Photronics Inc (PLAB) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Photronics first 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, February the 18th, 2009.

I would now like to turn the conference over to 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 first quarter 2009 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 second quarter 2009 results.

Joining us on the call today is Constantine "Deno" Macricostas, Chairman and Interim Chief Executive Officer, Sean Smith, Chief Financial Officer and Dr. Christopher Progler, Chief Technology Officer. Deno will first provide a review of the market conditions and our strategic direction, Sean will then provide a comprehensive review of Photronics' first quarter performance. Deno?

Good morning, everybody. Before turning the call over to Sean, I would like to take a few minutes to summarize events from Q1 and discuss our strategic direction.

The prior quarter was a difficult one for any Company related to the semiconductor industry. [Losses] seasonality the fiscal Q1 which is down five to 10% was fairly affected by extended factory shutdowns within our customer base in this past two-week and market demand. This year in fiscal Q1 included the holiday periods of Thanksgiving in the United States as well as Christmas and lunar new year. Therefore all geographic regions were affected by holiday periods and factory shutdowns. Our efforts to gain market share tightly controlled course during the quarter did enable Photronics to meet this revenue and EPS guidance range despite this decline in the [economic] environment.

While our sales declined sequentially by nearly 15%, Photronics fared much better than others in the industry. As a result of the softening of the near-term demand, we took action with several cost reduction initiatives during the quarter in order to lower our breakeven point. First we shut down manufacturing operation at our Manchester, UK location. Product volume from the site has been smoothly transitioned to other locations within our global manufacturing network, customary actions have been very supportive.

Cost benefits from this action will take effect in Q2, Sean will be the reviewing the associated charges to appear in his remarks. We also initiated a series of expense reductions after the close of the first quarter. This initiative including [solid semi con] cutbacks with the intention of reducing costs in excess of 10% in this area. Continue our sharp focus on cost control and balance improvements as the year progresses. Since the majority of our CapEx spend is behind us for the near term, we are confident in our ability to continue to lower our breakeven point and to generate cash flow from operations.

Despite negative news in the marketplace, true signs of an emerging turnaround has begun to surface. First, several industry analysts now believe the high seed wafer starts will bottom during the current first calendar quarter and rise thereafter. Second, the pricing environment for IC and flat panel displays have begun to stabilize. And finally, [we shall receive] rush orders to replace depleted inventories. Keep in mind that Photronics will be one of the first beneficiaries of a turnaround. Since new product designs are the core driver for the most industry growth.

Even during this weak demand environment, semiconductors FPD makers are developing new products and customers are continuing to look to photo masks a vertical enhancement solution as a method to advance [reticle] scaling. This will include the use of double patterning for our advanced IC mask and [transfer circuits] for flat panel displays. These advancements and others will create opportunities for photomask manufacturers in the supply chain.

Our capital investment during the past few years have positioned us for success when the market recovers. Through these strategic investments we have broadened our footprint in foundry and logic. We can now penetrate attractive new memory and logic market with our leading edge technologies. While, I would remain cautious concerning any immediate corollary revenue improvement, we will continue to work on new technology qualification and market share improvements to fully capitalize on the market recovery when it occurs.

Sean?

Thanks, Deno and good morning, everyone. I'll provide a brief analysis of our financial results for the first quarter of fiscal '09. I will also review our balance sheet and cash flows during the period and discuss our outlook going forward.

Before I begin, I'd like to remind everyone that on October 21st, 2008, we announced our intention to streamline our operating infrastructure in Manchester, England. 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 '09. During the first quarter we incurred approximately $1.3 million net of tax related to the Manchester closure.

Net sales in the first quarter amounted to $88 million as compared to $103.2 million for the first quarter of '08. Revenues for IC photomasks were $63.6 million down $16.8 million as compared to the first quarter of '08. The decline in IC photomasks was attributable to decreased unit demand as a result of the softening semiconductor market principally for mainstream products. Revenues for FPD photomasks were $24.4 million or $1.6 million higher than the first quarter of '08. Sequentially sales decreased $15.3 million due to the decreased IC unit sales principally mainstream of $13.9 million.

While we historically have experienced reduced revenues in our first quarter associated with the holidays as Deno said, this year's impact was much more severe as many of our customers instituted longer fab closures and work furloughs. Sales of advanced IC and FPD photomasks were 6.4% and 14.7% respectively of total sales for the quarter. Included in these percentages are mask sets for semiconductor designs at and below 65 nanometers and FPD sets used to fabricate flat panel products using G7 and higher technology. As a percent of total sales for the first quarter, sales were approximately 64% in Asia, 26% in North America and 10% in Europe.

