Ichor - Earnings Call - Q2 2020

Transcript

Speaker 0

Good day, ladies and gentlemen, and welcome to Ichor's Second Quarter twenty twenty Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Claire McAdams, Investor Relations for Ichor.

Please go ahead.

Speaker 1

Thank you, operator. Good afternoon, and thank you for joining today's second quarter twenty twenty 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, including those made about the impact of the ongoing COVID-nineteen pandemic on our operations and the industry at large, 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 ks for fiscal year twenty nineteen and Form 10 Q for fiscal Q1 twenty twenty on file with the SEC, and those described in subsequent filings with the SEC.

As noticed in those aforementioned filings, we remind you that the COVID nineteen pandemic continues to create significant volatility and uncertainty in our industry, limiting our ability to provide longer term forward looking statements. 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 Andresen, our CEO, and Larry Sparks, our CFO.

Jeff will begin with an update on our business and a review of our results and outlook, and then Larry will provide additional details of our second quarter results and third quarter guidance. After the prepared remarks, we will open the line for questions. I'll now turn over the call to Jeff Andresen. Jeff?

Speaker 2

Thank you, Claire. Welcome to our Q2 earnings call. I trust and hope that all of you and your families are staying healthy and safe. Today, we reported second quarter financial results at the upper end of expectations. When we provided guidance in early May, we expanded the ranges of revenue and EPS given the level of uncertainties related to COVID related constraints in our manufacturing sites and the global supply chain.

We noted that at the high end of the range assumed no additional restrictions on our manufacturing sites and a quicker than anticipated recovery of our weldment capacity. We are very pleased to report that easing restrictions and a rapid improvement in our weldment capacity enabled us to deliver total revenues of $222,000,000 and $0.54 per share in earnings in the second quarter. The global wafer fab equipment, or WFE, market has shown itself to be fairly resilient and continues to be strong in this dynamic and rapidly changing COVID environment. We continue to see strong levels of demand from our customers. And in Q2, we achieved sequential growth in revenues as well as increases in gross margin, operating margin and earnings per share.

Year to date in 2020, we have grown revenues by 59% and EPS by over 120% versus the 2019. Our foremost priority is to ensure the health and safety of our employees and their families. And our performance in the second quarter is testament to the dedication, commitment, and ingenuity of our workforce in delivering exceptional service to our customers during this unprecedented and challenging time. We entered the second quarter with shelter in place and distancing requirements in effect at all of our manufacturing locations. These impacted our capacity levels, as you would expect.

Our largest challenge was the shelter in place order in our Malaysia weldment operation that affected most of April. We all know these are unprecedented times, which require a certain degree of out of box thinking to adjust to the new requirements that we must follow. We have had to redesign workflows, work schedules, and factory spacing within our factories in order to maximize our productivity across all of our operations. In addition, all employees who can perform their jobs remotely are continuing to do so. Our operational capabilities and supply chain have largely recovered from the significant constraints experienced earlier this year, But we remain vigilant in continuing to take all appropriate actions to protect our people and safely maintain business operations globally.

I continue to be amazed by our employees and supply chain partners who have worked closely together to keep our business operating at a high level during these unprecedented challenges. I want to thank our employees and partners for their incredible contributions as we navigate the impacts of COVID nineteen. Turning to the demand environment. Beyond keeping our employees and their families safe, our second priority is to maximize our output in support of our customers' delivery requirements while continuing to drive our strategic growth initiatives. Since February, we've been working tirelessly to ensure that we support our customers' strong level of shipments in light of the challenges the entire industry is facing, both in capacity as well as the global supply chain.

Our Q2 guidance range assumed we would continue to face these challenges throughout the quarter and output would be constrained, which in turn gave us the visibility to predict sequential revenue growth for the September. Our quicker than expected recovery resulted in revenues exceeding expectations at the high end. And with continued strong levels of demand from customers, we continue to forecast sequential growth at the midpoint of our September guidance. This outlook equates to 55% revenue growth year over year for the 2020 and about double that rate in earnings per share growth. We will continue to have an expanded range, however, given the level of uncertainties and risks related to COVID-nineteen that can change on very short notice and rapidly impact our business.

