Photronics Inc (PLAB) 2008 Q3 法說會逐字稿

Good day, everyone, and welcome to the Photronics third-quarter earnings conference call. During the presentation, all participants will be in listen-only mode. After the presentation, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded on Thursday, August 14, 2008. I would now like to turn the conference over to Sean Smith, Chief Financial Officer. Mr. Smith, please go ahead, sir.

Thank you and good morning, everyone. My name is Sean Smith, Chief Financial Officer of Photronics. We would like to thank you for joining our fiscal 2008 third-quarter conference call. Before we begin, I would like to remind all participants about the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. And thus, except for historical events, the information we 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 2000 fourth-quarter results after the market closes on Tuesday, December 9.

Joining us on the call today is Constantine, "Deno", Macricostas, Chairman and Interim Chief Executive Officer, and Dr. Christopher Progler, Chief Technology Officer. Deno will comment shortly on the status of the Company's strategic direction and I will then provide a review of Photronics' third-quarter performance.

On August 6, we preannounced our results for the third quarter as we reduced our revenue guidance as a result of lower than forecasted demand for high-end IC products and price softness in the mainstream segment. While we were disappointed with the demand, we were pleased with the progress we made on our qualification process.

We also announced that we would record an impairment charge related to the write-off of goodwill and certain underutilized assets, primarily related to mainstream technologies in Europe and Asia. The total charge amounted to $198.2 million, or $4.76 per share, of which $137.3 million net of tax represented goodwill and the balance, $60.9 million net of tax, represented the write-down of underutilized assets.

In addition, we recorded a severance charge in connection with our former CEO of approximately $1 million during the quarter. I will now turn the call over to Deno. Deno?

Thank you, Sean and good morning, everyone. In terms of current business priorities, Photronics' strategic objectives have not changed. The short-term priorities are to gain high-end IC share, while aggressively reducing our cost structure without compromising our core business.

We have recently returned from a successful trip to the NanoFab, as well as visiting customers in Asia. I am extremely optimistic about our ability to be successful in the high end with our proven technology edge, as well as in our ability to operate more efficiently.

The cornerstone of the high-end strategy remains a global deployment of our fully operational, world-class, US NanoFab for memory and logic market. [Thus], we will continue to drive towards a seamless and globally integrated network that is able to serve the most important photomask market with leading capability, service and lowest cost. A key part of this strategy includes capability enhancements in Korea and Taiwan to meet the needs of our expanding customer base in Asia.

With respect to specific progress on our short-term objectives, the US NanoFab operation continues to move quickly on a broad range of high-end qualifications. We are concentrating our efforts towards our top-five customer opportunities in an effort to increase volume. This includes Micron and Micron-affiliated companies and two high-end logic customers. In addition to these five key accounts, we currently have the additional customers engaged in qualifications. We remain confident in strong, high-end penetration once market conditions improve.

We are enthusiastic about our recent expansion in the alliance network of Micron Technology by growing and enhancing the future value of the NanoFab investment, giving Photronics clear process of record opportunities in the critical Taiwan memory market. In China, we continue to see disappointments with our results and we are progressing at a pace that we do not plan. Accordingly, we continue to evaluate various options that includes revenues and reduce costs.

Finally, before I turn the call back to Sean, I want to assure our customers, our employees, our investors that we are committed to long-term global success for our high-end strategy, while in the short term, we remain cautious for the remaining 2008 into early 2009 as a result of issues currently affecting the semiconductor industry. In summary, we remain very confident and capitalize on market conditions as they present themselves. Thank you. Sean?

Thanks, Deno. Now turning to the results for the quarter. For purposes of our discussions on the operations for the third quarter, I will be primarily referring to our operating results, excluding the impact of the impairment and severance charges.

Net sales in the third quarter amounted to $105.7 million as compared to $104.3 million in the third quarter last year. Revenues for IC photomask were $77 million as compared to $85 million in Q3 '07 while revenues -- while FPD revenues were $28.6 million as compared to $19 million for Q3 '07. The year-over-year decrease in IC sales is related to decreased ASPs, principally for mainstream products. The FPD revenue improvement year-over-year is a result of increased high-end unit demand. Sequentially, sales decreased $4.6 million, or 4.2%, primarily as a result of decreased high-end IC and to a lesser extent, FPD photomask.

