Photronics Inc (PLAB) 2012 Q1 法說會逐字稿

Welcome to the Photronics first-quarter earnings call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded, Thursday, February 16, 2012. I would now like to turn the conference over to Pete Broadbent, Vice-President Investor Relations and Marketing. Please go ahead, Mr. Broadbent.

Thank you, and Good morning, everyone. My name is Pete Broadbent, Vice President Investor Relations and Marketing of Photronics. We would like to thank you for joining our first-quarter 2012 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, any statement we make during this call except for historical events, 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. These statements will contain words such as believe, anticipate, expect, or similar expressions. This call will remain archived on our website until we report our second-quarter 2012 results.

Joining us on the call today are Constantine Deno Macricostas, Chairman and Chief Executive Officer; Sean T Smith, Senior Vice President and Chief Financial Officer; Dr Christopher Progler, Vice President, Chief Technology Officer and Strategic Planning; and Dr Peter Kirlin, Senior Vice President, US and Europe. Deno will first provide a previous review of market conditions and our strategic direction. Sean will then provide a comprehensive review of Photronics' first-quarter performance. During Deno's and Sean's remarks they will refer to slides posted on our website under the investor relations link. Deno?

Thank you, Pete, and good morning, everyone. Please turn to slide 3 in our slide presentation. As expected, general market conditions, along with the holiday shut-down this year, impacted Q1 revenues. Sales of $112.2 million were slightly ahead of the aim of our guidance range. Because of our focus on cost control, we delivered non-GAAP earnings per share of $0.09, at the mid-range of our guidance. We showed robust strength in high-end semiconductor photomask demand, as leading-edge customers continue to invest in new designs.

First-quarter IC, high-end IC sales increased 6% sequentially. Due to the softness in many IC business resulted in 16% decline sequentially. Our customers in this segment were generally cautious during this period, and many extended a holiday shut-down this year. This quarter, FPD revenue was $25.4 million, down 1% sequentially. This represents a solid quarter in FPD for us. Our high-end demand was steady at $15.4 million, 61% of FPD sales.

Once again, our intense focus of driving costs down delivered solid earnings as strong free cash flow. EBITDA for the quarter was $33 million. Working capital increased from the fourth quarter by $11 million and net cash grew $13 million to $45 million. This result once again demonstrates the volume by investments on the high end and our vigilance in cost containment. As a result, our balance sheet continued to get stronger.

Looking forward, we are cautious of general market conditions and we will continue to be vigilant on controlling costs and managing our Cap Ex. We know the opportunities exist to continue reducing costs across our global operations. We will be flexible and agile with our investment to capitalize on opportunities to gain market share both in FPD and IC. Despite the current cycle trends and impact on revenues, we believe that we have at least maintained our market share this period. We are in an excellent position with our global operation of technology and our strong balance to grow our share in this market. Many of our customers are in an excellent position in their respective markets because they are investing in high-end capability. We are expected to benefit from the investment in future growth.

Long-term, we believe the trends in devices and leading-edge components are in our favor. Therefore, continued high-end growth and market share gains. Before I turn the call over to Sean, I would like to thank the entire Photronics global organization for their efforts at the start of this year. Our team continues to build a high-end strategy, cost management, and customer service.

And now, I will turn the call over to Sean.

Thanks, Deno, and good morning, everyone. I will provide a brief analysis of our financial results for the first quarter of 2012, and review our balance sheet and cash flows and provide an outlook for Q2. Please refer to slide number 4 for our GAAP to non-GAAP net income and EPS reconciliation, as we review the first quarter.

In December, we announced the streamlining of our operating infrastructure in Singapore, which was a mainstream manufacturing facility. We seek manufacturing of photomasks but retain critical customer support, data prep, and retail service for our customers. As we discussed, this action will have a minimal, if any, impact on revenue. We expect to record an after-tax charge of $1.5 million to $1.9 million in 2012 related to this action, the majority of which, or $1.1 million, was recorded in Q1, 2012. As a result, for purposes of our discussion, I will primarily be comparing our non-GAAP operating results, exclusive of the Singapore restructure.

