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Edited Transcript of ICHR.OQ earnings conference call or presentation 5-Nov-19 9:30pm GMT

Q3 2019 Ichor Holdings Ltd Earnings Call

FREMONT Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Ichor Holdings Ltd earnings conference call or presentation Tuesday, November 5, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Claire E. McAdams

Headgate Partners LLC - Managing Partner & IR Officer

* Jeffrey S. Andreson

Ichor Holdings, Ltd. - President

* Larry J. Sparks

Ichor Holdings, Ltd. - CFO

* Thomas M. Rohrs

Ichor Holdings, Ltd. - Executive Chairman & CEO

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Conference Call Participants

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* Auguste Philip Richard

Northland Capital Markets, Research Division - MD & Senior Research Analyst

* Craig Andrew Ellis

B. Riley FBR, Inc., Research Division - Senior MD & Director of Research

* J. Ho

Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Technology Sector

* Karl Fredrick Ackerman

Cowen and Company, LLC, Research Division - Director & Senior Research Analyst

* Mitchell Toshiro Steves

RBC Capital Markets, Research Division - Analyst

* Quinn Bolton

Needham & Company, LLC, Research Division - Senior Analyst

* Shek Ming Ho

Deutsche Bank AG, Research Division - Director & Senior Analyst

* Thomas Robert Diffely

D.A. Davidson & Co., Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Ichor Systems Third Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Claire McAdams, Investor Relations for Ichor. Please go ahead.

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Claire E. McAdams, Headgate Partners LLC - Managing Partner & IR Officer [2]

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Thank you, Katrina. Good afternoon and thank you for joining today's third quarter 2019 conference call, which will be available for replay telephonically and on Ichor's website shortly after we conclude this afternoon. 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 year 2018 on file with the SEC 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 and our earnings press release contains a reconciliation of these non-GAAP financial measures to their most comparable GAAP financial measures. On the call with me today are Ichor's Chairman and CEO, Tom Rohrs; our President, Jeff Andreson; and Larry Sparks, our new Chief Financial Officer. Tom will begin with a recap of our results strategy and outlook and then Jeff will provide further detail regarding our growth initiatives before Larry then provides additional details of our third quarter results and fourth quarter guidance. After the prepared remarks we will open the line for questions.

I will now turn over the call to Tom Rohrs. Tom?

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [3]

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Thank you, Claire, and welcome to our Q3 earnings call. Today, we are pleased to report revenue and earnings at the high end of our expectations. Total sales of $154 million were up 11% from the second quarter, with incremental improvement across all aspects of our business. Earnings of $0.30 per share were up 30% from the second quarter. Our revenues grew sequentially for each of the top 4 customers. Revenues increased for our gas panel and chemical delivery businesses, for weldments and for our precision machining business. The incremental revenues of $15 million over the second quarter came primarily as a result of an increase in our market share gains across all product lines and our EUV shipments as we discussed on our last call. Importantly for our overall business, the beginning of a recovery in the industry spending also contributed to our shipment growth in Q3.

At this time, I would like to switch gears and comment on the second press release we issued this afternoon. It is my pleasure to announce that Jeff Andreson will assume the duties of CEO beginning this January. Since our IPO, nearly 3 years ago, one of my primary goals has been to build the strongest possible leadership team for our country. Jeff -- excuse me, for our company. Jeff became President in April and has been doing a terrific job running the business and engaging with customers. Jeff's work along with that of our executive team has made the Ichor organization stronger than ever.

Heading into 2020, I'll continue to work closely with Jeff and the senior management team as Executive Chairman. Together, we will work on our strategies to solidify Ichor's position as a premier company in the semiconductor equipment industry. It's very gratifying to returning over the CEO reins to Jeff, as the industry is at the start of a recovery. Our forecast for Q4 is well ahead of what we expected a quarter ago. At the midpoint of our guidance, we expect revenues to be up 20% over our strong Q3 reflecting outperformance compared -- significant outperformance compared to our other -- to other suppliers in the industry. The growth equates to about $30 million of incremental revenues over Q3.

During the fourth quarter, all aspects of our business will contribute to this incremental growth. We'll have more revenue across gas panels, chemical delivery, weldments and precision machining and increased revenues from each of our top 4 customers. As others have been reporting, our revenue growth in Q4 is also being driven by the beginning of a recovery and capital equipment spending environment. It is clear that the current level of foundry and logic investments has strengthened considerably in the fourth quarter. And in addition, early signs of incremental memory spending lead us to expect a stronger year in 2020.

