Good day, ladies and gentlemen, and welcome to the Ichor’s First Quarter 2022 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 call is being recorded. I would now like to introduce your host for today’s call, Claire McAdams, Investor Relations for Ichor. Please go ahead.

Thanks, Michell. Good afternoon, and thank you for joining today’s first quarter 2022 conference call. 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 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 2021, 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. Our earnings press release and the financial supplement posted to our IR website each provide a reconciliation of these non-GAAP financial measures to their most comparable GAAP financial measures. On the call with me today are Jeff Andreson, our CEO; and Larry Sparks, our CFO. Jeff will begin with an update on our business and a review of our results and outlook, and then Larry will provide additional details of our first quarter results and second quarter guidance. After their prepared remarks, we will open the line for questions. I will now turn over the call to Jeff Andreson. Jeff.

Thank you, Claire, and welcome to our Q1 earnings call. Q1 revenues were $293 million, which was within our guidance range and grew sequentially from Q4. The $7 million or 2% difference compared to the midpoint of guidance was chiefly the result of additional disruptions in the supply chain that emerged since our last earnings call. At the time of our last call, we expected that the availability of some key components would improve by mid-quarter, but these did not materialize. Additionally, we had to manage through some key shortages that emerged in our machining business. While we now have these shortages largely behind us, they impacted our machining revenue mix in Q1. Both factors are indicative of the continued volatile dynamics in our industry supply chain, where we, like many others in the industry, continue to forecast improvement in support of the unabated customer demand. Yet new issues have arisen each quarter that cannot be predicted, including the recent closures of all shipping ports in and out of Shanghai that affected many of us since late March. Freight, logistics, factory shutdowns, costs, as well as the availability of labor, will continue to be headwinds to outputs and costs. At the same time, we are working to increase capacity across our footprint, which includes adding to our manufacturing headcount and our physical capacity. We are nearing the completion of our clean room expansion in Austin, which adds to the clean room expansion we completed in Singapore last year. Additionally, we have added a second building to our machining facility in Mexico and are in the process of ramping their output. Given the continued expectations for strong customer demand, and for wafer fab equipment growing to the $100 billion level, we made the decision to keep hiring at a level we need to support the unconstrained demand, with the goal of having both the flexibility to burst within the quarter and to ramp the business as the availability of components and materials improves. Our decision to maintain our plans for a higher level of resources to support customer demand, along with a less favorable mix of machining revenues in the quarter, resulted in gross margin and earnings below guidance. However, we fully expect our margins will recover over the next couple of quarters. We expect Q1 to be the low point for gross margin and EPS performance in 2022, and we are forecasting improving trends on both fronts. We continue to expect we will be able to achieve sequential revenue growth each quarter of 2022 and into 2023. The expectation for growth does not depend on significant changes in the availability of component and material supply compared to what we see today. We are planning for some key component constraints to continue into the second half of the year, and some of the shortages from Q1 have improved, as we are shipping at a higher level quarter-to-date compared to this time last quarter. We will continue to manage these ongoing and unpredictable supply chain challenges to drive increased output as we move through the year, as well as align with our customers to support their deliveries. With our current visibility and the improved shipment levels we are achieving recently, we are forecasting Q2 revenues to be up around 5% to 6% sequentially. Our revenue output is expected to increase sequentially through the forthcoming quarters. We believe our revenue growth will compare favorably to overall WFE growth this year, and the level of outperformance versus WFE will also depend on which segments of WFE are able to ramp the fastest in the second half. Also, driving our growth this year will be the addition of IMG, which is still on track to contribute $70 million to $80 million of revenue for the full year, along with increased demand from our customers. The added visibility brought upon by the tight supply conditions bodes well for the longevity of the current demand cycle, with our customers planning for continued growth into 2023. Now, I will provide a brief update on the progress on some of the new products, particularly the next generation gas panel and chemical delivery systems. For our next generation gas panel, following up on the first beta unit that is currently under evaluation with a new customer. We are now preparing to ship a second beta unit this quarter to an existing customer for an application that is expected to outgrow the WFE market over the next several years. Both of these gas panel beta units are fully configured with core content. We would expect both of these customer evaluations to extend up to a year, particularly given the engineering efforts that are assigned to qualifying new suppliers to address the supply chain challenges in the industry. We remain confident and highly encouraged by the progress we are making with our customers for these proprietary gas delivery systems. In our chemical delivery business, we have two evaluations underway within North American customers. One evaluation unit shipped late last year and another was delivered early in Q1. We continue to work with these customers as we move through the next phases of the evaluation for both programs, which are now progressing in tandem and are expected to complete in early 2023. As we have noted in the past, Japan is the largest market for chemical delivery systems. We continue to expect first production orders from the initial Japanese customer this quarter. The scale of this is relatively small, but it is an important step in penetrating the Japanese market. We are now able to travel to Japan with our technical resources, and are continuing to quote opportunities at other OEMs that are larger in scale. In summary, in a very challenging operating environment, the operations team is doing a very good job of maximizing output to address the customer demand we are experiencing, and with our current visibility, we expect to report sequential growth and record-setting revenues for the next several quarters. We are also driving a recovery and positive gross margin momentum. We have been reporting for the last few years that we achieved a significant improvement since 2019, and in Q4, we reported gross margins 330 basis points higher than where we were just two years ago. The setback in Q1 was a temporary one due to the investments we are making in headcount to support future growth, as well as the additional inflationary costs and less favorable product mix resulting from the latest supply chain disruptions. We are focused on driving increased earnings leverage on the revenue growth forecast for the forthcoming quarters. Prior to handing the call over to Larry to discuss our financial performance and outlook, I would like to personally thank Kevin Candy, who recently moved into a strategic role reporting to me for his contributions to Ichor over the past nearly five years since joining us in Q3 of 2017. He was instrumental in managing our operations over this significant growth period in the industry. Paul Chopra joins us a month ago as our new CEO. Paul brings a wealth of experience to the role. For the last four years, he was Vice President of Global Product Supply at Franklin Electric. Prior to that, Paul was Vice President of Global Supply Chain for the semiconductor division of Applied Materials. With that, I will now turn the call over to Larry.

