Photronics Inc (PLAB) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Photronics fourth-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, December 9, 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.

Thank you. 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 fourth-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 that is except for historical events the information we will cover during this call may contain projections or other forward-looking statements regarding future events or the future financial performance of the Company and/or the industry. Such statements are predictions and certain risks and uncertainties which could cause actual events or results to differ materially from those projected. Although we believe that the expectations are reasonable, we cannot guarantee the accuracy of any forecasts or estimates and we do not plan to update any forward-looking statements if our expectations change.

This call will remain archived on our website until we report our first-quarter 2010 results. Joining us on the call today are Constantine Deno Macricostas, Chairman and Chief Executive Officer; Sean Smith, Chief Financial Officer; Dr. Peter Kirlin, Senior Vice President United States and Europe; and Dr. Christopher Progler, Vice President Chief Technology Officer. 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?

Thank you, Scott. Before turning the call over to Sean, I would like to take a few minutes to review our conference call from the fourth quarter and the fiscal year. 2009 was an unusual year for Photronics and the semiconductor industry. While the first half of the year was extremely difficult, the second half saw end markets improve and our strategic initiatives succeed.

First, we set out to lower our cost structure, to [more swiftly] restructure our manufacturing network, to reduce costs, and align an ever-changing customer landscape. We did so in a systematic way without sacrificing service to our customers whatever new performance. Our network today is more efficient, it better aligns to serve market needs.

Secondly, we placed intense focus on improving our balance sheet, making tremendous progress during Q4. In September, a successful common stock, a convertible notes offering generated $98 million net, which was used to lower our bank debt. At the end of the fourth quarter, our working capital improved to $90 million and our outstanding debt was reduced by $65 million.

Concern about our financial viability are now (technical difficulty) behind us. We are currently generating sufficient cash to reduce debt while also funding our CapEx needs. Additionally, we set out to establish Photronics as a leading edge technology provider for semiconductor photomasks, having already established this capability with the flat-panel display industry. During the year, we delivered high-end photomasks for the industry's most demanding applications, flash memory, DRAM, and logic, for feature sizes at and below 45 nanometer.

During the quarter, we believe we gained market share at the high end where sales improved 32% sequentially. NanoFab again increased the number of qualified customers (inaudible) as results in volume productions. Today nanoFab services 17 qualified customers, 10 of which are purchasing in volume. Of the 10 volume customers, six are top 20 customers of Photronics. Production verticals have been shipped from nanoFab to all measured geographic regions. Our intelligent investment in advanced technology have Photronics poised to continue gaining market share at the high end.

It will be in fiscal 2010, we are currently engaged in multiple leading edge technology qualifications, particularly with Asian foundries and at the IDM manufacturers.

Over the past year, the Photronics team met and overcame significant challenges while delivering against our objectives. [Interesting] forecast for 2010 are bright and our goals for the year are to continue growing market share through the execution of our high-end strategy with a return to profitability in the second quarter. Sean?

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

To assist our listeners during the call or as when you are reviewing a transcript of this call, we have posted a series of slides on our website for your reference that highlight certain events during the quarter. Slide number one refers to a reconciliation of GAAP to pro forma EPS during. Slide number two is a reconciliation of GAAP to pro forma operating income. Slide number three details our sequential revenue for Q3 and Q4 broken down between FPD and IC, including high-end splits.

Slide number four provides sequential details of our cash position and our debt position. Slide number five is an update of our qualifications and volume status at the nanoFab. And slide number six details the quarterly improvement in gross -- I'm sorry in cash gross and operating margins at the nanoFab.

I would also like to highlight a few transactions that did impact our results for the fourth quarter. Included in our press release issued last night was a pro forma reconciliation of GAAP results to reflect the impact of these items on our quarterly results. As a reminder, our guidance for the quarter was revenue in the range of $92 million to $97 million with an EPS loss of $0.15 to $0.09.

As Deno mentioned on September 16, we issued 11.1 million shares of common stock at $4.15 per share. We additionally issued 57.5 million senior unsecured convertible notes which bear interest at 5.5%. The notes are convertible at a common stock price of $5.08 per share and equate to about 11.3 million shares. The net proceeds of $98 million was used to pay down outstanding bank debt.

During the quarter, we also incurred charges of approximately $6.6 million net of tax related to the previously announced closures of our China and UK facilities. We additionally sold our Manchester UK facility and generated a gain of $1.5 million net of tax.

As a result of the $98 million pay down in debt, we also wrote off $3.7 million of deferred financing fees. This was offset by approximately $800,000 of interest savings as a result of the debt pay down from the net proceeds of the Capital transactions. The interest savings was not previously forecasted in our guidance for Q4.