The gross margin for the first quarter was 12% as compared to 20% in the first quarter of '08. Sequentially the gross margin decreased 540 basis points primarily as a result of the decreased unit volume. Selling, general and administrative expenses for the first quarter of '09 were $10.4 million as compared to $16.3 million last year. Sequentially, SG&A decreased $1.1 million primarily related to reduced compensation and other expenses.

R&D expenses which consist principally of continued development for advanced process technologies were $3.6 million in the first quarter and sequentially R&D was down approximately $700,000. Excluding the costs associated with the Manchester closure, we incurred an operating loss of $3.5 million. During the quarter we continued to implement additional cost savings and reduction plans, thereby reducing the revenue required to achieve operating income breakeven to -- approximately revenue required to achieve an operating income breakeven to approximately $94 million in Q1 '09 of course using current foreign exchange rates as compared to $101 million in Q4 of '08.

As Deno alluded to, we have also accelerated several cost reduction initiatives which will further reduce our operating income breakeven in the second quarter and better position us for the future. These additional initiatives, among other items, include the following. A 10% across the board salary reduction, a freeze on merit increases, additional selected headcount reductions, reductions and elimination of certain benefits. Additionally, we continue to assess the 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 need to evaluate future facility closures, asset redeployment and further workforce reductions, we will do so. However, these actions will be predicated by market conditions and customer requirements.

Net other expense for the first quarter was $3.6 million as compared to $600,000 in the first quarter of '08 with the increase associated with increased interest expense due to overall higher effective interest rates and decreased interest income associated with reduced cash balances. During the first quarter we recorded a tax provision of $1.2 million and the minority interest expense for Q1 '09 amounted to $266,000 which represents a share of income related to our minority shareholders of our majority held subsidiaries. Excluding the impact of the Manchester consolidation charge, the net loss was $8.9 million for the first quarter with EPS loss at $0.21 per share. At the end of Q1 '09 we had approximately 1,370 employees, down from 1,440 at year end.

Cash and short-term investments at the end of the first quarter amounted to $72 million with working capital of $20 million. Included in working capital is $68 million of current debt, approximately $51 million of which is due on January 31st, 2010. Accounts payable and accrued current liabilities at February 1st, 2009, amounted to $80 million as compared to $95 million at the end of Q4 '08 with the difference primarily related to payments associated with accrued capital expenditures at the end of fiscal '08. Total debt at February 1st, 2009 was $220 million with the principal component of outstanding debt including; $123 million outstanding revolving credit balance, approximately $30 million in foreign term loans and approximately $57 million in capital lease obligations including the US NanoFab.

During the quarter on December 12th, 2008, we amended our credit agreement. Key terms and conditions of the amended agreement include the following; total availability under the revolver was reduced from $155 million to $135 million of which we have $123 million outstanding. The availability is further reduced to $120 million at the end of our fiscal year October 31st, 2009 and then to $100 million at January 31st, 2010. The agreement matures on July 30th, 2010, and the agreement also includes various financial covenants, limitations on annual capital expenditures. Additionally, our foreign term loans mature on January 31st, 2010.

Taking a look at our capital needs, we do feel confident that our significant capital expenditures over the past few years are behind us. And we do expect to generate cash flow from operations for the year in an amount certainly sufficient to cover our planned expenditures. Minority interest at the end of the first quarter amounted to $48.6 million, which relates primarily to the minority interest in the equity of our 57% majority owned subsidiary PSMC. Taking a look at our cash flow. Cash provided operations for the first quarter was approximately $8 million as compared to $12 million for the first quarter of '08. And cash flows used in investing activities during the first quarter amounted to approximately $12 million of which $12.8 million represents cash payments for capital expenditures .

Taking a look ahead, our short-term visibility as always continues to be limited as our backlog is typically one to two weeks. However, we are now operating in an environment in which customers are reducing costs by furloughing employees and closing fabs for an extended period. This has had and will continue to have a direct impact on our business model as we operate in a high fixed cost environment. Therefore, we believe it's prudent to take a conservative view in forecasting revenues and earnings for 2/2/09.

Based upon our current operating model the projected outlook for revenue for second quarter of '09 is in the range of $80 million to $88 million. Capital expenditures for 2009 on a cash basis are forecasted to be less than $50 million. We project our second quarter tax expense to be in the range of $700,000 to $1.5 million in whole dollar terms. As a result, based upon our current operating model, we are estimating our loss per share, excluding the impact of the ongoing charges related to the Manchester closure, for the second quarter of fiscal 2009 to be in the range of a loss of $0.30 to $0.19 per share.

