Photronics Inc (PLAB) 2014 Q2 法說會逐字稿

Welcome to Photronics' second-quarter earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded, Tuesday, May 20, 2014.

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. We would like to thank you for joining our second-quarter 2014 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 be archived on our website until we report our third-quarter 2014 results.

Joining us on the call today are: Constantine Deno Macricostas, Chairman and Chief Executive Officer; Dr. Peter Kirlin, President; Sean T. Smith, Senior Vice President and Chief Financial Officer; and Dr. Christopher Progler, Vice President, Chief Technology Officer and Strategic Planning. During our remarks this morning, we will be referring to slides posted on our website under the Investor Relations link.

And now, I'd like to turn the call over to Deno Macricostas. Deno?

Thank you, Pete, and good morning, everyone. We have a lot to cover today. I'm going to make just a few comments on the closing of our joint venture in Taiwan, which was a significant event for us in the quarter. Then I will turn the call over to Peter and Sean to cover more details on the transaction and our quarterly results.

First, my compliments to the management teams of DNP and Photronics [for] teams executing the combined vision for unified organization to serve our Taiwan customers. Transactions like this are always difficult to bring to completion, and I want to express my appreciation to both teams for the hard work and commitment to getting the job done. Both management teams [wanted] Taiwan in [their pro], and hit the ground after the closing to meet with our customers and suppliers. The reception to the formation of PDMC from our customers was outstanding and motivating. We look forward to the coming quarters as we realize the full effect of our [profit utilization].

And now, I would like to turn the call over to Peter Kirlin who will offer some additional comments on the joint venture and the quarter. Peter?

Thank you, Deno, and good morning, everyone. Sean will provide a detailed financial breakdown of our quarter, but first, a few highlights and some comments on the trends in our Business. Please turn to slide 3 in our presentation.

Keep in mind as we review our financials today that our results include about 3.5 weeks' contribution from the former DNP Photomask Technology Taiwan, which was merged into the new PDMC joint venture that closed on April 4. We are not breaking out the contribution from PDMC in our results this quarter or in the future, for competitive reasons.

With that said, in Q1 we achieved sales of $104.9 million, up 3% sequentially. IC sales were $76.6 million, basically flat sequentially. High-end sales were up 4% sequentially. FPD sales came in at $28.3 million, up 12% sequentially, driven by solid demand for high-end [display demand], which was up 32% sequentially.

On the IT side of our Business, we are still awaiting the increase in business resulting from our key customer's ramp of new technology nodes. The high-end IT reflected the continued softness in both memory and foundry logic. However, we are executing well, our customers are pleased with our support, and we expect the ramp to the next memory node will start during the current third fiscal quarter.

FPD sales were very strong during the quarter. High-end revenues from leading-edge products, including AMOLED, reached an all-time high of $20.6 million. Customer demand for leading-edge technology radicals for both R&D and production, and across multiple product types, was consistent across the quarter.

Looking ahead, we remain confident in our business model, our position in the market, and our opportunities with customers. Progressing to advanced nodes and semiconductors, and the diversity of demand for high-end display devices, were key macro trends that will drive our Business going forward.

We're driving efficiency throughout our operations, and we are constantly improving our customer service. We are laser focused on capitalizing on qualifications in high-end opportunities.

As Deno mentioned, one recent exciting milestone in the execution of our growth strategy was the launch of our joint venture, PDMC, in Taiwan. We are off to a very [stout] start in unifying our systems, processes, and leveraging tools across our facilities. As an example, even though it's only a month in, our customers are already benefiting from our joint venture through the utilization of our new toolbar app.

The team is working extremely hard and very efficiently, and most importantly, they're working [to garret]. As a result, we are on a great path forward to a solid operational model with excellent prospects for growth in Taiwan.

Given the [scale and efficiency], our key core stems of success in the merchant photomask market, success has also been derived from collaborations and consolidations. PDMC now brings a superior merchant capability in Taiwan, and the ability to partner with our customers for the long term. Going forward, we have better capital utilization that will be closely aligned with our customers' R&D and product roadmaps -- a supply chain designed for speed and efficiency.

Now, Sean will provide more details on the financial aspects of the joint venture, as well as on our quarterly performance. Sean?

