Photronics Inc (PLAB) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Photronics second-quarter earnings conference 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 reported Tuesday, May 15, 2012.

I would now like to turn the conference over to Mr. 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 of Investor Relations and Marketing of Photronics. We would like to thank you for joining our second-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 statements 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 third-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 brief review of market conditions and our strategic direction. Sean will then provide a comprehensive review of Photronics' second-quarter performance. During Deno's and Sean's remarks, they will be referring 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.

It was a strong quarter for us on a number of fronts. Our capture demand has increased through the quarter. We improved our cost profile, we grew our high-end business across both FPD and IC, and we secured ownership of our leading manufacturing facility in the nanoFab.

Sales for the second quarter were $117.5 million. IC sales of $89 million benefited from strong sales in the US led by growth at the high-end. Our high-end grew to 35% of sales, up from 32% in the prior quarter. FPD sales of $28.4 million were led by increased high-end demand.

Because of our vigilant focus on cost control, we delivered incremental growth and margins of 83% and 67% respectively on the increased revenue. Earnings per share both GAAP and non-GAAP were $0.14. EBITDA was $36 million, up $3 million sequentially. We closed the quarter with a strong balance sheet with working capital of $221 million.

Overall, we are confident about our business model. We are profitable and growing at the high-end. We're generating good margins and continue to find ways to improve our profitability.

The dynamics of the photomask industry are changing and we are in a very good position. In general, the captives are investing and growing at the high end, as is Photronics. We believe this growth is at the expense of our competition. Photronics is well aligned with the largest memory, and larger customers in industry, who are investing alongside them.

We are looking to get more data on this, but based on published analyst reports, we believe that we are now the only major merchant photomask company that is growing and profitable. Also we believe with IC and FPD combined, we are the strongest photomask merchant in the market today.

In the future we expect the strong will get stronger and we are poised for growth. We have the financial ability to make investments at the high-end. We will continue to generate good margins. We expect to continue to take market share. We feel quite positive about our business. We are aligned with strong customers. We're making pragmatic investments in high-end capacity, which is the growth engine of the photomask business.

Looking forward, we see momentum in our customers' migration to advanced nodes. We are qualifying additional advanced nodes across both memory and logic. We are diligent about cost control and disciplined in our approach.

Before I turn the call over to Sean, I would like to thank the entire Photronics global organization for their efforts during the quarter. And now I will turn the call over to Sean.

Thanks, Deno. Good morning, everyone. I will provide a brief analysis of our financial results for the second quarter of fiscal year 2012, review our balance sheet and cash flows, and then provide our outlook for Q3.

During the quarter we paid approximately $35 million to Micron to purchase the US nanoFab building, which was previously leased at an implied interest rate of 8%, up to $35 million, $25 million was financed as we amended our credit agreement by adding a five-year 2.5% term loan. As a result of this transaction, net cash flow will improve by approximately $5 million in fiscal 2013 and our expenses will also be reduced by approximately $5 million annually.

Please refer to slide 4 for our GAAP to non-GAAP net income and EPS reconciliation as we review the second quarter. For purposes of our discussion, I will be referring or comparing our non-GAAP operating results exclusive of a small charge related to the Singapore restructuring.

As a reminder in Q1, we announced the streamlining of our operating infrastructure in Singapore and expected to record an after-tax charge of $1.5 million to $1.9 million in fiscal 2012, the majority of which or $1.1 million was recorded in Q1 2012.

Slides 5, 6 and 7 show our sequential quarterly IC and FPD revenue performance. Revenues for IC and FPD photomasks were $89.1 million and $28.4 million respectively for the second quarter. Sequentially total sales increased by 5% to $117.5 million as a result of the improved high-end business.

Breaking out sales geographically, 59% of total sales were from Asia, 32% from North America, and 9% from Europe. As Deno mentioned, we achieved sequential improvements in both high-end IC and FPD business in the second quarter. High-end global IC sales were $31.3 million or 35% of total IC sales for the quarter. This represents a sequential increase of 14%.