Looking back over the past 5 quarters, we have shown that we can operate with strength and profitability during an industry downturn. We have also communicated that our business will fluctuate through the cycle along with our customers, while at the same time, we are executing on our strategy to expand our share of our served markets. Each quarter, we have expressed our confidence that we would emerge from the downturn with significant operating and earnings leverage. That is, in fact, evident by our Q4 earnings guidance of $0.43 to $0.51 per share, which at the midpoint is a 57% increase in earnings, off of a 20% increase in revenue.

Compared to our Q1 trough quarter, the mid-point of our Q4 guidance is 34% higher in revenues and 88% increase in earnings per share. Consistent with our stated objective to grow profits faster than revenue, we are forecasting more than double the growth in earnings compared to revenue from the low point to the high point of 2019. So with this being my last earnings call as CEO of Ichor, I want to take a moment to reflect on the following messages, which I have communicated consistently since our IPO. We are a semiconductor equipment supplier concentrating on fluid delivery technology. We believe that the semiconductor business will continue to grow faster than other industrial businesses and that we are very well positioned with our key customer accounts. We are expanding our served markets through strategic and accretive acquisitions. We are continuing to expand our product offerings and our customer base. Through each of our strategic initiatives, we are expanding our share of our served markets.

And through the cycles we have delivered revenue growth, outpacing the industry and have grown revenues faster -- have grown earnings faster than revenues. I feel we have done a solid job executing on our strategies and delivering on our message and I believe you can count on Ichor to continue to deliver strong execution against our strategic initiatives as we enter a new period of semiconductor equipment growth.

I'll now turn the call over to Jeff to provide an update on our progress made in the third quarter on our key business initiatives. And then, our new CFO, Larry Sparks will conclude our prepared remarks with the financial details of our third quarter results and Q4 guidance.

Jeff?

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Jeffrey S. Andreson, Ichor Holdings, Ltd. - President [4]

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Thanks, Tom. I'll now provide you an update on our progress against our market share gain initiatives as well as add a few comments on our operating performance before I turn the call over to Larry. We are continuing to see incremental revenues from market share gains, which as expected we're up another $5 million in Q3 over Q2. In our guess we took about a $10 million haircut to our expectations for the year bringing the total to $65 million. However, we now think that will be slightly higher than that at $67 million for the couple of million dollars of upside expected for Q4.

After several straight quarters of incremental revenues from our share gains. Our annualized revenue exit rate as we enter 2020 will be about $25 to $30 million higher than our 2019 revenues from these share gains. Our gas delivery business gains are largely in place and we'll now fluctuate with demand for system shipments, which are now at the early stages of a resumption of growth. In weldments, the delay that we experience as our customer manage the supplier transition is largely behind us and we are now seeing the revenue ramp. In precision machining, we talked about these qualifications having the longest cycle times but we are now in the final stages of multiple customer qualifications. We expect these qualifications will contribute to our 2020 revenue growth story.

The largest growth driver for our chemical delivery business remains our proprietary liquid delivery module. Our partner in Japan is now actively marketing the product and while it is still in the early innings, we are optimistic that we will see first revenue in the second half of 2020 as a result of this partnership. We are very pleased to report the news that we expect to ship our first Liquid Delivery Module beta unit to our largest customer in South Korea in the fourth quarter. This is an exciting milestone achievement for the company to expand its footprint in Korea. Meanwhile, we continue to work closely with our initial OEM customer on qualifying our liquid delivery module with additional chip manufacturers.

To summarize our incremental revenue growth and share gains initiatives have performed well and have improved to contribute approximately $67 million of incremental revenues in 2019 and position us well for a stronger 2020. Beyond this, we continue to make good progress on the development of our next-generation gas panels and have fully integrated our Q2 acquisition of a flow control technology and engineering group. We continue to have dialog with our customers and expect to have beta units available by mid-year 2020. The addition of this technology combined with our expanded operational capabilities will serve to expand our value add and margins as this next generation gas panel is adopted.

Before turning the call over to Larry to discuss our Q3 results and our Q4 outlook, I would first like to welcome Larry to the team. Larry brings a tremendous amount of financial, operational and industry experience. Well, he's only been here with us for about a month. He has hit the ground running. Secondly, I'd like to give some color on the gross margin headwinds we saw in the third quarter. During the quarter, our customers began rebuilding their inventories of our weldment and machining parts at a faster pace than expected, which resulted in a faster release of our higher per-unit overhead costs associated with these parts. Our mix of EUV shipments was also a bit lower than expected and we had a higher mix of gas panels. As we look to the fourth quarter, we expect margins to improve as we begin to see leverage of our fixed cost structure and capacity addition as we will be adding mainly variable costs as the industry recovery continues.