Thanks, Peter, and good morning, everyone. I will provide a brief analysis of our financial results for the second quarter of FY14, review our balance sheet, cash flows, discuss our forecast, and also provide a business update on PDMC, our new Taiwan JV. Please turn to slide 4, which describes the PDMC JV, which we formed, as Peter stated, on April 4, 2014, with the non-cash JV or merger of our wholly owned subsidiary, PSMC with DNP Taiwan, a former Taiwanese subsidiary of DNP.

Some of the basic tenets of the PDMC JV include the following. Photronics owns 50.01%, and has consolidated PDMC in our financial statements. Photronics manages and controls PDMC. This is absolutely critical to our ability to be successful with our high-end strategy.

Accordingly, our Q2 results include the revenues, expenses and cash flows of DNP Taiwan from April 4 to the end of the quarter. The PDMC JV has a well-capitalized balance sheet, and should be self-sufficient.

As a result of including the fair value of the former DNP Taiwan net assets on our consolidated balance sheet, Photronics' net assets increased by approximately $115 million. We did not assume any debt related to the formation of PDMC. And in connection with the formation of PDMC, and the inclusion of the fair value of the former DNP Taiwan's net assets, we had a net gain during the quarter of $14.4 million, which is net of approximately $2 million of one-time transaction expenses. The gross amount of the non-operating gain was $16.4 million.

Looking forward, we estimate that our top line will grow by at least $80 million annually from the JV, with the vast majority of the revenue from high-end IT products. We expect to extract annual cash synergies of $5 million to $7 million, with impact expected after the first two full quarters of inception, or in 2015.

We do expect our operating expenses, SG&A, and R&D to increase approximately $1 million to $2 million per quarter, until some synergies are realized. And we expect our consolidated depreciation and amortization to increase approximately $3 million over the next quarter. We do expect the JV to be accretive to EBITDA for the remainder of 2014, and to the bottom line in 2015.

Please refer to slide 5 for our GAAP to non-GAAP net income and EPS reconciliation, as we review the second quarter, which reconciles our GAAP net income to non-GAAP net income, excluding the net $14.4-million gain previously mentioned. For purposes of our discussions, I will be discussing our non-GAAP -- primarily be discussing our non-GAAP operating results.

Please turn to slide 6, which shows our sequential quarterly IC and FPD revenue performance. As I mentioned, our second-quarter results include the revenues and cost related to DNP Taiwan from April 4 through the end of the quarter. As Peter mentioned, for competitive reasons, we will not be breaking out incremental revenue or expenses for PDMC in our Q2 results.

Second-quarter revenue was approximately $104.9 million. Prior to the closing of the JV, we had guided Q2 revenue from $100 million to $105 million. Revenues for IC photomasks were $76.6 million, and revenues from FPD photomasks increased $3 million sequentially to $28.3 million.

Breaking out sales geographically: 66% of sales were from Asia; 24% from North America; and 10% from Europe. High-end global IC sales were $17.2 million, or 22% of total IC sales for the quarter. This represents a sequential increase of $600,000.

Advanced FPD sales were $20.6 million, which was a sequential increase of $5 million or 32%, and represented approximately 73% of total FPD sales. As a reminder, high-end IC revenues consist of revenue derived from semi designed at and below 45 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 margin for the second quarter was 21.2%, or down 130 basis points sequentially. Selling, general and administrative expenses for the second quarter were $13.4 million, and include $2 million of transaction expenses related to the JV. SG&A quarter over quarter was down $500,000 sequentially when you exclude the transaction costs for both quarters.

R&D expenses, which consist principally of continued development for advanced global process technologies and qualifications at advanced nodes were $5.9 million, up $1 million sequentially, primarily as a result of increased leading-edge development. During the quarter, we generated operating income, exclusive of the transaction costs, of $4.8 million, or 4.6% of the top line.

Please turn to slide 7. EBITDA, as defined in our credit agreement, for the quarter was $25 million, and for the trailing-12 months was approximately $107 million. As I mentioned earlier, other income and expense for the second quarter include the non-operating gain of $16.4 million related to the inclusion of the former DNP Taiwan's fair value of net assets on our consolidated balance sheet.

During the quarter, we recorded a tax provision of $2 million. And minority interest expense was $400,000, and primarily consists of DNP's share of PDMC's profits for the second quarter.

GAAP net income was $15.5 million, or $0.22 per diluted share. Non-GAAP net income, excluding the non-cash gain and transaction costs related to the JV, was $1.2 million or $0.02 per diluted share. At the end of the second quarter, we had 1,470 full-time employees, and that includes all of the employees of PDMC.

