Photronics Inc (PLAB) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Photronics fourth-quarter earnings call. During the presentation, all participants will be in a listen-only mode and afterward, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded on Wednesday, December 17, 2008. I would now like to turn the conference over to Mr. Scott Gish, Vice President of Marketing and Corporate Communications of Photronics. Please go ahead, sir.

Thank you and good morning, everyone. My name is Scott Gish, Vice President of Marketing and Corporate Communications of Photronics. We would like to thank you for joining our fiscal 2008 fourth-quarter conference call.

Before we begin, I'd 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 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 that may affect the Company's operations, market, pricing, competition, procurement, 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 first-quarter 2009 results.

Joining us on the call today is Constantine Deno Macricostas, Chairman and Interim Chief Executive Officer and Sean Smith, Chief Financial Officer. Unable to attend the call due to customer visit commitments prior to the holidays are our Chief Operating Officer, Chief Technical Officer and Senior Vice President, United States and Europe. Deno will first provide a brief review of market conditions and our strategic direction. Sean will then provide a comprehensive review of Photronics' fourth-quarter performance. Deno?

Good morning, everybody. Before turning the call over to Sean, I would like to take a few minutes to reflect back on 2008 as a whole and then take a look forward into 2009. During the year, several (inaudible) initiatives were achieved, for which we are quite proud. First and foremost, construction on our new high-end photomask manufacturing facility named NanoFab was complete in February. The construction and equipment installation were achieved on time and in just 16 months. Today, we can count 11 qualified customers in our NanoFab, covering nodes to 45 nanometer for memory and logic application. We can also confirm (inaudible) customers in each geographic region of our industry.

The NanoFab is indeed producing [verticals] with industry-leading specification. This has allowed Photronics access to new markets including Taiwan, [Beijing], (inaudible) manufacturers. (inaudible) highly efficient R&D model will allow Photronics to continue to prepare for future nodes as our customer base requires.

In Asia, we have expanded our manufacturing ability in both IC and FPD. Our [activity] revenues grew by 31% year-over-year, both through proliferation of Gen 8 technology (inaudible) and increased capacity and technology at our new PKLT site in Taiwan. During Q4, we achieved our first Gen 8 shipment from PKLT.

In October, we announced our intention to close operations of our Manchester, UK site. Manufacturing [for this] was in our fiscal Q1. Customer communication has been positive and cross-qualification activities with other sites have been completed. We are continuing to look at other opportunities for cost reductions to continue to reduce our breakeven point.

2009 will be a difficult year for many companies in the semiconductor industry. 54 months ago, many of our customers began to see softening demand. In addition, the financial market turmoil, which initiated this fall, is affecting everyone and Photronics is not immune. However, last (inaudible), we were able to successfully amend the credit facility agreement with our lenders. We remain committed to our long-term financial goals and most importantly, we will continue our focus to be the best-in-class service and value provider.

Of course, we must acknowledge and proactively manage the market realities currently faced by our industry. It is my goal as Chairman and Interim CEO to return Photronics to profitability and to strengthen our balance sheet. We will accomplish this through aggressive cost control and marketshare acquisition strategies.

I would like to conclude by expressing my thanks to our customers, suppliers and investors for your patience and support. I especially want to extend my deepest appreciation to our employees. Your energy and focus keep us moving forward and your [passage] has established tremendous loyalty with our customers. Thank you. Sean?

Thanks, Deno. And good morning, everyone. I will provide a brief analysis of our financial results for the fourth quarter and fiscal year 2008. I plan to also review our balance sheet and cash flows during the period and discuss our outlook going forward.

Before I begin, I would like to highlight two 2008 events that will impact 2009. During 2008, we recorded a charge primarily related to the write-off of goodwill and certain underutilized assets in the amount of $199.5 million or $4.79 per share. And on October 21, we announced our intention to streamline our operating infrastructure in Manchester.

In connection with the announced restructuring plan, we expect to record a total after-tax charge in the range of $3 million to $5 million through fiscal 2009. Approximately 25% of the total charge will be attributable to non-cash items and we expect to recover the charge in less than one year through lower operating costs and increased manufacturing efficiency.