I'll now turn the call over to Larry to discuss our financial performance for the third quarter and provide our fourth quarter outlook.

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Larry J. Sparks, Ichor Holdings, Ltd. - CFO [5]

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Thanks, Jeff. First, I'd like to remind you that the P&L metrics discussed today are non-GAAP measures unless I identify the measure as GAAP-based. These measures exclude the impact of share-based compensation expense, amortization of acquired intangible assets, nonrecurring charges and discrete tax items and adjustments. I'd also like to note that a schedule which summarizes our GAAP and non-GAAP financial results as well as key balance sheet and cash flow metrics and revenue by geographic region, can be found on the Investors section of our website.

The third quarter revenues of $154 million increased 11% from the second quarter and were down 12% from the third quarter of last year. Given the headwinds discussed earlier, our third quarter gross margin of 13.5% declined from the second quarter, however, we maintained good control of operating expenses in spite of revenue growth at the high end of expectations. OpEx was relatively flat from the second quarter at $12 million and included the addition of approximately $500,000 associated with the IP purchase that we completed in Q2 as we also absorbed a small engineering team. Operating margin was also similar to the second quarter at 5.8%. Our interest expense in the third quarter remained flat at $2.7 million. Our tax rate for the quarter was a benefit of 7% of pretax income. The benefit was due to an adjustment to our full-year forecast as we now expect more income in Singapore, where we have a tax holiday. Third quarter net income of $6.7 million was equal to 4.4% of revenue and $0.30 per share.

Now I will turn to the balance sheet. Cash of $30.2 million decreased $11.3 million from the second quarter primarily due to pay-down of $14 million on our debt, which was partially offset by positive operating cash flows of $4.3 million. Days sales outstanding of 45 days increased from 27 days in the prior quarter as a result of heavily back-end weighted revenue quarter indicative of the higher run rate entering the fourth quarter. Inventory decreased 2% from the second quarter, or $2.7 million to $106 million at quarter end. Inventory turns further improved to 5.0.

Now I will turn to our fourth quarter guidance. Our forecast is for revenues in the range of $180 million to $190 million, which is up 17% to 23% from Q3. Our earnings guidance of $0.43 to $0.51 per share reflects improved operating profitability as a result of the higher revenue volume and improving gross margin while maintaining tight control of our operating expenses. We expect interest expense will be down sequentially to approximately $2.5 million. We expect our tax rate will be approximately 5% in the fourth quarter and shares outstanding to be approximately 23 million.

Operator, we are ready to take questions. Please open the line.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is from Craig Ellis from B. Riley FBR.

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Craig Andrew Ellis, B. Riley FBR, Inc., Research Division - Senior MD & Director of Research [2]

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And Tom, congratulations on all you've accomplished with the Company. Jeff, congratulations on the CEO announcement and Larry welcome aboard. So quite a lot going on. Congratulations guys. So, Jeff, I wanted as my first question just to follow up on some of your prepared remarks with product activity in some of the dynamics. It sounds like from the comments around gas delivery weldments and precision machining that some of the things may be lining up. So we have comparatively stronger weldment and precision machining growth heading into calendar 2020 versus gas delivery. Was that a fair read of what you're conveying?

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Jeffrey S. Andreson, Ichor Holdings, Ltd. - President [3]

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No, I think that our core gas panel business is growing about the same rate as our other businesses. I think specifically what I was referring to in Q3 we had initial wave that just was a little higher than we expected. And as we've talked about, with the downturn you have higher overhead costs that are in inventory and those just kind of started to flush out sooner than we had expected, but I don't think that we're going to see -- all our businesses are growing relatively the same core. Obviously in the quarter, we saw a higher gas panel, which was what took us up to midpoint.

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [4]

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So one of the things -- Just quickly, one of the things we had mentioned on previous calls is that we have been gaining market share and I think you'll recall, we've said that the first types of product to come on board in terms of new share would be gas panels and probably the last that would come on board would be precision machining. This is strictly as a result of the amount of qualification effort required for those 2 different kinds of products. So in some ways, we've been a little bit heavier in gas in our market share gains and a little bit lighter in precision machining, but that will even out over the coming months.

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Craig Andrew Ellis, B. Riley FBR, Inc., Research Division - Senior MD & Director of Research [5]

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That's helpful. And Larry, since you handle the financials, I'll throw one at you. With regard to operating expense, clear message on good execution in the quarter and we've got the guidance, but as we think forward to the first calendar quarter, we would typically look for (inaudible) to put some upward pressure on operating expense. But is there anything else we need to bear in mind as we look towards the New year whether it's French adjustments, etcetera? Thanks very much, guys.

