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Ultra Clean
offers its customers, primarily semiconductor capital equipment OEMs, a
complete outsourced solution for gas delivery systems and other
subassemblies
Technology
Semiconductors
(UCTT-NASDAQ)
Ultra Clean Holdings Inc.
150 Independence Drive
Menlo Park, CA 94025
Clarence Granger
President and CEO
Phil Kagel
Senior Vice President and CFO
Interview conducted by:
Lynn Fosse, Senior Editor
CEOCFOinterviews.com
March 10, 2005
BIO:
Clarence Granger was named CEO in 2002 and was
the company's president and chief operating officer since 1999. He joined
the company in 1996 as executive vice president of operations. He has a
broad range of management experience with high technology manufacturing
companies. Prior to UCT, Granger was vice president of media operations for
Seagate Technology. Prior to that, he was president and CEO of HMT
Technology. Granger received his master's degree in industrial engineering
from Stanford University and holds a bachelor's degree in industrial
engineering from the University of California at Berkeley.
Phil Kagel
Senior Vice President and Chief Financial Officer
Phil Kagel joined Ultra Clean Technology in August 2004 as Senior Vice
President and Chief Financial Officer. He has held senior financial
positions in the semiconductor, electronic manufacturing services, disk
storage and flat panel display industries. Kagel was Chief Financial Officer
at Sipex Corporation, Akashic Memories Corporation, and Sigmatron Nova. At
Solectron Corporation, he was Vice President & Corporate Controller and Vice
President, Global Tax over a five year period from 1997 to 2002. Kagel holds
a Master’s degree in Business Administration from the University of Missouri
and a Bachelor’s degree in Mathematics from Brigham Young University. He is
also a Certified Management Accountant.
COMPANY Profile:
Ultra Clean Holdings, Inc. is a developer and supplier of critical
subsystems for the semiconductor capital equipment industry, focusing on gas
delivery systems. Ultra Clean offers its customers a complete outsourced
solution for gas delivery systems, improved design to delivery cycle times,
component neutral design and manufacturing and component testing
capabilities. Ultra Clean’s customers are primarily original equipment
manufacturers of semiconductor capital equipment. The Company is
headquartered in Menlo Park, California.
CEOCFOinterviews: Mr. Granger, how has Ultra Clean Holdings
changed since you became a public company?
Mr. Granger: “As
a public company, there has been a much different focus on the ongoing
business activities in terms of the emphasis on quarterly performance. As a
public entity, there is a much greater expectation of consistency and
quarter-to-quarter financial performance. As a private company that was not
as significant an issue as long-term strategic growth. As a public company,
we are now in a position where we need to emphasize both near-term growth
and longer term strategic growth.”
CEOCFOinterviews: What have you done to meet those criteria?
Mr. Granger: “We
are changing the way we do financial modeling in our business and the way we
do strategic planning. We focus on where we expect to be in a three to five
year time period as well as the analytical data that we put together for
quarterly performance metrics.”
CEOCFOinterviews: What service or product do you provide?
Mr. Granger:
“Ultra Clean Technology is an outsource supplier to the semi-conductor and
flat panel capital equipment industries. We develop and manufacture
customized subsystems similar to contract manufacturers but with more design
and engineering content. The subsystems that we manufacture are primarily
gas panels, but recently we have expanded into other modules, such as frame
assemblies, liquid delivery subsystems and process modules for our
customers. Our founding was in 1991 and we have benefited dramatically from
the trend toward outsourcing in the semiconductor, capital equipment
industry. To give you an idea of our growth rate, in 2000, we did $83
million in sales and in the most recent year 2004, we will have done over
$180 million sales. We have three manufacturing facilities in the United
States and we are in the process of opening a fourth manufacturing facility
in Shanghai, China that will become operational in March of this year. We
have been operating profitable every year since 2000 and we had our initial
public offering in March of 2004.”
CEOCFOinterviews: What are you actually providing?
Mr. Granger: “A
gas delivery system attaches to a semiconductor process tool and controls
the flow of the gases into the process chamber. In a semiconductor process
operation, you are essentially creating a chemical reaction within a vacuum
chamber that is either depositing layers of film on the surface or etching
layers of film from the surface of a wafer. The device that we make, the gas
panel, controls the flow of these gases into the vacuum chamber where the
gases react together and deposit a layer of film on the surface of a wafer
or react together and etch away a layer a film from the surface of the
wafer.”
CEOCFOinterviews: You have a unique position because you are
an independent manufacturer, will you tell us about that?
Mr. Granger:
“From a standpoint of being an independent manufacturer, we have a
philosophy of not being vertically integrated. What we do for our customers
is provide design and manufacturing services that they typically used to do
themselves. In the case of gas panels, up until the last five years or so,
our customers used to manufacture gas panels internally. They have
outsourced that design and manufacturing service to UCT and similar
companies. One of the things we do that we think is one of our great
strengths, is we have a strong analytical and testing capability for
components that go into gas delivery systems. What we do for our customers
is analyze all of the various options that might be utilized in the gas
delivery system in their specific application and recommend those components
that offer the required performance at the best price. We consider one of
our greatest strengths to be the ability to deliver advanced or latest
technology in the industry to our customers, yet maintain a very flexible
cost base by maintaining a low R&D and low overhead base.”