As a reminder in Q3, we issued 2.1 million warrants to our bank group in connection with our May 15, 2009 amendment. 40% of these warrants vested immediately. Concurrent with the debt pay down, we essentially clawed back the unvested portion or $1.2 million warrants. As a result, we recorded a non-cash gain of $6 million. We additionally recorded a $500,000 non-cash gain on the market value adjustment on the vested portion or 768,000 warrants to our bank group.

The aggregate result of these items on a pro forma basis -- now this is assuming the equity and bond offerings do not take place -- result in a pro forma loss, net loss of $3.2 million or $0.07 per share as compared to our guided range of $0.15 loss to a $0.09 loss per share.

For purposes of our discussions on operations for the fourth quarter, I will be primarily referring to our operating results excluding the impact of these pro forma items.

Net sales in the fourth quarter amounted to $94.7 million, which was slightly over the midpoint of our guided range of $92 million to $97 million. Revenues for IC and FPD photomasks were $73.8 million and $20.9 million respectively. Sequentially, total sales decreased by $700,000 due primarily due to decreased FPD sales of $2.8 million. The decrease was partially mitigated by improved IC sales of $2.1 million, principally high-end sales.

Advanced IC sales were 13% of total IC sales for the quarter, as compared to 10% in the third quarter. Advanced FPD sales declined sequentially by $3 million to $11.2 million or to 54% of total FPD sales. 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 G-7 and higher technology.

As we noted in our third-quarter conference call in mid-August, third-quarter revenues were enhanced by the early arrival of a few high-end photomask sets during the last few weeks of the quarter. These sets were previously expected to be taped out during our fourth quarter.

Regionally as a percent of total sales for the fourth quarter, sales were approximately 59% in Asia, 31% in North America, and 10% in Europe. The gross margin for the fourth quarter was 18%. Sequentially gross margins decreased modestly by 90 basis points due in part to the reduced sales coupled with increased compensation costs.

Selling, general, and administrative expenses for the fourth quarter were $10.2 million as compared to $11.5 million in the fourth quarter of '08. Sequentially SG&A increased by $200,000. R&D expenses, which consist principally of continued development for advanced process technologies were $3.8 million for the fourth quarter.

Excluding the consolidation charges and the gain related to the Manchester asset sales, we generated operating income of $3.1 million on $94.7 million of sales during the fourth quarter. Sequentially, our operating margin decreased slightly to $3.1 million from $4.2 million in Q3 '09. The sequential reduction is attributable to the decreased sales and to a lesser extent increased compensation costs.

Other expense net for the fourth quarter was $1.8 million which includes the previously mentioned mark-to-market gain of $6.5 million and loss of $2.9 million related to the write-off of deferred fees net of interest savings. Excluding the impact of these items, net other expense was $5.4 million as compared to $7.4 million in Q3 '09. The sequential decrease is attributable to reduced interest cost and foreign exchange items.

During the fourth quarter, we recorded tax provision of $1.4 million, which was within our guided range of $1 million to $1.8 million. Now including the effect of the previously mentioned pro forma items discussed earlier and in our press release, the net loss was $3.2 million for the fourth quarter of '09 with an EPS loss at $0.07 per share, which compares favorably to our guided loss of $0.15 to $0.09 per share.

At the end of the fourth quarter, we had approximately 1300 employees down from 1450 or 10% as compared to October '08.

Now turning to the balance sheet, cash and short-term investments at November 1, 2009 amounted to $88.7 million, with working capital of $90 million. Accounts payable (technical difficulty) and accrued liabilities at November 1 '09 amounted to $80 million as compared to $95 million at the end of last year with the decreased result of decreased accrued CapEx at year-end of '09, $10 million of CapEx was accrued as compared to $23 million at the end of '08.

Total debt at November 1, 2009 was $122 million. Principal components of outstanding debt include $57.5 million of senior unsecured convertible notes; $30 million in outstanding aggregate bank debt; and approximately $34 million in aggregate capital lease obligations including the US nanoFab. At November 1, 2009, we have approximately $47 million of availability on our revolving credit agreement.

As Deno mentioned during the quarter, we paid down $65 million of debt as a result of the net proceeds from the combined offerings of $98 million less the $57.5 million of recently issued senior unsecured notes. We additionally used proceeds of approximately $4 million from the sale of our Manchester UK facility to pay down debt. The remainder or approximately $21 million was paid off through operating cash flow and this was certainly benefited by the continued traction in the nanoFab during the quarter.

