Q4 2019 Earnings Call
This call.
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As a reminder, this conference is being recorded Wednesday December 11th 2019.
I would now like to turn the conference over to try to do <unk> Vice President of Investor Relations. Please go ahead Sir.
Thank you know good morning, everyone welcome to our review Photronics to something like Peter fourth quarter financial results.
This morning are Dr., Peter Cohen, Chief Executive Officer.
John Jordan Senior Vice President Chief Financial Officer, Dr., Chris will provide more vice President Chief Technology officer or strategic planning.
The press release issued earlier this morning, along with the presentation material, which accompanies <unk> remarks.
Well on Investor Relations section of our web page.
Comments made by participants on today's call May include forward looking statements.
Such words does anticipate believe estimate expect forecast in our view.
These forward looking statements are based upon a number of risk uncertainties and other factors that are difficult to predict.
Actual results may differ materially from those expressed or implied and we assume no obligation to update any forward looking information.
At this time I will turn call over to Peter.
Hi, Detroit and good morning, everyone.
We ended 2019 when all metal.
You mean record quarterly and annual revenue.
And a strong design activity across the majority of our customer base.
Increase capacity as we ramped production to new manufacturing facilities and.
And outstanding work by our entire organization to win new business.
Stand share.
In addition to record total revenue.
Raised the bar with record quarterly revenue for IC and PD photo mask.
Hang your hat PD revenues also reached a new high.
It was just a per quarter.
Okay, great year.
Very pleased with our performance.
The growing revenue at high operating leverage profit margins expanded.
Finally, consistent efforts to control cost, we delivered 13.7% operating margin.
Last quarter and last year, despite a larger operating footprint and growing headcount.
For the year operating margins were 9.5%.
Remarkable achievement given the challenges we see.
Including headwinds from start up expenses.
Conductor in L.P.D. industry downturn and growing geopolitical uncertainty.
These outstanding operating results generating E. P. S. A 15 cents per share for the quarter, we should along with our expectations and included significant foreign exchange loss below the operating line.
In addition to record revenue and solid earnings we maintained a strong cash balance.
Any an inquiry with 154 million in net cash.
Cash generated from operations more than offset or strategic uses of cash during the quarter, including share repurchases.
Well, the bulk or China investment now behind us and growing confidence in our long term ability to generate cash we restarted our share repurchase activity.
See this effective use of cash to invest what we believed to be an undervalued headset.
While also reducing the number of shares outstanding.
We spent approximately 11 million for shares in the last two months to the fourth quarter.
Since announcing our new 100 million dollar share repurchase program at the end of August .
We anticipate our purchases will continue for the foreseeable future given the value we seen this activity.
The fourth quarter was a great hand to some per gear.
I cant second quarter, we achieved year over year revenue growth.
For the second.
Excessive year, we attained record revenue.
Our balance sheet remains strong following two years of major investment.
And we're well on the way they meet the financial targets, we establish nearly two years ago.
I'm very proud of what we've been able to accomplish I remain confident in our long term strategy.
As I meet with investors the top two questions I received related to China.
He's come in one of two forms.
Current outlook for business in China.
How the U.S., China trade discussions are impacting our business.
I would like to address each of these starting with a wider.
The trust and philosophy or management is to focus on things you can control.
It comes to the current geopolitical environment. There is much that we cannot control that could easily become a distraction.
As we see it or challenge is to focus on our customers, while effectively managing operations in a dynamic uncertain environment.
During our third quarter conference call, we stated that on certain uncertainty created by actions taken by the U.S. administration.
Have begun to have a negative impact on some of our Chinese customers demand.
However, the impact was concentrated.
And relatively small.
In the fourth quarter impact flick become positive and more pervasive.
Have trade street discussions have gone unresolved and certain high price profile companies in China has been placed unrestricted trade list. There's always uncertainty has motivated Chinese companies to seek local solutions for their semiconductor needs as they try to become more independent and self sufficient.
Yeah, Matt.
In our view and meet in China, 2025 initiative has been irreversibly accelerated.
One outcome of this is a growing need for photomask.
