Q3 2020 Photronics Inc Earnings Call
[music], ladies and gentlemen, thank you for standing by and welcome to the Photronics third quarter full year, two dozen 20 earnings conference call.
At this time all participants are in listen only mode. At this because presentation Debbie a question and answer session. That's a question. During this session to meet the press star one of your telephone.
Please be advised today's conference is being recorded Thursday August 27 2020.
Regarding further assistance. Please press star zero and I would now like to have the conference over to speak today, Troy Dewar Vice President.
Investor Relations. Thank you. Please go ahead Sir.
Thank you Chris.
Good morning, everyone welcome to our review of Photronics, 2023rd quarter financial results.
Joining me this morning, our Peter Kirlin, our Chief Executive Officer, John Jordan, Our Chief Financial Officer, Chris hardware, our Chief Technology Officer.
The press release, we issued earlier this morning, along with the presentation material, which accompanies our remarks are available on the Investor Relations section of our web page.
Comments made by participating on today's call May include forward. Looking statements include such words as anticipate believe estimate expect forecast in our view.
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 and we assume no obligation to up to update any forward looking information.
At this time I'll turn the call over the Peter.
Thank you Kelly and good morning, everyone.
We performed well in the third quarter.
Getting strong revenue growth.
Hi chains returned to normal marketing in recovered.
Benefited from our broad product offerings global footprint and leading technology.
Design activity with healthy the dramatic improvements in high end display and mainstream IC market.
Also notable in our results for the quarter was a strong recovery in our China business.
Revenue for product shipment to China up 10% compared with the second quarter.
[laughter] margins improved sequentially and year over year.
Our relentless focus on cost control.
Which underpins our ability to leverage revenue growth into margin expansion.
Our China operations were profitable for the first time this quarter.
Given the size of our investment it has a very significant milestone for so truck.
Consolidated operating margins were 12.6%.
And earnings were 17 cents per share.
We add to our cash balance during the quarter fortifying our financial position.
We operate in the capital intensive business.
That requires significant investments for growth.
As our China operations per well under way to full utilization.
We are actively engaged with customers to obtain long term purchase agreement.
Provides port for incremental investment.
Our strong balance sheet enabled us to aggressively pursue these opportunities.
Without jeopardizing, our financial stability or diluting our shareholders.
Year to date revenues were 17% better than last year.
We are tracking towards our third consecutive year of record revenues.
Operating companies up 60% to the first nine months a year.
Cash generated by operations has more than tripled.
Our cash balance is 30% higher than this time last year.
These results validate our strategy is working.
We have fall a disciplined approach to capital allocation to places a priority of profitable organic growth.
How long it generates solid financial results, while also providing a pathway for additional investments, but the market environment and customer commitments.
Aligned with our competitive advantages.
At semiconductor producers in capital equipment supplier to report the results for the second calendar quarter.
His abundantly clear exposure to China is increasingly important.
This is because the Chinese customers are investing aggressively.
And is readily apparent that agings reaction to the ongoing treat discussion.
For the U.S.
Just to accelerate their efforts becomes self sufficient.
Escalating capital investments generates capacity.
We can turn creates an environment that is rich and new design.
Spring for them estimation.
Our deficient a few years ago to targeted China market through business development efforts and by building two new manufacturing facilities.
Has positioned us to grow with the local industry hasn't developed.
Our IC business is clearly benefiting from the decision.
IC revenues in China, where $95 million over the last 12 month.
Have grown had a 70% 74%.
Compounded annual growth rate in 2016.
Which is notable in that is an image or multiple of the market growth rate over the same period.
We anticipate additional growth as we complete the first phase of our tool installation.
And Jonathan.
We spoke last quarter about the impact to shelter and police directed had on our IC business.
Essentially pushing the anticipated ramped out about one quarter.
In addition is a push out in the qualification activities.
I have also been impacted by delay in the installation of a high end litho tool.
