Good day, ladies and gentlemen, and welcome to the Ichor Systems First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this conference is being recorded. I would now like to introduce your host for today’s conference, Claire McAdams, Investor Relations Council for Ichor. Please begin.

Thank you. Good afternoon and thank you for joining today’s conference call, which will be available for replay telephonically and on Ichor’s website shortly after we conclude this afternoon. As you read our earnings press release and as you listen to this conference call, please recognize that both contain certain forward-looking statements within the meaning of the Federal Securities Laws. These forward-looking statements are subject to a number of risks and uncertainties many 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 described in our Annual Report on Form 10-K for fiscal year 2017 which has 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, we will be providing certain non-GAAP financial measures during this conference call and our earnings press release contains a reconciliation of these non-GAAP financial measures to their most comparable GAAP financial measures. On the call with me today are Ichor’s Chairman and CEO, Tom Rohrs; and our Chief Financial Officer, Jeff Andreson. Tom will begin with a review of the business and then Jeff will go over the first quarter financials and outlook for the second quarter of 2018. After the prepared remarks, we will open the line for questions. I’ll now turn over the call to Tom Rohrs. Tom?

Thank you, Claire, and thank you all for joining us today for our Q1 2018 conference call. Our first quarter results serve as strong evidence that our strategy and operational excellence efforts are right on target. Our $258 million of revenue is 41% above Q4 and 74% above Q1 of 2017. This is league leading performance. Our earnings per share of $1.03 is 47% above Q4 and 81% above Q1 of 2017. Our gross margin of 18.3% is a 120 basis points above Q4 and supports and fulfills our commitment to grow our gross margins as we grow the business. Our operating margin of 13.3% is already within our target model range. This time last year, and as we went into our Q1 2017 conference call, expectations were that we would deliver just over $500 million in revenue for all of 2018 and about $0.02 a share in earnings. In the first half of 2018 alone, we will deliver revenue and earnings on a par with what a year ago our analysts predicted for all of 2018. For the full year of 2018, we believe that we will be close to $1 billion in revenues and earning close to $4 a share. This will generate about $130 million in EBITDA this year. On top of that, and our gross margin and operating margin will both show strong year-over-year increases compared to 2017 as we approach our long-term model. We are successfully achieving our goal of outgrowing the rest of the industry evidenced by the following. Our compound annual revenue growth rate of 38% since 2014, compared to 14% for the industry. Our 62% growth last year was double the growth rate for our industry. Our strong first quarter of 2018 revenue growth rates cited earlier were well above the industry,…

Thank you, Tom. Before I begin my comments, I’d like to remind you the P&L metrics discussed today are non-GAAP measures unless I identify the measure as GAAP-based. These measures exclude the impact of share-based compensation expense, amortization of acquired intangible assets, non-recurring charges and discrete tax items and adjustments. I would also like to note that we have added a schedule which summarizes GAAP and non-GAAP financial results discussed on this conference call, as well as key balance sheet and cash flow metrics and revenue by geographic region to the Investors section of our website. First quarter revenues were a record $258 million, increasing 41% from the fourth quarter and 74% from the first quarter of 2017. We exceeded the high-end of our revenue guidance as each area of our business, fluid delivery, weldments and precision machining strengthened versus our outlook as we entered the quarter. In the first quarter, we adopted the New Revenue Recognition Accounting Standard, which did not have an impact on the timing of our revenue recognition. Our record Q1 gross margin of 18.3% increased 120 basis points from the fourth quarter, which was slightly better than the 100 basis points of improvement we had forecasted. As expected, the increase compared to the fourth quarter was primarily driven by the accretive contribution of our acquisitions, as well as the higher revenue volume and was slightly higher than forecast due to favorable product mix. Versus the year ago period, our gross margin improved by 210 basis points, primarily reflecting the impact of both the Cal-Weld and Talon acquisitions. Importantly, our gross margin increased for the third straight quarter showing strong progress towards our improved target model range of 19% to 20%. Operating expenses were $13.1 million or 5% of revenue and were in line with our…

[Operator Instructions] Our first question comes from Patrick Ho of Stifel. Your line is open.

Thanks very much and congratulations on the quarter. Tom, first off, in terms of in this [Indiscernible] March quarter, did you see any…

Patrick you are facing

You are breaking up, Patrick.

