高塔半導體 (TSEM) 2003 Q4 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the Tower Semiconductor fourth quarter earnings release and year-end. 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 up for questions and answers after the presentation. I will now turn the conference over to Carmel Vernia, Chairman and CEO. Please go ahead, sir.

Thank you. Hello everyone and thank you for joining us for this quarterly conference call. The last few months have been extremely important in the implementation of Tower's business plan. Fab 2 has been in production for two quarters now and many of the financial issues that took place in the previous quarters were resolved.

Before I go into the details of the important events of the last quarter, I'd like to ask Amir Harel, our CFO, to go over the financials. Amir?

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. This could cause actual results to differ materially from those currently expected. These risks and uncertainties are more fully discussed in the company's Form F-3 filed with the SEC on January '04 in our recent (inaudible) on Form 6-K as (inaudible) filed with the Securities and Exchange Commission and the Israel Securities Authority and is available on the company's Web site. Tower assumes no obligation to update any such forward-looking statements.

And now, I'd like to share with you some of the financial highlights of Q4 and financial year '03. Our revenues were 19.8 million in Q4 versus 16.1 in Q3 and 16.6 in Q4 '02 (ph). The Q4 '03 (ph) revenue included $4 million from a technology agreement. Tower revenue in financial year '03 were 61.4 versus 51.8 in '02. The '02 revenue included 8.1 million from a technology agreement. The consolidated net loss was 46 million in Q4 versus 37.1 million in Q3 and 13.6 in Q4 02 (ph). Fab (ph) depreciation was up (ph) in Q3 '03, was 20 million in Q4 and 37.3 (ph) million in financial year (inaudible). Fab (ph) depreciation is expected to further increase in the future quarters and significantly impact our consolidated (inaudible).

(inaudible) special from operations in Fab 1 was (inaudible) on the seventh consecutive quarter. The consolidated cash closing balance as of December '03 was approximately $61 million. The total balance as of September '03 was approximately 788. Total cash out relating (inaudible) was approximately 70 million in Q4, 475 (ph) in financial year '03 and 858 (ph) (inaudible) as of September '03 (ph).

(inaudible) $5 billion loan in Q4 '03 and 451 million (inaudible). Total shareholders equity as of December '03 was (inaudible) million. As a result, follow-on offerings completed in January (inaudible) is expected to close (ph) at approximately $7 billion (ph). The company had 51.7 (ph) million outstanding shares as of December '03. In January, share count increased mainly as a result of a follow-on offering, 11 million shares, and the last proportion is strategic investment (inaudible) of 2.3 million shares at $7 (ph) per share. As a result, the number of shares pending as of today is approximately 65.1 million.

As of December '03, the company has 16 (ph) (inaudible) including 6.2 million options and (inaudible). The company expects that Q1 '04 related revenue to be in the range of (inaudible) million and (inaudible). Depreciation (inaudible) is expected to be in the range of 20 million (ph) (inaudible). And with that, I will turn it back to (inaudible).

Thank you, Amir. I would like to start with the financial from the business (ph). During the last quarter, we received the last final (inaudible) of our original equity investment in wafer (ph) partners. This fulfilled all of their commitment to Tower of approximately $300 million. We also concluded the new agreement with our bank (ph). According to this new agreement, to stop (inaudible) principle amounts only in '07 so that during the next years we can use all of the cash generated from operations (inaudible) of Fab.

Finally, last month we completed a follow-on offering (inaudible) raised $70 billion. With all this (inaudible) components in place, we can focus over the next month on increasing our customer base, ramping up capacity and improving our operational performance. On the operational front, I am happy to report that we have, in fact, installed (inaudible) with the capacity of 8,500 wafers on (inaudible). Also, our own (inaudible) ramped up deposit to the range of 15,000 wafers per month at the end of the year as we indicated in a previous conference call. All orders for this equipment are already paid and our vendors committed to deliveries (inaudible) so that (inaudible) and equipment shortage for this capacity. Our ramped up capacity continues to (inaudible) our yield our delivery.

On the technology front and with all of our programs potentially on track (ph), our (inaudible) Motorola is already yielding and we expect production (inaudible) beginning in '05. Our .18 micron embedded (inaudible) program started (inaudible) from the joint developed on Toshiba in Japan (inaudible) and the basic (inaudible) already operational. (inaudible) this program and expect production ramp up in '05 (ph).

We are making progress in .18 (inaudible) program. We now have all our (inaudible) in the microland (ph) (inaudible) and the first customers (inaudible) into production later this year. We also have some of the basic components required (inaudible), which is (inaudible) capacity first (inaudible) certain types of resistors (inaudible) positioning ourselves to developing under suppliers, (ph) analog and (inaudible) signal customers.