Nonetheless, at this point, we see strong levels of customer demand continuing in the fourth quarter. We are well on track for a record revenue year with year over year growth far exceeding that of the overall industry, testament to our success in expanding our served markets and increasing our share within those markets, which brings me to a review of the progress that we're making against our revenue growth objectives for the year. In gas delivery, we are continuing to work with our customers on opportunities to increase their share by leveraging our global manufacturing and engineering footprint. In weldments and in precision machining, after multiple new qualifications in 2019, we are moving forward with additional new qualifications, which will see first revenues in the later part of this year. Additionally, we're also benefiting from the continued bring up of EUV lithography with year over year growth in our gas delivery shipments expected for both 2020 and 2021.

Each of these factors is enabling us to achieve revenue growth outperforming the overall industry. Another revenue growth driver will be success in penetrating new customers, principally in Asia. The second the largest served market for chemical delivery is with customers in Japan and Korea. We have added capability and capacity in our Korea operation, which we acquired in mid two thousand and eighteen. And in Japan, we have partnered with a value added resell reseller that is actively marketing our liquid delivery module.

We continue to work with our Korean customer that is evaluating our liquid delivery module. And in Japan, we are actively in discussions with several potential new OEM customers. Both of these will position us for meaningful contribution from this region starting in 2021. Further, we continue to make progress on our strategy to leverage our engineering capabilities and IP portfolio to develop new proprietary products to drive longer term expansion of our share of our served markets as well as to drive the operating model towards increased levels of profitability. We continue to invest in this area and are making good progress in the development of our proprietary next generation gas delivery solution and expect to have our first beta units delivered this year.

Before turning the call over to Larry, I'll make a few final comments related to other recent announcements. Included in our filings today is a universal shelf registration statement for up to $200,000,000 This filing is a component of our strategic growth initiatives, increasing the flexibility available to us with our current capitalization structure, and enabling us to be nimble and act quickly when strategic opportunities arise. In late June, we announced that we made the decision to close our plastics manufacturing facility in California. We made this decision in order to streamline our operations and improve our asset utilization with this business. We remain committed to our chemical delivery business and have ample capacity in other operations to address the growth opportunity we see for this business.

We are targeting to have this restructuring completed by the end of the year and are working with our customers to qualify these products at other sites. To summarize the second quarter, the team did a great job in managing through the challenges we encountered as a result of the pandemic to deliver sequential growth in revenues, gross margin, operating margin, earnings per share, and while making good strides against our strategic growth initiatives. We continue to operate in a strong demand environment, have outperformed the industry with a 59% year over year increase in revenues to date in 2020. And with our current visibility, we are forecasting second half revenues to be stronger than the first half. The longer term growth drivers for fluid delivery serving critical semiconductor processes such as etch, deposition, and CMP remain firmly intact.

I'll now turn the call over to Larry to provide an update on our financial performance and outlook. Larry?

Speaker 3

Thanks, Jeff. First, I would like to remind you that the P and 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, non recurring charges and discrete tax items and adjustments. There is a very helpful schedule summarizing our GAAP and non GAAP financial results, including the individual line items for non GAAP operating expenses such as R and D and SG and A in the Investors section of our website for reference during this conference call. Second quarter revenue were $222,000,000 up slightly from Q1 and up 59% from the same period last year.

As Jeff mentioned, the high end of our guidance range for the second quarter assumed no additional restrictions on our manufacturing sites and a quicker than anticipated recovery of our weldment capacity. We actually came in above the high end of the range in revenues due to strong execution in a challenging operational environment. In spite of these challenges, we reported our fifth straight quarter of sequential revenue growth as customer demand has remained strong. We also achieved sequential growth in gross margin, operating margin and earnings per share. Gross margin for the quarter was 14%, up 20 basis points from Q1.