For purposes of our discussions on operations for the quarter and fiscal year, I will primarily be referring to our operating results, excluding the impact of these items. Net sales in the fourth quarter amounted to $103.3 million as compared to $101.6 million during the fourth quarter of last year. During Q4 '08 as compared to Q4 '07, revenues for IC photomask declined $2.7 million to $77.5 million and revenues for FPD masks increased by $4.4 million to $25.8 million. The decline for IC photomask revenues is principally related to decreased ASPs, whereas the increase in FPD photomask is principally related to increased units.

Sequentially, sales decreased modestly by $2.4 million, or 2.3%, primarily as a result of reduced FPD sales during the quarter. Sales of advanced FPD and IC photomasks were 18% and 10% respectively of total sales for the quarter. On a sequential basis, sales of IC photomasks increased 19% during Q4 '08 and as a percent of total sales for the fourth quarter, sales were approximately 61% in Asia, 25% in North America and 14% in Europe.

Gross margin for the fourth quarter was 17.4% as compared to 19.6% in 2007. The decrease is primarily associated with an expanding manufacturing base, including costs associated with the opening of our US NanoFab in '08. Sequentially, gross margin increased 430 basis points as a result of reduced manufacturing costs, principally equipment costs, including the reductions associated with impairment and also reduced compensation costs.

Selling, general and administrative expenses for the quarter were $11.5 million as compared to $14.6 million last year with the decrease associated with reduced compensation expenses and the US NanoFab costs now being reported in cost of goods sold. On a sequential basis, SG&A decreased $2.2 million as a result of reduced compensation expenses due in part to cost reduction programs and reduced headcount. For the year, consolidated headcount is down approximately 6%.

R&D expenses, which consist principally of continued development for advanced process technologies, were $4.3 million in the quarter as compared to $4 million in 2007. During the fourth quarter, we generated operating income of $2.1 million as compared to an operating loss of $4.2 million for the third quarter of '08. This significant sequential improvement was primarily related to our ability to reduce revenue required to achieve operating breakeven to approximately $101 million during the quarter as a result of cost savings from reduced equipment and compensation costs, as well as other cost savings initiated over the past two quarters.

We will 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 is a need to evaluate future facility closures, asset redeployment and further workforce reductions, we will do so. However, all these options would be predicated by market conditions and customer requirements.

Net other income for the quarter was $24,000 as compared to net other expense of $100,000 in Q4 '07. Year-over-year, increased interest expense and decreased interest income were offset by increased foreign currency gains. During the fourth quarter, we recorded a tax provision of $1.4 million as compared to $800,000 in the prior year.

Net income was $200,000 for the fourth quarter of 2008 as compared to net income of $400,000 in the fourth quarter last year and net income per diluted share was $0.01 per share. As we exited the fourth quarter, we had approximately 1440 employees, equating to sales of $287,000 per employee on an annualized basis.

Now taking a look at our 2008 operating results, sales were $423 million, an increase of $1 million as compared to '07. The increase is the result of increased FPD photomask sales of $26 million offset by decreased sales of IC photomask of $25 million. The decreased IC sales were principally associated with reduced ASPs, primarily for mainstream products, while the increase for FPD photomasks were attributable to increased high-end units.

The gross margin for 2008 was 17.2% as compared to 23.6% last year as a result of our increased manufacturing base, including costs associated with the opening of our NanoFab in 2008 and reduced ASPs. SG&A decreased $6.3 million to $55.2 million or 13.1% of net sales, primarily related to reduced compensation expense and US NanoFab costs now reporting cost of goods sold. SG&A last year was $61.5 million, or 14.6% of net sales. R&D costs were $17.5 million for 2008 as compared to $17.3 million in '07 and operating income, exclusive of the impairment and restructuring charges, was $100,000 as compared to $23 million in 2007.

Net other expense was at $6.3 million in 2008 compared to net other income of $900,000 in '07 with the decrease resulting from increased interest expense due to increased interest rate and debt balances and decreased interest income associated with lower cash balances, which were partially offset by increased year-over-year foreign currency gains. We recorded a tax benefit of $2.8 million in 2008, which includes a $7.2 million benefit related to the impairment charges and the net loss, exclusive of the previously mentioned charges and loss per share for fiscal 2008, was $11.2 million, or $0.27 per share respectively.

Now turning to the balance sheet. Cash and short-term investments as of November 2, 2008 amounted to $85 million and working capital was approximately $69 million. The balance sheet includes the impact of the goodwill write-off and impairment charges of $206 million, as well as foreign currency translation adjustments in equity, which were $53 million for the quarter.