Slides 5, 6, and 7 show our sequential and quarter-over-quarter IC and FPD revenue performance. As Deno mentioned, the first quarter was affected by softness in the mainstream IC markets, principally in the US and to a lesser extent Asia, as well as by typical seasonality. As a result, our net sales in the first quarter amounted to $112.2 million. Revenues for IC and FPD photomasks were $86.8 million and $25.4 million respectively for the first quarter. Sequentially, total sales decreased by 8%, as a result of market conditions experienced during the quarter.

Breaking out sales geographically, 63% of our sales in Q1 were from Asia, 28% from North America, and 9% from Europe. Sequentially, Asian sales increased, which includes the Singapore manufacturing cessation in December. High-end global IC sales were $27.5 million or 32% of total IC sales for the quarter. As Deno mentioned, this represents a sequential increase of 6%. Customers continued to invest in new designs, and we benefited in Q1 from a broader global diversification of high-end business. Advanced FPD sales were $15.4 million or 61% of total FPD sales. As a reminder, high-end IC revenues now consist of revenue derived from semi designs at and below 45 nanometers and high-end FPD revenues consist of revenue at and above G8, as well as AMOLED-based products.

Let's continue through the income statement. Gross margins from Q1 was 22.7%, down sequentially from 25.3%, as a result of the decreased revenue. SG&A expenses for Q1 were $11.3 million, which was essentially flat with Q4 of 2011. In R&D expenses, which consists principally of continued development for our global advanced process technologies, were $4.4 million in Q1, up slightly from $4.3 million in Q4.

During the quarter, we generated operating income, exclusive of the Singapore charge of $9.7 million or 8.6% of sales. EBITDA, as defined in our credit agreement for the quarter was $33 million. This equates to $164 million on a trailing 12-month basis. Also on a trailing 12-month basis, this equates to free cash flow of $83 million. We have continually discussed the leverage in our operating model on incremental revenue of the targeted range of 45% to 50%. Obviously, during this quarter, our revenue decreased, and as a result, our gross and operating margins were negatively impacted on a sequential basis. The actions we took in Singapore and other planned cost reduction activities are intended to reduce the impact of any potential softening in the market in the future.

Other income expense for the first quarter was an expense of $400,000, and includes net interest expense of approximately $1.1 million and favorable exchange gains. During the first quarter, we recorded a tax provision of $3.3 million, which was within our guided range of $2 million to $3.5 million. GAAP net income, which includes one-time and non-cash charges, were $4.3 million with an EPS of $0.07 per diluted share. Non-GAAP net income, exclusive of the Singapore charge, was $5.3 million or $0.09 per diluted share, which was within our guided range of $0.07 to $0.11 per share. At the end of the first quarter, we had approximately 1,285 employees, which was a decrease of approximately 4.8% sequentially, primarily related to the Singapore initiative and other selected reductions. This equates to a revenue per employee of $349,000 on an annualized basis.

Now turning to the balance sheet, which continues to improve, as Deno talked about. Cash and cash equivalents at the end of Q1 amounted to $202 million, and our net cash, which is cash less debt was $45 million, which represents a sequential increase of $13 million. Our working capital also improved during the quarter, with working capital at end of the quarter of $220 million, which amounts to a sequential increase of $11 million. Accounts payable and accrued current liabilities at the end of the quarter amounted to $90 million. At the end of Q1, $14 million of CapEx was accrued for, which is down $5 million from the fourth quarter.

Please turn to slide 9 as we review our capitalization, including a capital lease that was paid off early in 2011. Total debt at the end of Q1 was $157 million. The principal component of outstanding debt includes -- $22 million of a 5.5% senior unsecured convertible note, which is due October 2014; $115 million 3.25% unsecured note, which is due in April of 2016; approximately $18 million related to a capital lease obligation; and approximately $2 million related to an obligation with a customer who co-funded a tool purchase. At the end of Q1, we do not have any outstanding borrowings on our $30 million revolving credit line, which matures April of 2015.

