Rhonda Bennetto – Investor Relations Jim Scholhamer – Chief Executive Officer Sheri Savage – Chief Financial Officer.

Karl Ackerman – Cowen and Company Christian Schwab – Craig-Hallum Capital Group.

Good day, everyone, and welcome to the Ultra Clean Technology Third Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask question. [Operator Instructions] Please note that today’s event is being recorded.

I would now like to turn the conference over to Rhonda Bennetto, Investor Relation. Please go ahead..

Thank you, Phil. Good afternoon, everyone, and thank you for joining us. 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 with the financial review. Then we’ll open up the call for questions.

The press release issued earlier this afternoon, along with the 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 www.uct.com. Today’s call contains forward-looking statements.

Investors are cautioned that these statements involve risks and uncertainties that may cause actual results to differ materially from those discussed on this call.

Information concerning these risks and uncertainties is contained in our periodic filings with the SEC, including our most recent Form 10-Q and 10-K 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. Also on today’s call, we will be referring to non-GAAP adjusted financial measures, and reconciliations to GAAP measures can be found in today’s press release.

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

Jim?.

Thank you, Rhonda. And good afternoon, everyone. Thank you for joining us today for our third quarter 2018 conference call and webcast. We have a lot to cover today, so let me begin with an update on our Quantum Global Technologies’ acquisition and reiterate why this was such a significant and timely acquisition.

That will lead me to touch on our second quarter financial results that Sheri will expand on in her commentary. To conclude, I will share my thoughts on our industry, our newly expanded end market and the critical role UCT will play partnering with our customers to ensure their success and ours.

Before I talk about Quantum’s positive impact to our business, and expand on why this was such an important acquisition, I’d like to update you on the joint venture facility in Korea that was damaged by a fire in mid-September. On October 3, we announced that a majority of the production volume had been transferred to adjacent facilities.

As of today, I am pleased to report that Cinos has reached greater than 95% of original production capacity and customer feedback has been very positive. More importantly, the total impact to UCT revenue will be minimal, at around $1 million.

The decision of when to rebuild for additional capacity and the cost associated with that project are being reviewed and will be coordinated with our customers to ensure we meet their future needs.

While this was an unfortunate and untimely incident, it serves to highlight the advantages that come from being a larger, global, more diversified company. We are grateful that there were no injuries and no environmental impact or other issues associated with the fire.

UCT and Quantum work together, assisting our JV partner Cinos, to manage the incident and resume production, achieving a remarkable rapid recovery. I would like to thank everyone involved for their commitment and dedication to minimizing the impact to personnel, production and importantly our customers.

Now I’d like to highlight a few of the other advantages of the Quantum acquisition and what benefit our customers and shareholders can expect. As a reminder, Quantum works with top-tier OEM and IDM customers, with IDMs representing the majority.

Quantum provides outsourced tool chamber parts cleaning and coating services as well as micro-contamination analytical services. Quantum’s capabilities are critical to semiconductor fab performance and UCT is an important partner.

Quantum’s global presence further complements UCT as both serve core semi customers to require high-capacity solutions to deliver copy exact services.

Acquiring Quantum provided an excellent opportunity for UCT to gain a new recurring revenue stream in the semiconductor ecosystem, adding another $1 billion addressable market where UCT now holds a strong leading position.

To summarize, the addition of a service component to our business allows for vertical integration within our existing suite of solutions. In other words, we have added complementary capabilities to our existing business that have already begun to transform our operational and financial profile.

We are now a highly integrated, one-stop, full spectrum solution for our customers. This breadth and diversity gives us confidence in our ability to sustain strong performance under a variety of market conditions and provides a great platform for future growth.

Now I’m going to switch to the positive financial impact that Quantum is having on our business. Because Quantum’s revenue is tied to semiconductor installed base in wafer start, rather than solely WFE capital equipment spend, we now have a more resilient, recurring revenue stream.

This will serve as move-out fluctuations in economic and capital equipment cycles, creating a more stable and durable, combined business. When WFE spending positive or even declines, semiconductor companies will continue to need and potentially increase cleaning and analytical services to extend the lives of their legacy equipment.

Additionally, shrinking chip geometries and expanding complexity increases the need to minimize contaminant and often requires more frequent parts cleaning. As a result, Quantum services are becoming more critical to IDMs and OEMs as end-market demand for next-generation devices continues to evolve.

To validate the importance of having a diversified recurring revenue stream, you only need to look as far as our third quarter result and fourth quarter guidance. Including only five weeks of Quantum, total third quarter revenue was $234.1 million, $10 million above consensus that had been adjusted to include Quantum.

