Photronics Inc (PLAB) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Photronics second-quarter earnings call. During the presentation all participants will be in a listen-only mode; afterwards we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Wednesday, May 14, 2008. I would now like to turn the conference over to Mike Luttati, Chief Executive Officer. Please go ahead, sir.

Thank you and good morning. This is Mike Luttati, Chief Executive Officer for Photronics. I'd like to thank everyone for joining our fiscal 2008 second-quarter earnings conference call.

Before we begin I'd like to remind everyone about the Safe Harbor statement provision under the Private Securities Litigation Reform Act of 1995. 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.

This call will remain archived on our website until we report our fiscal 2008 third-quarter results after the market closes on Wednesday, August 13, 2008. I will open the call with some brief comments about the Company's performance and strategic positioning. Following my opening Sean Smith, our Chief Financial Officer, will provide an overview of Photronics' second-quarter results and third-quarter guidance. I'll then moderate the Q&A session. Joining Sean and me during the call will be Dr. Chris Progler, our Chief Technology Officer.

Second-quarter revenues of $110.3 million were in line with our guidance projections and consistent with our annual plan. Market factors aside, we are very pleased with our consistent execution and the progress that we are making against our strategic objectives. On a regional basis we had sequential growth in every region with U.S. sales increasing by nearly 21%.

Overall semiconductor mask revenues were slightly down with the biggest decline in Asia primarily as a result of the slow down caused by the Lunar New Year. High-end 90 nm and below sales were up 35% sequentially and represented 14% of total semiconductor mask sales compared to 10% in Q1. The ramp of the U.S. NanoFab and additional share gains in Asia contributed to the growth.

Flat-panel sales also increased by 33% over Q1 and reached a record level for the Company for a quarter. High-end FPD sales, G6 and over, increased by 53%. Performance enhancements for large screen TVs and conversions from G5 to G7 for monitors were some of the key drivers for these new flat-panel designs.

With respect to the priorities that we have set for 2008, here is where we stand through the first half of our fiscal year. As I stated on our last call, first and foremost on our priority list is to monetize the investments that we made during 2006 and 2007, specifically our flat-panel display facility in Taiwan, our semiconductor mask facility in China and the U.S. NanoFab. Year-to-date we have very good progress on two of the three fronts.

In FPD we have qualified all of the major Taiwan FPD panel makers adding a second writing tool and giving us additional capability and capacity. During Q2 we took advantage of this by increasing overall FPD revenues in Taiwan and in Korea. This increase is a result of strong market conditions and further share penetration, especially among Taiwan panel makers.

In China, while we continue to improve operationally, we are not progressing at the pace that we had planned. We still intend to ramp through 2008, although we expect to be below our initial annual projections. We are currently evaluating various alternatives to increase revenues and to reduce costs.

At the U.S. NanoFab we have made excellent progress. As planned we began shipping revenue generating product over the last six weeks of the quarter, and this included product to five separate customers including Micron, IM Flash, two OEMs and a 45 nm logic customer. Considering that the groundbreaking of this most advanced site was approximately one and a half years ago, we consider this accomplishment to be extraordinary.

We have also increased the customers engaged in qualification and evaluations from six to 10 excluding Micron. Although we are working with a limited data set, operationally we are tracking statistically to all the manufacturing metrics being achieved inside of MP Mask.

Our other priority has been to expand our successful mainstream business where we had several well-defined objectives outlined. While excess capacity in the mainstream business has continue to put pressure on ASP's, we have in fact increased unit output through a combination of share gains and expanded applications.

Finally, we continue to lean out the business model wherever possible in order to maximize profitability and cash generation. Despite some of the gains we have achieved thus far, this has been offset by an increasing cost structure as a result of our strategic investments. We continue to evaluate and will act responsibly as business conditions dictate to further reduce costs.

In the short-term we continue to remain cautious as both macroeconomic and semiconductor industry specific indicators raise concerns on prospects for at least the balance of 2008, maybe longer. While these factors will clearly impact our performance, we remain optimistic that the sources of revenue generated from our new investments will continue to support a plan for growth this year in 2008.

I'll now turn the call over to Sean to review our Q2 financials and our Q3 guidance, after which I will moderate the Q&A session of the call. Sean?

