Photronics Inc (PLAB) 2009 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 20, 2009.

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 second-quarter 2009 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 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 third-quarter 2009 results. Joining us on the call today is Constantine 'Deno' Macricostas, Chairman and Chief Executive Officer; Sean Smith, Chief Financial Officer; and Dr. Peter Kirlin, Senior Vice President United States and Europe. Deno will first provide a brief review of the market conditions and our strategic direction. Sean will then provide a comprehensive review of Photronics second-quarter performance. Deno?

Thank you, Scott. Good morning, everybody. Before turning the call over to Sean I would like to take a few minutes to summarize the events from Q2 and discuss our strategic direction.

This week Photronics restructured the significant debt instruments. First, we worked with our bank group to amend our revolving credit agreement. Second, we worked with our joint venture partner to reach an agreement to amend our NanoFab lease agreement. Amending these two agreements will improve our balance sheet and cash flow position.

Coupled with ongoing operations and financial activities, working capital during the quarter improved by $21 million and our cash balance increased $10 million sequentially. With this revised agreement and extended terms Photronics can now move forward through 2009 and 2010 with greater financial certainty and flexibility.

Our financial results for Q2 were in line with expectations and guidance for the quarter. During the past three months we have seen the customer environment stabilize and utilization levels within the fabs continue to rise. Likewise, at Photronics we saw order activity bottom in March and gradually improved thereafter.

Despite the difficult environment, which included many fab shutdowns during the quarter, our (inaudible) sales price photomasks remained flat quarter over quarter. Our panel display photomask sales declined sequentially because many of these customers experienced extremely low utilization levels throughout the first half of Q2 and therefore we felt new design takeouts. Flat-panel display order activity appeared to bottom later in IC segment.

Our continued efforts on cost reduction progressed during the quarter as well. In total we have successfully reduced our quarterly operating breakeven point approximately $25 million over the last year. We will continue our sharp focus on cost control and balance improvements as the year up 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 increase cash flow from operations.

The improving health of our customers; as we are looking forward to the second half of fiscal 2009 with increased optimism. Wafer starts and factory utilization rates are on the rise for IC manufacturers. Industry IC ASPs, average selling price, also continues to improve, particularly in the memory market. The flat panel display utilization levels have improved considerably and glass makers are increasing output levels. These factors point to an improving demand environment as we give customers the confidence to begin releasing new circuits and panel design.

We remain optimistic concerning quarterly revenue improvements. We will continue to work on new technology qualifications and market share improvements to fully capitalize on the market recovery. I want to thank you our suppliers for their support, our customers for their confidence, our employees for their continued dedication as we navigate through these difficult times and market conditions. Thank you.

Thanks, Deno, and good morning, everyone. I will provide a brief analysis of our financial results for the second quarter of fiscal year 2009 and I will also review the balance sheet and cash flows during the period and review our outlook going forward.

Earlier this morning we issued a press release announcing that we were entering a new NanoFab lease agreement. Under the revised terms agreed to with our lessor the lease term will be extended. Accordingly, the capital lease obligation and net assets associated with the NanoFab will be reduced by approximately $30 million and annual cash flows will improve by approximately $7 million.

As a result of this transaction and our press release that went out on Monday regarding our extended amended credit agreement, we have posted a series of slides on our website which detail some of the pertinent terms and conditions for each of agreement. The first slide, slide number one, discusses the relevant terms associated with the May 15 amended credit agreement. The second slide gives an overview of the warrant summary associated with the amended credit agreement. And slide number three depicts a pro forma balance sheet at May 3, 2009, which reflects the modifications to the NanoFab lease agreement, which essentially reduces our overall debt by approximately $30 million.

Before I get into some of the details for Q2 I would like to remind everyone that we ceased production in the first quarter at the Manchester, England, facility. During the second quarter of '09, including an impairment in the Manchester facility, we incurred approximately $1.4 million net of tax related to the Manchester closure.