Now turning to the balance sheet, please turn to slide number 8. As I stated earlier, at the end of the quarter, we have included the fair value of DNP Taiwan's net assets or $115 million in our consolidated balance sheet. As a result, we have strengthened our consolidated balance sheet, including our working capital.

With the assets we assumed, we obtained a state-of-the-art manufacturing facility with leading-edge equipment. This will allow us to have a more efficient capital allocation in the future.

Cash and cash equivalents at the end of the quarter amounted to $192 million; and our net cash, which is cash less debt, was $23 million at the end of the quarter. Our working capital at the end of the quarter was $209 million, up $33 million sequentially compared to Q1 2014.

Accounts receivable at the end of the quarter amounted to $98 million, which does include the DNP Taiwan receivables. Included in other current assets is a deferred tax asset of approximately $10 million related to the inclusion of a portion of DNP Taiwan's NOL. The utilization of this NOL will reduce our cash taxes in the future.

Accounts payable and accrued liabilities, current liabilities at the end of the quarter, amounted to $121 million. At the end of the quarter, $21 million of capital expenditures was accrued for; down approximately $18 million from Q1.

Please turn to slide 9 as we review our capitalization. Total debt at the end of the quarter was $169 million. The principal components of outstanding debt include a $22-million 5.5% convertible note, which is due in October; $115 million, 3.25% senior unsecured note, which is due in April of 2016; approximately $9 million for a capital lease obligation; and approximately $23 million related to a capital lease [for knee, bee and tool]. As of today and throughout the quarter, we do not have any borrowings outstanding on our five-year $50-million credit agreement.

Taking a look at our cash flows, cash provided by operations for the second quarter of 2014 was approximately $26 million. D&A for the quarter amounted to $19 million. Cash flow used in investing activities in Q2, amounting to approximately $25 million, includes $30 million of cash CapEx. Year-to-date cash CapEx amounted to $42 million.

During the quarter, we acquired tools from a captive shop that we will pay for, in part, by supplying IC photomasks to them. Net cash used [in part] by financing activities during the quarter amounted to $2 million, which was primarily related to repayments of debt.

Please turn to slide 10, as we look ahead. We do expect our cash CapEx needs for 2014 to be in the range of $75 million to $90 million. We do, however, have the flexibility to accelerate or decelerate our spend, depending on market conditions.

We do expect to continue to generate free cash flow, once again, in 2014. Our investments have been principally geared towards high-end leading-edge products for IC and FPD photomask applications. As I mentioned earlier, for Q3 we do expect D&A to increase approximately $3 million for the quarter.

Our visibility, as always, continues to be limited, as our backlog typically 1 to 2 weeks. We are projecting revenue for the third quarter of 2014 to be in the range of $120 million to $125 million.

Now, taking a look at taxes, for the third quarter we expect tax expense to be in the range of $2.5 million to $3.5 million in whole dollar terms. For FY14, we estimate total taxes will be in the range of $12 million to $14 million. We will be impacted by minority interest in Q3, as a result of first full quarter of PDMC.

We are estimating minority interest expense to be in the range of $2.5 million to $3 million for the quarter. As a result, based upon our current operating model, we estimate earnings per share for the third quarter of 2014 to be in the range of $0.02 to $0.07 per diluted share.

In summary, I will leave you with a few key thoughts. First, we are pleased with the integration of our new Taiwan joint venture, and believe that this initiative provides us with excellent growth opportunities in that region going forward. Second, we expect top-line improvement, as well as increased EBITDA in 2014, and to continue to generate free cash flow.

Third, we are confident about our business model and our ability to grow market share at the high end. We see continued opportunities in our customers' business and node migration plans, and we have a strong financial position and excellent technology to capitalize on those plans. And finally, we expect to continue to build on the momentum that we have established over the past few years as a leader in advanced photomask technology.

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

(Operator Instructions)

Edwin Mok, Needham and Company.

Congratulations for closing the joint venture. My first question is, I think Peter you mentioned in your prepared remarks that you expect to see high-end memory -- in the high-end IC side to grow in the coming quarter.

Is that coming from your joint venture partner here in US? Is that a trend that we should expect to continue? If you can provide some color around that, it would be helpful.