I apologize. In terms of the industry environment, the level of [Indiscernible]

So, Patrick, something is wrong with your connection and it’s almost impossible to ascertain what you are asking right now.

Is this better?

That’s a 100% better. Let’s go.

Okay, I apologize, Tom. First of all, in terms of the industry environment, can you discuss for the March quarter, the level of shipment pull-ins you might have seen and as we look going forward how is the visibility for Ichor in terms of – are you starting to see a level of visibility for the September quarter?

So, in the first quarter, we have guided 240 to 250 through the course of the quarter. Obviously, we gained more revenue than we had thought and obviously, then some of those were items that were originally scheduled into the second quarter and were shipped in the first quarter. So, yes, there was some pull-ins into the first quarter and with that, we were more than happy to meet our customers’ requests and fulfill those. The - in terms of the third quarter, the way we are looking at that now right, is, in terms of the second half and I think with regard to the first half and second half, we are seeing as very similar to what way I’ve had described with low 50% in the first half and high 40% in the second half and I think that is something that is I think pretty robust at this point. Obviously, if we end up being high – low 50s and high 40s that will start getting us very near the $1 billion number that I spoke about. Now as I said on my script, we are working on qualifications for a lot of additional revenue with weldments and precision machining and LDM modules and qualifications are very hard to quantify from a timing perspective. That could be some that result in second half revenues which would be additive to those percentage numbers I just mentioned. However, most of them will serve towards the growth drivers for 2019 as I discussed. And we think as well over $100 million when we look at what is available there in 2019. So, we are quite bullish in terms of both the overall wafer fab equipment as I said growing 10% this year. At this point perhaps slightly front-end loaded, but nevertheless strong throughout the year and then, we are actually getting very excited about 2019 and what we can do with our incremental revenue.

Great. That’s helpful. And maybe as a follow-up question for Jeff, in terms of the supply chain and managing that. Given these elevated shipment levels and higher demand for your customers, combined with the M&A you’ve done over the last few quarters, how are you guys managing, I guess, the supply chain and your own balance sheet as well as you have given this – I guess, really high level of spending you are seeing by your customers?

Hey, Patrick, let me – this is Tom, let me answer that for you. I am really happy with our supply chain team and last year, we added a number of executives last year, because I spoke about it during conference call. We also added a new senior executive of supply chain and he has built up a first rate team. And so, as an example, our on-time delivery gets better and better despite the large amount of purchasing and obviously, we are really happy about the large amount of purchasing. And not only that, but we only grew our inventory about 10% in the first quarter, while we were growing shipments 40%. So that gives us a lot of extra cash that we can use for things like buybacks and acquisitions. So, the supply team has done exceptionally well. We have a very good model for integrating acquisitions. We integrate them almost immediately into the appropriate functional areas and so they team up on the supply chain side almost immediately. So that’s worked extraordinarily well and overall, we’ve made some real significant investments and those investments are paying off.

Great. Thank you very much.

Thanks, Patrick.

Thank you. Our next question comes from Edwin Mok of Needham & Co. Your line is open. Edwin, check your mute button.

Hey guys. Sorry about that. So, congrats on a great quarter and great outlooks. First question I have is, in terms of your ideal concentrations of those two largest customers I think last year it dipped a little bit already to, call it 93% I think you had combined those two as high 90s obviously. As they continue trending that way mean that are you growing from the other customers faster than your larger customers? Was it still it’s kind of same level within those two buckets?

So, we mentioned, I mentioned during my script that the first quarter this year was really substantially above the first quarter last year. I think it was 81% above. However, our – outside of our two biggest customers, the other customers we have actually tripled in revenue from the first quarter of 2017 to the first quarter of 2018. So we are really happy about that and it gives you a pretty good indication of how things are moving.

That’s extremely helpful just we can’t see a trend and that doesn’t even include these two new Korean customers which you don’t expect until the second half of the year, right?

No, that does not include SEMES or WONIK.

Yes. And then, kind of leads to my next question, in terms of kind of the drivers that laid out, your weldment expansion in Korea, LDM et cetera, is there a way you can rank the timing of these opportunities? I know you are going to call up all of them, but I had some – some of them is so long than you are. Just kind of give us a sense in terms of the timing of these different opportunities?