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [6]

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Obviously, you're right, you see the employer taxes come back and that usually upticks it. The other thing that we're also looking at is as we get through our phase, we're an emerging growth company so our Sarbanes-Oxley. That will be one of the things that may have an effect in Q1. We're still assessing that right now. But other than that I think the message is we tightly control OpEx and when we added it's because we need to add it in other words. So I wouldn't see a big uptick, but there may be some modest upticks. Obviously, as you go in the fourth quarter, you get a little bit of an uptick on the audit fees. In Q1 to get a little more audit fees and so that will be an uptick but mostly around those types of things.

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Operator [7]

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Your next question is from Patrick Ho from Stifel.

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J. Ho, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Technology Sector [8]

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And I also like to extend my congratulations to you, Tom. The success of Ichor is a testament of what you've done for an extended period of time. And Jeff, I also want to wish you the best in your upcoming role as CEO. In terms of the OpEx structure maybe -- I'm sorry. In terms of the flexible operating model that you have you've shown this resiliency through both the ups and downs, but a lot of it has come in the past through your core gas panel delivery systems business. Are there ways to further optimize both the weldments and precision machining since those were acquisitions? And you put a lot of work and effort into fixing those models. Do you believe that there is additional moves you can make to optimize them further?

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Jeffrey S. Andreson, Ichor Holdings, Ltd. - President [9]

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Patrick, it's Jeff. So it's a really good question. I would tell you that in downturns we spend time optimizing. As we're starting to grow out of this obviously, we've got to add people to the cost structure and whatnot. And we will see better leverage out of those businesses than we did initially when we bought them. So we've had them for a couple of years now, and so we're pretty happy where they're at. We've always said, the incremental margins associated with weldments and precision machining and some of our plastics growth are higher than the average core business model?

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [10]

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There is another element, Patrick, which is that over time we expect to leverage, especially the precision machining. Also some of the weldments into the gas panel business, both as additional vertical integration, but even more so with additional value-added differentiation. So we're just beginning the journey of taking advantage of these acquisitions and we are looking forward to adding more and more value with that.

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J. Ho, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Technology Sector [11]

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Great. That's really helpful. As for my follow-up question, in terms of the gas panel systems for EUV systems, your customer has talked about a strong order flow that they saw in this quarter for delivery next year. Those are probably going to be for their next-generation systems. Is there any different content or increased capital intensity trends or are you just going to benefit from the volume in 2020?

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Jeffrey S. Andreson, Ichor Holdings, Ltd. - President [12]

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So -- it's Jeff. That's a good question. Yes, there has been some content shift between the two generations. We can't obviously tell you specifically what it is. That's for our customer. But there is some and we're also going to -- we expect to see higher volume as we go into 2020 and EUV. I would also note that our lead time is about 2 quarters before they typically would ship the tools. So we ship somewhere around 5 or 6 months prior their shipments typically.

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [13]

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We began shipping the new tool in the third quarter and in fact, some of the unspoken heroes here over the quarter was the guys working on that -- in that. As you know through understanding and watching the EUV introduction sometimes these products don't go all that smoothly into. This is a significant revision of the original EUV tool and everyone performed really well in the coordination with ASML was terrific. So we're really quite pleased about it.

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Operator [14]

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Your next question is from Quinn Bolton from Needham & Co.

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Quinn Bolton, Needham & Company, LLC, Research Division - Senior Analyst [15]

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Hey guys, I'll offer just a group, congratulations. And since we've already had a number, but wanted to just to step back on the gross margins. Inventory levels have come down over the last 4, 5 quarters. I understand that you get some of this higher cost inventory flushing through cost of goods at the initial phase of the upturn. But wondering how quickly do you think you start to get the higher margin product flowing through revenue? Is that a quarter, is that two quarters? And then sort of related longer-term question, if I look back to the peak of the 2017, 2018 cycle, your margins were hovering around 18% and that Q4 you had meaningful contribution from some of the weldments and precision machine parts acquisitions. Is there any reason why you think you can't get back to those previous peak if not higher over the next upturn?

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [16]

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Well, if we get to those levels that would be -- we would think we will get back to there. Obviously, I think the mix change will be helpful to that as well. Your first question was, how long will it take to kind of normalize your overheads. It's -- we have different types of businesses. Some will take a little bit longer, but probably on average, we saw a little bit in the third quarter. We'll probably see a little bit more in the fourth quarter and it may leak into the first quarter to some degree.