Sales of advanced FPD and IC photomask were approximately 19.5% and 8% respectively of total sales for the quarter. Included in this percentage are mask sets for semiconductor designs at and below 90 nanometers and for FPD sets used to fabricate flat-panel products using G6 and higher technology. On a sequential basis, sales of high-end IC masks were down 24% as a result of an industrywide slowdown in advanced tape-outs.

As we developed our initial guidance for the third quarter, we had anticipated that our high-end IC business would grow sequentially by at least 50%. As a percent of total sales in the third quarter, sales were approximately 63% in Asia, 22% in North America and 15% in Europe.

The gross margin for third quarter of 2008 was 13.1% as compared to 22.7% in Q3 '07. The decrease is primarily associated with an expanding manufacturing base, including costs associated with our recently opened US NanoFab. Sequentially, gross margins decreased 530 basis points as a result of the reduced sales and increased costs, principally depreciation, associated with the NanoFab.

Selling, general and administrative expenses, exclusive of the severance charge for the third quarter, were $12.7 million as compared to $16 million last year with the decrease related to reduced compensation expense and the US NanoFab costs now being reported in cost of goods sold. On a sequential basis, SG&A decreased $900,000 as a result of the US NanoFab [rebidding] of cost of goods sold. And additionally, overhead expenses decreased due in part to cost reduction programs and reduced compensation associated with reduced headcount. Year-to-date, consolidated headcount is down approximately 7%.

Research and development expenses, which consists principally of continued development for advanced process technologies, were $4.3 million in the third quarter. Sequentially, R&D decreased by $300,000.

During the third quarter, exclusive of the charges, we generated an operating loss of $3.2 million as compared to operating income of $2.1 million for the second quarter of '08. In our May call, we mentioned that our operating costs should plateau in the third quarter as we work to monetizing our new manufacturing facilities in the US and in Asia.

While we work through this expansion and customer qualification process, we want to assure you that we are continuously driving to reduce our costs. While depreciation and amortization rose $2 million during the quarter to $28.6 million, our operating costs should decrease in Q4 by approximately $2 million to $2.5 million as a result of charges we took during the third quarter.

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

Net other income expense for the third quarter is an expense of $2.6 million as compared to income of $900,000 in 2007 and 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.

During the third quarter, we recorded a tax provision, exclusive of the $7.2 million benefit associated with the charges, of approximately $200,000. The net loss, exclusive of the impairment and other charges, was $6.4 million, or $0.15 per share for the third quarter. As we exited the third quarter, we had approximately 1440 employees equating to sales of $294,000 per employee on an annualized basis.

Now taking a look at the first nine months of fiscal '08 operating results. Net sales for the first nine months were $319.2 million, a decrease of approximately $700,000 from the first nine months last year. IC sales declined 8.4% to $238 million as a result of reduced ASPs for IC masks, principally for mainstream products. The decrease was mitigated by an increase of $21 million, or 35% year-over-year on sales of FPD photomasks, principally high end.

Year-to-date gross margin decreased to 17.2% from 24.9% as a result of increased manufacturing base and reduced ASPs. SG&A decreased by $3.3 million to $43.6 million. R&D costs were $13.1 million for the first nine months as compared to $13.3 million last year.

Net other income expense was an expense of $6.3 million in '08 compared with income of $1 million in '07 as a result of increased interest expense and reduced investment income. For the first nine months of 2008, we recorded a tax provision of approximately $3 million. And for the first nine months, our net loss, exclusive of the charges, amounted to $11.8 million, or $0.28 per share.

Now taking a look at our balance sheet at the end of July, cash and short-term investments at the end of the third quarter amounted to $79.6 million with working capital at $65.3 million, a sequential improvement of approximately $23 million.

Accounts receivable decreased $7.4 million as compared to the end of the second quarter due to the decreased sales during the quarter. And the balance sheet does include the impact of the goodwill write-off of $138.5 million and the asset impairment charge, which reduced net PP&E by $66.9 million. Accounts payable and accrued liabilities at July 27, '08 amounted to $99 million as compared to $117 million at the end of the second quarter.