Accounts payable and other accrued expenses at November 2 amounted to $95 million as compared to $146 million at the end of last year with the difference primarily related to decreased accrued capital expenditures at the end of 2008 of approximately $47 million.

As Deno mentioned, on Friday, December 12, we amended our credit agreement. Key terms and conditions of the amended agreement include the following. The total availability under the revolver was reduced from $155 million to $135 million, of which we have $123 million outstanding. The revolver availability is further reduced to $120 million at October 31, 2009 and to $100 million at January 31, 2010. The revolving credit agreement matures on July 31, 2010 and the agreement includes various financial covenants and limitations on annual capital expenditures. Additionally, our foreign term loan matures on January 31, 2010.

Total debt at November 2 was $224 million and the principal components of the debt include the $123 million outstanding on our revolver credit balance, approximately $30 million of foreign term loans and approximately $71 million in capital lease obligations, including the US NanoFab.

Taking a look at our 2009 capital needs, we do feel confident that our CapEx spending is behind us and we expect to continue to generate quarterly cash from operations as we did this quarter. Minority interest at the end of the fourth quarter amounted to $49.6 million, which primarily relates to minority interest in the equity of our 57% owned subsidiary, TSMC.

Our cash flows from operations for the fourth quarter was $26 million and for 2008 was approximately $92 million as compared to $135 million in 2007. Cash flow used in investing activities during 2008 amounted to approximately $99 million, of which $105 million represented cash payments for capital expenditures.

Total CapEx, year-to-date, on an accrual basis was approximately $120 million, the majority of which consists of our US NanoFab and a 65 nanometer line in Korea. We do expect, in 2009, as I mentioned, to generate free cash flow as our significant capital spending is now behind us.

Taking a look ahead. Our visibility, as always, continues to be limited as our backlog is typically one to two weeks. While we are encouraged by a number of strategic opportunities at the leading edge with expanded presence in FPD masks and increased penetration and capacity to support 90 nanometer and below customers, we remain cautious as a result of this current environment.

As a reminder, we typically experience some normal seasonal shutdowns associated with the holiday period during our first quarter. This year, however, has been exacerbated by the difficult economic environment our customers are facing. As a result, we believe it is prudent to take a conservative view in forecasting revenues and earnings for Q1 '09. Based upon our current operating model, the projected outlook for revenue for the first quarter of '09 is in the range of $88 million to $95 million.

Capital expenditures for 2009 on a cash basis are forecasted to be less than $50 million. And during 2009, 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 areas which we are taxable. Accordingly, we are estimating income taxes for '09 to be in the range of $6 million to $10 million and for the first quarter of 2009, this will equate to a range of $500,000 to $1.5 million in whole dollar terms. As a result, based upon our current operating model, we estimate that the loss per share for the first quarter of fiscal '09, which is exclusive of the restructuring charges related to the Manchester closure, to be in the range of a loss of $0.29 to a loss of $0.17 per share.

In summary, we will emphasize that although our visibility is short, customer sentiment remained somewhat positive in the latter part of '09. That concludes my remarks. Now I would like to turn the call over to the operator.

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

Hi, good morning. Sean, when you're looking to the guidance for next quarter, could you comment at all directionally on what is going on in between IC and FPD? And then for the full year, what your kind of rough expectations are for growth in the high-end IC portion of your business? Historically, you guys have commented on targets, especially for the NanoFab.

Sure, Matt. I'll take a shot at it and then ask Deno or Scott to add further color to it. As we are all well aware, this is an extremely difficult environment currently and it continues to evolve. At the high end on the IC side, we mentioned we did see sequential improvement from Q3 to Q4 and the NanoFab also experienced some modest improvement; albeit not where we want it to be.

I think as we get into 2009, obviously, we guided down significantly from where we ended Q4 as a result of the current environment with the increased closures and the sentiment in the marketplace. We don't expect -- we do expect somewhat of a pickup sometime in '09, whether that is Q2 or Q3, it is really anyone's best guess at this point. We do expect increased high-end penetration, but that is all contingent upon high-end customers releasing designs for production. Deno or Scott, I don't know if you want to comment?

I have got to say, Matt, this quarter is going to be our low point for the fiscal year usually because our customers shut down the fab for two or three weeks because of the holidays, Christmas and Thanksgiving and so on. But definitely, we are optimistic that we'll, starting second quarter, we see an uptick, especially the second half, we should see much better improvement overall.