As we disclosed in our long-term debt footnotes in our 10-Q and 10-K filings, we previously had a capital lease with Micron on the nanoFab building. In May of 2009, the 8% capital lease was canceled, and we entered into an operating lease, which reduced, at the time, our quarterly cash payments from $3.8 million to $2 million. The accounting treatment required us to write off the capital lease asset over the initial lease term, which runs through December 2012. The revised lease agreement or operating lease term was extended to December 31, 2014, which will require us to renew the lease after that date. We are currently reviewing our options on the lease related to the nanoFab building, with the intent to improve our cash flow and reduce our operating expenses going forward.

Taking a look at our cash flows, cash provided by operations for the first quarter of 2012 was approximately $34 million. Depreciation and amortization during the quarter was approximately $23 million. Cash flow used in investing activities during Q1 amounted to approximately $20 million and includes $18 million for cash payments for capital expenditures. Net cash used in financing activities during Q1 amounted to $2 million.

Please turn to slide 10, as we take a look ahead. Our initial look or our updated look at CapEx needs on a cash basis for 2012 is in the range of $60 million to $80 million. However, I would like to remind you we do have the flexibility to accelerate or decelerate our spend, depending upon market conditions. We do expect to continue to generate free cash flow once again in 2012. Our 2012 investments will principally be geared towards high-end leading-edge products for IC and FPD applications. The significant high-end revenue increases that we have experienced in market share gains in 2011 have certainly validated our high-end strategy.

Our visibility, as always, continues to be limited, as our backlog is one to two weeks. At this time, we do expect to experience modest sequential growth, as we believe that Q1 was our trough quarter, so taking this all into consideration, we are projecting revenue for Q2 of 2012 to be in the range of $113 million to $118 million. During 2012, our tax rate will be impacted by the flow of income from jurisdictions for which we may have tax credits, and upon our limited ability to recognize tax benefits in areas which are taxable. Accordingly, we are estimating income taxes for 2012 to be in the range of $14 million to $16 million, and for Q2, this will equate to a range of $3 million to $4 million. As result, based upon our current operating model, we estimate earnings per share for the second quarter of 2012, which is exclusive of the impact of any restructure costs, to be in the range of $0.09 to $0.13 per diluted share.

In summary I will leave you with a few key thoughts. First, we do expect, as I said earlier, to generate free cash flow in 2012 regardless of the market environment. Second, we are very excited about our potential to capitalize an additional high-end growth in both FPD and IC and see opportunities to capture further share in 2012. We will continue to execute on our high-end strategy while serving our mainstream customers. We are particularly encouraged by the fact that customers have continued to invest in new high-end designs during this downturn.

And finally, we expect to build on the momentum that we established in fiscal 2011. As I said, at this point in time, we expect Q1 to be our trough quarter, and that we will report quarterly sequential improvement thereafter. Although our visibility is limited, we plan to match our operating infrastructure to the market environment.

Now we would like to turn the call over to the operator for Q&A.

(Operator Instructions). Our first question comes from the line of Edwin Mok of Needham & Company. Please go ahead.

First question on the guidance, just curious. What kind of assumption is baked into the guidance, with assuming the weakness on the mainstream to continue? And also that high-end continues to increase, and also a question regarding exposure to the memory side versus logic side, do you see a high exposure on that end beginning to occur?

Edwin, this is Sean, I will answer the question on the guidance and turn it over to Chris and Peter for further color on the industry segment. The guidance is predicated upon where we think we will be in Q2. Obviously, we will see sequential improvement. We were excited to see that we saw sequential improvement on the high-end in Q1, and as you noted, mainstream was down. We do expect that to rebound; to the extent it rebounds, and coupled with our FPD, will indicate where we will end up. That's why, based upon what we know today, we are in the $113 million to $118 million range -- obviously try to hit the high end of that range. But that's where we believe is probably what we see in front of us today will be at and Chris and Peter, want to jump in on the memory side?

Regarding the high end, I think the continued good news there is that our customer base diversifies on a global scale. So the growth -- I think it's safe to say the growth was not driven by our memory customer base. Without a doubt, memory will rebound and when it does, I think you -- that's more fuel on the fire. There is a growth of our high-end business.

Regarding the mainstream sector, no doubt, that was weak last quarter. The behavior we see out of our mainstream customer is that they really vote with their wallet. When their business is good, our business with them was good. When their business is not so good, they control expenses. So I guess the bad news is our business is down in the mainstream segment. The good news is, what goes down will come back up when their business improves.