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Quinn Bolton, Needham & Company, LLC, Research Division - Senior Analyst [17]

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Great. And then the second question, just looking at the end of 2019. We've obviously had a very strong uptick in foundry logic spending and I think there is going to be absolutely great fourth quarter on the foundry side. As you look out to the first half of 2020, do you see any pause in that foundry, logic side of the business or do you think a combination or maybe if you do, do you think a combination of share gains and the memory business recovering can sort of offset any potential pause you might see in Q1 or Q2 on the foundry, logic side of the business?

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [18]

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So I guess what we're seeing is, we see a pretty strong foundry, logic this quarter. We don't get all the visibility of the customers we get past the quarters or something but it seems to have some carry into the first quarter, but we're seeing some early signs of memory recover in the business as well. So we would agree that if -- and I think in general, most people think foundry, logic is going to be relatively flat on an annual basis 2019 to 2020 and so if memory does recover, then we'll see growth year-over-year.

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Operator [19]

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Your next question is from Sidney Ho from Deutsche Bank.

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Shek Ming Ho, Deutsche Bank AG, Research Division - Director & Senior Analyst [20]

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Thank you. Let me echo all the congratulations to all 3 of you as well. Moving on to the questions, just want to follow up with the last question. How much of an improvement in gross margin should we expect in Q4? And how much do you think your gross margin would have been in a normalized situation where you don't flush through the high-cost products, assuming the product -- assuming the revenues, it's the same level and the mix doesn't really change? In other words, are there any one-time charges in there that we should be aware of?

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [21]

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No, I don't think there are any what you would call one-time charges in Q3 other than the fact that we had an earlier save pull of inventory into our customers' factory than we had expected. We don't guide margins as you know, Sidney. So specifically we will see it improve off of this level in the next quarter. I think what I would tell you is that we've already commented on OpEx going up just slightly from Q3 to Q4. So you'll see that there will be some recovery there and then as we continue to kind of normalize our overhead rates to get that through the P&L we'll start to see the margin accretion improve quarter-over-quarter and obviously the revenue level the higher it goes the better it goes for us on the incremental basis.

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Shek Ming Ho, Deutsche Bank AG, Research Division - Director & Senior Analyst [22]

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My follow-up question is on the share gain opportunities. I think you mentioned $67 million for the year. That would imply somewhere around $23 million, $25 million in Q4. As you look forward to next year, is there a seasonal impact we should think about or is it more like up into the right? And the question is more about the slope of ramp. And just as a follow-up to that in the past, you talk about the 4 or 5 different areas of checking opportunities, can you help us understand what are the areas you have seen this year against this year, what are the areas that got pushed out to next year and how that profile may change in 2020?

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [23]

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Yes, certainly. A couple of things, one is using your number and we knew that the share gain was going to start small in the first quarter and then ramp up. So using your number for the fourth quarter. Obviously, $25 million times 4 is $100 million which is more than the $67 million we did this year. So works -- continue just based on the wins we've already had, we will continue to see additional revenue from those gains. I have already mentioned that we've been, let's just say a little slower in terms of getting those wins on the precision machining. And I mentioned the reason why because of the challenges of the qualifications on those products. And you can understand that since it's vitally important to the flow of the gases that control the actual activities inside the chamber. So this is a very critical item. And so we have not really seen much of that hit the scorecard yet and we would expect to see that next year. So that would be in addition. Having said that, we've also said that you gained share during the downturn. When people have time to do the qualifications, and it was part of our stated strategy from the beginning of the downturn that we are going to work really hard to gain share. And I'm really pleased with; a, the amount we've captured; and b, the effect it had in terms of helping us through the downturn and more importantly the ongoing impact it has as we move forward. There is more to come, but I don't suspect you'll see kind of a separate share gain initiative that we spoke of quarter-after-quarter. I guess the final question was and basically, I think we've answered it already slightly, but the share gains is across all the different product lines. And just because some of the precision machining hasn't hit the revenue line yet it doesn't mean that we hadn't been working on. We've been working across all the product lines. So that's gone well. There'll be some more. I think we won't be spilling it out for you. We won't be saying $20 million this quarter, $50 million next quarter, etcetera. I think that was a good exercise and keeping you both up to speed on what our initiative was and it was good for us in terms of really committing to it and then managing and measuring ourselves off that success.