As you know, the memory customers ramp new notes with some regularity. One thing is for sure, and that is there has been a slowdown over the last few years, and speaking of which next memory notes would have come to market. We are waiting to see this large customer of ours start the next node, and they made an acquisition in which it had an impact on their plans.

We now see in the coming quarter, the early stage of the next ramp. And that should start in the current quarter, buy the full effect of that will be felt in the out quarters. First step which should be a nice bulge of business for us.

Did the joint venture help you in terms of cash in some of the potential business in Taiwan or in Japan for that customer?

I think having a more capable Taiwanese manufacturing presence with superior customer service is a positive for that particular customer. And I think as you know, their acquisition was of a company where we had no business.

We expect that all of the acquired capacity will ultimately end up running either our joint ventures radicals or our radicals. So it is a significant positive for us, and the fact that we have a more capable presence in Taiwan is helpful. Having said that, given the strength of our technology partnership and our execution in Boise, I would expect it would have had all that business in any case.

I see. Okay, that is helpful. I think a few quarters ago, you talked about qualification on the logic side and the Korean customer.

I was wondering how is that progressing, and then I think the customer is investment at the same time they are planning on some capacity investment in the coming quarters. Do you see that as a catalyst to drive growth with a customer?

I think regarding the 28 nanometer qual for that customer, that is one in the rear view mirror for us now. That is completed and they are well satisfied with our capability.

Regarding the 14 as you mentioned, there has been a lot of press about 14, not just for them but for their partner GLOBALFOUNDRIES which is all good. But I think as you correctly stated, that is a 2016, not a 2014 calendar year event for us. I am very confident that we will be well-qualified before there is any real commercial volume either at the customer or their partner at 14 nanometers.

Great, I had a question for Sean and then I will get off the queue here. Sean, you mentioned that -- I guess you look at your tax and minority business. If I take your full-year tax guidance imply the tax will go to $4 million in the fourth quarter, and then you mentioned that you have a very high minority interest in this quarter -- in the third quarter. I was wondering, is that minority interest staying at this level or is it just a one-time event?

And finally, you talked about depreciation and amortizing expense of $3 million this quarter. Is it fully (assaulted) in your gross margin? Just help us out on the margin.

I will try to take it in reverse order. If I don't hit them all, just remind me. That was three questions in one.

With respect to depreciation and amortization, I did say we project it to increase approximately $3 million this quarter. That is representative of two items.

One is the full-quarter impact of PDMC including the tools from the former DNP Taiwan that we brought over. And then secondly, other tools within the Photronics network that are coming online.

With respect to the tax rate or tax expense, it's very difficult for us to give an effective tax rate as we talked about in the past because we are taxpayers -- for example in Taiwan, one of our subsidiaries in Korea, and we are not a tax payer in the US. So depending on what the flow of income is, it does reek havoc with an absolute effective tax rate. That is why we historically have given it in absolute dollars.

The minority interest comment -- essentially the majority of that minority interest represents our partner's share of profits that we don't retain. We didn't provide guidance in Q4 on that, but it just gives you a flavor on how we believe we expect the JV to be successful. We will provide further guidance as we move out.

As you remember a couple of years ago, we had minority interest anywhere from $1 million to $2 million per quarter, and we didn't own 100% of PSMC. That said, although minority interest is taking away from the bottom line, bear in mind that EBITDA is not and the cash flow is not and the balance sheet strength is not.

Sorry, I'm going to squeeze one in quickly. Historically your IC business declined seasonally in the October quarter. Is there any reason for us to believe that it will happen this year?

That is the fourth quarter. We aren't providing guidance on that.

Hopefully with the inclusion of the JV, our quarter should be up. But we will have to wait and see. As Peter talked about, there's many opportunities out there that we see, that we expect to capitalize on.

Great, that's all I have. Thank you.

Tom Diffely, D.A. Davidson and Company.

Good morning. It is nice of Edwin to let me ask a question.

Quickly on your guidance, you talked about $120 million to $125 million in the quarter, but you also commented that at least $20 million is coming from the joint venture. Is the core business pre joint venture up at all or was there a revenue component in the just reported quarter because of the month of business?

Both Peter and I said for competitive reasons we weren't breaking out the incremental revenue. I think it would be fair to say that we are trending towards the lower end of the range of our guidance for Q2. We also experienced a sequential decrease in IT revenues with one of our foundry partners.

