Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to Photronics first quarter in fiscal year 2020 earnings conference call. At this time, all participant lines ARNA listen only mode. After the speakers presentation. There will be a question and answer session. I ask the question during the session you would need to press star.
Then one on your telephone if you acquire any further assistance. Please press Star then zero.
As a reminder, this conference call is being recorded Wednesday March 4th 2020.
I would now like to turn the conference over to Georgia War, Vice President of Investor Relations.
Thank you Sarah Good morning, everyone welcome to our review Photronics, 2021st quarter financial results.
Joining me this morning, or Peter for one or CEO, John Jordan, or CFO, Chris probably ever see too.
The press release issued earlier this morning, along with the presentation material, which accompanies our remarks or available on Investor Relations section or what page.
Comments made by the participants on today's call May include forward. Looking statements include such words as anticipated believe estimate expect forecast argue.
These forward looking statements are based upon a number of risks uncertainties and other factors that are difficult to predict.
Actual results may differ materially from those expressed or implied we assume no obligation to update any forward looking information.
Before turning the cold Peter I'm pleased to announce Photronics will host an Investor Day, you May 29, 2020, New York City.
40 tells me coming soon.
At this time I'll turn the call over to Peter.
Thank you truly and good morning, everyone.
We performed well in the first quarter has sold design activity are leading market position enable us to deliver sequential growth in a quarter that it's typically seasonally weaker.
Design activity remain high during the quarter and revenue from our new China operations increased.
The only thing we improved revenues compared with previous quarter and the same quarter last year, but we achieved a record quarterly revenue.
Second consecutive quarter.
Well, delivering our 10th consecutive quarter of year over year revenue growth.
Our technology portfolio global operations and market position enable us to extend or streak of year over year revenue growth further validating the value of our investment strategy.
Moving down the income statement operating income relative to Q4 was negatively impacted by ramping compensation expenses.
At the there's several adjustments Blue line and earnings for the quarter were 16 cents per share.
Cash from operations was good and our cash balance increased during the quarter to $218 million.
We are well positioned as we prepare for next week I mean investment.
Beginning in PD market.
Before moving on I would like to offer a few comments on the current of voters.
Obviously, our priority has been take measures to protect the safety and health of our employees.
While maintaining the business.
Our sites in China, Taiwan, and Korea, and implemented policies to keep our employee safe well complying with all governmental regulation.
We are actively managing our suppliers coming I mean minimize any impact to our operation.
So far we're moving along at our standard setting and by 24 pay.
Effectively business as usual.
As far as our customers are concerned.
It's difficult to quantify the impact the virus is having on their operations.
Situation is very fluid.
So far we've seen some design leases push out in both our Asian, I see and NPD businesses.
And our second quarter guidance has been reduced to consider the associated impact.
Shifting away from the virus and back to our business strategy. During the last several years, our investments have been focused on China.
In 2016, we predicted that China, we'd be a region of growth for both I see in MPD masks.
Our country was heavily.
Investing in production capacity as part of their made in China 2025 initiative in technology developed was advancing in logic memory and display the wind able Chinese companies to expand their market share globally.
In addition, many companies from other countries, we're establishing a manufacturing presence there.
Effectively providing us with existing.
Versus new customers in China.
Based upon our assessment of the predicting growth we filed two parallel strategic hi.
First supposed to develop new business with the Chinese IC and display manufacturers.
It's required establishing a strong sales presence in the country and working hard to identify and partner with the domestic market leaders.
The outcome of these efforts is obvious in our financial results.
Our China revenues have grown significantly over the last several years expanding at a 72% compounded annual growth rate since 2016, and now represents 37% of our total revenues.
Our China business is comprised of a few large customers as well as many smaller developing companies.
And split somewhat evenly between IC SPD, creating a diverse revenue stream.
In summary, we are now enjoying the benefits what has been a deliberate long term initiative do help a broad base of business across the country.
The second part of our strategy with can build and equipment to stay the art manufacturing facilities.
We now have an M. P. D facility in her say that is running at full capacity.
Enabling us to cheat, a new enterprise record a $52.8 million in Q1.
Which was up 77% year over year.
And I see facility and John then isn't the process of qualifying several customers and ramping production.
These plants are critical pieces of an integrated global network of 11 manufacturing facility.
Good evening list to meet all of our customers technical requirements and firmly establishing photronics as the market in technology leader among the merchant put on asked manufacturers.
We expect to finish the ramping John then by year end and in doing so we will conclude the first phase of our expansion into China.
