Photronics Inc (PLAB) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to this Photronics first-quarter 2010 earnings conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Scott Gish. Please go ahead, sir.

Thank you and good morning, everyone. My name is Scott Gish, Vice President of Marketing and Corporate Communications at Photronics. We would like to thank you for joining our first-quarter 2010 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. Unless 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 2010 results.

Joining us on the call today is Constantine Deno Macricostas, Chairman and Chief Executive Officer; Sean Smith, Chief Financial Officer; Dr. S.H. Jeong, Chief Operating Officer and President Asia; Dr. Peter Kirlin, Senior Vice President, United States and Europe; and Dr. Christopher Progler, Vice President and 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' first-quarter performance. Deno?

Thank you, Scott. Before I turn the call over to Sean, I would like to take a few minutes to review our accomplishments from the first quarter. Sales in the first quarter grew $3.5 million sequentially, against what is normally a seasonally slow period. Sales growth was driven primarily by increases in high-end integrated circuit and flat-panel display photomasks, which grew 22% and 13% respectively. The increased revenue, coupled with a year-over-year reduction in our cost structure, allowed the Company to return to profitability one quarter earlier than expected.

High-end IC sales improved for the sixth consecutive quarter as our high-end market penetration strategy continued to gain momentum. The increase high-end unit shipments was again driven by improved production at the nanofab, as well as new customer qualifications within Asia. High-end panel display sales also improved sequentially as customers migrated production to G7, a larger substrate.

In Taiwan, our PSMC affiliate achieved record revenue during the quarter, aided in part by capacity expansion within our Taichung site. Sales growth within Taiwan benefited from a healthy foundry and design environment. The return to profitability in Q1 was a result of our cost strategy to reduce costs while simultaneously growing revenue. Our focus on cost reduction and marketshare improvements will continue throughout 2010.

An improved balance sheet has been another area of intense focus. We continue to identify means to reduce debt and interest expense. Yesterday, we announced a new 10-year revolving credit facility, which while reducing interest expense also provides improved terms and flexibility. Sean will provide details on the new agreement in his remarks.

Customer sentiment in both semiconductor and flat-panel displays has been positive. [Leaving its] customers (inaudible) memory and logic have invested in technology and are now producing products for 45 nanometer and below.

In addition, the flat-panel display market achieved record shipments in 2009, led by the strong growth of LCD TVs. Our customers in this market are expanding operations into China and adding [extra] quality improvements to the end products, which should drive demand for new products.

Likewise, Photronics just investing in new technology [discussed] in our global manufacturing network. Our [plan] investment technology will improve our ability to produce advanced flat-panel display and 45 nanometer IC photomasks from Korea. In Taiwan, we will continue to ramp our recent capacity expansion while adding 65 nanometer capability.

Finally, nanofab will remain focused on producing the Company's most advanced technology, leaving Photronics well-positioned in our served market. Sean?

Thanks, Deno and good morning, everyone. I'll provide a brief analysis of our financial results for the first quarter and fiscal year 2010. And I will also discuss our balance sheet and cash flows during the period and review our outlook going forward.

To assist our listeners during the call, along with the 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 information, or EPS. Slide number two details our sequential revenue for Q1 as compared to Q4 '09, including high-end splits for both FPD and IC photomasks. Slide number three discusses the recapitalization of the balance sheet and debt detail. And slide number four reviews our new credit agreement that we entered into on Friday that Deno mentioned in his remarks with the specific details and terms.

Before we begin, I would like to highlight a few transactions that impacted our results for the first quarter. Included in our press release issued last night was a reconciliation of GAAP to pro forma results to reflect the impact of these items on our quarter results. As a reminder, our guidance for the quarter was revenue in the range of $91 million to $96 million, with an EPS loss of $0.08 a share to $0.03 a share.

During the quarter, we incurred charges of approximately $200,000 related to the previously announced closure of our China facility and we also recorded non-cash expenses of $200,000 related to the warrants issued in 2009 in connection with our financing agreement.

Additionally, as we mentioned earlier, we entered into a new $50 million three-year revolving credit facility and repaid our previous outstanding aggregate bank debt, which amounted to $24.7 million as of January 31, 2010. Accordingly, we have classified our outstanding bank debt at January 31, 2010 as long term.

As we discussed in our Q4 '09 conference call, Q1 revenues have historically been negatively impacted by seasonal holiday shutdowns associated with the holiday period. Our revenue of $98.2 million for Q1, which was above our guided range and our Q4 revenues, was enhanced by increased high-end demand for both IC and FPD products. The aggregate result of these items previously mentioned on a pro forma basis resulted in pro forma net income of $600,000 or $0.01 per share as compared to our guided range of an $0.08 loss to a $0.03 loss per share. I would also refer our listeners to our press release, which details the impact of these transactions.

