Photronics Inc (PLAB) 2002 Q4 法說會逐字稿

Good morning. My name is Aamay and I will be your conference facilitator today. At this time I would like to welcome everyone to the Photronics fourth quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. McCarthy, you may begin your conference.

Thank you Amay. Good morning everyone. My name is Mike McCarthy Vice President of Investor Relations and Corporate Communication for Photronics. I'd like to thank everyone for participating in this morning's conference call which we'll discuss the results of our fiscal fourth quarter which were reported last night. Before we begin I'd Helen Roti (ph) like to remind all participants about the Safe Harbor Statement Provision under the Private Securities Litigation Reform Act of 1995. And except for historical events, the information we will cover during this call may be considered forward-looking. And it may be subject to certain risks and uncertainties that could cause actual events to differ materially from those projected including uncertainties in the market, pricing, competition, procurement and manufacturing efficiencies, and other risks detailed from time to time on the company's SEC reports. This call will remain archived on our web site until we report our fiscal 2003 first quarter results the week of February 17th.

Additionally, I'd like to inform everyone that Photronics will be making a presentation at the First Albany Technology Conference in New York later this afternoon. This event will also be web cast on our site. Our call this morning will begin with Sean Smith our Chief Financial Officer providing a detailed review of our income statement and balance sheet. Paul Feqo President and Chief Operating Officer will then follow with a brief review of the company's operating performance. Dan Del Rosario CEO will moderate the question and answer session. Joining them in the Q and A will be Steve Carlson Senior VP of TechnologyGreg Hickey Vice President and Treasurer in charge of strategic planning. John Smith, Senior Vice President of Europe and Michael Martinez Vice President Marketing.

Thanks everyone. I'll provide a brief analysis of our financial result of for the fourth quarter fiscal 2002 I will review our year-end balance sheet and cash flows for the year as well as your UR (ph) outlook going forward in our November 11th press release and subsequent conference call we reviewed two events which had an impact on the fourth quarter. During the quarter, we incurred an after tax charge of ten million or 31 cents per share resulting from the closure of our manufacturing facility in Milpitas and North American work force reduction. We also announced a net after tax gain of approximately 1.7 million or five cents per share related to the repurchase of approximately 41 million dollars of our six percent convertible subordinated notes. I will elaborate further in a few minutes on these and other cost reduction activities but for the purposes of our discussion of operations I will primarily be referring to our operating results excluding the impact of these two events.

Net sales in our fourth quarter amounted to 90.1 million slightly down as compared to the 93.8 million in the fourth quarter of last year. Total sales outside the United States accounted for approximately 59 percent of fourth quarter 2002 revenues, compared with 41 percent in the fourth quarter last year and 56 percent sequentially. Our strategic investments in Asia and Europe continued to enable us to gain share in these growing international markets. Sequentially, fourth quarter sales decreased eight million or 8.2 percent. The sequential decrease resulted primarily from a weakened pricing environment from mature technology and combined with an overall decrease in demand for reticle (ph) technology principally in North America and Europe. Shipments of photomasks for devices utilizing .18 design rules and below accounted for approximately 23 percent of our fourth quarter revenues. The fourth quarter gross margin of 25.2 percent decreased approximately 420 basis points from last year's fourth quarter level of 29.4 percent. Sequentially our fourth quarter gross margin decreased 340 basis points primarily as a result of our lower utilization of our expanded fixed equipment cost base.

Depreciation and amortization for the fourth quarter was 21.4 million, as compared to 18.2 million for the fourth quarter of 2001 and 21.9 million sequentially. Selling general and administrative expenses of 14.4 million for the fourth quarter increased slightly or just less than two percent year-over-year. Sequentially SG&A decreased four and a half percent or approximately 700,000 due in part to the cost containment measures enacted during the fourth quarter. SG&A as a percent of sales was 16 percent for the fourth quarter, 2002 as compared to 15.1 percent in 2001 and 15.4 percent sequentially. Research and development expenses of 7.9 million in the fourth quarter were approximately 19 percent higher than last year and sequentially 2.4 percent higher reflecting continued work on advanced soap wavelength reticle (ph) solution for 139 meters below technologies. R&D represented 8.7 percent of sales in the fourth quarter of 2002 compared with 7.1 percent last year and 7.8 percent of sales in the third quarter of this year.

Operating income exclusive of the 14.5 million consolidation charge was 400,000, slightly above break even as compared to the 6.8 million earned in the prior year. Sequentially, operating margins decreased by 496 basis points. Net other expenses of two million includes the impact of the convertible note gain or 2.6 million. Excluding this gain, net other expenses of 4.6 million increased from last year primarily because of higher interest costs incurred with increased borrowings associated with our outstanding notes, and borrowings associated with the PK acquisition. The increased interest costs were somewhat mitigated by investment income associated with our strong cash and short-term investment position. During the fourth quarter, we recorded a tax benefit of 7.4 million, which amounted to a 41.9 percent overall tax rate to reflect significant decline in pretax operating income, primarily in North America. As we discussed during the third quarter conference call, we projected to record a tax benefit in the range of 35 to 45 percent, including the impact of the consolidation charge as a result of the decline in pretaxed income from jurisdictions in which we are taxpayers, coupled with the impact of pretax income from jurisdictions for which we have tax holidays. Excluding the impact of the consolidation charge and gain on the buy back of the 41 million dollars of our six percent notes we recorded tax benefit of approximately 3.8 million. Net loss for the fourth quarter of 2002 excluding the consolidation charge and note gain was two million, as compared to net income of two million in the fourth quarter of last year and 1.2 million sequentially. Loss per share was six cents for the fourth quarter of 2002 as compared with diluted earnings per share of seven cents in the fourth quarter of 2001. As we exited the fourth quarter, we had approximately 1600 employees. Equating to sales of approximately 225,000 per employee on an annualized basis.