We continue to face a number of COVID-nineteen related headwinds impacting gross margin in Q2 such as increased freight and material sourcing costs as well as costs associated with ensuring the health and safety of our global workforce. These higher costs impacted second quarter gross margin by about 100 basis points consistent with our expectations discussed in May. In the current operating environment, we expect these costs to come down a bit with the gross margin impact moderating to approximately 50 basis points in Q3. Operating expenses came in as expected at $14,500,000 down slightly from Q1 and we expect to remain around this level through the 2020. Operating margin improved 30 basis points in the quarter and operating income was up 5% over Q1.

Our interest expense in the second quarter declined to $2,300,000 and our tax rate increased slightly to 11.5% compared to 10.2% in Q1. Our planning rate for tax over the next couple of years continues to be in the range of 10% to 13%. With revenues just above the high end of the range, a 20 basis point improvement in gross margin and relatively stable expenditures, EPS of $0.54 was at the high end of our guidance range. Year to date growth in earnings per share has doubled the rate of our revenue growth. Now I will turn to the balance sheet.

We ended the quarter with $57,000,000 of cash compared to $42,000,000 last quarter. The increase in cash was primarily due to increased borrowings on our revolving credit facility with our total debt balance up $23,000,000 over Q1. We generated approximately $15,000,000 of cash from the P and L during Q2, but this was offset by a significant increase in receivables that resulted from the upside in revenues occurring late in the quarter. As a result, days sales outstanding increased to forty three days from thirty six days in the prior quarter. Inventory turns declined slightly to 5.2.

We are very focused on ensuring adequate liquidity support projected long term business growth. We are comfortable with our debt levels and capitalization given our current outlook. With $64,000,000 of EBITDA over the last twelve months, we are well below our three times coverage covenants at the current debt balances. Even with the increased debt level, we have secured more favorable terms and expect interest expense to decline in the third quarter. While the revolver gives us significant flexibility, the S-three shelf registration statement filed today will offer us additional optionality enabling us to be more enabling us to be opportunistic with strategic growth initiatives and improve upon our current capitalization structure.

Now I will turn to our third quarter guidance. With revenue guidance in the range of $2.10 to $240,000,000 our earnings guidance of $0.05 0 to $0.70 per share reflects an improvement in gross margin and a similar level of operating expenses compared to Q2. We are forecasting interest expense to decline about to about $2,000,000 per quarter and our full year tax rate to be around 11%. We are assuming approximately 23,500,000.0 diluted shares outstanding for the third quarter. Given that we are operating in a dynamic and rapidly changing environment with continued COVID related restrictions and constraints in place, we expect to face some level of gross margin headwinds for the foreseeable future.

That being said, we anticipate sequential improvement in gross margin again for the fourth quarter. Our historical gross margin flow through is in the low 20s and the longer term goal remains to drive greater gross margin accretion through incremental cost reduction programs, growing our share within higher margin components markets and increasing our content of proprietary IP within our products. Operator, we are ready to take questions. Please open the line.

Speaker 0

At this time, we will be conducting a question and answer session. Our first question comes from the line of Quinn Bolton with Needham. Please proceed with your question.

Speaker 4

Hey, guys. Congratulations on the nice results and outlook. Larry, I just wanted to start with your gross margin comments. You said that the COVID related impact should decrease from about 100 basis points in the second quarter to only 50 in the third quarter. So should we be thinking with revenue levels roughly flat quarter on quarter that gross margin in Q3 is somewhere around 14.5%?

Or are there other mix mix related or operational efficiencies that could drive a better than 14.5% gross margin?

Speaker 3

I think we'll be in the range of, as you mentioned, around 14.5.

Speaker 4

Great.

Speaker 0

The mix is not significant.

