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Operator
Good morning and welcome ladies and gentlemen to the Tower Semiconductor second quarter and six months earnings report. at this time I would like to inform you that this conference is being recorded and that our participants are in a listen only mode. at the request of the company we will open the conference up for questions and answers after the presentation. I will now turn the conference over to Dr. Yoav Nissan-Cohen, co-CEO of Tower Semiconductor, please go ahead sir.
nissan-cohen: Thank you Anna, good day every one I would like to welcome you to Tower Semiconductor second quarter conference call, I am Yoav Nissan-Cohen from CEO, and with me is Amir Harel our CFO. during the second quarter we experienced a significant recovery in our business, which is reflected ion our quarterly financial report. sales have increased by 38 percent from $8.4 million in the previous quarter to $11.6 million in the second quarter. The net loss in Fab 1 decreased from $5.6 million in the proceeding quarter to3.1 in the second quarter. a closer look at our construction, it reveals that the $3.2 million growth in sales was only accompanied by a approximately $1million in
and Fab 1 manufacturing expenses, further more, Fab 1 operations activities generated positive cash this quarter, a quarter ahead of our expectations. The component
is largely related to our positive
activities, the net effect of Fab 2 non-capitalized expenses increased from $6.4 million in Q1 to $8.1 million in the second quarter.
The increase in business in the second quarter was 30
customers a day and including those established customers and new customers in a variety of markets. Looking forward we expect a moderate increase in sales for the sales quarter. We will see the biggest growth rate. Beyond there our visibility is limited year to
our other sales in the second half of '02 will continue to grow. As you all know Tower focuses on two specialized technologies in Fab 1, the sale of
and a number of
. In the
arena we continue to manufacture existing products to our customers while making progress in introducing new high quality products in the technologies inter production. We are still waiting for the condition of these products to high volume manufacturing. In
non-volatile memories we manufacture a variety of different products as well as
microFLASH products.
On the development side we have recently targeted with a major
to a develop our next generation microFLASH memory
technology. These projects will enable us to accelerate in the production of our embedded microFLASH memory into Fab 2. In so Fab 2 the project is progressing on schedules and below divided target and continued development in
repeatedly in our policy micro and pilot production line, including qualification obscurities and prioritizing of initial products to our
customers.
Meanwhile manufacturing
are being installed in the main
of Fab 2 and professional impact is expected on schedule at the beginning of next year. We believe that our new Fab will come just in time to meet the expected increase in demand next year which is predicted to create a shortage in the availability of
micron capacities. The
is our technology road map. We are also
the in activities on
technology and we
in the next few weeks. There is a
side of Fab 2. Our fundraising for the project continues in
. It can
for the entire
pensions
. The reason we are committed to invest $15 million in Tower's equity. Tower plans to
this fundraising
in the upcoming right of the shareholders and our
of shareholders is already committed to participate in this offering. In summary we are excited about the progress in Fab 2 and the recovery in Fab 1 division and we remain fully committed to meeting our objectives and working hard for a successful future.
I would now like turn the call over to our CFO Amir Harel, so he will forward on our financial conditional performance. Amir...
- Chief Financial Officer
hi everyone, I would like to share with you some of the financial highlights of the second quarter. at the offset sales where $11.6 versus $8.4 in the third quarter representing 38 percent increase, slightly above our indication in the May press release which was 25 percent. The growth and operating loss in Fab 1 had decreased for the fourth quarter in a row due to continued major cost reduction measures executed by the Fab 1 team; they the increase in sales in the last quarter also contributed to support these trends. The operating loss in Fab 1 was $3 million versus $10 million in Q2 01 although sales decreased by $1 million inclined a very significant cost reduction. The consolidated net loss was $11 million versus $13 million in Q2 01 excluding the capital gain of $4 million.
The loss in Q2 02 includes $8 million capital expenses net versus $3 million in Q2 01. as Yoav indicated cash flow from operations in Fab 1 was slightly positive versus our previous indication that
cash positive only in the third quarter. The consolidated cash closing balance as of June '02 was 54 million versus 33 as of December '01. The total balance sheet equates to 588 million in June '02 from 472 in December '01 and from 532 in March '02. The increase is primarily as a result of an increase in bank loans in
'02. The profits from the convertible deal in Q1 and the profits from the third
in Q2. The cash
amounts described above were invested in Q2 and in the first half primarily in
equipment and the construction project.
