Photronics Inc (PLAB) 2010 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 19, 2010.

I would now like to turn the conference over to Richelle Burr, Vice President and General Counsel. Please go ahead, Ms. Burr.

Thank you, and good morning, everyone. My name is Richelle Burr, Vice President and General Counsel of Photronics. We would like to thank you for joining our second 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, 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 2010 results. Joining us on the call today is Constantine Deno Macricostas, Chairman and Chief Executive Officer; Sean T. Smith, Senior Vice President and Chief Financial Officer; Dr. S.H. Jeong, Chief Operating Officer and President, Asia; Dr. Peter Kirlin, Senior Vice President, US and Europe; and Dr. Christopher Progler, Vice President, Chief Technology Officer.

Deno Macricostas will first provide a brief review of market conditions and our strategic direction. Sean will then provide a comprehensive review of Photronics' second-quarter performance. Deno.

Good morning. I would like to begin by saying I am very pleased with our progress in Q2. For the past year and a half, we have been working to reduce costs, while simultaneously growing revenue and returning to profitability. An improved balance sheet has been another area of intense focus.

Reviewing our performance against these key objectives this quarter, we experienced a sequential IC growth, a growth [all] technology nodes, including the high end, which grew 32% sequential. This high-end growth further validates our market penetration strategy to gain market share.

Secondly, as shown in detail, we continue to control our costs, as evidenced by a 52% drop-through to the operating margin on incremental sales. Lastly, we completed the sale of our former China facility, generating net proceeds of approximately $13 million, which contributed to the $18 million sequential reduction in net debt during the quarter. Over the last 12 months, our net debt has gone from $131 million to $17 million.

[Most of the] sentiment in the semiconductor industry continues to be positive. Leading-edge customers to memory and logic that have invested in technology are now producing products of 45-nanometer and below, where we situated, in the West, Korea and Taiwan, to capitalize on increased 65-nanometer and below tapeouts.

Although FPD sales were down for the quarter, we do expect sales to improve in Q3. As I mentioned in Q1 call, Photronics has invested in high-end technology to increase capacity in our global manufacturing network. Our [best] technology will improve our ability to produce 45 nanometer IC photomasks in Korea. In Taiwan, we will continue to ramp our (inaudible) capacity expansion, including 65 nanometer capabilities.

Additional capacity for our advanced FPD mask will be installed during this quarter. We expect to benefit from this additional high-end FPD capacity in the latter part of calendar 2010 and 2011.

I would like to thank the entire Photronics global organization for their hard work and dedication during this difficult period we recently experienced. Their teamwork and commitment has enabled Photronics to turn adversity into success.

In summary, we are executing on our high-end strategy while continuing to serve our mainstream customers. We expect to continue experiencing sequential growth for the foreseeable future and improve operating metrics, as well as to continue to improve our balance sheet. We are well poised to capitalize on new opportunities and continue to gain market share.

Now I will turn over the call to Sean.

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

To assist our listeners during the call or with the transcript of this call, we have posted a series of slides on our website under the Investor Relations tab for your reference that highlight certain events during the quarter.

Slide number one refers to a reconciliation of GAAP to non-GAAP financial information or EPS. Slide number two details our sequential revenue for Q2 as compared to Q1, including high-end splits. Slide number three details the capitalization of the balance sheet and debt. And slides four and five depict our estimate of the global IT market share with and without captives. And slide six and seven detail Photronics high-end IT revenue quarter-over-quarter and year-over-year.

Before we begin, I would like to highlight a few transactions that did impact our results for the second quarter. Included in our press release issued last night was the reconciliation of GAAP to non-GAAP results to reflect the impact of these items on our quarterly results.

During the quarter, as Deno detailed, we sold our China facility and recorded a net consolidation and restructuring gain of $5 million. Also during the quarter, we recorded non-cash expenses of about $860,000 related to the warrants issued in 2009 in connection with our financing agreement. And on February 12, we entered into a new $50 million -- which has since been increased to $65 million -- three-year revolving credit facility and we paid our previous outstanding aggregate debt, which amounted to $24.7 million as of January 31, 2010. In connection therewith, we took a non-cash charge of approximately $1 million related to the write-off of deferred fees from the prior agreement.

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

Excluding the effect of these items, non-GAAP net income was $4.7 million or $0.09 per share for the second quarter as compared to our guided range of $0.01 to $0.05 per share. I would also refer our listeners to our press release, which details the impact of these transactions.

