Q4 2020 Photronics Inc Earnings Call
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Ladies and gentlemen, thank you for standing by.
Welcome to the Photronics you for fiscal year 2020 earnings conference call at.
At the time, all participants are Gonna me in the listen only mode. After the speakers presentation, there will be a question and answer session.
Ask the question during the session you only the press Star then one on your telephone please.
Please be advised of todays conference is being recorded Wednesday December 920, 20, if you're acquiring for assistance. Please press Star then the zero or.
I'd now like to turn the conference over to toward Troy Dewar, Vice President of Investor Relations.
Thank you Jamie Good morning, everyone welcome to our review Photronics, 2024th quarter financial results joining.
Joining me. This morning are Peter Kirlin, our Chief Executive Officer, John Jordan, Our Chief Financial Officer, and Chris Cobbler, 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 investors section of our web page.
Current made for any participants on today's call May include forward. Looking statements include such words as anticipate believe estimate expect for cash in our view.
These forward looking statements are based upon a number of risks uncertainties and other factors that are difficult to predict actuals.
Actual results may differ materially from those expressed or implied and we assume no obligation to update any forward looking information.
Lastly, the before turning the call over the Peter.
Got you all to join US next Monday December 14 attend the M. Eastern for 2020, Investor and Analyst day.
You bet, which will be webcast will include an update our long term strategy and outlook.
For details are available on our website for you may contact me with any questions.
At this time I will turn the call over the Peter.
Thank you true and good morning, everyone.
Despite operating in the very challenging environment for your revenue of 2020 was 610 million.
The highest ever and the third consecutive year of record revenue.
If he achieved record revenue for the second year in a row.
Surpassing the last year's record level total by like talking 32%.
I see revenue of 2020 was the second highest ever.
Just shy of a record of established in 2015.
We also achieved record revenue of product shipped to customers in China on a consolidated basis.
As well as for both IC N P D.
It was a great here for the photronics the team that of many significant milestones.
For the fourth quarter revenue was lower the typical seasonality was worsened by geopolitical factors.
I rarely net of PD, where mobile display demand it was constrained by U.S. trade sanctions against walk away.
And I see we fill the strengthening trends among some logic foundry customers.
The U.S. and the easier over of memory demand was weaker for.
For the combination of the sectors, our revenue was down 5% sequentially.
For the call the decrease in revenue in the high amount of operating leverage in our business.
The fill the contraction profit margins.
Operating expenses the state under control as we maintain cost discipline in the midst of challenging circumstances.
The for able to deliver consent.
Diluted earnings per share.
We ended the year with 279 million in cash increase of 72 million from last year.
This was accomplished even as we spent 30 71 million on Capex.
Investing in the future growth.
The 34 million on share repurchase of returning cash to our shareholders I.
I believe these achievements demonstrate that our investment strategy is working and we are on the path to improving long term shareholder return.
Looking back on 2020 the.
Challenges, we face for unlike any of the like 35 year career per.
Primarily among them were sitting there given the supply chain and cost number of design team disruption has.
As governments around the world placed restrictions on travel working conditions and commercial activity.
Limit the spread of the current of ours.
In addition, the trade restrictions implemented by the U.S. hurdle of government against certain companies in China create their own set of market dislocation.
Fortunately with the development and approval of effective vaccine.
And the expected the impact of the U.S. election results. The periods. These challenges will diminish.
How does the move through 2021.
Regardless of the 2020 challenges I am proud of the way our team responded the work tremendously hard to take care of our customers.
And when every opportunity in the market.
Do their efforts, we achieved record revenue and I'm confident that we have gained market share.
For 2020 revenue came within just a few percentage points of the target.
The three years ago.
Well, we formally resented the $630 million gold in May during the height of the code the driven market uncertainty we continue to chase this target to maximize our growth.
There are no more victories and we.
I recognize there's room for improvement.
Really proud of our performance further I like our position in the market and the long term outlook for of business.
