高塔半導體 (TSEM) 2003 Q2 法說會逐字稿

Good morning and welcome ladies and gentlemen to this Tower Semiconductor second quarter earnings release.

At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode.

At the request of the company, we will open the conference for questions and answers after the presentation.

I will now turn the conference over to Carmel Vernia, Chairman and CEO.

Thank you.

Good day, everyone, and thank you for joining our quarterly financial conference call.

With me on the line are Amir Harel, our CFO and Harold Blomquist, our Senior VP of Business Operations.

As you probably know, I joined Tower Semiconductor two months ago.

My medium-term objective is to lead Tower to a tenfold increase in revenues by the time Fab 2 runs at full capacity.

During this call, I'd like to update you on recent developments in four areas.

The first one is sales and marketing, second one is financing, third one is manufacturing and the fourth one is customer services.

Before I do that, I would now like to turn the call over to Amir Harel, Tower CFO, to review our financial statements.

Hi, everyone.

Before we begin, I would like to remind you that some statements made during this call may be forward-looking and are subject to certain risks and uncertainties that could cause actual results to differ materially from those currently expected.

These risks and uncertainties are more fully discussed in the company's form 20-F for the year '02 and our recent press releases on form 6-K as has been filed with the Securities and Exchange Commission and the Israeli Securities Authorities and are available for the company's webcast.

Tower assumes no obligation to date such forward-looking statements.

And now I would like to share with you some of the financial highlights of Q2 '03.

Tower sales were 12.2 million, versus 12.6 million in Q1 and 11.6 million in Q2 '0l; all of them from Fab 1.

Looking at the net loss in Fab 1, you can see that most of the improvement in sales -- 1.3 million higher than Q2 '02 -- went all the way down to the net loss as a result of cost reduction and better manufacturing efficiencies.

The consolidated net loss was 16.8 million versus 14.4 million in Q1 and 11.3 in Q2 '02.

The loss in Q2 includes 14.9 million, sub 2 (ph) expenses net, versus 12.6 in Q1 '03 and 8.1 in Q2 '02.

It is important to note that we will start depreciating our Fab 2 facility from Q3.

Fab 2 depreciation is expected to been in the range of $20 million a quarter in Q3 and Q4 '03 and significantly impacts our consolidated results.

Cash flow from operations in Fab 1 was positive 2.9 million in the quarter, which represents a fifth (ph) consecutive with positive cash flow.

The consolidated cash closing balance as of June 30th was 32 million.

The total balance sheet increased to 762 million in June '03 from 716 in December '02.

The total cash out relating Fab 2 was 76 in Q2, including 48 million equipment.

It was 142 in the first half of this year and it is 745 million project to date as of June '03.

Total shareholders equity as of June '03 was 281 million and as of this date, the company had 47.9 million outstanding shares and 6 million options.

In Q2, 4.5 million shares and 1 million options were issued.

This concludes my opening comments and now back to you, Carmel.

Thank you, Amir.

Let us now review the four areas of activity.

In the area of sales and marketing, I'm pleased to report that the Rand (ph) Corporation, a leading fabless manufacturer of ICs for the consumer market, placed its first production order with Tower. (indiscernible) wafer partner (indiscernible) Semiconductor and QuickLogic, who already announced volume production orders at Tower.

Varian (ph) is the first production customer which is not a partner and Varian's choice of Tower is regarded by us as a very important vote of confidence.

I'm also pleased to report that we are seeing repeat production orders from SanDisk of increasing volumes, which reflect their level of satisfaction at Tower.

In general, we have expanded and are continuing to expand our sales infrastructure to cover the U.S., Europe, Taiwan and Japan.

We recently reported the opening of an office in Boston to serve customers in the eastern United States and the hiring of a sales executive in Japan.

This expansion already generated a significant number of customer engagements at various stages.

Following the improvement in our sales coverage, we expect to see the resulting design wins in the second half of 2003.

