Photronics Inc (PLAB) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Photronics third 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, August 14, 2013. 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 third quarter 2013 conference call.

Before we begin, I would like to remind all participants about the Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995. This 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 be archived on our website until we report our fourth quarter 2013 results.

Joining us on the call are Constantine Deno Macricostas, Chairman and Chief Executive Officer, Sean Smith, Senior Vice President and Chief Financial Officer, and Dr. Christopher Progler, Vice President, Chief Technology Officer and Strategic Planning. Deno will first provide a brief review of market conditions and our strategy direction. Sean will then provide a comprehensive review of Photronics third 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 three in our slide presentation, I would like to begin by highlighting the successful completion this past quarter of our tender offer for the outstanding shares of our subsidiary PSMC in Taiwan. We now own over 98% of the shares. As Sean will explain later, it was a productive financial transaction for our shareholders. Most importantly our Taiwan operations are highly strategic for serving our key customers like Micron affiliates, UMC and GlobalFoundries. Now one is a major center for us, we invest in high end capability and leverage our position there, and take advantage of growth opportunities throughout Asia.

Turning to the results of the third quarter. Revenues were $109.7 million, within our guidance range. IC sales were $84.2 million, up 2.4%sequentially. Growth in IC was driven by increased mainstream sales up 4.2% sequentially.

We capitalized on solid demand for mainstream photomasks across our customer base. High end IC photomask sales declined slightly from the second quarter, down 1.9%. Our ICs is a transition phase in our high-end business, as we explained in the last two calls, we are in the process of bringing on two advanced mask layers, between 8,000, proactively qualifying between 8 and 14 nanometer nodes in Logic. We expect to have those tools in production by the end of the calendar year, if not sooner. As we have said before, these layers are critical for 28 and 14 nanometer logic in advanced memory nodes. It will help to us take high end market share for years to come. Today, we are building the foundation for long-term while investing we believe well ahead of the competition.

In Memory, new designs for next generation devices were delayed. The delays were due to the strength of our customers existing products. Our customers extended manufacturing of current chips [inaudible] and posts meant for new photomasks. We expect new designs in memory to start up again during the current year. Overall, our key IC customers are doing well and investing. We have opportunities with new customers at delivering nodes, and we expect to gain market share as our new tools move into production.

Turning to the FPD side. Sales for photomasks were $25.5 million during the quarter. Up 4% sequentially. We remain confident in the demand trends in this market. The high end with AMOLED and larger ultra High Definition TVs continue to do well, we expect that to continue. Mainstream revenues picked up nicely this quarter, as we saw increased demand across a number of customers throughout Asia.

When the bottom line continues to do well, as evidenced by sequential improvements in gross and operating margins. Operating margin provides leverage on increased revenues. Going forward we expect to continue to improve our margins as our new technology begins to contribute to significant high end growth. Looking forward we are excited about opportunities. One of our major partners Micron just successfully completed the acquisition of a Elpida and Rexchip, we expect to benefit from the increased demand for photomasks in the future. In addition we have opportunities with some of the larger foundries to gain high end business. The FPD business demand is strong and our customers continue to invest, introduce new panels.

In summary, we continue to perform and we have a strong technology foundation for future growth. As a result, during the next couple of years we believe that Photronics is strongly positioned to become the leading photomask merchant in the market. Before I turn the call over to Sean, I would like to thank the Photronics global organization for their hard work thus far in fiscal 2013. We are moving very quickly on a number of fronts, we improved our business operations and technology. Due to the efforts of everyone, we have a strong global operations, and many opportunities ahead of us. I appreciate it. Thank you team.

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 third quarter of 2013. Also review our balance sheet and cash flows, and then provide our outlook for Q4. As Deno mentioned, we successfully completed the tender offer for PSMC and now own 98.1%. In addition to the strategic importance of this transaction, we expect it to be accretive going forward. The minority interest expense for Q3 was approximately $400,000 since the transaction was concluded in mid-quarter. Had we not acquired the additional 23% of PSMC, minority interest expense would have been in excess of $700,000.

Please turn to review slides five, six and seven, which show our sequential and year-to-date IC and FPD performance. Third quarter revenues totaled $109.7 million within our guided range of $107 million to $111 million. Revenues for IC and FPD photomasks were $84.2 million and $25.5 million respectively for the third quarter. Breaking out sales geographically, 59% of total sales were from Asia, 31% from North America, and 10% from Europe.