As Deno mentioned, customers continue to invest in new designs and we benefited in Q2 from a broader global diversification of high-end business. Advanced FPD sales were $19.2 million or 68% of total FPD sales.

As a reminder, high-end IC revenues consist of revenue derived from semi designs at and below 45 nanometers and high-end FPD revenues consist of revenue at and above G-8 as well as AMOLED-based products.

Now let's continue through the income statement. The gross margin for the second quarter was 25.4%, up sequentially from 22.7% as a result of the improved revenue, a greater mix of high-end sales, and reduced manufacturing expenses related to the Singapore closure and nanoFab building purchase, among other items. The gross margin for the quarter was actually higher than the 25.3% we recorded in fiscal Q4 of 2011 when our revenues were $4.7 million higher.

SG&A expenses for the second quarter were $12.2 million, which was sequentially higher by approximately $900,000 due to increased compensation costs including benefits. R&D expenses, which consists principally of continued development for our global advanced process technologies where sequentially flat at $4.4 million in the second quarter. And non-cash stock comp expense was $700,000 for the second quarter.

Please turn to slide 8. During the quarter, we generated operating income exclusive of the Singapore charge of $13.2 million or 11.3% of sales. We have continually discussed the leverage in our operating model on incremental revenue with a target of 50%. We achieved an incremental margin for Q2 of 67% as a result of the improved mix, reduced manufacturing expenses related to Singapore and the nanoFab, among other items. EBITDA as defined in our credit agreement for the quarter was $35.8 million. This equates to $155 million on a trailing 12-month basis.

Also on a trailing 12-month basis, free cash flow was approximately $70 million with EBITDA of $155 million less non-finance CapEx of $85 million.

Other income and expense in the second quarter was expense of $1 million and during the quarter, we recorded tax provision of $2.7 million which was slightly below the low end of our guidance as a result of increased profits mainly in the US for which we have offsetting NOLs.

GAAP net income was $8.8 million with an EPS of $0.14 per diluted share and non-GAAP net income was $8.9 million or $0.14 per diluted share, which was above our guided range of $0.09 to $0.13 per share.

At the end of the second quarter, we had 1,277 full-time employees and this equates to revenue per employee of $368,000 on an annualized basis.

Let's take a look at the balance sheet. Cash and cash equivalents at April 29, 2012 amounted to $192 million and our net cash, which is cash less debt, was $12 million. Our working capital at the end of the quarter was $221 million, up slightly from the end of Q1 at $220 million on 5% higher revenues. Accounts payable and accrued liabilities at April 29 amounted to $81 million. At the end of Q2, we had $5 million of CapEx accrued for, which is down from $9 million at the end of Q1.

Please turn to slide 9 as we review our capitalization. Total debt at April 29, 2012 was $180 million. The principal components of outstanding debt include $22 million 5.5% senior unsecured convertible notes due in October of 2014; $115 million 3.25% senior unsecured notes due in April of 2016; approximately $17 million for a capital lease obligation; and a $25 million five-year term loan related to the nanoFab building; and approximately $1 million related to an obligation with a customer who co-funded a tool purchase.

At the end of Q2 2012, we did not have any outstanding borrowings on our $30 million revolving credit agreement, which matures in April of 2015.

Let's take a look at our cash flows. Cash provided by operations for the second quarter of 2012 was approximately $28 million. Depreciation and amortization for the quarter was $21.5 million. Cash flow used in investing activities during Q2 2012 amounted to $55 million and includes $15 million for cash payments for capital expenditures and $35 million related to the nanoFab building.

Net cash provided by financing activities during Q2 2012 amounted to $17 million and includes $7 million related to the repurchase of PSMC shares, which were offset by the $25 million financing related to the nanoFab building.

