Good day, and welcome to the Ultra Clean's Third Quarter 2022 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ms. Rhonda Bennetto, Investor Relations. Please go ahead, ma'am.

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 the financial review, and 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?

Thanks, Rhonda, and thank you all for joining us today. I'm going to start with a brief review of our third quarter results and provide some insight into how we feel the rest of the year will play out. I'll also share our thoughts regarding 2023 and beyond and provide some additional commentary on our capital allocation strategy. After that, I'll turn the call over to Sheri for a financial review, and we will open up the call for questions. Solid operational execution and modest supply chain improvements contributed to a strong third quarter. Although the supply chain continues to present challenges, enhanced collaboration amongst our global teams, our suppliers and our customers has alleviated most constraints and we expect to see incremental improvements in the coming quarters. While some customers continue to prioritize and reconfigure their delivery schedules, we have seen only limited cancellations relating to the new export regulation for U.S. semiconductor technology sold in China. If we use the midpoint of our fourth quarter guidance, we expect full year revenue to be up roughly 16% over 2021. After several years of unprecedented growth, we are anticipating a decrease in demand fundamentals and believe there will be a pullback as chip makers and their customers draw down inventory and realign their investment plans. UCT is a much larger and more diversified now than ever before, and our operating model enables us to quickly flex and buffer the effects of a broader industry pullback. With 30-plus years of experience adjusting to these ups and downs, we are confident in our ability to perform well in a broad range of market scenarios. Long term, we remain very bullish on the industry as a whole. Demand for products powered by semiconductors is accelerating, driven by multiple and end applications from smart…

Thanks, Jim, and good afternoon, everyone. Thanks for joining us. In today's discussion, I will be referring to non-GAAP numbers only. Solid execution, supported by ongoing demand for our products and services resulted in total revenue for the third quarter of $635 million compared to $608.7 million in the prior quarter. Products division revenue was $556.3 million compared to $532 million last quarter, and revenue from our Services division was $78.7 million compared to $76.7 million in Q2. Total gross margin for the third quarter was 20.6% compared to 20.3% last quarter. Products gross margin was 18.3% compared to 17.8% in the prior quarter and Services was 36.9% compared to 37.2% in Q2. Margins can be influenced by fluctuations in volume and mix, materials and transportation costs and manufacturing regions, so there will be variances quarter-to-quarter. Operating expense for the quarter was $56.5 million compared with $55.9 million in Q2. As a percentage of revenue, operating expense was 8.9% compared to 9.2% in the prior quarter. Total operating margin for the quarter was 11.7% compared to 11.1% in the second quarter. Margin from our Products division was 10.8% compared to 10.2% in the prior quarter and Services margin was 18.2% compared to 16.9% in the prior quarter due to reduced spending. Based on 45.6 million shares outstanding, earnings per share for the quarter was $1.06 on net income of $48.6 million compared to $1.04 on net income of $47.4 million in the prior quarter. On our tax rate for the quarter was 17.9% compared to 15.2% last quarter. We expect our tax rate for 2022 to stay in the mid- to high teens. Turning to the balance sheet. Our cash and cash equivalents were $453.5 million at the end of the third quarter compared with $421.4 million last quarter. Cash from operations was $71.7 million compared with $81.8 million in the prior quarter due to timing of cash collections and payments. We made an additional debt payment of $11 million in the quarter. During the third quarter, we finalized the divestment of our third noncore, non-semi subsidiary that came with the Ham-Let acquisition resulting in a $20.8 million pretax loss. The impact of this divestiture is reflected in our third quarter GAAP financial results. Given the current global macroeconomic and geopolitical uncertainty, including the effects of the new export regulations for U.S. semiconductor technology sold in China, we are keeping our guidance range wide. We project total revenue for the fourth quarter of 2022 between $600 million and $650 million. We expect EPS in the range of $0.94 to $1.14. As we announced today, the Board has recently approved a stock buyback program up to $150 million over a three-year period. We intend to be opportunistic with our purchases; however, we have not factored this into our fourth quarter guidance. And with that, I'd like to turn the call over to the operator for questions.

[Operator Instructions] And the first question will come from Quinn Bolton with Needham & Company.

