Photronics Inc (PLAB) 2005 Q1 法說會逐字稿

Good morning. My name is Cynthia and I will be your conference facilitator today. At this time I would like to welcome everyone to the Photronics first-quarter earnings 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. (OPERATOR INSTRUCTIONS) Mr. McCarthy, you may begin your conference.

Thank you, Cynthia, and good morning everyone. My name is Mike McCarthy, Vice President of Investor Relations for Photronics and I would like to thank everyone for participating in this morning's conference call during which we'll discuss the results of our fiscal 2005 first quarter which were reported last night.

Before we begin, I'd like to remind all participants about the Safe Harbor statement provision under the Private Securities Litigation Reform Act of '95. Thus, except for historical events the information we will cover during this call may be considered forward-looking and 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 in the Company's SEC reports.

This call will remain archived on our website until we report our fiscal 2005 second-quarter results the week of May 16. Our call this morning will begin with Sean Smith, our CFO, providing a detailed review of financial results after which he will share some brief comments. Joining Sean in the Q&A will be Dino Macricostas, Chairman and CEO; S.A. Jeong, President of Asia; Chris Progler, Chief Technical Officer; John Chin, Vice President of Asia, as well as other members of the senior management team. Sean?

Thanks, Mike and good morning everyone. Before we begin, the entire Photronics management team would like to congratulate our valued employees for their outstanding efforts during the first quarter. I will provide a brief analysis of our financial results for the first quarter of fiscal '05 and will also review our balance sheet and cash flows during the period and review our outlook going forward.

During the quarter we acquired an additional 15 percent interest in PKL, our majority-owned subsidiary in Korea, for approximately $40 million which increases our total ownership from approximately 75 percent to 90 percent. The impact of the increased ownership is expected to be accretive to earnings in the year ahead.

For purposes of our discussion of operations for the quarter, I will be referring to our operating results excluding impact of the following two items. During the first quarter of '05, we repurchased 41.4 million of our 4 3/4 convertible notes. The redemption resulted in an early extinguishment loss during the quarter of approximately 1.2 million or 3 cents per diluted share. As a reminder, this charge was excluded from our guidance when we reported the fourth-quarter results in December. Additionally we incurred an early extinguishment charge of 1.1 million or 3 cents per share related to a $40 million redemption of the 4 3/4 quarter convertible bonds during the fourth quarter of fiscal '04.

Net sales for the first quarter increased 10.7 million or 12 percent to 101.2 million as compared to the first quarter of fiscal '04. The increase is a result of an improved high-end mix and increased sales of large area LCD masks. Sequentially net sales declined 2.9 percent due to the seasonality associated with our first quarter. To the extent we exceeded our guidance, it was the result of our strength in LCD Photomasks, an emerging market for Photronics. This represented the first quarter that LCD Photomask exceeded 10 percent of our quarterly revenue.

Geographically as a percent of net sales for the first quarter, sales were approximately 50 percent in Asia, 32 percent in North America, and 18 percent in Europe. Public sales outside North America including export accounted for approximately 71 percent of Q1 revenues compared 64 percent in the first quarter of the prior year and 71 percent sequentially.

Shipments of advanced photomasks increased to 18 percent during the first quarter. Included in this percentage would be mask sets for semiconductor designs at and below 130 nanometers and for LCD sets used to fabricate flat-panel products using G-6 and G-7 technology.

Gross margin for the first quarter was 31.6 percent. Sequentially first-quarter gross margin decreased 330 basis points as a result of the anticipated decreased seasonal demand associated with the first quarter and to a lesser extent increased costs associated with our expanding LCD business.

Selling general and administrative expenses of 12.7 million for the first quarter decreased by $800,000 as compared to the first quarter of '04 primarily as a result of reduced salary and wages. Sequentially SG&A decreased by approximately $400,000. SG&A as a percent of sales was 12.6 percent during the first quarter of 2005 as compared to 15 percent in '04 and 12.6 percent sequentially.

Research and development expenses which consist principally of continued development for advanced technologies including 65 and 45 nanometer process technologies were at 7.8 million in the first quarter. R&D represented 7.7 percent of sales in the first quarter of '05 compared with 8.2 percent last year and 7.6 percent sequentially.

During the first quarter we generated operating income of $11.5 million, a $3.8 million improvement over last year's first quarter. Our operating margin first quarter improved to 11.4 percent of total revenue as compared to 8.5 percent last year. We are intensely focused on improving this metric. Over the near-term we will likely experience some moderate fluctuations here as new equipment comes on line and customer qualifications are secured. However as our revenues continue to grow including shipments of advanced photomasks, we believe (technical difficulty) the goal of achieving operating margins of 20 percent is well within our reach.