As Deno discussed, high end global IC sales were somewhat muted during the quarter with sales of $22.9 million, down $400,000 compared to the second quarter. We did experience some delayed tapeouts for memory products due to the improved memory pricing during the quarter, as our memory customers generally continued to manufacture existing devices. We also experienced continued softness with one of our foundry customers, due in part to a node migration for which we had not yet completed qualification. We are optimistic in completing this qualification during the current quarter.

Advanced FPD sales were $16.7 million, a sequential increase of $200,000. Advanced FPD sales represented 65% of total FPD sales for the quarter. As a reminder, high end IC revenue derived from Semi designs at and below 40 nanometers, and high end FPD revenues consist of revenue at and above G8, as well as AMOLED-based products.

Now let's continue through the income statement. Gross margins for the third quarter were 24.7% up sequentially by 150 basis points,as a result of the increased sales and reduced manufacturing costs. The incremental margin contribution was approximately 77% on the increased sales, primarily driven by reduced labor and benefits. Selling, General, & Administrative expenses for the third quarter were $12.1 million, essentially flat with the second quarter. R&D expenses which consist principally of continued development of our global advanced process technologies and qualifications at advanced nodes were $5 million, up approximately $400,000 sequentially as a result of increased call activity.

During the quarter we generated operating income of $10 million, or 9.1% of sales a sequential improvement of 150 basis points. The incremental margin contribution was approximately 65% on the increased sales primarily as a result of reduced manufacturing costs. Noncash stock comp was approximately $1 million during the quarter.

Please turn to slide eight. EBITDA as defined in our credit agreement was $29.2 million, or $112 million on a trailing 12-month basis. Other income and expense for the third quarter was expense of $1 million, up $100,000 sequentially. During the quarter we recorded a tax provision of $2.7 million, which was within our guided range of $2 million to $3 million. GAAP net income was $5.9 million, or $0.10 per diluted share. At the end of the third quarter we had approximately 1,300 full time employees. This equates to revenues per employee of $337,000 on an annualized basis.

Now turning to the balance sheet. Cash and cash equivalents at quarter end amounted to $197 million, and our net cash which is cash less debt was $3 million, down $28 million sequentially. This was principally as a result of the completion of our tender offer for PSMC shares, for which we utilized approximately $27.4 million of cash during the quarter. We have taken PSMC private, and as I stated earlier, we own over 98%. Our working capital at the end of the quarter was $192 million, down from $207 million, or $15 million as compared to Q2, primarily as a result of the cash we used for the PSMC transaction. Accounts Payable and accrued current liabilities at quarter end amounted to $110 million, and at the end of Q3 the $30 million of CapEx was accrued for.

Please turn to slide nine as we review our capitalization. Total debt at quarter end was $194 million. The principal components of outstanding debt include $22 million of 5.5% seniorunsecured notes due October of 2014,$115 million 3.75% senior convertible notes due April of 2016, $12 million related to a capital lease obligation,$22 million of a 2.5% five-year term loan related to the nanoFab building, and approximately $23 million related to a 2.5% capital lease for an advanced eBeam tool. At the end of Q3 we did not have any outstanding borrowings on our $30 million revolving credit line that matures in April of 2015. Additionally, in connection with the PSMC transaction our equity decreased approximately $27 million during the quarter, as a result of the elimination of PSMC minority interest.

Taking a look at our cash flows. Cash provided by operations for the third quarter of 2013 was approximately $32 million, and was $68 million year-to-date. Depreciation & Amortization was $17.6 million for the quarter. Cash flow using investing activities during Q3 amounted to $15 million and $50 million year-to-date. Year-to-date cash used in investing activities includes $47 million of cash CapEx. Net cash used in financing activities during Q3 amounted to $29 million and $36 million year-to-date. As I previously mentioned during the quarter we invested $27 million through the tender offer for PSMC.

Please turn to slide 10 as we take a look ahead. We expect our non-finance cash CapEx in 2013 to be in the range of $65 million to $75 million. We expect to continue to generate free cash flow once again in 2013, and our 2013 investments have been principally geared towards high end leading edge products for both IC and FPD applications. Our visibility as always continues to be limited as our backlog is typically one to two weeks. For Q4, we do expect to experience some typical seasonality related to the US and European summer and holiday vacation seasons. As a result, we are projecting revenue for the fourth quarter of 2013 to be in the range of $110 million to $114 million.