Now, taking a look at our 2002 operating results before the impact of our consolidation charge and convertible note gain. Fiscal 2002 sales increased 2.4 percent to 387 million, a new record as compared to 378 million in fiscal 2001. Increase was driven by our strong growth in Asia of 82 percent or 58 million year-over-year. The growth in Asia was balanced by a decrease in sales primarily in North America. While we believe that North America will retain its prominence as a center of design innovation Asia waiver fads will continue to process an increasing number of waivers. This means we can expect significant leverage from our Asian investments in the month and years ahead. Gross margins in 2002 amend to 28.5 percent as compared to 32.7 percent for 2001. The decline is primarily attributable to decreased utilization of our expanded fixed equipment base, including the newly installed NTO lines. Selling general and administrative expenses increased 7.8 percent to 58 million or 15 percent of sales. SG&A last year totaled 53.8 million or 14.2 percent of net sales. R&D costs of 30.2 million were 21.3 percent higher than the 24.9 million last year. R&D was 7.8 percent of sales for fiscal 2002 versus 6.6 percent of sales of the prior year. Our investments in this area are viewed strategically important to the company's future growth and ability to provide the innovative (inaudible) Solutions required by our customers.

Operating income decreased to 5.8 percent of sales for fiscal 2002, versus 11.9 percent of sales last year. Net other expense excluding the impact on the gain on the repurchase of our convertible notes amounted to 16.9 million in 2002 compared with 9.3 million in 2001 as a result of year over year additional borrowings. For fiscal 2002, we recorded a tax benefit including the impact of a consolidation charge of approximately 30 percent for all geographic areas in which we are taxpayers. When we include the impact of pretax income from jurisdictions for which we have tax holidays, our tax benefit amounted to 59 percent, or seven million dollars. Net income amounted to 3.4 million or 11 cents per diluted share compared with 22.1 million or 74 cents per diluted share last year.

Now taking a look at the balance sheet. We continue to be extremely liquid at the end of the quarter with working capital in excess of 142 million which amounts to 190 improvement in working capital since the beginning of the year. Cash and short-term investments were 129 million as compared to 35 million at October 31st, 2001. The company's current ratio at the end of the fourth quarter was 2.3 to one as compared to 1.5 to one at the end of 2001, primarily as a result of the increased cash associated with our convertible note issuance in early 2002 and our ability to aggressively manage our assets in such a way to maximize our liquidity.

Accounts receivable decreased 12 percent year-over-year as a result of our improved collection efforts. Average days outstanding for receivables in 2002 were approximately 65 days for 2002, down from 67 days in 2001. At the same time, accounts payable and accruals increased 27.6 million year-over-year resulting from the timing on project payment on our equipment and accrued for seven and other consolidation charges during the quarter. Other current assets increased approximately 13 million year-over-year as a result of an increase in deferred tax, assets and refundable taxes. Intangible assets increased by approximately 28 million primarily as a result of an increased investment in PKL.

Our total debt has increased 85 million during 2002 to 307 million. The increase is primarily attributable to the 200 million convertible issuance, net of the repayment of our former line of credit last December, and note repayments. As I stated earlier, we continue to actively manage our balance sheet by reducing our debt while also maintaining strong liquidity. During the fourth quarter our total debt decreased by 52 million, while our cash and short-term investments decreased by only 20 million. The decrease in debt for the quarter is primarily related to the repurchase of the six percent convertible notes and repayment of foreign debt. As a result of the note repurchase, we effectively reduced our annual interest costs by over 2.4 million. The minority interest in PSMC amounted to 45 million at the end of the quarter. PSMC and PKL and our shareholders equity aggregated 339 million.

Taking a looking at our . Cash flow from operations for fiscal 2002 was approximately 136 million dollars. Cash flow used in investing activities amounted to 149 million of which 126 million represented capital expenditures during fiscal 2002 and 15 million in short-term investments. Free cash flows net of our capital expenditures was approximately 9.9 million for fiscal 2002. Cash provided by financing activities amounted to 83 million, which primarily represents the net proceeds from our convertible note issuance offset by repayment of other debt of 115 million. To take a look at some cost containment measures.

During the fourth quarter, as I discussed earlier, we closed our facility in Milpitas California and reduced our global work force by approximately nine percent. Of the total charge of 14.5 million, approximately 72 percent or 10.5 million was non-cash as it related to the manufacturing equipment taken out of service. The cash component of the charge consisted of severance and exit costs related to the manufacturing facility. The total charge is expected to be recovered in four to six quarters. For 2003, quarterly pretax savings will be in the range of 2 to two and a half million. As I previously mentioned, we have also effectively reduced our quarterly interest cost by over 600,000 or 2.4 million annually with reduction of our six percent notes. As a result of both these steps, our annual pretax savings for 2003 will be in the range of 10 to 12 million. We also continue to focus on numerous other cost containment measures as we work with our key vendors to reduce our material equipment data communication and other fixed costs to improve profitability.

Taking a look ahead, our short-term visibility continues to be limited. We believe we will see continued new design activity, especially for products utilizing our sub wave lengths reticle(ph) solutions technology. However, the continued slump in the semiconductor market over the last several quarters resulted in customer environment of plant shutdowns and consolidation, reduce work weeks and significant lay off. Many customers are planning shutdowns during the Christmas and New Year's holiday period. In fact, this year we believe we may see (inaudible) In Asia matching their production schedules to their U.S. and European customers. While our booking trend for the first five weeks of the quarter has been strong, our visibility to the post-holiday season is limited. As a result, we believe it is prudent to take a conservative view in forecasting revenues and earnings for the first quarter of 2003. Based upon our current operating model, the outlook for the first quarter revenue of 2003 is expected to be down 11 to 17 percent sequentially or in the range of 75 to 80 million, due largely to the typical seasonality reduction associated with the holidays.