Now taking a look at the operating results, net sales for the second quarter amounted to $83.2 million. Revenues for IC and FPD photomask were $63.8 million and $19.4 million, respectively. Sequentially, IC sales remained flat despite this difficult environment while our FPD sales declined $4.8 million.

Sales of advanced IC and FPD photomask were 7% and 12.1%, respectively, of total sales for the quarter. Included in these percentages are mask sets for semiconductor design at and below 65 nm and for FPD sets used to fabricate flat-panel products using G7 and higher technology.

As a percent of total sales for Q2, sales were approximately 61% in Asia, 28% in North America, and 11% in Europe.

Despite decreased sequential revenue of $4.8 million, the gross margin for the second quarter increased to 13.7% or 170 basis points, primarily as a result of our cost reduction programs and reduced equipment costs. SG&A expenses for Q2 were $10.6 million and R&D expenses, which consist principally of continued development for advanced process technologies, were $4.2 million in the second quarter, which is an increase of $600,000 sequentially. The increase is related to our continued high-end customer qualification in the US and in Asia.

Excluding the costs associated with the Manchester closure, we incurred an operating loss of $3.4 million for the quarter. During the quarter we continued to implement cost savings and reduction plans thereby reducing the revenue required to achieve our operating breakeven to approximately $88 million to $89 million in Q2 as compared to $94 million in Q1.

Over the past year, as Deno has stated, we have reduced this quarterly operating income breakeven point by approximately $25 million. We will continue our focus on several cost reduction initiatives which should further reduce our operating income breakeven in third quarter and better position us for the future.

Additionally, as always, 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 is a need to evaluate future facility closures, asset redeployment, and/or further workforce reductions, we will do so. However, all these actions should be predicated by market conditions and customer requirements.

Other expense net for the second quarter was $5 million as compared to $3.6 million in the first quarter with the increase primarily associated with increased foreign exchange expenses. During the second quarter we recorded a tax benefit of $76,000 and excluding the charges related to the Manchester facility closure our net loss was $8.7 million for Q2 with the EPS at a loss of $0.21 per share.

At the end of Q2 '09 we had approximately 1,325 employees, which is down from the 1,450 employees at the end of fiscal 2008.

Now taking a look at our first six months year-to-date operating results, sales for the first six months were $171 million, a decrease of approximately $42 million from the first six months of last year. The decrease is a result of reduced IC sales of $33 million and reduced FPD sales of $9 million. Year-to-date gross margin decreased to 12.8% from 19.1% as a result of the reduced revenues and SG&A expenses decreased by $8.8 million to $21 million.

R&D costs were $7.8 million for the first six months of '08 as compared to $8.9 million last year. And other expense net was $8.6 million in '09 compared with $3.8 million in '08 as a result of increased interest expense associated with increased interest rates and decreased investment income associated with lower cash balances.

Now turning to the balance sheet. Cash and short-term investments at the end of the second quarter amounted to $82 million with working capital of $41 million. This represents a $21 million sequential improvement. Included in working capital is $55 million of current debt. On a pro forma basis, which includes the impact of the NanoFab lease amendment agreement, working capital would have been $48 million at May 3, 2009. As discussed in slide number three, our total debt has been reduced by approximately $30 million as a result of this revised lease agreement.

Accounts payable and accrued liabilities at May 3, 2009, amounted to $73 million as compared to $80 million at the end of the first quarter. Our total debt at May 3 was $213 million or $182 million on a pro forma basis. The principal components of debt include $123 million outstanding revolving credit balance, approximately $27 million of foreign term loans, and approximately $63 million in capital lease obligations including the NanoFab. The $63 million is prior to the previously mentioned debt reduction of $30 million.

On May 15, 2009, we amended our credit agreement, and key terms and conditions as I indicated are outlined in slide one. Our total availability under the revolver was increased from $120 million to $130 million at the end of our fiscal year and from $100 million to $110 million as of January 31, 2010, through maturity. Our overall availability was reduced by $5 million to $130 million on May 15, 2009, and the Company also issued warrants that could be exercised up to 5% of the Company's stock.

