myriad of endpoint devices.

Among the forces reshaping the industry, few are more important than the ability to keep pace with consumer demand with increased content and higher functionality.

To meet the time sensitive requirements facing the semiconductor market, the equipment OEM key challenges include their ability to keep pace with the next-generation technology and major capacity additions. With all indicators pointing towards continued expansion for the coming years, OEM’s require ever increasing capacity from their partners.

This is where UCT sees tremendous growth opportunities. As a specialized contract equipment manufacturer focused on the semiconductor capital equipment industry we are expanding our capabilities and offerings further into our customers platforms. The trend toward outsourcing continues.

First, as technology requirements for the OEMs become increasingly sophisticated, manufacturing expertise will become even more essential. Second, product lifecycle is shortening magnifying OEMs need to focus on their manufacturing around key process technology components.

By outsourcing, OEMs can meet these significantly higher levels of demand while developing the new technologies required by semiconductor devices at an accelerated pace.

By expanding our content on our customers’ platforms with engineering, critical fabrication, integration and testing capabilities, we are executing on our long-term growth strategy to position UCT as the preferred outsourcing partner in the semiconductor capital equipment industry.

Turning to our non-semi display business, the display equipment market has more than doubled since 2013 and capital intensity is predicted to remain high through 2020 as the flat-panel industry pursues bigger, brighter, slimmer, faster and cheaper displays.

More specifically, demand is driven by ongoing TV size increases and resolution improvements, adoption of OLED and mobile devices and initial production of OLED TVs. As display manufacturers raise to get these new products to market, we expect our display revenue to remain at these healthy levels for the next few years.

These are exciting times in the semiconductor capital equipment industry and early forecast indicate a very strong start to 2018. We plan to capitalize on strategic growth opportunities both organic and inorganic that we believe will take UCT to the next level.

Now, I would like to turn the call over to Sheri to review our financial results in more detail and then 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. Third quarter was a solid quarter for UCT. We once again demonstrated our ability to meet our customers’ demand. We reached another revenue record and performed at the top end of our financial model.

Total revenue in the third quarter was $242.6 million, an increase of 6.3% from the prior quarter. Semiconductor revenue grew to $222.4 million, a sequential increase of 5.7%. As a percentage of total revenue, semiconductor held steady at 91.7%. Revenue from outside the U.S.

reached a new high of $132 million compared to $118.6 million in the second quarter as we continue to grow our manufacturing close to our customers. Our non-semiconductor business for the quarter was $20.2 million accounting for 8.3% of total revenue compared to $18 million or 7.9% last quarter.

Margins for the third quarter were at the high end of our targeted range of 15% to 18%, so down from the second quarter, where we saw beneficial product mix. Gross margin for the quarter was 17.6% compared to 19% in the second quarter.

Operating margin was 10.1% in the third quarter, slightly exceeding our targeted range of 8% to 10% compared with 11.2% in the second quarter. Going forward, we expect margins to remain within our target ranges.

For the third quarter, operating expenses increased in absolute dollars to $18.2 million from $17.7 million in the second quarter, while decreasing as a percentage of revenue to 7.5% from 7.8%.

In order to keep pace for the record revenue levels and gear up for the momentum expected in early 2018, we are making incremental hires and investments within COGS and operating expenses to maintain our operational efficiency and deliver to customers in a timely manner.

Third quarter net income was $21.3 million or $0.52 per share flat with the second quarter. We generated $17.4 million in cash from operating activities compared to $11 million in the prior quarter.

This quarter, we had non-cash charges of $2.3 million related to stock compensation, $1.3 million in depreciation and $1.2 million for amortization of intangibles. Turning to the balance sheet, net liquidity increased $9.9 million and cash grew $6.4 million to $65.9 million. Outstanding debt decreased sequentially by $3.5 million to $57.3 million.