In the area of financing, I'm pleased to announce that the company (technical difficulty) an arrangement with its major shareholders and its banks that would provide the company additional funding, if needed, in addition to the original commitments of $500 million by the banks and approximately $300 million by the wafer partners and equity investors.

While we may not need to use these additional funds, they certainly provide us with greater confidence that we will not lack funding to complete the Fab 2 project and to execute our business plan.

This arrangement also demonstrates our shareholders' and bankers' confidence in our ability to execute.

Details of the agreement are still under negotiations and it will be pending approval of Tower's shareholders.

In the area of manufacturing, I would like to report that we're ramping up capacity in Fab 2 according to schedule.

We started production in Fab 2 during last quarter and by the end of this year, our capacity will be at least 8500 wafer starts per month.

We are consciously building capacity ahead of demand in order to provide our customers with the comfortable level they need in order to engage with us.

Our customers know that we will have the production capacity when they need it.

We're very pleased with the quality of the products we ship.

Our yields exceeded in many cases our own and our customer's expectations.

Existing customers are recognizing this and are ramping production orders with us and potential customers engaging with us are encouraged with our manufacturing ability.

On a separate note, I would like to mention that our performance indicators of Fab 1 are excellent and that we're confident that as we ramp-up Fab 2, we will achieved similar results that will match industry's best in class benchmark.

In the area of customer services, which I view is a critical function of the organization, we are restructuring our activities.

We have appointed a senior executive with many years of experience in design and design management at the industry leader Intel to head this activity.

The customer services group provides excellent IP infrastructure, as well as design services to our customers.

It also provides presale and post-sale support to our business operations and program management to our customers.

The charter of this group is to make customers engagements with Tower an experience of unmatched quality and service, response time and professionalism.

In summary, I am pleased with the company I inherited.

We have great human resources, excellent technological skills, supporting wafer partners, investors and banks, and overall, we're in excellent position to increase our presence in the foundry market.

I find Tower a unique opportunity for its customers, investors and employees, including of course myself.

Thank you very much.

Amir, Harold and myself are now available to take questions.

We're all in different locations, so I will take all of the questions and route them to the others if needed.

Kevin Casey, Casey Capital.

Hi, guys.

The 8500 wafer starts -- what does that translate into peak revenues?

That depends on the average sales price, which may vary.

We do not know at this time exactly what the revenues are.

And also, what I said is that this will be our capacity, not necessarily the volume of shipments.

Right.

But if you ran full capacity, what would the revenues be?

Well, you multiply 8500 by whatever sales price you assume.

I cannot say what we assume at this time.

What about Fab 1?

Fab 1 overall capacity, depending on the mix, is on the order of 18,000 wafer starts per month, but those are six inch wafers.

I did not get the share count and the increase in the quarter.

Amir, can you take this one?

Yes.

The share count as of June 30, '03, was 47.9 million out of (indiscernible) 4.5 million were allocated in Q2.

4.5 million was allocated in Q2?

4.5.

Was that cash in for that?

Yes.

It was one of the injections by the partners relating to what we call milestone 5, and they got its cash flow equity.

How much injections are you schedule to get over the next six months?

From the original commitment with the waiver partners, we're still missing around 30 million, which are the last to complete the original 300, so it is approximately another 30 million, which are expected between now and the end of the year.

How much Capex are you planning to spend for the rest of the year?

You want me to answer this one?

I prefer not to address this question.

You have to ramp up the capacity for Fab 2, so there's going to be more Capex spending, right?

Of course, so I gave you dedicated indicator.

We're going to ramp up to 8500 wafer starts per month, and whatever it takes it will be done.

Most of the equipment is already at Tower and being commissioned as we speak.

What was Capex for the quarter?

Capex in the quarter, as I mentioned, was 76 million out of (indiscernible). 48 million was for equipment.

Great, thanks.

Mike Crawford, B. Reilly.

In Q2, what was the average selling price of wafers in Fab 2?

Q2, there are no sales from Fab 2.

We only started production.

The first shipments will be in Q3.

How many wafers did you start production on?