During 2013 our tax rate will be affected 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 we are taxable. For the fourth quarter of 2013, we expect this will equate to range of $2 million to $3 million, for fiscal 2013 we estimate total taxes in the range of $8 million to $9 million. As a result based upon our current operating model, we estimate earnings per share for the fourth quarter to be in the range of $0.10 to $0.13.

Please turn to slide 11. I will leave you with a few key thoughts. We do expect further top and bottom line sequential improvement in Q4, and looking into the latter part of Q4 and into fiscal 2014 we expect accelerated high end IC growth, as we capitalize on continued opportunities in our customers business and node migration plans. We believe that we are well-positioned to become the leading global merchant photomask supplier, as a result of our advanced technology, strategically deployed leading edge technology, and strong financial position. We expect to benefit from our increased high end capacity strategically located in Boise and in Asia. The capacity is in line with our foundry customers node migration plans, as well as our Boise JV partners growth prospects in Asia.

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

Thank you. (Operator Instructions). Our first question comes from Krish Sankar with Bank of America. Your line is now open.

Sean, just a quick question on the high end IC sales, it looks like it is not, last quarter you said you are going to start seeing a pick-up, but it didn't quite happen in the July quarter. I understand that one of your foundry customers is still like doing a node migration. I thought that was just a one or two quarter thing. How long is that going to drag on for?

Chris?

I can make a comment. The current qualification we have with that customer is proceeding well, we remain optimistic that qual is going to complete this quarter. At the same time, they are also doing a node migration to 14 nanometers, so we have taken an early start, early advantage of that qualification process as well. So we are actually doing two nodes in parallel now with this customer. To some extent it has a slowed down a little bit, completing the first qual. Optimistically that will lead to earlier 14 nanometer, particularly in 2014. So this customer continues to move very quickly, we are working with them, qualification is proceeding, and actually we have a strong lead on their 14 nanometer qual now as well.

Are they doing 20 and 14 or--?

20 nanometer seems to be a node right now that is being deemphasized by most of the foundries. I would say without speculating too much that the 20 nanometer node for this particular customer will be fairly minor, and their 14 nanometer node will be a much stronger cadence for next generation after 28.

Got it. That is very helpful. In terms of the outlook, how should we think about the IC flat panel and the high end IC high end flat panels in the October quarter versus July?

Krish typically the last couple of years Q4 has been down sequentially compared to Q3 because of the seasonality primarily related to the Mainstream product and the cyclicality of the DFPD. We did forecast or project to have increased revenue this quarter, that should be principally driven by high end applications primarily IC, without giving specific guidance, and probably will be on the latter part of the quarter.

Fair enough. And then one final question. The share count guidance, how do you reconcile it? I think you guys gave us some of the high share count guidance, but it came in much lower. Is that more to do with one of the debt related things, or how do we think about it?

We had some, you are referring to what we posted on the slide?

Yes. The 77.5 million shares.

That is fully diluted shares. I think last quarter we were at about 76 million, and our guidance was up a little bit actually, based upon some option exercises and some conversion of some warrants.

Got it. Alright. Thank you very much.

Our next question comes from Edwin Mok with Needham & Company. Your line is open.

Thanks for taking my questions. So Chris or Sean, it sounds like you guys are pretty confident about the recovery or improvement on the high end IC side, after you install these new mass writers. Should we read that as your belief that at least that the part of your business can continue to grow into the January quarter, which historically also you could see some seasonality because of the Chinese New Year?

We are still confident going forward. Definitely Micron is a known, with that chip, I think we will benefit tremendously. There is a lot of business there. At the same time, we are qualifying at the 28 and 14 nanometer nodes, and I do believe really all of these qualifications plus what will happen with Micron, we will be very strongly at the high end, and we are going to accelerate going forward. Especially the next fiscal year, definitely I feel very strong about that.

The entire team is very confident about our positioning with key customers, strategic customers, and the two tools coming online, so we still have that confidence that we spoke about in Q2. So we are really excited about our opportunities into next year.

I guess I would add one more thing, Edwin. On the Memory side, the scaling continues to be fairly robust. You probably saw Micron or Radical Partners announcing on the 16 nanometer flash memory in July, so there are new planer products rolling out, and Flash, also DRAM continues to scale. So there is a lot of qualification and design activity as well, we are very well-positioned to take advantage of. We see the road map is strong, we see our technology portfolio intercepting that right on, and we are very confident we are going to ride the wave of a strong high end adoption later this year going into next year.

Okay. That is helpful. Sean you mentioned the two mass rater that you guys have. Can you update us on where you guys are at on those two writers, and what time frame do you expect them to come online, and how much more time after they come online do you think you need for your customer to qualify those equipment before you can actually put them into use?