Congratulations on the strong neutral results. Obviously, it's a pretty quickly changing demand environment, especially -- 2023, one of your large customers last week predicted WFE could be down north of 20% year-on-year to the low $70 billion range. And I guess I'm just wondering, to the extent that WFE falls in that range. How are you looking at 2023? Do you think your revenue would be down at least on the product side, in line with WFE? Do you think you could outperform absent acquisitions? Any guidelines you could give us as you're thinking about '23?

Yes. Quinn, thanks. Yes, we don't see it down more than 20% at this point. But to your question about outperforming typically over the last five years or so, we've outperformed in an organic way outside of M&A or an average of 5 points above WFE. And we see that -- we continue to have good momentum in that space on winning share incrementally, and we see that, that should continue.

So Jim, if I'm just thinking about the product side of the business, if WFE is stay down 20%, you guys outperformed by 5%, thinking about your products down in the range of 15%, makes -- does that make sense sort of as an initial sort of view into to next year?

Yes. That's right, Quinn. That's our view.

Got it. And if that's the top line framework, Jim, how do you think about managing OpEx? I mean you've got a lot of skilled labor that you may not want to let go if you think it's relatively short duration downturn. But obviously, if you don't cut OpEx, you could see a bigger swing on earnings. So how are you thinking about managing OpEx through a potential downturn in '23?

Yes. Maybe I'll address like all spending. So a huge part of our cost structure is materials and direct labor. And those we can flex, it sometimes takes about a quarter to flush through, but we can flex those pretty quickly along with revenue. And we've done this before after 30 years. We've been through many of these. So on the OpEx side, you're exactly right, it's always a balancing act like we did in 2019 to keep the infrastructure in place and the continuous improvement in place through a downturn, which we don't see any reason why it would be extended outside of any large macro events. And so we make that balance. We did that in 2019. And we came out even stronger. We take that time to really also clean up after a pretty crazy few years. And so we do things like consolidate sites and put in things that make us stronger and more nimble and leaner as we go forward. So on the OpEx side, obviously, we will be adjusting the spending there. But there are some critical programs that we will obviously keep in place for the longer term.

And the last one, it sounds like from that comment about perhaps optimizing where you're manufacturing. It sounds like this downturn might be an opportunity for you to bring even more to Malaysia to continue to ramp that facility, as it's lower cost than some of the other global facilities in your footprint?

Yes. That's exactly right. Malaysia is ramping up pretty much on schedule and it is our lowest cost site as well as some of the local geopolitical events, I think they're going to -- the entire industry will be looking towards Southeast Asia, specifically. So we really love that out there.

The next question will come from Krish Sankar with Cowen and Company.

This is Steven calling on behalf of Krish. I guess, Jim, first one for you, just in terms of the near-term guidance. Just given some of the comments about improvements in the supply chain, I would imagine that product cycle times are also improving. As a result of that, is it safe to assume that your customers might also be reducing the inventory levels that they have at their end? Or do you see any indications from the customers that -- that they're still working strong and want to maintain some of buffer inventory that they've been maintaining in recent quarters?

Yes, probably a question better suited for them. But I think everyone in the industry is going to be reducing their inventory levels to some extent. The supply chain prices is nearly abated, not only for us but for everyone. So I think, obviously, everybody is flushing through their backlog in this last quarter. I'm sure there will be inventory adjustments due to some short-term softening in the industry. But I -- the magnitude of that. We haven't seen that yet in the fourth quarter.

Got it. Okay. That's helpful. And I guess my follow-up is on your Services business. So just kind of tying it into the earlier questions about calendar '23 WFE coming down based on market expectations of 20%. If WFE does come down to much, what are the implications to your services business, especially since that's more tied to wafer starts and capacity utilization rates? What have you seen there so far? And if the industry is down 15%, 20%, can your service business still grow potentially?

Growth will be a challenge. I think we will see some wafer start soften and a lot of what's happened in the wafer starts has been in the memory space that started happening today. And with the memory fabs do not use much in the way of high-tech cleaning and coding and analytics. So that -- that has been a very minor effect for us. But obviously, there have been some logic and foundry slowdowns as well in one or two of the customers. And so I think we would tend to grow or tend to fall in line along with wafer start. But I do expect wafer starts will fall a bit. But the swing in revenues, as you've seen in the past, is pretty dampened compared to WFE.

Next question will come from Hans Chung with D.A. Davidson.