Next week, we will host the Investor Day 70 preview some of the key points, we will discuss during that event.
Photronics resent represents a.
The compelling investment thesis, we are the largest from merchant photomask manufacture for the letting global facilities for.
The thing none of our competitors can match.
The the lift in technology to align our operations.
With the secular market trends, such as the industry's geographic expansion into China.
The growth of high end display technology, such as the Pamela for mobile applications.
And the enabling of our customers technology roadmap to continue the introducing new semiconductor knows the pursuit of the continuation of Moore's law.
Well, we've invested on model that enables us to invest in growth, which.
Which extends our cash flow and strengthened our balance sheet.
Positioning us to consolidate our market for returning cash to shareholders.
We believe this will lead to greater shareholder returns.
We performed well since our last Investor day in 2018, delivering on me the commitments. We made then such as constructing a quick.
Equipping the I think qualifying and ramping team the manufacturing facilities in China.
In addition, we have made further progress against our key initiatives to diversify the business by growing our China revenue, increasing our share of business customers that have kept of mass shops.
Increasing our sales for the high end product.
We've been able to do this despite the challenges in 2020 by staying true to our core competencies.
Being the low cost producer and pulling operational excellence in everything we do.
Prioritizing customer into the seem to become our customers trust the for them as a partner I.
The maintaining technology leadership to ensure we can meet all of our customers need.
These attributes has served us well for over 50 years.
We remain committed to them headed into the future.
Looking forward, we are increasingly optimistic regarding our long term path.
Look we have positioned the business for sustained growth.
The delivering the right technology to the right customer at the right time.
We intend to expand our leadership position.
The plans to increase profit margins enhanced cash generation we.
We expect to deliver even greater shareholder value.
Which one of the saying next week and I Hope you can join us.
Before turning the call over to John to provide additional commentary on our performance and outlook.
We'd like to thank all of the photronics employees for the commitment and hard work and wish all of wonderful holiday season John.
Thank you Peter good morning, everyone.
As Peter mentioned 2020 was a record revenue year to year, beginning on the run rate in Q1, well in excess of the $630 million target, we set of almost three years ago and after the covert related disruption in Q2, we recovered from a run rate still in excess of the targets.
Q4 was again impacted by geopolitical influences when the trade sanctions against for our way suppress the of PD business All day.
Net supply chain reset.
Nevertheless at $610 million fiscal year 2020 revenue exceeded the fiscal year 2019 record by 11% and set for third consecutive annual revenue record.
During the fourth quarter of business typically sees the slight seasonal decrease in demand as the design cycle winds down from recent introductions of new consumer electronics products.
Our fourth quarter decline this year was exacerbated by pockets of softness in some sectors and the negative impact from us trade sanctions against walk away.
Revenue for the quarter was off five per cent compared with last quarter and four per cent compared with the same quarter last year.
IC revenue was particularly strong in China, as we shipped a record level of product for customers.
Foundry logic, the man drove the increase as the.
The region continues to be healthy location for new design activity.
In other geographies Korea, and Taiwan also saw good foundry logic demand and us logic revenue benefited from an emergence of trusted supplier opportunities for defense applications.
The area of weakness for high end IC was memory, where recovery is not expected until sometime during 2021.
GAAP could the mass demand was negatively impacted by two factors first as we discussed during our third quarter call.
The us trade restrictions against for our way of having a dramatic impact on the China mobile supply chain as.
As far away was effectively prohibited from buying leading edge semiconductors their ability to release, new mobile phones is very limited debt.
Reduce the demand for new display panels, which reduced demand from the past from the panel for.
Yes.
The supply chain is in process of resetting to meet the demand, especially in China and Weve seen the market move away from our way to other China mobile for manufacturers.
While we recently sold the low end to mid price phone division for separate and insulate that business from the west trade restrictions.
Since February of is one of the largest suppliers of smartphones by units. The ripple effect of these moves is being felt throughout the supply chain.
Turning of meaningful effect on the mobile supply chain and therefore our business.
