Good day ladies and gentlemen, and welcome to the Third Quarter 2017 Ichor System’s Earnings Conference Call. At this time, all participants will are in a listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time. [Operator Instructions] I would now like to introduce your host for today’s conference, Mr. Maurice Carson, President and CFO. Please go ahead sir.

Thank you, Christy. Good afternoon, everyone. Thank you for joining this conference call which will be available for replay telephonically and on Ichor’s website shortly after we conclude this afternoon. To listen to the webcast replay, please visit Ichor’s Investor Relations webpage where you will find the complete instructions. As you read our earnings press release and as you listen to this conference call, please recognize that both contain forward-looking statements within the meaning and Federal Securities Laws. These forward-looking statements are subject to a number of risks and uncertainties meaning of which are beyond our control and which could cause actual results to differ materially from such statements. These risks and uncertainties include those spelled out in our earnings press release, those included in our prospectus and those described in our annual report on Form 10-K for fiscal year 2016, which have been filed with the SEC and those described in subsequent filings with the SEC. You should consider all forward-looking statements in light of those and other risks and uncertainties. Additionally, I should mention that we will be providing certain non-GAAP financial measures during our conference call and in our earnings press release. Our earnings press release contains a reconciliation of the non-GAAP financial measures to their most comparable GAAP financial measures. With me today is Ichor’s Chairman and CEO, Tom Rohrs. Tom will discuss some of the exciting industry trends and Ichor news and I will go over the financials. After the prepared remarks, we will open the lines for questions. Tom?

Thank you, Maurice and thank you all for joining us today for our Q3 2017 conference call. The third quarter was another growth quarter for Ichor Systems and was our seventh consecutive quarter of sequential revenue growth and our sixth straight quarter of year-over-year growth. Year-to-date revenues are up 72% over the first nine months of 2016 and earnings have increased over 135% over that same period, consistent with our stated goal of growing profits faster than revenues. Our recent acquisition of Cal-Weld contributed approximately $23 million of revenue in the last nine-and-a-half weeks of the quarter and our quarter revenues were approximately $141 million in concert with the lower shipment levels of our customers. At the mid-range of our Q4 guidance, we expect Cal-Weld revenues to grow to $27 million and our core revenues to grow to $153 million or about 9%. Our performance is a result of our consistent focus on what we do well. We believe we are differentiated by our skill set in fluid dynamics and we have expressed this expertise in leading gas and liquid delivery systems today and breakthrough ideas for the future. These gas and liquid delivery systems are used in our customers’ deposition tools, etch tools, CMP tools and lithography tools. These processes are differentially benefitting from the semiconductors industry trends towards 3D NAND, multiple patterning and FinFETS. But there are also several specific drivers that encourage us to be optimistic that our revenue and earnings growth will continue to outperform the overall industry. First, we are very executing well against our acquisition strategy that we discussed 11 months ago during our IPO roadshow. At that time, we pointed out that we had opportunities to buy private companies which would add to our capabilities in fluid delivery systems and move our financials…

Thank you, Tom. I also would like to make sure that everybody knows how much u have enjoyed working both for you and with Ichor and all the extraordinary things we’ve managed to do over the last few years. Let me go through some of the details from the financials. Unless noted otherwise, I will be referencing non-GAAP financials in Q3 compared Q2. Revenue grew quarter-on-quarter by 3%. Tom gave you some of the details on the mix of this, but let me say that this was completely in line with our guidance, but there was significant mix shift within the final number. Base Ichor was slightly down from initial expectations, but Cal-Weld outperformed in the quarter. In general, it was a difficult quarter starting very slowly but accelerating through the end with a significant portion of the quarter shifting in the last two weeks. This is consistent with our increased guidance for Q4. Gross margin was up significantly in Q3 at 16.6% compared to 15.8% in the prior quarter. The addition of Cal-Weld drove this improvement and as base Ichor margins were down in the quarter. We made the decision to keep our manufacturing labor force in tact in anticipation that the revenue decline would be short-lived. As you can see from our guidance, this was the right decision. Operating expenses without Cal-Weld were essentially flat to the prior quarter. Cal-Weld added $1 million of operating expenses, just what we had anticipated. The book tax rate was a little over 2%. Our cash tax rate for the quarter was less than 1%. We had guided to a higher tax rate last quarter with the addition of Cal-Weld and still anticipate this to be the case in the future. However, we do have NOLs that we were able to use…

[Operator Instructions] Our first question is from Karl Ackerman of Cowen. Your line is open.

