高塔半導體 (TSEM) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Tower Semiconductor second quarter 2006 results conference call. All participants are presently in a listen-only mode. As reminder, this conference is being recorded. With us on-line are Mr. Russell Ellwanger, Tower's CEO, and Mr. Oren Shirazi, CFO. For opening remarks and introductions, I would like to turn the conference over to Mr. Russell Ellwanger. Please go ahead, sir.

Thank you. Welcome to all of you and thank you very much for joining us for today's conference call. We think we had a very exciting and a very successful quarter for Q2 and really are happy that you joined us to hear of it and to participate in the discussion.

We'll begin with our CFO, Oren Shirazi going into detailed report of the second quarter 2006 financials. I'll then review development and achievement with respect to our capacity ramp plan, our product lines, customer pipeline, the technology and the operation as realized in results within the second quarter. I trust that you'll find the results and plans interesting and really hope that all of you stay on and participate in the question-and-answer which will ensue. So Oren, please and thank you again.

Thank you Russell and hello everyone. Before we begin, I would like to remind you that some statements made during our call may be forward-looking and are subject to uncertainties and risk factors that could cause actual results to be different from those currently expected. These uncertainties and risk factors are fully disclosed our Form 20F and 6K, as well as filed with the SEC and the Israeli security authority. They're also available on our website as well as in our Form S1 and S3. Tower assumes no obligation to update any such forward-looking statements.

And now, let's go over the financial highlights of the second quarter of 2006. Revenue in Q2 '06 was $44.6 million, another record high quarter, and 132% higher than the $19.2 million sales we had in Q2 '05 excluding $8 million from a previously announced technology related agreement. These Q2 '06 revenues also represent a 24% increase over the $35.9 million we had in Q1 '06.

[Growth] in Q2 '06 was $43.6 million, an $11 million improvement over Q2 '05, excluding $7.2 million net effect in Q4 '05 from this previously announced technology related agreement. [Growth] per share $0.65 which is $0.16 better than Q2 '05. Depreciation and amortization expenses for the second quarter of '06 were approximately $38 million, same as in the first quarter of '06 then compares with $37 million in the second quarter of '05.

EBITDA, we also continued to improve our quarterly EBITDA and recorded a $10 million year to year positive shift in EBITDA as compared to Q2 '05, excluding $7.2 million net effect in Q2 '05 from a previously announced and technology related agreement. This is after the $6.1 million of positive EBITDA in Q2 '06 which is the third consecutive quarter of positive EBITDA for Tower.

Moving to fundraising, [Ben] Israel Corp., and financing update. We successfully raised more than $31 million of (indiscernible) for our public offering in Israel a few weeks ago despite challenging financial market conditions. Following this fundraising, we fully satisfied all our bank fundraising (indiscernible). In May, 2006, we signed in amendment to the facility agreement with the bank to defer approximately $100 million in payments formerly scheduled to be paid between October '06 and June '07 to July '07.

We are progressing with our recent major achievements already mentioned towards our (indiscernible) including the bank (indiscernible) structuring and Israel Corp.'s investment, all target to expand our [pass-through] capacity by 50%. In addition, we're progressing with the bank towards a definitive amendment to the facility agreement based mainly on the terms of the MOU signed between us and (indiscernible) [we made].

The MOU for the restructuring of our long-term debt is based on the following three main goals. 30% of the debt is to be converted to equity for approximately 62 million ordinary shares of the Company, which means that the bank will invest in Tower's ordinary shares for $3.04 per share. The interest cash payment of the long-term loans is to be [between] from LIBOR plus 2.5 per annum to LIBOR plus 1.1% per annum. And no loan principal payments will be done before September 2009.

The financial outcome of the above-mentioned loan conversion and interest rate reduction is total interest payment savings of approximately $70 million [per year]. The terms of the MOU are subject to the closing of a definitive agreement (indiscernible) the facility agreement containing mainly these terms and are subject also to a commitment of Israel Corp. to invest $100 million in Tower's capacity expansion plan.

Israel Corp. (indiscernible) permitted to invest $100 million in the Company for approximately 66 million ordinary shares at $1.52 earnings per share subject to the closing of a definitive amendment to the facility agreement containing many of these terms and Tower's shareholder approval. A majority of the equipment needed to support the ramp-up of Fab 2 was already ordered in Q2 '06 from the suppliers and manufacturers and is starting to roll in from Q3 '06.