Thanks, Mike, and good morning, everyone. I'll provide a brief analysis of our financial results for the second quarter of fiscal year 2008; I will also review our balance sheet and cash flows during the period and discuss our outlook going forward.

Net sales in the second quarter amounted to $110.3 million as compared to $109.6 million in the second quarter of last year. Revenues for IC photomasks were $80 million as compared to $88 million in Q2 '07 while FPD revenues were a quarterly record of $30.3 million as compared to $21.4 million for Q2 '07.

The year-over-year decrease in IC sales is related to decreased ASP's principally from mainstream products. The FPD revenue improved year-over-year as a result of increased high-end unit demand. Sequentially sales increased $7.1 million or 6.9%, virtually all of which was related to the increased revenues for FPD photomasks.

Sales of advanced FPD and IC photomasks were approximately 20.6 and 10.2% respectively of total sales for the quarter. Included in this percentage are mask sets for semiconductor designs at and below 90 nm and FPD sets used to fabricate flat-panel products using G6 and higher technology. On a sequential basis, sales of high-end IC photomasks were up 35% primarily as a result of the sales generated in the U.S. NanoFab. As a percent of total sales for the second quarter sales were approximately 60% in Asia, 24% in North America and 16% in Europe.

The gross margin for the second quarter of 2008 was 18.4% as compared to 23.9% in Q2 '07. The decrease was associated with an expanding manufacturing base including manufacturing costs in the U.S. NanoFab. Sequentially gross margin decreased 160 basis points as a result of increased costs, including depreciation, associated with the NanoFab.

Selling, general and administrative expenses for the second quarter were $13.6 million as compared to $14.4 million last year with the decrease related to reduced compensation expense in Q2 '08 as compared to Q2 '07. On a sequential basis SG&A decreased $2.7 million as a result of the commencement of manufacturing in the NanoFab and rebidding of costs from SG&A to COGS during the second quarter of '08. Additionally, overhead expenses decreased due in part to cost reduction programs.

R&D expenses, which consist principally of continued development of advanced process technologies, were $4.6 million in the second quarter. Sequentially R&D increased by about $400,000.

During the second quarter we generated operating income of $2.1 million as compared to operative income of $56,000 for the first quarter of 2008. In our February call we mentioned that during the next few quarters we were likely to experience some fluctuations on the operating margin line as we work towards monetizing our new manufacturing facilities in the U.S. and in Asia.

The incremental fixed costs in the third quarter related to the NanoFab are projected to be in the range of $2.0 million to $3 million. Our operating cost should reach a plateau in the third quarter as it will be the first fully loaded quarter with the NanoFab. While we work through this expansion and customer qualifications I assure you that we are continuously driving to reduce our cost.

Additionally, we continue to assess our global manufacturing strategy as our customer base continues to evolve and migrate. If this ongoing assessment warrants the management team to decide that there's need to evaluate future facility closures, asset redeployment and further workforce reductions we will do so. However, all these actions would be predicated by market conditions and customer requirements.

Net other income and expense for the second quarter was an expense of $3.2 million as compared to income of $400,000 in the second quarter of '07. The decrease year-over-year is related to increased interest expense associated with our increased debt year-over-year and decreased investment income associated with reduced investment balances and increased foreign currency losses year-over-year.

During the second quarter we recorded a tax provision of $930,000 and the net loss was $2.1 million or $0.05 per share for the second quarter. As we exited the second quarter we have approximately 1,465 employees equating to sales of approximately $300,000 per employee on an annualized basis. Total headcount since the beginning of our fiscal year has been reduced by 5% on a global basis.

Now taking a look at the first six months year-to-date operating results, net sales for the first six months of '08 were $214 million, a decrease of approximately $2 million from the first six months of last year. The decrease is a result of reduced IC sales of $13 million associated with reduced ASP's far IC masks principally for mainstream products. The decrease was mitigated by an increase of $11 million year-over-year in sales of FPD photomasks, principally high-end.

Year-to-date gross margins decreased to 19.1% from 25.9% as a result of our increased manufacturing base and reduced ASP's. Selling, general and administrative expenses decreased by $1 million to $29.9 million. And research and development costs were $8.9 million for the first six months of '08 as compared to $9 million last year. Net other income and expense amounted to an expense of $3.8 million in '08 compared with income of $145,000 in '07 as a result of increased interest expense and decreased investment income.