Hi, good afternoon everyone. I have two questions. I appreciate the long-term model and the acquisition of Talon. That’s wonderful. As you look into the December quarter and perhaps more importantly in 2018, I’d love to hear your thoughts on your expectation for incremental revenue opportunities at your third and fourth largest customers who appear to be in the earlier stages of outsourcing key gas and chemical sub-systems, to merchant suppliers like yourself? And I have a follow-up please.

Yes, sure. Karl, thank you. So, I think, I had mentioned couple of times that, while our third and fourth largest customers have had trouble kind of reaching the operational if you will because the base business has been growing so fast that this year, 2017, they are going to about double from last year. And we anticipate that next year, 2018, they will double from this year. As you know, both of these customers are – I would say, in the top five or six of all of wafer fab equipment companies, certainly after Tokyo Electronic and KLA but probably very close buys. So the major customers were very happy with the way we are moving with them. We are very happy with the acceleration and the continued growth. So, it’s a very good new story and when all that said and done in a very positive influence for us in terms of our overall business.

Great, thank you. Thank you for that. I guess, maybe more about an industry question. While your business is certainly impacted by the absolute level of WTE spending which 2018 looks to be another very healthy year. I think one of the misconceptions is that, as WTE mix shifts away from memory toward foundry and logic next year on the ramp towards some nanometer, your business may face headwinds. Could you comment on the opportunity you have in foundry and logic and maybe how the capital intensity increases with greater adoption of FinFET transistors and eventually EUV?

Yes, well, first of all, let me comment on the EUV. As I think, you may know we are making the gas delivery systems for EUV. So, we are very close to that activity and certainly that activity is accelerating. Having said that, I think you also hit the nail on the head in terms of the logic devices using the same types of 3D approaches that memory and especially 3D NAND use and this is manifested in the FinFET architectures that are now being seen in a lot of the logic devices. So the bottom-line is that, first of all, I am not sure I would say that the memory aspect of the business is in fact going to slow down next year. And I really don’t want to get into try and get into a conversation about that. But I think, 3D NAND and certainly DRAM will remain strong. But I also believe that the FinFET devices and even multiple patterning will continue to grow and affect the logic devices. Bottom-line is, we see wafer fab equipment growing next year in a positive way and when all is said and done, I believe that most of our customers will probably be saying the same thing.

Thank you gentlemen. Appreciate it.

Thanks, Karl.

You are welcome.

Thank you. Our next question is from Edwin Mok of Needham. Your line is open.

Great. Thanks for taking my question. Congrats on a good quarter and obviously, a great deal. I wonder, Tom maybe dive into kind of in a little bit more, trying to understand, I think you mentioned that your supplier, just trying to understand what they supply to you, right? And I assume the revenue number you’ve provide are the - factor in that inter-company transfer. And then, I guess, beyond what they supply to you in terms of – in the gas delivery, what are the machine parts they sell to within semi and all those outside of semi?

So, specifically, they make a number of components that we buy including valves and fittings that are part of the gas delivery system and we are buying approximately 25% of their total output at this point and that will of course help us from a vertical integration standpoint, because it will be accretive to our gross margin as we make those products ourselves after buying Talon. They also make specific components. These are components – some of which are proprietary to Talon, called the Talon Module System. They are similar to the blocks used in the construction of a gas panel called the K1S blocks that we had designed here at Ichor. These are the structural components that are used as the substrates if you will on to which the valves and the fittings and MFCs are attached. And so, they are very, very, very highly precisioned manufactured parts, actually very few people are able to do it. And Talon maybe probably – if not the best among the best of those who do, do it. So, it’s a very important acquisition both in terms of the critical components that are being manufactured there, but also in terms of our ability to also get involved in the valves and fitting parts of the business, which add to our vertical integration.