DSOs remained flat with the second quarter at 40 days. At the end of the third quarter, inventory had increased by $25.6 million due to the timing of shipments early in the fourth quarter, as a result of days payable outstanding increased to 59 days from 51 days.

With increasing visibility heading into 2018, we anticipate another increase in inventory in the fourth quarter. That concludes our prepared remarks. Operator, I would like to open the call for questions..

Thank you. [Operator Instructions] And our first question comes from Edwin Mok with Needham & Company. Please go ahead..

Hi, everyone. This is actually Arthur on for Edwin. Thanks for taking our questions and Jim it’s good to hear that you are doing well after your medical leave..

Thank you..

So, my first question is on the outlook, I just wanted to understand what the puts and takes are in your for 4Q revenue guidance. I think it’s up 1%. And one of your key customers has talked about shipments up I think 9% in the fourth quarter.

So, just wanted to understand what you are seeing in terms of your outlook for 4Q?.

Yes, thanks Arthur. Obviously, we are looking at our quarter being up a little bit. There is as always even from the shipment-based numbers that some of our customers give, there is always puts and takes on what lands in the quarter and what doesn’t. So, there can be a lag in there as well.

So, we typically see that from quarter-to-quarter that they don’t match identically with their numbers..

Okay.

Can you provide some color on what you think the mix would look like between non-semi and semi in 4Q?.

Yes. I think it will be roughly the same as we have been seeing. It hasn’t been changing much over the last several quarters. I think we are seeing a lot of growth in the semiconductor quarter-on-quarter that continues. And we saw kind of a quantum jump in display a few quarters back and now that’s leveling out at those same high numbers..

Got it, okay. Sheri, so I have a question for you on the gross margins. I think gross margins declined this past quarter.

And I think you mentioned that since you benefited from mix, just wanted to see if there was anything else beyond that whether you are being more competitive on pricing to try to gain additional share?.

Yes. No, really Q2 was really quite a perfect combination quarter with the volume, the mix of product as well as where we shipped out of. So, this is really quite where everything aligned up very well. For Q3, just the mix changed a bit from Q2.

And I would anticipate for Q4, you would see a similar margin profile that we saw this quarter, so really not about pricing as much as just the shifting of different products that occur.

We were still at the high-end of our range from a margin perspective and we still feel like that range as I think I mentioned last quarter that range is still a really good range for us to be in..

Got it, okay. If I could just squeeze one more in, you talked about some incremental investments in COGS and OpEx to help the business grow.

Can you just provide a little bit more color on that?.

Yes, I will start off with from the OpEx side we are making the investment in a new ERP system. We have talked about this for quite a while and this is where we are starting to see some of that incremental spend start to occur in Q4. Really, it sets us up for the go live as well as growth in 2018 and I will let Jim talk about the COGS side..

Yes, Arthur, to add a little color, while we have seen significant growth across most of our sites, the growth of our Singapore fab has been quite extraordinary. In the space of a year, that site has gone from roughly a few million dollars a quarter and revenue in the space of a year to one of our largest factories actually revenue wise.

We have been able to manage a huge ramp out of that facility. We have on-boarded a tremendous number of new products, new platforms as we have on-boarded from both our customer and other competitors. And so we’ve been adding resources and skills and talents to manage been a pretty amazing growth of our Singapore plan.

And also getting ready for what we can now see to be a very, very strong start to 2018..

Got it, got it. Thank you so much for taking our questions..

Thank you..

Our next question comes from Karl Ackerman with Cowen. Please go ahead..

Hi, everyone. Jim, you just referenced it on the last question that you gave, but I think clearly the most significant concern maybe an investment community is the sustainability of a current environment. So I’d love to get your thoughts on sustainability and I guess specifically given that display CapEx is much stronger today than historically.

Is there a greater propensity for your – for your customers to engage in longer-term agreements with you on a quarterly basis that would increase our backlog and visibility with those customers especially as you tried to broaden your addressable market and move the mix towards more high value-added solutions? And I have a follow-up please..