As of the balance sheet date, the Company is in full compliance with its financial ratios and covenants under its bench facility agreement. And last viewing the first half of 2006, approximately $16 million of convertible bonds which were issued in January '06 were already actually converted to Tower's ordinary shares. As of June '06 we had 84 million outstanding shares; 29 million warrants; 50 million shares issuable from 2002, 2005 and 2006 convertible bonds; 5 million shares issuable from options to convertibles.

Upon the closing of the amendment, of the amending agreement with the bank we will issue additional 52 million shares to the bank and 66 million shares to Israel Corp. By then, the Company expects Q3 of '06 revenues to be in the range of $49 million and $53 million. And now, I will give Q2 '06 (indiscernible). [One] diversifying customer base -- as of the end of Q2 '06, Fab 2 had 20 customers in production, growing from 9 in the end of Q2 '05 and from 18 in Q1 '06.

In addition, 27 customers in preproduction were recorded in Fab 2 as of the end of Q2 '06. In Q2 '06, 64% of our sales were to fabless customers and 33% to IBM. [To satisfy] geography, in Q2 '06, 64% of sales were generated by U.S.-based customers, 8% by Israel customers, 20% by Asia-Pacific and 8% by Europe customers.

And some of the last bullets, revenue by specialized technology on a consolidated basis in Q2 '06, half of our revenue was generated by specialized technology products which [demonstrated] the implementation of our specialty -- of our specialized (indiscernible). 50% of sales were in (indiscernible) while 26% in mixed-signal, RF, and power management and 24% of sales were in the (indiscernible) central and MDM product line.

And last bullet, switching to diversifying the revenue by market segment. In Q2 '06, we saw another increase in the communication segment with 34% of all consolidated revenue coming from this segment. 25% of sales was designated to the consumer market segment, 4% to PC, 11% to industrial, medical and automotive markets, and 26% to [multi-market] and others. Thank you very much.

Thank you, Oren. So as per Oren's statement, we achieved the second consecutive quarter of record sales and four consecutive quarters of sales growth.

I personally joined Tower halfway into the second quarter of 2005, and truly take great pleasure in the efforts of the management team and the efforts of our employees worldwide to have achieved 132% sales growth against the Q2 2005 base business, as well as to have within such a steep growth ramp implemented operational efficiency actions which drove an 18 million positive [flee] in EBITDA against a sales increase of about 25 million.

In mid-May, we announced a major milestone in our strategic and financial [forum]. It comprised two elements. The first, the decision and plan to expand capacity Fab 2 capacity to 50% targeting 24,000 wafer starts a month in order to address our customers' forecasted demand. The second is the restructure of the long-term debt with the bank.

The first elements required naturally raising the necessary funds to finance the capacity expansion. Our major shareholder, The Israel Corp., has committed to invest 100 million with an additional 31 million having been successfully raised through a public offering in Israel. We're very pleased with the reception of this offering which had excess [demand], especially considering that it was conducted during a period of worldwide capital market instability. The financial community and the public in Israel real gave a very strong vote of confidence in Tower's market roadmap and financial future.

The signed memorandum of understanding of our lender banks to refinance our long-term debt will reduce the interest payments by 17 million per year and will defer the principal repayments to begin in the second half of 2009. We believe that the closing of the definitive agreement with the banks as well as with Israel Corp. will be completed during the third quarter of this year.

Tower's Fab 1 and Fab 2 are performing at over 90% capacity utilization. We will be increasing the Fab 1 capacity beyond the present as a function of several industrial engineering projects without any incremental capital expenditure. We have started the Fab 2 capacity ramp up. Equipment has begun to arrive at Tower and the first tools are in the process of being installed.

In the second quarter, we shipped revenue products to a customer base of approximately 55 customers, among which we shipped approximately 50 new products. Of these new products, a substantial amount was generated in Fab 1. So although the technology nodes in Fab 1, the 0.35 micron 0.5, 0.6, etc. I'll refer to as legacy, within these nodes are many exciting designs and design wins which are still occurring.