If I could add just one thing, Edwin, you asked the inter-company revenue is reflected out of our guidance for the revenue that we put in the press release. So we have taken in that into account. To your second part of your question

Okay, that’s helpful. Is there a way to describe, of the 75% that don’t sell to you, right, I assume they sell to outside customers.

Yes.

Is there a way to describe how much of that is semi versus non-semi and in non-semi, what would it refer to?

They probably are somewhere around 85% to 90% semi. They have a part of their business that they sell to industrial customers and we are obviously taking a look at that and we will decide strategically whether that is something that we think is a positive or perhaps we might actually use that capacity for more semiconductor output. So, that’s to be decided.

I see, okay, that’s helpful. And then, maybe kind of look a little bit beyond, obviously, you guys provided a nice fourth quarter guidance, in fact business is improving and we’ve heard from your customer that how shipments are likely to higher in the first half of 2018? To the extent you can provide any color on the industry. Any kind of disability you guys – on the industry demand you can provide and then, how is the component shortage we’ve heard that before, is that anything did creep up that you are seeing right now on the market on that end?

Well, let me comment that, and you know, Edwin, that we do not give guidance for Q1. However, we’ve had this conversation before. I can remember a couple of times last year when we would describe our feeling about the future quarters and right now, I can describe our feeling is very, very optimistic. And one way to look at that which we again talked to you about last quarter and it seem to be a reasonable pre-cursor is the amount of monies we are spending on additional capacity and maybe Maurice, you want to talk about that a little bit.

So, yes, Edwin, we told you before about or not just you, everybody about the fact that we built out capacity in Malaysia, Singapore and Portland to support the business growth this year. We also are building out additional capacity to that in Malaysia. We’ve talked to you about that, that’s well underway to support significant more growth in weldments for all parts of the business and additional growth in Portland to support both gas delivery and weldments. So, we continue to focus on capacity as our customers have asked us to.

Okay, great. That’s great color. I assume that there is no update on those change in component shortage situation that’s not real – that’s behind us?

No right now, it’s quite good and bottom-line is, expectations are that – and you can see this, we are at a position where we are – under normal conditions have a little more inventory than we would like to have. But it’s exactly the right thing to do given what we are seeing into the future.

Okay, great. That’s all I have. Thank you.

You are welcome.

Thank you, Edwin.

Thank you. Our next question is from Amit Daryanani of RBC Capital Markets. Your line is open.

Are you okay, Amit?

I am good.

Good, good.

I guess, couple of questions. Maybe first to start with, the updated gross margin, net income margin guide that you guys just provided, just help me understand, the uptick that you guys are doing on gross and net income, how much of that is in the better organic fundamentals versus acquisitions? And then, is there a revenue runrate you need to get to these targets?

So, I think, I just want to make sure I understand the question and the new model that I just went through that gets us up to the 19% to 20% gross margin. Your question is how much of that is driven by the base business and how much through the acquisitions?

Right, so you basically, the gross margins we have about 150 basis points, I am trying to get a sense of what’s driving it and then what’s the revenue runrate do you need to get there you think?

So, the primary driver of that, it continues to be the acquisitions and the growth that we will have in weldments, machining and then also organically from LDM which we’ve always talked about, Amit, as an important part of our margin expansion as we go to market with our proprietary products. The baseline business is for gas delivery will move up, but not significantly compared to those other items.

Got it.

And I would say, to the other part of your question, Amit, the volumes are based on – essentially the volumes that we are building into our plan for next year.

Got it. Could you help based on that number? Is that like a $200 million a quarter that you think?

I prefer not to do that.

I think, it’s always worth a shot.

Yes, so, it’s a good idea.

I guess, maybe just going back to some of the discussion you had on your September quarter performance. I think you talked about the core business being a little bit slower at the start and then it picked up. What exactly happened and what drove that slowness and the pick up that you’ve seen in – towards the end of September, it sounds like, do you expect that to sustain as you go through the December quarter?