For the first half of 2008 we recorded a tax provision of $2.8 million. Our net loss for the first six months of '08 was $5.4 million or $0.13 per share.

Now turning to the balance sheet -- cash and short-term investments at the end of the quarter amounted to approximately $70 million with working capital of $42 million. Accounts Receivable increased $7 million as compared to the end of the first quarter due to the increased sales during the second quarter. In accounts payable and accrued current liabilities at April 27, 2008 amounted to $117 million as compared to $115 million at the end of the first quarter.

Total debt at April 27, 2008 was $222 million. The principal components of outstanding debt include $115 million outstanding on a revolving credit agreement, approximately $30 million of foreign term loans and approximately $77 million in capital lease obligations including the U.S. NanoFab.

During the second quarter we paid on our 2.25% $150 million bonds thereby reducing our outstanding debt from $259 million at the end of the first quarter and improving our net debt position in the second quarter by $11 million to $152 million at the end of April 27, 2008. In reviewing our 2008 cash flow and capital needs we will continue to explore various options should we determine the need to obtain additional financial flexibility. We remain confident that our access to capital will not inhibit our growth plans.

Taking a look at our cash flows, cash provided by operations for the second quarter of '08 was approximately $23 million and amounted to $35 million year-to-date. Cash flow using investing activities during the first half of '08 amounted to approximately $77 million of which $78 million represents cash payments for capital expenditures. Total CapEx for the first half of '08 on an accrual basis was $114 million and includes our capitalized NanoFab lease obligation.

Taking a look ahead, our short-term visibility, as always, continues to be limited, typically one to two weeks. Turning to our outlook for the third quarter, many industries reflect continued softness. While we do expect to see a moderate improvement in the environment for design activity especially for advanced IC and high-end flat-panel, we feel it is prudent to remain cautious. Based upon our best analysis our revenue guidance for the third quarter is in the range of $112 million to $118 million.

Capital expenditures for 2008 on a cash basis are forecasted to be approximately $120 million to $130 million with the vast majority of which already installed. Most of the newly installed CapEx relates to the U.S. NanoFab and for additional high-end capacity in Korea.

During 2008 our tax rate will be impacted by the flow of income from jurisdictions for which we may have tax holidays or credits and upon our limited ability to recognize tax benefits in years which we are taxable. Accordingly, for the third quarter of fiscal 2008 this will equate to a range of $1.0 million to $1.8 million in whole dollar terms. As a result, based upon our current operating model, we estimate earnings per share for the third quarter of fiscal '08 to be in the range of a loss of $0.11 to a profit of $0.01 per share.

That concludes my prepared remarks. Now I'd like to turn the call over to Mike. Mike?

Thank you, Sean. We're now prepared to take your questions.

(OPERATOR INSTRUCTIONS). Tim Arcuri, Citi.

This is actually Brian Lee calling in for Tim. Thanks for taking my questions. I had a couple of things. First off, for Sean, how should we be looking at the breakeven levels here in Q3 '08? I think last call you mentioned that it would be going to about 108, is that still the view? And would you expect that to go up again in Q4?

Our breakeven level in Q2 was actually a bit higher than that. If we're looking at the operating income line it would have been about 108, 107. Our breakeven point for the third quarter at the operating income line would be in the range anywhere 115 to 116 as a result of the additional depreciation coming on with the NanoFab being fully ramped for a full quarter.

Okay. And would you expect that to go up again in Q4?

No, I would not, Brian. We expect to plateau with respect to our operating costs in Q3 and we look to additionally pull some costs down, some additional costs. But with respect to depreciation, which is the key drive to such costs, that will plateau in Q3.

Okay, great. And then on the business mix, it looks like -- last call you guys were talking about semi's and flat-panel both being up in Q2. It looks like flat-panel came in better than expected and otherwise you would have been closer to the low-end of guide on revenues. So all in it looks like you're ahead of expectations on flat-panel. Can you talk about what drove the better revenue trends there and what sort of trajectory we can expect in that business in the second half?

Sure, Brian. It's Mike. As I mentioned in my prepared remarks, it was a big drive obviously in the high-end TV market and also a conversion of the display market from Gen5 to Gen7, so we saw a lot of new designs pop out as a result of that. Our best indicator is that that will continue at least through June, maybe more into the summer. The Olympic Games are driving a lot of the TV demand, but there is a lot of new improvement and resolution -- scan speed, viewing angle, brightness -- a number of tweaks that are being made in designs that are driving these applications.

