Good afternoon, everyone, and welcome to the Ultra Clean Technologies’ Q1 2018 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, today’s conference call is being recorded. At this time, I would like to turn the conference call over to Ms. Rhonda Bennetto, Investor Relations. You may begin.

Thank you, operator. Good afternoon, everyone, and thank you for joining us for our first quarter 2018 earnings conference call. 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, after which we will open up the call for questions. The press release we 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 may contain forward-looking statements, including the Company's views regarding future financial performance, new capabilities on orders, shipments and industry growth. Investors are cautioned that forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those results listed here. 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 first quarter 2018 conference call and webcast. Extraordinary demand in the first quarter led to exceptional performance on the top and bottom line for UCT. Our ability to custom design, manufacture, and deliver on time elevated our position in critical content on customers’ platforms allowing us to significantly outperform the markets we serve. For the first quarter, total revenue grew to $315 million, a 26% sequential increase, and up 54% year-over-year. Our ability to adapt production to accommodate the increase in demand led to non-GAAP earnings per share of $0.69, a 17% improvement over the last quarter and a 47% surge from the same period last year. Our ability to execute across the Board and our solid commitment to customer satisfaction is strengthening our relationships and leading to increase business. UCT’s growth this quarter was well above consensus and exceeded our expectations. We delivered on an unforeseen increase in time sensitive demand from our customers late in the quarter and executed on the accelerated ramp of our new product line wins. Because we were able to execute and successfully meet customer demand, Q1 revenue growth nearly doubled our estimates. Taking into account, the midpoint of Q2 guidance this equates to a 23% increase for the first half of 2018 compared to the second half of 2017. Our proven ability to provide engineering, critical fabrication, integration and testing capabilities on short notice, while meeting stringent quality levels further strengthened our position as the preferred outsourcing partner in the semiconductor capital equipment industry. This is an area where we continue to hold a significant competitive advantage and see tremendous growth opportunity. As semiconductor equipment OEMs increasingly rely on partners like UCT to fulfill ever expanding capacity requirements.…

Thanks Jim. In today's discussion, I will be referring to non-GAAP numbers only. The first quarter was a strong start to 2018 for UCT. During the quarter, the flexibility of our operations and the commitment of our entire team enabled us to quickly respond to our customers increasing demand by ensuring the quality completion of orders received, while maintaining excellent operational efficiency, we deepened our relationships with our customers and vastly exceeded our expectations. Total revenue for the first quarter reached a record high of $314.8 million, an increase of 26.5% from the last quarter. This for us surpassed the high end of our guidance due to an influx of last minute customer pull-ins at the end of the quarter. In addition, our newly introduced product line wins ramped faster than expected. As a result, semiconductor revenue grew to $300 million, an increase of 27.5% quarter-over-quarter. As a percentage of total revenue, semiconductor revenue rose to 95.3% from 94.5% last quarter. Revenue from outside the U.S. reached a new high of $180.9 million compared to $139.4 million in the fourth quarter, as we continue to see the benefit of being strategically located close to our customers. Non-semiconductor sales for the quarter were $14.9 million, an increase of $1.2 million over the prior quarter. Gross margin for the quarter was 15.8% within our targeted range, however down from the 17.7% last quarter. Higher material costs required to meet the unanticipated late quarter demand together with the accelerated ramp of new products impacted gross margin. We expect gross margin to remain within our targeted range of 15% to 18% going forward. Applying a disciplined approach towards operational efficiencies, we saw considerable reduction in operating expenses as a percentage of revenue, while revenue grew 26.5% sequentially, OpEx as a percentage of revenue declined…

[Operator Instructions] Our first question today comes from Christian Schwab from Craig-Hallum Capital Group. Please go ahead with your question.

Hey, congratulations on a good start to the year. As we look through the rest of the calendar year, one of your large customers kind of talked about roughly a [52] waiting right around there plus or minus of revenue. So as you look at your business, do you kind of believe that the current run rate is going to be kind of the run rate throughout the year or do you see some drivers that could increase it in the back half of the year versus the front half?

Yes. Thanks, Christian. Yes, obviously we see 2018 as a good year, very strong year, nothing has changed in that. Yes, I think the comments in the industry event, they have been roughly flat. Obviously, one quarter – quarter-to-quarter there maybe some fluctuations, but I think overall, we see the year to be pretty strong.

Okay. So the back half of the year could be plus or minus kind of about the same type of levels that Q1 and Q2 are, is that fair? Make sure I understood that correctly.

Yes, I think that's the sentiment in the industry right now. And again, Q3 might differ from Q4. Well I'm sure Q1 and Q2. So yes, we don't predict that to the second half, but I think the industry is pretty much aligned that the second half and the first half are relatively equal balance. If you remember when we started 2017 there was a belief that the second half would be down quite a bit and as the year went on it flattened out. And I think we went into this year thinking it would be more of up and a more balanced year, and I think nothing has happened to change that view.

Fabulous. And then my last question is, is there any update or funnel update on potential acquisitions that you're looking at? Do you have anything to add regarding your outlook there?