Because sufficiently skilled OEM personnel have been unable to travel to our site to do the complex work of installing tool.
This third party issue has added an additional quarter to the timing of the production ramp up one of our line.
The installation has now begun and we do not anticipate any further delay.
New capacity should begin to generate revenue for the end of our second quarter and 2021.
SPD is also benefited from our China business development efforts.
Typically revenues to China over the last 12 months or $113 million and our business has grown at a compound annual growth rate 62%.
Since 2016.
The global display Photomasks market is forecast to grow 2% in 2020.
Year to date.
PD revenues are up nearly 50%.
Due to our technical leadership and investment in China.
Furthermore, we have kept all our factories running at capacity.
While we believe leave our competitors have not.
Just as Nic, we have dramatically outperformed the market as customers recognize that we had differentiated technology, we've captured market share as a result.
Moreover, the next phase or SPD investment is underway.
We anticipate maintaining growth rate.
Well above the market in 2021 as well.
However, we are not free of external challenges in our display business.
In the mobile market is presently softened.
Largely as a result two factors.
First.
The number smartphone shipments expected to decline, 12% to 15% in 2020.
And second.
Quite a ways de americanization of their supply chain.
Has temporarily paused or new product roadmap.
Given that while away with the global.
Mobile phone market leader in Q2.
There are pulled back is having material impact on the photo mass market, which is new design grid.
We expect this effect to be temporary it's far away is well underway to completing the redesign has a current product line.
And the run of Fiveg networks is furthering the adoption handle it.
As filmmakers went to offer the most advanced displays for the premiums sector the market.
Given the near term softness in demand we have decided.
To pull forward the legally mandated pan European Weaver perfectly facility into Q4.
As a result, we expect SPD revenues to be down sequentially.
On the new business front, we're beginning to see demand for mass to build advanced many leading back like.
As they start to penetrate mainstream display application.
Within the landscape of large screen Tvs.
The market is presently formed around older technology Lcds with a separate passive factly.
Were some version of OLED, such as LG is way OLED or Samsung QD over it.
The emergence of active matrix mini how we de backlit LCD displays sits between these two technologies.
And able to traditional LD LCD displays to offer vishal perform.
Similar to OLED TV.
The industry is in the very early stages of the commercialization of many tend to related micro AG displays.
But there is little doubt that these technologies will find their niche in the rapidly expanding solid state splay marketplace.
This is yet another example of the increase need for Photomasks to support a plethora of innovative new products in the display space.
Given our position has been working and technology leader.
Customers are increasingly turning to photronics to support the development of new display products and or technology.
During the quarter it took another step to strengthen our company.
As we announced the Daniely ehealth will be joining our board of directors.
Daniel brings a wealth of relevant experience.
His knowledge of the semiconductor industry.
Principally with Lam Research Corporation, we still serves the senior adviser.
Puts his experience with technology development operations.
The tremendous value to our board.
We did his appointment we now have seven board members, including for independent directors.
We've made improvements to our corporate governance over the last few years addressing diversity tenure.
I know from discussions with our Divestures easier pool issues for you.
And we have been have will continue to be mindful of creating policies that align it with corporate governance best practices.
Looking forward our business has momentum and we are on a long term trajectory of revenue growth.
Margin expansion and improving returns on capital.
I'm very pleased with our performance for the first nine months of 2020.
And remain confident we will continue to improve.
Before turning the call over to John I would like to personally. Thank all of our employees for rising to the challenge of operating a global company in the face of a multitude of challenges presented by the Corona virus.
By working together, we are protecting each other.
Well our customers enjoy the service and performance that separates us from the competition.
I'm very proud of you will.
Now I'll turn the color John to provide additional commentary on our performance and outlook.
Thank you Peter good morning, everyone.
We resumed strong revenue growth in the third quarter, increasing 11% sequentially and nearly equally the record levels of our first quarter.
Revenue of $157.9 billion was 14% better than same quarter last year. The 12 consecutive time, we've achieved year over year revenue growth.