Given the outlook that most of our mainstream customers have for Q1, which is looking pretty traditional, which is sequentially down, our guidance there is muted, or our thoughts there about the business are muted. However, the tone in our mainstream customer base is generally positive. So as that business builds, as our customer's business builds throughout the year, we are very sure we have not lost any market share there, so we would expect our business to rebound in step with them.

Very helpful color there. Just to comment further on the high-end customers. I think on the prepared remarks, as well as your comments here, you talk about how broad your customer base is on the high-end stuff. Anyway you can quantify it, maybe either by number of customers or number of 10% customers in high-end?

We can just make some general comments on the segments. As we mentioned previously, our high end business started from a base linked to DRAM and that technology. We have since expanded it to NAND, flash, that's a high-end driver, foundry logic and also [IEM] logic and I think you know who the large players are in each of those segments and we are engaged with most of them. All of the segments are doing well as time goes, some will be better than others, but we have a broad, global, diversified high-end product line and customer base now. In terms of specifics, who is strong and who is weak, I think we don't generally comment on that. But you can follow the larger companies that are in this space, and probably draw your own conclusion on which segments are particularly strong and which were weaker last time. The good news is, we set out from a base of memory. We have expanded it into different applications. We were playing in all of the major high-end segments now and it's a global exposure.

Great. That's actually helpful color there. One question for you, Sean, would be cost reduction effort, just curious how do you not think about OpEx reduction or margin benefit that will shift back in the current quarter and if there is any, when do we expect those to kick in?

Edwin, during the quarter, I think last quarter we stated that our operating income breakeven revenue required to be there was probably $96 million to $98 million. And we believe with the Singapore initiative and other selected reductions and cost controls, cost avoidance programs in place, we estimate in Q1, the break-even point which reduced to about $95 million to $96 million. We will continue to look at that. We aren't going jeopardize our high-end penetration, but we will continue to try to be as lean and efficient as we are, as we can be.

Okay. Maybe more specifically, do you expect OpEx to actually come down in the quarter?

You are referring to OpEx at SG&A and R&D?

Yes, that's correct.

We would expect it to remain approximately flat to down slightly. Now, R&D could increase, depending upon initiatives with respect to qualifications, so that's a good variable number that we have. But R&D is up, and that's a good sign for the future for us.

Great. And one last question and I will let you guys go. Just curious, any thought about paying off some of your debt? Especially the 5.5% convert you have been watching?

Yes. The 5.5% convert, the $22 million has a strike price of $5.08, and I believe -- I don't know what it's trading at today or recently, but it was trading at a premium that would require an amount of cash that we did not feel we should part with at this point in time. But we will continue to evaluate our options.

Okay. Great. That's all I have. Thank you.

Our next question comes from the line of Patrick Ho of Stifel Nicolaus. Please go ahead.

Thanks a lot. Sean, maybe a question for you first, in terms of the CapEx. I know you mentioned today and in the past about being flexible in I guess accelerating or decelerating. How quickly are the turnaround times in terms of getting the equipment in place and getting those -- any new capacity up and running for customers?

We have ongoing plans, Patrick, even when we discussed things were slowing down in Q4, with our vendors, to try to secure potential slots for equipment. And we kept the guidance the same at $60 million to $80 million. I think it would be fair to say that we are trending or anticipating to be at the high end of that range, and to the extent we see further opportunities to expand our selective footprint, we will increase that and we will talk about that at the end of our Q2 call. We do not feel we will miss any opportunities as a result of our capacity.

Okay. Great. So basically, you are implying that you'll get the capacity in place if need be in time to meet any customer demand.

Yes.

Great. Going through the FPD side for a second. AMOLED is a growth opportunity for you, but obviously the general FPD market remains somewhat soft. How much do you see AMOLEDs growing in calendar 2012 that can help offset some of the broader weakness in the space?

