Good day, ladies and gentlemen, and welcome to Ichor's First Quarter 2024 Earnings Conference Call. As a reminder, this call is being recorded. I'd now like to introduce your host for today's conference, Claire McAdams, Investor Relations for Ichor. Please go ahead.

Thank you, operator. Good afternoon, and thank you for joining today's first quarter 2024 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 2023, 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 Greg Swyt, our CFO. Jeff will begin with an update on our business, and then Greg will provide additional details about our results and guidance. After the prepared remarks, we will open the line for questions. I'll now turn over the call to Jeff Andreson. Jeff?

Thank you, Claire, and welcome to our Q1 earnings call. As expected, our Q1 revenues were similar to Q4 levels at $201 million, reflecting the relatively stable demand environment within the wafer fab equipment market. Q1 gross margin of 12.2% increased sequentially from Q4, but not quite as much as we had forecast due to a combination of mix and cost. Revenue mix was slightly less favorable than our earlier expectations for Q1 revenues. Q1 was a particularly back-end loaded quarter with about one-third of our revenue shipping in the final three weeks of the quarter. The high volume of shipments at quarter end was highly weighted to gas panels compared to components, and our overall mix of higher-margin components decreased compared to Q4 versus our prior expectation for sequential growth in our components businesses. At the same time, we witnessed a late-quarter slowing in build rates for EUV gas delivery associated with order delays in leading-edge logic. We remain on track with our strategy to drive gross margin improvement through greater integration of proprietary components and continued cost reduction initiatives. In Q1, we achieved a sequential uptick in proprietary content that was aligned with our expectations, but with higher-than-expected costs as we begin to ramp these products. With continued execution of our gross margin improvement strategies, we are driving further expansion of our margin profile at similar revenue levels expected in Q2. Our earnings for the quarter came in below guidance because of a combination of gross profit impacts as well as a change in the tax provision as Greg will cover shortly. We completed an equity offering in early March that yielded net proceeds of $137 million. We paid down the entire balance of our revolver, vastly improving our leverage ratio and cutting expected interest expenses by over half. With this transaction, we believe we have significantly improved the company's capital structure as well as our earnings leverage and overall flexibility to execute against future strategic objectives. Now I'll turn to our outlook for the year. Expectations for industry demand in 2024 have remained relatively stable year-to-date. Within an overall WFE landscape that is expected to be similar to modestly up from 2023, the current revenue baseline for Ichor continues to be fairly stable at the $200 million level. The midpoint of our Q2 guidance is slightly below that baseline because of some isolated softness in a couple of areas, namely in our silicon carbide gas panel business which has slowed a bit as the industry digests the capacity installed over the past few years as well as a slower-than-expected EUV system build rate through midyear, given certain order delays in leading-edge logic. We will remain optimistic for an improvement in the second half revenue volumes as the demand profile begins to build in advance of a stronger 2025 spending environment. That being said, our visibility remains limited to approximately three months given the return to normalized lead times in the supply chain. And with our current visibility, we are not yet seeing a meaningful uptick in demand for new systems serving the NAND market. The recovery in this market remains in the very early stages and recent reports indicate that the improvement year-to-date is chiefly focused on technology upgrades. Given the strong etch and deposition intensity characteristic of the NAND market, we look forward to a more meaningful improvement in NAND demand, driving a strong growth year for us in 2025. In other semiconductor end markets, the emergence of new technology drivers and process inflections, such as gate-all-around and high-bandwidth memory require an increasing use of applications that are highly dependent on the accuracy and repeatability of the fluid delivery systems. These include applications such as Selective Etch, ALD, Deep Silicon Etch, ECD, and more. We have a role providing fluid delivery to all of these applications. And while the expected pace of EUV deployments has resulted in a current slowing in the build rate for 2024, as we move into 2025, we expect a significant increase in gas delivery deployment for litho as well. Outside the semiconductors, specifically for our IMG business, we are also seeing improvement in the overall demand forecast as well as incremental share gains ahead within IMG's customer base in aerospace and defense, as well as certain commercial markets. As each of these markets and applications continue to expand, we see opportunities for Ichor to increase our revenue potential and continue to add breadth and diversification to our customer base. All of these factors build a strong story for Ichor's revenue growth as the industry recovery accelerates. But it's our proprietary products, including our next-generation gas panel that we are most excited about, as our key initiative to drive overall gross margin expansion within our business, and this period of muted demand has enabled us to make steady progress penetrating our new products into the market. I'm pleased to report that we recorded our first revenue on some of our initial shipments of next-generation gas panels during Q1. By midyear, we will have over 20 next-generation gas panels shipped and installed in the field with most supporting our customers' evaluation tools that have shipped to device manufacturers. Our new gas panel contains about 80% proprietary Ichor content compared to around 10% today, which will drive significant expansion of our gross margin profile. These tool evaluations typically take about nine months to complete. So the earliest these will be completed and production shipments can begin is the fourth quarter for the initial shipments. We have been qualified on three applications and are now expecting to complete a fourth application qualification by midyear and have four active customer engagements. Our strategy to expand overall proprietary Ichor content extends to our components businesses as well. We are now customer qualified on fittings that are used in our weldment business, substrates used in our gas panel as well as seals and valves. These are all critical components used in the existing gas panels that we assemble. All of these component qualifications can be deployed to our existing gas panels that we build today as well as being designed into our next-generation gas panel. These specific products are now qualified at three customers and began shipping in the second half of the first quarter. We expect our proprietary component content will continue to increase within our build-to-print gas panel business over the next several quarters. These applications have significant opportunities to drive margin accretion as we further integrate them into our gas panel business. In summary, I'll remind everyone here today that our revenues tend to recover more sharply when industry spending rebounds. Furthermore, our business model and financial profile tend to generate significant operating leverage as revenues grow. Given the current industry expectations for WFE remaining relatively stable at these levels through 2024 in advance of a strong 2025, we also expect our revenue run rate to continue around the $200 million level until the beginning of a revenue ramp. We look forward to ramping revenues back towards the $250 million to $300 million plus level in 2025. We expect to be able to deliver significant earnings growth as revenue volumes increase, which is why we continue to make critical investments in our business in support of future growth. With that, I'll turn it over to Greg to recap our Q1 results and provide further details around our Q2 financial outlook. Greg?