Therefore, we're currently developing the next phase of our growth strategy.
And the first step will be to build upon the momentum we have already established in PD.
The objectives that the second phase will be the saying that the first.
Extend our market leading position.
Sure the right technologies in place to support our customers product roadmap.
Align our operations with secular growth trends.
I work with customers secure long term purchase agreements.
If we do these things correctly, we should realizing improved return on capital further enhancing shareholder value as part of our disciplined count topical capital allocation strategy.
We plan to be more specific with our long term plans, we host during investor day in May.
As our organization in the markets, we serve have evolved over the last few years.
One thing remains constant is important civil fog Murphy till that tronics manufacturing process.
No matter, what happens with hadn't market trends are process development.
The thug if he is the critical bridge from circuit design to advanced manufacturing.
Easy deep you V. Eight inch 12 inch 14 inch Fiveg artificial intelligence folate Atwood LCD micro leidy.
And advanced packaging.
All of these require foot on us.
And developers of these products need a trusted but I mean, its partner that can do the right technology at the right time into the right. Please.
Bridging the convergence and manufacturing and design.
[noise], combining operational excellence and technology leadership.
Little bit two outstanding customer service, while being the low cost producer has been the foundation of our success.
He's competencies had carried us through our first 50 years and I'm confident they will continue to do so in the future.
We have made a great start in 2020 with our 10th consecutive quarter of year over year revenue growth another quarterly record for photronics.
We believe these results clearly demonstrate that our strategy is enabling us to outgrow the photomask market.
I would like to thank all of our employees for their outstanding contributions in Q1.
And while there's certainly some near term challenges ahead, we are optimistic with guarding the long term potential or business.
At this time I will turn the call over to John through like commentary for our performance and outlook.
Thank you Peter good morning, everyone.
Despite typical first quarter seasonal softness we delivered record revenue this quarter, 2% better than the previous record last quarter.
At 28% better than last year's first quarter.
We continued to realize the benefits from our growth investment strategy that has allowed us to bring more capacity and capability.
The market over the last year, especially in the important China markets.
Our performance during the first quarter 2020, as a continuation of our strong 2019 results.
Record MPD revenue was driven by demand for example that and LTPS mobile displays as well as GE 10.5, plus for large format TV.
Display technology remains a vital point of differentiation for many of our customers.
And they rely upon us as a trusted partner to enable them to meet the specifications.
The IC business achieved double digit growth year over year, but decreased sequentially in line with seasonal trends.
Lower gross margin due to costs are ramping the China businesses and increased compensation cost.
Melted in an operating margin of 10.2% somewhat lower than historic 13.7% margin in Q4.
First quarter results included $2.9 million operating loss in China.
Although we point out that our herve facility operated at a profit in the quarter.
Other income of $3.7 billion resulted from a foreign exchange gain from Remeasurement of U.S. dollar denominated assets and liabilities.
Books of our foreign subsidiaries offset somewhat by increased interest expense in China.
The tax provision of $9.1 billion resulted from the jurisdictional mix of profits and losses.
Anticipated for the fiscal year, together with tax holidays, and investment credits and certain foreign jurisdictions.
And valuation allowances in a number of jurisdictions.
The net income attributable to photronics, inc. shareholders was $10.3 million or 16 cents per diluted share.
Cash flow generation was strong once again, we generated $31 million from operations invested $14 billion in capital expenditures and returned 11 million to shareholders.
Through repurchases of common stock.
Cash balance at the end of the quarter was $218 million and we have $54 million in that.
For the fiscal year 2020, we expect total capex to be approximately $100 million, which includes the previously discussed 2019 carryover.
Plus approximately $35 million of equipment that will be financed through a lease.
Before I provide first quarter guidance I'll remind you that our visibility is always limits as as our backlog is typically only one to three weeks.
Demand for some of our products is inherently and even in difficult to predict.
Additionally, the Asps for high end mask sets are high.
And as this segment of the business grows a relatively low low number of high end autos can have a significant impact on our quarterly revenue and earnings.
Lastly, I will caution that any change in trade policy will then the countries in which we operate.
Could have an adverse impact on our industry and therefore our results.
Given those caveats, we expect second quarter revenue to be in the range of $145 million to $155 million.
While the general end market environment is healthy and we anticipate the longer term trends remained positive.
Our revenue expectation incorporates a wider range to account for uncertainty related to the Corona virus.
Based on this revenue expectation and our current operating model.