For competitive reasons, we can't give specific guidance, but what we can say, Patrick, is that obviously weak overall FPD market, Q1 revenue was sequentially flat as Deno alluded to. So while the largest scale and larger displays are a little softer, we do see some encouraging business on the AMOLED side. To the extent how much that goes up, it's still in a good position from a competitive standpoint and perhaps, Chris, do you have further color?

I would just say what we have talked about on AMOLED, the complexity of the masks and the high-end opportunity there is coming to fruition. The companies that we work with are investing in capacity, to the extent how that growth offsets other parts of the FPD segment, I don't think we can comment on that now. The AMOLED does look like a growth opportunity for us on the display side.

Great. That's all I have. Thank you.

Our next question comes from Chris Blansett of JPMorgan. Please go ahead.

This is Bill Peterson calling in for Chris. I wonder if you can walk us through, I guess when you think about the mainstream market with low utilizations, how do you view pricing or predatory pricing with the competitor out there? And related to that, is how long are contracts in place for such a market?

I will start, and then I'll turn it over to Peter. The mainstream market has been always very -- price competition has always been there. And despite the decline quarter-over-quarter in the mainstream business, we have a very lean and efficient operating infrastructure and it generates a lot of cash. We are less susceptible to, because of our set up, less susceptible to price degradation, but we are still profitable in that segment. Peter, do you have any further comment?

I think the tone of mainstream segment is -- unit volume down. Customers are optimistic about their business prospects. So right now, the deceleration of revenue is mostly volume-driven. The pricing environment has not materially changed.

Regarding contracts for the large customers, they tend to be 12 months and two years. So there may be some tactical actions right now that are I would describe as isolated. We, as Sean said, have a very lean infrastructure and we are still nicely profitable and we are generating a lot of cash in the mainstream segment. What I would suggest is you watch this segment of the business over the next two or three quarters, and I think you will see a nice change. But time will tell.

You would expect prices to actually increase over time, not necessarily this quarter, but throughout the year.

I wouldn't say expect to increase, As Sean said, we usually see a smaller version in prices but what I did say is I haven't seen any remarkable change in the market. It's just business as usual. It's just that unit volume isn't there presently.

I think Peter, another way to say it as well is the unit volume wasn't there but we are fairly confident that despite our decrease, we are sure our competitors are suffering even more in that quarter.

I think that is a good way to describe it.

Okay. Fair enough. And I guess related to a small amount but related to the charges for Singapore, would you expect that to be I guess in this current quarter primarily or spread out through the rest of the year?

I think Bill, it will be primarily mostly in Q2 and based upon the range that we gave, it's not going to be significant.

That's all I had. Thanks.

Our next question comes from the line of Tom Diffely of D.A. Davidson. Please go ahead.

Good morning. Sean, along the lines of Patrick's question earlier, and in light of the Singapore closure, what is your current installed capacity? I know it depends on mix, but are you up in the $130 million range?

Q3 of last year would be at $136 million, and said Q3 and Q4, depending on the mix, we could have done upwards to $150 million and since the Singapore closure, we said because we have install capacity, we don't expect to lose any revenue, we are still certainly around that number, if not a little bit higher depending on the mix and market environment. To the extent that we see a snap back in any facet of the business, we have the install capacity to handle that.

Okay. Great. I was hearkening back to a year ago, when you initially thought that April quarter was going to be below $120 million and came at $133 million. Wanted to make sure you could respond quickly.

About that or something like that. But we have to be pragmatic about what we see today. We do, as Deno said, Peter said, and Chris said, we are excited about our opportunities and we can react very quickly if there is a snap back.

Some of the other equipment companies regards to the memory sector, said that they've seen a definite change in the tone of the customer in the sense that all of the activity started to really ramp up later in December and a lot of times it wasn't quick enough to impact the first quarter, but they thought that things were setting up well in the second quarter. Curious if you are seeing similar trends where, if not orders, then just the overall activity levels picked up with some of the memory-related customers.

This is Chris. I don't think we seen dramatic changes in the memory companies we are working with. For sure, capacity is coming online and companies are working on new nodes and ramping new fabs. But I would say we have not seen the market change in that over the short term. I think if we have seen it change on the capacity and the node transitions recently, last quarter, to be more on the foundry side. There seems to be more aggressive node switches now. 28 nanometers seems to be yielding quite well finally at some of the foundries. So I would say there, over the short term, we have seen a little more activity. That's not to say the memory companies are stagnant. We just have not seen on the mask side what you are talking about. Now equipment and masks can be multiple quarters of difference in how they cycle, so that does not necessarily mean much at this point.