Yes, as Deno mentioned in his prepared remarks, both tools have been delivered, and we expect them to be qualed and generating revenue by the end of the calendar quarter, if not sooner. Obviously we are pushing very hard to get them qualed and into production. And as I said in my remarks, hopefully we see some high end pick up in the second half of the quarter.

I see. Okay. That is helpful. On the FPD side I saw that the Mainstream actually picked up a little bit. Is that a trend that we should expect to continue, and what was the driver of that increase?

It picked up about $800,000. Not a significant, a high percentage but not a significant amount, Edwin. I think typically it is more on the seasonality side of it. Principally I think that revenue was generated in Taiwan.

Maybe Chris can answer the question. And I believe the AMOLED and other high definition TVs will drive forward the FPD. And the FPD scale is almost like an IC now. More complex, has a phase shift, and as a result it is priced higher too. I believe the high end is going to drive the FPD growth. Map Chris can answer.

Sure, thanks Deno. On the display side for sure, ultra high def, the 4K displays are driving a lot of design activity, a lot of smaller transistors and pixels, so that is making the lithography and also the masks much more complicated. The layer counts are going up for those devices as well.

At the same time, there has been renewed interest in LCD in general. A lot of companies are trying to push the standard LCD technology even further. So same design activity connected with that. AMOLED is a very strong technology, multiple companies are using it. The scale-up of that to TV size, I think the timing remains in question, but as far as its use in mobile applications, very strong new features are being added. The display mask space is very rich and growing from the point of view of high end and new applications, there is no doubt about it.

One thing further, Edwin across, on both segments on FPD and IC we saw an increase in Mainstream products which was good for us, and the Mainstream side is up 4.2%, and unfortunately Peter Kirlin wasn't able to join us today, but he is driving that increase with increased market share gains.

Okay. That is helpful. One last question just on cash. Do you see some cash outlay that you need to put out on the CapEx in the coming year, because of these two tools, or should we expect CapEx to come down in 2014? That is the first part of the question. Second part is you have this $20 million debt that is due later on next year. What is your intention to do with that?

With respect to our cash, as you noted, I will note that we reduced our capital spend, our projected capital spend for this year. Some of that cash, that spend is just being pushed out into next year for payments on certain tools. We will provide guidance for our capital plan for 2013, but we are just going to, I am sorry 2014 in December, but we are confident in our ability to generate cash to pay for our capital spend, and we do expect next year to generate sufficient free cash flow in excess, as we have over the last four or five years in excess of our projected capital spend.

And the debt?

The debt that is due October of 2014 is a convertible note that has a strike price of $5.08. So it is in the money now, and hopefully if we hit what we say we going to do in 2014, it should not be any issue whatsoever.

Great. That is all I have. Thank you.

Thank you.

Our next question comes from Patrick Ho with Stifel Nicolaus. Your line is open.

On the memory IC side of things, can you give a little bit of color in terms of the transitions that are going on, particularly on the DRAM side, as a lot of the suppliers are converting their capacity over to mobile and server DRAM capacity. Is that shift also impacting some of the near term revenue flow, and once they get their capacity converted, that is when you could see an uptick again, in terms of revenues from that side?

Patrick, this is Chris. Certainly related to our largest memory customer, there has been a kind of market dynamics shift as you have said, and also an acquisition for them, and they are digesting wafer fab capacity, and figuring out how to integrate products they have acquired into their own portfolio, so that has caused somewhat of a pause on some of the photomask work. On the other hand the fabs are very busy also on the memory side, and that has probably muted a little bit some of the memory mask demand in the very short term. As far as the trends for memory, I think all of the big players, or remaining three big players are pushing very hard on the mobile side, to take it down to low 2X nodes. So let's say 20 nanometer-type nodes very quickly, and I think you are going to see those sorts of capacities ramp pretty fast next year into the mobile space.

A little bit of a pause on node transition, and also high utilization in the fabs, but definitely the memory road map in DRAM is pushing hard for the next node. As far as going to 1X DRAM, the R&D is in place. There is a lot of good cell designs for that. There are prototypes and the lithography strategies are established, and we are engaged in those. So I see fairly robust memory node transition cycles at least for the next two to three years, and we are directly in the pipeline of those I believe.