Our design results (ph) are showing pretty strong capability (inaudible). A recently converted customer from a (inaudible) the assistance of one of our authorized design. With this process, we managed to reduce (inaudible) size and improve yields (inaudible) in a very significant way.

On the sales and marketing front, we're continuing to be strong (inaudible) for many of our customers. Particularly from SAN (ph), who recently issued area growth into the market. Today, we sell every wafer we can manufacture. And particularly (inaudible) recently announced a (inaudible) with (inaudible) which will put to use a lot of (inaudible) over the next 5-10 years (ph). Value of (ph) (inaudible), which is expected to be signed (inaudible), is approximately $200 million.

So in summary, I feel very comfortable that we are substantially on track with the execution of our business plan. (inaudible) portions (ph), please keep in mind (inaudible) period, therefore might not be able to answer all your questions.

Thank you, sir. The question-and-answer session will begin at this time. [OPERATORS INSTRUCTIONS] Your first question is from Ollie O'Ronny (ph) of CIBC World Markets. Please go ahead, sir.

Good morning, gentlemen. Carmel, the quality of the line, at least on my side, is pretty bad, so forgive me if I'm going over some of these data again. Could you please reiterate your guidance for the first quarter? As I understood it through the broken line was 23-25 million in sales with depreciation running at 22-28. And could you give us some guidance for Capex on the first quarter as well?

And I'm hoping, you know, looking at your current capacity, that you could give us some guidance through the first quarter. From 8,500 a month, where do you see Tower at the end of Q1? And if you could give us an idea of where mix and yields have been and where you expect mix and yields to go in the near term.

Oh, Ollie (ph), you squeezed so many questions in one question. I'm not sure I remember the beginning - yes, guidance gave - the first time we're giving guidance was between 23 and 25 in revenues and depreciation is between 26-28.

OK. And any views on what you might spend on Capex in the first quarter?

I'll let Amir respond to this.

On (inaudible) '03 is in the range of 150-200. And I was assuming (inaudible) spread more or less evenly, like here also is the second half.

So, Amir, that was 120-200?

One fifty to 200.

One fifty to 200.

Regarding the capacity earlier, I am sorry, but this is one of the questions I cannot answer. I can only repeat previous guidance we gave, which is 13,000-15,000 by the end of '04. We cannot provide data on capacity at the end of Q1.

But I guess it would be fair to, if you're spending your Capex on a linear basis, for the year, as Amir said, it, you know, we conservatively assume that that capacity would come on line linearly at the very least. Something like that.

A little bit more weight is on (ph) the second half, but ...

OK. And on mix and yields, Carmel?

Mix - what do you mean? Mix of ...

In terms of mix for process - .18 versus .25 at the end of the year and, you know, the commitments that you're getting. Are you - are they coming at better mix than you expected and at better pricing and at better yields or, you know, could you give us some color on where you are and where you see the product mix moving to?

OK. First of all, we do not have .25 in this Fab (ph). We only have .18 and we really be going into .135 (ph). In terms of yield, our wins are quite specific. If you take one example of the (inaudible) should achieve again roughly 92 percent yield already in the high 80s. (inaudible) our customers think that it's very good performance.

OK. Great. Thank you very much.

Thank you. Our next question is from Quinn Voltan (ph) of Oppenheimer. Please go ahead.

Good morning. Question for Amir. Amir, can you just sort of talk about where the EBITDA came out in the March quarter and then right now, at least - I'm sorry, for the fourth quarter - if you look at the forecast for the first quarter, it looks like depreciation may be growing faster than your revenues. And so, I'm wondering if you could just talk about your EBITDA projections as you come through 2004. When would you think that, you know, could you just talk about what that EBITDA ramp looks like and, if possible, give us a target as to what EBITDA level you'd need to - or what kind of revenue level you need to reach to get that EBITDA breakeven level. Thanks.

Hi, Quinn. Thanks for the question, but I'm afraid I won't be able to address this. Again, this 40-day (inaudible) prospectus is finalized, having significant limitations on things we can say, which are not included in the prospectus. On the Fab 1 level, as indicated, we are, for the seventh quarter, positive (inaudible) and positive EBITDA. And as to forecast when do we break even on Fab (inaudible), I apologize, I cannot comment on this.

As to the depreciation, Fab 2 and debt, we have addressed specifically went up from 17 million to 20 million. And as I said in the opening statement, it will continue to further increase and will reach a level of 30-35 million in a couple of quarters and stay at approximately debt levels quite awhile.