At a time where peers are struggling to adapt to the timing of WFE capital investment, UCT should see a significant benefit going forward, thanks to the addition of Quantum’s revenue contribution that is tied to wafer start and installed base versus solely semiconductor CapEx spend.

In addition, Quantum’s higher-margin operating model was evident in our third quarter results and should continue to be accretive to UCT’s operating margin and free cash flow going forward. As we finalize our integration and look to further optimize our business, we expect to see ongoing improvement in our growth profile and profitability.

To manage our business efficiently, we have looked broadly at our business needs and have taken several cost-cutting actions as the equipment market softens. We continue to manage our cost in line with the business needs.

To support this, we have created two business divisions, semiconductor products and solutions and semiconductor service business to drive operational excellence company-wide and secure our leading position in the fast-growing global semiconductor market.

This organization minimizes redundancies and creates efficiencies and allows for faster decision-making. Both business divisions have natural connections and intersections with OEM and IDM customers, and we’ll work closely together with customers in developing comprehensive solutions.

The business divisions will have increased accountability for financial performance. And overall, these changes should help drive sustainable, profitable growth and high returns for our shareholders. Now I’d like to share my thoughts on the semiconductor market environment and what we believe is driving negative investment community sentiment.

While it may feel to some that this pause is similar to the start of another major semi cap downturn, we believe that supply-driven digestion period will be relatively modest in magnitude.

Over the past couple of years, capital intensity and the level of required equipment spend continues to stay at elevated levels, supporting continued end-market semiconductor device growth.

Underlying demand drivers remain robust, and UCT is well positioned to benefit from the multiyear technology inflections in leading-edge logic, foundry and memory as well as the increased purity requirements in semi more broadly.

I think we all agree that emerging applications such as autonomous vehicles, the Internet of Things, high-performance computing, artificial intelligence and technology to support the data-sharing economy are inevitable.

Next-generation devices and systems architectures and the expansion of the materials in chip design and manufacturing are creating compelling opportunities for our strength in equipment manufacturing as well as parts cleaning and micro contamination analysis over the long term.

And lastly, our non-semi display business posted another solid quarter as overall spend remained elevated when compared to historical patterns. From a market demand perspective, long-term demand will come from both expanding OLED adoption and the transition towards Gen 10.5.

Both the 65-inch and 75-inch TVs are the fastest-growing segments in the LCD TV market, and display makers on the whole believe that more Gen 10.5 capacity will be needed to meet the appetite for super large-sized TVs.

Looking out, we see a period where OLED capacity has temporarily outpaced demand, causing a lower outlook for display over the shorter-term. Although display equipment manufacturing is a relatively small portion of our revenue, we expect the revenues will remain above historical levels.

In summary, we are pleased with our execution and the ability to respond during this challenging business environment. With the addition of a resilient services business, we are better balanced across the market segment that address next-generation technology inflection.

By expanding our leading capabilities, we have increased our strategic relevance to the success of our customers, and we will continue to execute on our strategy with a disciplined approach. We remain focused and committed to creating and capturing value for our customers and our shareholders. With that, I’ll turn the call over to Sheri..

Thanks, Jim. And good afternoon, everyone. Thanks for joining us. In today’s discussion, I will be referring to non-GAAP numbers only. UCT executed well in the third quarter and exceeded revenue consensus by nearly 5%, while meeting consensus on the bottom line.

The addition of five weeks of Quantum revenue helped to offset the effects of delays in semi capital equipment spending in the quarter. Total revenue was $234.1 million and included $22.5 million from five weeks of Quantum operations.

Approximately 90% of our total revenue came from our semiconductor business and 10% from our non-semi business, which includes display. Gross margin was within our targeted range at 15.7% compared to 15.9% last quarter due to reduced factory revenue and utilization, offset by lower material cost.

During the quarter we took steps to adjust our workforce to more closely align with revenue, and we’ll continue to look for ways to optimize our operations.

As we’ve shared before, margins can be influenced by a number of factors, including customer concentration, geography, product mix and volumes, and you should expect to see variances quarter-to-quarter. Operating expenses as a percentage of revenue for the quarter were 9.4% compared to 7.2% last quarter.

While we reduced our run rate across COGS, overhead and operating expenses in the quarter, we are actively looking at ways to further reduce spending to more closely match business volumes. Operating margin for the third quarter was 6.4% compared to 8.7% in the prior quarter.

The reduction can be tied to the decrease in our core UCT revenue, offset by the addition of Quantum. We are operating in a very dynamic environment affecting the cost of operations and have implemented changes within our organization to drive cost improvement.