Speaker 4

I guess kind of looking back to the 2018 peak, gross margins are probably a couple of 100 basis points below the levels you were able to achieve in the last cycle. Can you give us any sort of sense what's changed? Is it the sort of overhangs on some of the plastic or the liquid side of the business that's different? Just trying to should we still be thinking longer term you can get back to kind of a 16%, 17% gross margin assuming that low 20% fall through on incremental revenue?

Speaker 2

Hey Quinn, I'll start. I think that we've talked about this before is we've added some capacity since the prior peak. So that has some effect on the gross margin not being able to get back until we cross those revenue levels of $250,000,000 or something like that. So that's part of it. We do have some headwinds, think, in plastics as a business that hasn't ramped for us.

We're working to make that a much more efficient operation at this stage. Working on other gross margin initiatives. Obviously, we have some headwinds that will work themselves out as we get through this pandemic. And I would fully I would not be happy if we weren't back up those 200 basis points by the time we can get work through some of this stuff in the next several quarters.

Speaker 3

And the only other thing I'd add is some of the share gains that we bet in the last year, were in the integration area, which as you know, it's traditionally lower margins than the kind of aggregate in the company. We're we're we're hitting that. Yes. Yeah. I think in the long term, we wanna change that that mix a little more heavy in the weldments and the precision machining, and that'll give us more of a tailwind there.

Speaker 4

Great. And then just maybe last question for me. You know, with the revenue ramping nicely, how are you guys feeling on just overall capacity, revenue capacity from the facilities? Do you feel like you've got the right infrastructure in place? Or do you think you have to start adding incremental manufacturing capacity if the cycle continues into 2021, which it certainly looks like it will?

Speaker 2

Well, added some that we're still that is adequate to handle what we can see for the foreseeable future. We do have plans in place, and we can quickly turn on incremental capacity in under six months. So, you know, I I would say the belief in in marketplace today is that the second half, obviously, is gonna be a stronger WFE environment than the first half of the year with memory starting to improve. And 2021 seems to be a year where we'll see growth on top of 2020. So I think we're in good shape at least through the next year or so with capacity.

And it won't take much in CapEx to increase that, you know, if if we need to.

Speaker 4

Great. Thank you.

Speaker 0

You bet. Our next question comes from the line of Sydney with Deutsche Bank. Please proceed with your question.

Speaker 5

Great. Thanks and congrats on the good execution. My first question is you talked about strength likely will continue into Q4 on this call. Is that a couple of questions here. One, is that typical visibility for you guys given your relatively short lead times?

Or is it just because the backlog is just building longer and lead times have been stretched? And the second part of that question, can you talk about what areas do you see strength into Q4? What is foundry logic versus memory? And maybe how does that compare to what you expect maybe a quarter ago?

Speaker 0

Thanks. And I

Speaker 2

So q four visibility, we typically get really good visibility for three months and pretty good visibility directionally for six months from our customers. So that's where our confidence comes. In addition to the we do see memory recovering. We're not the best ones to ask about this, but we do have enough visibility into the memory space now that we have a Korean operation that we can still see memory strengthening. Albeit a lot of what's going on now are techno transitions, incremental layers in three d NAND, 1x to y and 1y to z that we can see there.

So there hasn't been a bunch of wafer starts that we see increasing in the second half, but we do see that being stronger and still a solid foundry logic market, even though it will come down a little bit from the front half.

Speaker 5

Okay. That's helpful. Maybe my follow-up question is I know on the gross margin side, I know a lot of interest in the near term gross margin trajectory. But if you kinda look beyond this COVID issues, focusing on the longer term, I think in the past you talked about various components that drive the gross margin accretion. Can you kind of help us rank order one of the biggest drivers outside of maybe just revenue growth?

Is it the cost reduction program you talk about? Is it the higher margin business or is it the products of like the higher proprietary IP? Maybe if I put a time frame in the next twelve to twenty four months.