While we're not prepared to provide detailed guidance for the second quarter, initial inputs from our largest global customers indicate that we track to the historical patterns of strong sequential revenue performance during the second quarter as these customers release designs put on hold during the year-end holidays. Capital expenditures for tools and equipment in fiscal 2003 are projected to be approximately 40 to 45 million, down significantly from fiscal 2002's level of (inaudible). Capex-for facilities are expected to be in the range of 12 to 17 million dollars. Although our 2002 capex increased our fixed cost base, the impact on margins will be somewhat mitigated by savings from our consolidation, reduced debt and continuous cost containment initiatives. As I mentioned earlier, we recorded a tax benefit of 7.4 million during 2002, based on our ability to carry back and recover taxes paid in jurisdictions for which we are taxpayers. During 2003, our ability to continue to recognize similar tax benefits will be limited for GAAP purposes until such time as the applicable cash attributes can be offset to taxes that would otherwise be payable to the taxing jurisdictions. Accordingly, we are estimating an effective tax rate to be in the range of 10 to 15 percent for 2003. As a result, based upon our current operating model, we estimate the first quarter loss per share to range from 30 cents to 40 cents. That wraps up the overview of our financial performance and our short-term outlook. Now I'd like to turn the call over to Paul to provide the brief comments before we move into Q&A. Paul.

Thanks, Shawn. Without question the fiscal 2002 will enter the record books as one of the most challenging years any member of the Photronics team has ever seen. There though our visibility is limited we're thank full to be receiving inputs from our customers as they look into the new year that lead us to believe that we will not see any further deterioration from the current business levels. In fact, we believe major global semiconductor industry players are beginning to regroup and position themselves for moderate improvement throughout the year. Helping to gauge this improvement we will be moderating developments in three areas that we believe will be key in determining the magnitude of our improvement. They are technology investments, international expansion and operating efficiently.

As we began the year, our expectations were that revenues would be split evenly between North America and non-North America customers. Looking more closely at the fourth quarter, that metric was 59 percent international and 41 percent North America. And for the fiscal year, it was 53 percent international and 47 percent North America. This largely reflects our team's vision to expand strategically into Korea and Taiwan. Both Samsung and UMC are now in our top ten customers. Neither of these companies were even in the top 50 two years ago. We believe the infrastructure required to support our global technology driven customer base is largely in police for the 10030 nanometer and 90 nanometer note. Photronics has already qualified these tools and processes with its key core customers and are now accelerating the qualification of such assets with semiconductor industry leaders, where we have an opportunity to increase our market share as a strategic partner in the supply chain. We expect our diligence tenacity to focus on service, to open up new doors for us, to participate in the road map to defining programs as our customers position to increasing more complex designs.

In managing our capital assets, we have been and expect to remain very proactive, as Shawn noted, we have made excellent progress reducing our debt load and interest costs. Capital expenditures peeked in fiscal 2002 and we're now in the maintenance mode. More than ever our focus is on return of assets, generating free cash flow to enable us to continue to trim debt levels further in the coming quarters. Before moving to the Q&A I would really like to emphasize that we have scaled the Photronics organization to meet both technology capacity requirements of our global semiconductor customer base, but certain conditions warrant we will take the appropriate actions and quickly and decisively in order to achieve our long range goals. Our team is hungry and they are ready to accelerate as the marketplace indicates. As Dan has said on many occasions, Photronics is the thoroughbred kicking at the gate, when the gate opens the tape outs flow freely. We have little doubt that our competitors will be looking at our backs as the distance grows between us. Thank you for your attention. Following some brief instructions from the conference call operator, we will be happy to address your questions.

At this time I would like to remind everyone, in order to ask a question, please press star then the number 1 on your telephone keypad. We ask that you please limit your questions to one and you may conclude with a follow-up question. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Brett Hodess from, Merrill Lynch.

This is Samir Dicien (ph) for Brett. A couple of questions. In terms of your outlook for the first quarter of a decline of 11 to 17 percent, is that typically in line with the seasonality seen? Is that a little bit worse? What are your thoughts on that?

This is Dan Del Rosario. As Shawn stated, our visibility for the first quarter is still not very clear. However, I can tell you that coming out of the quarter and into the first month of our fiscal year that we have seen significant positive signs. However, due to the fact that there will be major shut downs in the December period, we're not sure if this increased activity is the result of a pull through in releases and designs prior to the shut down. Our main concern with visibility lies with January, because typically when we have seen these extreme seasonal shut downs, the return of designs has taken time to return, sometimes stretching out toward the latter part in January and thus our conservative approach.

I would like to add, the last two years also included the impact of two acquisitions in PSMC and PKL.

Right, that's right. And in your comments you said you saw some strength already in the quarter. Could you comment on that relative to demand in terms of units and also pricing? I mean is the strength in units or is pricing firming up as well in the quarter is what I'm getting at.

I think it comes from both sectors, we've seen some firming in pricing as we said in our last conference call, and additionally we have seen increased take outs and interestingly enough some of those tape outs have been at the high end, at the .13 level. So it is very encouraging. Paul, would you like to add anything?

Yeah, this is Paul. The situation of all this consolidation has been going over the last several years is starting to show some signs. The capacity is now getting a little bit. It's starting to be saturated at a little bit better levels that we believe this market is getting ripe on price increases as selective nodes as we go forward the coming quarter so we'll keep our eye on it

Your next question comes from Derrick Winger Jeffery's andCompany.

Four small financial questions, details and then with regards to the bank lines. Can you give me gross interest expense for the fourth quarter, the investment income and then lastly the capital expenditures. D and A level for the first quarter coming and then the bank lines, total size of the facility, has that been increased because of the repurchase of the convertibles and what is the maturity.

Good morning. I'm not sure if I got all your four to five or four to six questions. I'll try to answer them. If I do not hit on one please repeat it for me. With respect, let's go to the latter part of your question, you asked about the bank line.

Yes.

What is your specific question on that?

Total size of the facility, how much is drawn and what's the maturity and did it increase because of the repurchase of the convertibles? .

Our total size of our facility is 100 million dollars. And it matures in July of 2005. And to date we've drawn approximately about $10 million on that. And we have not utilized that line to repurchase any of our outstanding notes.

Okay. So drawn as ten million. How much of the six percent notes are outstanding still?

Approximately 50 million dollars, 61 million dollars.

61, right? Okay I thought there was some provision if you bought back half of that issue that there would be more available to the line or the line could be increased.

In accordance with the loan agreement, which is filed as an exhibit to our third quarter Q, you're correct. If we pay off more than 50 percent of the six percent converts to the 25 billion dollar accordian feature we have, we don't feel we need it as of today because of our extreme strong cash position, but we've also effectively during the quarter paid down about nine to 10 million of high interest foreign debt.