Please turn to slide 10 as we take a look ahead. We expect our CapEx needs on a cash basis excluding the $25 million finance portion of the nanoFab building for 2012 to be in the range of $85 million to $90 million. However, we have the flexibility to accelerate or decelerate our spending depending upon market conditions. We do expect to continue to generate free cash flow once again in 2012 and our 2012 investments were principally geared towards high-end leading-edge products for IC and FPD applications. The significant high-end revenue increases and market share gains as we have seen in 2012 -- 2011 and thus far in 2012 have certainly validated our high-end strategy.

Our visibility as always continues to be limited as our backlog is typically one to two weeks. At this time we expect to experience continued growth so taking this into consideration, we are projecting revenue for the third quarter of 2012 to be in the range of $118 million to $123 million.

During 2012, our tax rate will be impacted by the flow of income from jurisdictions which we may have credits and which -- and upon our limited ability to recognize tax benefits in areas in which we are taxable. Accordingly we are estimating income taxes for 2012 to be in the range of $14 million to $16 million and for the third quarter this will equate to a range of $3 million to $4 million.

As a result based upon our current operating model, we estimate earnings per share for the third quarter of fiscal 2012 exclusive of the impact of any restructure costs to be in the range of $0.14 to $0.18 per diluted share.

Please turn to slide 11. In summary, I will leave you with a few key thoughts. First, we expect to incur top-line and bottom-line sequential growth in this environment. Second, we are very excited about our potential to capitalize on the high-end growth in both FPDs and IC. We see opportunities to continue to capture high end market share in 2012 as we execute on our high-end strategy while servicing our mainstream customers. And as Deno stated, we believe we are the strongest combined IC and FPD merchant in the market today.

Finally, we expect to continue to build on the momentum that we established in fiscal 2011 and have continued through the first half of fiscal 2012. Although our visibility is limited as always, we will plan to match our operating infrastructure to the market environment.

Now I would like to turn the call over to the operator for questions and answers.

(Operator Instructions). Steven Chin, UBS.

Thanks for taking my question. This is Mahavir Sanghvi for Steven Chin. Hi Deno and Sean. Just a clarification question, Sean. So the increase in the cash CapEx, is that driven by the Micron nanoFab purchase?

Actually that's correct. Last quarter we had guided $75 million to $80 million and this quarter we are guiding $85 million to $90 million primarily the increase is solely related to the $10 million cash portion of the non-financed building purchase. So we haven't changed our core CapEx plans for fiscal 2012 and we do expect when we announce Q3 guidance to give further granularity into our future CapEx plans as we get into the end of 2012 and 2013.

Great and then what's impacting the mainstream business? Is it just the lower volume or aggressive pricing?

I will give a few key points and then I will turn it over to Peter Kirlin for further discussion. But just as a reminder, we do recognize that it is down year-over-year but it is still a cash cow for the Company. We firmly believe we are not losing share. It's a profitable piece of our business and we scaled our infrastructure with Singapore and some other selected moves to maintain our margin leverage.

Peter, maybe you can give some further granularity on that.

Yes, regarding the mainstream business, it's very much goes as our customers go. So there is always exceptions but if you look at the mainstream customer base, generally without pointing to single customers to give what is out there publicly, it's very clear that most of them call the bottom in the market and they are in the first calendar quarter, which is generally the first fiscal quarter for most of those semiconductor manufacturers, they are all more or less are largely projecting incremental growth going forward. So we have I think some optimism regarding our mainstream business for next quarter and the second half of the calendar year.

Having said that, I think what we've also said generally is the high-end continues on whether the semiconductor business is soft or strong and I think our high-end numbers clearly reflect the fact that that part of the business has remained vibrant regardless of overall market conditions.

So we are -- we go as our customers go and they right now looking forward are generally optimistic for the mainstream, which is a nice change.

Got it. And then a couple of quick questions. What is the key assumption embedded in the guidance? Is the assumption that the mainstream business you expect it to grow Q over Q in the July quarter?