And now about equity. As of June '02 the company has 30.2 outstanding shares and 4.6 million options including options to employees,
and excluding options, which might result from the January convertible deal. In the same task 5.2 million shares were issued out of which 4.9 in the second quarter. Up to 4.9 million shares might result throughout the time from the debentures and related options
. In Q2 '02 the
advanced statement originally related to
three in the amount of 35 million and received 4.9 million shares. I would like to remind you that some statements made during this call may be forward looking and that actual results may be different from what is currently expected. The risk factors which may influence our results are listed in Form 20-F in
report in Form 6-K for the month of January '02 and the in the
prospective recently filed with the
and the SEC,
.
nissan-cohen: OK
opening statements and we are now ready to answer your questions.
Operator
The question and answer session will be begin at this time. If you are using a speakerphone please pick up the handset before pressing any numbers.
participants to ask a question please press one followed by four. If you would like to withdraw your question please press one followed by three. For Israel participants to ask a question please press star one to withdraw your question please press star two. Please stand by for your first question. The first question comes from
please state your affiliation followed by your question.
Hi CIBC World Markets, congratulations guys on a good quarter. A few questions first can you talk about the number of tools you now have installed in Fab 2 and how that ramps over the next couple of quarters to get to the production start for early next year and then I've got a couple of follow on questions.
Unidentified
OK, thank you
basically what we did as you know last year we installed the one of the
with initial
which enabled us to start the productions of prototype now a pilot line and
. Basically what we are doing now we've started the installation of the second
and by year-end we will have a
capacity of about 25 hundred
two months. And starting at this point we are going to
our capacity and we are pleased to be at the capacity for about 10 thousand ratios per month by the middle of the year. So the information for this capacity
we have issued
order for about 20000 million dollars during the first part of the year.
Unidentified
Great, and then just to follow-up on the Fab 2. Can you talk about the progress you've made to date with additional strategic partners, you know, can we expect any additional strategic to be announced between now and year-end, and also the number of customers that you're currently doing prototype work for.
Unidentified
This is definitely a major challenge for the company to
as fast as possible the customers who substantiate their rate for the next year. In relation to strategic
, we are in discussions with potential candidates to become strategic
and strategic partners to the company, and I surely hope, that between now and year ending, we'll be able to announce on partnerships like this, but of course, we can not be sure that we are working on this, and this is one of the goals of the company. We are working in different stages of programs, OK, and some of them are prototyping, some of them are final design, or new design, a stage we've, over all seven companies right now, and we are engaging discussions with some other potential customers which we hope to bring in within the next six months.
Great. Then one quick follow-on
talked about guidance for the second half of the year range, that, you know, continued growth in the second half, versus the first half, should we read that to mean that third quarter will be up sequentially, and that fourth quarter will be up again sequentially, or is that too tough to call at this point.
Unidentified
Our internal forecast states exactly what he said OK, you know, that there will continue to be some growth in Q4 as well, but what you said is also true, because our customers because our customers are not providing the high confidence on their forecast for
of Q4. We have to be very careful. Today was a situation that you do see, any hesitations in the forecast, and therefore we cannot be, we cannot believe we've
the forecast for Q4 and beyond.
OK. Great. Thank you.
Unidentified
Thank you.
Operator
The next question comes from Alvin Kressler, please state your affiliation, followed by your question.
- Friedman, Billings, Ramsey Group, Inc
Friedman, Billings and Ramsey. Good afternoon gentleman. My question I would, I have a couple of questions the first is the morning the AMG
agreement was safe, and is there any impact on your relationship with Safe, under this new agreement and settlement between AMD
and any potential follow-on business generated out of this agreement.
Unidentified
Since you
for the question, maybe the lack of
towards the influx on, of the
announcement on Tower, and let me tell you that from our point of view this is just great news, and to just demonstrate the point of how we are, what is our opinion about the
and
also its technology. Let me just tell you, or give you a piece of information that we, as a part of
with
initial training, the first training with the technology to
about three years ago, so the first time that an
got any training on how to use this technology was
production environment, so we are definitely looking at these sale relations as the number one
is a validation of what we said all along that this technology is has tremendous added value, and potential for the future, and we think really number one point for us.
Secondly there is no straight for the A&D direction because our facility for moving the advanced technology is a facility for the foundry arena and then A&D as everybody knows is not a foundry, and is not going to provide foundry services to anybody, so as far as our business at least it does not create any threat, and it does create some potential corporation that it might be developing in the future, and
you know that at least part of the royalties is the
in getting for the licensing of the clothes we come into power because part of our unique way with
are we do not
in
, and there so any
to
has been good to us, and maybe the last point is validation of the value of
in
is vital because our right in the technology cause physically the mutation of the
flight this season and so on are not dependent on our holdings
. So let's create a financial asset that we have in the shares
, which go the right price. We might manage a
, so that too it will mean that the dilution of the company, so all in all this is very good news Tower.