This is Linda on behalf of Hans Chung. So first of all, congratulations on the quarter. And I guess my first question, in terms of the China export restrictions, I wanted to ask, obviously, the entire industry is dealing with the impact, but I was wondering if you might be able to quantify for us how much revenue might have been impacted both in the third quarter as well as any potential impact in the fourth quarter guidance from the regulations?

Yes. Linda, this is Sheri. Nothing has affected us in the third quarter, but we anticipate around a $15 million impact in the fourth quarter for the new export legislation.

Great. And maybe my follow-up question, again, for Sheri. On the gross margin puts and takes, I was wondering from your perspective, with -- I think you mentioned supply chain issues you’re seeing and may be some inflationary pressures and volume issues. I guess how can you -- can you give us a little bit more color on the plans there and how we should think about maybe impact in 4Q and overall calendar '23?

Yes. I mean, we're evaluating that right now. Obviously, some of it will depend upon where the revenue is for calendar '23. As things go down, we do see gross margin going down, you can't completely eliminate all factors. But as Jim mentioned, we will be looking at our footprint and other costs associated with our revenue materials and labor makeup -- direct labor make up about 55% to 70% of the P&L. So that's something that is taking into account right away when revenue comes down. So we'll be looking at that as we go across the year. We're not really giving guidance at this point for the full year, but that's something that we're heavily looking at, at this point.

That's fair. So lastly, regarding the Malaysia facility, if I remember correctly in the past, you have said that the first phase of the facility could do about $200 million a year and above $50 million a quarter. Am I getting the numbers correctly? And with that, was the -- was the revenue -- what was the revenue run rate in 3Q? And if you may, what do you expect in 4Q and potentially '23?

Yes, that's right. Phase 1, we mentioned around $200 million run rate for Malaysia, and we're pretty close to that run rate, a little bit shy, but pretty much on schedule. The total capacity of that fab -- our factory when it's up and running will be $600 million to $800 million, probably won't need all of that next year, but it's been ramping pretty well.

Yes, in Q3 was about $24 million. So we see that continuing to go up in Q4.

The next question will come from Christian Schwab with Craig-Hallum.

This is Tyler on behalf of Christian. I ask a couple of questions, too. So going back to the Services side of your business, Jim, Ham-Let acquisition, you guys have talked in the past about some share gain opportunities and some potentially pretty significant ones. I was just wondering to update on those thoughts as the environment here softens, that change your outlook there? Does it maybe even improve your opportunity to pick up some share gains to offset some of the softness? Any thoughts on that would be appreciated.

Yes, definitely market share in the former Ham-Let we call it Fluid Solutions, continued market share improvements are part of that 5 points of outgrowing the market. And we've -- we're coming from a very small market share. So we've made great strides even this year even before a lot of the capital equipment that we've ordered for that business has come in. So we've increased the capacity and the output and the revenue from that acquisition pretty substantially, I think over a 30% year-on-year. And so yes, absolutely. Going into next year, even with the WFE fall in, we see a lot of opportunity there. We've been in a situation where if we can make it, we could sell it. And that's where the largest part of our backlog in our business still resides. I think you mentioned Service. I'm sure what the question is beyond what I've already answered. I think unless you're talking about service with Fluid Solutions. The Fluid Solutions is primarily the majority of the sales are into the products or on the equipment side and there is a little bit in the -- directly to the fabs and we're, of course, looking to expand that, but that's a multiyear program.

That's great. That exact -- talking about the Ham-Let, the Fluid Solutions. A lot of questions otherwise have been answered. So I thought maybe just big picture fundamentally during a down something like this, Jim. I know in the past couple of years when things have been pretty robust. You've talked about opportunities to gain share, to gain new modules, new nodes with some of your leading customers. So fundamentally, with those customers during a downturn, what does that look like as an opportunity for you to better inject yourself with them? Any thought there?

Yes. I mean we've been doing a great job of that through the year. It's actually -- maybe what you're alluding to, it's been harder with supply chain, somewhat seized up throughout the year for those programs to go forward. But certainly, in the next year, there'll be a lot more focus on that. I think our customers are going to see and they're expecting in the longer run '24 and '25, we've got another big hill to climb in WFE. And so yes, 2023 will be the time to -- to make sure that for us and for our customers to get set up for the rebound side after 2023.

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

Thank you, everyone, for joining us today, and we look forward to speaking with you again in the new year.

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