For purposes of our discussions on operations for Q1, I will be referring to our operating results, excluding primarily the impact of these pro forma items. Net sales in the first quarter amounted to $98.2 million and revenues for IC and FPD photomasks were $74.5 million and $23.7 million respectively. Sequentially, total sales increased by $3.5 million, due primarily to increased high-end IC and FPD sales.

Advanced IC sales were 16% of total IC sales for the quarter, which represents a 22% sequential increase over Q4 '09. Advanced FPD sales increased sequentially by $1.5 million or 54% in sales -- of FPD sales. Included in each percentage are mask sets for semiconductor design at and below 65 nanometers and for 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 62% in Asia, 28% in North America, and 10% in Europe. The gross margin for the first quarter was 18.5%. Sequentially, the gross margin increased by 50 basis points. While we were pleased with the sequential increase in revenue, we were a bit disappointed by the incremental gross margin of $1.2 million or 34% of incremental sales.

During the quarter, we did experience some additional unplanned manufacturing costs, including maintenance, which was required to meet the improved demand. Selling, general and administrative expenses for the first quarter were $10.1 million, which was essentially flat with Q4 '09 and R&D expenses, which consists principally of continued development for our global advanced process technologies were $4 million for the first quarter.

Excluding the consolidation charge previously mentioned, we generated operating income of $4.1 million on $98.2 million in sales during the first quarter. Sequentially, our operating margin increased by $1 million from Q4 '09.

Other expense net for the first square was $2.5 million, which does include the previously mentioned non-cash expense of $200,000 related to the warrant. During the first quarter, we recorded a tax provision of approximately $1 million, which was within our guided range of $1 million to $1.8 million.

Excluding the previously mentioned pro forma items discussed earlier and in our press release, net income was $600,000 for the first quarter of 2010, which equates to $0.01 earnings per share, which does compare favorably to our guided loss of $0.08 to $0.03 per share.

At the end of our first quarter, we had approximately 1300 employees.

Now taking a look at our balance sheet. Cash and cash equivalent at the end of Q1 amounted to $84.4 million with working capital at $89 million. Accounts payable and accrued current liabilities at the end of Q1 amounted to $84 million as compared to $80 million at the end of fiscal 2009 and at the end of Q1, we had approximately $10 million of CapEx, which was accrued for.

Total debt at January 31, 2010 was $119 million, which is down approximately $3.5 million since year-end. The principal components of outstanding debt include $57.5 million of senior unsecured convertible notes; $24.7 million of aggregate outstanding bank debt; approximately $33 million in aggregate capital lease obligations, including the US panel fab; and approximately $3.7 million related to an obligation with a customer who co-funded a tool purchase. It is anticipated that this obligation will be reduced via future sales to the customer.

As of January 31, on a pro forma basis, we have approximately $25.3 million of availability on the new three-year revolving credit agreement. Speaking of the new credit agreement, key terms and conditions of the revised $50 million credit agreement include the following -- reduced cash interest cost of 525 basis points, relaxed covenants, and an ability to expand the total commitment to $65 million and generally less restrictive terms and conditions as compared to our previous agreement.

As we discussed in our Q4 '09 conference call, we're in the process of disposing our China facility. As of this date, we have a deposit in escrow on the facility and we expect that once the deal is complete, we will use the proceeds to pay down additional bank debt, which in turn should and will increase our availability under the new credit agreement and reduce our interest costs.

Taking a look at our cash flows, cash provided by operations during the first quarter of 2010 was approximately $16.4 million. Cash flow using investing activities during Q1 amounted to $18.5 million and includes $21.5 million for cash payments for capital expenditures. Of the $21.5 million dollars, approximately $3.8 million was funded by the customer as we previously discussed. These expenditures were somewhat mitigated by a $4.2 million deposit on our China facility.

Net cash used in financing activities amounted to $3.4 million and includes approximately $7.3 million of debt repayments offset by the $3.8 million of financing provided by the previously mentioned customer. We continue to feel confident that our significant CapEx is behind -- CapEx spending is behind us and we expect to generate cash flow from operations certainly in an amount well in excess of our planned capital expenditures for fiscal 2010.

Taking a look ahead, our visibility, as always, continues to be limited as our backlog is typically one to two weeks. We are encouraged by a number of strategic opportunities at the leading edge with our expanded presence in both IC and FPD photomasks and our increased penetration and capacity to support 55 nanometer and below customers.