Sorry, just because the line is not that great, you said 30-35 million is where depreciation for Fab 2 should level off?

Yes. Currently, (inaudible) it will take a couple of quarters to get there and when it gets there it stay there at debt level for five years.

OK. And then, the last question and, again, you might not be able to comment, but you've talked about a capacity target by the end of the year of 13,000-15,000 wafer start. Does the recent completion of the equity offering give you any flexibility to increase that to the extent that you have demand for greater than 13,000-15,000 wafer starts a month?

This is Carmel. I will answer that. The recent offering was part of our business plan. I mean, we needed this money to execute our business plan and therefore, it will not allow us to potentially increase this amount.

OK. Thank you.

Operator Thank you. Our next question is from Daniel Camere (ph) of Bear Stearns. Please go ahead, sir. Mr. Camere (ph) - Kramer (ph)? Thank you. Our next question is from Steve O'Rourke (ph) of Piper Jaffray. Please go ahead, sir.

Hi. Good evening. A couple of questions. And again, I apologize if some of this was answered, as the line is kind of difficult to hear on. Could you give us what utilization was at Fab 1 and Fab 2 and do you have or are you looking now at some new customers or partners on the near-term horizon?

OK. It's Amir. I'll take the first one. Utilization in Fab 1 is in the range of 50 percent and it has been like that since the recent few several quarters. As to Fab 2, it's much more difficult specialization as we are sharply ramping up. So we indicate quarter-on-quarter (ph) in full capacity at the end of '03 and '04 and as you can surely understand certain time (ph) in certain capacity to inflate (inaudible) achievement. So it's very difficult to measure debt. What we can (inaudible), and Carmel said it before, is every wafer we are able to manufacture, we are able to sell. Demand is fairly strong.

Fair enough. And are there some new customers or partners on the horizon that you can talk about in addition to your present partners?

We cannot be specific, certainly not about customers or partners, but I would only make the general comment that if we found the right - the right entity that will bring us substantial amount of business and the right kind of technology we want to ramp up, we will welcome another wafer partner.

Fair enough. And with respect to siliconics (ph) and Fab 1 utilization, what can that do for utilization at Fab 1 throughout 2004?

First of all, siliconics (ph) deal with utilize, the best utilize part of Fab 1, however it will only start kicking in, in '05 - '04 is a project transfer year so I think, assuming that the (inaudible) of Fab 1 remains substantially similar, it would substantially increase it to the utilization of Fab 1 and similarly the cash flow (inaudible) in '05.

Fair enough. And one other question on Fab 2. If you could ramp wafer starts to, say, 20,000 by the end of 2004, do you feel very confident that you could fill all of those wafer starts throughout the year?

That's a tough question, but I would say yes.

Thank you.

[OPERATOR INSTRUCTIONS] We have a follow-up question from Ollie O'Ronny (ph) of CIBC. Please go ahead, sir.

Yes. Good morning, again. Carmel, I'm hoping you could give us an idea of the seasonality of the business. You mentioned you could sell any wafer - every wafer made in Fab 2. Are we looking at down seasonality for Fab 1, at some of the mature technologies in the first quarter or do you see Fab 1 also being able to stay flat or ramp up?

I don't see any seasonality - any downturn in Fab 1 in the next quarter or so. So, I guess that's good news, right?

Would you see an uptick in volume in Fab 1?

Certainly not something very substantial. Fab 1, you know what kind of technologies we have there, where we're happy as long it generate cash for us. We're not looking for growth in the (inaudible) siliconics (ph). There is an extremely upside for us - extreme upside. We don't have any higher expectations than that.

OK. Well, if I look at your revenues in Q4 and back out the four million from the technology deal, recognize that Fab 1 is staying seasonally flat and then look at the high end of your guidance, we're basically looking at about 10 million incremental revenues from Fab 2 in your guidance. Am I reading that correctly?

The $4 million of revenue from the technology (inaudible) in Q2 '02.

OK.

Not in - not in Q - I mean, SY (ph) '02 and not in '03.

And no technology revenues in Q4 of '03.

No.

OK. And then, I'm hoping you could give us an idea of pricing. Obviously, if you're in a position to sell every wafer that you can produce, one would think that the pricing terms would be rather advantageous as well. Are you looking at your sales being driven at price points that are comparable to the competition, even though this is a new Fab, or are you trying to position the capacity of an aggressive point to gain new customers? Could you give us some guidance on your strategy?

Yes, Ollie (ph), but I can only speak in very general term. For an existing contracts, existing purchase orders, generally we cannot change pricing. On new quotation (inaudible) the prices are somewhat higher and we're aligning ourselves with the rest of the industry. I can say that typically, our prices are somewhat lower than the industry leaders.