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Shek Ming Ho, Deutsche Bank AG, Research Division - Director & Senior Analyst [24]

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I appreciate it. Maybe a last question here. I think you indicated that in your press release, the beginning of the recovery in memory capital investment, what is your current expectations in terms of timing of that? And can you give us a little more color of what you're seeing that gives you that confidence? Is that already showing up in your orders or perhaps in some of the longer lead time products?

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [25]

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So the simple answer is yes. As we acquired a business in Korea and we're a little closer to the memory big customers as you know and so we're seeing -- and by the way, that business was as we've talked about in the first quarter we had it. It did probably 2x or 3x what it did last quarter. So it's been -- the timing has been bad. They are definitely tied to memory in particularly 3D NAND. So what we see now is early stages of 3D NAND investment.

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Shek Ming Ho, Deutsche Bank AG, Research Division - Director & Senior Analyst [26]

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Congrats on all the good results and guide and also on the new roles that you guys have.

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Operator [27]

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The next question is from Karl Ackerman from Cowen.

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Karl Fredrick Ackerman, Cowen and Company, LLC, Research Division - Director & Senior Research Analyst [28]

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Hey, good afternoon. Tom, it's been great getting to know you since your IPO and I wish you all the best in your future endeavors. And Tom, Larry certainly congrats on your new positions of influence. A few, if I may. A question on gross margins first. Last quarter you spoke about some mixed headwinds from your Plastics business as well as the fact that some of the share gains and gas are initially at lower margin. At the same time, you spoke about how weldments would add ballast to margins in the December quarter. So maybe just provide a bit more color on the various sub-components and how they formulate your view for margins in the December quarter as well as early 2020? I have a follow-up.

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [29]

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So let me just go one at a time, and hopefully, I cover them. So our Plastics business is going to be -- from our view now is still not recovering to the level we are seeing on our gas distribution business. So to some degree, that headwind is still in place in the fourth quarter as well, which is not helpful to the gross margin, but we are starting to see the early stages of that revenue growth coming back to more normalized. It's just not happening as quickly as on the gas distribution side. I think the point we made about gas distribution is when our average margins were in the mid-teens. We have things that are higher and things that are lower so when gas grows a little faster its incremental flow-through is less than weldments and particularly probably our highest flow through is on precision machining. So all of those have begun now. It took us a little while to get through the transition from one supplier to another one. But our weldment -- new weldment shares are starting to grow, maybe not as much as we anticipated at the beginning of the year but they are going to be incrementally positive to the gross margin. And so as we come through the next two quarters and with higher revenue growth we'll see margin accretion from those. So I hope that answered all your questions.

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Karl Fredrick Ackerman, Cowen and Company, LLC, Research Division - Director & Senior Research Analyst [30]

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It does. Tom, on outsourcing; I believe that the initial $75 million of incremental share gains, the weldment and plastics portion ramp was dependent on or predicated on a recovery from the memory market. So when should we see the ramp of the weldments business next year and would you say that opportunity is the same size or is it just much, much larger than you expected 90 days ago?

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Jeffrey S. Andreson, Ichor Holdings, Ltd. - President [31]

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So it's Jeff so plastics is really tied to -- today the large component of that is foundry, logic. So that's what drives our plastics business in general particularly LDM is tied to a larger customer. Our other plastic businesses are tied to other applications that are more in the foundry space. And so plastics memory will be helpful at some stage when 3D NAND gets going. We do have some piece parts and components that we manufacture. That will grow. On the weldments side when we made the acquisition of Cal-Weld several years ago was primarily focused on our largest customer, which has a very heavy portion of their business to memory. So as memory goes that business will grow quicker. Having said that, by adding our second largest customer wellness position, we have a much more balanced weldment business as that grows across more applications.

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Karl Fredrick Ackerman, Cowen and Company, LLC, Research Division - Director & Senior Research Analyst [32]

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Thanks, Jeff. One more if I may. Recently, China big fund revealed that Phase 2 will focus on etching machines and film and testing cleaning equipment. Given your unique position within the supply chain, I'm curious how you or your team see the development of indigenous China technology on etch and CVD Equipment as well as their ability to improve yields and existing manufacturing processes and whether their desire to develop their own equipment is additive to your model next year or 2?