Net other expense for the first quarter was $3 million. Excluding the 1.3 million one-time expense related to repurchase of the bonds, net other expense increased approximately $600,000 sequentially as a result of reduced investment and interest income.

During the first quarter we had an effective tax rate of approximately 19 percent. The tax provision amounted to $1.8 million, which was slightly above our stated range as a result of the higher than anticipated income above our reported guidance.

Minority interest charges which represent the minority interest in earnings of our non-fully owned subsidiaries in Korea and Taiwan for Q1 was 2.1 million as compared to $1.5 million last year and 3.4 million sequentially. Net income for the first quarter exclusive of the $1.2 million bond redemption was 5.8 million as compared to 2.1 million in the first quarter last year. Sequentially net income exclusive of the bond redemptions in Q1 and Q4 decreased by $3.2 million.

Diluted earnings per share for the first quarter excluding the bond charge was 16 cents per share as compared to the 7 cents per share in the first quarter of '04. Sequentially EPS decreased by approximately 8 cents per share.

As we exited the first quarter, we had approximately 1470 employees reporting to sales of 275,000 pro (ph) employees on an annualized basis.

Now turning to the balance sheet, cash and short-term investments were $149 million at the end of the first quarter, a decline of approximately 78 million from year and. As I mentioned earlier during the quarter we bought back 41.4 million of our 4 3/4 convertible bonds and increased our stake in PKL to 90 percent, investing approximately $40 million.

Inventory of 17.4 million increased 1.3 million from the fourth quarter of '04 as a result of increased LCD business which has a higher material blind (ph) component.

Intangible assets increased sequentially by approximately $20 million as a result of the increased investment in PKL. Working capital at the end of the first quarter remains strong at $190 million.

During the first quarter our long-term debt decreased by 42.4 million, which includes the redemption of the Company's 4 3/4 convertible debentures. Total debt at January 30, 2005 was 276.5 million. The principal components of outstanding debt include 110 million, 4 3/4 convert due December of '06; $150 million 2 1/4 convert due in April; and approximately $16 million of other term loans. We had no outstanding borrowings during the quarter on our $100 million global revolving credit facility.

Minority interest of 59.7 million represented a share of net assets which we do not own in our majority held subsidiaries in Korea and Taiwan. Shareholders equity aggregated 461 million, which amounts to a book value per share of $11.04.

Taking a look at our cash flows, cash flow provided by operations for Q1 was approximately $27 million. Cash flow used in investing activities during the first quarter amounted to approximate $5 million of which 18.5 million represented capital expenditures; 40.4 million of increased ownership in PKL; and $54 million of decreased short-term investments. Free cash flows from operations which are net of capital expenditures was 8.7 million for the first quarter of 2005. And cash flow used by financing activities during the quarter amounted to 43.7 million, which primarily relates to the repayment of long-term debt during the quarter.

Now taking a look ahead, our short-term visibility continues to be limited as our order backlog is typically only one to two weeks. We believe however in 2005 we will continue to see increased design activity especially at 180 nanometer and below. We are also encouraged by a number of strategic opportunities that should enable us to increase our revenues through organic growth and market share gains from competitors including our expanded presence in LCD mask and increased ability to support 65 nanometer development with our second toolset being installed in Asia. As a result, we believe it is prudent to take a conservative view in forecasting revenues and earnings for the second quarter of '05.

Based upon our current operating model, the outlook for second quarter revenue of '05 is to be in the range of 102 to $107 million (ph). As was the case during the latter part of 2004 and throughout 2005, we will be selectively expanding our operating infrastructure to capitalize on strategic alliances and opportunities with key customers. As a result our operating expenses are projected to increase modestly during the second quarter of '05 and throughout the year. This will have some near-term impact on meeting our growth and operating margin goals but when evaluated over the longer-term horizon, we believe that these investments and the manner in which they are being made will provide greater stability and diversity in our revenue base and enable the Company to generate improved returns on its invested capital.

Capital expenditures in fiscal 2005 are forecasted to be approximately 105 to 125 million as we invest in capability and customer relationships to enable us to achieve additional growth and market share gains. One of our team's key priorities is to maintain our financial flexibility and continue matching capital outlays to meet both increasing demand and new opportunities. While we are not providing guidance for the full year at this time, we continue to expect to fund our planned 2005 capital expenditures from operating cash flow.