We are also actively pursuing a disposition of our recently closed China facility, the proceeds of which will be used to further pay down outstanding bank debt.

Taking a look at our cash flows, cash provided by operations for the fourth quarter of '09 was approximately $27 million and amounted to $68 million for fiscal '09. Cash flow used in investing activities year-to-date for the year amounted to $25 million which includes approximately $35 million for cash payments for capital expenditures. Free cash flow in fiscal '09 amounted to a $33 million.

Net cash used in financing activities for fiscal '09 amounted to $41 million and includes approximately $134 million of debt repayments offset by $98 million in net proceeds from the combined convertible and common stock offering.

We continue to feel confident that our significant CapEx spending is behind us and we expect to generate cash from operations in 2010, certainly in an amount that is significantly more than sufficient to cover our planned capital expenditures.

Taking a look at our forecast for Q1, our visibility as always continues to be limited as our backlog is one to two weeks. We are however encouraged by a number of strategic opportunities at the leading edge for both IC and FPD photo masks. As a reminder, we typically do experience some normal seasonal shutdowns which in a typical year could be down 5% to 8% which are associated with the holiday period during the first quarter. As a result, we believe it is prudent to consider these shutdowns in forecasting revenues and earnings for Q1 2010.

Based upon our current operating model, the projected outlook for revenue for the first quarter of 2010 is in the range of $91 million to $96 million. While we will not be providing detailed guidance to the second quarter this morning, initial inputs from our largest global customers indicate that we will likely return to historic patterns of strong sequential revenue performance during the second quarter as these customers release designs that are held up to the year-end holidays.

Capital expenditures for 2010 on a cash basis are forecasted to be approximately $50 million which does include $10 million of install CapEx from 2009. During 2010, our tax rate will continue to be impacted by the flow of income from jurisdictions for which we 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 2010 to be in the range of approximately $6 million to $8 million and for the first quarter of 2010, we estimate this to be in the range of $1 million to $1.8 million in whole dollar terms.

As a result based upon our current operating model, we estimate that the loss per share in first quarter of 2010 is exclusive of any remaining impact on the mark-to-market valuation of the vested common stock warrants to be in the range of a loss of $0.08 per share to a loss of $0.03 per share.

In summary, I will emphasize that though our visibility is short, customer sentiment remains positive for continued improvement in fiscal 2010. That concludes my prepared remarks. I would like to turn the call over to the operator.

(Operator Instructions). Krish Sankar, Bank of America Merrill Lynch.

Thanks for taking my question. A couple of them. Sean or Deno, first in terms of the FPD, high-end FPD revenues being down in Q4, was it primarily a function of some of those high-end FPDs got pulled into 3Q? How do we think of flat-panel revenues going forward into 2010?

Krish, we did have certainly -- we did have some sets that came in at the end of Q3 that we had anticipated coming into the beginning of Q4 that did have an impact on a sequential basis, certainly. But we still remain very optimistic on FPD and Scott Gish can provide some additional color.

Yes, that's correct, Sean. There was some capacity expansion in our customer base during the third quarter which drove some incremental sales. That was completed in the third quarter, came in right at the end of the quarter and buoyed the sales in Q3. It does look like LCD television sales were very strong here. The Black Friday week sales and they are anticipated to be good for the Lunar New Year. So as we look in 2010, I think you will see a return in FPD.

All right. In terms of the IC side, can you talk a little bit about the activity you are seeing there, specifically like between memory, logic, and foundry, where do you see the most activity, at what technology node by segment?

Well, as far as technology nodes, are you saying what technology nodes are driving high-end sales at the moment?

Yes, by memory, foundry, logic.

Well, we don't typically break out our segments, but we are certainly benefiting from the memory side in our relationship with Micron and the affiliates, including in Taiwan and we expect that to continue to perform as we get into fiscal 2010. And certainly with some other logic customers we are seeing some traction starting in the nanoFab.

Yes, we had the first logic customer break the $1 million barrier in revenues in the nanoFab on a run -- last quarter. Broad-based it is really the strength in the business is not isolated to any one particular technology node or segment.

This is Scott. We have certainly seen some advanced push from no transition in the memory and flash segments. Maybe Chris Progler, our CTO, could comment a little bit on that.

Sure, yes, this is Chris. I think what we've seen the last two quarters at least to the customers we work most closely with on the memory side are kind of turned on capital goods investments to put some capacity on line for 50 nanometer class DRAM and below. So we expect that capacity to start ramping in 2010 and we think we will benefit from that both for startup and maintenance sense.