CEOCFOinterviews: Is there much competition in your segment of
the industry?
Mr. Granger: “In
our segment of the industry, there is always competition. There are two or
three good size companies and there is a significant number of much smaller
players. As the semiconductor industry is maturing, the outsourcing of these
key subsystems like gas delivery subsystems is maturing.”
CEOCFOinterviews: How do you market your services?
Mr. Granger: “Our
customer base is relatively small; there are probably ten to twenty
potential customers of good size. For years our customers have known us as a
gas distribution system manufacturer, but in order to grow our market and
expand, we are looking into other subsystems beyond gas delivery systems.
Recently we have started to do frame assemblies, liquid delivery subsystems,
and some process modules. Our customers have felt comfortable in coming to
us with their requirements for gas delivery systems but it has taken awhile
for us to educate those same customers on expanding our opportunity into the
other subsystems. Our customers, with this outsourcing trend, are looking to
identify suppliers that they can outsource more of their modules to, and at
the same time, they are looking to consolidate the supply base. We are
finding that by virtue of our size and our relationship, we are able to
extend our market with our existing customers into these other subsystems.
That is primarily where we see some of our big growth opportunities in the
near term.”
CEOCFOinterviews: Where else do you see potential?
Mr. Granger: “We
see other growth opportunities as well, for example, I mentioned earlier
that we are in the process of establishing a manufacturing facility in
Shanghai China. Even though our gas panels go on tools that are shipped
throughout the world, we currently do not have any customers outside of the
United States. By having a presence in Asia, we anticipate that will put us
in a much stronger position to start doing business with Asian customers.
Also, there continue to be several smaller semiconductor capital equipment
companies that we have not yet penetrated. Those are probably the three
largest growth areas for us, the outsourcing of other modules beyond gas
delivery, expansion to other smaller potential customers in the U.S. and the
expansion beyond the U.S.”
CEOCFOinterviews: Is inventory a consideration for you, or do
you make things to order?
Mr. Granger: “Gas
delivery systems tend to be highly customized because each of the end users,
for example Samsung, Intel or IBM, all have their own recipe of these unique
processes requiring different modifications to the gas delivery system. Even
though our customer may have a standard platform, the end customer is going
to have some unique requirements on that gas panel. We end up with
customized design and manufacturing. We maintain very little on hand
inventory other than what is common for all customers.”
CEOCFOinterviews: How do you weather the ups and downs in the
semiconductor industry?
Mr. Granger:
“Weathering the ups and downs is one of the things that we are very proud
of. Our flexible cost model has been extremely effective for us. We have
been operating profit positive every year since 2000 and the reason we are
able to do that is that we do not have a high fixed overhead cost. Because
we do not manufacture specific components, we do not have worldwide
marketing or service demands and our cost basis is much lower and flexible.
We flex our workforce through temporary employees, as necessary, to handle
ramps and then in the downturn we scale back. That works effectively for us.
We are able to keep our R&D expenditure below two percent, by doing
extensive testing and working with our suppliers. This enables us to bring
our customers the latest technology but at the same time, we do not have a
high fixed overhead cost associated with that.”
CEOCFOinterviews: Why should potential investors be interested
and what should they know that perhaps they do not realize when they first
look at the company?
Mr. Kagel: “This
business model generates free cash flow and a very high and robust return on
invested capital. Because we have this flexible cost model, most of our cost
is variable, so that we do not have high losses during downturns. We do not
have much cash tied up in working capital. Our three largest customers
comprise about 90% of our sales and they all pay very quickly. Our DSOs run
under forty. Our inventory turns are very good as well and they are running
nine to eleven. With that, we generate cash and working capital. We do not
have a lot of capital equipment investment like some of the EMS companies.
We have clean rooms and after that very little capital expenditures. Our run
rate of CAP-Ex is $200 to $400 thousand a quarter, which is about our
depreciation rate. Because of our flexible cost model, we run a profit and
because we have good strong working capital metrics and very little capital
expenditure, we generate a good cash flow. The results are a very good
return ROIC. Our return invested capital on a steady state basis would be in
the 20 to 30% range. We will do over twenty percent in 2004. Through nine
months, we ran about 20%. So we feel very good about our business model and
I think that is extremely important for investors who are looking at the
company.”
CEOCFOinterviews: What are the challenges you see going
forward and how are you prepared to meet them?
Mr. Granger: “I
think some of the biggest challenges we see in our industry are related to
the cyclical nature of the business. I think that is something we are going
to deal with on an ongoing basis. We believe we have handled that very well.
The other significant trend is long-term movement towards Asia. We are one
of the first companies in our sector to be aggressively moving to China. I
think there is going to be a continued shift toward Asian presence in the
next few years. We feel it is very important for us to have a strong
presence there.”
CEOCFOinterviews: In closing, do you think you have
accomplished your goals?
Mr. Granger: “We
are proud of our growth rate. We have done well in downturns and upturns.”
Mr. Kagel:
“I think that we are well positioned. The outsourcing migration is a strong
trend and evidenced by what is going on in the industry. It allowed us to
have the kind of growth of which Mr. Granger spoke of earlier. We believe
the outsourcing trend will continue. If you look at the OEMs, their returns
are a lot better because they have begun to outsource. We expect to benefit
by outsourcing."
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