Yes, I think we will start to see some activity on the precision machining first and we are hopeful to see some of that into the back-end of 2018. We will see some activity on the weldment side soon thereafter. And, with regard to the liquid delivery module, we actually and that looks like the first quarter we hit on all cylinders, we actually had some push out if you will of LDM because it was qualified on a very large customer, whose 10-nanometer fab was delayed. And so, we actually saw some delay of that. And so, we expect that probably to start kicking back in again in the second half. So, I would rank them that way in terms of timing.

And is it fair to say just based on call it your comments around the prepared remarks, is it fair to say that precision machining plus weldment is probably the largest opportunity available in all these different ones?

Yes, I think that’s a fair assessment. The market size there and I mentioned that it’s $1.5 billion of weldments and precision machining that is used in the semiconductor industry alone. And, our share of that is, maybe 25% in the weldment side and probably less than 10% in the precision machining side. So, there is a lot of area for us to play in.

Great. Sorry about the background noise. Last question I have, just kind of in terms of M&A and debt capacity, I think, Jeff, you mentioned on the prepared remarks you guys had upped the debt and it sounds like you are comfortable going up to three times leverage. Is that the way to think about your debt capacity?

No, well, the way I would think about it, Edwin, is that we can’t go to 3. We’ll probably stay something below that given that we want to make sure that we are prudent. So I’d suspect that will stay between 2, 2.5, but that’s kind of where we are looking at it right now. But we have the capacity to go to 3 should something arise, that allows us to do that.

If you don’t have, like if you didn’t come across or build income through over the next several quarters or any kind of larger deals that will need to use this debt, right. How do you prioritize, buyback versus working down the debt?

I think the way we think about it is, I mean, obviously we’ll have to look at them all together depending on where our share price goes, we’ve – $23.75 it was what we would consider a very good value, I think and what we bought our shares back for. In light of the future, if we saw some risk to some kind of a down tick or some we might consider the debt ratio and make sure that we don’t get overleveraged. So, we’ll just have to balance it in the outlook.

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

Thank you. Our next question comes from Karl Ackerman from Cowen. Your line is open.

On IAN, Jeff or Tom, I know you haven’t yet closed on IAN Engineering, but does this accelerate or postpone your ability to achieve your newly saved gross margin in that income model? And I have a follow-up please.

Well, I don’t think it - the effect on the income model is marginal. Don’t forget we are paying $4 million now and $2 million a year from now and $2 million in two years and the current runrate is $20 million and so that $20 million is not going to move the needle that much with regard to the percentages what we are – even more excited about though is that it gives us as we said, it’s at the beachhead. But it’s also a growing point in Korea, especially with SEMES and WONIK where can sell weldments and precision machining and delivery modules which would be at the same or maybe slightly higher in some cases, margin than what we ship today. So overall, as this plays out and I think Jeff mentioned it’s over $100 million of opportunity that we see there, I think it will play very well with our long-term plan vis-à-vis growing margins.

I appreciate that. As my follow-up, Jeff or Tom, how do you think about your manufacturing footprint today, given the soon to be four M&A deals you’ve completed over the last 24 months have brought about several smaller facilities spread across the world. Should we expect any opportunity to consolidate some of these facilities, maybe particularly in your – into your Singapore and Malaysian factories, that may drive additional OpEx leverage next year?

Well, I think I mentioned as I was talking through the script today, we are building a lot of weldment capacity in Malaysia and so, while it doesn’t mean we are moving any one from the Cal-Weld business, because they are doing really, really well. A lot of the incremental weldments will be done in Malaysia. So, in essence, yes, that business will be consolidated with the activities we currently have in Singapore and Malaysia. And I suspect though that, in terms of where we are with Talon and also with just buying IAN, those entities will remain where they are and in fact, probably won’t be consolidated. It’s just that as they grow, we will probably do the growing part in more advantageous cost centers.

Great. Thank you.

You are welcome.

Thank you. [Operator Instructions] Our next question comes from Sidney Ho of Deutsche Bank. Your line is open.