Speaker 2

Yeah, I would we're obviously focused on growing the component side of the business, which we've talked about having higher incremental margins than the average of the company. And so we're focused on continuing to grow those gain shares in that particular area. We're streamlining our plastics operation. That will help. We have continued reduction programs inside the company that will drive it.

And so I would imagine that on the streamlining of our plastics business, the bulk of that we'll probably see the benefit of that happening in 2021. But we'll see some effect of that. And we have other plans in place this quarter I mean, this year for gross margin improvements that will help us continue to drive the margin up. Then hopefully in twelve to eighteen months, we're back to more normalized revenue levels I mean, margin levels.

Speaker 0

Great. Thank you. Our next question comes from the line of Chris Sankar with Cowen and Company. Please proceed with your question.

Speaker 6

Hi. Thanks for taking my question. Two of them, Jeff, can you just say a little bit about the strength that you see in your products line? Is it mainly gas delivery? Or is is it across the board?

Can you just give some color on that?

Speaker 2

Yeah. It's generally across the board. I think as was talking about, we like DEF and EDGE a lot, CMP as well. So I think we're seeing a lot of strength in those particular type of applications. We're seeing what we can see is a bit of a stronger memory back half than the front half, although it was not too bad in the front half as well, and then foundry logic.

So it is across the board for us. We're seeing growth in all all verticals of our business.

Speaker 6

Got it. Got it. That's very helpful. And then you kind of said that, you know, any kind of traction on the Korean semi cap Williams as a calendar '21 story. Do you think you'll get equal opportunity with both NAND and DRAM, or would it mainly be one versus the other with some of the Korean semi cap companies?

Speaker 2

Well, I think today, we're primarily exposed to three d NAND. We hope to to work with a customer that's got exposure in both three d NAND and DRAM. But at this point, that's when you look at our revenue stream in Korea, which is relatively small, it's mostly focused on three d NAND at this particular stage. We're working to qualify a liquid delivery module, which would go on a cleaner. I think that will get us access to a DRAM space.

And then we're also working with the other OEMs there on deposition gas panels. We're primarily on the etch side there. So we're we're working across probably three or four of the local OEMs now. Again, it's a twenty twenty one story for us.

Speaker 0

Got it. Our next question comes from the line of Mitch Steves with RBC Capital Markets. Please proceed with your question.

Speaker 7

Hey, thanks for taking my question. I had two. The first one is just really going back to the gross margin question here. You're talking about kind of improving revenue trends going forward, gross margins being up in December versus September. So the way that I'm thinking about this is if revenues continue to go up and you had a plant closure as well, shouldn't you see kind of operating margins expand at a faster rate so you're going to see more leverage off the operating margin line?

Or am I thinking about this incorrectly on a go forward basis?

Speaker 2

Yeah, so I think the simple answer is yes. As we streamline an operation, I would tell you it's not a very large operation per se. I mean, it's you've probably seen the eight ks on it. You can kind of size from the headcount. I won't repeat it on the conference call.

But it's not real big, but it will have a positive effect. And we're trying to also see the growth in the components business start to outgrow. In the early part of the year, we were seeing a faster pace of growth in gas panels. Now we're hoping that the components business catches up, particularly as they start to add some inventory onto their books, which we've seen a little bit of so far.

Speaker 7

Got it. Understood. And the second one is just the move to high-tech. It seems like more and more companies are kind of pushing to bleeding edge. So does that change any of the value proposition for you guys?

So if they sell higher end semi cap equipment, you guys sell into there, wouldn't that increase the ASPs or the content you guys or the value of the content you guys are getting? Or is it not really the case that the higher end solutions would be value add for you?

Speaker 2

No. I think when you look at the newer higher end solutions, I think what you're going to see is there's more and more gases used per gas panel. That will drive incremental ASP for us you know, and the number of gases. So with each gas you have, you'll get a flow controller, etcetera, and all the components that go with it. And so it will drive incremental ASP for us over the long haul.