So as we begin Q2 2010, we are optimistic that we will experience sequential improvement in the second quarter on the top line. As a result, we are projecting revenue for Q2 to be in the range of $98 million to $103 million.

Capital expenditures for 2010 on a cash basis are forecasted to be approximately $55 million. During 2010, our tax rate will continue to be impacted by the flow of income from jurisdictions for which we may have tax holidays or credit and upon our limited ability to recognize tax benefits in the areas in which we are taxable.

Accordingly, we are estimating our income taxes for 2010 to be in the range of $6 million to $9 million. For the second quarter, this will equate to a range of $1 million to $1.8 million in whole dollar terms.

As a result, based upon our current operating model, we estimate that earnings per share for the second quarter to be in the range of $0.01 per share to $0.05 per share. This range is exclusive of any impact of the warrants and restructuring charges in Q2.

In summary, I will emphasize that although our visibility is short, customer sentiment remains increasingly positive for fiscal 2010. That concludes my prepared remarks. Now I would like to turn the call over to the operator for questions and answers.

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

Good morning. This is [Paul Thomas] for Krish Sankar. Thanks for taking my questions. First off, could you talk about the customer mix on the semi side between foundry, memory and logic in the quarter, which one of those was the strongest and do you expect any changes there in the mix in the April quarter?

Hi, this is Chris. I can make a few comments on the high-end customer mix. I think it was pretty well split between the segments you mentioned. I would say our largest growth sequentially was in the memory side. We're still seeing strong demand both for node transitions and volume, particularly in memory, DRAM and NAND.

On the foundry site, I think high-volume parts, 45 nanometer looking quite strong and on the ASIC or [low runner] side, 65 is starting to take hold. And then logic, the [high runners], microprocessors, graphic processors, things like that, running very strong for node transitions, 45 nanometer and below. So a pretty good mix and I think memory is kind of leading the pack there.

Okay. That's hopeful. And then also for next quarter, how should we think about the mix between flat-panel and semi ICs? Semi IC still going to be the fastest grower in the group you expect?

Paul, this is Sean. We're not going to give specific guidance for IC and FPD, but we do expect continued sequential improvement both in high-end IC and high-end FPD in Q2.

Okay. And lastly, since we finished the calendar year 2009, I wanted to get your guys' thoughts on marketshare, what you think you'd finish the year at and what changes you saw in the marketplace?

Well, I do believe we feel that we have certainly taken share at the high end in IC and certainly in FPD. I think we were historically tracking as early as a year and a half ago in the low single digits in the high-end IC. We are certainly over 10% in our estimation and FPD, anywhere from 16% to 20% or so.

Okay. Thanks a lot, guys.

Ahmar Zaman, UBS.

Hi, guys. Congratulations on a good quarter. My first question is on looking at fiscal year '10, consensus estimates for the semiconductor industry CapEx is about 62% year-over-year. A majority of that is related to shrink and the technology migration. How should we, in that landscape, how should we think about your potential for year-over-year revenue growth?

Well, we certainly -- Ahmar, this is Sean. Maybe I'll start and then Deno or Chris can fill in. We certainly do expect year-over-year growth. We are starting the quarter certainly versus Q1 last year at a significantly higher amount of revenue and we expect sequential growth for Q2. And at this point in time, I don't see any reason why we wouldn't expect that to continue to grow sequentially, especially with our continued traction in the high end.

Yes, this is Chris. I can make a few additional comments. On the lithography side, we are seeing a larger installed base of immersion scanners at our customers and also adoption of double patterning. This is when two masks are used to make a single circuit layer and both of these things I think are positive trends.

Also in terms of the mask equipment, you mentioned CapEx. We still have a very state-of-the-art toolset. We are filling in capability gaps here and there where we need it, but we think we have a lot of legs left in our network, as well in terms of capability.

Thanks for that. So I mean based on all of that, just trying to get a more quantifiable -- try to get a little more quantifiable -- your last peak quarter I believe was about $120 million, do you foresee getting to that level this year?

Our goal, Ahmar, is to have sequential improvement and not take our eye off the ball, see growth at the high end and once we achieve a plateau, we want to get to the next plateau. We would certainly like to be sitting here all of us talking about $120 million, but that's a little bit down the road.

Okay. Appreciate that. Can you -- I joined the call a little late, so I apologize if I missed this, but can you tell me how many, for nanofab, how many customers you had in the quarter that were revenue versus qualified?