We haven't typically provided that level of granularity with respect to guidance, but as Peter said, we are optimistic that it will improve perhaps the second half of 2012, but we certainly have the upside -- certainly if upside comes, we have the infrastructure in place to react to improving business conditions. The high-end has been very strong for us even in our trough quarter of Q1, it continues to be strong so to the extent the mainstream business quote unquote snaps back, we certainly can react to it very quickly.

Got it. And one last question. Do you have any exposure to Elpida and do you expect any positive impact from Micron purchase of Elpida? Thank you.

Chris, why don't you handle that question?

Okay, Sean. Sure. Today, no, we do not have any exposure to Elpida. That is not a current customer. To the extent there is a transaction there that one of our larger customers benefits from, we can speculate that they may change in the future but we really do not have any particular information right now we can comment on. I think all we can say is any opportunity presented to us, particularly one that was not existing prior, could have potential and we will do everything we can to maximize any opportunity that's given to us in that space.

Great. Thank you, guys.

I would say we are very confident that we are capable of building any photomasks that Elpida or their affiliates would need.

Krish Sankar, Bank of America.

Thanks for taking the question. I have two of them. Either Sean or Deno, the well telegraphed issues of the foundries at the leading edge from the yield and all of that challenges, does it actually slow to the design tapeouts?

Sorry, Krish, we couldn't hear the beginning part of that question. We heard --

I was trying to find without all the issues the foundries are having with the leading edge whether it's EUV or other challenges, is it actually slowing out design tapeouts for next-generation technologies?

Chris, why don't you jump in on that?

No, I don't think it's really slowing. In fact, you might see a little bit of the opposite since photomasks tend to sometimes increase in volume when companies are working on yield and new designs and re-spins. You can sometimes see a counter effect there and I don't think we have seen a downtick on the foundry side. In fact I would say the opposite particularly for non-PSMC foundry probably stronger demand profile. And it may have something to do with some of the other companies looking around for alternative suppliers.

Okay, then when you look at it longer term from when EUV starts rolling in, how does it impact the mask industry both in terms of number of masks needed and also what will the pricing be for EUV-related photomasks?

Oh, EUV in particular, this cusp for photomasks, for a single EUV mask tends to be higher because it's a more complicated mask. However, it's usually replacing a double patterning or triple patterning layer, so the total cost for the layer to deliver may not change that much.

As far as the merchants go, we expect a fairly gradual pickup in EUV over the next few years, 2015, 2016, potentially the market starting to grow and become more substantial. With that said, we are gradually increasing our R&D effort although today it's still a relatively small fraction of our total -- both in our JV and in our own facilities we do have a few stronger initiatives in EUV. We're talking to the other suppliers, the equipment companies, the resist companies to make sure we know what the infrastructure looks like and we are in constant communication with our customers to make sure we can match into their roadmap.

So we do think from a business side it will be a gradual transition.

Is it fair to assume that the decrease in the number of layers would be offset by the increase in pricing?

Yes, that's kind of what I was trying to say in my first comment. That's right. Generally the cost of a single mask should be a -- it will be higher but the total number of levels per set, mask set likely will go down because you are replacing some double and triple patterning layers.

So the aggregate may not change much. And of course the mask set prices go up generally with each node anyway. So I don't think you're going to see a dramatic change in the node pricing models for masks as the EUV comes on line.

If I can provide a little more granularity on that, EUV will only be used for the most difficult layers. So if a mask set is 40 layers, you will be able to count the number of EUV layers on one hand. So given the pricing volume trade-off that Chris just talked about, it's actually a trade-off over only a subset of the total reticles in any one order so it's really for us a marginal impact.

Thank you, that is helpful. Thank you, guys.

Patrick Ho, Stifel Nicolaus.

Thanks a lot. Sean, maybe in terms of the guidance for the July quarter, can you just kind of on a broad basis characterize where you are seeing I guess growth between advanced versus mainstream IC masks?

