Q2 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Photronics second quarter fiscal year 2020, <unk> earnings Conference call.
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Please be advised that today's conference is being recorded Wednesday may 27 2020.
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I would now like to handle accomplices over to support the war.
<unk> President of Investor Relations. Please go ahead.
Thank you Sarah good morning, everyone.
Our review of Photronics, 2022nd quarter financial results.
Joining me this morning, our Peter Kirlin, or Chief Executive Officer, John Jordan, Our Chief Financial Officer, Chris trouble or our Chief Technology Officer.
The first choice we issued earlier this morning.
Thanks, rich or what's your company's <unk> remarks.
Well on Investor Relations section or what page.
Comments made by your participants on today's call May include forward looking statements include such words I.
I believe the main extract for cash and argue.
These statements are based upon a number of risks uncertainties and other factors that are difficult to predict.
I don't mean differ materially from those expressed or implied we assume no obligation to update any forward looking information.
This time I'll turn the call over them here.
Like Detroit and good morning, everyone.
Before beginning our discussion I'm second quarter results and third quarter outlook.
Well they take a few limits the recognizer global workforce.
Outstanding response to recent challenges.
In February with our operations in China.
And extending globally over the last three months.
Or im pleased to have this fleet dedication commitment.
Customer centric attitude that enable us to continue operating tween customer expectation.
Isn't that started to evolve we quickly developed implemented a game plan to focus on four key areas employee health raw materials for customer.
Poured into maintenance.
Well these are critical for staying our global operations.
Of course, our site.
Women policies to protect our employees through health monitoring.
Actually no best practices to limit spreading the virus, including the use of personal protective equipment.
Comprehensive global 'cause it or policy.
Hey, buying smaller segments or workforce to work from home in accordance with local requirement.
Reinitiate regular internal meetings to monitor a global supply chain and addressing issues.
Continued to be direct contact with a raw material suppliers logistics partners.
Equipment service group.
There is any impact on our operations.
Because of these actions, we've been able to meet or customer spread on that I see.
The same quality and delivery performance could which they are custom.
Affected actively business as usual.
Truteam effort.
I'm very proud of our response.
We do on to second quarter results revenue was higher year over year, driven by U.S.P.D. as we benefited from stronger global demand as well as more capacity from our new Chinese factory.
Enable us to achieve year over year revenue growth.
11 consecutive quarter.
To the first half of this year.
Revenues for 8% ahead of last year's peaks.
Which was a record year for free trial.
This demonstrates the performance we can achieve.
Whether expanded global footprint.
Yep.
Really even greater growth in the future.
Both our Chinese factories, I C N P D compete or ramp and our product mix is better optimize.
Revenues dropped sequentially.
I appreciate the borders first in China, and then to a lesser extent across the globe, resulting from the extent of Chinese new year shutdown.
And subsequent worldwide mobility restrictions to combat the Corona virus.
The impact was filled most strongly into mean for sotomayor skews and I see foundry at high end display production.
Fortunately, you're already beginning to see or sales in these markets improve.
Well there is uncertainty ahead, we're cautiously optimistic regarding the overall market outlook for the down for the fiscal year.
For most of our IC customers products.
In doing the same show and operations have not take interruption.
Whoever today's device designs are complex, requiring large teams and engineers.
Approval, we often have multiple layers.
But in any of our customers engineers working from home design verification is more difficult.
Which seems to have slowed the pace of design releases early on I stick adjusted to remove working conditions.
Based on an order uptick.
During April and May it appears that design teams are adjusting to the remote work setting.
Or in some cases have returned.
To the office.
We believe the companies are moving forward, we didn't reduction next generation devices.
Anticipation of a recovering economic environment.
As far as SPD is concerned all three of our factories were fully during the entire quarter.
However, I think suffered in China.
Significant decline in June 10.5, plus booking.
We do not believe we lost market share.
But in state kind of current simply ran existing product.
Pushing out the timing of new design releases.