As a result revenue for animal that mask sets was down 21% sequentially.
The second display trend was the improving profitability of panel producers.
Strong unit demand and higher pricing for TV and tea products created incentive for.
For them to continue production runs of existing product to maximize short term profit.
That resulted in a delay of new design movies of the driver of that demand.
The demand for LCD masks for GE 10.5 clubs as well as the smaller form factors was down for the quarter negatively impacting both the high end and mainstream revenue.
Profit margins are on the gross and operating line were lower due to the impact of operating leverage on the results.
The continued focus on margin expense and should yield improved results next year.
As we complete the ramp of our IC phase one of investment in China and implement our next phase of the reinvestment.
We will elaborate more on our long term margin targets targets during our Investor event next Monday.
Below the operating line the other expense of $2.9 billion included interest expense.
The primarily unrealized effect of the re measurement of US dollar denominated balance sheet items of our foreign subsidiaries.
Tax provision of non controlling interest for in line with expectations, resulting in the earnings of 10 cents per diluted share for the quarter.
Our cash balance at the end of 2020 was $279 million, an increase of $72 million during the year and $18 million during the quarter.
Significant cash events during the quarter were $63 million generated from operating activities $34 million of capital expenditures $18 million returned to shareholders via share repurchases, we repurchased 1.7 million shares of photronics stock during the quarter and $13 million.
Net proceeds from debt.
We also paid $16 million in dividends to our Taiwan JV partner of those dividends are generally contributed back to our China JV in future periods.
Total capex in 2020 was $71 million less than $80 million target.
The next year, we forecast Capex of about 100 million as we complete the phase one investment in Germany and.
The and execute the next phase of RFP the investment in Asia.
Our strong balance sheet has enabled us to invest in China and returned $79 million to share repurchases since 2018.
Going forward, we of part of the course of will generate sufficient cash from operations to conversion continue to invest in organic growth and return cash to shareholders in the.
Parallel we will be actively open to M&A opportunities in the photo mass space to extend our market and technology leadership.
We will share more on Monday.
Before I provide first quarter guidance I'll remind you that our visibility is always limited as our backlog is typically only once the three weeks in demand for some of our products is inherently uneven and difficult to predict.
Additionally, the Asps for high end the mask sets are high and as the segment of the business grows the relatively low number of high end orders Didnt have a significant impact on our quarterly revenue and earnings.
Geopolitical risk related to the government actions to address health concerns or trade policy may have an impact on our operations for the operations of our customer the suppliers or end market demand, resulting in the adverse impact on our industry and therefore our results I.
I will also point out that our first quarter, we'll have toward the is the in the fourth quarter.
Given those caveats, we expect first quarter revenue to be in the range of the $145 million to $155 million.
Underlying market demand in many sectors is healthy and improving driven by trends in the remote work and education.
Although geopolitical headwinds remain due to trade restrictions on and the government actions to limit travel in the business activity.
The midpoint of our guidance implies revenue essentially flat with Q4.
Based on the revenue expectations and our current operating model, we estimate earnings for the first quarter to be in the range of seven to 14 cents per diluted share.
2020 was the challenging year and it appears many of these challenges carried into 2021.
However, our workforce has responded well all around the globe and we're in the solid position financially to be able to continue to invest in capabilities and technology to drive growth.
While taking meaningful steps to improve profit margins and optimize returns.
Our initial outlook for fiscal year 2021 suggests the revenue growth will be high single digit per cent.
And that operating profit growth will be similar to the 23% growth we achieved in 2020.
Again, please join us on Monday to learn more.
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 the press Star then one non you touched on telecom to withdraw your question from the queue. Please press the pound key please stand by the we can part of the Q1 day roster.
Our first question comes from Patrick Ho with Stifel. Your line is now open.
Thank you very much maybe first of all Peter in terms of the mainstream IC market place can you just help reconcile a little bit of the the commentary I've been getting in terms of high utilization rates for.