We estimate earnings for the first quarter to be in the range of 11 cents to 17 cents per diluted share.
The second quarter to be in the range of 11 to 17 so.
We're pleased with our first quarter performance and believe we have made a good start to meeting our full year objectives. The near term challenges related to the krona virus has the potential impact our business and are being actively manage.
Long term, we believe the impact will be minimal.
We have focused on executing our plan.
I'll now turn the call over to the operator for your questions.
Thank you.
As a reminder to ask a question you need to press Star then one on your telephone to withdraw your question. Please press the pound key.
Please standby, we composite una roster.
Our first question comes from the line of Tom dismissed with D.A. Davidson. Your line is now open.
Yes, good morning.
Just a quick question on the crude as learners isn't where you can quantify how much of the impact on your first or second quarter Guide was sounds like some the text boasts the I see this lepton businesses are priests seeds stable to strong right now so I'm curious how much of the here are you concerned.
That Tom normally.
You look at our business, great seasonally we would guide up flat to up.
In.
The second quarter.
So we have.
10 million plus of downdraft.
Baked into the midpoint of our guidance.
For the impact of the current of Iris on our business.
Okay. That's very helpful. And then when you look at what's driving that impacts.
It's my you mentioned that most of your key components come from outside of China. So I wouldnt seek to supply would be the big issue is it just the uncertainty of the customers at this point assumes that.
Turns business during the quarter.
Well you know.
Sitting right in our shoes, we have four key constituencies to manage as we go through.
The trajectory of this.
Particular.
Then we have suppliers, we ever employees, we have our customers and of course, we have our shareholders. So there's four communities that we need to take care of as far as to our employees go. We continue to operate we always do through you know Chinese new year's.
Yes.
The regulations in different places have evolved our employees as the walk through that front door of our facilities get their temperature taken.
And they are provided with masks and we've isolated critical groups in our facility. So someone who ends up six we don't end up with.
You know a key group, but that would otherwise.
In a b.
You know decimated.
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Well so far.
Its operations as normal with some wrinkles.
As far as the suppliers are concerned you know, particularly from regions above we view as unreliable.
We've raised our inventory levels. So our materials are all in good shape than we have no more than enough to contain to run our factories.
As far as equipment goes.
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Not every supplier is you know on the job.
Supporting our tool set.
Some of them or calorie.
Having said that we as a company do a lot of self maintenance and we've developed in order to do that centers of excellence and video technology to allow service engineers in one location to guide service actions in another.
So we have deployed those actions with the suppliers who can't seem.
It could get up the hot spot to show up when.
There is a major problem with one of their tools.
And as I sit here right now there is always single tool in our manufacturing network anywhere in the world that is down because supplier cannot get to it.
To fix it because we're fixing it for them when we need to.
So as far as the suppliers go it's not been as smooth as.
As we'd like but you know we've taken care of it.
Now moving on to the customer base.
As I mentioned in my remarks, we see projects being.
Actively pushed out for.
New product releases now we're very.
Aggressive in the marketplace, where you know shouting from the.
Hi, its mountaintop that we're operating work.
No in business, we're taking orders we going to the extent for example, we've actually delivered.
At PD radicals into will Han happens to be that the person who drove the truck. When they came back has to be inquired team for 14 days, but we've gotten a job done.
So.
Hi.
We're we're moving right along but there's no doubt that particularly what I would call, yes, hi complexity.
Jobs some of them are pushing.
And therefore, our guidance is pushing.
With that.
So that kind of I think covers three of the four publix and of course, we're on the phone.
With the Investor public today.
You guys know.
Where where we are but.
Yes This company.
Is full of people that are accustomed to adversity and the first answer always is it can be done it will be done and so far the first answer has been the answer that has stuck so.
So far so good.
Okay. That's very helpful. And then finally, a long term question. We start to look you know what a second season.
Like some of the Gen 10.1 facility.
Mostly what type of capitals that going to require.
Hello. This is going to stay tuned stone you see the feedback through either.
Well you know it curves.
You know.
For me anyways right.
You are having a little conversation here amongst us before the call started three years ago. What we said you guys was.
What her fans ramped SPD revenues.
Would exceed $200 million.
Right and we'd expect that the number.
The revenues in China would reach the 20 million dollar a quarter level.
Well guess, what right you look in the slide you'll see that.
You know the revenues in China breached the 20 million dollar level at our SPD businesses clipping, along at almost $610 million rate kind of remarkable that we're sitting here now three years later and it's not exactly what we thought but you know what.