Thanks, Jeff. To begin, I would like to emphasize that the P&L metrics discussed today are non-GAAP measures. These measures exclude the impact of share-based compensation, amortization of acquired intangible assets, nonrecurring charges, discrete tax items, and adjustments. There is a useful financial supplement available on the Investors section of our website that summarizes our GAAP and non-GAAP financial results as well as a summary of the balance sheet and cash flow information for the last several quarters. First-quarter revenues were aligned with our earlier expectations at $201 million, remaining relatively steady from Q4 levels. Gross margin improved 180 basis points sequentially to 12.2%, driven by improved factory efficiencies as well as the pass-through revenue events from Q4 not repeating this quarter. While gross margins improved meaningfully compared to the Q4 trough, we were about 100 basis points shy of forecast due to less favorable product and customer mix versus forecast as well as higher costs for our internally produced proprietary products. Q1 operating expenses came in below forecast and were up slightly from Q4 at $22.1 million due to the resetting of labor-related taxes and benefits and our operating income for Q1 was $2.4 million. Our net interest expense was $4.1 million, and our non-GAAP net income tax expense was above our forecast at $800,000 due to higher international profits and the elimination of our ability to recognize a U.S. tax loss benefit. The change had approximately a $0.03 impact on our EPS within the quarter. The resulting net loss per share was $0.09. Now turning to the balance sheet. At the end of the quarter, our cash and equivalents totaled $102 million, a $22 million increase from Q4. We generated $4.8 million in cash flow from operations and after deducting $4.5 million of capital expenditures, our free cash flow was roughly neutral. Accounts receivable increased from year-end due to the back-end loaded revenue profile of the quarter, and our DSOs were 33 days. Inventory decreased $5 million during the quarter to end the quarter at $241 million and inventory turns increased to $2.9 million. During the quarter, we completed an equity offering that raised net proceeds of $137 million. The proceeds were used to pay down $115 million of our revolver balance. Our total debt currently has an outstanding balance of $133 million, and our net debt coverage ratio improved to 1.9x. Now let's discuss our guidance for the second quarter of 2024. With anticipated revenues in the range of $190 million to $205 million, we expect our gross margins will improve to a range of 12.5% to 13.5%. We expect Q2 operating expenses to be approximately $22.2 million or roughly flat to Q1. We expect operating expenses to remain at a similar level for the remainder of the year. Net interest expense for Q2 is expected to decline to approximately $1.8 million. Looking beyond Q2, we expect our net interest expense to continue to decline as a result of the declining term loan balance as well as improvement of our leverage ratio and the applicable spreads associated with the leverage ratio. For modeling purposes, you should model net interest expense for the full year of 2024 to be approximately $9 million. We expect to record a tax expense in Q2 of $500,000. For the full year, we are forecasting a non-GAAP effective tax rate expense of $2.5 million. Finally, our EPS guidance for Q2 reflects the higher share count of 34 million shares. Operator, we are ready to take questions. Please open the line.