Net sales in the second quarter amounted to $105.1 million, which exceeded our guided range. Revenues for IC and FPD photomask were $84 million and $21.1 million, respectively. Sequentially, total sales increased 7% or by $6.9 million due to the increased IC sales of $9.5 million. The increase in sales was driven by increased IC product demand for both high-end and mainstream products. Increased demand is the result of improving market conditions and increased year-over-year market share, which are based upon our internal estimates, as evidenced on slides four and five on our website.

Advanced IC sales were 18.2% of total IC sales for the quarter, which represents a 32% sequential increase over Q1. In addition to the high-end, we also experienced increased demand across all mainstream test nodes during the quarter.

Advanced FPD sales were 51% of 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 G7 and higher technology. As a percent of total sales for the second quarter, sales were approximately 59% in Asia, 31% in North America and 10% in Europe.

The gross margin for the second quarter was 21%, and sequentially the margin increased by 250 basis points. The incremental margin on the increased sales was approximately 57%.

Selling, general and administrative expenses for the second quarter were $10.9 million as compared to $10.6 million last year and $10.1 million sequentially. R&D expenses, which consist principally of continued development for our global advanced process technologies, were $3.6 million in the second quarter as compared to $4.2 million last year and $4 million sequentially.

During the quarter, exclusive of the restructuring gain from China, we generated operating income of $7.6 million or 7.3% of sales. EBITDA for the quarter was $32 million, which excludes the China gain, or $128 million annualized. Our internal goals are first to generate annualized EBITDA in excess of $150 million and then to achieve an operating margin of at least 15%.

Sequentially, we experienced a 52% drop-through to the operating margin on incremental sales. Other expense net for the second quarter was $2.2 million, which includes the previously mentioned non-cash expense of $1.9 million related to the warrants and write-off of deferred financing fees.

During the second quarter, we recorded a tax provision of $1.9 million. Excluding the previously mentioned items discussed earlier and in our press release, non-GAAP net income was $4.7 million, with EPS at $0.09 per share, GAAP net income was $7.9 million, with EPS of $0.14 per diluted share.

At the end of the second quarter, we had approximately 1290 employees, which equates to a revenue per employee of $326,000 on an annualized basis.

Now turning to our balance sheet, cash and cash equivalents at May 2 amounted to $91.4 million, with working capital of $93 million. Accounts receivable at May 2 was $81.2 million, a sequential increase of $8.4 million, due primarily to the increased sales. Accounts payable and accrued liabilities at the end of the quarter amounted to $94 million as compared to $84 million at the end of the first quarter. The increase primarily related to accrued CapEx with extended payment terms. At May 2, 2010, $29 million of CapEx was accrued for.

Total debt at May 2 was $108 million, which is down approximately $11 million since the first quarter. The principle components of outstanding debt include $57.5 million senior unsecured convertible notes, $17 million in aggregate outstanding bank debt, approximately $30 million in aggregate capital lease obligations, including the US nanoFab, and approximately $3.3 million related to a customer obligation who co-funded a tool purchase.

As we disclosed in our press release, we have sold our China facility and realized net proceeds of $12.9 million. We repatriated the cash to the US on Monday, May 17, and used the majority of the proceeds to pay down our revolving bank debt. So as of today, our outstanding bank debt is $5 million and we have availability of $60 million. As compared to the end of the second quarter of 2009, our total outstanding debt as of today has decreased by $117 million.

Taking a look at our cash flows, cash provided by operations for the second quarter of 2010 was approximately $17.3 million and $33.8 million year-to-date. Depreciation and amortization for the quarter amounted to $23.4 million. Cash flow used in investing activities during Q2 amounted to approximately $600,000 and $19 million year-to-date, and includes $31 million for cash payments for capital expenditures. These expenditures were somewhat mitigated by the net proceeds from the sale of the China facility.

Net cash used in financing activities during Q2 amounted to $11.3 million and $14.7 million year-to-date, and includes approximately $14 million of net debt repayments year-to-date.

Taking a look ahead, our visibility, as always, continues to be limited, as our backlog is typically one to two weeks. However, we are encouraged by a number of strategic opportunities at the leading edge with expanded presence in FPD mask and increased penetration and capacity to support 65 nanometer and below customers.

So as we begin the third quarter, we are optimistic that we will experience sequential improvement. As a result, we are projecting revenue for the third quarter of 2010 to be in the range of $105 million to $110 million.