And some of the existing contracts or purchase orders, when do you see the purchase orders that were aimed at the low point of the cycle, say six months ago, kind of falling off and being replaced by more favorable price points?

That's hard for me to answer that. If our purchase orders run a few - quite a few months going forward on the contracts we have are a little bit longer in (inaudible). So I - it's hard for me to give you a single - or a number of data points that will answer your question directly.

But we're talking quite a number of months rather than, say, a year.

Yes.

OK. Great. Thank you very much.

Thank you. Our next question is from Joseph Azar (ph), private investor. Please go ahead, sir.

Yes. Good morning, good evening. Well, it looks like things are progressing. I had just a couple of questions. Quick logic - on the last conference call, it seems like they were going to make a - the final installment plan and they didn't at the end. Is there any reason for that?

Hi. It's Amir. Q.L. has (inaudible) consideration and it's true that the last proportion of my stay (ph) has not been consistent (ph) lately from (inaudible) their own cash and other consideration. And all and all we go like 300 in (inaudible) 6 million out of the 310, so it's by far the vast majority and we're help you with it.

They also said on their conference call that they are rapidly ramping up at Tower. I mean, do you see that continuing throughout the year?

I can only confirm that we have an excellent relationship with Quick Logic as a customer. I think we're giving them good service and we're happy - we're very happy to be having them as a customer.

Just on a general note, I mean, I know you're under 40 days from the prospectus, but most - right now, a couple years ago, people - the semiconductor industry of the companies were not giving such forward guidance, but the last quarter or two, most semiconductors companies have come through with very forward-looking guidance. I mean, it would be very helpful for investors if you would start matching all that guidance that all the other semiconductor companies are giving at this point.

Well, I guess that's why we gave guidance for Q1, which is something that, at least during my tenure at Tower, we never did.

OK. That is correct. How were you happy with - how were your feelings on the equity offering that just went? I mean, the price shot up, the price shot down. I mean, how did you take that?

It has nothing to do with (inaudible), at least in my mind. The market did what it wanted today (ph). For us, it's excellent news and we have more money now. We can execute our business plan. And myself as a manager, I will always want more money because the more money I have, the more flexibility to execute my plans I have, but it has nothing to do with feelings (inaudible).

OK. Just keep up the good work and your PR firm, Ion Fusion (ph) is also giving out good information. I'm happy with them, also. And just keep up the good work.

Thank you.

Thank you. Our next question is from Daniel Amere (ph) of Bear Stearns. Please go ahead, sir.

(inaudible), I mean, sorry for before. It seems like that the line has been on and off for part of this conference call, so I might have missed some stuff. But just a quick question. I was just wondering, what is the - what is the - in the road map, what is the additional financing that you're still planning to do in the next 12-18 months?

I can give you only the general picture, Amere (ph). According to the bank covenant, we have to raise another, roughly, $18 million between now and the end of '05. That has to do only with bank covenant. Again, I would repeat what I - of the previous investor that asked a question. The more money I will raise, the more flexibility I will have to execute my plans and this is what I'm going to try and do. But we have a number of sources to do it, not necessarily an enough (ph). Remember, we have - we may find another wafer partners, we have the fund shares. So we have a number of options. I'll try to exercise them at the optimum time.

So it's not something that you should expect in the near future? It's just more of an ongoing - an ongoing process as the business is about to develop.

I'd like to keep my options open at all times. I don't want to say what I will or will not do at this point in time. We have additional financing needs to complete the projects and we will execute them at the right timing and with the right information of sources.

OK. That's fair.

Thank you. [OPERATOR INSTRUCTIONS] Our next question is from Joseph Azar (ph). Please go ahead, sir.

Yes. A follow-up question. I didn't want to mention this, but you brought up (inaudible). It's hard to get information on what's exactly (inaudible) standing. If you look at A&D (ph), it seems like they're using their technology. Is there anything coming down through Tower's bottom line because you have - you're supposed to - so you have a lock-up agreement with them that you will receive (inaudible) before (inaudible) and that's coming up soon. Is there anything going on that front?

(inaudible) is a private company, so I'm not in a position to disclose a single task, but (inaudible) revenue stream (inaudible) from them, but it has not been very significant in the past.

Do you expect it to pick up or stay at this level in the next six to eight months?

I cannot comment on that.

OK. Thank you.

Thank you. There are no further questions. I'll turn the conference back to Mr. Vernia for final remarks. Please go ahead, sir.

I want to thank you all for attending this conference call and I hope to meet you again in three months and hopefully we'll have some more news to share with you. Thank you very much.