Total debt at the end of July was approximately $229 million. The principle components of outstanding debt include approximately $123 million outstanding on our revolving credit balance, approximately $30 million of foreign term loans and approximately $76 million in capital lease obligations.

Taking a look at our 2008 and 2009 capital needs, we do feel confident that our significant CapEx spending is behind us and we expect to continue to generate quarterly cash flow from operations as we did this quarter. We are also in the process of meeting with our financial providers and reviewing various options and alternatives for additional financial flexibility should we determine we need it. Of course, the type and term is subject to negotiation.

Minority interest at the end of the third quarter amounted to $53.7 million, which primarily relates to minority interest in the equity of our 57% owned majority subsidiary, TSMC. Our book value per share was approximately $10.44 at the end of the quarter and shareholders' equity aggregated $435 million.

Taking a look at our cash flows. Cash flow provided by operations for the third quarter was approximately $30.8 million and amounted to $65.9 million year-to-date. Cash flow used in investing activities during the first nine months of '08 amounted to approximately $94.3 million, of which $95 million represents cash payments for capital expenditures. Total CapEx for the first nine months of '08 on an accrual basis was $117 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 fourth quarter, many industry factors reflect continued softness and we expect to see these conditions continue perhaps through Q1 of '09. While we are not providing any specific guidance for Q1 of '09, I would like to remind participants on today's call that our first quarter, which ends in January, includes the holiday periods.

Based upon our best analysis, our revenue guidance for fourth quarter of '08 is in the range of $103 million to $108 million. Capital expenditures for 2008 on a cash basis are forecast to be approximately $115 million to $125 million with the vast majority of the CapEx already installed. Most of the newly installed CapEx relates to the US NanoFab and additional high-end capacity in Korea.

Our initial pass of CapEx needs for fiscal '09 are in the range of $50 million to $65 million. However, we would like to emphasize to you this morning that we do maintain a significant degree in flexibility in how we invest capital into our organization, so if that trend accelerates or decelerates, we can move quickly to optimize our competitive position.

For the remainder of '08, our tax rate, as always, will be impacted by the flow of income from jurisdictions, which we may have tax holidays or credits and upon our limited ability to recognize tax benefits in areas which we are taxed. Accordingly, for the fourth quarter of fiscal '08, this will equate to a range, a tax amount range of $1 million to $1.8 million.

As a result, based upon our current operating model, we estimate that the loss per share for the fourth quarter of fiscal '08 to be in the range of $0.16 per share to $0.08 per share.

That concludes my prepared remarks. Now, I'd like to turn the call over to the operator before we begin Q&A.

(Operator Instructions). Matt Petkun, D.A. Davidson & Co.

Hi, good morning. Sean, could you share with us what your views will be from a revenue perspective for the NanoFab this year? I think the previous target was $50 million; although I could be off on that. And we will probably come in below that obviously, but how does that look for this year? And then obviously Q1 of next year is soft, but any views in terms of the opportunity to grow that business next year?

Sure, Matt. I will take a shot at it and then I will also see if Chris can add any color and/or Deno as well. They were both recently out there. We had, probably six months ago, Matt, mentioned that we expected Q4 to achieve -- exiting Q4, we would achieve a run rate of approximately $15 million in the NanoFab. We obviously are not going to achieve that as a result of current market conditions, but we are not going to provide any specific guidance at this point in time.

The good news is, and I will let Chris elaborate further on it, the process technology is there. We are qualified to engage with these customers. And we feel confident that, once the markets turn, we will increase those orders as they come in. Perhaps, Chris, if you would like to --?

Sure. I can add a little bit of additional -- we have sampled a lot of masks. We are selling masks obviously out of the NanoFab. Very good reports from the customer base. We believe the technology is quite sound. We have the capacity. So we really are involved in evaluating the market, trying to tune our customer profiles and jump on any improving market conditions we can.

Probably the most optimistic thing we see near term is related to some of Micron's activities in Taiwan with the memory companies there. That potentially taps into a new, fairly large mask market for us that we did not have -- anticipated having access to previously. So that is one we are working very hard to understand and capitalize on.