Thanks, Jeff. First, I would like to remind you that the P&L metrics discussed today are non-GAAP measures. These measures exclude the impact of share-based compensation expense, amortization of acquired intangible assets, non-recurring charges and discrete tax items and adjustments. There is a very helpful schedule summarizing our GAAP and non-GAAP financial results, including the individual line items for non-GAAP operating expenses, such as R&D and SG&A, in the investor section of our website for reference during this conference call. First quarter revenues were $293 million, up 2% from Q4 and 11% higher than Q1 of last year. Q1 revenues included $19 million of contribution from IMG for the full quarter, compared to $7 million for the partial quarter of contribution in Q4. While Q1 revenues came in relatively well compared to expectations a quarter ago, the increasing cost and component supply issues faced in the quarter, at the same time we ramped hiring, impacted our gross margin. Q1 gross margin was 16%, down 110 basis points from Q4, compared to the 80 basis point improvement expected in our prior forecast. The total impact on gross profit was approximately $6 million, about half of this amount was associated with higher costs of direct manufacturing labor. The other half was pretty evenly affected by three factors: First, product mix; Second, increased freight and logistics costs; And third, higher indirect factory costs such as supplies and utilities. Q1 operating expenses were $22.4 million, $1 million above forecast, primarily driven by higher than forecast fees related to audit and SOX compliance, ERP implementation, as well as increased investments in R&D, given the progress we are making with our new gas delivery products. The resulting operating margin was 8.4%. As expected, interest expense for Q1 was $1.5 million, and our tax rate was slightly lower than forecasts at 12.1%. The resulting earnings per share were $0.70 for Q1. Now I will turn to the balance sheet. Like many others in the industry, cash conversion of working capital was unfavorable in the quarter, with supply and output still constrained in the current environment. Inventory increased in support of customer demand. Accounts receivable also increased due to the timing of shipments weighted heavily to the end of the quarter, while our payments to suppliers increased, driving payables down. Going forward, we expect these working capital investments will translate to strong free cash flow generation in the quarters ahead. Now I will turn to our second quarter guidance. With revenue guidance in the range of $290 million to $330 million, our Q2 earnings guidance is $0.68 to $0.94 per share. We expect a 30 to 100 basis point improvement in gross margin for Q2 compared to Q1. Our Q2 operating expense forecast is approximately $23 million, consistent with prior expectations that our quarterly operating expenses run rate would be moving up a bit with incremental investments in R&D, supporting our new product development programs for our new gas distribution products, some additional investment in IMG infrastructure costs, higher costs associated with our new ERP system, and overall investments supporting company growth. We expect our interest expense will be approximately $1.7 million in the second quarter, reflecting the recently announced increases in interest rates. Our tax rate in Q2 is expected to be approximately 13%, and we estimate our fully diluted share count to be approximately 29.1 million. Finally, we continue to expect capital expenditures to be around 3% of revenues for 2022, which reflects the higher levels of investment required to support our machining business. We expect to deliver improving free cash flow performance as we move through 2022. Operator, we are now ready to take questions. Please open the line.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Quinn Bolton with Needham & Company. Please proceed with your question.