Sure, Patrick. We believe that we will see at this point in time sequential growth in the high-end. To the extent further demand continues to come in higher than -- we certainly have the infrastructure in place to handle more high-end business and mainstream business as we move forward. Our guidance is based upon what we see today and as Peter pointed out on the mainstream side, we do expect that to be a little bit stronger in the second half. Hopefully some of that falls into this quarter so we are optimistic about our opportunities.

Okay, great. Maybe just going to the FPD side of things, obviously they look a little a bit stronger than we all expected. In terms of the advanced FPD, are you seeing that from traditional business or are you seeing any pickup on the AMOLED side of things?

Well actually as Deno alluded to in his prepared remarks, we did see high-end growth in FPD in arguably in somewhat of a soft market and we can say without providing too much granularity for competitive reasons, we did see growth at both -- sequential growth in both G-8 and AMOLED-based products.

Great and final question for me again bigger picture just related to the EUV versus double patterning, have you seen any pickup on your end in terms of double patterning type of techniques or the masks related to that because of the raise in EUV? Have you seen any pickup either in designs or even mask sets for those type of processes?

I think on the R&D side I would say yes. We have seen in most all chip makers we work with are now exploring multiple patterning solutions to need to last longer than they had anticipated given some of the delays in EUV. So on the R&D side, definitely seeing higher volume there even three, four mask kind of flows per level. To the extent those move into production, then the overall volume should increase, driven by those patterning strategies.

Great, thank you very much.

Edwin Mok, Needham & Co.

Thanks for taking my questions. So kind of further on the last question but not related to EUV, have you guys seen any activity being done on the 3-D NAND or 3-D DRAM memory technology? Where do you think that progress is coming?

This is Chris. I can make a few comments without getting into specifics. We have seen increased activity on 3-D across multiple customers particularly on the NAND side as it gets ahead. The DRAM side a little more complicated in how you scale that to 3-D architecture. And of course on the microprocessor side, there's work on 3-D on the transistor level.

So the short answer is yes I think all the major memory companies are working very hard on this and looking at it and NAND seems to be the most serious potential move into that architecture.

Great, thanks for clarifying that. Second question regarding the high-end growth on the IC side, how much of that is driven by kind of logic side? Because all these customers are moving to basically the 45 or beyond node, how much of that is driven by memory shrinking?

Right now, the lion's share or the high-end growth is being driven by our penetrating more and more of the logic customer base. Our flash business has remained very -- it has been steady Eddie, very true and very stable. Yet DRAM still we are looking forward to a snap back in it and the growth is really logic.

Great, that's very helpful, so that's good penetration there. The third question I have for Sean is based on your guidance it seems to imply pretty healthy offering or margin improvement there. I was wondering how much of that is kind of reduction in OpEx versus just gross margin improvement?

I think it's a combination of both gross margin improvement and OpEx. We certainly did see a little spike in SG&A during the quarter. We expect that to pull back a bit and certainly once the costs are fully -- with respect to Singapore -- fully baked into the model and plus the savings from the nanoFab and other details -- I'm not going to get into that level of granularity but cost savings initiatives primarily on the manufacturing side is providing the leverage to the model. So we are still targeting as we move forward based on sequential revenue growth, a drop through, a target drop through of both 50% at the gross and operating margin line.

I see, great. Actually one question I have was is there any kind of one-time either restructuring or incurring charges that you expect in the coming quarter?

At this point in time we don't anticipate any significant one-time charges. There may be a small amount related to Singapore coming through that partly restructuring costs. We certainly don't expect any significant costs at this point in time.

Great, and the last question I have is you mentioned that you did some buyback on PSMC during the quarter. I was wondering what drove that decision to buy back PSMC? And given that your stock is trading below book value. Have you thought about buying back your own stock?

What we can say about that is PSMC is a publicly traded company in Taiwan. We had majority share of approximately 57% and they have elected because of their stock price to buy back treasury shares in the open market and as a result that flows through our consolidated cash flows and balance sheet. And as a result, our ownership has increased from 57% to 67% approximately and if you look at our income statement, the minority interest, our net income attributable to non-controlling interest is a deduction for us which means some of that is going to the minority shareholders. So to the extent we own more, that number should decrease as we move forward.