Included in 2005 planned CapEx are toolsets and process technology for 65 nanometer and below development, additional LCD capacity, and a facility in tools associated with our Greenfield site in China. I would emphasize to you this morning that we maintain a significant degree of flexibility in how we invest our capital into our organization. So that if trends accelerate or decelerate, we can move quickly to optimize our competitive position while also aggressively managing our quarterly breakeven levels. At this same time we feel it is important to remind the members of the investment community that we see opportunity for growth in the year ahead and are confident that we can increase our market share. Additionally as we are investing to expand our LCD capabilities, we are successfully penetrating this emerging market for us.

During 2005 our tax rate will be impacted by the flow of income from jurisdictions for which we may have tax holidays or credit and upon our limited ability to recognize tax benefits in areas which we are taxable. Accordingly, we are estimating an effective tax rate for 2005 to be in the range of 20 to 25 percent. For the second quarter this would equate to a range of 1.8 million to 2.3 million in whole dollars.

Accordingly based upon our current operating model, we estimate earnings per share for the second quarter of fiscal '05 to be in the range of 17 cents to 22 cents per share.

Every Photronics employee worldwide is driven to continually improve the Company's competitive position and bottom-line performance. As a leading global mask supplier this means that we are focused on the delivery of services to our customers across all technologies in all regions and across all product categories. The daily focus of the sales and operating team is on maximizing market share and performing to schedule. In R&D, our focus is on supporting the most advanced applications which in a semiconductor companies pushing towards process nodes below 65 nanometer while with flat-panel manufacturers supporting the G-7 ramp (ph).

Our longer-term strategy involves leveraging our core manufacturing expertise, regional presence, and customer relationships to supply Photomask solutions and Photronics unique brand of service into both existing semiconductor and rapidly emerging LCD markets. We are accelerating customer qualifications, improving advanced product yield, and aggressively managing our cost structure. As yields improve for all our advanced -- our business model is capable of supporting an operating margin approaching the 20 percent range. These goals are within reach and the team is anxiously driving to reach this milestone.

Success in the years to come will require more than simply acquiring size. Agility, the size and innovation will strengthen strategic relationships built by delivering consistent and reliable performance.

In summary, I want to emphasize that although our visibility is short, customer sentiment remains generally positive. The global demand for the full range of photomask technology, services and products should continue to grow as Photronics ability to service the larger share of the worldwide market.

That wraps up my prepared remarks. Michael, I'll turn the call back over to you.

Thanks, Sean. Following a brief reminder from Cynthia about how to get your questions in the queue, we will be happy to begin addressing your questions.

(OPERATOR INSTRUCTIONS) Suresh Balaraman with ThinkEquity.

I guess the LCD business is rather lumpy and I was wondering if we should expect this to be about 10 percent of your fiscal Q2 as well? And also can you give us some thoughts on what level of revenues we can expect from this segment on an annual basis?

Good morning. Thanks for joining us. Perhaps we can have Sean and S.H. begin answering that question.

We would expect our LCD Photomasks to continue to grow sequentially each quarter. Whether or not it is greater than 10 percent of sales is contingent upon how our IT business grows as well. So that number may fluctuates to some extent but we fully expect it to be an emerging growth vehicle for us.

Can you also give us what was 130 nanometer as a percent of revenues? I know you talked about advanced masks -- that also include the LCD, but what was it excluding LCD?

Suresh, what we are doing here, we are defining our advanced Photomasks to include 130 nanometer in G-6 and G-7 products, so that all in was approximately 18 percent because we consider LCD Photomasks an additional product offering for us that complements and leverages our current infrastructure. So going forward we will be defining and discussing both of those metrics together.

Okay, great. Thanks.

Timothy Arcuri with Smith Barney.

This is actually Dan Berenbaum for Tim. Congratulations on a great quarter. Quick question on the minority interest and your plans for purchasing the rest of PKL and KSMC as well. How should we think about minority interest moving forward and how should we think about what your plans are to become the full owners of both of those entities?

I think Sean can probably fill that in for you.

Dan, with respect to minority interest, to the extent our two majority held subsidiaries in Taiwan and Korea continue to improve their operations and profitability, we would expect that number to be reduced going forward. With respect to increasing our ownership in either of those and two entities, that will be a market-based decision. As of this point in time, we have no (technical difficulty) to do so but we obviously have been very strategic and very opportunistic as conditions dictate.

Okay and then if I could ask another quick question on CapEx, you talked about strategic investments. What is the split if you could help us out a little bit to understand what the split is between 65 nanometer, 45 nanometer, and LCD and CapEx? Also on the timing of the CapEx ramp, if you are going to spend even to the low end of the guidance, there obviously needs to be a pretty steep CapEx ramp at some point during the year.