With a manufacturing facility in China supported by our global manufacturing footprint.
We were able to quickly respond to these needs to enable our Chinese customer success.
In fact for IC capacity in Taiwan, and Korea was sold out in Q4 as a result satisfying sudden uptick in China demand.
And PDMC set a new record.
Revenue record in Q4.
We are now exactly where we want to be ramping the young men factory into an oversold Asia I see manufacturing network.
Looking forward, even if the trade deal is finalized we believe this trend will continue as many Chinese technology companies are concerned about future restrictions and want to avoid any potential impact from trade wars.
Turning to the outlook for our business is very clear that China has become the mature region for us.
Just over three years ago, we announced the first of two Greenfield investments to build state New York manufacturing site.
Today, both of these facilities are complete and.
And we were in the process of ramping up to full production.
The U.S.P.D., particularly in her say began production.
At the end in second quarter.
It has ramp quickly due to strong end market demand and relatively short qualification time.
Yeah, I see facility in Japan, which is part of a JV, we DMP begin qualifications in the third quarter.
As a result nine to 12 month qualification time. It showed me a PD ramp by approximately four quarters.
During the fourth quarter, we generated 11 million revenue from that's produced in China, nearly all SPD.
In parallel with expanding our manufacturing operation in China. We have also intensely focused on building a strong book of business there.
Revenues to China were a record in the fourth quarter.
And represented 33% of our total revenue.
Not only do we set a new record in the quarter.
But our toll with an outstanding 49% better.
The previous high watermark, there were established just one quarter ago.
For the year revenue a product shipped the China was 27% of or total revenue.
And put that in perspective, when we announced our gentleman investment in 2016, China, representing about 5%.
Of our total revenue.
And just three years, we've increased our China revenue fivefold.
Over that time, we've entered into long term purchase agreements with for customers in China.
Two I see and to have PD.
As you would expect they are well represented in our China revenue corresponding to just under 60% of the total.
However, we also have numerous other customers that make up the other 40%.
This means our businesses diverse and not relying on any one customer or product.
Makes our revenue stream healthier and more sustainable.
Even now we are engaged with other customers on discussions for long term agreements.
Which will further enhance the quality of our China business.
As has been a case for most of last year and PD demand was very strong for us in all regions, particularly China.
PT revenue this quarter was $43.7 million, which corresponds to an annual rent run rate of 175 million.
61% of this was for customers in China.
We present or a long term outlook, a fairly 2018, we indicated or NPD revenues with double.
To about 200 million annually.
Which included Herve production plus growth and other facilities.
Since then capacity additions and Ltd market has outpaced growth in demand, resulting in a market downturn.
As a result in near term outlook for 210.5, plus the production has softened.
Has the associated put an estimate.
Conversely.
Analysts demand has strengthened more rapidly than we expected two years ago.
In addition to a vibrant Korean business, we are now shipping to more than a half a dozen Chinese panel display manufacturers.
Customers are focused on penetrating the global market for premium smartphone.
The most advanced of which incorporate foldable display.
Recently, we announced a significant increase in plans for production of flexible animally panels in 2020.
Dynamic markets create opportunity.
And our hamlet outlook is now much stronger than we projected in 2018.
For the balance of these puts and takes we see tiny being a very attractive region pre SPD investment well into the future.
Earlier this year, we order to precision light.
Mass raters from my chronic.
This will be important assets as we optimize our existing operations.
To expand capacity for mainstream masks.
You are used for certain layers and mass sets for five at high end applications, such as analysts and large screen OLED Tvs that are manufactured on GE were smaller panels.
Samsung or the largest SPD customer recently reported plans to expand their Q D OLED capacity.
These new tools by optimizing the balance of throughput and resolution effectively map, our global factory into the sweet spot of this exceeded range of applications.
With the excess of our business in China.
We expect to operate her say at full capacity for the remainder of the quarter.
When we designed our first a cleaner and we include the option for future expansion within the buildings footprint to allow us to grow without the need that bricks and mortar.