So fortunately, because of the strength of our position in the high-end FPD business, we've been able to take advantage of that. And the timing of having our facility and additional rider in Taiwan really allowed us to capture share that we might not have had had we not had that tool in place. So we really benefited from that. We think not only did we ride the market but we also gained share as a result.

On the IC side, as Sean mentioned in his prepared remarks, we had a nice uptick in high-end IC sales. And the thing that really took a hit on the IC piece was a decline in ASP's over the mainstream business. Although unit volumes continue to be up -- we had strength in unit volumes in every region.

I would say, Too, Mike, when we did the forecast for the -- to answer Brian's question about the uptick. We didn't predict such a big increase in flat-panel, but we did expect it to go up sequentially. On the IC side Asia was a bit slow returning back from the Lunar New Year which we had forecasted to be somewhat muted, but it was down slightly from where we thought it would be.

Good point.

Okay, great. And then one last quick one from me. Given the run rate you guys saw out of the gate in Q2, is there any change to the $[50] million run rate by Q4 that you guided to on the last call for NanoFab?

A lot of it's going to depend -- obviously, as we said before, we depend heavily this year on Micron and IM Flash as a big percentage of the revenue with the DRAM and flash market being what it is there may be some softness. However, frankly their design activity has continued to be reasonably good. It may be down some from that level, but we still expect to see continued ramp through the end of the year.

And we're trying, obviously, with the additional customers that we now have, both in terms of qualification and evaluation, as I mentioned in my prepared remarks, of six to 10, to pull some additional revenue in from those customers to make up the difference.

Okay, thank you.

Matt Petkun, D.A. Davidson & Co.

Good afternoon. Mike, you commented that you did have one 45 nm qualification at the NanoFab this last quarter. Can you tell us what the results were from that and whether you or not you expect that customer to continue to use you on a go-forward basis or if you feel like, at least in the near-term, you're more of a backstop to their own internal capacity?

Let me just say that that customer -- it was actually a revenue shipment. So what I referred to as the five customers for the quarter, the two OEMs, Micron, IM Flash and the 45 nm customer, we did actually get paid for that so it was revenue shipments. So we have qualified to a certain level. We do expect ongoing business there and that's about all I can say at this point, Matt.

Okay, great. And then Sean, on the interest expense, did you give a specific outlook for how that should look, the net interest income and expense, as we head into Q3 and into next year?

I did not but I can give you some guidance on that, Matt. We do expect interest expense to increase quarter over quarter. The interest and other income line all in including FX, interest expense, interest income, could fluctuate on a quarterly basis up to $500,000 to $700,000 or so depending upon rates and where we are.

Can you give us some more specifics on where that sat relative to prime or something like that?

We have a couple of different instruments that are out there. I can say that with the replacement of the $150 million bonds and our current interest rate on the revolving credit agreement because it's at LIBOR plus 1.5 which does fluctuate every couple of months, it's probably about a 200 basis point increase all in.

Okay. And then I think you had previously said something about '09 CapEx being down, is that right?

Yes, we haven't finalized our '09 plans. We certainly are holding to our discussion that we've been talking about over the last three quarters with respect to saying after Q2 the big spend in capital expenditures is over. We should get back to a maintenance level unless we see a significant uptick in demand at the high-end. But I think we feel we have enough installed capacity. Our first projection at '09, Mike, is probably in the range -- certainly probably $60 million to $70 million and certainly trying to achieve a target of not higher or get it down to about 15% of annualized sales.

Okay. And so hopefully excess cash helps offset the interest expense and barring any other changes in the capital structure?

Correct. In my prepared remarks I said most of the equipment that we have for '08 is installed. We've paid about -- I think I said $78 million; you have about another $50 million to go. And we certainly have cash flow from operations over the next two quarters to cover that. So we don't expect a significant change barring anything unforeseen in our overall cash balance and hopefully they will go up by the end of the year.

Okay. Just finally, what was the exact depreciation and amortization in Q2?

The exact depreciation in Q2 was $24.4 million and amortization was $2.1 million.

Okay, thanks, guys.

(OPERATOR INSTRUCTIONS). Joe Feng, JPMorgan.