With respect to CapEx, Dan, the timing and delivery of certain tools that we have in the hopper to come in and the acceptance will really drive the level. We have commitments that we do expect to get to the 105 to 125 million during the year. Now some of those tools may slide out a little bit based on delivery windows. Some may be brought in a little bit quicker.

And the breakout between 65 nanometer and LCD, we began investing in LCD in the early part of 2004, so I would say it's about 20 to 25 percent is LCD in the remainder on the IC side.

I think Chris Progler, our CTO, might be able to give you a little more insight on the 65, 45 nanometer issue.

Thanks, for 65 nanometer most of are CapEx investments in the U.S. are near completion. The next site we're working on is PKL and Korea. We expect to be able to start qualifying 65 this year, but revenue from that node just based on design cycles and our work in studying design cycles suggests 2006 probably as our revenue gets more significant.

In terms of 45 nanometer, that is really at the very early prototyping stage. We will be leveraging the 65 nanometer equipment to do most of that work. Some of the mask infrastructure tools are still under development and we're working closely with the suppliers to make sure we are in good positioning for those when they are ready. But there is not a lot of activity in that area now in terms of CapEx.

Okay, great. Thanks.

Bill Ong with American Technology.

Could I get a little bit more color on the goal of operating margins going to 20 percent? What type of revenue levels are you looking for? Also on gross margins what type of gross margins do you think you can move up as revenue starts to improve over the next how many quarters out? Thanks.

I think Sean can fill that in for you.

Bill, our goal, our global workforce goal is to focus on the operating margin of 20 percent. If we took a look where we were, our operating infrastructure during the first quarter, revenues would have to be in the range of about $116 million depending on mix to hit the 20 percent margin level, which we fully have the capacity today to hit. Gross margins should move up sequentially as we get closer to that level but the entire team's focus is more on the operating margin because we want all of our 1470 employees focused on controlling costs and being profitable and moving that operating margin up to 20 percent.

Just as a follow-up, since your margins were in the mid 30 percent level in the $104 million and change, do you think you can get to that level in the current quarter?

I'm sorry, can you repeat that?

It also looks like you should be able to hit mid 30 percent gross margins in this quarter or next quarter, around the range?

We should see some sequential improvement in our gross margins based upon the range of guidance on the revenue line that we supplied.

Okay, thanks.

Robert Maire with Needham.

A couple questions. Number one, can you give us a little more detail in terms of competitive positioning and market share vis-à-vis your other currently domestic but soon not to be domestic Photomasks manufacturing? Can you also give us a little bit more of a geographic breakdown in terms of strength versus weaknesses and is this sort of back-end loaded in the quarter or spread out through the quarter and how you see things developing?

Good morning Robert. Why don't we have Deno start out with the first part of that question and I think there's probably a couple of guys here this morning that could fill in the back part of that.

Good morning. This is Deno. We think really with the merger or the acquisition of buying TDMA (ph) will create immense opportunities for us. As you already know, TDMA announced they shut down one of the divisions in Kokomo, Indiana, and we see substantial opportunities in the United States. Also they shut down a couple of locations in Europe which gives us the opportunity to gain market share also too. I also believe the landscape is right for us to gain market share in both the U.S. and Europe.

Have you seen that yet?

We are qualifying some customers. Not very significant yet, but definitely we see very good opportunities and we've qualified some customers.

Okay, and the other question in terms of geographies and how the quarter laid out, was it linear or a little loaded towards the back end?

Robert, this is Sean. The quarter as in typical quarters it's fairly a daily type of business. We have some -- within a week we may have some good order flows but we did see coming back from the holidays some pick up.

Okay, and any change in terms of just general activity level or tape outs? Has it been linear over the quarter or increasing toward the end? What I am looking for is what you're seeing in terms of momentum.

This is S. H. All over Asia, Photronics is -- we are very strong at this moment so we gain market share anyhow. So I am sure we will get more market share for the next quarter and year end. So we are very strong on Asia front.

And your sense about pricing in the quarter?

We have got a lot of price pressure from our customers but we can maintain with a certain level of price and we reduced our costs too, so we will maintain our gross margin anyhow.

Okay, thanks.

Just a follow-up to S.H.'s comment on pricing. During the quarter pricing is always competitive but we have not seen any significant changes in our pricing with our customers. We do interact and it is a fairly competitive business but there has been no significant sea changes in the pricing environment with any of our customers out there.

What we see basically as you move to the next generation is you see an adjustment to the previous generation pricing which is normal. We can not $1 million for 130 nanometer -- photomask because the $1 million is the 65 nanometer or the 90. So we do have an adjustment price as we escalate and as we move to the next invention (ph). We do not call it price pressure. That's normal.