A few thousand.

When you said yields are exceeding expectations around, where are the yields?

I don't want to get into exact numbers.

They depend on product.

So far, we have only very few products in the line.

But when we and our customers compare our yields to yields of similar fabs at this stage of their development, we will consider this as a very good achievements.

On a different subject matter, what is the status of Sci Fun (ph)?

I don't know what you expect to hear.

There's a relationship between the companies.

You own, what, about 10 percent of that company?

That's right.

A little over 10 percent.

When was the last time they had an equity round (ph)?

Was that back in 2002?

Amir, do you want to (MULTIPLE SPEAKERS).

There was a deal with (indiscernible) Fujitsu in August ' 02, and the second deal was in (indiscernible) in February of '03.

So that is on your books at I think 6 million?

Yes.

And do you have an estimated market value of that position at this point?

What I can tell you is that in the books with historical value of 6 million, and the last valuation (indiscernible) deal, as far as we know, were around $550 million for the full safe (ph) fund, but those are effects (ph).

Okay.

Final question on that -- around what is their business stage?

Do you have an estimated revenue run rate for that company?

No, we don't.

Okay, thank you.

Ali Irani, CIBC World Markets.

Good morning.

This is Mary Brooksey (ph) in for Ali Irani.

I have a couple questions.

Is the first one is -- can you tell us what utilization rates were in the quarter?

I don't have the number.

Maybe Amir has it, but I would caution not to use quarterly numbers, because we are a relatively small fab and there are fluctuations from quarter to quarter.

I think a better indicator in the company our size would be a yearly utilization rate.

But anyway, if you have the number, Amir, please go ahead and provide it.

In Fab 2, it is not meaningful yet, because as Carmel mentioned, we'll start recognizing revenue from Q3.

In Fab 1, it was in the 50 percent range.

Okay, great.

Can you also provide me with what depreciation was in the quarter?

Yes.

Depreciation was approximately 3.8 million in Q2 -- sorry -- in Fab 1, and the negligible numbers in Fab 2, as I mentioned, the depreciation, the big numbers would start in Q3.

The Fab 2 will be fully qualified from an accounting standpoint at June 30th and, therefore, depreciation kicks in from Q3 and the range, as I said, would be approximately 20 million a quarter for the next two quarters.

And speaking on Fab 2, what us your target for full capacity when all is said and done?

Our target for full capacity is 33,000 wafer starts per month.

So that is still unchanged.

What were sales of I CMOS?

You provided that last quarter.

Could you provide that again this quarter?

Can you repeat the question?

Sales of I CMOS.

You had your I CMOS image sensor sales.

Can you provide what percentage of revenues that accounted for in the quarter?

I don't have the numbers.

And again, I would caution not to use quarterly numbers as indicators in this business.

Okay.

And then you said (indiscernible) is a non-strategic partner.

I think that is great that we're starting to see non-strategic -- nonpartners -- noninvestors come in.

Is (indiscernible) the only nonpartners customer at this point for Fab 2?

We announced customers that are in production in volume (indiscernible).

As you might expect, we have quite a number of customers that are engaging with us at various stages, but they're not in production yet.

When they come in production, we will announce them, and yes, many of them are non-investors.

Great, thank you very much.

Joseph Asia (ph), a private investor.

It seems like you are having a nice momentum buildup to production here.

I noticed QuickLogic on their conference call were very bullish in their comments on their company and they based most of the bullish comments on your company (indiscernible).

Are they giving you most of it what has come to you?

I think of this as a question you should pose to QuickLogic.

We're very happy with our relationship with them, they're a great customer and partner and we hope to be serving them very well.

How many wafer starts as a maximum (indiscernible) providing to them and to SanDisk?

I cannot answer the question.

Do you see capacity constraining, so if everybody would be placing (indiscernible) orders with you in Fab 2 right now?

Right now, we don't see capacity restraints.

We're building up capacity ahead of customer demand.

We want to make sure that the customers, if they ramp up their production, if they have the capacity of Tower.