It's pretty darn close and I'm very proud of.
So all the work team had to do.
To make that result happened so I would begin by answering your question by saying what we told you. We would do three years ago I think it's on Equivocating clear that we have done that and.
We have.
A good head of steam up and the next wave of investment and personally is going to be focused.
On the animal Ed.
Market.
We're in a very good position.
Mobile displays.
China is likewise being very aggressive and we will aspire to.
We will expire to do the same thing again as I said in my remarks, we're right now act aggressively.
Working into contracts with customers.
Depending on how successful we are with that activity the wheel.
It will moderate or govern the indicted investment we're willing to me. So by the time, we have the shoulders meeting in May I think we'll be wrapped up with.
The business development effort with the customers and at that time will tell you exactly what the capital investment looks like.
Okay, well, thank you and good job in a tough environment.
Thank you thanks.
Thank you. Our next question comes from the line of does Richard with Northland Securities. Your line is now open.
Yes, thanks for taking the questions.
Give me a little bit of color on the push out you see is that FTD I see is one is the Korea. It just any any color you can provide.
Yes, so it's both.
It's both.
PD and I see the case of our Ed PD business.
Yes.
Where we were I think very confident we'll get to keep our factories full.
What will happen during the quarter is.
We will see a shift in the business mix and of course that affects the top line, particularly in 10.5, pushing how it affects our topline in SPD because of the value of a single reticle set.
So in SPD.
Factories will be full but the mix will be ideal.
I see we seeing.
Business impacted in China, Taiwan, and Korea, all three and we expect that.
Through the quarter at least.
There will be less tape outs.
In those.
Three markets, we're seeing it actively.
Right now no effect outside of those three countries, but certainly affect in effect within all three of them, but as I said.
What we see is most definitely baked into the guidance that we have.
Given.
Got it and then.
You mentioned that the driver that had to be quarantine for 14 days after diving into wander Koubei province.
He is the crude virus impacting your.
Cost is adding to cost in any material white.
It's not it's only so a couple of comments there is some good news is seen as some of what you're written on the Corona virus Gsis model gloom and Doom. So if we look anj Amen within the last two weeks at least up until last night. When I went home I haven't checked. This morning, there's not been a single new case.
As the Corona virus diagnosed and.
And John then in per Se in the past.
14 days there has been one so the effect.
The actions of the government in China seem to.
Locations were up operate anyways.
The bearing fruit so books to us tentatively like the situation in China.
It's starting to improve and we were sort of kind of seeing that with.
Some of our customers at the present time.
Two but where it's effective instead to that's on the cost line.
It is only really inefficiencies in repairing some of our tools and it's really not material.
So.
Yes, not much in effect, just more aggravation really operational observation.
Got it and then the lesson for me to just give me a little color on qualification of the new IC fab in not shop in China.
So where are you in one do you expect that to start.
Getting close to profitability.
Yes, so you know.
As we said, we I think we shipped the first reticles after there and.
In July for.
For the startup of the facility. So we said nine to 12 months right.
So I think we're.
Proceeding along that trajectory more or less as we expected.
Yeah, we ought to be seeing material revenue in the second half a year, we expected to come on strong at the ended the year right kind of like the SPD factory did.
Revenue coming on at the end of the year, maybe you're reaching.
A full production with the installed Toolsets Q1 of next year. That's the path. We're on so far I think we don't see any reason to change our our view of how quickly we're going to go.
Got it thanks.
Excellent execution, and what is a very challenging environment.
Yes, well like I said I'm very proud of our team.
We have a lot of new employees in China, but we have some old ones there and deal wins that are there are very accustomed to.
Aging adversity, and our new employees with the leadership of the old.
Hi.
I'm very pleased with how they have responded yep.
Thank you.
As a reminder to ask a question you would need to press Star then one on your telephone.
Our next question comes from the line of Patrick Ho Stifel.
Your line is now open.
Thank you very much a Peter maybe first off.
Looking at the Corona by this situation, but on the other side of it when things get back to normal.
How do you feel in terms of deep overall operations on a potential snapped back that once this situation gets resolved stuff starts getting pulled in.
On the demand obviously starts picking up again, how's your ability to ramp up in that space, particularly given that you do have two relatively new facilities.
Bush still in the process of ramping obviously, we have phase is up and running right now how do you feel about that scenario whenever it comes.
Okay.
Yes so.