Most importantly, the maturity of the agreement was extended to January 31, 2011, and the agreement contains modified -- has modified certain financial covenants.

In addition, we are working with our financial partners on our foreign terms debt, all of which is currently classified as current. Should we successfully conclude this discussion we expect that approximately $19 million of this loan will be co-terminus with the revolving credit agreement. Our minority interest at the end of the second quarter amounted to $48.8 million which primarily relates to the minority interest in the equity of our 57% majority owned subsidiary, PSMC.

Looking at our cash flows for the first six months and quarter, our cash provided operations for the second quarter of '09 was approximately $18 million that amounted to $26 million year to date, and our cash flows used in investing activities amounted to approximately $14 million, which includes $20 million for cash payments for capital expenditures. Free cash flows year to date amounted to $6 million and is expected to improve for the remainder of the year.

Taking a look at our 2009 capital needs we continue to feel confident that our significant CapEx spending is behind us and we expect to generate cash from operations for the year in an amount that is sufficient to cover our planned 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. As we begin our third quarter we are cautiously optimistic that we will experience some improvement over the second quarter. However, we do believe it is prudent to take a conservative view in forecasting revenues and earnings for Q3 '09.

Based upon our current operating model, the projected outlook for revenue in the third quarter of '09 is in the range of $83 million to $89 million. Capital expenditures for fiscal '09 on a cash basis are forecasted to be approximately $45 million and our projected third-quarter tax expense is estimated to be in the range of $800,000 to $1.6 million in whole dollar terms.

As a result, based upon our current operating model we are estimating our loss per share for the third quarter, excluding the impact of ongoing charges related to the Manchester closure and exclusive of the potential mark-to-market impact of the recently issued warrants, we expect the loss for the quarter to be in the range of $0.27 to $0.18 per share.

Now that concludes my prepared remarks. Now I would like to turn the call back over to the operator for questions.

(Operator Instructions) Patrick Ho, Stifel Nicholas.

Thanks a lot and nice job on the cost-cutting efforts. Sean, can you just give a little color in terms of the revenue outlook, in terms of the loss that you are projecting for the quarter? With revenues going up and I assume a little bit of better fixed cost absorption that the loss would also go down, particularly as you are getting close to your operating breakeven. What are some of the variables, I guess, that are keeping at least the earnings per share loss at these levels?

Okay, Patrick, that is an excellent question. Primarily there are a couple of drivers related to that. It is true our operating fixed costs or cash costs are continuing to go down, but as a result of the revised credit agreement we do expect interest costs to go up about $1.3 million to $1.5 million quarterly. And we do expect as a result of the revised lease agreement to have some D&A go up, believe it or not, as we write-down the NanoFab facility over a quicker period.

So that is a non-cash item. So it does increase costs that are essentially below the line or non-cash costs. But our true operating cash costs are projected to be flat to down quarter over quarter.

Okay. That is great. Maybe on a broader basis in terms of the NanoFab, I know that the current markets are preventing any 'volume' and probably some design activity. But given your exposure on the memory side of things with your partner Micron can you just give a little color on how things are going on the logic and foundry side in terms of qualifications, particularly since those guys are moving to a 4x node? Just provide a little color on how things are going there.

I will speak to, Patrick, with respect to the -- just briefly on a high level the NanoFab without providing specific data. We did see sequential improvement in the NanoFab from both a top line and from an operating income standpoint, so we continue to be excited about that. And with respect to the qualification process, I will turn it over to Scott for a little additional color.

Hi, Patrick. This is Scott. We did during the quarter add one additional qualified customer in the NanoFab and probably more importantly one another customer who had previously been qualified we moved to commercial production. So those were the two significant advances for the quarter in NanoFab.

I guess just maybe a little more color, like on the logic side are you seeing any more activity just given that they are moving to the 4x node?

