Good day, and welcome to the Ultra Clean Technology Second Quarter 2021 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Rhonda Bennetto. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me today 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 a financial review, then we'll open up the call for questions. Today's call contains forward-looking statements that are subject to risks and uncertainties. For more information, please refer to the Risk Factors section in our SEC filings. All forward-looking statements are based on estimates, projections and assumptions as of today, and we assume no obligation to update them after this call. Discussion of our financial results will be presented on a non-GAAP basis. A reconciliation of GAAP to non-GAAP can be found in today's press release posted on our website. 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. I'm going to start with a brief review of our second quarter performance while sharing my thoughts on the industry and how UCT continues to increase its value within the semiconductor ecosystem. After that, I'll turn the call over to Sheri for our financial review, and then we will open up the call for questions. By maximizing our current market position and capabilities and consistently working to meet customer demand, UCT again reached new revenue and EPS milestones. Total revenue for the second quarter was just over $515 million, a 50% increase year-over-year, and EPS grew 32% to nearly $1. Over the past 5 years, we have consistently outperformed the markets we serve. This track record, combined with our commitment to investing in our future, paves the way for a very exciting road map for growth in 2021 and beyond. As the semiconductor industry continues to be stretched by record-high demand, we are leveraging our leading position as a partner of choice to help our customers and their customers accelerate the rapid migration towards next-generation devices. The global semiconductor industry has historically been driven by demand from electronics such as smartphones and computers. More recently, continued enhancements of existing products and the inclusion of emerging technologies such as AI, 5G networks and high-performance computing applications are creating sustained demand increases across a much broader end market. This mega trend is enabling greater visibility with multiyear, record-breaking industry CapEx plans for leading and trailing-edge capacity to support the extended ramp. UCT's broad spectrum of products and services are increasingly relevant to the success of our customers, and this gives us a significant competitive advantage. We are one of the few semiconductor-focused manufacturers with a proven ability to sustainably…

Thanks, Jim, and good afternoon, everyone. Thanks for joining us. In today's discussion, I will be referring to non-GAAP numbers only. Total revenue for the quarter was $515.2 million, up 23.4% from the prior quarter. Our Products division was up 28% to $442.5 million, which includes nearly a full quarter of revenue from Ham-Let amounting to $58.2 million. Our Services division was up slightly to $72.7 million. Total gross margin for the second quarter remains at the high end of our model at 21.2% compared to 21.3% last quarter. Products gross margin was 18.8% compared to 18.2% last quarter, and Services was 36.2% compared to 36% last quarter. Margins can be influenced by customer concentration, geography, product mix and volume, sure there will be variances quarter-to-quarter. Operating expense for the quarter was $48.9 million compared to $38.1 million in Q1 due to the acquisition of Ham-Let. As a percentage of revenue, operating expense was 9.5% compared to 9.1% in the prior quarter. Total operating margin for the quarter was 11.7% compared to 12.2% in the first quarter. Margin from our Products division was 10.9% compared to 11.7% in the prior quarter, and Services division was 16.7% compared to 14.3% in the prior quarter. As we mentioned when we purchased Ham-Let, their operating margins are below our typical products margin range. With synergies, we will continue to improve the Products operating margin over the coming quarters. Based on 44.3 million shares outstanding, earnings per share for the quarter were $0.99 on net income of $43.7 million compared to $0.92 on net income of $38.2 million in the prior quarter. Our tax rate for the quarter was 17.6% compared to 18% last quarter. We expect our tax rate for 2021 to stay in the high teens. Turning to the balance sheet. Our cash and cash equivalents were $451.4 million at the end of the second quarter compared with $264.3 million last quarter. A significant portion of the increase was a result of the equity offering in April 2021. Cash from operations was $51.1 million compared to $65.6 million in the prior quarter. During the second quarter, we made an additional voluntary payment on our Term B loan in the amount of $25 million. Before we review our guidance for the third quarter, I wanted to share a change to our Services joint venture in Korea. We have recast our arrangement to purchase additional shares of the JV to remain much more flexible. This change will not impact revenue or operating margin [Technical Difficulty] reduce our reported EPS in future quarters. For the third quarter, we anticipate revenue between $520 million and $560 million, an increase of 5% using the midpoint. And we expect EPS in the range of $0.94 to $1.10. Our EPS guidance includes a $0.03 to $0.04 impact from the joint venture change I just noted. And with that, I'd like to turn the call over to the operator for questions. Operator?

[Operator Instructions] Our first question comes from Krish Sankar with Cowen and Company.

I actually had 3 of them. First one for Jim or Sheri. Just a quick housekeeping question. You said Ham-Let was $58 million in June. How much is Ham-Let in your September guidance? I'm going to ask 2 other questions.

We have not -- we didn't break that out, but I would anticipate it would be similar to up to the amount that they did in the Q2 time frame.