Okay. Thanks, Deno. Sean, could you comment just briefly given some of the changes to your debt structure what the expected interest expense is for Q1?

Our interest expense for Q4 was approximately $3.5 million or so. We do expect it to increase $1.5 million to $2 million for the quarter. That said, we do expect as we get into '09 as a result of our ability to generate cash flow from operations, even at a modest level and only spending less than $50 million on CapEx, we will have a significant ability to service our debt service and sequentially over time get that interest expense down.

Okay. And I think I missed it. What was the other income that offset that expense in Q4 -- the total?

As a result of the significant fluctuations on a worldwide basis in Europe, US and in Asia, foreign currency gain of a little bit over $3 million during the quarter -- other income and expense.

Okay. So all in all, you would expect that number to go up pretty meaningfully in Q1? The total nonoperating expense?

It should go up. Meaningful, how much remains upon a number of other factors in there, but it should go up at least $2 million I would presume.

Okay, thank you.

Brett Hodess, Merrill Lynch.

Good morning. A couple questions. First, can you talk a little bit about, as you look at the next quarter or two, given the guidance, the difference between FPD and IC, demand during those quarters, do you expect them both to fall about as much or do you think one holds up better than the other?

Well, we didn't give specific guidance with respect to the revenue splits between IC and FPD. Certainly, the IC units will be down because of we are exposed to a lot more customers. We would expect FPD to be sequentially down as well as a result of the holidays. So we are keeping a daily eye on what is going on in the market environment. Scott, I don't know if you want to add any color to that.

I think, Brett, they both trended down a little bit. As Sean has said earlier, our mix has improved a little more high end in FPD, so I think that is tempering that and helping us do better on the FPD side than IC.

Okay, great. And if you could remind us on the IC side, what, as for the advanced ICs, what is the breakpoint that you use on technology for considering it in advanced IC masks?

It's primarily 90 and below, but the vast majority of what is in the pocket or in the pipeline right now is 65.

Okay. Then could you talk a little bit about the breakeven level? You said it was $101 million this quarter. Where do you expect, in your current cost reduction programs, you'll take that to over the next few quarters or do you have a goal for later in the year to be at a lower level or maybe if you could give us some insight on that?

Our primary goal is, at any specific revenue levels, to be at breakeven. We expect to get the $101 million down as we have gotten it down. I believe in Q2 of fiscal '08, it was $113 million and Q3, it was about $109 million. In Q4, we thought it was going to be $105 million or $106 million. It came in at $101 million. So we're going to continue to work on ratcheting that down. During this quarter, we will benefit to some extent by the closure of Manchester and getting those costs behind us and those employee costs will essentially -- the majority of which will go away. So I would expect it to be down $1 million to $2 million each quarter as we move forward.

Okay, thank you. And I guess one last question. When you look at the pricing environment, there is always price pressure, but you talked about the pricing declines in ICs and it sounds like that came mostly in the mature market. Is that accurate and is the advanced market holding up or do you get a mixed ASP benefit as you get more 65 nanometer over time? If you could talk a little bit about that pricing environment.

Maybe Scott can give you more (inaudible).

So of course, the pricing environment is competitive as you might expect. I think it is pretty much spread across the board as far as high end, midrange. Pricing pressure is there everywhere. However, since we are a new entrant in the high end, we are able to get our corporate ASP higher by getting a better mix on the high end. So I think we are handling that pretty well so far.

Great, thank you.

Steven Chin, UBS.

Hi, this is Ahmar Zaman calling in for Steven Chin. Hi, Sean. Hi, Deno. Congratulations on the good execution this quarter. My first question is looking at your guidance next quarter and your commentary so far, what gives you confidence that 1Q is the low-water point in this cycle for Photronics? Is it share gains? And then just to follow up, how much of the revenue in this quarter came from NanoFab?

With respect to the low quarter, I mean we literally have day-by-day orderly flow and when we are hearing our customers on a global basis are closing sometimes for a week, sometimes for two weeks work furloughs, that essentially takes arguably 10 to 15 days of production out of our workflow because we are not getting the orders flowing in. So just by virtue of -- unless these furloughs continue, which we would not expect after the holiday period, we would expect, as Deno alluded to, a modest or a typical seasonal pickup in Q2, but we will continue to monitor that obviously.