In the second quarter, Fab 2 had 20 revenue customers and generated 23 news [takeouts] as compared to nine customers in Q2 '05. Looking at our customer base, we have increased the number of customers to whom we are shipping greater than 1000 wafers per month 8-inch equivalent to seven customers in Q2 '06 as compared to two customers in Q2 '05. We expect this number will increase further in the coming quarters and that within the customers that we're shipping more than 1000 wafers a month to now, that the numbers that we're shipping will also substantially increase. In Q2, we've seen an increase in revenue in our specialized technologies, which as Oren stated was approximately 50% of the revenue split.

We would now like to discuss some of our technical achievements. Firstly, our core CMOS product line provides the technology platform for the specialized product line, and is itself providing about 50% of the present revenue split. In the second quarter, we started several hundred of 0.13 micron technology wafers for a lead customer. We expect fourth quarter 0.13 micron shipments to exceed 1000 wafers per month which should grow to thousands of wafers per month in Q1 2007.

Using the 0.18 micron platform, we started production of an embedded controller for Winbond Electronics Corp., a leading integrated device manufacturer in Taiwan. Moving then from the core CMOS and the new customer which they received, as well as the introduction of the 0.13 micron product platform, and looking at the CMOS image-sensor product line, we began volume manufacturing of a 3 mega pixel camera for camera phone applications using our new generation 2.8 micron pixel advanced technology, which enables continues benchmark performance with respect to low dark currents, low noise, and also implemented fourth-generation high fidelity colors.

We continued to ship high-volume of x-ray image-sensors for medical applications, with two key and important design wins which moved to 0.18 micron pitch technology. We also completed development and shipped prototypes of high-dynamic ranged 10 mega pixel high-end video camera. In the mixed-signal RF product line, we announced in Q2 production starts for three important customers, demonstrating the growth and growth potential of this business.

We are the manufacturing supplier of choice for Alien Technology's generation 2 RFID, RFID being radio frequency identification. RFID tags help enable supply chain efficiency, visibility, and security and are being deployed in retail, defense, transportation and health markets. Gen 2 protocol is the emerging standard in RFID tag technology and is projected to be a $1 billion market by the end of the decade. Alien is a leader in the RFID product market. And we feel it was a great accomplishment that our R&D and manufacturing capabilities were chosen by Alien.

We announced that signed a comprehensive sales agreement to manufacture mixed mode integrated circuits for a major European fabless company. The agreement includes a mutual commitment for about $10 million of sales in Q4 2006. The products are used in [DEC's] cordless phones and Wireless game controllers, which is a very fast-growing market.

Another market where our manufacturing services are applied is the metro Wi-Fi, which is expected to grow significantly in the coming years. We started production of metro Wi-Fi baseband controllers for Waveon, a developer and supplier of a new generation metro Wi-Fi system for the communications industry.

We've also recently announced the production start of [MAC Fast] ASIC products. This was a result of joint collaboration between WAVE Audio, BLSI Solutions and Tower. The product was enhanced in each to meet JVC's stringent requirements for audio quality. Apart from the immediate contribution to Tower's revenue from a growing new market segment, we believe that such a collaborative project will open the door to new opportunities.

To support all these activities, our design services have become a significant part of the total solution provided by Tower as new customers and new products benefit from the IP and design services that we offer. During the past quarter we further increased the design infrastructure for 0.18, 0.16 and 0.13 micron technology. We're developing new and exciting proprietary intellectual property building blocks in the non volatile memory, CMOS image-sensor and mixed-signal RF space.

As I am sure you're aware, the past two weeks have seen conflicts in Northern border of Israel. Tower's activities have proceeded in an uninterrupted fashion and we're well positioned to meet our manufacturing and engineering commitments.

So to summarize, we finished a record strong quarter and we're forecasting further growth in Q3. We're extremely excited about our ramp up plans which will allow us to continue to grow our customer base and market share, meet higher financial targets and further grow our shareholders' confidence. I thank you for your time in listening and would like to then turn the time over for any questions you might have.

(OPERATOR INSTRUCTIONS). Ramesh Misra, CE Unterberg Towbin.

Good evening, Russell and Oren. Congratulations on the second consecutive record revenue.

Thank you.

My first question was in regards to your capital expenditure plans for Q3 and Q4. I know you committed to spending about 100 million to ramp-up your 0.13 micron. Can you give us kind of a timeline for how that will be spent over the next three quarters?