And we'll take our first question today from Brian Chin with Stifel.

Maybe I asked a few questions. Maybe just first, maybe a clarification. Historically, I have not been aware of Ichor having material exposure to semi equipment OEMs that are based in China. I guess, can you firstly maybe just confirm whether that is the case? And then maybe just since we're on the topic of China, indirectly through your larger U.S. OEM customers, do you have any sense if China spending is sort of growing or at least sustaining this year?

Brian, it's Jeff. We do not sell directly to the China OEMs, including NAURA or AMAC, so we don't have a channel there. Regarding your question about China, the market is still quite strong and I expect it to remain at decent levels in the first half. However, there are indications that the second half might be slower, although growth in areas like high-bandwidth memory could help offset that decline. Therefore, we do not anticipate that China will maintain its current levels in the second half, which reflects our perspective at this time.

Got it. For my follow-up, I have a few questions regarding the second half and how various dynamics might influence the overall outlook. I found it interesting that you mentioned the business could either maintain the $200 million level you guided for in the first half per quarter or potentially increase to $250 million as revenue ramps up. This creates a sort of binary situation heading into Q4. However, is this the right way to frame it? What kind of inventory situation still exists with your larger OEM customers? Could this be a factor that might limit revenue over the next few quarters as they work through that inventory? Additionally, what are the gross margin implications of not being able to achieve a normalized mix if this inventory continues to be an issue in the coming quarters?

That's a great question with several parts. I'll address it now. I want to clarify that we don't expect to be completely flat for the remainder of the year. We've completed four months so far, and we're not seeing as much change as we had hoped, but the timing for 2025 is different from what it currently looks like for us and possibly for our customers. We still consider 2025 to be a growth year compared to last year. The timing will significantly influence our fourth quarter. Regarding your second question about the inventory reduction, we expect to continue working on that mostly until the end of the year, although some components will still need to be dealt with. The greatest impact will likely be on our weldment business, followed by machining. Gas panels seem to have reached a normal state. We've been stable for about six quarters, and we believe that gas panels are typically in a standard range, without creating an excess that needs adjustment. The issues are mostly on the component side of our business. As for gross margin, the qualifications we've outlined will affect it. We usually see a margin increase of about 25% on revenue from one quarter to the next, and it could even be a bit higher. Looking ahead to the fourth quarter, we expect the gross margin to improve regardless of revenue levels. This will happen as we start reducing costs and gaining efficiencies in our factories, allowing us to overcome some of the cost challenges we faced in Q1. We anticipate that margins will continue to improve at similar revenue levels. Once we see growth, our gross margin typically surpasses expectations. Our outlook regarding our cost initiatives aimed at improving gross margin remains consistent with what we communicated previously.

Our next question will come from Craig Ellis with B. Riley Securities.

All the color so far, guys. Jeff, I wanted to start just by following up on a comment that you made in response to Brian's question. So with regard to the point that you're not seeing as much of an inflection in '24 as you might have thought three months ago, which of the businesses, gas panels, weldments, et cetera, is that having greater impact on or is it impacting all of those about equally as you think about where we are and where we could be in the back half?

I think gas panels is still pretty close to two-thirds of our business or 60%, I don't know the exact number, but and then chemical integration. I mean they're going to be the ones that we need to see inflect. But the biggest impact to drive gross margin would be a recovery in our component side of the business as well because they'll bring through more incremental margin on a per revenue basis. And so those are kind of the drivers, I think, that we see. And our visibility, I think I mentioned it is really kind of three months with what I would call good visibility. I think after that, there are pockets where it's really well understood, and there's other areas where we're not seeing the visibility and largely because the industry has kind of pulled back the normal lead times and visibility.