Some more activity there, yes. There certainly is a qualification effort still going on there and I would say that qualification efforts are both in -- they are in all regions -- US, Europe, as well as Asia.

Patrick, I would like to highlight too that in my prepared remarks that R&D expenses did actually go up sequentially $600,000. And that is all related to the qual processes that are ongoing despite this difficult environment.

Great. And a final question for me. Obviously the commentary we are starting to hear in the marketplace on the flat panel display side of things are improving. What tangibly are you seeing currently out of this quarter? As we are in the July quarter, what are you seeing on the flat panel display side that is either giving you more encouragement or things are saying the same?

I will take that one again. The thing that we saw that gives us encouragement is the overall pretty strong improvement in utilization in the facilities, especially in Taiwan. Like we said in the remarks, the flat panel sides bottomed later than IC. It stayed stronger longer into the downturn and then it hit its bottom for us a little bit later, but we are seeing customer confidence now starting to turn. They talking to us about the advanced G7, G8 tape outs, some of which have occurred and others that are already in the queue.

Great. Thanks a lot, guys.

Brett Hodess, Bank of America.

Good morning. This is [Paul Thomas] for Brett Hodess. I wanted to ask you guys on the breakeven levels -- so $90 million was the last sort of stated objective and now with things rearranged a little bit is there a new objective below that or is it still in the same range?

Paul, this is Sean. The $90 million goal was at the operating income line and we achieved that this quarter. We are going to continue to try to ratchet that down to amounts less than that, but certainly we have achieved our overall goal. But we are going to continue to work on our cost containment, cost avoidance programs to pull some of our fixed cost out of the system without compromising our ability to service our customers.

Okay. And quick, on the revolver you didn't draw any more money down on the revolver recently. With the extended terms was there a near-term need for that money?

That is a good question, Paul. In fact we haven't drawn on the revolver I believe in well over a year. The reason that we entered into the amendment primarily related to the fact that the revolver was to become current Q3 of this year at the end of July. So we didn't necessarily need additional availability, although it does provide some financial flexibility.

We needed the extension, if you will, to take some of the near-term pressure off on the balance sheet as we work to improve our -- work to capitalize our installed capital and monetize it and improve our overall efficiency.

All right. Thanks a lot.

(Operator Instructions) Stephen Chin, UBS.

Hi, this is Ahmar Zaman calling in for Stephen Chin. Congratulations on a good quarter. My first question is about you mentioned the utilization rates. Can you tell us what your fab utilization rates were at the beginning of the quarter and what they are now?

Ahmar, this Sean. We don't specifically quote utilization, but we can say that certainly baked into our guidance and when we announced our February results we had anticipated a slowdown and that is what we did see coming into the quarter. Things picked up modestly in the midpoint of the quarter and that is baked into our guidance going forward, but it was certainly a slow start.

Okay. But things are improving on a month-over-month basis?

With such a short-term window, yes.

Okay. And then just a follow-up on the comment about NanoFab. You mentioned that you had added one customer to the qualification round and then had moved one customer to volume production. Can you give us an update of how many total customers there are in either states at the NanoFab?

This is Scott. There are 12 customers who are now qualified and can do revenue production from the sites that are fully qualified. And two things are happening now, among that list of those 12 customers they are, of course, continually adding new technologies even though they are a qualified customer as well as other people trying to come in. So I think the progress that we have had in the last quarter we are on pace probably to do the same as we go through Q3.

Okay. And can you also just add how many customers are in volume or revenue generating at the moment at NanoFab?

Of that list of 12 they are all I would say revenue generating, although some are more major than others. At least half that list would be, I would say, more volume type customers.

I think it would be fair to say that the opportunities there when things improve that these qualification have been completed. So we don't want to get too granular about the level -- the number of customers and the volume that each specific customer is doing, but the good news is the level -- the opportunity is there, the qualifications have been executed seamlessly, and we are there for the taking.