Hey guys. Two questions. First, just on the sort of annual outlook. If you are looking for sequential growth through the year. You commented in the prepared comments, I believe that you felt you could grow faster than WFE this year. I’m wondering if you back out the IMG revenue, do you still think the core business can grow faster than WFE given all of the constraints you are facing here, at least in the first half of the year?

Quinn, that is a really good question. So the answer is I do think we can grow faster than the segments that we largely addressed up in EDGE, as you know. When you look at some of those outlooks, those are a little muted versus the total WFE, but I think we can outgrow with IMG and outgrow WFE certainly.

Great. The second question is just on the gross margin. I think prior models probably had you at or above 18% by the end of the year. I know you are facing some near-term cost pressures, increased staffing levels, and kind of an adverse mix. But do you think you can get back towards 18% activity this year? Do you think that some of these higher costs, especially on the hiring side, won’t get absorbed fully in the model until sometime in 2023?

I think we expect that sometime by the end of the year, we should be back on 18%. I mean, we definitely have the headwinds with labor and freight costs, but we are confident that we will get back on track to that range.

Also, Quinn, we are making the assumption that we are going to grow quarter-over-quarter sequentially. We expect to grow into the infrastructure, and the flow-through will get us there, and then we will see the mix recover in the machining business that we saw decline a little bit this quarter. We have strong confidence we will be back there by the second half of the year, depending on how fast we recover, but certainly by Q4.

Got it. Thank you.

You bet.

Thank you. Our next question comes from the line of Craig Ellis with B. Riley Securities. Please proceed with your question.

Yes. Thanks for taking the question. The first is a clarification on revenue, the seven million variance that was mentioned for the first quarter. Was that all related to issues that were internal to Ichor or was some of that just Ichor being unable to ship due to component issues elsewhere that had customers having to pull back product?

Yes, I think the largest factor was driven by component shortages in our supply base that didn’t allow us to build as much as we wanted. This really affected the integration business. However, we also had a lower than expected machining output this quarter because we had to deal with some delayed raw material. We have gotten that all behind us now and we will catch up on that demand. None of that, I would say none of that delta to our midpoint is perishable demand; it’s all going to get fulfilled this quarter.

Got it. And the second question is related to some of the comments on hiring. And I think there were comments both in COGS and OpEx. So maybe you can clarify. But the question is this: It seems like there is a much greater emphasis on hiring and the level of hiring in the near term than what we had heard of late. Are there things that are happening either with the current environment or just given different product programs or other issues that would be impacting OpEx that are causing an increase? How do we think about where productivity is in the COGS line relative to OpEx and where it has been applied?

Yes, I will start and then I will hand OpEx over to Larry. What we did is we did not take our foot off the gas for hiring. Hiring was, as you know, we have all talked about how difficult it is. So we wanted to have the people in place, as I talked about in my prepared remarks about being able to burst and also ramp. I would say we will see very little need for incremental headcount as we go through the year. The faster things recover, the quicker we can grow our revenue. From a COGS perspective, we are comfortable that we can address growing demand over the next two to three quarters.

To add on the OpEx side, most of the increase in OpEx was not directly labor related, although there was a little bit of a labor tie to it. Most of it related to R&D materials, where we brought in significantly more than we expected to address some of the new products that Jeff mentioned. We did have some higher costs around our SOX compliance audit and some things around IT as we worked through the implementation of a few of the sites on our new Oracle cloud system. Most of what we are seeing there is investment-related.

Got it, Larry, and I missed what you said about the guidance prospects in the second quarter. Can you repeat that? And from the second quarter, what should investor expectations be about the trajectory of OpEx in the back half of the year?

We are looking at around $23 million in Q2. Moving beyond that, it will probably be a couple hundred thousand a quarter as we go through it. It will depend on the speed of the R&D activities, which today look very promising, but I think that is a reasonable amount to model.

Got it. Thanks, guys.

Thanks, Craig.

Thank you. Our next question comes from the line of Patrick Ho with Stifel. Please proceed with your question.

Sorry about that. Jeff, given the current environment, and obviously, there are a lot of moving pieces, but you are probably working a lot with your customers in terms of redesigning components. You talked about some of the integration work. Can you just give a little more color or granularity on those types of efforts, and when you think some of those can begin paying off, especially given that the supply constraints and that environment has not really improved over the last few quarters?

Yes. We don’t have a hundred percent design control, as you know, on the build-to-print gas panel business. However, we do work with our customers to help them find alternative supplies for some of our components that just aren’t scaling. There is considerable effort going on in the industry to look for new sources of supply where we can. Obviously, some things are very difficult to change, as they can affect processes in a chamber. We are putting efforts into that as well as working with our customers individually in areas where we think we can collaborate.