During our second quarter call reported that demand trends were continuing to improve.
As a third quarter progress that improvement manifested in strong order and revenue growth.
Many of the supply trends that were initially impacted by the shelter in place mandates returned to normal and end market demand mostly recovered.
I see revenue improved $108.7 million, 12% better than second quarter due to strong mainstream demand.
Given by a recovery in foundry logic in Asia.
Hi, and I see was essentially flat.
Looking forward, while we do see signs are stable to improving underlying demand trends across many markets.
The latest department of Commerce announcement of restrictions against why way creates an additional level of uncertainty across the supply chain.
It is too soon to be specific on how this new regulation may impact our business.
As we along with the rest of the industry is still working through the detailed language of the law to ensure we are in compliance.
In addition to trade policy, there are still possible headwinds from any potential government restrictions to address health concerns.
FTP revenue improved to $49.2 million up 7% sequentially and 30% compared with last year driven by increased demand from our targeted high end sectors.
Gee 10.5, plus demand nearly doubled from very those second quarter levels that were limited.
By shelter in place either.
Demand for mobile applications, including goals. They handle that is LTPS technologies also improved as panel makers release, new designs for the next generation of smartphones.
The display market environment is very dynamics as Korea continues to transition product production capacity away from LCD to OLED or ample that.
China is ramping to 10.5 pause capacity to expand their LCD leadership position. While also further penetrating the mobile amolillo space.
And Taiwan investment micro LNG to develop differentiated differentiating technology.
However, as Peter mentioned, the restrictions against why were causing a temporary dislocation in the supply chain.
This uncertainty is behind our decision to perform the annual preventive maintenance and her effect this quarter.
And we'll have an impact on the revenue forecast reflected in our fourth quarter guidance.
Long term through two on technology leadership in the display market. We will continue to work closely with all of our customers to help them navigate these challenges with photo mask that enable their product development objectives.
As we have seen demand improved for both I see an everyday during the third quarter and continuing into the fourth we're running at high utilization rates across all of a high end facilities.
Notwithstanding the near term uncertainty just discussed we anticipate maintaining relatively high utilization rates over the next few quarters.
There's presents both opportunities and challenges the opportunity is to optimize our cost structure that carefully manage cash flow to deliver lots of improper them returns.
However, while there should be chances to accrue revenue with mix and incremental productivity increases.
The next significant growth catalyst will be the capacity additions plan for 2021.
Third quarter revenue reflected an annualized revenue run rate above $630 billion with the launch piece March Chalmette investment to come online by the end of our second quarter in 2021.
The next page or free de investment will follow closely which showed a sure continued revenue growth in 2021 and beyond.
Gross margin improved to 23.9% in the quarter and operating margin expanded to 12.6%.
As an operating leverage and cost management allowed us to grow the bottom line more quickly than the topline and China operations I had a $1 million positive contribution to operating profit.
Looking forward to fiscal 2021, we expect to continue making progress toward a 15% operating margin target, which will require our usual resolute focus on cost reduction.
Always of primary importance.
Below the operating line other expense of $2.1 million included interest expense and the primarily unrealized effect of the Remeasurement of U.S. dollar denominated balance sheet items of our foreign subsidiaries.
Tax provision and non controlling interests are aligned with expectations, resulting in 17 cents per diluted share for the quarter.
Our cash balance increased $23 million during the quarter regenerated nearly 17 million and cash from operating activities and we see the 10 million dollar capital contribution from a JV partner as part of the funding of our upcoming German investment.
[laughter].
Capital expenditures in the quarter were $7 million total debt at quarter end was 53 million and net cash was $208 million.
We have revised forecast of total capex for the year to $80 million due to changes in the timing of cash payments for certain tools.
As always we had some flexibility on exact timing of capex to allow us to respond to changing market conditions.
Our financial position remained strong with sufficient liquidity and manageable debt.
