Q4 2021 Photronics Inc Earnings Call
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Okay.
Good day, and thank you for standing by and welcome to the Photronics fourth quarter fiscal year 2021 earnings Conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
I ask a question during the session you will need to press star one on your telephone.
As a reminder, this conference is being recorded Wednesday December eight 2021.
I'd now like to turn the conference over to John Jordan Executive Vice President and CFO.
Thank you Shannon good morning, everyone.
Welcome to our review of Photronics fiscal year, 2021, fourth quarter and full year financial results.
Joining me. This morning are Peter Kirlin, our Chief Executive Officer, and Chris program, 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 webpage.
Comments made by any participants on today's call May include forward looking statements that 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 update any forward looking information.
At this time I will turn the call over to Peter.
Thank you John and good morning, everyone.
We ended 2021 with accelerating momentum.
A market environment of robust design activity from our diverse customer base.
In addition, we strategically expanded capacity in 2021.
Most notably in display with additional with the addition of three new lithography tools.
These factors among others enable us to deliver another.
Order a year of record revenues across the business, including both IC N F. P D.
This is our fourth consecutive year of record revenue.
Straining our ability to drive our top line up.
The entirety of the semiconductor industry cycle.
These increasing levels of performance have been made possible by the efforts of the entire team to provide outstanding customer service.
Coupled with solid investments and the right technology and the proper location to position us to win in the marketplace.
In addition to growing the top line, we expanded margins during the quarter.
It's driven by operating leverage the ability to realize higher prices and mainstream products.
The present focus on cost reductions.
It was just one year ago in December.
When we communicated our long term target model the gross margins in the high Twenty's and operating margins in the high teens.
Today, we are already operating in the upper end of that model.
While we recognize the need to improve.
We are extremely pleased with the progress that we've made and even more excited about what is possible going forward.
Cash flow was strong for the quarter and the year.
Enable us to maintain a strong balance sheet.
While investing in inorganic growth and returning cash to shareholders.
Since initiating our first share repurchase program in 2018, we have brought back the hundred and $828 million of shares.
Reducing our share count by approximately $12 million.
Accustomed to our commitment.
Shareholder value.
Making targeted investments that improve our return on capital is one of the key factors contributing to our success.
Outside of strong end market demand and great execution by our entire team.
Our investment philosophy is built upon aligning operations and technology with specific market trends and ensuring that every decision to invest is backed by customer commitment.
This approach mitigates risk and enables us to quickly ramp new tools to volume production.
Which helps to ensure we deliver our required returns.
Work remains to be done to further improve return on invested capital.
We're very encouraged by our progress.
Over the last few years, our investment strategy has been focused on mounting a geographic expansion into China.
While exploiting the technology inflection from LCD of amyloid and advanced mobile displays.
Beyond these longer term secular trends, we are now capitalizing on another rapidly growing sector in the IC market.
Mainly in China and Southeast Asia.
That is now being referred to throughout the industry as you know I would say in quotes legacy foundry.
We've been speaking about this for the last several quarters.
As growing demand for masks versus relatively fixed supply has placed pressure on capacity, providing us with very rare very rare pricing leverage.
These technologies have been in production for many years.
With a particular focus on the advanced and mainstream.
It spans roughly from 14 90 nanometers.
Demand for these notes is tight across the entire photo mask industry.
For us as well as for our competitors, while at the same time more and more IC capacity is being installed.
Which leads us to conclude the favorable pricing will be sustainable.
Demand is particularly strong in China and Taiwan.
And along with our JV partner, we are investing now in the expansion of our facility in Taiwan, while adding capacity across the region to meet this growing demand.
We believe this is a unique opportunity that will play out over the next several years.
And we are positioning ourselves to capture the lion's share of the growth that we see in this segment.
We see several drivers of growth.
In the legacy foundry sector first on.
On the demand side Moores law is essentially come to a halt for most logic applications.
With 28 nanometer being the last node.
Where incremental economic benefit was achieved by moving to the next smaller node.
There are very few applications that justify the cost to design develop.
And manufacture at the very leading edge 10 nanometer and below.
For most applications order.
Do the job effectively.
Including automotive industrial applications and ubiquitous internet of things.
This is creating a renewed drive to install more semiconductor capacity yet to mature nodes.
Is the chip market leads.
The photo mass market follows as more and more customers are now differentiate their products based on design rather than next node technology.
This is very exciting for a matchmaker as we believe we are witnessing the effective rebirth.
Of the ASIC market.
Second the development of the semiconductor ecosystem in China spurred by that government's 2020 tight 2025 strategic goals.
Has caused significant divestment chip capacity at these mainstream.
Since our decision five years ago to expand our operations into China working closely with our JV partner, we've built a sizable business there with leading market share.
Revenue shipped into China is presently at a trailing 12 month 12 month run rate of $250 million.
This momentum positions us well to.
Continue growing in this important country.
Yeah.
Finally, the market growth within mainstream nodes is sustainable due to growing nationalism within the semiconductor industry.
After navigating the external shocks of trade agreements and a lot of times companies.
Companies are rethinking their reliance on manufacturing other countries, which is driving a huge investment in domestic chip manufacturing.
We are seeing this in Asia.
And are now seeing it in the U S and Europe.
In fact, the supply demand in version.
That led to pricing strength in Asia.
Is now being replicated in Europe.
And we are beginning to take pricing action in this region as well.
Well, our European business is much smaller than Asia.