Okay.

I guess there is just one trend fairly recently on 90 nanometer -- I think that over the past two quarters just in general we follow obviously the EDA companies in there quite closely and it seems there is much more activity on 90 than there has been in the past. And with the design cycle of roughly 12 to 18 months, we expect 90 to get more material and more interesting in the coming year.

Matt Petkun with D.A. Davidson & Company.

Good morning. Sean, just looking at this percentage that you broke out for us of advanced masks, you said 18 percent. I just want to know if that -- I think it was 15 percent you reported in the October quarter. Did that also include LCD masks or is this really the first revenue you've seen from LCD masks?

That is a good question. We did report last quarter about 15 percent. If I was to do a pro forma if you will on the fourth quarter, it would've been 15.5, 16 percent.

Sorry, 15.5, 16 percent?

Yes. This is really the first quarter we saw the increase.

Okay, so then there is a significant decline in the .13 activity?

No, no, no, not necessarily.

I see what you're saying. It was just about 15 million then. Okay. And then just commenting a little bit on Deno's point about DuPont shutting down in Kokomo and then as well as in Europe, those are trailing edge facilities and I have no problem with you going after trailing edge facilities because you know how to make money there. But would you expect then if you are going after some of that business, would you expect leading-edge to improve as a percentage of sales?

Maybe as a follow-on to that question they have been shutting down facilities in those places but they have been adding capacity where you have been adding capacity in Texas. So I'm wondering how you feel positioned with customers like Texas Instruments given the competition that's going on there?

I'll take the first part of that question. With respect to -- we would expect in absolute dollars our advanced Photomasks to increase each quarter. To the extent we pick up additional mature type of business, which is a cash cow for us, it helps drive our technology investments and other opportunities. If our overall percentage declines, we're not going to be dissatisfied with that but we do expect in absolute dollars to increase sequentially. And then, Deno, would you like to comment?

I do believe the investment we're making in Austin still qualifies with major customers in the 90 and eventually 65 nanometer so those investments will pay well, the 90 and 65 nanometer. Also Austin will support Europe on the 90 and 65 nanometer because those investments are so expensive capital expenses so we decided to invest in two locations, Austin and Korea. And Austin will support Europe too, on the 65 and 90 nanometer.

Matt, the focus is not to go away from leading-edge business. The focus is to gain additional market share in leading edge business throughout each of the three regions. (multiple speakers)

One more thing on the 65 nanometer qualifications, when we execute on what we see as our first one there, that will set a new benchmark for Photronics in timing relative to a leading-edge customer roadmaps. So I think the momentum is increasing really for us at the leading-edge in terms of customer engagement.

From Asia, we are expecting more business from our customers of 130 and 90 nanometer node and also we are expecting more business from Generation 7 LCD mask so I think in whole Asia we have pretty good shape at this moment.

Thanks and one other question, Sean, on the depreciation schedule. It looks a depreciation declined sequentially from October to January. You are adding capacity. How should we think about depreciation costs throughout the remainder of this year?

I think, Matt, depreciation is essentially flat quarter-over-quarter. We did have increased depreciation in Asia as new tools came on line and we had some of our mature facility depreciations kind of fall off but I would expect to see that increase a couple hundred thousand per quarter.

Thank you, good quarter.

Mark Fitzgerald with Banc of America Securities.

Thank you. On the expense ramping through the year here can you give us some idea what it means by the end of the year where you might be with your expenses?

I think Sean can address that part for you.

The ramping of expenses is contingent upon primarily our advanced technology products. As our yields improve, that should help minimize the additional capacity we're bringing on line. We do not expect a significant amount of additional expenses with our corporate infrastructure SG&A type of items, but we do expect to see as we bring these tools on line and get the customer qualifications in place that to ramp up.

Does that mean your R&D expense? Is that what we're talking about here?

We're talking primarily in our gross margin. Some of it will be R&D but I think R&D -- Chris has a very good handle on that flow and to the extent we are reacting or accelerating programs we may divert some additional monies to react to opportunities with some customers.

So is it fair to assume 8 million is the range we will be running at for most of the year in R&D?

Yes. Plus or minus 100 or 200,000 per quarter, yes.

Okay. And then no big change in SG&A going forward? Is that something you are targeting it be flat through most of the year?

As certain costs go up with inflation, we are -- the management is tasked with keeping our call structure as flexible as possible. We do not want to expand in that area. We are actually looking to -- continuously looking at controlling and reducing some costs and trying to pull out additional redundancies in the network.

Okay, and on the LCD business was that material in 2004 for you?