We're already seeing cooking three down in may with immediate blowing a slate to more.
He wants to expect GE 10.5 business back to normal, but he ended the third quarter.
Earnings were impacted by the decrease in revenue.
We always keep the canine on cost to maintain our status.
As the low cost producer.
And this quarter was no exception.
Due to this focus we delivered earnings of 10 cents per share.
We improved the strength and flexibility of our balance sheet during the quarter.
Increasing our cash balance to $230 million.
Joe thing more in a few moments, but we believe we're well positioned to navigate this period of market uncertainty as well as to execute against our strategic growth objectives.
To summarize what we saw in the second quarter.
Our team has responded well working with our partners across the supply chain with no meaningful disruption to our operation.
Well maintain health and well being of our employees.
However are customers pushed out orders.
Those were limited primarily China.
We are seeing improved bookings in April and May.
Theres too much uncertainty regarding future economic growth is takes a worse is behind us.
However, im extremely pleased with how we have responded.
Encouraged by current trends.
During this period of uncertain dynamic market conditions. One thing has not changed is our commitment to investing growth.
Investing is not new to us.
Well our facilities in China performing well.
Caring for the next phase of our growth strategy.
This will entail targeted investments in display.
We recently placed an order.
For a second precision 800 mass brighter for my chronic.
Total is scheduled to be delivered earlier calendar year 2021.
We're also scheduled to receive two precision Hayes lighters.
Writers in 2021.
The addition of the three machines to already formal lineup will fortify our leadership position.
According to the most advanced and brought a technology portfolio available.
We have the flexibility to install these.
New tools in any of our three SPD facilities in Asia.
And we will select the best location to serve our customers, while optimizing our financial return.
Total investment, including any additional support tools will be in the range of $50 million to $70 million.
Depending on the location of each mass brighter.
The <unk> to support this investment.
We have entered into it.
Your purchase agreement that collectively represent a business commitment in excess of $40 million annually.
There are multiple market factors driving a need for these advanced tools.
Primary among them is strong and growing amyloid demand.
Most manufacturers or premium smartphones have transitioned to animal it.
And more and more metering models are adopting the technology.
The rest of Fiveg technology is expected to accelerate this transition.
Second high end tablets and laptops.
Now the only to migrate to superior animal it displays.
Finally payment smartphones continually talk more innovative display technologies with greater really solution and more features.
Such as integrated fingerprint sensors.
Discrete design and manufacturing complexity.
Thereby increasing number of mass per said.
And let's face it Campbell at mass that has 12 layers.
For the most advanced can have up to 25 players.
The only to the number of layers increase.
But there are more critical layers further enhancing the value we provide.
Our new tools will enable us to better serve this growing market extending our market leadership in protecting our technology leadership.
In addition to growing hamlet demand for mobile applications Green Korean panel producers are in the process of shifting production.
From LCD and OLED for large screen TV.
Okay.
Some of its intended to provide competitive differentiation based on technology.
I think advanced display makers innovate to maintain their technology leadership.
It will partner with them to enable them to deliver on their strategic objectives.
Our new tools.
Especially the P eight right.
For the perfect solution to allow us to satisfy this demand.
Before concluding I would like to speak to the recent rulings by the U.S. Department of Commerce.
Our first order business it to understand how the rules apply to us.
And to ensure we are in compliance.
Fortunately.
PD so demands are not touched by U.S. technology or suppliers. So they do not apply.
Regarding IC Photomasks based on our initial work, we believe that we should be able to comply without significant interruption.
As we all such ruling.
It often takes some time to fully understand and adapt to the implication.
Well, we do not currently anticipate significant changes to our business outlook.
The trajectory of our business activity during the second quarter and into the third quarter has been encouraging.
Current booking activity.
Moving on a positive direction and both are I see in SPD businesses.
I believe the underlying long term trend that we've aligned our strategic growth objective with have not changed.
The exact profile the business in 2020 is uncertain and remain confident on our long term outlook and believe that we're in a strong position to deliver.