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Jeffrey S. Andreson, Ichor Holdings, Ltd. - President [33]

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Well, there is a lot of different ways to go about trying to answer that question. And a lot of it is tied to the different geopolitical trade wars and whatever is going on. Then to the extent that countries tried to prioritize their internal manufacturing. I think we're at a state right now where that seems to be the case and there is no doubt that there are a couple of very good manufacturers inside of Japan. One of them that had done a lot of MOCVD tools, which are not very interesting, through the bulk of the semi space has some capabilities in etch tools so we expect to see that. Although, to be honest with you, I expect that to be pretty small. The second has some really good and interesting capabilities in the clean space. We don't have -- our products are today not really tied into the clean space, but we think they could be through the liquid delivery modules. So in many ways, that's an interesting space to us, but again this particular company those successful and kind of had a nice slow splash on in the stock market. They are not that large either. So the bottom line is, there's in my opinion two reputable companies, the Chinese fabs will use as much of their equipment as they can, but they don't think it will be all that much compared to the spending of the fab. I think there is a flip side to that story, which helps us dramatically, which is the kind of a corollary trade war between Korea and Japan. This one is actually probably even more meaningful in that there is a lot of activity going on in Korea today to try to replace Japanese-based products with American-based products. Beyond semiconductor this goes for any type of product coming into Japan -- coming into Korea. So this is a great opportunity for less Tokyo Electron product where we have very little share, as you know. And more opportunity for Lam and Applied Materials, where we have a very large share. So I think this particular activity will far overweigh whatever we might lose from an etch tool in China coming from an indigenous supplier.

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Operator [34]

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Your next question is from Mitch Steves from RBC.

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Mitchell Toshiro Steves, RBC Capital Markets, Research Division - Analyst [35]

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I really just had 2 pretty high levels. Just the first one is just kind of the component costs when you go to 7-nanometer and below kind of the new equipment products. Is there any sort of a content change story or pricing story when it relates to creating the higher-end tools? And then secondly, do you guys think you can get to high teens gross margins long term again? Remember that was a higher-end target and we got there for a couple of quarters. Is that back on the table, assuming that there's a memory recovery in the back half of 2020?

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [36]

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Yes. First of all, as you go to different nodes, there is not a discernible difference in component cost for our products. It goes without saying as you march down any maturity curve you're going back to be getting lower component costs as people grow and develop and mature, but it's not something that is -- here comes 7-nanometer and all of a sudden prices are going to be shrinking etcetera. So I wouldn't worry too much about that. What was your second question?

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Mitchell Toshiro Steves, RBC Capital Markets, Research Division - Analyst [37]

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And the second one was just gross margin.

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [38]

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Let me answer it this way. So we have a business model, the business model says our long-term goal is 19% to 20% gross margin. We're not changing that. And we certainly believe during upturns margins will improve. And as a bunch of the things that we've been working on, as I said before, start to hit the scoreboard margins will improve and that will that happen over some time, which is why we call that a long-term model. To be blunt, in the first quarter of 2018 almost two years ago now, we did have some very high margins and fundamentally that was a huge jump in volume. I think we did $183 million in the fourth quarter of 2017 and $260 million in the first quarter of 2018 and so a lot of that came from just incredible amounts of overhead absorption and labor stretching etcetera as opposed to something that was long-lasting. So the bottom line is that the business model of 2019 to 2020 still is corrected and we're marching towards that every day.

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Mitchell Toshiro Steves, RBC Capital Markets, Research Division - Analyst [39]

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Okay, that's helpful. And just one really small one just is $12 million to $30 million the normalized OpEx we should assume or is there going to be some more or would that increase if revenues increase with say 20%?

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [40]

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Well, I think if you're talking about the fourth quarter 13 number is way too high. I would say as we look at next year if we have to become SOX compliant and we're looking at potentially an ERP upgrade, we might get to that higher-end at some point in the year.

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Operator [41]

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Next question is from Tom Diffely from D.A. Davidson.

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Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [42]

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Congrats to everybody. And Tom, we're going to miss your industry strict talk going forward. So a couple of questions here. The first one on the share gains, just to confirm now when you get to a steady-state of $120 million run rate. At that point going forward, do you expect that business to ramp with the rate of your other business ramping or does it ramp slower or faster? What do you think the natural ramp is from there?

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [43]

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You mean other than the market share gains we've been talking about, Tom?

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Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [44]

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Yes. So once you get that those market shares in place.

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [45]

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I think on the gas panels side, they are in place. We're going to now flex with the market on those. There may be another leg at some point, but the ones we won, we won pretty early in the year and so now they're floating with the market. I think there are certain components, particularly I think when memory recovers, we'll see a little bit faster growth in both the precision machining and weldments versus when memory is kind of running sideways. So that will be helpful when that occurs. And like we said, we think we see some of the early signs of that spending coming back.

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Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [46]

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Okay. And then from the initial $100 million projection back 4, 5 quarters ago I just wanted to confirm. It was just market-driven declines and not losses of programs that drove the decrease in the subsequent increase?