Our efforts are aimed at delivering balanced top line and bottom line growth that creates shareholder value over the short, mid and long-term. Based on 38.9 million shares outstanding, earnings per share for the third quarter were $0.30, in line with consensus and derived from net income of $11.9 million.

This compares to $21.5 million net income and $0.55 per share last quarter. Our tax rate for the quarter was 14.6% compared to 11.9% last quarter. Considering the tax implications of the Quantum acquisition, we now expect our tax rate to be in the mid-teens going forward. But as always, you can expect to see variances quarter-to-quarter.

Turning to the balance sheet, we ended the quarter with $160.3 million in cash and cash equivalents, an increase of $19.2 million over the prior quarter. Cash from operations was $27.4 million compared to cash usage of $17.1 million last quarter due to timing of shipments and payments. Inventory decreased by $30 million this quarter.

We will continue to optimize our inventory level to closely match customer demand going forward. Our fourth quarter business outlook calls for total revenue to be up almost 7% over the third quarter, using the midpoint of our guidance.

This speaks volumes to the point Jim made earlier that having a recurring revenue stream that is tied to the semiconductor installed base and wafer start, rather than WFE capital equipment spend, makes UCT a more resilient company overall.

For the bottom line, we anticipate some minor headwinds related to the timing and flow-through of our cost reduction initiatives and expect our earnings to be slightly below third quarter levels.

As Jim also mentioned, the real benefit of having a higher-margin services business contribute to our bottom line should be realized over the next couple of quarters as we will fully integrate and look for additional operating leverage. With that, I’d like to turn the call over to the operator for questions..

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Karl Ackerman with Cowen and Company. Please go ahead..

Hi, good afternoon. First, I had a clarification question for your guidance. Jim or Sheri, could you describe the sequential trajectory of your services business for December? Because it would seem your guidance implies that business roughly flat sequentially on an apples-to-apples basis.

And therefore, your overall systems business would also appear to be flat sequentially as well. And I have a follow up, please..

Yes, so we’re seeing about 20% to 25% of our guidance revenue coming from the Quantum acquisition. So that hopefully gives you some idea of what the total would be from a UCT core business versus Quantum..

Okay, I appreciate that. I guess, looking into 2019, I’d love to hear your thoughts on your expectation for incremental revenue opportunities, particularly from QDT as well as other key customers who appear to be in the early stages of outsourcing key gas and chemical subsystems to merchant suppliers like yourself.

And I guess, to extend that further, if say, hypothetically, WFE were to decline 5% or 10% next year, what does that imply for your services business? Can you still keep it flat or even grow it? I guess, how should we think about that conceptual sensitivity to WC? Thank you..

Yes. Hi, Karl. Yes, I’ll take them one at a time. So I think the growth of Quantum is something that we certainly are focused on. As you saw recently, we’ve organized in longer divisional basis in order to do that.

Historically, Quantum has performed very well and downed WFE use and the range of performances been anywhere from flat to pretty decent growth, even in downed WFE years.

So obviously, we’re not guiding out growth percentage for 2019 for the services businesses, but I think if you think of a range of flat to something in the high single digits or so, that’s certainly feasible.

As far as the second question, I’m not quite sure I follow that, the WFE equipment horizon? Is that what your question is about?.

No, I think you answered it.

But in the sense of – if WFE were to decline next year, can you actually keep your services business flat or even grow it? And how we should think about that sensitivity?.

Yes. I think, even – I think when you think about a flat Quantum business, I think that’s in a declining WFE situation or a significant decline. Although it’s possible to grow even on a significant – on a lower WFE spend..

Perfect. I’ll leave the floor..

Thanks, Karl..

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

Great, thank you.

On a combined basis, can you just give us kind of a rough estimate of percentage of business that you think is unit driven? And then what percentage of your business, roughly, maybe on a trailing 12 on the wafer front-end side is foundry logic versus memory?.

When you say – hi, Christian, when you say unit business, what do you – what are you referring to?.

Well, you guys talked about the Quantum business being predominantly unit driven.

So should we assume their entire business is unit driven?.

You mean IDM, like chip driven?.

Right. Wafer-start driven..

Yes, wafer-start driven. Yes, it’s well over half of the business is driven by the IDM chip. But there’s still a significant portion that’s also OEM driven..

Okay.

And then on the wafer front-end side, can you just – do have an idea of what your exposure is to memory?.

I think it’s roughly along the lines of applied and Lam and our major customers. So I don’t know the percentage, but it depends on the year, so it’s – it roughly lines up with our major customers..