Despite can work in China is very strong and we've established ourselves as the domestic and marketing technology leader. We are therefore, considering accelerating our phase two investment to extend this leadership position and realize additional financial benefits more quickly.
Enhancing our return on investment.
29 team was a great year for photronics.
We've made significant strides towards meeting our long term targets.
Revenue is running at record levels across the organization.
Production is ramping into new manufacturing facility.
As easily as utilization levels rise, we anticipate growing earnings more quickly than revenue.
We have a clear line of sight to additional organic growth.
Our balance sheet is strong and can support investments for profitable growth.
We're very optimistic.
At this time I will turn the call over to John provide commentary on our performance and outlook.
Thank you Peter good morning, everyone.
We saw strength across nearly all of our end markets in the fourth quarter, resulting in record quarterly revenue of $156.3 million.
13% better than the previous quarter, an 8% better.
The fourth quarter of last year.
Sectors that have been strong remains strong and other sectors strengthened during the quarter.
No manufacturing facilities in China contributed $11.2 million and revenue further fueling growth.
It was a great quarter and demonstrates the benefit of our broad and deep product lineup and global footprint.
I see revenue was a record in the fourth quarter up 12% sequentially at 1% year over year.
Demand growth was broad based with increases in logic and memory that across technology nodes encompassing high end to end mainstream.
From a regional standpoint, China, and Taiwan or notable areas of strength, while revenue by sea product shipped into China grew significantly 72% from the previous quarter. The predominance of these masks were produced outside of China.
As reported previously qualification for IC products takes nine to 12 months. So production from our new gentlemen facility will be increasing over the next few quarters, providing another leg of growth as those qualifications are completed.
Underlying IC market demand is expected to be stable to improving influence from was by normal seasonality.
MPD revenue was also a record 15% higher than the previous record established last quarter.
The drivers remain the same strong demand for mobile displays and increased production from our Herthree facility.
We do not anticipate any weakening of these trends. So we expect to growth in her favorite continue as production ramps.
Gross margin improved sequentially the impact from operating leverage expanded margins to 24.4%.
Operating margin also improved to 13.7% the effective increased revenue and lower operating expenses.
The headwind from China operations was $4.1 million and our hurford operation was close to breakeven in Q4.
Tony or operating expense margin, excluding China expenses was essentially flat year on year.
Other expense was $6.1 million almost entirely due to unrealized foreign exchange loss, primarily in China and Korea.
Minority interest was essentially flat compared with the third quarter earnings from our Taiwan, JV were partially offset by losses from the China JV.
This resulted in net income attributable to photronics inc. shareholders of $9.7 million.
Theme cents per diluted share.
Cash generated by operations is quite strong at $48 million for the quarter. We also received $5 million and government incentives from China.
We spent $17 million for capex in the quarter and paid 19 million in dividends to our Taiwan JV partner.
We also repurchased nearly 1 million shares of our common stock in the quarter for $11 million.
For the fiscal year 2019, we repurchased 2.1 million shares for a total of $22 billion.
Since inception of our share repurchase program in July 2018, we have spent 45 million to repurchase 4.7 million shares.
The share repurchases combined with the redemption of our convertible debt over the last few years have reduced our reported diluted shares by 15% from the peak in 2015, creating additional value for our shareholders.
Capex for the full year 2019 was $177 million slightly less than our estimate of 185 billion.
We expect that difference together with the approximately $25 million deferral, we mentioned during our third quarter conference call to be spent in early 2020.
For the fiscal year 2020, we expect total capex to be approximately $100 million, which includes the 2019 carryover.
Before I provide first quarter guidance I'll remind you that our visibility is always limits.
Backlog is typically only one to two weeks and demand for some of our products is inherently uneven and difficult to predict.
Additionally, the ASP is for high end mask sets.
Right.
And as a segment of the business grows are relatively low number of high end orders.
And then have a significant impact on our quarterly revenue and earnings.
Lastly, I will caution that any development from the ongoing trade discussions between use in China or from tensions between Korea, and Japan could potentially have an adverse impact on our industry and therefore our results.
Given those caveats, we expect first quarter revenue to be in the range of $146 million to $154 million.