As I said Herve basically was full capacity all quarter, how long, it's really great normal.
Yes, Herve isn't on mode now that I would describe as you know normal it's normal operations, there may not be quite as.
Stronger tree, yet as some of or other.
Factories, but.
It's really.
With all the challenges the local team has had to face.
As being tested.
As far as.
John that is concerned.
We're moving along the qualification.
Ramp.
And the speed at which shopping can respond to a snap back in the business is really going to be gated in my mind, but the number of processes that we have qualified when that snap back.
You know takes place now there'll be some bumps in the road I think you heard in my remarks, and John's remarks.
That.
Herve was profitable, but our gross margin this quarter was and what we expected or hoped it would be.
And the reason for that is we had.
You know qualification expenses, we had some material scrap so.
It's not.
At a 100% quite yet but progress I think is outstanding so if the snap backs in a quarter too.
You know I'm pretty confident we're going to be able to manage it.
With not a lot of or a win win not a lot of you know problems. I think also I would finally, just say that you may recall that we'd been kind of.
The PD operation.
We built that as quick as humanly possible the IC plant our AR.
There was a little more gated and it was one of the reasons, we could gain it was there's been a lot of cross qualification done between.
Our Asian manufacturing network, and our China customer base. So even if there are some struggles in Germany on which I don't expect.
But you never know.
Our Chinese customers or more broadly qualified across our manufacturing network.
I see business than any other geography in the globe.
So I think.
You know.
Well, no one where there and what health or were there sooner rather than later, but I think we're in good shape.
Great. Thank you and maybe as my follow up question.
You noted in your prepared remarks since the supply chain is it impacted from China specifically.
But you do procure supplies from a lot of other regions within Asia itself and there's some disruption there how you mitigating that issue in terms of both alternative suppliers are secondary suppliers how're, you handling and building the inventory or I guess during this morning.
Allergan period.
Yeah.
Yeah.
Yes, the cross qualification of suppliers is something that we do.
Every day as a normal course of business activity.
So we really not theres nothing extraordinary going on where you have a single point of failure and we have a fire drill.
But what we have done.
Is you know we have a strong balance sheet and where we.
Leveraged it to ensure that.
We have.
More than typical inventory levels, where we think there's any.
Threat of potential disruption, that's what we have done.
There is that you know, we've we created a global team and the team you know me a weekly and I think we have a good grasp of.
All the critical materials that we need and we have more than enough.
Great. Thank you very much.
Yep.
Thank you we do have a follow up question from the line of Tom just leave with D.A. Davidson. Your line is now open.
Yeah, you might its axle appear on the Germans ramp so how much of the business job that is going to be for new customers.
This is just replacing some business unit to your time would systems to China and then what's the facility actually in China and does that limited Jess intense.
Well you know the.
Tom you know this quarter.
Greg Q1.
We shipped.
58.6 million.
Of sales into China.
In 2016.
Right.
Our entire year.
Wasn't in China, and an equal our first quarter of 2019.
So we're almost at a $240 million run rate of shipments into China.
Now off the top my head I can't quantify how much of that as new versus old but.
The lion share of it clearly.
His new over.
The last three years.
Why is shared is new and some of it is.
New with is more within with customers you already have but the majority of it is.
Is that is completely new business.
So thats the best way can quantify for you off the top of my head.
We all get probably up to $4 million on a run rate basis of incremental business in China relative to 2016.
Okay, and then just on that same topic any impacts that you've seen.
Two subs.
He's looking at any given to extension.
Well I.
I think right everybody knows that.
They're one of the large is.
Customers have you know TSMC right and their product line is you know broadening.
Pretty extensively.
And it's broadening extensively because of the like.
Their own internal initiatives, but B you know the trade war.
If you want to use that binocular has accelerate their efforts to diversify their their product line to support fully the domestic manufacturing base.
So this is kind of.
Holding or both.
And.
In both China and Taiwan.
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And you know to the extent that.
More of that happens, there's even more business to the extent.
There's a slowdown.
You know sort cuts both ways, but long term.
It's clearly a positive.
Trend for us.
Okay. Thank you.
Thank you.
Ladies and gentlemen, there are no further questions at this time I would now like to turn the call over to Peter Kirlin for closing comments.
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Thank you for joining us. This morning, we made a great start in 2020 and remain on track to hit our objectives. This year.
Look forward to updating you as we progress.
Ladies and gentlemen that concludes the conference call for today.
Thank you for your participation and as such you. Please disconnect your lines.
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