Great. Some comments about the [foreign effect] that have 100 or 75 day lead times, versus yours, which are virtually overnight in some cases.

That's right. Install time for capital equipment of course has to be taken into consideration. It's a good forward-looking metric for us.

And then finally Japan. I know a year ago, with the disruptions there, you ever get a little bit of share over the summer? I was curious how the market conditions had changed the competitive front with your Japanese competitors.

The Japanese market is definitely shrinking in a big way. They don't make any more memory chips there. And our competition lost big market share there because the business was not there. I do believe our competition is [shrinking], definitely I don't see it getting any better. It has a lot of problems. So overall, I believe the Japanese competitor is not do very well and the Japanese market is shrinking overall.

Okay. Thank you.

Our next question comes from the line of Krish Sankar of Bank of America. Please go ahead.

This is Thomas Yeh calling in for Krish Sankar. Thank you for taking my questions. The leading-edge semis held up well during the quarter. Can you give us some perspective on your customers utilization rates at the leading-edge, how they compare on the utilization on the mainstream side and how they are trending to 2012?

Thomas, this is Sean. We don't comment specifically on utilization rates of our customers in segments. But as Peter alluded to, certainly on the mainstream side, you would be fair to say that utilization was down sequentially. And on the high-end side, in pockets, as Chris alluded to, there are some increases in revenue which would then equate to increased utilization or installed capacity. We do expect, broadly in 2012, and as we said earlier because most of our growth is directed toward high-end business. We do expect that to improve sequentially each quarter. How much and how quickly that does improve remains to be seen, but we expect to see overall improvement.

Thanks. That's helpful. And you had mentioned previously on CapEx, that would tip toward IC investments this year following heavy investment in FPD last year. Can you provide additional granularity on how you get to that high end of the range that you mentioned for this year?

I don't recall specifically if we broke down in the past, the capital spend between IC and FPD. We will make selective high-end capacity adds to both IC and FPD in 2012. And I think I did recall that in our guidance from Q1 that plus or minus 25% of our business is FPD, so maybe just a general rule of thumb, it may be 25% plus or minus 5% going to FPD, but it could fluctuate. We will react and spend in accordance with the market opportunity.

Thanks, that's helpful.

(Operator Instructions). Our next question comes from the line of Stephen Chin of UBS. Please go ahead.

Sean and Deno, this is Mahavir. Thanks for taking the question. Just wondering if we could share some thoughts on, looks like the memory customers could come back in the second half, given the higher spot prices for DRAM expected in the next coming weeks or months and so DRAM utilization rates could go up. So wondering if you could see a kick in from memory and also maybe a boost from AMOLED investments in the second half?

Mahavir, Peter will answer you, with Chris as well.

If I was to look into the future, I think your assessment of the market is reasonably accurate. And also I think when Sean speaks to CapEx, as we get into the middle of the year, we will be placing bets that we'll have capacity coming on line early next year. We are very close to our memory customers, and we are looking for a ramp to occur this year. And the timing of that ramp will have -- should have a significant impact on our revenues A, and B, could impact our Cap Ex plans. So I think your thesis there is a good one.

This is Chris. Regarding AMOLED, again, it's a timing of the investments that customers are putting in capacity through the technology. When that translates into photomask demand, somewhat out of cycle with that, so the capital equipment cycle is first, and that is happening as we speak. Again there is an upside potential for later in the year as that capacity gets on-line, there will be more demand for designs and capacity.

Great. Thank you. And Sean, I'm wondering if you could share what run rate or what the overall market size run rate are you managing the business? Do you think 2012 could be flat in terms of just overall market size, compared to 2011?

I believe the market would be flat over last year. I don't see any growth in the market. But I do see growth in 2012 in market share.

Got it. So basically a flat market. Thank you, guys.

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

Thank you everyone for participating in the conference, and have a good day. Thank you.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect and have a wonderful day.