Yes, sure. So some of that is just a cyclical effect. Got it. Okay. And then, Greg, just turning to gross margins. versus our expectations, we're tracking around 100 basis points lower than we thought in the first half of the year. As you look at the business and the way it can trend in the back half, and admittedly, we have a hard time seeing beyond maybe Q3, but how do we think about gross margins? Are you thinking that we can execute fairly steady gains at that 20% to 25% incremental margin, I think Jeff referred to? Or is there either any cost item or mix item that can give us more of a step-up as we think about second half trends?

Okay. Craig, so as Jeff said, right, we expect that as we drive incremental revenue, the 25% flow-through is still where we believe we're driving to and expect to see. So that will continue as we move through the year. The other thing is, as Jeff talked about, is we've got our proprietary side that will start to drive some incremental margin improvements in the second half of the year. How much we're working through all of that. But for now, the 25% flow-through is what you should still model.

Craig, to elaborate on our internal proprietary products that we are integrating into our existing gas panel business, the progress is aligning with our expectations as we began the year. Aside from the first quarter, revenue has been quite consistent, although we initially underestimated our capabilities in producing some of these new fabricated parts. However, we are confident that we will quickly adjust and improve.

Our next question will come from Krish Sankar with TD Cowen.

Just had a couple of them. One is when I compare or contrast to your closest peer reported last evening, they've been kind of growing revenues for the last couple of quarters. You guys have been kind of flat lined. Is the delta as simple as they are more tiny semi-cap OEM exposure, you have more silicon carbide? Or is there something fundamentally going on with the top large U.S. semi cap OEMs?

Well, I don't want to comment on my competitors, but we overlap around 40%. Overall, I don't notice much difference where we compete. That said, some of his growth is likely due to the revenue sources from China, which we don't pursue as actively. The services sector is different and you have recently acquired a gas delivery business, which further reduces our overlap. In the areas where we do compete, I don't observe any significant changes in market share. The business profiles are different, making it not a straightforward comparison.

Got it, Jeff. And then you kind of spoke about EUV delays for leading edge. I'm kind of curious, just can you just talk to the mechanics of like when your EUV customer ASML gets a booking to when they ship a tool to when you get the order and when you ship it, can you just talk us through the timeline? Because I'm just kind of curious how to figure it out compared to this year versus next year and given their build-out profile?

We ship approximately five months before they are able to ship a tool. However, I won't speculate on their revenue recognition. Our involvement begins around five months ahead of their delivery. During the last quarter, we experienced a slight decrease from the quarter's entry point. When discussing the midpoint being down a bit quarter-over-quarter, the decline is likely split between silicon carbide and EUV components. Additionally, they have reduced some of their production plans, and they have communicated this clearly. This situation is projected to impact us into 2025, setting us up for a strong growth year in 2025, particularly regarding EUV. Moreover, over the past six or seven years of our partnership, we have begun to take on more subassemblies, which is helping us increase the content we receive from each EUV tool.

Got it. Got it. And one final question, if I can just squeeze it in. If you kind of spoke about the inventory side to Brian's question, how gas panel inventories are kind of normalized, but weldment and machining are still pretty high. I'm just kind of curious, if you look at your products, where would you say is the stickiest market share to the lower? I'm guessing gas panel is probably high market share or it's pretty sticky compared to machining and weldments, which could be more fungible. Just your thoughts on that would be helpful.

Yes. I would say certain portions of the addressable market within weldments are highly fungible. We call it orbital welding in a little more of a less skilled. When it comes to TIG and more sophisticated combinations of weldments and subassemblies, those are a little bit sticky. I mean in the long run, nothing is truly sticky, to be honest. But I think with machining, it's fairly sticky. Those take long qualification periods. So once you have a machine shop, that becomes fairly sticky in the long run. And obviously, with gas panels, we still view ourselves as having the largest market share, somewhere around the low 30s, I would say, percentage of market share globally. So that's pretty sticky as well. And new entrants are fairly rare, maybe one in the last five years has come in.

Our next question will come from Tom Diffely with D.A. Davidson.

I appreciate the chance to ask a question. Maybe, Greg, first a clarification on the cost side. For the components, was it material cost? Was it expediting, what caused the variance in the cost this quarter?

So on the component side, Tom, so really, it was, I would say, more of a mix within the customer mix there, not.

Well, that was about half of the miss on the components. Not expediting. We're not seeing any of that now in the market from supply chain on fees and things like that. It's more about the customer mix within the components.