However, it is not related to any market share shift. We do expect things to improve. If they improve better than what we have forecasted, great, but this is what we see as we move into the quarter.

Okay. And then Sean, if you look at your guidance for EPS of $0.02 to $0.07, is there some way you can project that that EPS would've been had you had your $5 million to $7 million in cost savings in place?

Perhaps as we move into -- there are a lot of moving parts with respect to the JV. It's in its infancy, and Peter mentioned we are making great progress in the integration.

But we have a transition for the quarter and I think will be better versed once we close Q3 to give a little bit more granularity. Electronics is arguably -- maybe I will let Deno add some comments on this --has had a great track record of extracting costs out of acquisitions in the past few years.

We are optimistic, there's a lot of opportunities. We feel very positive that we are going to streamline the operation. Like the other side to reduce the costs.

Did most of those costs come from the COGS line or the operating expense line?

Most of them come from the COGS line, but there will be some operating cost, and they run the gamut from materials to equipment cost, service contracts. We have some Japanese support costs that will condition over time, any redundancies that we have. It is a lot of items that we have been working on.

I was simply going to say we have a very long list of 30 day, 60 day, 90 day and then 120 day integration objectives. We had a very extensive review of the 30 day objectives as you would imagine just two weeks ago.

And I would say with a 95% closure rate, we were successful against the 30 days and we have very good penetration against the 60 day. As long as we dollarize the decisions and keep everything visible, we will hit our targets.

And finally Sean, you mentioned that you did acquire some tools from a captive shop. Any meaningful leading edge tools there or is it essentially buying some assets to acquire a customer, if you will?

It is typically what we've done in the past. It just rounds out our installed equipment base.

Okay. Thank you.

(Operator Instructions)

Patrick Ho, Stifel Nicolaus.

First question in terms of the Taiwan JV, as that region starts migrating to the leading edge on a broader basis, can you give color on how you're going to capitalize on that region's I guess migration to those advanced technology nodes?

I think there's two aspects to your question. I will maybe take the commercial aspects and let Chris handle the technology.

You are very correct. Obviously PSMC is going great guns at 28 has been. That is well known. Having said that, the rest of the region on the foundry site is just really starting to ramp that note commercially.

Given our partnership with that customer now, we are very confident that we are going to enjoy the lion's share of their commercial ramp at 28 nanometer node because we have the -- basically on the ground, to build their parts. And we have that capability on that ground backed up.

Now two other global sites and soon a third. We have secured local capability commercially. We have far more back up globally, and we have a technology partnership with them that we expect to expand upon. I will let Chris comment on that.

Thanks Peter. This is Chris. I think for 28 nanometer logic call we have solid process capability there.

We are finishing up some text transfers. We ramped adoption. We definitely will ride a nice wave of expanded use of that logic node.

The next logic node, those are under development getting finished up, and actually both parent sites will do a technology transfer in the joint venture, Patrick, is how it will work. We will have some signees who move those processes very quickly. Tying them to the market as it starts to expand for 14 nanometer. So we're in particularly good shape there as well technologically.

The memory side, as Peter mentioned, we are -- our joint venturer with Micron has already qualified with all of the Micron memory products through a partnership qualify for most of them, and we're finishing up the remaining ones. To the extent that those processes start to ramp in Taiwan, most notably in those Micron affiliated companies, we will initially service the majority of that from our foreign sites, but we also move those processes over selectively to give some local supply.

We have good models, flexible, local capability, we think is best in class. But also we have a nice pipeline of new technology coming from really both parents, DNP and Photronics, we can keep that technology capitalized to meet the customer needs there.

Great, that is helpful. Sean, maybe a question related to the cost savings. You mentioned just a few moments ago that the majority of cost savings are going to come from cost of goods.

Without getting into specific dollars, can you try to give us some examples of the initiatives you're going to take to get some of those cost savings? Are they primarily just in terms of reducing duplicate costs or are there other tangible measures that we will see over the next couple of quarters in getting those cost savings?

Patrick, there's really a variety of initiatives. Certainly consolidating our purchases gives us leverage with the vendors. Looking at the materials both parties use and searching for the lowest price point on materials is another, looking at that we make versus they make.

What materials we use versus what materials they use since both are qualifying. Which suite of materials offers the lowest cost to produce and then implementing that broadly.