Well, the second part of the answer is, yes, and we’ve already seen that. So, that’s kind of easy to say. In the third quarter, we knew that our customers and they announced this. So you knew it also we are dropping the shipment levels. It was actually pretty well discussed. It was discussed during our earnings call in the second quarter. It was discussed during our secondary roadshow back in July. And it was pretty commonly understood. Plan was very specific about it in terms of this percentages applied less so. But the bottom-line is that their shipments were lower and I think we would describe it as essentially as pause in the overall ongoing ramp. And that’s what we saw. Now, as a result of that, we did end up and they ended up placing orders on us a little later in the quarter than they normally would. And that, as Maurice very well said, leads to positions where you can’t receive all the receivables because you’ve shipped very late in the quarter. Bottom-line is that, we have certainly got through that particular pause without doing any damage if you will. And fundamentally see that as we’ve guided the fourth quarter moving up and it continues to look very, very, very good. So we are very happy about it.

Got it. And just finally for me, inventory, I mean, is up about 15% sequentially. Just talk about what drove that uptick and how do you see cash cycle broadly trending into December.

So, Amit, the uptick was due to Cal-Weld, the baseline business for Ichor was actually down in the inventory quarter-on-quarter, small amount, but Cal-Weld drove that increase. And their – quite honestly, their business has been booming also and they have the right inventory – forward-looking inventory for the increased growth that they are going to experience.

Yes, and normally when you buy a company, you are worried about what’s stripping out the working capital. In this case, the working capital was very robust both in terms of receivables and inventory. So, it’s actually a very good thing, but it skews our numbers a little bit and we’ll have to normalize that for you guys.

Perfect. That’s it for me and congrats on a nice quarter guys.

Thank you very much.

Thank you. Our next question is from Patrick Ho of Stifel. Your line is open.

Patrick?

Yes, thank you. First off, as it relates to y our capacity expansion plans, and I know you had Cal-Weld basically for only about a quarter or so. How do you evaluate given their strong demand trends that you just mentioned and the potential for additional capacity expansion for that piece of the business?

I am really glad you mentioned that, Patrick, because part of the capacity expansion that I just referenced is for Cal-Weld. As we integrate their growth with our growth in weldments and expand their presence worldwide. So, I would say, probably a quarter to a third of our plans for – that we’ve already announced or just talked about are related to Cal-Weld which is a key part of our overall weldment strategy.

Great. That’s helpful. And maybe as a follow-up question, in terms of the Talon acquisition, and the opportunities ahead for the company, you obviously mentioned as part of the vertical integration, Cal-Weld if we look at that deal was probably more of a market expansion opportunity. How do you evaluate those different opportunities of more vertical integration, more synergy versus market expansion opportunities that you're getting from something like Cal-Weld? I guess, ultimately, how do you decide to bring one of those two variables into the larger Ichor fold?

Right. The bottom-line is, and we’ve mentioned this, I think a few times, Patrick. When we are looking at acquisitions, we are not necessarily looking at this has to be a market expansion acquisition or this could be a little more of a vertical integration expansion. We are looking at a number of things. One is, how does it fit in with what our customers are doing and what they want us to be doing. It’s a very important point. And it derisks our acquisitions dramatically when we have the full throated of our customers behind that as you can well imagine. So that’s the critical element. The second is that, we financially want to make sure that it’s going to be accretive both to the gross margin and to the bottom-line. The third thing is that, we also want to make sure that it in and of itself has future growth opportunities. And both Cal-Weld and Talon fit all three of these elements. I would say, well, Talon does have a vertical integration element to it, it’s not a pure vertical integration play by any stretch. There is also a market expansion aspect to it. But, again, that’s not really the key point. The key point is that, it kind of clicks all those boxes appropriately and in both cases, we were able to purchase the company at a EBITDA multiple which we like to be around the five times EBITDA range. Sometimes it’s a little more, sometimes it’s a little less. But, we have successfully done that in these cases. So, we are very happy with both of them.

Great. Thank you very much.

You are welcome.

Thank you, Patrick.

Thank you and that concludes our Q&A session for today. I’d like to turn the call back over to Mr. Maurice Carson for any further remarks.

Thank you very much. We appreciate everybody’s call and time today. Tom, do you have anything you would like to add at the end here?

Yes, again, thank you all and look forward to a good quarter and looking forward to seeing you all in the New Year. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today’s program and you may all disconnect. Everyone have a great day.