Okay. But is that automatically, that accordian facility is it automatically extended because you have bought back half of that issue..

No, we have not.

You're right.

We bought almost 41 hundred of the 103.

Right. Does it automatically extend if you buy back the 10 million additional or whatever.

There's an option, I have to refer to the details within the agreement. There's an option with an accordian feature. The banks I believe have to approve that, but there is that process in there

: Thank you. Your next question comes from Steven Palao Morgan Stanley.

I don't think he was finished. I think capex interest rates and depreciation and amortization..

If you can remember all the questions they came pretty quick, I'd appreciate it.

I think those three and interest income.

He wanted to know capex for the quarter?

Yes.

Capex for the quarter was approximately 38 million dollars. It was a little bit higher than what we had anticipated. We did elect to accrue as a result of some factory acceptances, meeting certain criteria at the end of the quarter. I think in our November 11th conference call we estimated we come in around 120 million. We came in at 126 million for the year. And depreciation, was that the second question, which I mentioned earlier depreciation. Basic depression was 20.6 million, depreciation and amortization was 20.4 million, I believe. 21.4 million.

I think he had some questions about interest income expense, investment income.

It was about 4.7 million and interest income was approximately 800,000.

All right. Now some questions from me. I'm interested in your comments about the last five weeks, seeing a pickup, your customers kind of suggesting calling for a bottom here. The impacts have kind of shut downs going on. I'm trying to sort through all this mess. When you look at -- let's focus first of all on the leading edge. You talked about those qualifications and those take outs starting again. With total revenues going to be down to 75 to 80 million or so, should I then assume that your dollar level of point .18 micron or below activity will likely increase and thus a percentage should actually take up quite a big jump in the first quarter.

Steve, based on, again really short vision on the last four or five weeks, but based on the booking trends, we would expect that number to increase.

Are we talking 30 percent of the 75 to 80 million dollar come in at .18 micron or below.

It's too early to put a number on that because we lacked visibility in January.

Were there any comments discussed about break even rates? I don't know if I missed it.

No, Steve, we didn't discuss break even, but I can say that with the costs that we pulled out of the system, as we exited the third quarter, our break even level was approximately 96 to, I'm sorry, 97 million dollars. And our break even level as we speak right now is anywhere from 92 to 94 million, depending on the shift of income or where it's coming from, which geographic area. But we have pulled significant costs out of the system. As Paul alluded to, we will continue to evaluate our cost structure and align our structure with business conditions and if needed we will act and respond very quickly.

Just the last question. The 92 to 94 million break even what type of gross margin do you assume on that?

Probably about 25 to 26 percent, 27 percent.

Thanks

Thank you, your next question comes from Mark Fitzgerald Bank of America Securities.

Thank you. Comments on possible pricing firming here. Is that because the market is pulling capacity off line or is it, do you expect demand just to pick up?

This is Paul. I think it's a combination of all those items. I think there is capacity going off line. I think we're starting to see the activities across the regions picking up on that front. I think some of the yields we're seeing out of the fab sides are getting a little bit better. I think it's a bit of a confidence level going in there. I think for us, as Dan mentioned, we're starting to see some trends we like. January for us is a big item in our quarter and so we can have post holiday day, that rate, not to wave the banner but we're certainly upbeat where we've been, we're certainly up beat about some of the customers we've been qualifying and should be breaking late in this quarter, early second quarter for us. So I think everything is adding up to give us the confidence that we can do some pricing.

And is this in some of the trailing technologies you expect this to happen?

There's a little bit trailing and there's some of the moderate technology and there's some on the high end right now.

Additionally Mark, when Paul referred to qualifications, he's referring to qualification in areas typically that are not affected by significant price pressures, especially on the high end because of the number of wafersthat are produced per asset. And this is having somewhat of a mitigating affect as well.

Are you talking like a micro-processor market, somewhere.

Phonetic that sort of thing.

Can you give us a quick forward look on what's happening with taxes here?

Yes, taxes are a very complex issue as a result of our being a global player. During this year we were able to record certain tax benefits primarily here in the United States based on our ability to go back and recover taxes previously paid. In accordance with the, I don't want to get too far down in the weeds but in accordance with GAAP our ability to record those benefits will be limited going forward until we can demonstrate the ability to recover future profits in certain geographic areas. So for 2003 we're estimating based on what we see today an effective tax rate of 10 to 15 percent.

And just one last question here? When you consider kind of this, the effect of the shut downs here, looking out into the second quarter, would you expect a pretty sharp snap back to a more normalized level than maybe what we're seeing today after this pretty weak first quarter.

Typically in the past, what we have seen, when we had a significant shut downs is it's a little slow as I said coming back into January. But as a result of our second quarter starting in the February, while we don't give guidance going out that far, it has been historic that we have seen a snap back in the February time frame.

When you're talking to your customers, can you see these designs building up behind the design walls here?

Yes, we believe as we stated before that there's significant design activity at the hundred 130 nanometer I have no idea and when you reported at the full yield at the 130 nanometer Mode we believe we'll see much more activity going into the second quarter after we come out of the year.

Are you guys shut down over the holidays?

No, we're actually seven by 24-365. We have skeletons covering at different locations but we have customers who have asked us to please be on board for them for some key quality they've got going and quick turn business they have got going. We'll operate at the appropriate levels to support them.

Thank you

Thank you. Your next question comes from Tim Agre (ph) Deutsche Banc.

Just one question for you. The increase in activity you've seen in the last five weeks or so, be it seasonal or not, is it primarily from your fabless or your foundry customers or from your IDM customers?

We have seen it across the board. And we have seen it not only in Asia as alluded to our Asian sales have increased significantly but we have seen it in north America as well as in Europe.

Is there one particular area, be it technology and market or kind of geography that you could kind of generalize and say it's stronger in that one region than it is anywhere else?

We've seen a significant improvement as I alluded to earlier at the .18 and below arena.

But there's no color as far as deram(ph)or microprocessor or FPGA or anything like that?

No we're just seeing it across the board. And that's why we mentioned, we're cautious that there might be a pull through of designs based on the large plant shut downs during the holiday season.