At this time I will turn the call over to John to provide additional commentary on our performance in healthcare.
Thank you Peter good morning, everyone.
We performed well during the second quarter and manage our business through very challenging circumstances.
Revenue of $142.8 billion improved 9%.
Compared with the same period last year, albeit down 11% sequentially in some customers, particularly in China.
First our borders we believe that the order rate order rate will recover and indeed, we have already seen improving trends during our third quarter.
I see revenue was lower compared with both the previous quarter and the same quarter last year.
Well that half of the sequential variance in IC revenue.
Due to lower demand from China foundries as their operations.
Were impacted by the protracted Chinese new year shutdown.
FCB.
Revenue improved over last year as additional capacity in our new perfectly facility expanded output.
On a sequential comparison the revenue declined due to softer demand in China as customers pushed out orders, particularly for GE 10.5, plus and Pamela.
We were able to keep our NPD plants running at full capacity, albeit with a mix of product not as favorable to the top line.
Both gross margin operating operating margin moves in line with revenue trends.
During this period of economic uncertainty, we intensified our perennial focus.
On cost control.
We accelerated global cost reduction programs and we are challenging all spend to ensure we are properly prioritizing expenses.
SGN a expense in the second quarter was nearly a million dollars lower than the previous quarter essentially equal to the prior year quarter.
Year to date SGN expense declined as a percentage of revenue from 10.6% in fiscal 2019% to 9.1% in fiscal year 2020.
Overall, opex increase nearly 1.2 million from the first half of fiscal 2019 due in large part two increased R&D expenses, resulting from the many new product qualifications in several of our operations.
Total opex as a percentage of revenue decreased from 13.6% in the first half for fiscal year, 2019% to 11.9% in fiscal year 2020.
China effect on operating income was reduced to just about a million dollars in the quarter.
Margins in the second quarter were reasonably go to the circumstances, but we expect to do better and we'll continue to drive costs out of the business.
Other expense of $1 million resulted primarily from the foreign exchange impact re measurement of U.S. dollar denominated assets and liabilities.
On the books of our foreign subsidiaries together with interest expense primarily in China.
Tax provision or non controlling interests were inline with expectations, enabling us to delivered 10 cents per diluted share for the quarter.
We are in a very strong financial position with sufficient cash manageable debt.
And ample liquidity, including our unused $50 million revolving credit line that is available if needed.
Our cash balance increased $19 million during the quarter. A result of investing 16 billion in capex and repurchasing $6 million of our common stock from the 31 million, we generated from operations and 10 million of government subsidies and contributions from non controlling interests.
Earlier in the second quarter, we made the decision to terminate our share repurchase program out of an abundance of caution.
In consideration of the uncertainty in the current environment.
A desire to use this vehicle as a means of improving shareholder value has not diminished.
And we anticipate resuming this activity.
Appropriate time in the future.
Our forecasts are total capex for fiscal year, 2020 will remain that approximately $100 million, including about 35 million for equipment that will be lease finance.
As always we have some flexibility on exact timing of capex to allow us to respond to changing market conditions.
Before I provide third quarter guidance I'll remind you that our visibility is always limited as our backlog is typically only one to three weeks.
When demand for some of our products is inherently uneven and difficult to predict. Additionally, the as piece or high end mask sets are high and as this segment of the business grows a relatively low number of high end orders can have a significant impact on our quarterly revenue.
And earnings lastly, geopolitical risk may have an impact on our operations. The operations of our customers are suppliers or end market demand as governments announce restrictions to Toronto to address.
Broader virus or changes in trade policy.
Resulting in an adverse impact on our in this industry and therefore our results.
Given those caveats, we expect third quarter revenue to be in the range of $145 million to $155 million.
End market demand trends for IC and SPD appear to be positive as we get well into the third quarter and we anticipate a longer term trends remain positive. However, it's difficult to ignore the macroeconomic uncertainty and we have attempted to incorporate this when developing our third quarter outlook.