Not really. It was a strategic initiative that we began in the latter part of '03 and '04 with some investment and it did ramp up during '04 but again, it is not -- we don't consider it a separate business unit. It is just another product offering such as OPC or Phase (indiscernible) Mask and it really leverages our infrastructure in Korea. There is no additional, very few additional people that you bring on line. There is some tooling but there's also some complementary tooling but it really complements the existing footprint we have there.

But what I was curious is can you give us a percentage on revenues for '04 in LCD and (multiple speakers)?

At this point in time we are going to be just focusing on going forward with that percentage.

Okay, but if you look at your 13 percent growth, year-over-year growth in '04, was that all organic growth?

Most of it was organic, yes.

So basically what we are seeing is a new cover year, the mask industry grew about 13 percent?

There was, Mark, built into that organic growth there was some additional market share gains with some key customers during fiscal '04.

Okay, thank you.

Brett Hodess with Merrill Lynch.

A couple questions. I was wondering if you could give us maybe the 180 nanometer and below percentage so we can get a feel for how you're doing in the slightly maturing parts of the businesses as they grow? And then following on that, on the LCD side can you comment on the profitability of that business? Is the margin in line with semiconductor photomask?

Brett, 180 nanometers and below I believe was approximately 44 percent or so for the quarter and with respect to margins and I'll turn this over to S. H. shortly, we're not going to break out the separate components at this point because we are somewhat new to this area and for competitive purposes we want to make sure that we get to full capacity. We are not there yet with the tool line that we have in place. So things aren't as robust as we would expect certainly on our mature side or advanced side on the IC side but we would expect through time to get to there. S.H., do you have any additional comments?

General expense of the LCD business is a little bit higher than IC side but mainly from material so material relatively very high compared to IC masks. But we can manage it so depreciation is relatively less than IC Photomasks. So we can -- I think we can manage and balance. So I don't see any big difference.

If I could have a quick follow-on. If you look at the LCD business, is the driver mostly the panel size for each generation, or are there resolution and technical aspects also that drive the LCD masks?

Most are from panel size. You are correct. Some, yes, from technical side, but mostly from panel size. So since 7 years, mask sizes are 850 by 1200 (indiscernible). But we also -- the technology side also is, of course, but we are ready to prepare all technology. So we are very good position to compete with our competitor anyhow, in terms of technology.

Let me just add that at this point in time, we're not changing our operating model because of the increase in LCD business. So we're still maintaining our operating targets.

Got it. Just one last one. Back on the minority interest that was asked earlier, Sean; so it's going to decline roughly from the level it's at now because Korea and Taiwan are becoming more profitable. Is there any change because of the higher level of ownership at this point?

Yes, it's almost two separate and distinct. If we step back prior to -- if you look at '04 sequentially, you saw that number go up as the Asian -- the Taiwan and Korean operation improved significantly by the time we (indiscernible) to Q4. Because we own more of PKL, we should see that number decline accordingly. However, to the extent Taiwan ramps up even more and the products in PKL go up, you'll see that number increase. But generally, sequentially next quarter you should see that number come down a bit.

Thank you.

Auguste Richard with First Albany Capital.

Yes, hopefully the last question on LCD. Wondering what does a Gen-7 mask set go for?

Why don't I turn that over to Sean and to S. H.?

The price does vary depending on a number of different complexities but it is certainly higher than our IC side and S.H., maybe you can give a broad range of price?

One set consists of around 11 10 layer but just this is almost 2.5 million to 3 million.

And that's for a Gen-7?

Yes.

And then the yields on Gen-6 and 7 are abysmal at this point. As those yields improve, do you expect volumes to increase?

Of course. Gen-7 at this moment we are in initial stage for mask production so there's definitely room to improve. So probably generally TL - LCD mask is higher than IC Photomasks but Gen-7 is just the initial stage so we have a lot of room to improve.

Okay and then just switching questions a bit -- Samsung is bringing up some Logic lines in Korea. If I understand it, that's going to be used at least in part for high-volume foundry customers. Such as maybe in NVIDIA. Given that you are locked out of TSMC because of the internal match shop (ph), it this going to give you an opportunity to start participating with some of these folks going forward?

Yes definitely. We are a number one supplier for Samsung so their new investment on the Logic side is definitely a good movement for us. So we will capitalize on this opportunity.

Gus, I think John Chin, our VP of Asia, also has some insight on that one.

I think the whole Asia operation positions very well for all the foundry opportunity and also we have a strong alliance with the major IDM like the Korean IDM over their. So whatever the business opportunity moving to Asia either traditional foundry business or the emerging foundry business, we have a very good chance to grab the opportunity.