This is Deno Macricostas. At the present time, really, we are going to stop explaining how many customer qualified or how many customers in production. At this stage, nanofab is very busy, nanofab has established itself as an acknowledged leader. Nanofab definitely has a broad base of customers and we believe it becomes academic to explain every quarter about nanofab.

And today, customer base, especially the semiconductor industry, our customers, they accept us and they believe in us. We gain credibility as a leading technologist. So we don't believe really from now on it is necessary to explain from quarter to quarter our customer base.

And I do think, Deno, too, and maybe Chris would want to highlight this as well, is as a result of the traction in nanofab over the last nine months, our other locations in our global network are experiencing additional work as a result of our mix in that strategy and the collaboration between our sites. Chris, I don't know if you want to highlight --?

Yes, and there is not much more I can say. I think during the startup phase it's kind of appropriate to highlight new qualifications, new customers. The site now is well integrated into our network as a myriad of customers in both logic and memory working in a coordinated way with our other locations. And it just doesn't seem necessary at this point to continue to count the quals or the volume customers.

And by the way, still continue qualifying as more customers come to production, so it is not stopping, it is continuing to happen day to day. So it's a very viable entity and again our credibility in our industry.

Okay. That's fair enough. Just going back to the comment about the maintenance that was experienced in the quarter, is this a seasonal thing or as demand continues to grow? I guess how should we think about that or the potential of this going forward?

I think, Ahmar, going forward, I think our cost structure is basically intact. We highlighted the drop-through, which arguably was anywhere from $600,000 to $800,000 short, which we would have expected. We saw an opportunity to put a few additional items online. There were some start-up costs related to that because we wanted to capture the revenue. It's embedded into our cost structure. We do expect to get back to our targeted goals of sequential -- as we grow sequential revenue, the sequential drop-through on the gross and operating margin line. So it's a little -- it's just basically a little bit of noise, but it really enabled us to capture some additional share.

Okay. I think that's all I have for now. Thank you.

(Operator Instructions). [Ali Motamed], Boston Partners.

Hi, guys. I was wondering -- I know it's a little bit farther out, but if you could talk about maybe the CapEx needs of the business, not just this year, but next year? I know as we look at the history, we've been sort of above the $80 million range for five or six years, but then again we've expanded capacity, built the nanofab and done a lot of good things. So what does the business look like potentially next year if you have sort of moderate, let's say, 5%, 7% growth?

Just give you the -- just an overall picture. We are planning to invest approximately 15% of our gross sales. Basically if we do $400 million, it would be $60 million. By doing that, we believe our cash flow should be about -- our EBITDA should be gross $100 million. So [always] the interest as long as you have a positive free cash flow every year. So our goal is not to -- about 15% of our gross sales, 1-5, 15%. Let's use that as a guidance going forward so we'll always have a positive cash flow, free cash flow at the end of the year.

Okay. Thank you.

Welcome.

(Operator Instructions) [Arthur Winston], Pilot Advisors.

I don't understand the analogy of spending 15% of the sales on capital spending. Shouldn't it be based on return on investment and what's available as to trying to invest -- figuring out how to spend 15% of sales? What are the opportunities and why do we have to spend so much?

We are in a tight -- we are a technology company really. If we don't invest, we are going to suffer in the future from growing anymore. So if you want to continue to grow and stay part with your customers -- it's your customer's investment so we have to follow your customers in technology. If you don't invest, you are left behind. So we're not doing it just to spend the money. It helps us to take care of customers. If they invest, have to follow them, take care of them.

Certainly, as Deno mentioned earlier, our planned investment over the near term is certainly going to be in an amount that should be -- our cash flow should significantly self-fund that and not use debt to fund those capital items and additionally reduce our debt while improving our balance sheet. There are always a few items that you need, as Chris alluded to, to complete on the technology side, but what we don't want to get into position, now that we've established our credibility at the high end on a global basis and we are picking up share, we want to continue that traction, albeit in a very prudent manner.

I have one other question. Should we assume that, in quarter one, the $600,000 to the $800,000 was more or less a one-time special event that otherwise would have fallen back down to the bottom line? Is that the best way to think about it?

There are a number of different items that flow through on a quarter-by-quarter basis, but we managed Q1 to meet our customer needs and to ensure that we grew, we grew profitably. We got back to profitability a quarter in advance of Deno's comment in Q4. So that's our goal.

Thank you.

(Operator Instructions). With no other questions remaining in the queue, I would like to turn the conference back over to Mr. Macriscostas for any additional or closing remarks.

We appreciate your attention and participation on this morning's call and thank you very much you guys.

Again, that does conclude today's conference call. We do thank you for your participation.