Yes. No specifics to add at this time. Inorganic growth is a very high priority, a top priority for us. I think given some of the recent stock market volatility and some of the declines in valuations, the targets have become even more intriguing. We see it as a very target rich environment. We've added a lot of resources and increased our efforts quite a bit in this area. And we are focusing on the things that we always focused on which is immediately accretive or nearly so, customer concentration, geographic location, supply chain consolidation, and any specific capabilities. So we're very active and it's a great space right now for us.

Fabulous. No other questions. Thanks.

Thanks, Christian.

Our next question comes from Karl Ackerman from Cowen. Please go ahead with your question.

Hi. I had a question on gross margins. While I understand there were some higher shipping costs and associated with a last minute order ramp, could you bucket the decline in gross margins between maybe mix and shipping costs? And I guess additionally your June quarter guidance seems to imply flat margins from here despite the near record revenue. So I was hoping to elaborate if 20% incremental margins is the right way to think about your longer-term gross margin profile? And I had a follow-up please.

Okay. Thanks, Karl. I’ll take the first half and then I’ll let Sheri follow on with some of the more specifics. As we mentioned on the transcript, we've been gaining quite a bit of share from our customers, especially in the last half of 2017 and early 2018. And we saw those new products for us ramp much faster than expected. So we believe – obviously the efficiencies of new product lines they take some time to ring out. So we expect those to improve, the efficiencies of those lines will improve going forward.

Yes. I mean, Karl, I think we talked about this in the past on other calls that the real key measure for us is probably more operating margin. I understand your question around gross margin just because of with the flexibility of our model with our OpEx and being able to drop further profit down to op margin that's kind of the key things that we look at internally. Obviously, this quarter we were able to deliver quite a bit of revenue at higher qualities to meet our customer demands and that really kind of just showed our operational flexibility and keeping our OpEx lower allowed us to drive more profitability. So we see us staying in the ranges of 8% to 10% from an op margin perspective. We really don't guide as much on gross margin, but the op margin we see us in the higher end of those ranges and within our ranges for the gross margin.

I appreciate that. Thank you. As my follow-up, I think one of the key attributes both you and your primary competitor of share is the ability to grow above WFE spending on continued outsourcing opportunities from the front-end equipment providers. As I think there is a growing want to work with fewer and more capable suppliers. I would imagine most of the share gains from here should come from your manufactured components business. So could you just talk about how we should think about opportunities unfolding over the next 12 months to expand your non-semi’s business that is not OLED related? Thank you.

Sorry, Karl, are you talking about the display business in particular?

Non-display within your non-semi’s business, you had talked about some new program ramps, but just kind of want to talk about maybe the trajectory both from new programs, but also from the ability to gain share from maybe some traditional EMS suppliers that you may not have previously?

Yes. Actually we see the share gains within the semiconductor space is still – there are lot of opportunity there both organically and inorganically, and there's a lot more room to run in that space. I think that's one of the primary ways that we're going to continue as we have been to continue to outgrow the WFE market. We see that continuing over the long-term. And again, display is relatively strong. Our strategy is to focus on semi and display and we really are not focusing on the non-semi, non-display market. We have some business in that area, but it is not our main focus. So our growth is going to come from continued expansion into the semi space. If you think about the overall spending from the OEM, we're still less than 10% of the overall spend in that area and we're one of the largest, if not the largest suppliers in the space. So we see a lot of opportunity within that area.

Perfect. Thank you.

Thanks, Karl.

Our next question comes from Patrick Ho from Stifel. Please go ahead with your question.

Hi there. It’s Brian Chin on for Patrick. Thanks for letting us ask a few questions. First question, just to go back, Sheri, can you just quantify quickly the gross margin impact from that late quarter expedite demand, just curious like it was a 100 basis points or 150 basis points?

Yes, we actually don't break it out that way. We look at it in an aggregate. So in general, I would say that I am not able to quantify that for you. But basically I think the key factor really is that the operating margin has been the key factor for us. We went into the quarter understanding what our forecast was and knew that our operating margin would be at the higher level. So gross margin can fluctuate quarter-over-quarter within that 15% to 18% and we feel like we’ve done a – we're in a good area based on the revenue that we delivered.

Okay. And curious in terms of the future inorganic opportunities that you're looking at. Obviously, you're looking to expand your TAM against the scenario that you don’t have core competencies and what else for the opportunities that you're looking at? Are there candidates and targets there where you can potentially expand your margins, either through at the gross margin line in terms of the value you are bringing to customers or could bring or in terms of scale synergies in terms of op margin? Did you see legitimate opportunities there in terms of your M&A activity?

Yes, absolutely. There's a wide spectrum of Company types in that range. There's companies which are at significantly higher gross margin and operating margin. They tend to be in more niche areas, niche capabilities, so they have lower revenue potential. The majority of the revenue in our space sits around where we perform. So I would say on average there are opportunities across the spectrum, but the large thing that move the needle on revenue are in similar margin range where we sit. But yes, we're looking at targets across the spectrum both in the specialized components area and into larger revenue areas as well.