Got it. I think anything else has been asked, thank you.

Ted Berg with Lehman Brothers.

With the 116 million revenue needed for the 20 percent gross margin, Sean, or the 20 percent operating margin, what does that increase to throughout the year as you add the additional capacity in Korea and China and elsewhere with the CapEx budget? Or does that go by the end of the year?

At this point in time I am not going to provide as much detail on that because as we put additional capacity on line, we have other capacity coming off or depreciation falling off and as we look -- we're constantly looking at our cost structure trying to pull cost out as we put costs on line. I don't expect it to go up a great deal but we're managing that actively.

Okay so as some of these new production facilities ramp up and you get the startup costs associated with those and the additional depreciation you are saying that you are removing costs out of other facilities or depreciation expenses are falling off of older facilities that essentially offsets the newer cost?

That is our goal. We don't expect to be -- not to be a step function. Our Board has tasked us with keeping our financial flexibility as the number one goal so to the extent that we're increasing our cost structure we have to ensure that the revenue stream is there. So we're going to manage that each and every day.

Is there any particular quarter down the road here over the next couple of quarters where you'll see a disproportionate amount of increase as startup costs being incurred that might adversely impact the profitability trend? Or is it a smoother, linear ramp?

Some of these are competitive discussions that -- decisions that we're making. We provided guidance just for the second quarter but I don't see anything on the horizon that would cause me to have great concern of a significant ramp in a specific quarter. If we do see that and we do elect to as I mentioned in my text, pull in or react to a certain opportunity, we will certainly disclose that and go through those mechanics and opportunity.

Okay, and on the gross margin line, the revenue was above the high end of your guidance but the gross margin looked like it was below where maybe you would've expected given the higher revenue. I know I think you mentioned that the margins on LCD masks are a little lower than what you did in the IC area. Is that the only explanation for it at this point and at what point would you expect to see those margins reach parity?

Is that a nine-month thing; a twelve-month thing? Or do you have to grow LCD business like 20 percent of revenue to get there or if you can context in any way?

The sequential decline in gross margin primarily related, Ted, to the seasonal softness associated with the first quarter. To a lesser extent we did incur some additional costs at the tools that we brought on line and with the LCD business, but that was not the key driver. Our margins should improve sequentially as we move forward -- gross margins.

I think in October you were at 35 percent gross margin on the same revenue level that you are expecting for April at the midpoint. Would you expect gross margin to be back up to 35 percent in April?

We're not providing specific guidance on gross margin. We're focused on the bottom line and the operating margin line, but we would expect our gross margins to increase whether that is 200 basis points or 300 basis points can be a function of mix and bringing certain tools on line.

Okay, thanks.

Cristina Osmena with Jefferies.

I just wanted to follow up on that. That was an interesting point. Hi Sean. The gross margins may not be the same level that there were in April even on the similar revenue levels because of the additional tools? Is that how it is working out?

That is possible, yes. The additional tools, mix of product.

Okay and the product mix is LCD influenced or is it some things --?

It is product mix in general. It's the different types of products that we offer. Chris, perhaps you can provide a little color on that.

There's a number of qualifications we have going on now that are more leading-edge nodes. They do take a lot of resources to do but they are obviously very worth doing. So we do have an unusually high level of qualification activities going on at the advanced nodes now.

The LCD business that you got in the January quarter, could you give us a sense then how much was quall (ph) activity and how much was actual LCD for production?

Because of Gen-7, it is in initial stage of mass production. They had a couple of test types we have to provide customers. So I think that perhaps a little bit of our cost. But I don't expect any more cast plates (ph) for Gen-7 because that is already in mass production stage.

Is there any kind of seasonal pattern that you could -- the LCD business? Certainly its presence basically in the January quarter kind of throws off the typical seasonal pattern that you see in April so is this going to be an ongoing thing?

Even chip and (indiscernible) is similar to the IC pattern I think so seasonal effect is yes, we have.

What we saw, Cristina, during the quarter was just the ability to react to opportunities that we had laid out in the early part of '04 that came to fruition during the first quarter.

Okay, now with the mask sets of 2.5 to 3 million, it could have been 10 percent of your business on just 4 mask sets or more of your business on more mask sets. I was wondering will this give you better visibility into your business or does it have the same kind of turnaround time?

Let me help you philosophically. The G-7 was not many devices. When we started, it was one device. Of course in the future it may become more production and we will do more than one device in the quarter. On the LCD mask we see them as a growth area. We see something better than 30 percent compound growth per year. So just to give you an idea in a few years we completed (ph) our Company, 25 percent of our business will be LCD masks. Anything you do today we have LCD for communication (ph), the iPod, to television -- mostly I would say that 150 billion television they needed to replace with a flat-panel display. So in a sense, there is anything to do it is -- they have a flat-panel display.