The exact how it will be spent is maybe a little less important as when the equipment is arriving. So the equipment has begun to arrive now. The bulk of the equipment will be arriving in the latter part of August, September, and the beginning of October with some of the last equipment arriving in the end of November timeframe. And we should have the full 24K wafers start capability at the very end of the year, beginning of next year.

Okay, all right. Great. At this point, do you [see] you'll be pretty much using that 24K wafer capacity by year-end?

I think we have --

In other words, does your order pipeline support that already?

The customer demand is what drove the capacity increase. The forecasted demand will fully eat the increase we're doing. So if you ask do we expect that we'll have the starts fully utilized, yes I believe that we will.

Now, the important thing to note, however, is that we will have throughout Q4 an incremental increase in starts period. But from the time that we achieve the full start capability, it then is two to three months before you start realizing the revenue in the shipments. So as we're targeting to have the full capacity available for starting wafers in the middle to end of December, that would mean the full revenue would not be being seen as far as shipments until the very end of Q1.

Okay. In terms of these tools that you're getting, is this basically an expansion of your current tool set or -- so basically what I'm getting to this will there be some process tweaks required that may take some cycle time in terms of optimizing profits for these new machines? Or is this pretty much kind of a copy exact of your older -- your existing 0.13?

Probably to the 90, 95th percent type level they are tools we already have qualified for the same matching tool we already have qualified. There are a few tools where we have moved -- one specific tool where we've moved from the initial supplier to a different supplier for a variety of reasons. But that being in the [lead bench] area, which although a critical process and step, is not difficult step for startup.

So, there's process tweaking. As far as needing to come up with a new process, parameter set in order to meet the capabilities of a different tool versus the installed -- the present installed base, that is -- we will not be doing. However, one always has to take into account the ability of a capital equipment supplier to make one tool as a copy exact to another is not 100% there. So as you start up any tool, it always takes a good amount of engineering capability and also a close partnership with the equipment supplier to enable a very fast startup, if that answers your question. So there --

Yes. That helps. So basically, you don't anticipate -- you should hit the ground running basically as these tools start popping up.

Yes, we really should.

Okay. Another question is maybe for you -- just for modeling purposes. I know you went into the share count a little bit. What should we be looking -- modeling in for a share count at the end of Q3, diluted share count?

Okay, so the basic for the beginning of Q3 was 84 million. And it will be increased only a few in the later part of Q3 after the 62 million shares (indiscernible) to the banks and the 66 to Israel Corp., we will have approximately 200 million ordinary shares assuming the end Q3. However, for the EPS calculation, I think under Israeli GAAP -- I know under Israeli GAAP it's taken into account on a weighted average method, meaning that it will only be counted from when it will happen.

So if [we are to] assume it will happen in the beginning of September most of it will not be taken into account in Q3. So I am talking about additional 120 million. So this is the ordinary shares. And on top of that we have approximately, as I said before, 50 million options or convertibles which are in the money so -- close to the money; mainly from bonds.

Okay. So basically kind at the end of Q4 that we should be looking at that full share count impact?

Yes. For Q4 it will be a fully impact of all this $200 million for basic EPS and $250 million for the fully diluted.

Got it. Okay. I think those are my key questions.

Thank you very much.

[Mosha Friedman], (indiscernible).

Congratulations for your results. I would like to ask a couple of questions. One is you stated and you're quoted here in that you reached [cap] (indiscernible) utilization of 90%, both factories. You stated also in your guidelines for the third quarter, you stated sales of $49 million to $53 million which reflects approximately 20% -- approximately 10 to 20% increase in sales from the second quarter to the third one. I was wondering how can you do that with a capacity of 90%. And because it seems a little bit odd that you are near your -- near the top of the capacity utilization and yet you state that you can increase sales by more than that.

That's a very good question. The answer itself though is not so complicated. The utilization is based upon the wafer starts. It's -- the cycle time to get them through the Fab, depending on how many photo maps, is on the average between 60 and 80 days. So by having achieved greater than 90% utilization, you will see the revenue for it several months later. The Q3 revenue growth is off of a good portion, say 60, 70% of it, is off of the starts that you do in the latter half of the previous quarter.

So that's the first answer. The other answer is that the capacity ramp, although not very much of this will be seen in Q3, but the capacity ramp in Fab 2 as well as the industrial engineering projects for Fab 1 will begin to have impact within the third quarter as well. But that impact will not be as strong in the revenue side as it will be in the start side.