That concludes my remarks. Now I'd like to turn the call back over to the operator for

Thank you. (Operator instructions) . One moment, please, for our first question. Our first question comes from the line of Patrick Ho of Stifel

Hi, this is [Mary Lee] for Patrick Ho. Can you give an update on your NanoFab and number of customers qualified and revenue to be recognized in the next few quarters?

Mary Lee, I'll -- this is Sean. I'll start answering the question and I'll have Chris Progler follow up. With respect to revenue the next few quarters, we did see during the -- we are not going to disclose the exact amount of the revenue but we did see modest improvement sequentially in the NanoFab. And we continue to be excited about the progress. With respect to the qualifications, I'll turn that over to Chris.

Sure. This is Chris Progler. We have about 11 customers qualified in the NanoFab. We have -- on the last call we reported three were in process particularly related to logic nodes. We have completed one additional one from that group and the other two are just about closed. We are just waiting on wafer feedback. So I'd say our qualifications are still proceeding as we had hoped. The end user demand, as you know, is a little bit down now so the pull-through for volume production orders from those [qualls] is a little slower than what we would like. But we are still seeing the customer support for the qualls and the qualls are proceeding very strongly.

Okay. And in terms of the costs, how much of it is reflected in cogs versus SG&A this quarter?

There's very limited costs related to the SG&A on a qualification process.

Okay. Great. Thank you.

(Operator Instructions) Our next question comes from the line of Brett Hodess of Merrill Lynch.

Good morning. A couple questions. First, Sean, on the restructuring of the debt, can you tell us what the interest rate has changed to on the revolver at this point?

The interest rate is approximately LIBOR plus 450, 475. So the effective yield all in is probably about 6.5% to 7%.

Okay. And that's compared to what it was before. Could you remind me?

Well, before last year we had a -- most of our debt was subordinated debt at 2.25%.

Okay. Great. And then on the flat panel side, as you mentioned that you're starting to see a little bit of stabilization there, can you give us an idea on that side how visible the activity is there? Is it are you seeing a lot of new product activity flowing through that gives you confidence that it can maybe show stabilization before the semi side or is it more -- is it still hard to predict what comes through there?

Brett, this is Scott Gish. What we have seen in the flat panel market is for the last two to three months the panel pricing of the -- the customer pricing has stabilized. It kind of hit its floor and it's held there for the last two, maybe three months. So that's kind of a good sign for them. In addition, we have certainly seen that activity in Korea has remained stronger than it is in Taiwan, which is more of a foundry type model for flat panel manufacturing. So there are estimates out there that show that by the end of the calendar quarter the utilization rates may be pretty high in Korea. They will lag behind that for in Taiwan.

Okay. Great. And then on the NanoFab qualls and on the leading edge in general, 6.4% at or below 65 nanometer, can you give us a feel for where the demand, is it at 65 or you're starting to really see it grow at 45?

For the -- this is Chris. For the memory products, I would say sub 65 was stronger pull for us. For logic, 65 and I would say limited activity at 45. So memory, particularly on the nand side definitely, full mode or more below 65-nanometer was very strong for us.

Okay. And then my final question was it sounds like the issues -- obviously it's volume, of course. Can you comment on how the pricing environment is for the advanced photomask at this stage? Is it mostly driven by capability or is the low demand level causing price pressures there that are impacting things as well?

Brett, I'll take a shot at answering that first and I'll turn it back over to Chris. But I will comment overall the -- sequentially we have seen pricing, pricing was not the issue in Q1. It actually had stabilized as Scott had alluded to even at the mainstream side. The issue was really unit volume. With respect to the high end and I'll turn it back to Chris, we did see some modest improvement in the ASP on a sequential basis and modest improvement on the top line with respect to the high end. So it's really just a unit driven exercise and it's not really price driven across the board. Chris?

Yes. I would agree with that. We have seen actually a little bit of an uptick in our ASPs for the high end mostly because of node migration more than anything. We have not seen tremendous amount of pricing pressure at the high end, primarily because the volume is a little bit lower and demand is down. Usually when demand picks up, the customers are ordering more volume. I think that's when you start to see more emphasis on customers pushing price down agendas. So right now it is not the main issue. The main issue is unit volume and end user demand.

Great. Thank you. I appreciate it.

Ladies and gentlemen, there are no further questions at this time.

Okay. Thank you, Sean. Thank you for your guidance and I'd like to thank everyone for their participation and for their attention and -- for this morning's call. 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.