The first fiscal quarter is typically a seasonally slower quarter photronics, but we assume that our IC markets will be stable to improving.
And the strength in mobile displays will continue to fuel the PD business.
We also anticipate increasing contribution from our new China facilities.
Based on this revenue expectation and our current operating model, we estimate earnings for the first quarter to be in the range of 13 to 18 cents per diluted share.
At the beginning of 2019, we spoke of a cautious optimism.
As market conditions appear challenging than we needed to complete and equip our new China facilities.
What we were encouraged by our financial strength and market position.
At the end of the year, we're looking into 2020.
We believe we have performed well and.
A great position.
We are financially strong and our market position is better than ever.
We are optimistic and look forward to even greater color punishments next year.
I will now turn the call over to the operator for your questions.
Thank you as a reminder to ask the question you will need to press star one on your telephone.
A question pest upon key please stand by probably compared to 10 day roster.
Our first question comes from the line of Patrick Ho with Stifel. Your line is now open.
Hi, Good morning, it's Brian Chin audits are Patrick Thanks, so much for taking my questions and congratulations on the results.
Maybe.
First question here just.
Peter maybe to go back and just to clarify something in addition, so 100 million Capex for Siskel 20, which includes a carryover does that include that potential acceleration. Peter you you reference in terms of the phase two capacity installing her say and also would that still use to effectively double your output from that to say.
LT and from a timing standpoint, how quickly can you install and ramp that capacity.
Okay. So the 100 million is.
The approximate 200 million is $33 million carryover.
And in addition to that.
We would describe is maintenance capex at our current run rate.
Number is.
Current run rate 625 million, 10% of 625.
The two and a half million add 33, you can get approximately 100. So there is no.
Capex for the next wave.
In her fan that number.
The magnitude of.
The Capex will dictate.
On a revenue uplift.
That we can achieve right so.
We have not.
Definitively made up or mine exactly how much doing that.
And when but our global factory sold out we have no more capacity, we have returning business away from multiple customers.
We're.
Market leader in amyloid displays so.
The demand there is tremendous.
So there's no doubt.
If we invest we can fill the tools I think no doubt.
So we're talking to customers were talking too.
The local government and we're trying to arrive at it.
This plan.
For the next wave that has the acceptable financial returns that were looking forward.
That's not done yet that's a work in progress.
Hopefully we'll have.
A lot more to say about that.
On the next call what we're getting we're getting close.
Timing of it is more difficult because the long pole Nintendo typically.
Can easily run.
Now anyways.
From anywhere from 15 to 18 months.
So.
That's the only.
The only challenge we have is the speed at which ore suppliers can respond.
So.
Everything else is.
Lining up nicely.
Okay. What was that 15 18 months was that a lead time on the tool.
Yep.
Okay got it so even if you made a decision.
This quarter.
It wouldn't be producing revenue within this fiscal 2008 rising there could be beyond that.
No not unless we can pull.
Pull a miracle right, but.
Highly unlikely yep.
Got it got it.
And it's kind of relate to that the China startup costs and it looked like being a kind of a 200 basis points.
Lesser headwind in this fiscal Fourq you.
What do you can sort of thinking in terms of fiscal one Q January and.
Yes, I guess albumin next question.
Hi, Brian Good morning, it'll be less in first quarter as we said.
Earth payables reach breakeven in the fourth quarter. So we expect that to continue improving and the effect from gentlemen, who will be.
Yes.
Yes.
Good.
Just to clarify that as John said her say is profitable.
Expected to make money in the quarter.
And we expect to that it will continue to make quarter every quarter.
So we're through that whole went out the other side.
And quickly.
Yes.
Yes.
I said, great sold out qualifications behind it so perfect making money.
And on the other hand.
We can accelerate qualifications the market pull might help us is helping us I think a little in that respect, but no revenue in lots of people and lots of fleet.
You know.
Create expense, but that expense.
As we reach the.
Let second half of the current year in moving into.
Next fiscal year should rapidly turned into revenue and profit. So it's getting less it's getting less because of the profit were generating.
In SPD and.