Great. That is helpful. Maybe as my follow-up question for Larry. Again, a lot of moving parts. I understand it is really a challenge right now. For the June quarter, what is the biggest issue that you are facing? Is it the supply constraints? Is it labor constraints? What is the biggest issue? And then maybe secondly, what is the quantifiable impact on the gross margin line? Is it several hundred basis points or less?

The supply chain is obviously impacting us because it is affecting output. We have very strong customer demand, and we are driving as hard as we can to meet that demand. If you look at the midpoint for gross margin, we are projecting about a 65 basis point improvement, primarily driven by some volume leverage. Our expectation is that as we get more volume, our machining business will also perform better than it did last quarter. There are continued pressures on freight and logistics, which have worsened compared to what we had historically, and this ties into what we previously described as COVID impacts. Instead of the previously expected 50 basis points, I would say we are looking at impacts closer to 100 basis points, possibly a little less than that.

If you were to ask me 90 days ago, we were still seeing some headwinds in our supply chain to get hiring done. That has improved; it is not perfect. It's true that everyone still has some level of struggle with hiring. However, the primary effect on our performance is stemming from component supply, and we are seeing improvements, although they are not great at this point in time.

Great, thank you very much.

Thanks, Patrick.

Thank you. Our next question comes from the line of Tom Diffely with D.A. Davidson. Please proceed with your question.

Yes. Good afternoon, thanks for the question. So I guess first, Jeff, when you look at the hiring, is it focused on one particular region like Malaysia or does it involve a global increase in capacity to handle that burst?

It is global. We are hiring in every location we have. In certain areas, it is easier to hire than in the U.S., particularly in Malaysia where we had much quicker access to incremental resources. Singapore is a little tight, so that is one reason we didn’t take our foot off the gas. People are beginning to return to work in the U.S.

Okay. When you look at the future or the plan to have enough people to handle burst capacity as needed, does that change your long-term view on what the staffing should be on a permanent basis, or will it remain the same?

That is a really good question. My initial reaction is no, we have always carried bursts. However, we have never been this far behind demand. Everyone is chasing demand, and if you looked at our last month, it would equate to a revenue level much above what we achieved. I believe we have capacity to handle bursts when the supply chain recovers, as we are supporting our outlook for the remainder of the year with what we have done in hiring today.

Okay, that is helpful. When you look at the supply chain issues, can you quantify how much that was driven by either direct or indirect impacts of shutdowns in China?

Yes. Some suppliers were shut down during the first four to seven days due to the shutdown in China. Given our inventory positions, we were in a good position with those particular suppliers. The significant effects we faced involved getting items transported. So even suppliers outside of the shutdown lines, for example in Shanghai, we had to find alternative transport methods. This incurred extra costs for us.

Okay. Lastly, when you look at your gas panel 2.0, it sounds like you are the first ones with a couple of very specific applications. Do you foresee this gas panel accommodating a vast majority of the gas panel needs out there or is it going to remain siloed into certain applications?

No, it will be versatile and able to address a wide range of applications and flow rates. As Larry mentioned some incremental investments in R&D, the first ones are relatively specific, but we know the flow rates and there is a broader range we can address. We are still investing time to finalize these aspects.

Great, thank you.

Thanks, Tom.

Thank you. Our next question comes from the line of Krish Sankar with Cowen. Please proceed with your question.

Hi, this is Robert on behalf of Krish. Thanks for taking my questions. First, could you break out the quarterly sales from the IMG business? For the year, you reiterated around the $80 million revenue level with 100 basis points gross margin benefit for the year. Is that still the correct way to think about the business?

Yes. IMG was $19 million in revenue for this quarter. We are still holding with the forecast of $70 million to $80 million for the year, and overall profitability for that business is meeting our expectations. Most of the issues we face today are really in the core business we had prior to adding IMG.

Okay, thanks. That is helpful. Any progress on the manufacturing capacity there? Is there any tightness in components that you can manufacture?

Yes. IMG has capacity that we can utilize to help support some of the supply for some of the weldment sub-assemblies that we do. We are working on that in the E-Beam welding as we speak. We believe by mid-year these should be ready to go. There is a qualification process for both, and we are still tracking to that.

Great. Thank you. That is all for me.

Thanks, Robert.

Thank you. We have reached the end of our question and answer session. I would like to turn the call back over to Mr. Andreson for any closing remarks.

Thank you for joining us on our call this quarter. I would like to thank our employees, suppliers, and customers for their ongoing dedication and support as we continue to execute against this historically strong demand environment for our industry. Our upcoming investor activities include a Virtual Roadshow with D.A. Davidson next week, the B. Riley Growth Conference later this month, the Cowen Tech Conference on June 1st and the CEO Summit at SEMICON on July 13th. We also look forward to our next earnings call scheduled for early August. Operator, that concludes our call.

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.