This is kind of why we're a little bit upbeat on the situation, because we're not seeing a particular product line driving some specific business. We're seeing a very nice universal across the board lift here which has got us very upbeat. We just again, we want to see the post-holiday shut down before we start to put out the flags and start waving.

Is the shut down different this year from any other year?

We have seen a much larger increase in fabs shutting down from last year, absolutely. And there will be geographic regions. Typically you would see that in North America and Europe, but we have had indications that some of the foundaries(ph) and Asian companies will be aligning their operating, their operations and manufacturing to the North American and European customers and that will be both the fabless and IDMs.

Okay. Great. Thanks a lot

: Thank you, at this time I'd like to remind everyone, in order to ask a question, please press star then the number 1 on your telephone keypad. Your next question comes from Tim Burg Lehman Brothers.

I was wondering in the press release you issued last night you indicated that pricing had formed a bottom in the second half of this year. And given the guidance you provided, was it down 10 to 17 percent, 11 to 17 percent with normal seasonal trends, excluding the acquisitions, seem to be down five to 10 percent, what gives you confidence that pricing has bottomed? Why couldn't it get worse going forward?

I'll address the high end market and we have seen, as I said increased demand at the point .18 level and we have seen that pricing has stabilized. And also we're seeing demand come out of the 130 nanometer level. That's not to say that there isn't selective pricing going on, but that is typical in any cycle, because certain customers, to get into qualifications, that type of thing, will give significant discounts. So it's really selective pricing, but we do see strengthening in the .18 and below on the pricing side and then perhaps because of the uptick, it could be that our customers are seeing that supply will tighten, especially at the 130 nanometer node and as you know we're positioned for the 130 nanometers with our technology lines around the world. Paul maybe you can give some color to the mature pricing.

I think on that side we have seen stability in this arena. It was earlier in the year, mid-year, it was getting ugly. It was a lot of things going on that were not making sense. We have seen a lot of discipline in the business and people holding firm and walking away from some business. Even at the point of not giving it away. So I think that the behaviors have held themselves we're seeing a lot more requests, from some quick turn business and things that normally indicate some things are getting saturated. So we believe that the environment is right. Like we said once we get through our January window we will see what we want to position ourselves going into the second quarter and how we want to deal with it.

Is there any way to quantify how much additional capacity you need to think has to come off line, be shut down and mature segment before pricing gets better?

Ted, we are in a quick turn business. We need to have the facilities when the business comes and we feel we've aligned our structure to meet demand and as Paul mentioned earlier, if we don't see the see demand in the future we'll act accordingly.

Okay. And then one final question was when demand does come back, when we get an upturn, will most of that be concentrated at the 130 nanometer node or is there any reason why you would expect demand to first come back at 180 nanometer and ramp?

We would expect the demand to come back across the board. 130 nanometer will be slower to develop, because it's dependent on the yields at the waiver manufactures that have 130 nanometer technologies. There are indications now that those yields are improving and then secondly it really depends more on the end markets for the 130 nanometer and as that rolls out. We believe from some of our resources that 26 percent of the customers are designing at the 130 nanometer node. So we believe there's a backlog 130 nanometer design activity. It all comes down to one when it is released. And as Paul said we're prepared with our five nano technology lines we feel we're at a horse race we're the thoroughbred and we're just waiting for the gates to open. We're prepared.

Thanks a lot

Thank you. Your next question comes from Alli Irani(ph) CIBC World Markets.

This is Ali Irani with CIBC. I was hoping you'd give us an update on the China operations and time line, seeing if the market is picking up and address the foundry in Taiwan with respect to TMC and their own internal mask shop to give us an update where you see the Market for chronics and other local merchant shops. I must have missed the mix for the quarter for the sub one eight micron Dan if you could give that again.

Good morning, Ali. As far as the mix it was flat with last quarter at 23 percent, point 18 and below. Getting to China, in China as you know we had ground breaking in August and in November we started to put the pilings in the ground. It's scheduled for the facility as we have said before to be completed at the end of this fiscal year. Not fiscal year, I'm sorry, at the end of the calendar year. And we will ramp production in that facility commensurate with the demands in China. But also prior to furnishing demands out of China, we can also ship in from any of our three Singapore sites. So we will be prepared, as the demand ramps in China. On the other front, as far as the foundry is concerned, at TSMC they have a huge internal capacity, as you mentioned, and with demands being down they are not at capacity at their internal facility. However, we are qualified at TSMC as a back-up solution and we have had very good success with their SSMC facility or their joint venture SSMC between themselves and Phillips in Singapore where we are producing 90 percent plus of the reticles(ph) for that facility. And there are many positive indications that we will be able to SMC facility or their joint venture SSMC between themselves and Phillips in Singapore where we are producing 90 percent plus of the reticles for that facility. And there are many positive indications that we will be able to provide their requirements when they ramp their facilities in China.

When you look at the balance of power and the mask buying, the mask decision making, is it still coming from the fabless customers and the IDMs you've traditionally serviced? Where do you see that power being driven or is it being forced by TSMC and buy the whole package?

I think we see a little bit of both. There are some concerns that we have heard from our customers that they are cautious about the black box approach so they would like to buy the reticles(ph) directly from the merchant suppliers, especially in North America where you have the IDM'sin a significant part of the fab less part of the community going to the foundries there. But I think you see both situations. One of the things that we have to look at, and we're constantly evaluating, is that in the late 80s and into the '90s we had a lot of captive mask operations. Once they started to look at these operations as cost centers, then it was easier for them to make the, make or buy decision and decide it was better to, divest themselves of these internal mask operations and buy on the outside. I think in the TSMC case, we're not really sure we hear certain numbers, but I think at some point in time, if they started looking at that, they might also, it might be an impetus for them to buy more of their reticles(ph) on the outside.

One last point on the utilization of the high end lines. You mentioned you had five lines out there, and clearly there's a pickup in the design activity out in Asia. I spent last week over there. What is the utilization running on the five tools right now, and given that you cut back your capex pretty significantly at this point into next year, where would you see that utilization go over the next couple of quarters?