The reason I am not willing to answer is because I don't want to disclose any information about our customers that they may not be willing to disclose.

So if you will ask them those questions, then they will answer, that is okay.

I mean what's (indiscernible) SanDisk can do (indiscernible ) conference call, they were very bullish and they said they have capacity constraints and they did some filings in case they would need additional capacity.

Would Tower be able to provide order capacity (indiscernible)?

Tower is not the only a supplier of SanDisk.

To the best in my knowledge, we have all of the capacity that SanDisk needs from us.

Would you say at this point, Tower is starting to turn the corner and you see them lights at the end of the tunnel?

I would like to answer you, but I joined the company.

That's my answer.

On the price, you don't want to answer on the price if there's price fluctuations.

Do you see price pressure on chips or its (indiscernible)?

No, we do see price pressure.

We still see a lot of price pressure, yes.

I understand the third quarter, you should be at this point, bookings, I understand the fab, most of it is shippings, the bookings have to have been done for the third quarter.

Is that ahead of schedule?

The only comment I can make about the third quarter is what we mentioned in our press release.

We said that, overall, we're going to see a modest growth, although Fab 1 deliveries will be smaller, but Fab 2 will start shipping.

So overall, there will be a modest growth.

It is not correct that we have the whole quarter known to us at this point in time.

It sounds like things are picking up, and I wish you continued success.

Thank you very much.

We hope so.

Robert Katz, Invest Israel Partners.

I have a few questions for you.

What is the breakeven level for the company now?

Let's say at -- was it 8500 starts per month.

Would you be able to breakeven?

When you say breakeven, you mean cash flow wise?

Yes.

About 10,000, to be more conservative.

Again, it is a matter of what the wafer prices will be, but this is a ballpark figure that we feel comfortable with. (indiscernible).

How much more CapX do you need to get to 33,000 wafer starts?

This is a big number.

Let me help out.

As I mentioned, the project as we said long ago, is in the order of (indiscernible) was $1.5 billion.

And as I said in my opening statement, we have spent today roughly half of it, like 745, and let's call it 750.

So we are roughly halfway and most of the remaining has to do with capital equipment.

To refresh my knowledge, (indiscernible) .13, .18 8-inch fab?

That's correct.

What is said that you do differently, then, let's say Taiwan Semi that would bring customers like Zoran and SanDisk to you (MULTIPLE SPEAKERS) Taiwan is running a 12 inch .09, .13 type fab?

That is the million-dollar question, isn't it?

It is.

We hope that we can provide certain customers in certain technology areas a service of a level that is very competitive, even with the largest and the best in the industry.

Is it my understanding that things like image sensors and certain memory structures don't require the fine geometries that a Samsung or a Taiwan Semi does, and that you can be competitive with them on a technology level with your fab?

Let me be modest.

I don't think there's anything that we can do that Taiwan Semi cannot do?

But if overall foundry industry were less than one-half of 1 percent market share, than in those specific areas, we at least have the chance to be 10 or 20 percent market share.

And (indiscernible) you mentioned are two of them.

What type of products do you do for SanDisk and Zoran?

Are they memory and image sensors, or are they more on the controller side?

I think (MULTIPLE SPEAKERS) I can only state the general category, and that is standard logic CMOS.

Standard logic.

What is the margin difference between let's say a non-strategic investor and one who has been sort of a -- an investor in the company, let's say?

Would there be a margin difference on the wafers being run now because of the investments?

We still don't have a lot of statistics.

But yes, the wafer partners have some discounts built into their investment agreements.

What is your -- I guess best knowledge on when those wafer pricing agreements will play out and everyone will be paying normal prices for wafers?

I do not remember but the discount that the wafer partners have are not that huge that they make a substantial difference.

There are discounts but they are not that meaningful that you will see an immediate difference when they cease to get the discounts.

It's more in the neighborhood of 5-10 percent discount?

That is right.

Are they for a certain number of wafers?

Was that part of the agreement?

I do not remember the details.