Okay. That's helpful. Maybe one last question. Just curious from a sensitivity standpoint, again, I know that there's maybe been some talk about a little bit of first half bias in terms of the larger equipment makers in terms of their shipment distribution in 2018, but this in a given quarter your revenues were declined 10% sequentially. Just curious how quickly you could lower – how fast you can lower OpEx in that kind of a revenue sensitivity environment?

Yes. I mean from an OpEx perspective, we're probably where we need to be with the levels of revenue that we're at. It's more probably the key factor on our P&L really as material in labor. So that's the two key factors that for some reason revenue were to decline. That's the two factors that would come down the quickest at this point.

Okay. Thanks.

[Operator Instructions] Our next question comes from Edwin Mok from Needham & Company. Please go ahead with your question.

Hi, guys. Thanks for taking my question. Good quarter. So first, I guess, if I understand maybe the mix – how mix has a factor on gross margin. I know you talk [indiscernible] being a headwind for margin in the first quarter. But just curious on the first quarter, did mix play a factor? And I think previously we have seen that when you ramp some of these new wins you – you put some traction on your gross margin. Was that also a factor on your gross margin in the first quarter? And I have two follow-ups.

Yes. There's a lot of – there are multiple factors in the gross margin area. The product mix it definitely a factor. This quarter we saw a lot of quick turnaround at the end of a quarter, required quite a bit of flexibility from UCT. We're very proud that we're able to deliver for our customers on a very short turnaround. There's a spectrum on the product mix as well just like on the targets in M&A. And it's kind of a Gaussian distribution if you would. And the newer products – the flip side of winning newer products is a – obviously they don't start out as efficient in the very beginning. We ring the efficiencies out as we get more time on of them. So they tend to start out at the lower end of the bell curve, and then as we get experienced in ring costs out there they move up to the right. So there is – these are depending on the region that we ship from and depending on what type of product we're making. There are a lot of variables in that, but really it's a reflection of our success on share gain where we are seeing some of the mix temporarily and being very heavy in the new product line wins. They ramped much quicker than planned, which is a great thing for us.

Maybe I’ll ask differently on [indiscernible] normalized cases once those new tailwind has ramped, right. Do you think that you can get to your 15% to 18% range where they tend to be on the lower end of that range?

In terms of the new products?

Yes. You mentioned and the number has demonstrated [indiscernible] number of new products. Just curious is like some of the new wins and the type of product that you guys sell, are they generally potentially come in at a lower end the range? Or they generally come in at the high end of range with typical over the rate…

Yes. Generally they come in at the lower end of the range, but it obviously depends on what it is, but they just naturally started out as we're learning how to make the products and we're working down the labor hours required to make it in the material costs, they tend to be below – they start out lower than where they end up. And this is historically this is where UCT has done for decades has worked the costs out of products as we bring them on board. So it's a great thing that we're bringing on so many new products. We've got a lot of opportunity to continue to work cost out which UCT is an expert at.

Okay. I have a question on inventory. Internal relations seems pretty high, part of it I guess that helps you because it allows you to have product to ramp for your customer. And Sheri, is there a way to kind of think about [indiscernible] and how you think about your inventories kind of at the right level now in terms of the lower inventory or inventory days for business or do you see room for that to improve?

Yes. Edwin, good question. I mean we obviously keep a very close eye on working capital in general. I think the key thing is that we need a certain level of inventory to be able to meet our customers demand very quickly. So it did go up quarter-over-quarter to be able to meet that demand that they have because obviously there's timing as to win certain shipments go out. So I think we obviously strive to continue to get more and more efficient from an inventory perspective as well and that's something that we're concentrating on to make sure that we're spending the right cash on inventory. So I see that as something that we continue to keep an eye on, but for now that this level is what we need to meet our customers demand.

Okay. Great. Helpful color there. Last question I have on – on the M&A pipeline, so one of your public competitor, they did another transaction that seems like away for them to get into international market. How do you think you are filtering this internationally to some of the customer outside of U.S.? And is that kind of the right strategy, I know you guys have quite a bit of international footprint in Mexico and Shanghai already right? Is it a right strategy that you feel that Ultra maybe target more [indiscernible] products makes more sense for you in terms of M&A?

Yes, we are very well setup with our geographic locations across Asia. We have several sites in Asia, in the U.S., and Europe. But it is a factor, our customer diversification and product diversification. These are other areas that we look at. So as I mentioned, it's really a very fragmented supply chain and there are targets and good opportunities in almost all areas where you look, and so it is one of the considerations of improving geographic footprint is one of the many that obviously being – we buy healthy businesses, we don't buy broken businesses, and we buy healthy businesses, integrate them in with our strong base business, and make one plus one equals three, that's the idea. And we've been very successful over the many years in our M&A strategy and we look at all those factors, but to your point, we are – geographically, we cover the world pretty well already.

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

All right. Thanks Edwin.

Thanks, Edwin. End of Q&A

[Operator Instructions] Ladies and gentlemen, at this time I'm showing no additional questions. I'd like to close today’s question-and-answer session and turn the conference call back over to Mr. Scholhamer for any closing remarks.

So thank you for joining us today. We appreciate your support and we look forward to updating you on our second quarter.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.