We'll turn the corner.
Late in the year early next when both PDN IC, you're making money.
Yeah.
Okay.
My last question. This is sands things out a little bit here, but it sounds like what was more of.
The headwind now shifted a little bit the Tailwinds fiscal Fourq, you in terms of China, and maybe China mainstream.
In particular in terms on the I see side of the business.
Okay curious can you sort of maybe calibrate sort of how your non China.
Hi, and mainstream business is doing right now, yes that encompasses maybe the memory market as well and also sort of how you sort of whether you think theres any sort of and tip temporary on sustained business coming from China based on sort of like you said.
Maybe buffering that might be happening in the China market right now.
No I think you've read my comments for a long.
We'll see the China momentum in China diminishing we don't see this is a temporary.
Blip on the radar screen Theres been a strategic shift in the market.
That isn't.
That in our view.
Is not living in the opposite direction.
China is.
Their foot flat on the floor.
And.
The market's part of it.
But also.
In the government's behind the government doesn't really.
I have the same.
Profitability.
Requirements that.
Normally enterprise has so China is moving to be self sufficient.
They see non Chinese.
Suppliers as strategic liabilities and the turn it back.
So this is not a temporary blip.
No material change in how the business goes.
Not too.
Not to diminish.
As far as the rest of the business is concerned.
You know this particular quarter.
Our memory business was up relative to the prior quarter.
There was down slightly prior to the quarter a year ago.
Given our customer base in memory, which is basically foundry DRAM and.
One very large non volatile player who's not really sensitive to the industry downturn, our memory business is going along quite nicely.
Through.
The last year up down a little bit not in a material change either way.
I do think that when we get somewhere around the middle of the calendar year and the overall memory market if.
It improves as many people think.
We should be in a position to build on our memory revenues.
So.
So we've seen a business the guidance for the quarter is seasonal softness.
And to the extent, it's offset by growth in SPD, we get to the top of the range and by the way they get to the top of the range SPD should be at or above its $200 million run rate that we projected so long ago.
So thats kind of how the quarters it.
And we really can.
Bill on the IC revenue beyond what we have because the agent network is sold out.
Right now and.
China has not yet in qualified so we can't ship revenue. So there's no IC revenue.
Come out of China now if the non.
China business, non China, Taiwanese business picks up.
I see we can.
These are IC revenue for.
So whether.
The second half the year is memory getting better or it's the gentleman capacity ramping and we see a nice.
Revenue trajectory for IC business in the second half.
Could be great or it could be good, but it's going to like the one or the other.
Got it okay. Thank you.
Thank you. Our next question comes from the line of Tom definitely with Davidson. Your line is now open.
Tom If your line is muted please UN mute.
Hi, guys I think you can you hear me.
Yep.
Hey, guys Hi, This is Frank Grant for Tom I. Thank you for.
Letting us is asking for your questions.
You talked about I see coming back in time can you speak a little more to it in terms of what is driving the return and spend again.
The memory or logic, and maybe a little farfetched, but.
Perhaps who were the main players behind it.
Yes, the demand in China really is both memory logic high end mainstream.
It's.
Yes.
It's very broad base.
It's big customers like while your spec cabinets, many other smaller customers with.
Factories.
That are ramping and coming online.
So.
Yes, really quite broad I think generally speaking.
Some real bright spots.
Our.
If the movement of digits display driver business to 28 nanometers, and you've heard a lot of that how strong appetite market is hill vibrate the display businesses, where there's a big shift underway right now at the 28 nanometer nodes.
Pushed the display driver business down there.
Fiveg.
Isn't unbelievable piping driver.
In the China business right now.
Both in country and then the movement of the.
Mobile.
Products.
Down there.
What is engaged in road initiative, the China manufactures are really following the money.
Around the world.
As you know China expands it.
Global footprint.
So.
Automotive applications.
Real driver in our business.
Consumer products.
It's really hard to point to.
Any one specific.
Market, but generally aiotv local fiveg and display fall are.
Hitting on.
Bob eight cylinders in China right now.
And Taiwan.
Right because.
And Korea.