Looking at what service models they use, what the service model is, who has best in class for both as well as purchase price perspective. I could go on and on and on. There are plenty of opportunities in front of us to bring the cost up that we are looking for.

Peter is correct. Patrick, we obviously have a lot of moving parts as we work to integrate both the operations and backroom functions. As Peter talked about, we have an aggressive synergy plan that we are working on, and we are extremely confident we will be successful.

That said, it is going to take some time, and to do expect when we close Q3 -- we gave guidance for Q3, when we close Q3 we will give further granularity around success points and where we are and also give us establish new target by incremental revenue. We talked about in the past 50% drop through.

Obviously that is not feasible being one or couple quarters of the JV. We establish new targets as we move forward.

The other synergy opportunity on the upside rather than on the revenue line, the cost line is the PSMC is basically added capacity. Before we did the acquisition, we had planned as you might recall to invest there and raise capacity.

The deal on the other hand, our partner wasn't fully loaded. As I said in my prepared remarks, we are already raising tax utilization to combine entities. So we have a different kind of synergy but it is not one to be missed for sure.

Final question for me, maybe going into the flat panel display side for a second. Overall trends appear to be getting better, near term particularly for larger panel size.

Two part related to this. Is that where you are seeing some of the pickup particularly at the advanced flat panel display?

And secondly how do you see the AMOLED market trending? Is that something that AMOLED now pushes out into calendar 2015 based on what some of the customers are doing?

Thanks. This is Chris. I think you are correct on the large panel size, particularly LCV, stronger than it is been in a while. That is a positive trend.

On the mobile display, I think that is going to get very interesting later on in the year, particularly Apple's rolling out a larger format display that always gives the entire -- both your competitors and the supply chain a kick in the pants for raising things up on mobile displays. Larger higher end mobile displays, of course Apple's not designer on AMOLED, but I think what you will see is the bar get raised once again on AMOLED displays for their competitor.

And we are engaged in developing projects and working with them on new designs for AMOLED. That also looks very interesting going into the future next couple of quarters. I think you will see a lot of good work on the display side.

Thank you.

Tom Diffely, D.A. Davidson & Co. If you could check your mute button please.

Sorry about that. Just a follow-up on the flat panel display side. We are seeing equipment guys get a few large orders from Chinese vendors. I am curious, if you have exposure there today and if these are potential customers that you can serve from your Asian opportunities.

Yes, this is Chris. We do have exposure, and we are selling flat panel masks into China. We track the market very closely.

And you are correct. Just as in the IC side, there seems to be renewed commitment there to establish production capacity, particularly a little more aggressive on the technology side in mainland China for both display and IC actually.

So we are coupled into both of those initiatives. We are selling into mainland China, and we keep a close eye on it to make sure we participate to the extent the capacity comes online.

Chris, when you look at the equipment guys and get some nice orders this quarter from both the DRAM and the flat panel display market, what is the relative time lag between when you see equipment orders and design activity for you in those two markets?

That is a good question. It depends if they are equipment orders to add capacity, it could be fairly rapid. If they are capability orders for new nodes, it could take much longer.

I would say that six months is kind of the minimum. If it is just capacity bottleneck tools that we actually put online pretty quickly. I think in the memory case that is what you are seeing. Some of that is capacity and filling in a couple of holes.

So that capacity could come on line quickly. I think on the long end, it is 12 months to 18 months by the time you see a strong capital equipment cycle feeding into the broad materials supply chain if that equipment gets put to use in wafer fabs. So that is kind of the time span depending on the use of the capital investment.

So it is encouraging for a ramp over the next year.

I think so. Yes.

Sean, one more question for you. You talked about an operating expense increase of $1 million to $2 million. is that above and beyond what you posted in the April quarter?

If you take the April quarter, you have about $2 million of transactional expenses. And then it could be up to $1 million to $2 million until we get the synergies extracted.

Excluding the transaction cost, SG&A was actually down $500,000 quarter over quarter. While we are focused on extracting synergies out of the JV, the ongoing daily effort throughout the rest of the enterprise is still ongoing.

So we're taking out $2 million and then adding $1 million to $2 million, then we are essentially flat quarter-to-quarter.

It could be zero to $1 million. That is correct if you want to look at it that way.

Thank you.

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

Thank you for participating this morning's call. I would like to thank all Photronics employees for their dedication and hard work. Thank you kindly.

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