Got it. Right. Okay. Fair enough. And then a question for Jim. What is your visibility today? Is it into the December quarter or even into 2022? And the reason I'm asking is that in the past, you've always outgrown WFE. And since the last earnings call, the WFE outlook has increased to over 30% this year. If I do the math, that basically means that the December revenue has to be flat to up if you want to outpace WFE. So I'm just kind of curious what does this look like in essence? [ph] Can you give any color in the December outlook?

Yes, Krish. Thank you. Yes, we certainly are not forecasting out through December or through the March quarter. But I think it's safe to say that all throughout the industry, we see a pretty solid forecast out through the end of the year and into next year. At this point, it's really a case for the whole industry more gated by the ability to really produce the WFE tools rather than orders on hand. So I think we see an unusually long trail of orders heading out several quarters, which normally we don't see.

Got it. And then a final question for Sheri. I just want to take on the operating leverage. Clearly, revenues increased in June, but margins were kind of flattish. In your kind of your guidance based on September, it looks like revenue is improving, but EPS is kind of still not that much. So, is Ham-Let [Technical Difficulty] or do you think the incremental operating leverage is kind of waning now that the easy [Technical Difficulty]?

Yes. No, from an -- Ham-Let is definitely accretive to the gross margin. But as I mentioned in previous calls, they're not accretive yet from an operating margin perspective. We anticipate that we'll be able to get them into our Products range of 8% to 10% in the next couple of quarters. They're adding a specific amount of OpEx, et cetera, and cost that we'll continue to work on along with revenue synergies over the next couple of quarters. So that's what will help us see that operating leverage as we continue to move forward with them. So, that's really the -- one of the key contributors as well as we have to continue to add [Technical Difficulty] so that we can continue to grow. So we will continue to work on that as we move forward.

Our next question comes from Quinn Bolton with Needham & Co.

Congratulations on the results and outlook. Jim, wanted to start with the overall industry capacity constraints. And specific to UCT, how are you feeling about your ability to manufacture to demand? I know you've got Malaysia ramping in September. But how tight are things now? And do you feel that your business is constrained through your manufacturing footprint, or do you think you should be able to meet demand based on your manufacturing capacity today?

Yes. Thanks, Quinn. I think overall, we're doing a pretty good job of keeping up with demand and making the deliveries that we're expected to make. It's more a case of the ability of the whole industry to really absorb the other parts. If we make a module on time or we make a tool on time, there's other elements to that that have to also be ready. So I think it's really a case where the whole industry, our customers and our peers are also kind of hand to mouth right now. So even when we're able to make deliveries, we're a little bit constrained on when the whole tool is ready to go, if you would. So -- but I think we're doing a pretty good job keeping up. But it's, I think, one of the few times I've seen in the industry where maybe 20, 30 years ago, it happened in the late '90s, where, where the revenue is really gated by -- not by orders, but by the ability of the whole industry to keep up with things.

Got it. Second question for me. I know you've only had Ham-Let under your belt for about a quarter now, but wondering if you could give us any update on your ability to begin qualifying those Ham-Let components on your gas panels to try to capture additional value in that sale?

Yes. Thanks for that question. Demand is really strong across the board for Ham-Let. We're definitely making progress with all the engineering and drawing changes needed to really set that up. The book-to-bill in that business is really high right now. And so that work where we're doing the qualifications and getting in place is really setting us up for next year. And I think at this point, we're doing everything we can to kind of increase the capacity of Ham-Let to just to meet the orders on hand is definitely, I'd say, around the time that we closed on the business, we saw orders really spike up pretty dramatically in that space.

That's great. And then lastly for Sheri, maybe I missed it, but can you just walk us through the JV change and why that's dilutive to EPS by $0.03 to $0.04 a quarter?

Yes, absolutely. This was something that was put in place by QuantumClean before we purchased them. And basically, there was an obligation to buy up to 86% of the JV. As a result, we were able to consolidate profits up to 86%. So what we're doing is basically taking away the obligation and making it optional. We still own a majority of the JV, greater than 50%. And really what it allows us to do is it gives us -- as we continue to look at M&A is core to our strategy, it really allows us to maintain flexibility with our capital so that it's more beneficial to shareholders. And if we decide we want to buy up to that amount, we will, but it just gives us more optionality versus obligation.

So will you just effectively be recording a higher minority interest so that you historically had 86% of that JV flowing through your income statement and now that it's -- you don't have the obligation, you'll have a lower than 86% of profits effectively flowing through the income statement?

Correct. Revenue and operating margin will stay the same. We'll just have a bigger adjustment of profit below the line in other income. So you'll see a little bit larger back out of profit in the other income and interest line, and that's what the effective $0.03 to $0.04 is.

The next question comes from Patrick Ho with Stifel.

Congrats on the nice quarter and outlook. Jim, maybe to follow-up on the capacity constraint question. I look at it from a different angle of supply constraints. Based on your results and outlook, it looks like you managed that very well. One, did you experience any, I guess, meaningful supply constraints? And secondly, if not, what have you been doing differently? Or how have you been able to procure the necessary supplies to keep up with your customers and demand?