The business is a strong cash generator and the combination of a disciplined working capital management and financially strong customer base mitigate collectability risk.
When we determined that the uncertainty brought on by the colder virus.
As a geopolitical situation has subsided we.
We will consider revisiting the share repurchase decision to reinitiate that return cash to shareholders.
Before I provide fourth quarter guidance I'll remind you that our visibility is always limited as our backlog is typically only once a three weeks and demand for some of our products is inherently uneven and difficult to predict.
Additionally, the aerospace for high end mask sets are high and does this segment of the business grows at relatively low number of land daughters can have a significant impact on our quarterly revenue and earnings.
Geopolitical risk related to government actions to address health concerns or trade policy may have an impact on our operations the operations of our customers our suppliers or end market demand.
Well thing in an adverse impact on our industry and therefore our results.
I will also point out that our fourth quarter I has one less day than the third quarter and five fewer days than the fourth quarter of last year.
Given those caveats, we expect fourth quarter revenue demand the rents are $148 million to $158 million.
There are signs of a strong end market demand across both I see enough Pee Dee. However, there's also uncertainty related to new U.S. trade policy regulations that may likely softened demand during the quarter.
And as we discussed we're also planning annual P M in her friends.
Based on our revenue expectation in our current operating model, we anticipate we estimate earnings for the fourth quarter could be in the range of 12 to 19 cents per diluted share.
We are pleased with our performance. So the first nine months or 2020, our market leading position in financial strength have enabled us to navigate the challenging environment over the last few quarters.
And we believe will help us continue to outperform the market going forward.
I'll now turn the call over to the operator for your questions.
Thank you.
And as a reminder, ladies and gentlemen, just a question each person or what are your telephone.
Well George your question. Please press the pound key.
Demo its barbecue a roster.
And our first question comes from the line of Tom definitely with D.A. Davidson. Your line is now.
Yeah. Good morning, Thanks for taking the question Peter first on the wall way.
And such and are you seeing how did you see a disruptions during the quarter is just so projected potentials disruptions in the Cisco slows clue.
Yeah, we really started to see the effect.
In the last month for the quarter.
We're seeing it now.
We are you thinking we'll behind its who will be behind its a you know as we are going to exit the quarter, maybe a little sooner. So it's about a quarter dislocations spread one third.
Over Q3 into thirds a into Q4 the way we see it but oh, yeah, we don't have complete.
Yeah, we don't have complete clarity.
You know we.
I have complete clarity on what's happening there.
Okay, and then maybe just a clarification it sounds like you know the wall way panel issue is what's the handsets I was under the impression that yeah. That's a facility. Gen 10.5 was much more on the TV side of the business.
Maybe you could square those two items.
Yeah. So he looked.
So if you look at the.
Focus of the of her saying, yes. It is a large large panels, but we also build a lot of non semi kind Oakland noncritical amabelle that layers.
You know layers there so and we knew if you are SPD business.
Around or you know global footprint.
To maximize our revenue and profit right.
As you know we've been running.
Yeah, we've been running or add capacity and that includes.
Q2, what our revenue.
Dropped to 46 million. The reason the revenue dropped was the mix of product, even though Paul the factories.
We're sitting in a full.
So the way we see.
The business normally.
So if you look at our facilities, we don't personal will be LTM all of them every year.
We don't do that but we do a P. M. All our factories in Asia that sit in Science Park, because generally those teams are mandated by the science park or and or the government.
So this is a or an activity that normally we do in December.
When demand is that you know endear, alright, a minimum rather than having even at a minimum.
In our markets given they.
Annual Carty Graham.
You know the end market demand.
So you know we pulled the.
Mandated pm in herve for the quarter.
Because we believe.
This quarter will be the quarter, where the demand profile for the industry.
Kids or you know at its a minimum.
So anyway that.
Yeah, that's a that's why we're doing it.
We'd like to get it held away when the market is the you know weekends.
Okay that typically a one to two week event.