Okay, sure. I will address the sustainability first. That’s always a question, how long will it last and exactly what quarter will it change? I would say we are very, very confident and bullish about the semiconductor market for quite some time going forward. And we have more visibility out more than one quarter.

In the past, we have had – we can kind of see the next quarter and it happened this quarter, the mix can change around a lot, but visibility was difficult to see out more than a quarter even within a quarter. What we are seeing is much stronger visibility farther out and typical and that looks very, very strong.

And I think all the fundamentals are in place for the semiconductor market over the next several years. So, there maybe – there maybe pauses somewhere down the road, but I think all the end market conditions are right for that market.

As far as the display, display CapEx, we do have with many of our customers and in display as well, we do have global supplier agreements in place that are multi-year and we have a very strong position in the product portfolio that we have in display and we are always looking at new opportunities to expand in those platforms.

It’s certainly much more ripe, within the semiconductor area for expanding and bringing on new modules and penetrating deeper into our customers’ tools than in the display market, but we are always looking at those opportunities as well..

Understood. And if I could just follow-up on that. Where do you think you are today from a market share perspective in chemical delivery, I understand the Miconex acquisition helped bolster your position in that market. But I was just curious, if we could hear your thoughts on the opportunity you have in that market on a go forward basis? Thanks..

Yes, good question. I think obviously that was the core of our company for many years and it’s a strong part of our portfolio. That remains pretty stable. Over time, there is not a lot of movement on share from really anyone in that space, very good space for us, very stable.

Our biggest area of growth is all the new modules additional different modules that we make such as I’ve been talking about in past calls the hemispheric modules, the transportation modules, the vacuum transportation modules, a lot of the front-end modules.

So we are kind of adding more pieces to the customers’ tool on the semiconductor side and we see the gas and chemical delivery side as relatively stable..

Thank you..

Thanks..

Our next question comes from Christian Schwab with Craig-Hallum Group. Please go ahead..

Hey, great. Congratulations on a good quarter. Welcome back, Jim. Congratulations, Ms. Savage.

As we look toward, Jim, I think following up on the sustainability question, I think, I mean Applied Materials probably has the best look in the world and they think display CapEx is going to be accelerated at levels greater than 2x previous levels through 2020 and $45 billion wafer front-end average ‘17 to ‘20.

So in that environment, what is your capacity for revenue, I know 1.5 year or 2 years ago you guys kind of talked about being able to come at a $1 billion run-rate, congratulations, because we appear to be approaching that.

I am just wondering how big the company could be with the infrastructure in place?.

Yes. Thanks, Christian. Yes, we have certainly a lot of the capacity that we had, you see it as more of an incremental movements that are not too significant. So, as far as buildings and other large capital expenses, we tend to be in pretty good shape at this time.

It tends to be more people resources that we are adding and we tend to add those incrementally. However, it’s been obviously we have been adding a lot more in Singapore than typical.

So, it’s something that I believe that we have – this is adding capacity to the next level is something that you will see us incrementally doing, but I don’t think it will be anything to be called out in a major way..

I guess, let me rephrase the question.

So, $250 million this quarter, do we have the infrastructure in place where we just need to add some people, would you kind of talked about potentially doing to generate $300 million plus a quarter?.

Yes..

$400 million plus a quarter?.

We will make $400 million a quarter..

Alright. No other questions. Thank you, guys..

Thank you..

[Operator Instructions] And our next question comes from Patrick Ho with Stifel. Please go ahead..

Hi, this is Brian Chin calling in for Patrick. Thanks for letting me ask a few questions. And also Jim, welcome back.

So, it’s my first question – first question is as you alluded to the semi revenue business has effectively doubled in a 1.5 year maybe 2 years’ time and just kind of curious over that top given that elevated revenue level, it kind of gets whether some of your costs might have to transition from variable to now fixed cost in nature.