Thanks for taking my call, guys. One of the questions I had was I'd like to get your overall view on semi end markets. [What] big suppliers last night called their second quarter at the bottom. What do you guys see? And the second part of that question is as the China facility ramps up slower, is that due to the overall slowness and softness in semi or is it something else operationally?

On the first I don't know that I can offer a lot more than everyone else that you've talked to from the equipment side and certainly from the customer side in saying on semi. We're seeing a fairly good strength in design activity pretty much across the board. The mainstream business is heavily driven by analog design activity in the U.S. and Europe. We're seeing -- just because we haven't had exposure to the high-end until recently we're obviously participating in a way that's for us probably better than it would be for our competitors because we're getting access to customers we didn't have before.

So us independent of the cycle we're participating in areas -- available markets that we didn't have. I think that from everything I've heard, as I mentioned in my closing remarks, there's consciousness out there, particularly through the balance of the year. FPD, as I mentioned, looks to be good through at least the summer from everything we can tell and it could continue even stronger.

With respect to China, yes, we've had two issues. I've mentioned this on previous calls. One is operational and the other is just the softening of the market in China. We've actually done a good job in getting customers qualified, it's just that it's very competitive there and there have been a number of existing suppliers into China. We're just trying to get some momentum built.

So we're not throwing the [capital] in. We think that there's significant potential in the China market. We believe we have made an investment in a facility that's good as any facility in mainland China and we believe that we'll be able to compete there, it's just been taking a lot longer than we had hoped.

Okay. And then a follow-up too then. In terms of the gross margin, it took a little bit of a dip this quarter and what's the plan to bring it back up to the 20 something level? Is it going to be a combination of volume and ASP increases or what's your thought on that?

Joe, this is Sean. It's volume driven. As I mentioned, our cost structure, operating cost structure will plateau this quarter. And to the extent we are at the midpoint or high-end of our range we should see sequential growth in our operating margin. We talked about in the fall that Q1 would be our trough quarter with respect to our operating margin. And despite the bottom-line projection from the range, we do expect to see, to the extent we get to the midpoint to high-end of the range, sequential growth in our operating margin. So with that, it's a combination of additional depreciation coming on board, we'll cover those costs with the volume and then after that the inflection point is quite high.

Okay, very good. Thank you.

Brett Hodess, Merrill Lynch.

Good morning. Sean, regarding the breakeven point being higher than the 108 projected last quarter, as you mentioned it was because of the higher depreciation. The depreciation is higher than what you had planned because the NanoFab is coming on more rapidly, did I get that correct?

Let me try to clarify. We gave, Brett -- it may be due to miscommunication -- we gave our range last quarter, 106 to 112. We guided from a $0.12 loss to $0.00 at 112. So the breakeven I believe that I think Brian referred to a few minutes ago, that was related to the first-quarter run rate. We did expect and project costs to go up. So nothing has really changed from our plans other than we do have some tools that are coming on a little quicker than what we had forecasted.

Okay. And then secondly, when you look at the mature product where the pricing has declined -- mainstream where the pricing has declined quicker than you thought, even though you've been picking up volume, I guess as, Mike, you said that that's mainly a marketshare gain that you're picking of volume on which indicates there's still a lot of capacity there. Do you see it at any point, any of the excess capacity on the mainstream side moving out of the market and allowing things to stabilize there? Or do you expect it just to continue to stay pretty tough like this?

I think it's going to be a little tough for a few more quarters. But what we're trying to do is do two things on the mainstream business. One is we have a very high share to begin with so we're incrementally trying to improve our share inside the customers where we already have 60, 70, 80% share. It's very hard to get 100% in many of these customers so it's sort of nibbling away at an additional couple of points here or there.

And then the other is there are some new applications that we've dabbled into with back end masks and some other things to try and grow. But it's all incremental. I think that this will stabilize over time, but there's still a lot of capacity in the network.

Brett, just to Mike's point, the increased volume that we were seeing certainly offset on the mainstream side a decline -- our margins were essentially either flat or up slightly, except in Asia where the mainstream issue was more prevalent as a result of the drop in volume related to Lunar New Year.

And it's amazing actually that we continue in these sites to ring out cost, additional cost to offset the ASP erosion so that, to Sean's point, we're able to maintain relatively decent margins.

So really the real issue really was just, as Sean pointed out earlier, the higher depreciation?

Exactly.