We've made the investments starting over a year ago, actually two years ago, and while the investments were very important on the equipment side, both lithography and Helen Roti (ph) inspection and all the supporting tools, the very important site for us was the process technology. What the process technology, one of the gains going to the chemically amplified resist was we became much more efficient and right times were cut by a third or more. As a result, our capacity for that 1030 nanometer and below remains quite robust. We have quite a bit of capacity. And as a result we've given guidance that for the fiscal year 2003 we are in a maintenance mode, because we have all the capacity that we need. Steve, would you like to add anything to that.

Sure. Good morning. One of the things I want to add to this particular point is the tool set we chose for 130 nanometers, we've chosen very carefully. We chose the Hitachi and Toshiba platforms and the associated equipment to balance those tools because they are extendable beyond 130. And while the 130 node ramp at this point is dependent on a lot of factors we're extremely active on those tool sets, those five lines. In sub 130, early qualifications and also some prototyping activity down to the 65 nanometer node which looks today to be a pure optical technology because of a combination of timing and risk factors associated with 157 and EUV. So this points us at a unique position in the competitive landscape to be able to provide not only the 130 ramp when it's available, but also to expand using that same tool set down into the 90 nanometer and 65 nanometer node, recently we pulled in some work in Semiconductor International and Marcus with some customers that outline some activity at 65 nanometer node and that particular piece is significant because it's in an area of a customer base that we have not been participating in the past. This is all the result and some other activities in that area, all are strategies to choose the right tool set, focus on expandability and then have common process platforms that are not only expandable but robust enough for. interop ability for customer requirements.

Looking at the early yields on these 90 nanometer prototype masks what are you finding.

Could you repeat that.

The early yields.

On the 90 nanometer masks?

That's right.

Obviously yield is a very complex equation and to get true yield numbers you need lots of volume. The focus on the 90 nanometer and 65 nanometer node right now is really on understanding the variables and helping the customers define their road maps with the types of reticle(ph) solutions they're going to need to meet their waiver requirements. So the volume is low and much of the focus now is providing the enabling solution to the customer base. So I think it's a little bit early to make comments on what those yields are or what they're going to be.

I'd like to add that we have a lot of -- we have the five lines. We have confidence that we have significant amount of capacity that we have aggressively gone after new customers for 130 nanometers on all three continents. As a result, we're qualified in North America. We've qualified at some customers in Asia that we thought were not available to us before. And maybe to add a little color, I'd like to since John Smith our senior VP of Europe, maybe he can comment on his customers in Europe.

Thanks, this is John Smith here. We've been following this company now the European venture goes back over to five years we've developed a very strong business in this region now over that period. It's predominantly underpinned by our very strong relationships with the two major IDMs in that region. We've been in stable production mode of .18 for the whole of 2002 and we've seen significant market penetration at that node. The 50 KV tool set which we're talking about here was installed during 2002 and we're imminently about to qualify sub 180 with two of those major IDMs we're looking at a window of opportunity as we move into 2003 with a market sector which was up until this point was excluded from us. So there's some optimism there for us for the point 130 node.

Thank you very much

: Thank you your next question comes from Christina Osnea(ph) of Needham.

I just wanted to revisit this issue about the sequential revenue decline. It's the largest sequential revenue decline looking at my model at least over the last 10 years or so and yet you say that pricing is improving. And that activity has gotten better. So wouldn't those forces at least offset some of the revenue decline here a little bit? What decides the shut down is going on.

Good morning, this is Shawn. As Dan alluded earlier, is while we're seeing some pickup in our strong bookings the first couple of weeks, we are concerned with the level of shut downs, the significant increase in shut downs that are being anticipated across all geographic areas.

So I know this was asked earlier, but could you give us perhaps a firmer idea of how significant this level of shut down, these shut downs are.

This is Paul. I'll give you an idea, last year at this time, North America, you're probably looking at about 40 kind of fab lines going on an extended holiday. This year we're looking at probably over a hundred. So it's quite large.

Okay.

In North America -- in Europe you're seeing the same kind of activity you saw. Everybody is taking advantage of shut down and Dan has mentioned we've even seen this behavior in Asia this year which we did not see last year. Universally globally you've got an across the board shut down. Which is driving (inaudible) and demand going to this level.

That sounds pretty significant. And I are you seeing most of these shutdowns taking place in January or are they going to spill over into February.

No, you're seeing the Christmas and the new year's day, boxer day in Europe, England, type of behavior. Instead of taking one day down, they're taking three to four days. That kind of window. And that's what we're saying. We're being cautious because we like what we're seeing, you're saying how could you say that with you being down on your outlook, the thing is we want to get past New Year's Day when everybody gets back on line and see if they. Continue to pick up the pace.

Also, last year, Christina, remember that Chinese New Year's fell in January. This year Chinese New Year falls on the 29th of January. But the difference is, again, as Paul just alluded to and I did earlier, is that we're seeing behavior in Europe, behavior in Asia where they're aligning their manufacturing operations during the holiday season with their customers in North America and Europe.

Okay. All right. Okay. So moving on to another issue here, another question. Could you give us guidance for your other expense line going forward? I know you take out, you reduce interest expense by 600,000, but are there any other forces, do we see more interest expense going forward from the other credit lines?

No, are you referring to the other expense line, we do not anticipate our interest costs to go up. In fact, as I mentioned a little earlier if you didn't catch it we paid down some of our essentially swapped some debt with our revolving line of credit at a lower interest rate than the effective rate that we had on some foreign debt to save the arbitrous(ph) there, so we are continuing to actively look at our outstanding debt use our cash flow wisely to pay down debt and we'll keep an eye on our outstanding converse to see where we are in the future.

Also. Could you give us a sense of what cash is looking like at the end of Q1? .

Cash at the end of Q1 should be pretty strong, because most of our monies have been spent on our capex. And as I say, we have active programs in place to improve our receivable collections. We're working with our vendors and we still expect to have a significant amount of cash in short-term investments.

Okay. You think it could stay flat.

I didn't say that. I said it would be very strong.

Okay. Thank you

: Thank you, your next question comes from Jim Barnett FM Global.

A few questions, if I may. I'll just do them one at a time. I just wanted to follow up first on the capacity utilization. What is overall capacity utilization at this point? And can you segment that between advanced mask and mature masks?