Yeah, it's about everything will be turned off you know it varies but in in the way the the way the government or requires us to do it there they'll be turned on hold for four days and.
They re warm uptake said two to three so we lose about a week's worth of output in China as result of ER or the T M.
And the team in ER in Japan for the years already getting done you know earlier in the year. So again, we try to.
We try to make adjustments, where we try to tiny things so that they have minimum.
Impact on revenue and profit.
Okay that makes sense.
And then lived though to the mainstream business. The strength you saw was that pent up demand. Some closures in this first calendar quarter or do you can get leased lucky wait till the end market Nestle run rate is.
No I think a you know I think the snap back in the mainstream.
He will largely was.
Uh huh.
Largely was driven.
In China.
And it was a snap back related to you know what we didnt see in.
Well, we didn't see in the second quarter.
So you know the business in Q3.
There was <unk>.
Then the normal tone plus as.
Additional demand that we wouldn't saying Q you know our.
Q2.
Okay that makes sense well John Dads final question here when you look at a your comments about expanding margins is that just yeah. Your ongoing cost control efforts or is there something product some of which lifted that would help you'd spend margins as well.
Yeah, I don't like given the answer all your bumped off but it's a it's a combination of decks and.
<unk> cost reduction and China's improving.
And China is improving.
Revenue and.
Margin performance.
Okay. Thanks, I'll hop back into queue.
Thank you. Your next question comes from a lot of pass your go with Stifel. Your line is now.
Oh, Thank you very much or maybe just following on from Tom's question regarding our the market environment.
Peter posted very strong results in third quarter talked about the demand trends did you see any potential pollutants that may have come out of the October quarter, because traditionally your October quarter.
You use your strongest quarter or the year. So I'm just wondering whether you saw any of those dynamics.
That might have boosted threeq no good maybe at the expense of four Q.
Uh huh.
Hey, no in fact.
Oh, we did not so.
Are you know we think are.
Our fourth.
Quarter.
Yeah. The demand we will see is in <unk>.
Isn't where it and maybe indigenous since the.
It is the words is or the right word to use we do expect to see.
The yeah.
The mobile market. Unlike a typical here a pick up sequentially Q4 to Q1 likewise.
If you look at the market for key has seen Phnom is projected.
For the TV market, it's a very it.
You know the.
He M. P D market is very dynamic.
And very fluid right now.
Great Korea is turning off as you know.
Effectively all their G eight and a half LCD capacity.
Turning it off.
Being shifted.
And the first.
The first business for that shift in fact.
We expect to see in the current quarter at least as far as our you know there one customers current concerning to shift from.
LCD to OLED, we'll have we'll begin.
QD all led in the current quarter.
So we see a bunch of LCD capacity coming off line.
Shifting into Oh, OLED capacity in Korea, that's one dynamic under our feet I.
Another dynamic under our feet you know, it's the bottoming of the demand for our mobile displays that their dynamic underneath our feet right now.
Is the.
Continuing turning of the screw with the trade war between.
The U.S. in China, specifically as it impacts.
You know walk away and I'll say it again right.
Well way is not the same.
Household name at Samsung or Apple, but they were the goal not Chinese but the global market leader in mobile handsets in the second quarter year.
So you do you dislocate their product road map.
And it's gonna rattle through the business.
You know it's Ah so anyways all three of those factors are moving and they are not.
Selective typical seasonality.
So we do not see the second half a year.
As typical in its Ah demand profile, we see this quarter as the bottom and we see it improving you know probably even mid mid teen ended this quarter, we should we expect to see the market picking up.
I want to say that yeah. We'd also just read we say again, we ran at capacity in the current quarter, we believe.
If you take the blend of what the competitors so.
We think they were running at about 70% utilization in the current quarter with market.
Working.
So you know we.
Uh huh.
We look we we are pleased with how we're doing.