Capital expenditures for 2010 on a cash basis are forecasted to be approximately $60 million to $65 million, which is slightly higher than our earlier estimates of $55 million.

We would like to emphasize to you this morning that we do maintain a significant amount of flexibility in how we invest capital into our organization. So if trends continue to accelerate, we can move quickly to optimize our competitive position.

During 2010, our tax rate will be impacted by the flow of income from jurisdictions which we may have tax holidays or credit and upon our limited ability to recognize tax benefit in areas which we are taxable. Accordingly, we are estimating income taxes for 2010 to be in the range of $7 million to $9 million, and for the third quarter, this will equate to a range of $1.5 million to $2.5 million in whole dollar terms.

As a result, based upon our current operating model, we estimate earnings per share for the third quarter of fiscal 2010, which is exclusive of any impact of warrants, to be in the range of $0.07 to $0.11 per share.

In summary, I want to emphasize that though our visibility is short, customer sentiment remains increasingly positive for the remainder of 2010.

That concludes my prepared remarks and now I would like to turn the call over to the operator for Q&A.

(Operator Instructions) Stephen Chin, UBS.

This is [Mahavir Sanghavi] for Stephen Chin. I have one quick question about your FPD photomask sales. Especially given the fact that flat panel makers are increasing investment in the Gen-8 this year, especially Samsung and NLG, we were wondering why the FPD photomask sales are down 11% overall.

This is S.H. Jeong. I think probably we missed a couple of orders because of our limitation of tools. So that is why we already decided to buy new tool which is precision, which kind of covers very high-end technology. So probably Q3, we will recover all of the revenue from FPD sales.

Over the last couple of years, we invested heavily into advanced IC tools, and we did not invest, as S.H. alluded to, in certain advanced products for FPD. We have a tool coming in in Q3, as Deno said in his prepared remarks, and we expect to benefit from that tool in the second half of 2010 into 2011 at the advanced leading edge.

That's great. Thank you. So just to think about it in terms of a model, so we should expect a sequential growth for next -- for the rest of the year in the FPD photomask sales?

Correct.

Okay, thank you. That's all I had. Thanks for my question.

Patrick Ho, Stifel Nicolaus.

Thanks a lot and congratulations, guys, on a nice quarter. Sean, I may have missed this, so I apologize if I am repeating anything. Based on some of the revenue growth you've seen on these potential market share gains, I could see it coming from the high end. Are you seeing any increase in terms of your mainstream IC business?

Patrick, I'm going to turn that over and let Peter answer that.

Yes, Patrick, our unit volume is up across the mainstream segments, and it is up in regions where we believe the market to be flat. And it's up even more strongly in geographic regions where we believe the market to be recovering.

So I think it is a fair conclusion to say that we are gaining share both at the high end as well as in the mainstream market. And both market segments are really, as you might imagine, feeding off of one another.

That's great. That's helpful. Sean, you guys made a nice step-up in terms of gross margins this quarter, and obviously probably a driver of that is increasing volumes. What other -- what are the other levers for gross margins on a going forward basis?

Gaining additional share and maintaining our cost structure, with constant focus on trying to reduce materials and other variable costs that are baked into our structure. So we are going to continue to focus on that, and as we move forward, we do expect, although our depreciation should pick up slightly in Q3, we do expect to see continued expansion on the margin side as we get incremental revenue, as evidenced by the 57% drop-through this quarter.

That's great. And again, I apologize since I probably missed this part. Are those incremental margins sustainable over this coming cycle and on a going forward basis?

Yes, they are. We've targeted a 50% to 60% drop-through on a sequential basis. We are not moving off that target and we believe it is achievable (technical difficulty) to the extent we generate incremental revenue.

Great. Thanks a lot, guys.

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

This is Paul Thomas for Krish Sankar. First off, could you talk a little more about the customer mix on the semi side between foundry, memory and logic in the quarter? Was any one of them particularly strong and do you expect a similar mix next quarter?

This is Chris. I can make a few comments and then some of the other participants can add. I think the strongest for the quarter probably were foundry and memory. Those two grew, I think, the fastest. Memory was mostly all high-end, some market share gains, some just node migrations and additional capacity being added to memory fabs. And on the foundry side, the utilization is quite high now in the foundries, in Taiwan in particular, and we definitely took advantage of that with increased tapeout activity.