On the capacity utilization side, we don't really state our numbers. We don't break them out by tech node. We can just say that we have seen an increase of like we said earlier we see an increase of 10 to 15 percent over the last few weeks. That's feeling about what's going on. But it's too early in the quarter for us to make any kind of firm numbers to you.

Okay. Can you just qualitatively state whether it's higher in advanced mask or mature mask set right now?

No, like we said earlier we have seen, which has kind of got us on the positive side of this, is that we're not seeing just the high end of the business driving things right now. We've seen a very nice across the board activity on the mature end (inaudible) Above and below. We don't see any one product line, Mike (inaudible) proceed assessor or D ram anything like that. It's a unique situation that's why we feel better we don't have a holiday buy going on or a pre-inventory (inaudible) Somewhat optimism going forth.

Additionally, we never see utilization equal across the board in geographic regions, but what we've done to make efficient use of our equipment is we use a mix and match strategy. And we are matched throughout the world. As a result, we can shift work very quickly between sites whether it be between Europe and Asia or within Asia, within North America or North America and Asia or Europe, and that way being very effective in the way we utilize our tools.

Okay. Is that hey new strategy? Is that something you've implemented more recently.

No we've had this strategy for the last three years or more.

My other question was on break even rate. You said it's around '92 to 94 million and I'm just wondering, is that a static number or should we look for that to come down even a little lower?

That is not a static number. We're obviously always looking to reduce our fixed costs and to improve our profitability. And the range is as a result of the different regions we would get the income from. So it is somewhat of a variable number.

Okay. And then just lastly, since you can't really control the revenue side of things so well right now and you can work on the costs, what are you doing in terms of salaries and raises at this point in time? And then also given that many of your customers are taking shut downs during the holiday period, why wouldn't you look to do that as well?

We have effectively reduced our head count by nine percent during the last quarter. And all the 1600 employees that we have right now are central to the success of Photronics. They've worked very hard during this past year. They're valuable members of the team and we will not quote with respect to salary increases. But certainly we're taking advantage of opportunities, as Paul said we have some skeleton crews set up to handle the work as it comes in. We need to have facilities in place when the order comes in to turn it around as we are the preeminent service provider. Paul.

Also the thing is we take advantage of these time windows to do a lot of PNR tool set that we've had an opportunity to do. So we have certain schedules set. That's why we're work very closely knowing what our customers are doing to allow us a window so we'll scale appropriately to what we need to do.

Okay. Thank you

Thank you. Your next question comes from Helen Roti UBS Warburg.

Hello, I realize that you spent a good bit of time going over the tax rate this morning If you look at the fourth quarter can you tell us what the effective tax rate would have been excluding the nonrecurring items, so excluding the restructuring charge and the convertible notes that were purchased?

The all end effective tax rate?

Yes.

The all end effective tax rate without the consolidation charge and bonding is approximately 65.5 percent.

Okay. So if we look at that on sort of a per share basis, like excluding charges, you had a pretax loss of 4.2 million, which is about 13 cents per share.

I don't think you can look at it like that. Maybe I can provide some color to you. The consolidation charge is 14 and a half million dollars. We were able to record effectively about a 31 percent federal benefit related to that, which equates to about 31 cents for the quarter or 32 cents for the year. With respect to the bond gain, we had a gain of approximately 2.6 million dollars, which is income, and the rate was slightly higher because there was some applicable state taxes added to the federal rate that we do not record a benefit for on the consolidation charge, as a result of FAS 109.

Okay. Thank you

Thank you. Your next question comes from Sarish Alaramen (ph) from Think Equity Partners.

Can you guys give us a sense of how many basic designs you see for this year or next year. A few years back we had like 10,000 basic plus designs a year fell off the cliff to four or 5,000 the last couple of years and where do you see it headed if you have any thoughts on that and I have another follow-up on that. Thanks.

Good morning. Michael Martinez just joined us about eight weeks ago new position VP of World Wide Marketingand as you know going forward we're very concerned about end markets and being able to address our strategies here based on the developing market. So I'm going to have Michael answer that question.

Yes, I think we certainly want to be very, given the limited visibility moving forward and the trend that you mentioned, I think one of the things we want to do is be very conscious of measuring the trends on a global basis and certainly making sure that we acknowledge the right technology node at which those are acquiring at. So we want to be very vigilant about that, but I think one of the things we'll be doing is be very careful about noting the very specific trends and being more careful of monitoring them as we move forward.

The follow-up on that is one of the biggest reasons why the asicks (ph) fell so deeply because mask prices are falling at alarming price. And so you guys have had to held up because your (Inaudible) compensated for that fall. But do you think, are we at a level where people cannot go much lower on the number of designing more circuits or do they think do you think there's more room for that total number to fall more?

Once again, being very careful about that, I think today I think the levels of what they're at are probably at a pace that we can only see them probably return hopefully up to normal levels and higher than that. But again we have to remain very vigilant about that at this time.

I think what you're seeing is that people are, because of the mask costs and the extended downturn, that they're doing much more simulations than they have in the past. As a result, what you referred to, the 10,000 prototypes some years ago has fallen off dramatically. And we would expect as the market returns that you would see some increase but you certainly are not going to see the same type of increase that you have seen in the past.

Okay. Can you guys also comment on how the Japanese are standing in the last few quarters and do you see any changes in the landscape especially VMP and Japan Phonetic.

I think as far as the landscape you need to really look more at the Japanese market which regards the semiconductor companies there. Because that really is their primary market, although they do serve the amount of work outside the U.S.But the majority of their business comes from within Japan. And we're seeing significant consolidation in Japan, as you know, looking at Elpita(ph) and Ranasis (ph), looking at thedevelopments with Oshiba (ph), Sugitsu(ph), Sony and so on so forth we expect the electronic companies will be divesting more of their semiconductor operations in these consolidations. What's positive for us on that front is that most of these companies, because of the tremendous losses somewhere approaching 12 billion dollars for the top five last year, this year it's going to be down significantly but it's expected to be maybe in the five to six billion range, they have not made the capital investments that were necessary in @waiver manufacturing, as a result all of them are going to the fab light scenario and expecting to outsource 30 to 50 percent of their market and so as a result we have qualified our goals in Japan have been to qualify at a number of these customers and we're well into the qualification phase or have already been qualified. So we like our strength in Taiwan and in our growing presence in China as these Japanese start to outsource to those areas.