Okay, thanks. And then, Sean, what are your expectations from a depreciation perspective in your guidance for Q4?

Matt, our depreciation should go down approximately $2 million to $2.5 million from where we were at the end of Q3 as a result of the write-down of those underutilized assets. We don't anticipate going forward our depreciation to increase based upon the best available information we have right now.

Okay. And then obviously a lot of this is mix-related, but would there be a goal to get the Company to reduce its breakeven on a GAAP basis from a top-line perspective?

Absolutely.

Yes, definitely we are intending to do that. Our goal is to reduce costs. Every item on the P&L statement is going to be looked to [intensity] and try to reduce costs and we hope, of course, the top line to increase. And definitely our goal is to turn back to the black, making a profit.

Okay. One more question before I let other people jump in. The tax that you said for Q4, Sean?

Yes, it was -- sorry -- stumbled over my script a little bit. It was $1 million to $1.8 million.

Expense?

Yes, sir.

Okay, thank you.

Brett Hodess, Merrill Lynch.

Good morning. Can you elucidate a little bit more on what you think the breakeven is now and what revenue level you think you can get the breakeven level down to?

Sure, Brett. For Q3, our breakeven -- and then I will give you Q4. Breakeven on the operating income line was approximately $109 million. We had anticipated that to be about $112 million, $111 million, $112 million, but we had some other cost saving initiatives in there. For Q4, we estimate it to be, on the operating income line, to be approximately $105 million to $106 million. And we do have plans to -- as Deno said, every line item on our P&L is under scrutiny to reduce that even further without compromising our ability to achieve profitability and high-end growth.

So from a bottom-line perspective, obviously with the guidance -- at the high-end of the guidance at $0.08 per share, we would probably have to be at about, under the current operating environment, somewhere in the $109 million to $110 million, but we will get that down even further as we move forward.

Okay, and then you have commented on the business environment and the lower level of mask starts. Has that intensified the competitive environment as well at this point and are you fighting pricing pressures and things like that in addition to the lower volume?

I can make a few comments on that, Brad. I think the short answer is yes. In this kind of environment, you do see increased competitive pressures, more competition for qualifications and for the tape-outs that are coming out. On the positive side, we are better positioned than we have ever been to compete, particularly at the advanced nodes. So competition is high, but we are also offering a more competitive product into the market.

The bottom line though is the number of tape-outs and the volume of high-end masks getting pushed out into the merchant mask industry is just not where we would like to see it right now.

And then my final question on the FPD side, the business there was pretty good in the quarter, but now with FPD prices falling off, do you expect to see a weakening in that area or is that still going to be better because of new design activity or what not?

We do expect it to be down slightly or seasonally down for Q4 and that is embedded in our guidance, Brett. We have had a fairly good year in FPD year-over-year obviously, but it is still a significant part of our business, but we do expect it to be somewhat softer during this quarter.

Great. Thank you.

(Operator Instructions). Stephen Chin, UBS.

Hi, this is Ahmar Zaman calling in for Stephen Chin. Hi, Sean. Just a few questions. First of all, your gross margin declined by 500 basis points while revenue declined by 4%. Can you talk about that a little bit?

Yes, certainly. It is primarily related to two factors. We did have increased depreciation during the quarter and we also had the full-quarter impact of the NanoFab being open. Back in Q2, we only had basically a half a quarter impact of that being open. So the costs that were previously in SG&A were fully turned on in depreciation in Q3. Additionally, our high-end mix was down I believe from about, on the IC business, from about $11.8 million to approximately $8 million. So we had some unabsorbed costs impacting the margin as the primary factors.

Okay, thank you. Thanks for that explanation. And then just more kind of broadly on the market itself, for FPDs, how do we see -- you just mentioned that you expect the FPD business to be down going into the next quarter, but looking further out, we had Applied Materials that guided flat-panel orders down 75% quarter-over-quarter and then expect orders to be flat at that level going forward. LG this morning said that they expect a slowdown in FPDs in the second half of this year going into 2009, at least the first half of '09. How should we think about FPD, especially advanced FPD photomask business, going for the next few quarters for Photronics?