- Friedman, Billings, Ramsey Group, Inc
OK thank you, and then the other question is really more for Amir it's a maintenance question on depreciation in cap ex when you look at if you could break it between Fab 1 and Fab 2 or if your not going to do that just on a combined basis with depreciation, amortization, and then cap ex was in the quarter.
- Chief Financial Officer
Depreciation I cannot discuss right now about the cap ex in the second quarter, and it was in the range several cents of 10 million in Fab 2 in Fab 1 it was not visible.
- Friedman, Billings, Ramsey Group, Inc
OK thank you.
Operator
Ladies and gentlemen once again to ask a question for U.S. participants please press 1 followed by 4. For Israel participants please press * 1 to ask a question. The next question from Mr. Alvin Kressler, please state your question.
- Friedman, Billings, Ramsey Group, Inc
Yes.
take up a little more of the question here. In terms of the technology road map in Fab 2 the plan is still .18 followed pretty quickly by moving to .13, or 1.0, which are you leaning in the kind of time frame on that?
- Chief Financial Officer
Absolutely you should expect some announcement related to .3 in the near future. We are already working for quite sometime on our plans so the point
, and do you not reveal the next few weeks the actual progress is going to
start in order to be able to
in micro technology even for manufacturing. Sometimes picking
we feel that it'll really fit a good timing because the today you still don't wear the ...
Unidentified
... official announcement v so I really don't want to relate to the details I'm in the
position being also a board member of
. Today we are positioning is at 12.3 percent basic and the close to 11 percent on
basis so whatever the investment in
could affect these numbers but these are the numbers to date.
Unidentified
OK great and then just wanted to follow up I believe in some of the past conference calls you talked about a new US
beginning to ramp at Fab 1 and then two other customers ramping beginning to ramp a few
Center Business just wondering if those ramps remain on track or whether those have been delayed given the sort of more cautious environment now.
Unidentified
They are not exactly meeting our mutual
expectations.
clean up of the products
on the design side of the products has been due to their marketing environment because sort of
the market and wanted it to be totally clean from the design point of view and meeting all the design product specifications. Vendor then can go to high volume. So today yeah we do have some volume of new products one of them for example is a 14
OK and this 14
very high end professional
which
outside of this
it creates demand which are not negligible and then we are happy to
up so this product is already qualified and going into production but some of the more higher volume products
I also said in my opening statements we have few
so these products materialize into volume in manufacturing and this hasn't happened yet unfortunately.
Unidentified
OK and then the final question it just it sounds like some of the customers are getting a little bit more cautious don't know if you can comment by end market whether you are seeing particular weakness in any one segment say consumer or PCs you know any comments you could provide there would be helpful.
Unidentified
Yeah I can provide one comment which is that is seems that the mood in the industry is as far we are concerned we still don't see it exactly on
of the orders and that's why we sell it
better than Q2 which means that at least what we see in our business we don't see any particular weakness customers are up not down in orders but it seems that there's
here and the mood is very
as we said but we still haven't seen a reduction or at least not any significant one in any of the segments which we are in which is mostly the
, the consume area so we seem to have orders coming in. We don't see the growth that we had hoped to see before but we've definitely see a stable environment so at least stable environment so I don't know if it is negative for some other people, I was talking from this point of view. All in all I have to tell that I think
cautiousness and the tension in the market might eventually be good for Tower because what we're definitely seeing in the market is that people have stopped their investment that they'd started in Q1
equipment manufacturers in February and March you saw smiles on their faces because the customer was
back again and I was a little bit concerned that this recovery was a little bit too early for
significant capacity only in the middle of next year. So I was concerned to see people have started to reinvest in Q1 that the up cycle will be shorter and weaker for us and we will not be able to really benefit from that cycle. I hope nobody can be sure but that now we have a second year that the semi-conductor company are not investing that
the market will
again is that we will see more serious and a longer up cycle just because of shortage in piloting micro-manufacturing capacity which is eventually going to be good for Tower so all in all it is not very
environment which makes more difficult for us the efforts to build new customers at this stage because they don't think that the capacity shortage is coming very soon with
results so
difficulty but all in all I think in retrospect a year from now we will have a pretty good chance to say that it was good for you.
Unidentified
Right thank you.
Operator
Just as a reminder ladies and gentlemen for US participants please press one followed by four to ask a question, for Israel participants please press star one to ask a question. If there are no further questions I will turn the conference back to Dr Yoav Nissan-Cohen to conclude.
nissan-cohen: OK thank you very much for the participation in our conference call. We look forward to continue to share with you our progress in the quarter and if we have anything special to announce we'll do it earlier so have good day everyone.
Operator
Ladies and gentlemen this concludes our conference for today thank you all for participating and have a nice day. All parties may now disconnect.