Further as a result of this uncertainty, especially as it relates to demand during our fiscal fourth quarter. We are withdrawing full year fiscal year 2020 targets that were previously and those.
Well, we may still meet these targets the confidence level in doing so is reduced by these uncertain demand environment.
Based on our revenue expectation in current operating model, we estimate earnings for the third quarter three in the range of 11 cents to 17 cents per diluted share.
These are certainly challenging times and as always during periods of uncertainty we increase our focus on photronics longstanding.
Core competency of being the low cost technology leader delivering high quality photomasks to our customers.
Successful execution of these competencies combined with our financial strength and flexibility should enable us to overcome these challenges and emerge stronger and better able to serve our customers evolving needs.
I'll now turn the call over to the operator for your question.
Thank you as a reminder to ask the question you would need to press Star then one on your telephone to withdraw your question. Please press the pound Keane again that is star then one if you will like to ask the question.
Our first question comes from the line of Tom Diffely with da Davidson. Your line is now open.
Yes. Good morning, Thanks for the question.
So just going back to the guidance you gave for the the April quarter.
Todd you're expecting about 10 million dollar impact from Covidien 19, curious what drove a little bit of upside to that was the domestic China give a little softer or was it the impacts to the rest of the world.
Yes, the original guidance did not contemplate.
The virus.
Rolling through.
Europe in the United States.
So if you look at or quarter about 75% of the loss of revenue came from China.
The other 25% came from the us in Europe and that was not contemplated.
In the guidance when we gave it so.
That is more or less how the quarter.
Yes.
The drop in revenue split out.
Okay.
Is there anyway to quantify the cobot impact you have embedded in your guidance for the.
For the end of July quarter.
Yes, well.
If you look at our year right Q1.
Was just shy of 160 million. So we were at a 640 clip.
If you look at the second quarter, we had a fee.
So February was 48 million March was 44.
April was 51.
So.
When you look at our guidance for the current quarter and you look at the April number doesn't take a lot of imagination.
To determine where it came from.
Okay. It sounds like you're not seeing any end market demand disruption.
You know outside of the delay you saw from the the design activity early in the quarter or I guess in the March timeframe.
Yes, we saw big dip right.
March we sold a hangover from the Chinese new year shuts down.
Which I think we all know extended several weeks beyond what was originally intended.
The effect.
US in Europe, starting to be felt.
So that was a big gig.
Where we sit right now right I would still.
Say that.
Overall demand is down mid single digits as a result of the overall economic hanging over.
From Cobot 19.
Okay, Great and then I'm doing.
Yes, sorry, Tom relative to what it would have been passed and it's.
Yes.
Okay, and then really in your comments on the Commerce Department. It sounds like you're withdrawal of the full year guidance is really a cool that impacts not.
Not any impact from the new Commerce Department rulings.
That's that's absolutely correct I mean.
No one knows.
What the fall will hold.
I think the only thing that we can say definitively is the virus will not have left the spot.
So what its profile looks like.
In the fall is anybody's guess.
Well I will say is if you look around Asia.
Korea, Taiwan, China.
These are.
Significant markets for us.
You know somewhere between 70% of our revenue.
Is coming from the Asian markets.
Compare their ability to.
Manage the virus.
This spring.
This is the west it was very favorable.
So.
If the fall is a replay of the spring.
Everybody should do better because everybody should be better informed.
And.
No we're hopeful that.
No.
The effects will be quite modest in Asia don't really know about your than North America.
So.
This is why were.
Withdrawing.
Full year targets, we do that with lots of disappointment because.
It's very clear we were with 11 quarters of year over year revenue growth.
In Q1 being what it was we were well.
We were in fact, the head of our play indicate the 638 cents.
Having said that.
The current quarter is a significant step.
Okay. So.
We're.
We're cautiously optimistic.
Okay I understand and then finally from me just maybe technology questions, probably so Chris I guess.
She moves to adoption of video Levy, how does that impact to slow to masks.