On the logic side and foundry I think 65 is still kind of the predominant vastly predominant high-end node but a little more 45 nanometer particularly from the large volume players, graphics, chips, and that sort of thing. And then on the IDM side, microprocessor, a very strong roadmap still. One of our customers still very, very committed to full two-year cycles and they are pushing us quite hard on qualifications.

So I think it's fairly broad-based and we are seeing renewed attention on node transitions now that we hadn't seen, say, over the past year.

Okay. Just a final two questions. You are talking about disposing of the selling of the recently closed China facility. Is that the last of the facility shutdowns or do you have any more in the pipeline? And after this going forward, do we still maintain the same 60% incremental gross margin contribution going forward?

Sure, Chris. The China facility is the only facility that we have that is not in operation that's being disposed of. We don't have any present plans to dispose of any other assets or facilities as we feel the network is well situated to support our customer needs. We obviously have ongoing -- we take a look at all the time where the customer needs are and we will make sure our manufacturing base fits to those customers.

So with respect to our operating margin drop through, it can vary anywhere from 50% to 65% depending upon the mix. We certainly do not expect to see any significant increases in our cost structure going forward, so we do -- are fairly confident that we will generate quite a bit of cash during fiscal 2010 and see an improvement in our gross and operating margins.

Thank you.

Matt Petkun, D. A. Davidson & Co.

Good morning. A couple of questions. First, Sean, I think I missed it but can you give what you expect will be the Q1 interest and other income expense? Net?

I didn't provide that, Matt, but I can give you a general framework depending upon our debt level and the amortization of some of the fees, anywhere from probably $2.6 million to $3.1 million.

Great, and the goal obviously with operating cash flow in addition to CapEx would be to continue paying down debt, it sounds like?

Our goal, our primary goal is to pay down our existing bank that we have on the books today. We have sufficient availability in case we need to access it, but we don't want to -- we want to knock down that $30 million that is outstanding quite a bit so we can improve the bottom line as well.

Okay, then the $50 million in CapEx, can you tell us where that is going to be allocated generally speaking?

Generally speaking, into all three regions but with a predominant measure probably in Asia and in the US. We have $10 million of installed CapEx that we need to pay for in fiscal 2009, so we are talking about on a cash basis an additional $40 million, which is really not a lot. So we are going to -- we have a few tweaks here and there in the network to improve our throughput, but it will be spread to where the business is.

So pretty much maintenance CapEx, just keeping up with the market and your customers?

Right.

And then if you guys wouldn't mind, I believe that Q1 of this most recent year, Q1 of '09 was the first year you broke out leading edge IC just including 65 nanometers and below; last year it was 90 nanometers and below. So would you be willing just so we could see the year-over-year progress to give us the 65 nanometer and below number for Q4 '08? Or roughly kind of the year-over-year increase?

Well, I believe -- I don't have that at the tips of my fingers, but it's quite substantial, Matt. It's probably about -- let's see -- probably about a 75% increase in absolute dollars.

Okay, so somewhat commensurate with the slide you gave us just on the growth of the customer base.

Growth in the customer base. We're certainly seeing increased 65 nanometer business in the US and in Asia and we are benefiting from the collaboration amongst our sites even our closed facility in Manchester having some customers qualified in the US. So we are effectively leveraging our assets in the network. We expect that number to continue to increase quarter-over-quarter.

Okay, and then one other housekeeping question, Sean. The expected tax provision for Q1?

It is in the range in absolute dollars of $1 million to $1.8 million.

Okay, thanks so much and really a tremendous job of managing this balance sheet without TARP money, so a lot of credit goes out to you, Sean, and your entire team.

(Operator Instructions) Patrick Ho, Stifel Nicolaus.

Thanks a lot. Guys, can you just -- given how lumpy the business typically is and how you have these short lead times, what do you think will be the bigger variable as 1Q progresses? Is it IC that is going to be the swing factor or do you see a potential pickup in FPD again that could be the swing again for 1Q?

Scott, do you want to pick up that one too?

Well, we do believe that FPD should strengthen in Q1 from where it was in Q4 although IC will probably be a stronger driver as we go through the year. There's a lot of capital equipment spending happening now especially for advanced nodes and particularly in the memory markets, which as we go through 2010 should -- should drive needs for advanced photomasks.

Okay, great. With the China fab sale underway or in the process of being sold, in terms of the proceeds and when you can use those proceeds to pay down the debt further, do you have -- is Q1 the timing of this? Is that something we could expect or could this fall into 2Q in terms of paying down further debt?