Feeding into that too because it's the non us.
Supply chain.
I think if other color and then as a follow up to Brian's question on Capex earlier.
So when you when you remove the carried over from this here you've got roughly 70 million.
Is it sort of the ballpark that you're thinking about moving forward as a maintenance level or where do your thoughts on that.
Yes, I think our view of maintenance cap ex is about 10% revenue right. So.
Hi.
That for US is that we see is a good target.
Going.
For me a little more some years, maybe a little less others.
So I'll just remind you a leading edges bogusky towards $40 million. So you don't need to by many of those to be at 10%.
Yep, Okay. Thank you for that and then run out you have in a four customers with long term agreements in China, how many of these.
Customers do you have the capacity to serve overtime.
Well, we're we're taking care of.
All of them I think.
You know to quantify Ed what we said was it represents about $300 million dollars a business over three year period.
So that's 100 million year on average right now that's.
Between 15, and 20% of our revenue, which is on one hand did a really nice solid base load, but it's not.
Something to overwhelms.
Our global footprint on the other.
And one of the reasons.
The herve such as success story for us as we ramp into an oversold manufacturing network.
And we've been working.
Yes.
Too.
But our IC.
Factory in job and into the same scenario you want to ramped into that oversold conditions, who.
As the business Commons, whereas the fat or that has the capability comes you can sell it.
So we feel right now.
You can take on wanting it is lucky, but the other half integrate the factory we've been working on it for almost three years, where exactly the same spot and John and that we were two quarters ago in Herve, we can sell everything we can may.
Okay. Thank you and then lastly from us.
Thank you for the color regarding the headwinds in China, you said that the effect has been concentrated and relatively small.
Good to sort of quantify what you're baking into your guidance for the first quarter.
No the headwinds in China were in Q3, we mentioned that the business was.
Impacted what happened.
In what happened over the summer.
He has some very prominent companies.
Put on unrestricted.
On trade.
There was disruption in the product development Roadmaps.
But.
Generally.
The Chinese electronics manufacturers.
The conclusion that by buying from Chinese companies are Taiwanese companies and perhaps that they have.
Korean companies they can build their products may don't quite work as well as they thought they might but they weren't well enough.
And when they came to that realization, we saw a real acceleration in our.
Asian IC business.
Acceleration that for me was really remarkable.
So.
That happened in the fourth quarter. So Q3 was a slight headwind in Q4. It was a significant tailwind regarding Q1.
There is the whole world.
Tektronix business works on a product development cycle targeted at the Christmas holiday season, some people don't celebrate it but generally there's a huge product cycle that goes on every year and have the shelves full for the holiday shopping season, so far our business what that means is this quarter.
Which includes Christmas you sort of alone. So we work on a current agree on where Q1 is typically the lowest Q2 and Q3 are the highest and Q4 typically slides down between Q1.
Q3, that's how our business works every year.
In a flat market if there is.
And industry upturn.
It's on top of that Corey agreements industry downturn. It sits on top of that Corey you bring him so for.
Q1 is normally the seasonally slowest quarter and the guidance at the bottom.
The range reflects that that's what we've looked like in a flat market with season is with seasonality going on top 5% down.
Well, what John said and what I reiterate it is we could be flat, which is 5% up.
Depending on how strong the growth and have PD is in the quarter to offset the normal seasonality across the entirety of the business.
So that's how the guidance comes about.
All right. Thanks, so much.
Thank you.
Ladies and gentlemen, there no further questions at this time I would now like to turn the call over to Peter Kirlin for closing remarks.
Thank you for joining us this morning, as we move into a new year Port business is performing and we're well positioned to continue growing into 2020.
And beyond.
We're the leader and a merchant photomask industry with tremendous market position and leading technology.
Our operations are aligned with several secular growth trends such as the adoption of hamlet for mobile displays.
And we were proven investment strategy it is driving profitable growth.
Finally, before closing I would like to take this opportunity to once again, thank all our employees for their outstanding contributions throughout this year intuition have you want to safe and happy holiday season.
Ladies and gentlemen that concludes the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.
[laughter].