Yes. Thanks, Patrick. We've definitely had some level of constraint happening from some of the kind of the built-in OPM to call an original part manufacturers. So that definitely throttled back our ability. We could have delivered more revenue. Now we met the customers' needs, but we could have delivered more if we had been able to procure more of some of those OPM parts. I think when Kuala Lumpur got hit with a 2 10-day or 2-week shutdown, we were not affected. And some of our competitors were, but we were able to pick up some additional business within this quarter and probably this quarter a little bit as well. So there's some puts and takes. Overall, I would say we've been able to meet the customers' needs. But because of some of those constrictions, we were constraint on delivering the amount of revenue. We could have delivered more revenue this quarter without those issues.

Great. That's helpful. And maybe a question for Sheri. In terms of gross margins, as you mentioned, there's a lot of moving parts to it. But as you get the Malaysia facility ramped up, typically, there are startup costs associated with it. But given, I guess, the high demand that we're seeing out there, am I right to assume that you could absorb that capacity faster and I guess, the normal time start-up cost could be a little bit less? And you could get gross margins or I guess you could keep gross margins at these elevated levels because of the high demand?

Yes. I do think that we are able to absorb a majority of those costs. Malaysia is going to really be something that's probably more impactful to 2022. But I think as we slowly started up, I don't see there being a huge drag on our margin as a result of that.

Our next question comes from Christian Schwab with Craig-Hallum Capital.

Congrats on another good quarter and outlook. Can you help us understand what the -- remind us probably how much revenue you could get from the new Malaysian facility in '22? And would it be running at full capacity by the end of '22? Or do you think it would take longer?

Yes. Christian, thank you. Yes, the full capacity, when it's all built out in 2 to 3 years, just the maximum is roughly around $600 million in revenue. There's always some wiggle room in there as well. I think through 2022, I think our estimate is something around 1/3 of that would be utilized and -- but the $600 million is not -- require some additional hiring and building out of different clean rooms and things. So we're doing the capacity in different stages. So the ultimate capacity is $600 million, but roughly 1/3 of that is -- will be -- is available right now, and we expect to have that kind of filled out by the end of next year.

Great. And given kind of the tightness and the strength of the wafer front-end equipment market in general, are you already securing orders for your September production and into '22 for that facility as we sit here today?

Yes. One of the phenomena we're seeing is a lot more working together with our customers to secure long lead time POs from them, which, therefore, we are able to cover that -- cover those POs back through our supply chain. So we're getting a lot of great cooperation from our customers to really put the money down and put the orders in. And we're then we're able to lay out long-term orders then with the supply chain. So that's definitely one of the things that as we're entering our third year of this big ramp, we're seeing a lot of improved cooperation between all parties. So I think we're in good shape.

And then lastly, would you guys still expect as we go through the wafer front-end equipment spending cycle for you guys to outgrow WFE by at least 10 points on a go-forward basis? Everything you're seeing still suggested that and point to that?

Yes, definitely. Absolutely. I mean, obviously, this year, if you look at the inorganic, the acquisition of Ham-Let, that kind of puts us already in that territory. And then on top of that, we're doing very well with the organic side of our growth equation, which is share gain, continued outsourcing that we're seeing from our customers, continued penetration of the litho space where we're heavily engaged. So I think I'm very confident that this year, we will do -- we will easily hit the 10 points and hopefully much beyond that.

Our next question comes from Dick Ryan with Colliers.

Jim, can you give us your views on WFE and wafer starts kind of the second half of this year and maybe some commentary on next year?

Yes, I think WFE, I think a lot of the prognosis is -- I think we're in pretty much the same boat as our customers. I think they're looking at roughly $80 billion plus perhaps. Yes, I think we kind of see that there. Wafer starts are a little bit slower just because the fab, they're all running full out. So there's no utilization to really soak up. So the wafer starts are growing as the equipment goes in. So we're seeing wafer start growth, but it's really, at this point, a little bit tapped out due to, I think, every single fab that we know is running at full capacity. So I think we're in pretty much lockstep of what the big OEMs like Applied and Lam are saying, I think which is roughly $80 billion to $85 billion. And I think they're also predicting a pretty strong 2022 as well. And I think also, the consensus is that the second half of this year will continue to grow.

Okay. How much revenue was pushed out of the quarter with the constraints that you saw?

I mean, I think I wouldn't say pushed out, but I would definitely term it we probably could have done another $20 million, $30 million or so. But I think many companies have the same story.

Yes. And then Sheri, were there any margin hits of material cost, logistic issues from the supply constraints that hit the quarter?

I think one of the things that we're still trying -- still seeing is freight costs being quite high. I think a lot of companies are seeing that as being kind of one of those expenses that have come in higher than we had pre-COVID. So I would say that that's something that I would anticipate probably being ongoing, but I think the margins still did very well despite having such expenses flow through.

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

Thank you, everybody, for joining us today. We appreciate it, and we really look forward to speaking with you again next quarter. Thank you very much.

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