Many market segments within the trailing edge geometries, and I guess, just the kind of the mixed outlook you are talking about.
On that side of things.
Yes, if you look at our mainstream business. This year Patrick can you look at it at the 100000 foot level. Thanks.
Been pretty stable quarter to quarter site rental revenues of.
Hi, Sixtys 67 68.
Maybe that $70 million.
If you Peel back that remarkably stable trend.
Right.
What has happened during the year is a rotation of the business.
From the U.S. in Europe.
In two primarily Taiwan and China.
So our mainstream businesses the demand profile the.
Shifting.
With the.
In of.
As I said with the west.
Seeing the market.
Finish with growth in the far east.
We think that rotation is more or less run its course.
And we see.
Upward demand.
In.
The foundry logic business.
Asia, and we expect that to.
Continuing strength and actually as we.
Move.
Through next year and in to the following year.
So.
There has been a shift we think.
The shift is more or less complete and we're actually really bullish on.
The market opportunity.
In China, and Taiwan, and you'll hear a bit more about that next week.
But its a clear clear.
A clear target for us for growth.
Fair enough debt.
Thanks for that color and maybe as my follow up question on the memory side of things.
I concur that the current environment for.
For most of the memory market continues to be soft, but at the same time the do here of the industry trends the issues both in terms of DRAM.
As well as NAND towards next generation devices.
Yes can you reconcile a little bit of typically the shift to the next generation nodes, the and layer accounts.
That's usually a positive driver for photronics in terms of design wins.
Keith reconcile I guess, a little of what's going on there versus.
Some of the softness that you're seeing in the near term.
Yes.
It's interesting that the again, if you look at our ICEE business year to year.
We've had a lot of our business has been the salt too.
Right. This year, where we've had to you know I would we would describe is pretty healthy quarters.
For Q1 and Q3.
And those quarters have been at about a 640 million dollar run rate, which is great.
What we had.
Q2, and Q4 Q2 was basically driven down into the high 500.
On a run rate basis by coated.
Thank you for was driven to just slightly below 600.
Bye.
Basically trade for impacts so our business has been skits of frantic from what I would describe as.
The strong and normal too.
For family influenced by external factory trade at our memory Likewise has been a solid too.
Through the year up and down.
And the only real material trend you can see if you look year over year, our memory business is down which I think reflects the overall state of.
The memory industry.
We do.
From the perspective of our customers, we're expecting our memory business to step up significantly next year.
Particularly as we get the into.
The early spring.
So we.
We see this as the.
More or less it.
Where we are as the.
Near term.
Belly, but.
Yes, we're optimistic given what we see in the market for a rebound in the.
The memory business and our particular customers have pretty aggressive plans for no transition the next year.
As really as you point out.
What drives our revenue in that industry. So yes. So.
So that's that's the quick summary.
Right look for to your day on Monday. Thank you.
Okay.
Thank you and Im showing no further questions in the queue at this time I'd like to turn the call back to Peter Kirlin for closing comments.
Okay. Thank you for joining us this morning, and we look forward the reconnecting next Monday during our Investor day.
Before we sign off.
Hey, guys I did see to other participants join the queue and make you we'd like to continue to take your questions of the.
Of course, yes understood understood. Our next question comes from Thom definitely with da Davidson. Your line is now open.
Hi, Good morning, guys, obviously, most of the Franco and for Tom This morning.
Thanks for taking my question I guess I worked for us how much conservatism. The I guess are you, including in your first quarter outlook I understand that right now obviously the.
The the geopolitical headwinds are difficult to ascertain but any color on the actual quite the sabal of conservatism number.
Yes so.
If you look at our business normally Q1 seasonally is down maybe 5% of.
Off of.
Q4.
So the midpoint of our guidance reflects a.
The flat quarter.
So our businesses our markets are improving.
So we take the guidance too.
Thanks for the improving improving improvements in our market.
I've said seasonality, that's what we've done.
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If you look at our ICEE business.
Right first.
Demand trends in Asia, you know.