Okay. And then on the balance sheet side, extending the credit facility. So you are paying down the debt, but you are extending your credit line. Is there anything in there besides just the extra tool you talked about for FPD? Are there other CapEx expansion plans baked in there?

We did, Paul, increase our estimate of CapEx for the year by about $5 million to $10 million. And as I alluded in my prepared remarks, we are evaluating opportunity as we speak. We don't necessarily intend to use our credit line to fund those tool purchases. We have plenty of cash. It just provides us with additional financial flexibility.

So if we see an opportunity with a leading-edge customer or the business continuing to uptick, we are going to react to it to make sure we have the capacity to handle those additional orders.

Okay. Thanks a lot, guys.

Chip Bonnett, FM Global.

Good morning. Congratulations on a good quarter here, and thank you for a pretty detailed slide deck. That information is helpful.

I've got a few questions here. First of all, just to go back to incremental gross margin, while decent, I almost would have expected more given that you had strength in high-end IC and FPD was weaker, and that's a lower gross margin. So anything keeping that from actually being stronger and any message in there?

No, we don't believe so. We had 57%. We target 50% to 60%. Some quarters, we are as high as 65%. A lot of it has to do with mix, you are correct, but --

That is why I thought it would have been maybe even above 60% this quarter.

We were pretty pleased with where we came in and the performance. So we are still going to try to hit our targets, and to the extent the mix comes in, in certain points, it could be a little bit higher going forward.

This is Deno. The area we will miss the opportunities of the FPD, it was the high end. And the high-end FPD has a good margin. And that is where we missed the opportunity.

Okay. And the 50% to 60% incremental margin, is that both gross and operating margin or just really operating margin?

It is both gross and operating margin.

Okay. In terms of share, you broke that out, showing you've increased your share a little bit. Do you have any goals overall there in terms of increasing that further? Do you have an aspiration of a certain share percentage you would like to capture?

I guess to say it one way is we want to see that metric go up sequentially each quarter. As we reach a plateau, we want to establish another plateau. So we don't want to get too far ahead of ourselves and say we want X. We want to grow incrementally, service our customers and continue to have recurring engagements.

So perhaps Chris, you can talk about the nanoFab and some of the high-end customers from a year ago that were qualified, what's going on, have they returned, that type of --

Yes, we don't have a specific percentage target, but definitely we want to see sequential growth in market share. In terms of the nanoFab operation, we've been very successful both acquiring and retaining customers there. Those that have qualified with the facility, most are now in volume, and many are new to Photronics, so we see definite opportunities for additional market share gains there.

And our process of record partners that are coming through micron in that facility also are expanding capacity. So that will be incremental growth. And some of that is at the expense of our competitors, since Photronics now has the process of record technology for those customers.

So we don't put out specifics on percentage, but we do see opportunity to continue to grow it. We don't want to be buying market share necessarily. We want to earn it through good performance and customer service and retaining our customer base.

Okay. And just to jump on that, since you brought up nanoFab. You said most of the customers, Chris, are -- actually have turned into volume customers. And just going from memory, I think you've thrown out numbers in the past of 15 to maybe not as high as 20, but at least high teens, I think, of customers that were qualified that. How many are volume customers at this point? And have you qualified any other customers recently?

We kind of stopped breaking out quals and volume customers as specifics for that facility just for competitive reasons. We do -- we are engaged in ongoing qualifications for new nodes with the majority of those customers, and we are also starting qualifications with new customers as well. But we don't specifically lay out the numbers any longer.

Okay, but there are still some qualifications going on, and you are pleased with the amount of customers that have been converted to volume customers?

(technical difficulty) [Definitely] pleased with that. If you look at our top 10 customer list, you see many nanoFab accounts in there now. So we are quite pleased with that progress.

Okay. And then to jump back to Sean, given your guidance for next quarter, $107 million at the midpoint, more or less. And the EPS number would actually just to come in at the midpoint what you did this quarter. So given the incremental revenue, what is holding back EPS improvement?

One of things that's factored in there, Chip, is when we reached approximately $5 million in net income, the convertible shares are approximately $11.4 million because it becomes dilutive. So that takes a penny to a penny and a half away from the EPS on the bottom line. That wasn't baked into the $4.7 million on a non-GAAP basis that we earned this quarter.

Okay, all right. I'll give someone else a chance. Thanks, and again, congratulations.

(Operator Instructions) Ladies and gentlemen, there are no further questions at this time.

Appreciate your attention and participation in this morning's call. Thank you, guys.

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