With respect to the NanoFab, we are not going to specifically indicate what the revenue level was for competitive purposes, but we will say that it was modest improvement in a very difficult DRAM environment and we are continuing to focus on ways to monetize that facility. The customer quals have been executed very well by the team there. Unfortunately, it is a difficult environment at the leading edge right now.

And then if I may quickly, were there any 10% customers in the quarter?

Typically, we disclose 10% customers at the end -- annually at the end of a quarter and Samsung certainly has consistently been a greater than 10% customer. With respect to our other customer mix, I don't anticipate, on an annual basis, to have any other 10% customers in there. However, when we file our 10-K, you will see a slight change in or customer mix with some additional high-end players in there.

And just finally, can you give us an update on the private placement for senior debt that you initiated a couple of months ago?

Sure. With respect to the private placement we've launched I believe end of September, early October, we did not proceed with that or actually have any paper issued. In the amendment to our credit agreement, the requirement to obtain $75 million of permanent capital has been removed. Obviously, with the difficult credit environment and appetite for that type of debt to come in at significant interest rates, we did not execute on that.

Thank you.

Patrick Ho, Stifel Nicolaus.

Hi, this is Mary Lee for Patrick Ho. Thanks for taking my question. Just a few housekeeping questions. Can you provide us the stock options expense for this quarter?

Sure. For the quarter, it was approximately $600,000.

And then what is your free cash flow?

For the quarter?

Yes.

It was about $16 million.

Okay. And so gross margins came in better than expected this quarter and you had talked a little bit about the cost reduction. Can you discuss a little bit about the trend of gross margin for next quarter or 2009?

For the first quarter, gross margin, as a result of the guidance, would end up going the other way, obviously, because we operate on somewhat of a high fixed cost business. That said, as we continue to pull costs out of our infrastructure and then our revenues go back up sequentially, gross margins should improve, we expect, sequentially Q2, Q3, Q4 of '09.

Okay, great. Thank you.

(Operator Instructions). [Chip Bonnett], FM Global.

Good morning. A few questions if I could. Sean maybe said it earlier, I missed the -- what was the high-end mix this quarter?

Hi, Chip. The high-end mix as a percent of total sales was 18% for FPD and 10% for IC.

10% IC. Okay. And you mentioned about some cost shifts from SG&A to gross margin. Can you elaborate on that a little bit?

That was more of an annual basis; it was not for Q4.

Okay.

Because on the startup operation last year in the NanoFab and some others, we had those costs bend in SG&A, but on a sequential basis for SG&A Q3 to Q4, that is essentially an apples-to-apples comparison.

Okay, fine. That's great. And then in the past, you have talked about qualifications at the NanoFab. Can you talk about that a little bit today and has activity there kind of come to a halt given the environment?

Sure, Chip. We will -- Scott will give you some additional color on that.

Sure. The qualifications to the NanoFab are going very well. We have 11 different customers that are qualified today, which we have or can get revenue from. There are another three major logic IDM customers who are in, what I would call, the latter or final stages of qualification. So they would turn that into revenue towards the end of this quarter or certainly into Q2.

Okay. So for the most part, you have qualified I guess maybe the bulk of the customers that you have been working on for say the past six months and basically just waiting for the conditions to improve for customers to order from you. Is that essentially the situation?

Right. We are continuing to -- we brought customers in in phases obviously. We had the JV partners to bring in first and get them ramped into production and then we had several phases of customers that we were bringing through. So we are into our third phase now. We are bringing some new customers on in the early parts of that as we are finishing up other qualifications. But you are correct in that, in some ways, the ramp of production will be, of course, mitigated by their demand needs, but we will be ready to take that.

Just to add a little bit on the NanoFab. Although we are not going to provide specific revenue and expense targets, I will say that, even with the modest increase sequentially, NanoFab is not a significant, at this point, a cash drain at the operating income level.

Okay. That's great, thank you.

There are no further questions at this time.

I would like to make one comment really that we are expecting the Q1 to be soft, but definitely we are expecting Q2 and going forward to be much better positioned to see some increase and at the same time, looking to continue reducing cost. So definitely that is how we are going to be able to become profitable again.

After that, I would like to thank you for your attention and participation in this morning's call, you guys. Each of us from Photronics wish you happy holidays and a prosperous new year. Thank you.

Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation and ask that you please disconnect your line.