Chris, why don't you elaborate a little bit on that, please?

Sure. I can make some comments. I think FPD for the high end really depends a lot on design activity, new form factors and those sorts of things. We do believe that the leading edge panel makers are going to continue to try to design their way into new products. We don't see it as serious a situation as we did a few years ago where a lot of the big panel makers just put a complete freeze on new design and R&D activities. So we are still seeing some pretty good demand for high end, mainly attached to new designs, new form factors and new displays.

In terms of volume in the manufacturing lines, I think we have the same information you have that most of the large panel makers are forecasting some softness there. So that will hurt us on the repeat orders and the production mask side.

Thanks. Thanks for that. And then finally, a quick one, Sean. What was the options expense in the quarter?

I'm sorry. Can you --?

How much was options expense in the quarter?

Stock compensation expense was approximately $800,000.

$800,000. And should we expect that to be stable going forward?

It has been about $700,000, $800,000 the last few quarters. Don't anticipate at this point in time any significant fluctuations there, but we will report as things do change.

Okay, thank you very much.

Patrick Ho, Stifel Nicolaus.

Thanks a lot. Sean, can you just give a little more I guess color in terms of the advanced IC decline? What technology node was it at? Was it more the 65 nanometer node or was it more the 90 nanometer node type?

I think it was basically mostly DRAM at 65 nanometers, but there was some slight softness in the 90 nanometer as well, principally in Europe.

Okay, great. And Chris, I know you mentioned that you just got back from the NanoFab. In terms of the technology and some of the challenges that you guys have been I guess addressing over the past year, what are some of the technology challenges still ahead for you guys in terms of qualify or getting new customers onboard?

I think the main challenge we see for new customers is in the absence of a real strong demand, many customers are reluctant to qualify multiple suppliers. So for process of record costumers, those where we have the first in position, particularly with Micron, IM Flash and some of Micron's new partners, we are in very good shape there. We have the capability and the technology. We really need to just anticipate and react when the demand improves.

But in the current environment where we are not process of record because demand is pretty soft, the customers tend to be less aggressive with qualifying second sources. And so we are pushing instead of there being a pull from the customer side.

Things are going very well. I think they are very pleased with what they see. We get a lot of compliments on our capability, but there is not that intense pull to qualify multiple sources because they don't anticipate the need just yet. So I would say that is our biggest challenge on the short-term side.

Longer term, we continue to be concerned about cost of new equipment, capital equipment for next generations of nodes and utilization of that equipment, particularly for sub 45 nanometer mask technologies.

Okay, that actually provides a lot of color. And I guess just following up on that, I assume when you mean like for those that are second source type of customers, those were some of the logic ones you mentioned. I guess going forward, when demand picks up, will you be ready to ramp as the demand picks up whenever this next upturn hits?

We believe so. The customers, even the logic customers, remain supportive. We are still working through qualifications. We are not running into any serious problems with those qualifications. It is just not that strong pull you need to really push these things to closure. But we expect when their business improves, their tape-out volume increases, they need second sources, they will turn up the intensity on that and we are definitely ready. We have not had any warning signals from our customer base that we lack any technology components to deliver those high-end logic masks.

Great. Thanks a lot, guys.

[Jenny Hume], JPMorgan.

Hi, good morning. Just a couple of questions. Did you guys give the geographic sales breakout?

Jenny, I did. I can repeat that. Bear with me for one second. Sales in Asia were 63%, 22% in North America and 15% in Europe.

Okay, great. And then how much revenue did you generate from the NanoFab last quarter?

We did not disclose that for competitive purposes. We are certainly -- well, we did mention we did not have the robust tape-outs that we had expected for Q3. We did make significant progress, as Chris talked to and Deno also spoke about, with the qualification process. So we are disappointed certainly in the short term, but we are very confident in the long term. Once that market comes back, we can serve those customers and we will see our revenue go up.

Okay, and just so I am clear, how many customers are qualified at the NanoFab and how many have ramped volume?

Chris?

We have officially qualified I will say between three and five customers. I don't want to give the exact number. In terms of customers that we have shipped to, revenue, probably about five customers we shipped to and I would say three of those in volume.