We do expect to pay down debt in Q1. The proceeds we would hope to be able to utilize in Q1 to the extent it's not closed, it will be in Q2, but we are optimistic on that. The timing sometimes is out of our control. The Manchester UK facility was disposed of very quickly. But in any event, we will pay down debt during Q1 whether or not we get the net proceeds from the China facility.

Great, and final question for me, to get your gross margins back to some of your historical levels in the mid-20s to even the 30% level, is it now just getting the revenues ramped now that you've got a lot of the cost cuts out of the way? Is it just fixed cost absorption and product mix that will help the gross margins improve over time?

Correct. It's product mix and the absorption. We're not -- to the extent we get a $10 million incremental revenue depending upon the mix, you're going to see anywhere from 60% to 65% on that drop right to the margin line. However, we will also continue to try to extract costs out of our -- both our manufacturing base and operating base so we can get a better lift as we move forward. It's an ongoing effort but certainly revenue growth at this level will really drive both gross and operating margins.

Guys, great work on the balance sheet.

Stephen Chin, UBS.

Hello, this is Ahmar Zaman calling in for Stephen Chin. Great work on the balance sheet, guys. Just some questions about your guidance, first of all. You just mentioned that there's a lot of strong momentum in the memory side and you were hearing a lot of memory customers looking to invest in shrink for 2010. With all that activity, is there a level of conservatism built into your January guidance? Are you just being conservative here?

Ahmar, we don't believe so. The one thing that we are impacted by holiday shutdowns and we have historically been impacted by those. Last year was a different time of -- last year is not an indicator. We're still very optimistic about our growth in 2010. We still have these customer engagements. The extent the tapeouts and when they occur perhaps we could come into a little bit more into Q1 or the latter part of Q1 or fall into Q2. So we do not believe we are being conservative. We are being pragmatic and we are still very, very optimistic about our growth in 2010. As Deno mentioned, with our goal to get back to profitability in Q2.

You may see a slowdown during the holidays, unfortunately, during -- before -- during Christmas and New Year's and beginning of the year, it kind of slows down a little bit. So we have to be cautious.

Okay, thanks for that. Then just a follow-on. As far as your interest and other income, should we look at the guidance that you just gave of $2.6 million to $3 million as sort of the run rate for the year?

Hopefully to the extent we are successful in reducing our debt, hopefully those numbers go down a bit. But certainly for Q2 -- or I'm sorry Q1, that would be an approximate run rate but we are going to continue to work on below the operating margin line to reduce our cost structure there as well.

Okay, and then finally can you -- just a housekeeping question, can you give some guidance as to your share count, diluted share count in the January quarter?

Sure, our outstanding shares at the end of Q4 were $53 million. Bear in mind we do not have that $53 million outstanding during the full quarter. It was only for half the quarter because the common stock offering was in mid-September.

So starting the first day, we are about $53 million so if you add in the impact of some of the warrants, I think if your -- modeling purposes I would use about $54 million all in.

Okay. Thank you.

(Operator Instructions) Krish Sankar, Bank of America Merrill Lynch.

Hi. Just a quick follow-up. You guys mentioned about returning to profitability in Q2. Does that mean that -- should the share count go up in fiscal Q2 because of any kind of like -- any of those contracts in your offering?

It is a good question, Krish. In the shares that would be dilutive with respect to the 5.5% senior unsecured notes are about $11.3 million and that is not included in the $54 million I just said. For to be dilutive, we would have to generate net income of approximately $5 million plus or minus a couple hundred thousand.

Got it. So when your net income hits $5 million, then you are going to be seeing an incremental $11.3 million shares hitting your EPS line.

Yes.

Got it, and then where do you think your market share is today or if you could just guesstimate for like 2009 for IC and FPD?

Scott, do you want?

I'll take that. For IC if you just look at the merchant part of the market, I would say all in we are probably around 12% if you look at the merchant side, take the captives away, we are probably in 18% or 19% of the total market. On FPD looking at the entire market, roughly the same at about 18% or 19% there as well.

Than just a last question, is the operating breakeven still around $86 million, $87 million?

Yes. The operating breakeven depending upon the mix is approximately as we speak today with forecasted slight increase in depreciation going forward is between -- runs between $88 million to $89 million.

Okay, thank you.

Ladies and gentlemen, there are no further questions in the queue at this time. I would like to turn it back over to our speakers for any additional or closing remarks.

I appreciate your attention and participation in this morning's call. As stated earlier, we look forward to 2010 where we believe growth will return to Photronics with profitability beginning Q2. On behalf of Photronics team, I wish you a happy holiday season. Thank you, guys.

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