Okay. And as you said, that's going to plateau this quarter and OpEx is going to go up I guess a bit after that. But after that we'll start to see leverage as the revenues grow on a more steady basis?

Yes, when you refer to OpEx, Brett, you're referring to SG&A and R&D?

Yes.

SG&A should not be going up sequentially; R&D may go up -- tick up slightly, but overall OpEx should remain essentially flat.

Okay. And final question, if you're looking at the customers that you're qualifying in the NanoFab now, you've got you said about 10 customers that are qualifying, five of which are already shipping revenues or was that 10 customers in addition to the five that are getting revenues?

The 10 would include the -- we would include the five but exclude Micron from that. So it's effectively four plus -- so we've got an additional six in the pipeline.

Very good. Thank you.

Just to add a little more on that, that is starting to become more global in nature. Obviously you know about some of the relationships that Micron has outside of the U.S. And so we're getting exposure now to NanoFab business outside of the U.S. and Europe.

That's great. Thank you.

Stephen Chin, UBS.

This is Jagadish on behalf of Stephen. A couple of questions, Mike and Sean. The first question is have you given us the breakout of how much of the revenues are the shipments from the NanoFab, please?

Jagedish, this is Sean. For competitive purposes we aren't providing that breakout. But what we can -- as Mike alluded to in his prepared remarks, certainly at six weeks of revenue generating capacity everything is on track there. So [six] weeks of revenue generating opportunity and everything is on track and we do expect sequential improvement over the next couple of quarters.

How should we think of margins once you start to fully ramp the NanoFab given that you are at the leading-edge in terms of supplying the IC mask, how should be think of margins trending up going forward, please?

Margins will trend up once we cover the additional cost coming on. I mentioned a few minutes ago, our operating margin should improve sequentially. And then once we reach our plateau in Q3, as we get into Q4, depending upon our projected revenue guidance, that will be indicative of how much the gross and operating margin goes up.

And the other question is that I wanted to find out -- you had a nice increase in North America. Could you elaborate on where was the strength from particularly on the segment that did North America, please?

Actually sequentially North America increased both in the high-end and in the mainstream product side.

So obviously we had the NanoFab contribution as well as some additional penetration in the mainstream business.

And how do you see that going forward, please?

As I said earlier, there's a lot of strength around the analog business where we are particularly strong and we feel like we're very well positioned there. So I don't know that it will go up dramatically, but we certainly believe it will be steady-state and at least if we can incrementally get some share gains, maybe some modest improvement there as well.

Thank you.

You're welcome.

Jay Deahna, JPMorgan.

Thanks very much. Good morning. A couple of questions. First of all, of the six customers that you were referring to on Brett's last question, how much of that is fresh business from existing customers or new customers as opposed to cannibalization of business that you're doing in other facilities around the world at Photronics?

Jay, this is Mike. I would say that because this is technology that we were never able to ship before, they may be customers that we have supported on the mainstream business, but they're all new high-end customers to us. Just to maybe add a little more to help you there, there are I would say about three of those that we have not done any business with before.

Okay, that's certainly encouraging. Mike, if we take this to a high level. First of all, if you look at Photronics' history, the Company historically established its presence in the market with several facilities in the U.S. and Europe. And if you look at the way business has trended over towards the Far East over the last decade or so, how do you feel about your spread of property, plant and equipment and what can we expect in terms of perhaps shrinking your cost basis or your footprint for manufacturing in the U.S. and Europe as this NanoFab comes up?

Well, we have done that. As you know, we have 1.7 facilities in the U.S. and continue to do that. And you're absolutely right, I think it was a couple of calls ago, we talked about the fact that the footprint -- my view of the footprint of the Company five years from now will look differently as things migrate.

What that will end up being in terms of number of facilities in each region I don't know, but we clearly have to, for efficiency purposes as well as for keeping these facilities aligned to the customers and the demand of the customers, migrate some things over time. And I believe that will happen and we're continuing to look at all of those things.

The one other thing that I would say is because we've been asked this and maybe just -- I don't know if this is somewhat behind your question. But with the NanoFab in the U.S. there have been a lot of questions about how we'll be able to support a global business from the U.S. to the high end. And it turns out that the high-end products tend to have a little bit longer cycle times in terms of order to shipment and we believe that we are going to be in a good position based on the yield and manufacturing capability of that facility to be able to support a global business from Boise just as well as our competitors can from Japan.