Sure. Thanks, Nelson Meneely de that's a technology with a larger size early pieces you know, it's mostly applicable to two applications kind of very large TV signage that sort of thing and then it's kind of dynamic backlighting in regular displays so in both.
So as you know they need a driver circuitry.
They're not as complicated to operators organic Ltd, but still the driver circuitry, it's fairly complicated and we see a pretty healthy.
Mask profile for many ltd, particularly for the dynamic backlighting, no you're going to meet some additional circuitry to make those work. The Michael Ltd. Those are kind of direct drive fairly de similar to animal would but using inorganically piece.
Said kind of story on the surface, Italy. These are relatively easy operate but to get the right control on the displays you'll have to can you have to operate currently voltage just like all is so we we see pretty strong profile for lithography depressed demand from that really be as well.
Comparable kinds of mass counts, but for some of the integrations cadence, perhaps even higher.
Okay, great. Thanks appreciate that thanks for your time today.
Thank you Tom.
Thank you. Our next question comes on the line of Gus Richard with Northland Securities. Your line is now open.
Yes, thanks for taking the questions.
Just quickly can you talk about the normal linear already in the quarter.
And was Q1 unusual in that.
In that respect and kind of what is typical linear already in Q2.
Yes Q2.
If you compare our business right as a cardium Graham.
Great. Okay. The Cardium Ram has the lowest year over year.
Correlation based on the deal for the holiday.
Season of products. So if you look at our business, where we see normally a definitive profile.
Is.
Q1 is typically.
A down quarter Q2 in Q3 step up.
For the holiday season in in Q4 steps down as result of the holiday season. So Q1 is the lag of.
It's not being in the pipeline Q2, there's more to three there's even more and then Q4 incorporates the holiday so thats the.
Normal quarterly Ram for our business any year. So based on that Q2 should have been up but obviously it was not.
A typical quarter.
There is some statistical variation month to month, but normally with the exception of.
You know with the exception of January always being down relative to December.
And February there is no systematic.
Month to month variation.
Within a quarter.
Thank you and then.
Just talking about.
The expansion of the entities list by the Commerce Department.
You guys made some comments that you don't see that impacting you and I was just wondering how you walk through that analysis or do you have low exposure those companies into or do you think you can get around.
The regulations.
Yeah, it's actually it's quite easily it to.
Yes, so far away right is the.
No major poster child, so any the affiliate companies affiliated with with them right that's already well in the.
Rearview mirror.
Right and when you step away.
When you step away from when you step away from that there's a complicated gauntlett you have to run regarding.
Yeah yard codes, and it's quite complicated so each customer.
And the products they sell require.
A separate assessment.
So we have.
Several individuals or at least one individual that is really isn't an expert in this area inside the company.
So they've been through.
The new regulations and relative to.
The prior ones, there's really only too.
Customers of concern for us right now.
We're all working to try to determine.
What we can do for them if we can do nothing it's still.
Should not have significant.
Packed in our revenues.
And.
Yes.
Yes, you kind of take it to the highest level why is that so.
For the wire that so it's we're building radicals all around the world.
Our factories are IC secretaries.
In Taiwan.
In China.
China.
You know you use technology that was largely developed in Asia, and if not we have a giant Japanese partner that where we can use Japanese technology to get the job done.
So.
Yes.
Right now, where I think in pretty good shape, but theres still a lot of dialog by the way going on to clarify exactly what the wording in of rulings me.
So that's why.
My prepared remarks.
We were quite careful say, we're still along with other than the industry.
Working to get complete clarification on specifically what the wording means.
Got it and then just remind me say your top couple of IC customers how.
How big would they be are they one 2% of revenue on on an annual basis.
If you look.
You look yet.
Our.
Top five IC customers.
In a quarter.
Typically they're more than 50%.
Our revenues and that number varies right I don't know.
If we break that out.
But.
Yes.
We do at the top of our business have a high customer concentration, but I'll tell you that we have.
Typically year more than 600.