How to size that? I couldn't tell you off the top of my head right now how many new gases. But I do know with some of the more advanced semiconductors that are being manufactured today, they're using more and more gas as per gas panel.

Speaker 7

Just to clarify that real quick. So if you know the number of gas panels or gas valves, whatever phrase you want to use, in the higher end, can you maybe give us what that ASP would be versus kind of a more standard unit? I'm not sure how to phrase it. I'm not looking for the exact mix because it's pretty much impossible But to what's the gas different than the content?

Speaker 2

Yeah. I think that's pretty hard for us to just give you a range there because it would depend on how many gases. If they're adding one or two, it's not going to be a tremendous ASP increase in absolute dollars. But it just varies by deposition, application, and each one of our OEM customers. It's a little tough to give you ASP guidance on that particular question.

Speaker 7

Okay. Thank you.

Speaker 0

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

Speaker 8

Yes, good afternoon. Maybe another question on the closure of the plastics facility. Was that driven at all by demand, either being less than you thought or geographically different than you thought, or was it purely just a cost savings restructuring program?

Speaker 2

Well, I think the answer is it's a little bit of ball. I mean, that part of the business wasn't scaling as quickly as the other gas delivery versus chemical delivery. We looked at the capacity that we have. We manufacture plastics in four sites. And so we had enough capacity such that we could go ahead and make the decision to close this between now and the end of the year and work to move those products into other facilities.

Speaker 8

Okay. And then, Jeff, what do you think you guys are as far as the EUV rollout goes for gas panel revenues to your company? Are you still

Speaker 0

in the early innings?

Speaker 8

Are you getting close to kind of a steady state?

Speaker 2

No. Think we're we're we have I mean, we're obviously we do the low pressure gas delivery for every EUV tool. So whatever ones are getting manufactured, we're on each and every one of those. We're probably now working on at least three of the types of products that they have, 34, 36, 5,000. So we continue to work closely with our customer there.

Speaker 8

Okay. And then finally, has any of the Commerce Department rulings impacted your discussions with Korean or Japanese suppliers as far as not wanting to have US content?

Speaker 2

No. Not of any significance yet. Obviously, we read everything you guys read, and there could be maybe a net benefit to some of the local Korean OEMs. But I think when it comes to more advanced applications, I think they still have to rely on our other larger customers.

Speaker 8

Okay, great. Thank you.

Speaker 2

You bet.

Speaker 0

Our next question comes from the line of Craig Ellis with B. Riley. Proceed with your question.

Speaker 9

Yes. Thanks for taking the question and congratulations on the nice execution. Jeff and Larry, my first question was just clarifying gross margin. So I think what I heard is that gross margins will rise in the third quarter and in the fourth quarter. And is the fourth quarter rise really the last of the 100 ish basis points of COVID headwinds coming out of gross margin?

Or is that something else that's driving the sequential gross margin improvement?

Speaker 3

I think there's a little more of some of our cost improvement initiatives in the fourth quarter and a little bit of product mix as we ship some more machining and components business. At least that's our expectation. COVID, I

Speaker 4

think

Speaker 3

until we see a change in the distancing requirements and the restrictions and the cleaning, extra cleaning we have to do today, I think that's going to be with us until that situation changes.

Speaker 9

Makes sense. Thanks, Larry. And then large U. S. Manufacturer pushed out a seven nanometer project time.

Admittedly, it was planned for next year. So it's a ways away. But what, if any, impact is there for I Corps from that move?

Speaker 2

Well, I think if there's an impact as to the amount of equipment sold by our customers, we obviously will feel some sort of impact. I guess the question really comes, I think the underlying question is does that migrate somewhere else and is it just a timing delay? I think the underlying demand products is there.

Speaker 9

Got it. Got it. And then lastly, guys, just on the filing today, so nice to have that incremental $200,000,000 of flexibility. But what was the specific trigger for doing so now? Is it that you feel like you have enough demand visibility that being able to move strategically is much more feasible?