Okay, perfect. And then just an elaboration potentially on what you’re seeing in the cycle, obviously, we’re doing cost containment, short, mid- and long term would kind of signify potentially it could linger more than a short period of time.

As you guys are running your business and looking on a calendarized – calendar basis from 2018 to 2019, how are you positioning your operating expenses on a wafer front-end spend? Are you assuming that it’s down modestly at 5%, to flat, to down 15%? If you could give us any clarification there, that’d be great..

Yes. I think at this point we are cutting costs and we did in Q3, as we get better visibility. The visibility, as you know, is not the greatest right now. So we are cutting cost as we go. We continue to cut cost as we get more visibility.

I think we’re – we basically have the same view as many in the industry that we’re kind of in a position where the WFE spend is going to be roughly bottomed out. It’s very difficult to ascertain what level that is, but I don’t think it’s more than a few percent in one direction or another for the – at least for the time being.

So we’re kind of assuming roughly in that range for our cost cutting, and we’re trying to balance that with what we believe are the long-term drivers with – in this industry and making sure that we’re ready to really take advantage of the next upturn when we get some visibility on when that’s coming.

And we’re taking advantage of this time to do a lot of integration work and a lot of – getting a lot of the benefits out of Quantum and trying to grow in that side as well. So we’re spending this time doing a lot of continued cost-cutting, when also a lot of optimization of our business overall structure from both divisions..

Okay. Your largest customer has you previously said that September is the bottom, the December is a little bit better. That the first half of calendar next year is going to be greater than the second half of 2018.

So does that mean kind of at a minimum you would expect your business on a go-forward basis next year to be kind of be running at this $240 million to $260 million level and if the market kind of improves to step up from there?.

Yes, obviously, we’re not guiding out for the first half. But yes, we would expect to follow I think – we don’t exactly mimic our customers. Although, we do have a service business now, which is working very well in our favor, there are some differences that cause a few percentage points differences between us and them.

And especially from quarter-to-quarter. But yes, I think that’s a roughly safe assumption..

Great, thanks. No other questions..

[Operator Instructions] We have a follow-up question from Karl Ackerman with Cowen and Company. Please go ahead..

Hi, Jim and Sheri. I know you previously had a target of 50% of your revenue in manufacturing outside of the U.S. with a pure focus I think on Singapore and China.

But how should we think about the potential disruption to your own supply chain in the event tariffs continue to escalate year-on-year? What’s your relative exposure from a supply chain standpoint? Thank you..

Yes, Karl. Obviously, we’ve experienced a few of those disruptions in the last few quarters, which we’ve been able to manage. We’re – being set up as a global supplier is a big advantage, though. We typically manufacture and we service within regions. So we don’t cross a lot of borders where we can help it.

Where we have had certain areas where tariffs have come into play, we’ve been able to mitigate them by moving production around from one plant to another relatively seamlessly. So that’s already been happening and it’s had no material affect and we don’t expect it.

Although, we don’t know what new legislation may come down the line, we don’t anticipate any material impact from tariffs going forward as well..

Perfect. I guess one last one, if I may.

How do you think about the competitive environment in your nonsemis business, particularly from traditional EMS companies where there’s at least one in particular who is in the process of acquiring one of your smaller peers within the display supply chain? How do we think about the competitive environment over time, if it’s changed at all or not? Thank you..

Yes, Karl. We don’t see a big change. We are actually – we’re – there’s not a lot of competitive overlap on what we provide in that market. So we actually, as a result of that potential acquisition, and I believe it’s not closed yet, we really don’t see any change in the business going forward on the display side..

We have a follow-up question from Christian Schwab with Craig-Hallum Capital Group..

Sheri, can you just remind me quick on gross margins, what your expectation is on a go forward basis? Is it still the same range as we’ve been using before? And can you tell me what some of the puts and takes of being at the low end to the high end of that would be, please?.

Yes, for now we do see the same range that we’ve had, the 15% to 18%. Obviously, as we move forward with the Quantum acquisition and having that integrated, we’ll potentially update our model in the new year.

Some of the puts and takes as I’ve talked about before is really volume, where things are shipping from a geographic location, the mix and obviously customer concentration. So those are really the key things. I think volume plays probably the most significant key right now. But I think those are the factors that help us..

Okay, that’s what I thought. There isn’t anything new or dynamic that’s going that can move that other than kind of historical reasons..

Right..

Okay, perfect. Great, thank you..

Thank you..

Seeing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Jim Scholhamer for any closing remarks..

Yes. Thank you, everyone, for joining us, and we look forward to updating you in – for – on our Q4 in the new year..

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