Fair enough, maybe as a follow up question for John Oh, It's I agree that there is lot of moving pieces for gross margins are but given that you've got several investments are underway for both of your facilities in China.
Are you confident at least from an absorption side of things that I'd go get absorbed pretty quickly and not negatively impacts gross margins are you know from a fixed cost bases and what I'm getting dairies.
You know again, there are a lot of moving parts mix revenues in all of that but do you feel confident that the the demand prospects will help absorb the you fixed costs that are coming in over the next few quarters.
Yeah, Patrick them and keep in mind those fixed costs are coming in a couple of quarters hands and as weve related and in past calls.
We have a mandate to make sure we've got customer commitments.
Before we invest and and these new in the new capacity, so we're pretty well assured that as we.
Qualified or the new tools to new lines are there will be demand there and we'll be able to ramp I don't want to say quickly, but and are in pretty good time sort of where our absorption ramps up commensurately.
Yeah, I would you add to John's comments, Patrick our variable margin drop through was 48% this quarter.
Great that's sort of kind of.
Because you've been with its a long time, what you would expect out of our business.
So you know there's.
As you said you know the way we see it there's competing efforts right. One is we're adding fixed cost, but the same time, we continue to work very hard to pull costs out of the existing business model and as they said in my prepared remarks.
We had positive operating income out of the combined China operations for the first time.
Period.
So the business sort of kind of right now is settling in do you know business as usual.
Finally.
So yeah, we expect it to perform.
Like it has historically.
As we layer on revenues on the top line I think were three then awful.
Great. Thank you.
Thank you.
And ladies and gentlemen.
This does conclude today's question and answer at this time.
Actually I do have one question from the line Oh, Gosh Richards with North <unk>. Your line is no.
Yes, thanks for taking the questions squeezing me in.
In terms of the mature I see market how is pricing in that market. Then is it still on its normal trajectory or are you seeing any any changes.
Yeah, I know, it's a pretty much on its you know normal trajectory as we Oh.
Describe now reinforced you know the snap back in the mainstream was really a foundry logic in Asia.
Pricing in that market is really pretty stable.
So yeah, there's really nothing out of the ordinary.
In the mainstream you know business.
Okay, and then in terms of.
Startup activity.
China.
<unk> are you seeing any impact from new companies forming too.
Well I'll call de American Nice Chinese products.
You are I think.
No I mentioned you know guys you know mentioned while away you know earlier, yeah, we don't really.
We don't really have a first order effect.
I'm hardly at all.
What we see is how old <unk> why wait bodies affects our customer.
That's where we see the de americanization in a shift in the business.
In either semiconductor suppliers that we're selling to in fact you.
One of the reasons.
We see a snap back in our IC business is the de americanization away supply chain, because the I seem to being replaced but it displays are still the same.
Right in the phone.
So.
You know our customers still see us in China.
Is enabling you know their mission in life.
So as long as that continues.
I think we're gonna be fine, but we obviously see demand.
Shifting from the U.S. in Europe.
As a result was that to China.
Right in our business.
That's how it de americanization is presently impacting us.
And just for final bit of color on that point is that mostly logic is an analog or you know you give any color as to what part of the market.
Yeah, it's mainly mainstream if the way I would you know answer the question, it's mainly mainframe because that's where you know the sweet spot right now in the capability of China resides.
Hey, mainstream and if any and all of the above.
Okay. So a 28 nanometer and above were 45 nanometer like yeah for the way. We 28 week, we are categorized as high end, so it's 40 and above.
Got it okay. Thanks, so much.
Thank you.
And ladies and gentlemen, there no further questions at this time I would now like just trying to pull over to Peter Kirklin for any closing remarks.
Thank you for choosing to spend some time with us. This morning, we appreciate your interest and support where there are obvious challenges we're facing this year.
We are encouraged water performance and demand trends in our market.
2020 is on track if he had a record your photronics, but we're working hard to maximize our financial returns to enhance shareholder value.
Before to updating you as we advance.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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