Great. Maybe then moving to the NAND side, Chris on that front, there are a lot of varying degrees of how fast the various players are going to transition to 3D NAND, in terms of the planer to the vertical NAND transition. Big about picture from the Photronics side of things, does that benefit you guys one way or the other in terms of the industry transitions, and depending on how who is making that transition, or are you kind offing agnostic to that industry shift?

I think for Memory in general both DRAM and NAND, the layer counts per device will continue to increase. They have increased for the last two or three nodes, after being static for many years, and they will continue to increase now node over node mainly due to multiple patterning. Needing multiple masks to do single layers are going to drive layer counts up on plainer or 3D NAND.

As far as 3D goes, we are seeing that transition already building masks for vertically integrated NAND, as well as plainer, so that transition is real and we are involved in it. The layer counts tend to be a little higher for that technology, but the number of critical layers may be a little lower. I think as far as the mask impact relatively neutral, but a lot of it still depends on how companies do their 3D NAND. If they build so called decks of layers to make 3D, that has one implication for mask count. If they do very, very large vertically stacked devices, that is a different implication. I think the message I want to leave you with is there is not a big difference. Layer count continues to go up for plainer and 3D. Multiple patterning is still needed, and the most important thing is the node transitions and the new designs, which we believe will happen in either architecture case, will drive the mask demand for NAND.

Final question. Again for you Chris in terms of the foundry side and the qualifications, you mentioned that the activity at 14 nanometer is also starting to pick up. For many of the foundries that is a shift to thinset and obviously a different transistor structure. Can you detail or provide a little bit of color on how their efforts and trying to shift to thinset, which could be very challenging, how that could potentially push out I guess some of your quals, or some of the work that you are doing on that front, simply because that is a very challenging transition for the foundry players, going from their current structures that they are doing now to 14 nanometers which is expected to be thinset?

I think we have been a little surprised at how aggressive the broad foundry community is going after 14 nanometer, and the thinset style front end. It has been aggressive in our view. From the point of view of that being very difficult to scale and manufacture, and volume manufacturing for some of the foundries, we are not that concerned about it, because it will give more lifetime to the previous node, which is a good thing for us. 28 nanometer in particular we think still has a fair amount of lifetime. The early adopters will do 14 nanometer, and everybody is chasing the thinset front end. I believe also foundries are looking at parallel pads as well, because they understand that type of transistor may take a while to get acceptable yield. I think we see that aggressive move to thinset. On the other hand, I don't think that is going to be a slowdown, because it will just extend the previous node further, and there maybe another micro extension, 20 nanometer bulk may come back a little bit more strongly as a backup plan.

Great. Thank you.

(Operator Instructions). Our next question comes from Andrew Masuto with D.A. Davidson, your line is now open.

This is Andrew Masuto calling in for Tom Diffely. Sean, I was wondering if you could talk about the Mainstream business, and what drove the strength in the quarter, and how you guys look at this segment in the October quarter? Thanks.

The Mainstream segment increase was broad-based,in Europe and in the US and Asia. It was just a lot of nuts and bolts, servicing the customer, but it did pick up and we do believe we had some share gains, and as you know, a very profitable and cash strong part of our business. Typically without giving specific guidance for Q4, we do see some softening, primarily in the US and Europe, because of the seasonality that I mentioned in my prepared remarks. Europe shuts down for a month or so, and a lot of vacations are taken in August in the US, so we are still very confident about our long-term prospects there. Mainstream essentially bottomed out at the end of 2012, and improving albeit slightly since then. We are very confident about our ability to ten to service the customers which are many. We have over 600 customers. We do speak a lot about, quite a bit here about the high end, high end prospects but the Mainstream is really our cash cow, and allows us to invest for the future.

Okay. And then just maybe if you could provide a little bit more color on when you guys expect to see a material benefit from the Micron Elpida merger?

Chris.

I can make a few comments. I mean we are not really giving specifics on that right now. I think we would just like to say that we are working very closely with Micron through our joint venture on photomask technology, our joint venture is engaged on the Elpida products now, they are Micron fabs, and Photronics is engaged through that as well with our joint venture. We think 2014 as Micron starts to transition some of their bit cells to different processes, that will be a likely time that we may see some benefit. Perhaps sooner but I think to speculate further on details would not be appropriate now. We are engaged, the qualifications are ongoing, and Micron is in the process is of taking firm control of those fabs as far as we can tell.

Okay. Thank you.

(Operator Instructions). I am showing no further questions. I will now turn the call back over to management for closing remarks.

I would like to thank all of the participants. I appreciate your time. And I wish you a good day. Thank you.

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