In machining, when you begin to ramp up production, you handle smaller quantities, which limits throughput. This situation is similar to a learning curve. As volume increases, the average cost per unit decreases. Unfortunately, we did not achieve the results we anticipated at the start.

Okay. That's helpful. And then when you look at the proprietary products that you have going forward, weldment's fittings, precision machining, which of those do you think is the biggest market for you ultimately? And is there any type of a margin difference between the three?

I would say from the least sophisticated, more ubiquitous types of parts, they're probably in the low 30s, and you might get into the low 40s. So the range is not that far off from them. I would say the markets that we address today in precision machining and things like that are kind of measured in billions and components and things like that. So there are big opportunities. Individually, I'd say the flow controllers are the ones that can help move the needle the most in the long term. But in the near term, it's definitely going to be the components I mentioned on the conference call because those are going into existing gas panels we manufacture today so that they're also going on the new stuff, but the new stuff, obviously, is in early stages of qualifications.

Okay. That's helpful. And then finally, when you look at the inventories you needed to reduce, at what point will you need to start increasing inventory for gas panels? And how far in advance of revenue do you start to see that?

Well, I would say maybe the way to think about it, Tom, is that when we will know the inventory burn is largely gone when we see our component business start to inflect because they have the longest lead times. I mean, our contractual lead times are three weeks, four weeks for gas panels. They're longer than that for the EUV gas delivery, but the volumes are much, much smaller, obviously. So we usually see it on the component side first. And that's still running fairly sideways for us in the first half of the year.

Our next question will come from Ross Cole with Needham & Company.

On behalf of Charles Shi. So in the past, you had mentioned that you expect the two largest OEMs to reach a restocking point in the second half of this year. Do you still think that's the case that they might not want to wait until inventory gets back to historical normal levels? Or do you think that the management of those companies will still want to maintain a higher inventory buffer than they have in the past?

I don’t know what levels of buffers we have, but I do know that we’re carrying higher levels, which should reduce the need for them to take action. We’ve added safety stock to manage demand spikes. Once they finish their inventory normalization in certain areas of our component business, I believe they will return to normal lead time ordering.

Our next question will come from Christian Schwab with Craig-Hallum Capital Group.

Great. Would you say that on your utilization rate on gas delivery systems that you're keeping your workforce and the fact you're a little bit elevated with the hope of being able to gain market share when the recovery starts in 2025? Or have you kind of leaned that down?

I would say we have rightsized our workforce, but we leave enough excess such that we can handle demand in the 10% to 20% range. So we have lowered our direct labor workforce quite a lot. We still keep some excess capacity such that we do get pockets, and we have to address those. And then I would say definitely on the component side because those are tougher skill sets to acquire as you ramp.

That makes sense. My last question pertains to the recovery of NAND. The NAND manufacturers are just starting to emerge from a significant loss phase, especially in this consolidated market, and they have much to recover financially for future investments. Do you anticipate a significant enhancement in your NAND business in 2025? If so, will it primarily be focused on that year? It seems to me that without a meaningful increase in smartphones or PCs, we need that boost to see real improvements in NAND, or am I thinking about this incorrectly?

No, I think you are largely correct. I believe that the inflection in NAND will greatly benefit Ichor, especially since we have a strong position with our largest customer who holds a significant share of the NAND market. This inflection is expected to begin in 2025. While I’m not an AI expert, NAND is also necessary for generative AI applications due to their storage requirements, which is boosting NAND demand as well. We are witnessing some strengthening on the DRAM side too. However, you are right that NAND is currently at very low levels, close to its all-time lows. Additionally, there has been a discussion recently about the material and engineering aspects being less than half of WFE for the first time in history, with lithography playing a significant role. Even though we have a presence in that area, the average selling prices are considerably higher than that of process tools, resulting in a lower percentage of their content compared to process tools.

There are no further questions at this time. I will now turn the call over to Jeff Andreson for closing comments.

I want to thank all of you for joining us on our call this quarter. I'd like to thank our employees, suppliers, customers, and investors for their ongoing dedication and support. We look forward to the opportunity to meet with investors during several upcoming investor conferences, including the B. Riley, Craig-Hallum and Cowen conferences taking place later this month and the CEO Summit in early July. Please feel free to reach out directly to follow up with us. We look forward to updating you on our Q2 earnings call scheduled for early August. Operator, that concludes our call.

Thank you. This does conclude today's conference call. Thank you for your participation. You may now disconnect.