Customers. So we have a broad.
Very broad and diverse customer base, but very top there's a significant amount of cut customer concentration.
[noise] and just to be clear is that.
I would imagine is mostly dominated by MPD customers as opposed to IC.
There were competing customers in the top 10, then I see that's correct.
All right that's it for me thanks, so much.
Thank you. Our next question comes from the line of Patrick Ho with Stifel. Your line is now open.
Thank you very much Anglican your everyone well, Peter maybe just as a follow up from your prepared remarks can you discuss your.
Your manufacturing situation and I guess with all the new rules or social dismissing and all of that how it impacts your core throughput capabilities and maybe it's the second part of that question is how much do you believe if some of the lost revenues in the pent up demand thats starting to come back.
Now into July quarter.
How much of the do you believe is made up in July where does the carry over a couple of quarters, where you make up that that lost revenue from the April quarter.
Yeah, so as far as our manufacturing operations are concerned.
[music].
We I don't know if you want to.
Used the word fortunate.
But I.
We use that word from the standpoint of knowledge is power.
And that is in Asia right. This is not the first Corona virus, the Asian communities had to deal with great.
2000, Theres been six three significant.
Corona virus epidemics in Asia there was.
The middle East respiratory system.
Syndrome, there was the swine flu.
And there was.
Sars.
So there were three.
And the best practices in help too.
Operator.
In a corona virus infected community.
We are already known to Joe are particularly our Taiwanese operation.
So we took that playbook.
And we rolled it out.
Around the world.
Right, so rolling out that playbook.
Our manufacturing output is the same today as it was three months ago as it was three months before that so.
So we have not seen.
Any degradation in our.
Top line.
As a result.
Iris, we had a lot of supply chain.
Disruptions, we had to actively managed through but we.
We are able to do that.
And again, where.
We still think ourselves as a small company, but we havent really dispersed global footprint. So when we are having problems with particular materials in one location.
We went by them and we would buy them in another battery export them ourselves.
So by being flexible with acting as a global team, we did not have any manufacturing disruption zero not nothing.
So.
And we.
We're already.
Though preparing for the fall.
Right, we would be foolish not too.
Because we know something is going to have a we just don't know what but what we do know is we're going to be ready.
So.
Yes, so our revenue output same as always.
Of course like they always I mean, as our as we add tools changes but.
Aside from capacity.
Additions no impact as far as demand goes here we.
I expect what was there to push out over.
The next few quarters.
That assumes theres no major.
Economic dislocation.
As a result of.
Pandemic and I don't think right now any windows.
What the overall economic outlook looks like.
Three months from now.
You know I think thats really hard.
I think thats really hard to have a firm grip on but I will say again the countries that have done a good job managing the virus are likely to do a better job.
In the fall Unfortunately, that's where the majority of our global footprint resides.
Having said that it's all also as everyone knows rate the west.
Presents a significant mounted demand for chips.
And if were.
If we're having difficulty there is bound to be some economic impact of that that is hard to predict.
So we're doing what we always do we know we got our head down we're focused on execution.
Things, we can control, we're managing our costs were making sure that were well set up for the fall, we're not deviating from our long term strategy to the extent that.
We can.
Get customers to hold hands with us so.
Where.
Hyper focused on what we can control and.
We're vigilant on what.
Is happening outside of us, but its a.
Uncertain.
It's an uncertain time.
No fair enough. Thank you very much.
Thank you.
Ladies and gentlemen that concludes the conference call, ladies and gentlemen that concludes our question and answer session.
I'd now like to turn the call back over to Peter Kirlin for closing remarks.
Thank you once again for your interest in Photronics I understand the current environment is create uncertainty for all of us.
As cost disruptions to our daily routines.
By all of this we are encouraged to see demand recovers and look forward to obtain was progress throughout the rest of 2020.
Ladies and gentlemen that concludes the conference call for today, we thank you for your participation and assets you. Please disconnect your lines.
[laughter].
[music].