Thanks for taking my question. Just to follow-up with the previous question on the acquisition. IAN offer products that are similar to what you offer today? Or today have you - additional capabilities that you can leverage to existing customers? Just trying to understand the SAM expansion opportunity, which I think you said $125 million for two customers that you mentioned?

The products at our gas delivery systems which are very similar to what we are building today and that is a very good thing actually, because it’s a direct fit and it actually is as much as anything is very exciting because it gets us into two brand new customers. And obviously, we have opportunities to grow that particular gas delivery business and then we also have the opportunities to put our other products into the mix in Korea as we use that as a launching point. But, there will be good sharing of information between IAN and our current gas delivery capabilities. Point of fact is that, I think IAN will gain in terms of their efficiencies since, obviously we know as much about building gas panels as any one and probably more than them. So, I think that’s the way the synergies would move in regard to the gas delivery side.

Got it. But, just to follow-up to that, what was the competitive landscape in South Korea right now? And any reason why you can’t get to the same market share you have with those SEMES and WONIK as you have to know with the other two existing customers?

Well, the competitive market in Korea is one where Samsung is very anxious to see more and more of their supply coming from Korea. And so, we felt, we wanted to be in Korea. We felt that it was important in terms of the growth opportunity to be in Korea. And this was the methodology we chose. We felt that would be very expensive and probably unsuccessful to start our own Ichor subsidiary, first of all, it wouldn’t be Korean and second of all, we wouldn’t really know how to do that. So, this is a method we chose. So, now, this puts us in a preferred position in Korea, because they will be anxious to buy the kind of product weldments, machining, et cetera, et cetera that we can do. We may end up doing some of it in Korea as well and become another indigenous source to the overall Samsung supply chain. So, it’s a very big opportunity and it will be leveraged into people who are on the Korean peninsula. Our customers in the U.S. understand this. One of them has a very, very, very, big subsidiary in Korea. I think it’s probably $800 million or so and this also puts us in a position to supply them, since they want to have Korean sources of supply. So, we think it’s important. We think it’s a great opportunity and we are very, very happy with this deal.

Great. That’s helpful. My follow-up question is, on the guidance, Q2 guidance, which part – well, taking the midpoint of your guidance that’s down 3% quarter-over-quarter, which part of the business do you expect to pullback a little bit to see weldments still growing and I think you mentioned in your previous quarter, you have expected first quarter the core business to grow 30% and how did that end up?

Well, let me give you my perspective on this. So, you understood our first quarter, we anticipated being a at $245 million. And I’ll be very blunt with you when we looked at that in January and we are at $183 million going at $245 million and we knew everyone else was forecasting up at 8% or 9% or 10%, we were kind of saying this is real, what we are doing well, of course, we knew what we were doing and fundamentally, we preceded to do a very good job of that and even overachieved it to get to the $258 million number. When we were looking at the first quarter, we thought it was going to be $245 million in the first quarter and about $260 million to $265 million in the second quarter and we ended up pulling in $13 million of that into the first quarter. So, if you look at the half as a whole, there is no degradation at all to the total number, it’s just that customers wanted a few things earlier than others and that’s the way it played out.

Excellent. Last question, I think last quarter, Jeff you mentioned you expect gross margin to improve throughout 2018. Is that still true, especially, after a jump in Q1,what do you think will be the drivers for the improvement over the next few quarters?

Yes, I mean, I think as you look forward, I mean, obviously, I mentioned that we had some favorability in our margin due to product mix. I wouldn’t say that we are planning on that right now. But our focus is really going to be in addition to what the new acquisitions have brought, there is still other things that we can do with those acquisitions to internally consume some of those parts. We are working on those programs. And then, as Tom said, the supply chain organization is doing a very good job at looking at how to bring our overall cost down on our other products outside of the Talon and Talon type products that we can use internally. So, those will be the drivers going forward. Obviously, depending on the revenue levels and stuff you will see some leverage up or down, so.

Okay, thank you very much.

Okay.

Thank you. This concludes the Q&A portion of today’s conference. I would like to turn the call back over to Tom Rohrs, Chairman and CEO for closing comments.

Thank you and thank you for joining us on our call this quarter and we certainly look forward to updating you on our Q2 call, which will be in August. Thank you.

Ladies and gentlemen, thank you for your participation in today’s conference. You may disconnect. Have a wonderful day.