Amir if you (MULTIPLE SPEAKERS)?

I will help you out.

It is 5 percent and it is on all things.

Forever or 5 percent for (MULTIPLE SPEAKERS)?

As I recall there's no time limitation.

Five percent with all of the configuration and so it is not that big.

Great, thanks and good luck.

Stephen Granoff (ph), Access Capital.

Hi.

I was just curious if you could give us a little more insight as far as the capacity for Fab 2 and for Fab 1 in terms of wafer -- total wafer capacity today and where you expect it to go over the next couple of quarters?

Fab 1 is a mature fab.

It has the capacity of approximately 18,000 wafer starts per month, 6 inch wafers.

Fab 2, I will refrain from saying the exact capacity today but the end of this year will be 8500 wafer starts per month.

So, by the end of calendar of '03?

Great, thank you very much.

Joseph Asia (ph).

This is a follow-up question.

This is for Amir because he has been with the company longer.

Looking back, are you basically on schedule or a little bit behind -- going back two years (indiscernible) at this point?

from the standpoint to Fab 2 project planning?

Yes.

There are some delay's, not that big.

As a result of --- as you recall, we have signed all of the agreements in January '01 and they were actually done in 2000.

I do not need to mention (indiscernible) what the financial markets looked like at that point or the semi industry and what have we done so far.

So I think under (ph) what went in those two markets, we are substantially on schedule.

Still, there are some delays here and there, and as Carmel called it, we are looking ahead at each point of time and building capacity as it makes sense, in terms of the demand as we see it.

Okay, thank you.

Ali Irani, CIBC World Markets.

It's Mary again.

Quick question for you.

Of the 14.9 Fab 2 startup expenses, could you break out what was research and development, and the other was SG&A?

I will refrain from doing that right now.

I am sorry.

Okay, just trying to get apples-to-apples.

All right, thank you.

Joseph Asia.

One more question.

I think (indiscernible) a few months ago that maybe (indiscernible).

At this point, are you laying off people or are you keeping steady or even hiring?

What you read in the paper was a complete big lie, so there is no truth behind it.

Overall, we are growing, growing slowly, according to the ramping up of Fab 2.

But here and there, we also lay off some people, but the number is growing overall.

And the governments and (indiscernible) problems right now with their end of the deal, or are they -- ?

Oh, yes.

The government is committed to grant up to $250 million.

However, they grant it as we move on with procurement.

They give us back 20 cents on every dollar we spend on equipment.

Of the 260 million, how much has already come in from the government, and how much is still expected?

Over 100.

We've received over 100, and the balance is still (indiscernible).

They have (indiscernible) they have not cut any of this?

Now they haven't, and I don't expect them to do so.

I don't think they can do so anyway.

And the tax rate is going to say the same?

The tax rate is approximately 20 percent right now.

But between us, it is theoretical because the loss (ph) (indiscernible) for tax purposes are exceeding 100 million.

So we will not face this problem in the coming few years.

Joanne Ito (ph), Semicon (ph) Research.

Can you provide some detail, in terms of your sales by market segment, such as the PC market or consumer market; what it was this quarter, which market segment grew faster for you this quarter and what you see in the second half of this year?

No, I'm sorry.

I'm afraid I don't have this data.

And also, I believe that a relatively small family such as ourselves would not give any indication about other markets.

Okay.

Can you provide any information on your sales by process technology, percentage terms?

Was it above .35?

How much was above .35, how much was below .35?

All of it was above .35.

Fab 2 is only ramping up right, and the first sales will be in Q3.

Fab 1 is also all above .35?

Yes.

Okay.

It's .35 and above.

Okay.

Thank you.

If there are no further questions, I will turn the conference back over to Carmel Vernia to conclude.

Okay, thanks.

And thank you everyone and I guess I'll talk to you nest quarter.

Thank you again.

Ladies and gentlemen, if you wish to excess of the replay for this call, you may do so by dialing 1-800-428-6051, or 973-709-2089 with an ID number of 302180.

This concludes our conference.