Okay.

And we have three additional qualifications we are working on, but I can't declare those complete.

Okay. And the three you are working on, are those logic or memory?

They are logic.

Great. Thank you.

Chip Bonnett, FM Global.

Good morning. A few questions if I could and just a follow-up on the qualifications, because you have thrown out some numbers before and each quarter they had gone up a little bit. So could you just review that one more time as to how many customers are qualified or that you are in the process of qualifying please?

In general, or just for --?

At the NanoFab.

The NanoFab. Sure. We have five customers that we consider qualified that are related to -- including Micron, Micron affiliates. We have three others that I would say are in mid to late stages of qualifications, but we can't really consider those closed. And we do actually have a couple of others that we have shipped sample masks, test masks and you could say are in the early stages of qualification. But just reiterating my comment previously, in the absence of their business needing multiple sources of supply for photomasks, we are just not getting that pull. So we are a little softer on those last couple.

So total five, plus three that are moving along, plus a few more that we believe will take it more seriously once their business requires it. That should be pretty consistent with what we have said previously.

Okay. Yes, that makes better sense to me now. When we are in a better environment, do you see that number building much more than a 10 or 11 type of customer number or is that probably about the number of customers you will have and it is just a matter of building volumes?

Our intent for the NanoFab is to try to get a smaller number of customers that purchase in volume. This is really the best model for a facility like the NanoFab. So a small number -- by small I mean five to eight that commit volume, that really are strategically aligned to the NanoFab and can benefit from the kind of capability we have there.

If that volume does not exist from those customers because of market conditions, then we will cast a wider net and qualify whatever customers are available, even if it is relatively small volume. So we are remaining flexible, but our ideal situation is a relatively small number, less than ten who are really strategically committed to the operation and will purchase volume.

Okay, good. That is great color. Thank you. In terms of the high end, you have talked about the weakness there. And I am just trying to parse out how much of that weakness is from volume and how much is stemming from pricing at this point.

Chip, it is mostly from volume. It is not related to pricing. We don't believe during the quarter on the high end we lost any share. As Chris alluded to earlier, the customer requirement of demand wasn't there. And most of our -- a lot of our customers had taken some cost reduction measures, therefore, reducing their design activity or need for tape-outs during this point in time.

Okay, there was a comment that the environment has gotten more competitive in this light volume environment. So that was what I was picking up on in terms of pricing.

I think what we were trying to articulate there, and then maybe Chris can add on, is with respect to activity for some of the other qualification process, there isn't a need today with some of the -- not second tier, but other types of customers because they don't have the demand so they are not investing the time and resources for the qual process.

Okay. So basically it is fair to say it is really a volume issue and not so much a pricing issue at this point?

That's correct.

Okay. You talked about reducing costs and I am just wondering what your plans are there and what ability you think you have, because it seems in the recent memory anyway, you guys have been trying to focus and buckle down on your expenses for a while and it seems, at this point, you might be down to almost the muscle.

I don't believe that really. There is always room for improvement. And as I said earlier, we're going to look with attention to the whole P&L statement. There are opportunities in materials, there are opportunities all over the place really. So addressing the issues one by one and try to reduce costs. There are opportunities. We do believe that very strongly.

Okay. Is it more -- you mentioned materials. Do you foresee having to reduce headcount in any meaningful way or what other avenues are you going to pursue to continue to get expenses down?

Some headcount, but not anything significant, a very small percentage, not worth mentioning. There will be some small headcount, yes, very small.

Okay. And just lastly, you talked about some of your facilities maybe not being fully utilized. I think the China facility is not doing as well as you expected. Can you just -- and you took some impairment charges as well, but can you talk about what facilities you think are running well and other ones that utilization is well below plan and you may have to take further measure?

I don't think at this point in time, Chip, we want to comment on any specific facilities other than what we talked about in our text. But that said, we continuously review our manufacturing network. We will deploy the assets to where the work is and if those decisions are made that we need to close or consolidate, we will do so.