So, I am just kind of curious if you see yourselves going through that process and kind of what the impact might be looking forward to the model, if some of these variable costs have to turn fixed?.

Hi, Brian. This is Sheri. Yes, I mean, I would say that our model of having somewhat of a variable cost model, that’s kind of a key thing to our business. We need to be able to move up and down based on what’s happening in the industry. So, I don’t see that necessarily changing.

The only thing would be continued growth as Jim said in the last question if we needed to add additional capacity that’s something that obviously does potentially become a fixed cost, but that’s something that we incrementally do as we move forward and make decisions on.

So, we are generally very careful with adding any infrastructure as well as headcount in general to make sure that we can ebb and flow with the cycles that are happening..

Okay. Thanks, Sheri. That’s helpful. I guess, you are just also thinking about your business structurally and strategically. On prior calls, you have referenced the existence of bottlenecks in the supply chain for various components.

And just getting our increased scale and the short lead time nature of the business, what’s stopping you I guess from becoming more of a vertically integrated business taking that approach?.

So the short answer there is nothing stopping. As a matter of fact, that’s been part of our strategy for many years now and we have a very, very broad capability. There are some things like fabricating cables and other more industrial products that never makes sense to have in your own house.

Those are the types of things that pop up from quarter-to-quarter. They get managed and either wise, prudent or necessary to vertically integrate those types of supply chain..

Okay, got it. Maybe kind of last real quick question here. Again, businesses have stepped up quite a bit over the past several years, but the R&D level has been fairly steady kind of $2 million, $3 million per quarter for several years now, so kind of lower that’s a percentage leading with the acquisition.

So, just wondering if there are any opportunities you see to increase the rate of R&D spend maybe to develop more of your own in-house kind of IP that might even help you broaden out your customer base a little bit over time?.

Yes. As you know, we are not a product company. So, our R&D is mainly focused towards operational excellence bringing in the latest technologies and capabilities focused towards the efficiency quality cost and delivery.

So yes, we’ve been spending a similar amount of money has been moving up a little bit, but nothing that you would do you nor needed for the type of company that we are nothing needed in a dramatic way for the considering the kind of company that we are which is a highly complex, contract manufacturing company..

Okay. Thanks..

And our next question comes from Dick Ryan with Dougherty. Please go ahead..

Thank you. So Jim you talked about outsourcing and the continued strength there.

Are you seeing bottlenecks with competitors given the overall strength in the industry that maybe moving some of that business your way?.

Yes, that’s been, so as far as business moving are we – we want a lot of it, the bottlenecks have actually mostly been with our customers a bit capability, in-house capability where they had outsource at an accelerated pace recently just to make room for some of the more critical modules that they do in-house such as the process area, process chambers.

As far as some of the other competitors, yes, there has been a few of them that have some issues in their productivity and we’ve there are it’s less of a factor than they’re outsourcing that were getting from our customers itself, but we’ve been having those wins as well..

Okay.

And you did mention in the release increased presence on customer platforms and an expanding SAM is there any other, is there some more color you can put around those comments?.

Yes, the number of especially in Singapore, but it’s been several of our fabs. The number of new – we call new products that are not new to the – our customer, but they are new to us.

There has been quite a rate, I would say the rate of new products being introduced into our – into our production stream has gone up dramatically and that is the – that is continuing as well. We have quite a schedule of feathering in from pilot production to high-volume in especially in our Singapore plant.

I think it’s - is really is quite startling how that plant has been able to grow and keep up with on top of our ramp, huge industry ramp, huge amount of product when going through their it’s quite outside to be hold..

Good, great. Thank you..

Thank you..

This concludes our question-and-answer session for today. I’d like to turn the conference back over to management for any closing remarks..

Thank you, again, everyone for joining our call today. With our business fundamentals intact we continue to execute on our strategy and look forward to the rest of the year at a solid start into 2018. Thank you..

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