Okay, and the start side will not be seen in the report?

I'm sorry please?

And the start side will not be seen in the report. And the starts will not be seen in the report.

In the Q3?

In the third quarter, of course.

In the third quarter what you'll see with the starts is that our starts capacity will have increased.

I see. Okay.

As far as the revenue, the Q3 starts, you see the impact in revenue predominately in Q4.

I see. Okay. The second question is about your savings from the debt restructuring. You stated previously -- stated today and in previous presentations that savings will be $17 million per year. I was wondering if -- I'm pretty sure that not all of it will go to the P&L, [meaning] $5 million savings of interest and another $12 million in savings of the balance itself, which will not be reflected in the P&L, but will be reflected in your cash flow. Am I correct about that?

No, no, no, no. All of the 17 million are reflected in the P&L. Today we are paying an amount of approximately $10 million interest per quarter also for the cash flow, also for the P&L. And this amount will be reduced by $4.3 million for the quarter and will be $5.6 million, $5.7 million per quarter from whenever we'll sign a definitive agreement with the banks. It's both P&L and cash flow, the 17 million.

I see. So they will be reflected as of the third quarter in the P&L, but not -- when do you expect the closing will happen -- will occur?

Within the third quarter.

I see. So it will not be fully reflected in the third quarter? It will be reflected in the fourth one?

It should be fully reflected in the fourth and a prorated reflection in the third according to the date that it closes, a portion of the quarter to.

Okay. The last question is about -- there are rumors that M-Systems and SanDisk will probably merge, one will buy the other. Since SanDisk is one of the -- is a major shareholder in Tower, how will Tower capitalize on this merger if it happens? Do you expect that sales will grow due to this merger?

In addition since Apple announced it will buy flash -- no, NAND chips from Samsung for its iPod nano, there are expectations that the price of the flash will increase. How do you think this -- these developments will affect you?

So, to answer to the first question is in an interview yesterday, Eli Harari said that he makes no comments on rumors. As a supplier to Eli Harari, I certainly don't make comments on rumors that deal with him. So I really can't say anything in that regard.

Of course you can't say whether they will buy M-Systems or not, but my question is a hypothetical one. Suppose they do. How do you think it will affect Tower? Do you think sales to SanDisk and to the combined company will increase significantly? Do you expect there will be no change? Do you think the competition with Samsung will increase? Something like that so we will know in what kind of environment you're working.

So to answer the question multiple-fold, firstly we do not supply commodity flash to SanDisk nor do we supply commodity flash to M-Systems. We make controllers. So the commodity flash is not an area that we're in at all. So --

But you'll probably participate in the production of the X4.

I can say that -- (multiple speakers)

Because this one does require a controller.

If there was any truth to anything going on between SanDisk and M-Systems, I'd see no way that it would reduce our revenue.

Okay. Okay. And then the second one?

The second was what again, please?

About the prices of flash chips. Do you see some Samsung -- do you see the beginning of purchases of Apple from Samsung?

Again, it's a market we do not compete in is the commodity flash. It would not have an impact on Tower that I could see at all.

Embedded flash?

Embedded flash we do make -- we are involved in, but it's a totally different area. And it really has very little to do with what would happen with commodity flash. The embedded flash is a very highly specialized capability. It demands very good ASPs.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS). Ramesh Misra, CE Unterberg Towbin.

Just a bookkeeping question, and Russell, a very diplomatic answer on the last one. You should be involved in this peace process. What were your depreciation expenses last quarter? And that is it, thank you.

We are at $38 million this quarter, but it was 7 million in Q2 of '05.

Okay thanks.

(OPERATOR INSTRUCTIONS). There are no further questions at this time. Mr. Ellwanger?

No questions? No, seriously. Thank you very much for participating in the call. It really was a very good quarter for Tower. We're as an entire Company happy with where we're at, where we're going. We do see Q3 allowing us continued growth and are very excited about the capacity ramp plan and can foresee Q4, Q1 having again sequential growth off of where we are right now. Thank you for your interest. Appreciate it very much and thank you for your confidence in the Company.

Thank you. This concludes Tower Semiconductor's second quarter 2006 conference call. Thanks for your participation. You may go ahead and disconnect.