What we need to do as well is protect our relationships with our customers to ensure that we don't compromise our global business as a result of one decision or a decision on one or two manufacturing facilities. But we are continuously looking at that. Deno has got -- Deno is in the process of reviewing all the facilities with us and has some ideas we're going to take a look at going into Q4, but at this point in time, we don't want to comment on a specific location.

Okay, thank you.

(Operator Instructions). Jay Deahna, JPMorgan.

Thanks very much, can you hear me?

Yes.

Okay. A question for Deno. Deno, how long do you plan on doing the CEO thing this go around and what is your plan for bringing in a new CEO? Are you going to look to hire internally or externally?

And then for Sean, Sean, if this downturn lingers somewhat severely into the April quarter, do you start getting concerned about some of your debt covenants? What would trigger some concern on that?

And then the last one is you mentioned your China facility in the prepared remarks. Can you sort of expand on what is happening there?

I will take the first question, Jay. I [see that point] and a search committee, two individuals from the Board of Directors, and they are interviewing various executive search firms. They are in the process of picking one of them. And I would say within six months or so, we should have a new CEO in the Company. Definitely, at my age, my goal is not to stay for too long as the CEO of the Company.

Jay, I will comment. With respect to -- if the downturn is prolonged, we would obviously have to make certain other changes in our operating structure to ensure that -- and work with our financial providers to ensure that we are in compliance with our debt covenants. We do monitor them and have an open relationship obviously with our financial providers. And we are working on a number of different, various scenarios in case things do not pan out the way that we feel they would.

With respect to China, quite frankly, we are disappointed with the available market there. It hasn't developed that we had anticipated, through no fault of our folks there. The operations have improved. It's primarily a mainstream marketplace and the TAM today isn't where we thought it would be say three or four years ago.

So are you just going to sit with it with underutilized capacity because it is a potential large growth market over time or is there something that can be done to improve the lack of overhead absorption there?

There is a number of alternatives we are taking a look at. We obviously cannot afford to continue with that burden going forward if we don't generate the top line. But no firm decisions have been made, but we are working on a number of different scenarios.

Could one of those scenarios be just remove the equipment and just kind of sit there with the building at a minimal cost structure and use the equipment somewhere else and get back to it later so you don't eliminate your opportunity in that market?

Jay, there are a lot of options, but at the present time, we cannot comment on those options because it affects the employees, so we don't want to say exactly what we are going to do. I do believe, as the interim CEO, my future is very, we would say, helpful to the Company right now really because that is what I can do best to help the Company. But I don't want to elaborate now what our game plan is right now.

Okay. And I have got one last question for you, Deno. If you look at Photronics, it is a pretty straightforward business. You make photomasks for the semiconductor industry and now for the flat-panel industry. There is really no great discussions about diversifying into other businesses and whatnot, so it seems like your mandate is pretty straightforward and your objectives are pretty straightforward.

So given that scenario, why is it that the average lifecycle of a CEO at Photronics is somewhere in the two to three-year range and it just kind of keeps changing all the time? What is driving that and what can change that so that the Company can get some stability because clearly when CEOs move in and out, people below the CEO move in and out of that creates disruption?

The [other whole thing] is below the CEO, we have hardly any turnover below the CEO. Unfortunately, the CEO drives the bus, the CEO sets the tone, the CEO sets the pace. And unfortunately, we have not been very fortunate to find a CEO that has the passion and hungry. It seems, on the surface, a straightforward business, but it is not. It is a cutthroat, a difficult business. It takes a special skill set to survive in this environment.

That is all I can say. And I hope for this time, we have a better luck because definitely my desire is not to keep coming back to Photronics to run this Company at my age. But definitely as you say, I cannot agree with you that it is a straightforward business. It is a difficult business to run. People that came in with us did not survive for too long. You have to jump in and find out how difficult it is.

Okay. Thanks very much.

With that, ladies and gentlemen, we have no further questions on our roster. Therefore, Mr. Smith, I'll turn the conference back over to you for any closing remarks.

Thank you for your attention and participation in this morning's conference call. We look forward to talking with you again at the end of our fourth quarter at our December conference call. Thank you and have a good day.

Again, ladies and gentlemen, this does conclude the Photronics third-quarter earnings conference call. We do appreciate your participation and you may disconnect at this time.