Is it something that you see with the opportunity set? Just if you could help fill in what the driver is to the current timing, would be appreciated. Thanks guys.

Speaker 2

Yeah, I think it's just something that the company has been discussing for a period of time that we wanted to consider putting a shelf out there just to ensure we had some flexibility should there be an opportunity that we couldn't fund either from ongoing cash generation or the revolvers that we had today and other kind of optionality to our capital structure. So I wouldn't read much into the specific timing on this other than we generally have some strategic discussions at the board level and that decision was made here recently.

Speaker 0

Got it. Thanks, Jeff.

Speaker 6

You bet.

Speaker 0

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

Speaker 10

Thank you very much, and congrats on a nice quarter. Jeff, I apologize if you've gone through this a few times already, but with the gross margins at where they are today and some of the improvements you see on a going forward basis in terms of revenue growth being a contributor, what are some of the other key variables that are weighing on it today that you can, I guess, drive or help improve upon? Are there anything you're doing? You mentioned, I guess, the plastics restructuring and things of that nature. But what other efforts can you do internally to get gross margins up about 200 basis points as you go forward?

Speaker 2

Well, I'll start and then maybe Larry can finish up. I think on the product side, we're trying to drive the growth in our components business. And at the initial phase of this particular ramp that we're seeing, we've seen our gas panel business outgrow our components business to some degree. That'll normalize as as we start to see, you know, inventories recover in our customers. And and we saw a little bit of that, but largely any kind of inventory growth that we're seeing in our customers today is probably a little bit more around just the timing of everybody's recovery, COVID.

So we're we're gonna drive incremental higher margin product growth. Obviously, we've done something on the plastics side from restructuring. We're driving other internal cost reduction programs. And so we'll see some improvement quarter over quarter. And we continue to just drive it relentlessly within within the company.

And with that, maybe if Larry has any other comments.

Speaker 3

No. I think as you mentioned the product mix, I mean, the new products, whether it's the gas pound, next generation gas pounds, other things, those to the extent we can get those qualified and in the revenue mix, I mean, that's probably the biggest long term kind of strategic move. It's a 2021 move, but that's going to be one of the ones that Jeff didn't mention.

Speaker 10

Great. That's helpful. And maybe, Jeff, as a follow-up question in terms of some of the EUV lithography opportunities you described in the past. As your customer there migrates to its next generation system and eventually to the high NA systems, how much more, I guess, or given some of the vacuum capabilities that are required in those systems, how much more content do you believe you can increase as they move upon as they move into those next generation systems?

Speaker 2

Well, what I I I mentioned a little bit earlier is that we're we're working we're delivering on every EUV tool that they ship. We have the low pressure gas. There's a high pressure gas. That's a little bit of something that takes a lot more engineering and a different type of expertise that we have because of the levels of pressure versus low and high pressure. So it's a long term opportunity but not a near term opportunity.

There's other machining parts and weldments that we can probably focus on there. But versus the ASP of the gas distribution system, which is, as you know, significantly higher than a a process tool or an etch tool just because of the sheer size and complexity of what we're doing for them. But it will as they get more sophisticated, we're seeing some ASP appreciation but not very much because that unit isn't changing dramatically with each generation.

Speaker 10

Great. Thank you very much.

Speaker 0

Ladies and gentlemen, we have reached the end of our question and answer session. And I would like to turn the call back over to Jeff Anderson for any closing remarks.

Speaker 2

Thank you for joining us on our call this quarter. I'd like to thank our employees, suppliers and customers for their support as we manage through these challenging times. We look forward to updating you again on our next earnings call in early November. In the meantime, we are scheduled to participate in virtual that's hosted by Needham next week and by Citi and Deutsche Bank in September, which will be available via webcast on our IR website. Operator, that concludes our call.

Speaker 0

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