Pretty solid you.
If you look at it PD right last quarter, we estimate debt.
The industry our industry for them as history, maybe ran at about 70% utilization in FTD.
In terms of this is internally what we estimate.
That's the worst quarter.
I can't remember.
My memory, maybe goes back free to five years I'm getting old but the.
It was a really sour quarter of.
For SPD.
Likewise, the month of November through Thanksgiving.
The remain the hour.
Right around Thanksgiving the SPD market started the rebound.
And it continues to improve.
Now.
Could it what we'll do.
Right, we don't know.
So.
We're trying to kind of the aged between for normal market and what is it what was the terrible market our utilization was probably 15% the off.
Up of the industry you know.
Average last quarter, but it's the first quarter in several years, where we haven't been sold out so.
So that's.
Thats kind of our markets, that's what we see and.
And that's our guidance.
Thank you so much for current there.
Yep.
Yes, I would also add unlike.
Prior years right before the new revenue recognition rules.
Right.
Every place we have in the line.
As a percentage completion associated with it right.
Right so the our business.
Is the complete.
Reflection.
Of what the market is we're not of capital equipment company that runs with backlog that the can pull.
Pull some tools into this quarter that would shift next quarter, you know with the week to get into in backlog right our businesses and the exact representation of what the market gives us theres no ability for us to manage.
Our.
Our wip for our.
Uh huh.
Our backlog of two.
The strength in one quarter at the expense of another management has no operational discretion whatsoever comes in we make it and you guys see exactly what the tone of the businesses real time.
Thank you. Our next question comes from Gus Richard with Northland. Your line is now open each day.
Yes, thanks for taking the questions.
Real quick on.
Net which is just gotten the band.
The.
Are you seeing customers migrate there.
Your business to other foundries is that at that helping the mainstream.
Hello.
Well I think to the extent that happens over time.
Right.
Yes.
The mix so first of all sneakers the customer of ours.
They're not a big customer because they have their own captive but.
But their customer anything that harms the customer.
For us as a negative we don't like to see any customer harmed in any way by external factors that are not driven by the market.
So I think that would be the first comment we wish is Mick Mike.
Like all our customers well and it's our culture, regardless of where customer sits in the world.
To walk run through walls to help them be successful that's really what we want.
Having said that it is true that you know if you shift from market demand from a cash.
Customer that builds the.
A significant fraction of their own.
Phone photomasks to customers, who buy them on the merchant market you know that's kind of create demand for photronics, but it's not a happy way.
Our mind of.
The of seeing our market expense.
Got it.
And then.
There's been a number of companies that have.
Planned to or have listed on the star market.
Where valuations for semiconductor related companies are significantly higher than the U.S.
Is that something you guys might consider for any thoughts there.
Well you know we can we.
Constantly relentlessly share look.
Look for ways.
To increase shareholder value.
And Uh huh.
This is one of many possibilities.
That we.
The either have or you know intend to consider.
Right I'm moving like that.
As some potential upsides and it could have you know.
Potential downs for depending on.
On what happens on the geopolitical front.
So yeah.
Yes, so we're aware of it.
We're looking at it but the where company generally that's been around for 50 years of.
And were normally flow to move to the new trend because the.
The typically a good way to get a lot of hours in your back.
So we're very aggressive with the market.
So you know we unlike others have really Roche head.
Headlong into China, because we see the of.
That's where the growth is in our industry so from an execution perspective.
Were very aggressive from the standpoint of what I would describe as other trends, we generally like the others.
Moving forward.
Look at the outcome of that and the evaluate both pluses and minuses based on you know if you have some kind of history and then make an informed decision so but that's where we are.
Okay. Thank you for the now it's.
Yes, the looks interesting, but it's really early in the game.
The.
Okay. That's it from me thanks, so much.
Okay.
Thank you and I'm not showing no further questions in the queue at this time.
Okay. So thank you for joining the sporting and we look forward the reconnecting next Monday.
Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program and you may now disconnect.
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