Okay. Well, if you look over the last year or so as you've made investments in your new facility and to a certain extent underutilized your older facilities, that's had a negative impact on your margin structure. As you begin to ramp your new facilities, get better absorption from FPD, etc., better business out of the nano center in Idaho, can you actually juice the margins in a reasonably discountable period of time, meaning later this year, into the first half of next year by actively reducing some of your cost structure in the underperforming areas. Are we actually going to see that happen or is that something that still is up in the air and needs to be decided later?

Jay, this is Sean. We have subtly started that process. We've shrunk the infrastructure in the U.S. and Europe over the last six months I believe between 7 and 9% in headcount. We've also redeployed tools in areas where we felt we had excess capacity into Asia where we feel there's revenue opportunity. What we have existing in Europe and in the U.S. as far as the legacy sites, they're actually performing well, but certainly -- and generating decent cash.

And we haven't made significant investment obviously in those areas or those manufacturing locations in the past few years, it's all been in Asia or in Idaho. But to Mike's long-range plans, we will continue to be very active in determining how we can load our facilities, especially our greenfield facility, the one in Idaho, the one in PKLT in Taiwan and in China while we look to redeploy and maximize our profits in our legacy sites.

Okay. Then, Mike, the last one. What do you view today as the sustained secular annual growth rate for this company compared to when you first joined the Company? Is it higher or lower and why? And at the end of the day are we just looking at kind of a onetime phenomenon here as you ramp up the NanoFab and experience a little bit of an improvement in cyclical demand for flat-panel? Or is something structurally and fundamentally changing for the Company that's going to allow you to break out of this sideways trend and deliver sustained growth over a multiyear period of time?

Jay, let me cover that. I think that what we've described and what I described when I joined the Company hasn't changed dramatically in terms of what we're trying to do in terms of the growth pieces that we've put in place. The high-end market is growing in double digits, the high-end IC business, in excess of 40% if you look at over the next five years sort of 90 nm and below and it's a business segment that we've had very modest, under 10%, market share.

We really believe that we can participate in a big way there. Not only with the NanoFab, but also with the investments we've made in Korea where we have a 65 nm line and also in Taiwan as that will be a follower to the Korea and NanoFab investment.

The industry growth rate, as you said, it's sort of a 3% growth rate from a macro, if you all in look at it. And so if you take the growth that we see in high-end IC and add it on to what we believe we can continue to grow on the mainstream business, and that puts us into the low single digits. And then you've got the flat-panel business on top of that. I think this is a business that could growing in the double digits -- at least the low double digits and maybe higher if we could grow share.

Okay. And then I actually do have one last one. If you look at the long-term growth rate in IC units, it's about 10, 11% over for and a half decades. But over the last five years or so it's actually been about 15% for digital ICs based on a consumerization of ICs, Flash coming up and the transition of bit densities in DRAM to three years from two years.

And at the same time it seems that the sustained growth rate for the photomask industry has actually gotten a little bit lower despite an acceleration in IC unit growth. Is this a PLD replacing ASIC issue or what? What is the dynamic going on there and is that a sustainable trend or can that turn based on perhaps new transistor architectures and what not as we move down to 45 and below?

I think it's a combination of things. Maybe I'll ask Chris to cover it, but sort of from my point of view it's just improvements and better design methodology, first pass designs versus what we've seen in the past where there were man multiple iterations of designs and so that drove some acceleration on the mask side of things. People are very -- with the escalating cost of design they're trying to squeeze it every way and make improvements so that there's not multiple passes of mass sets. Chris, can you potentially add to that?

Sure, Mike. Yes, I think that's correct. I think the programmable devices have also played a role, Jay, that you alluded to. I think that's kind of wrung out down, though. I don't see that being very strong in the future. I think SOCs have played a role as well where multiple functions are combined on a single chip.

One possibility favorable to masks is that as companies aren't as committed to go to the next node they may be more pervasive in design activity to wring more out of an existing node, we're seeing this in some of the mature customers already. So that's a trend that I actually expect will happen to bump up design activity. This company is just trying to wring more life out of existing nodes and differentiate through design. So I think those are the two kind of opposing dynamics we're going to see in the next few years.

Thank you.

Gentleman, there are no further questions.

With that we'll thank you all for joining us and we'll look forward to talking to you at our third-quarter conference call.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.