And then just a final housekeeping question, can you give us what your total stock option expense was for the quarter?

Sure, Ahmar. I believe it was about $640,000.

Okay. Thanks, Sean.

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

Hi, good morning. Sean, your expectations next quarter for the total non-operating expense line item roughly?

We probably expect that to go up sequentially, Matt, anywhere from $1.3 million to $1.8 million.

Okay.

Related to cash and non-cash interest. The warrants that we issued, although they have a value as indicated on slide number two of approximately $3 million, they need to be amortized into our income stream as a non-cash item.

Okay. And when you move to profitability would those warrants be included in the diluted share count?

They would need to the extent that they are exercisable. So we hopefully will get to the point in the very near term that we can start talking about the impact of those, but we are a bit aways from that.

Okay.

We do have -- I am sorry. I didn't mean to cut you off. We do have the opportunity to claw back up to 3% of those issued warrants.

Right. And then you had mentioned that there is going to be some accelerated depreciation at the NanoFab. What would you expect total D&A to increase by sequentially in Q3?

Probably about $1.4 million to $1.7 million. Some of that is related to the amortization or the non-cash amortization of the financing fees coming in. So most of the increase is on -- well, D&A is non-cash, but it relates to just, relates to the write-down of the -- accelerated write-down over the initial lease term to the NanoFab facility. And then there is the non-cash components related to the amendment that we went through.

Okay. And then just my last question is that I am actually pretty impressed by your ability to maintain the mainstream business in this environment. That is where we have seen, at least on the Fab side, a lot of people bring down their use of consumables, not that photomasks are consumables per se. And utilizations are far lower at that mainstream section.

How have you guys been able to maintain even just flat sequential business there? And would you chalk most of that up to market share gains?

I would like to turn it over to Peter Kirlin, Dr. Peter Kirlin. Peter?

The real answer there is we are proud of the efforts of both our sales and operations team around the globe because the way we have been able to preserve the mainstream business is through superior execution. And what that means to our customers is they get the reticles they order, not on time, but ahead of time with absolutely no issues whatsoever in product quality.

We are viewed by our customers as a result of the efforts of our global team as the low risk, literally, the no-risk supplier of their products. So that is how we are getting the job done.

Okay, great. Thank you so much.

(Operator Instructions) Stephen Chin, UBS.

Hi, thanks for taking my follow-up. Just to clarify on the interest expense line, you mentioned that it will increase by about $1.5 million a quarter. Is that kind of the range we should think about this line item going forward, about a loss of $5 million?

That will depend on the outstanding debt that we have obviously, Ahmar. To the extent we pay it down we would expect the interest to go down. There are certain provisions under the agreement that we would need to take a look at say for Q4, Q1 of next year. We are not at this point in time providing interest guidance out that far.

But our goal, obviously, is to pay down some of that debt that we have outstanding as quickly as possible to minimize the impact on our bottom line.

Okay. And then just on your advanced photomasks -- advanced photomasks sales were down about 42% sequentially and you mentioned that likely at the bottom right now. As we go into the second half how should we think about increasing advanced photomask sales? What opportunities are there in FPD and IC photomask realm?

Ahmar, I will try to bifurcate the two product types. On the IC side advanced photomask sales were actually up modestly quarter over quarter, which is a good indicator in this environment. And that ties into the qualification process we were talking about.

On the flat panel side they were down, and that is a result of demand during the quarter. But we do expect certainly on the IC side that metric to go up sequentially as we move forward.

All right. Thanks.

This is Scott, Ahmar. One more thing to add on to that is if you are looking at year-over-year numbers we had 90 nm included in the prior year where we don't have that in there now. So that would change that comparison.

Okay, thanks.

It appears we have no further questions in our queue at this time.

Okay. I would like to thank everyone for participating on the call. We look forward to discussing our earnings release in August when we close our Q3. Thank you. Deno, do you want to --?

Thank you for your attention and participation in 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 disconnect your line.