Great answer. Thank you, guys

: At this time I would like to remind everyone, in order to ask a question, please press star 1 on your telephone keypad. Your first follow-up question comes from Derrick winger.

Several items if I can stay on until I get them answered. First quarter, what is the pretax guidance for the first quarter?

Derrick, we have not provided pretax guidance.

If we can go through the debt on the balance sheet, what is the other 35 million outside of the two converts and the line of 10 million drawn?

We have some outstanding foreign debt that is related to our two majority owned subsidiaries in Asia.

How much and at what rates.

The rates are variable, anywhere from seven to 10 percent and I think you already named the amount.

Okay. And lastly two other items. Are there restrictions on repurchasing further convertible debt?

There's no restrictions on repurchasing the six percent debt.

On the four and three-quarters yes?

Excuse me.

But yes on the four and three quarters?

The four and three-quarters we consider that long-term capital that's not due until 2006.

Right. And lastly, where does the investment income flow through on the income statement line? Because I was trying to reconcile this other expense line. If I have interest expense of 4.7 million and this gain of 2.6 I come up with 2.1 where does the investment income of .8 flow through.

Flows through net. There are a number of items aggregated in there including foreign currency translation, the gain on the bond, amortization of some financing costs.

So it flows through that same line item?

Yes, sir.

But the gross in expenses is 4.7 million?

Yes.

Thank you very much

: Thank you. Your next question comes from Mark Fitzgerald.

It's been answered. Thank you

: Your next question comes from Steven Palao (ph).

If I can explore once more the pricing environment I see four quarters you did twenty percent higher and .18 micron below (inaudible) and then you're more up on resist and other lines up and running now I would think you have plenty of capacity at point 18 micron how are you so positive about the pricing environment and increasing there and secondly if you could look at the whole competitive landscape are you primarily the only ones out there that may have some this excess capacity so you'll be able to take advantage of it and it's really tight elsewhere around the globe?

I guess the way to answer the question is that there's been some consolidation of capacity globally around the situation. I guess the other way to answer the question is that we're continuing to qualify and leading some IC manufacturers that we did not have the prior quarters that's coming into play into our capacity now. We believe that we're seeing, everybody wants to play on the shiny coin of a play one three world but there's a huge amount of our business in quarter micron .18 and people are migrating into. And we're seeing activity there. And like I said earlier, we have not given in on pricing and we have walked away from some things and we have seen some stability behavior and there is opportunity as these customers calls complete the business is going, the capacity at the high end will become, be a challenge to get. And we think we're working our way towards that.

This is Steve. A little bit on that. If you look on the design side, a lot of folks have gone back and looked at their design efficiencies and we've seen a lot of activity in adding more design effectiveness at the existing '92s while the 1.3 yields have been stabilize and just the beginning of ramping on the waiver side. So partly provided by some of the pressure on the wafer yield side. We do see a lot of activity, actually, in looking back at the design cycle and design efficiency and perhaps enabling .18 and even .25 designs during this period of time. So there's a lot of effort focused in that area as well. But as Dan mentioned earlier, we are starting to see the wafer yield environment improve and so going forward we should see point 18and point 25 and above as well as the .2003 as well as .13

The last area I wanted to talk you talked about significant market share gains. I think I know versus your primary competitor in U.S. you're one month off with your reporting it's hard to do apples to apples because you're not on the exact same timing but even you do a rolling kind of six-month look at those revenue levels, there certainly was a period there for the previous four or five quarters where you guys have been significantly higher in revenues and now it seems like it's getting a little bit closer when you look at the guidance for the next quarter, it's roughly about equal, once again I know the timing is a little bit off. Even when you look at it on a rolling six-month basis. I guess I'm trying to figure out I believe you did gain quite a bit of market share in the previous four quarters or so. But I guess now looking forward, is in fact now stabilizing or maybe you're giving some back?

Steve, I don't think we're losing any market share. While our revenues have declined, I think it's commensurate with the decline in the demand. Again, as you've said, because of the difference in the quarters, we are again cautious about January. But going forward, as we said, as we come out of this seasonality, we expect to see typically strengthening in the second quarter. And historically our second quarter has been very strong. We believe that we will be making market share gains because we're qualifying at customers that we were not qualified before. Particularly at the .18 and .13 node and it's across the board as we have John Smith here today and he was saying that at 18 he's seen significant increase in Europe and now positioned to qualify .13. I just said that on the foundry side for the Japanese that are going out to Asia, Taiwan first and then to China, we've qualified. So we like our potential for increased market share. We believe that there are other market share gains that have been made by some of our other competitors, not at our expense. And we believe as B and P announced recently that their revenues were up 12 percent and it came primarily from overseas. So they have also gained market share at the high end, but not at our expense.

All right. Fair enough. I was just trying to put you guys on the same calendar quarter assuming your October quarter is a September quarter and compared primarily to photo mask and you guys have historically have been anywhere from five back to your fiscal Q225 percent higher on that quarterly revenue basis and now when I look at the next quarter's guidance your January quarter compared to their December quarter is about flat. They're about even numbers. So just that one month of timing difference?

It's a one month timing difference and we're being very cautious about that January timing and we have all said once we come into the January quarter we will have a lot better visibility as to when we see take outs starting to release again. And typically they're released towards the end of January, so we've been able to capitalize in February.

All right. So then the April quarter we'll expect you guys to distance yourself once again. Sounds again.

Thank you, Steve

Thank you. Ladies and gentlemen, we have reached the allotted time for questions and answers. Mr. McCarthy are there any closing remarks.

This is Dan Del Rosario. I'd like to thank everyone for joining us on our conference call today and I'd like to close by wishing everybody a very happy and safe holiday season. Thank you very much

This concludes today's conference. Thank you for your participation. You may now disconnect. Call ended at 9:55 a.m.--- 0