So we see the LCD mask as a growth area and we've seen the benefit right now of our investment of about 1.5 years ago and we have more capacity and will continue growing.

Hi Deno. By the way, long time, no talk. Of the 25 percent of your business, could give us maybe a sense of time?

I'd say a few years. I cannot say specifically. We do expect really to give us nice -- just give an idea of expecting IC organic growth about 8 or 10 percent. We expect to gain market share to bring us higher and to (indiscernible) mask or the LCD mask to give us another boost to higher compound growth. Turns out we see a tool for us and other another masks to give us more growth, more compound growth per year.

And in addition how many customers are you servicing out of PKL for LCD? Is it just one large customer?

Oh no, almost all LCD customers. Not only Korea basis but also Taiwan basis too. So if you wanted to hear about the specific number but I better not say. You know already, right?

Okay, great. And I had to ask this one question. Do you have any exposure to Hedgeon (ph) in China?

That is an IC mask?

Yes, for IC, it is --

It is now official UMC foundry?

The CEO was just arrested.

We don't comment specific customers but we do ship masks to pretty much every foundry in Asia.

Okay, thank you.

Kevin Vassily of Susquehanna Financial.

Maybe you guys can help me with the map again here on LCD. I'm trying to work through the numbers. I heard what you said correctly with regard to 0.13 and below absolute revenue levels quarter-to-quarter. It would imply that your 6-Gen LCD revenues were about 3 percent of total. Is that right?

Kevin, we commented that our overall mix for advanced photomask was 18 percent of total revenue. We do not provide (multiple speakers)

Right, but I heard you say -- help me if I heard the numbers right. I can back into the map. I thought I heard you say no meaningful change quarter-to-quarter in the revenue level from what you are terming at 0.13 Micron and below, correct?

No, we did see improvement in 0.13 and below sequentially.

On an absolute dollar basis?

Yes.

Okay, I can back into that then. Thanks.

Gerry Fleming with WR Hambrecht.

With your spending budget, Sean, that you were talking about, it seems like the depreciation number which has been sort of in a rut for the last two or three years should start to accelerate. I wonder if you could tell me were that might be by the end of the year?

Gerry, I believe it is going to increase a couple hundred thousand each quarter sequentially. So if we are at I believe it was 21 million for the quarter, 21.2 million, it should ramp up to 22 to 23 million as we exit the year. And that is dependent upon when these tools come on line. And when the acceptances and qualifications are done.

Okay then a question about 90 nanometer activity. What's going on with design activity and tape outs and what percentage of your business is at the 90 nanometer node?

Why don't we have Chris give you some insight on that?

We've seen just following design activity definitely an increase in the last couple of quarters in design activity but it is taking a fairly long amount of time for design activity to materialize and to tape out (technical difficulty). Design activity is a good forward indicator for tape outs at that note looking 12 months ahead. So the signs are very encouraging in 90 nanometer perhaps speaking to the yields and the foundries and that sort of thing.

As far as the percentage of our business at 90, we are booking revenue today at 90 nanometer but we don't break it down by node below 130.

Okay, thanks a lot.

Stephen Chin with UBS.

Just a quick question for Sean. What is the expectation of continued bond buyback going forward? Are you satisfied with the current capital structure or is this something we could expect more of going forward?

Good morning, Stephen. What I will say is we are not satisfied with our current capital structure. We have some work to do and depending on market conditions we may react to certain opportunities but as of right now we are not -- we don't have any definitive plans.

I just wanted to circle back quickly on the business in Asia. It sounds like the strength in the fiscal first quarter was certainly for LCD photomask for LCD. I was hoping you could us some color on how photomask in LCD in traditional semiconductors did in the Asia in this first quarter?

Sales in Asia were about 50 percent of our overall mix, similar to the fourth quarter. So it was very strong.

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

Thank you, Cynthia. Before we break off, I would just like to remind everyone that we will be in San Francisco on March 22 hosting our analyst meeting. At that time S.H., Sean, John, Chris and Deno will be prepared to go into more detail about the opportunities we see ahead in both the IC and LCD mask side. If you are able to join us it will be a 2:00 session over at the Palace Hotel in downtown San Francisco. Please let me know. You should see a press release announcing that activity shortly.

And if there are any additional follow-ups or further questions, please feel free to reach us in our offices. Thank you very much for joining us.

Thank you for participating in today's Photronics first-quarter earnings conference call. You may now disconnect.