And buy back for your own stock?

At this point in time depending upon our capital needs as we look forward, we don't have any present plans to do so, however it is a [food] environment and we always look at all options.

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

(Operator Instructions). Tom Diffely, D. A. Davidson.

Good morning, Sean. First just a quick clarification. Did you expect the margin leverage or the incremental fall through to be 50% or 60% going forward?

We're still targeting 50%. Obviously if we have a quarter at 60%, we will be very pleased.

Okay, is there a big difference between high-end versus mature mainstream business on that margin leverage?

Not necessarily at this point in time. Every incremental dollar is -- would drop about the same, but certainly the velocity would be -- the absolute number would be higher because the revenue is higher attributable to high-end business. But we are pretty much agnostic once we move forward and when we reach our breakeven to get the revenue in. So as Peter alluded to earlier, to the extent things really snap back or improve on the mainstream side, we have the capacity to handle the work and at the high end, we have the capacity to handle to work if it comes in whether it be IC or FPD.

Okay, it sounds like the mainstream accelerated nice through the quarter. There's no reason to believe it doesn't continue that trend is there at this point?

No, hopefully it does -- continues to improve. Certainly we had a little bit of a slow start in Asia in the beginning of the quarter related to the Lunar New Year but we expect it to continue to improve moving forward.

Okay, all the trends we're hearing from the outside is that kind of the mainstream business across the board has gotten better. So it should be a nice quarter-over-quarter improvement I would think.

So looking at the cash flow over the last year, it looked like you were $70 million of free cash flow. Is there some way to quantify what it would have been if you had the facility ownership at the time and the Singapore closure was in place?

I think what we can say to that, Tom, is that we have said in the press releases that we would expect to save approximately $3 million to $4 million in cash related to the Singapore closure on an annualized basis, so that's one number. And then on the nanoFab building, we are saving -- we publicly stated that we are saving $5 million annually on cash flow.

Okay, that helps. Then finally, when you look at the capital spending plans for the year, I assume that at this point that builds in the expectation for growth at the high end as well. So if there's continued growth at the high-end that number doesn't go up unless it's some spectacular growth somewhere?

That's correct. We are currently evaluating as we said on our last call our plans for fiscal 2013 and 2014 and as we make those decisions, Deno and team makes decisions on where to spend and deploy the capital, we will provide updated guidance. We do expect to give further granularity our first outlook into 2013 when we close Q3.

Okay, thank you.

Chris Blansett, JPMorgan.

Good morning, guys. This is Bill Peterson calling in. Congratulations on a good quarter. My question is more if you consider the full year -- and I guess maybe I am speaking calendar year -- it looks like it could be down. I'd like to get an indication on how you view the overall photomask market particularly for semiconductors.

And then the second part question of that, assuming your trajectory and market share, where would you think you would end up relative to your competition as the number two position within reach?

This is Chris. I can make a quick comment on the overall market. As we have stated previously, market grows as a percentage of semiconductors historically been 1% to 1.5% at semiconductors, so to the extent that is growing, overall photomasks should grow but modestly. And so it's a relatively flat market. Most of the large gains come through market share wins, node transitions, and acquisition of new customers.

In terms of Photronics' opportunity, I will bounce it back to Sean and Deno and make some comments on that.

With this opportunity basically, as Chris said, in gaining market share, but as I mentioned earlier, the strong become stronger and we do believe in a position to continue to gain market share and capitalize the opportunities coming along.

Okay, thanks a lot. That's all I have.

Ladies and gentlemen, I am not showing any other questions at this time.

With no other comments, I would like to thank all the participants on behalf of the management and thank you for your participation. Have a good day.

Ladies and gentlemen, that concludes this conference call for today. We thank you for your participation and ask that you disconnect your line. Thank you.