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [47]

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So the answer is yes and I'd say in the Tom already talked about it, it's just taken us a lot longer to qualify some of the precision machining component trade. So some of that decline was just that being delayed, but we're still working on those and actually progressing much better than this time on our last call. And then the other part of that business is LDM is a little lighter as we said versus what we wanted to achieve this year and our liquid delivery modules. So that will pick up steam next year too as our customer starts to qualify additional customers of theirs, success in Korea. We're really happy with the progress in Japan that we're seeing in the first 3 months of our partnership.

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Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [48]

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Okay. And then I guess when you look at the prospects of a nice ramp over the next several quarters, are you finding that to be a tougher market to ramp up your employees?

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [49]

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A little bit. We're at 3.6% unemployment in this country and Singapore is probably at that same level or lower. There is clearly a situation where there is more opportunities to enable bodyworkers these days. So it's a little bit harder, but we have ways of doing it. And at this point in time, we're very satisfied with all of -- with the success we're having in terms of getting the people in the right place at the right time.

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Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [50]

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Okay. And then the other half of that was during the slowdown, were you able to maintain kind of the skilled welding capacity that you needed?

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [51]

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Absolutely. And when during the slowdown, we don't reduce the head count dollar for dollar with the slow down or in the same ratio. There is a certain degree of people who were not -- who are key to the processes and number of people who are very important to getting materials and engineering and processes running properly. Those people we never let go of.

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Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [52]

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Great. All right. Well, congratulations, everybody.

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Operator [53]

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Next question is from Gus Richard from Northland.

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Auguste Philip Richard, Northland Capital Markets, Research Division - MD & Senior Research Analyst [54]

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Going into the downturn, you guys have underperformed this year, customers normalized inventory and it appears that you're going to outperform here into a little bit of an upturn. Can you talk a little bit about where your customers are with their inventory and when you think there are normalized to their run rate of shipments? It's hard to disaggregate that from share gains.

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [55]

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Yes, we were just talking about this. Obviously, in many ways it's a little bit hard for us to understand exactly where the customer inventory levels are, and I know as we are going down, you folks would ask where the inventory is in terms of the customers. Some of them we know and some of them we didn't. Having said that, it is normal that they would be rebuilding some inventories. However, we were just talking about this and I think where things are right now, is most of what we will build this quarter will go into shipments and a very small amount of it will go into rebuilding inventory. And to the extent that the ramp continues that percentage and ratio might change, but this quarter, we don't anticipate a great deal of our product going on to their shelves. They think most of the product we shipped to them will go into their tools and out to the customer.

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Auguste Philip Richard, Northland Capital Markets, Research Division - MD & Senior Research Analyst [56]

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Got it. And then Tom, we talked about value-added products. Now I was just wondering if you could kind of walk-through when you expect to start beta testing those getting into customers' hands and when we might expect a ramp of new programs with more value-added, higher-margin content?

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Jeffrey S. Andreson, Ichor Holdings, Ltd. - President [57]

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Hey, Gus, good question. It's Jeff. Our first prototypes won't be available until about mid-year and then it's a long cycle of getting those designed into products at our customers. So I don't want to lead you to believe that next year is going to have some big bubble because of this. It may be a several-year journey because it's a pretty novel approach to some degree. Having said that and we've talked about it before, our capability that we've added with weldments and machining, there is more components that we can sell to our customers that we buy today. So we're focused on that too. So while we're also talking about our next generation gas panels, we're also starting to position other components that we can manufacture out of those sites to increase our value that we actually manufacture on each gas panels, which will be helpful to the margin.

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Auguste Philip Richard, Northland Capital Markets, Research Division - MD & Senior Research Analyst [58]

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Okay, so just to regurgitate you're going to -- in the near term, you are going to drive content per box. Longer term, you are going to drive value per box?

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [59]

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Yes, that's a good way of thinking about it.

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Auguste Philip Richard, Northland Capital Markets, Research Division - MD & Senior Research Analyst [60]

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Okay. All right. Congratulations guys.

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Operator [61]

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I am showing no further questions at this time. I would now like to turn the conference back to Mr. Tom Rohrs.

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Thomas M. Rohrs, Ichor Holdings, Ltd. - Executive Chairman & CEO [62]

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Well, thank you all for joining us on our call this quarter and I would also like to thank our shareholders, employees, customers and suppliers for their contribution state during my tenure here. Next quarter, you will have Jeff and Larry update you on our Q4 results. And thank you and we look forward to a great quarter.

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Operator [63]

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Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.