It is more biased towards the mainstream and we anticipate pricing actions will raise sales and margins in this region as well.
Okay.
In summary, there are several catalysts of course, our business to drive sustainable growth a foot on this demand for both IC and SPD well into the future.
We have made investment decisions in the past that enabled us to benefit from these trends propel.
Propelling us the outstanding performance, we achieved in the fourth quarter and throughout the full year of 2021.
We have the widest range of technology and unparalleled global footprint that enables us to respond quickly.
Dynamic market and any customer request.
Record revenue expanding margins and strong cash flow position.
Position us to continue to make prudent investments that we believe will allow continued growth.
I am very proud of the entire team and what we're able to achieve this year and I'm optimistic that 2022 will be even better.
At this time I will turn the call over to John.
Thank you Peter and good morning again.
Record fourth quarter revenue of $181 million was driven by the same enablers, we've seen throughout 2021.
Strong demand growth and new designs for semiconductors and displays that are enabled by our leading technology unparalleled geographic presence and strategic investments to expand capacity.
Fourth quarter revenue improved 6% sequentially and 21% compared with last year demand strength was broad based including builds I see an S. P D and across both mainstream and high end products.
Both IC and <unk> also posted.
Record revenues for Q4, and the full year.
And I see the high end business grew primarily from logic demand for major foundries memory demand remained fairly stable.
The mainstream revenue increase was driven by the demand profile of Peter commented on in the pricing actions, we've enacted since earlier last year.
We believe these market trends are sustainable and expect to continue IC growth with more investments planned in 2022.
SPD strength was driven by displays for mobile applications as well as a recovery in mainstream LCD demand.
We've stated before that the LCD photo mass market was soft as customers focused on mass producing existing products to ship into their strong display markets. Thus, we're not releasing new products.
We saw this trend start to shift in the fourth quarter as panel makers began to introduce new product designs to maintain or expand market share.
This recovery together with continued strength in mobile displays and the full year benefit of our tools installed during 2021 instills confidence that 2022 will be another record year for F. P D revenue.
Demand for products shipped into China was strong again setting a record in Q4 and for the full year.
On a consolidated basis, China now represents 37% of our total revenue.
And that's P. D photo mask demand in China continues to increase those panel makers look to expand their presence in the global market.
IC sales to China customers are driven primarily by.
The high end of the mainstream technology.
And we've established a market leading position.
And that merchant dominant region.
Margin expansion in the quarter enabled us to deliver the best gross and operating margins since we before we begin repositioning the business in 2016.
Gross margin of 28, 7% and operating margin of 18, 5% position us solidly.
The upper end of the three year target model, we presented about a year ago at our Investor day.
Achievement of these margins results from technology leadership, consistent reliable delivery constant focus on cost reduction and insistence on disciplined expense control.
While we're in coverage encouraged by this performance, we recognize the need to execute consistently and we expect to be able to continue generating gross and operating margins in the target ranges.
Below the operating income line other income increased due primarily to unrealized foreign exchange gains primarily from the remeasurement of monetary assets and liabilities at our international locations.
The income tax provision increase was consistent with the increase in earnings and the net income to Noncontrolling interest increased with the strong performance of our joint ventures in China and Taiwan.
Earnings per diluted share was 33 cents for the quarter.
And 89 cents for the year with $61 million and 62 million diluted shares outstanding respectively.
Cash and equivalents were $277 million at the end of the fiscal year with $112 million in debt and net cash of $165 million.
Our balance sheet has remained strong throughout the year and as we discussed earlier in the year that increased from to low interest rate equivalent leases.
And equipment purchases in China.
Operating cash flow was $38 million in the fourth quarter, bringing full year operating cash flow to 100, and 451 million, 5% better than last year.
Capital expenditures of $17 million in the quarter, but brought the full year capex totaled $203 million.
Nearly $6 million in subsidies received and slightly below our previous projections as.
As some payments were deferred into 2022.
During fiscal 2022, we expect to spend about $100 million in Capex for point tools to supplement and expand existing mainstream IC capacity.
And for initial deposits on tools for delivery in fiscal 2023.
We believe our capital allocation strategy is having a tangible impact on shareholder value. We again spent $12 $5 million in the fourth quarter repurchasing 937000 shares of our stock, which brought total repurchases for the year to $3 9 million shares for 48 million.
Cumulatively, we have spent $66 million of the current $100 million authorization.
As Peter mentioned, we've repurchased an aggregate of $11 8 million shares for 127 $5 million since we began the repurchase initiatives.
Total shares eliminated from the diluted share count. If we include repayment of the convertible issues is over 22 million shares for an aggregate of $242 million. We believe there is significant value in the equity and we continue buying we plan to continue buying under.
This authorization.
Before I provide first quarter guidance I'll remind you that our visibility is always limited as well.
While it is typically only one to three weeks and demand for some of our products is inherently uneven and difficult to predict.
Additionally, the Asps for 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.
Given those caveats, we expect first quarter revenue to be in the range of $178 million to $86 million.
The photronics fiscal first quarter is normally a slower quarter due to seasonality.
But as we've discussed throughout our commentary and market demand factors are favorable across both IC and F. P D and we expect them to continue into 2022.
Thus, we're expecting the strong demand to more than offset the seasonal weakness and contribute to a stronger first quarter and carried through the remainder of the year for another strong strong single digit annual revenue increase.
Based on those revenue expectations in our current operating model we.
We estimate earnings per share in the first quarter to be in the range of 27 to 34 cents per diluted share.
We delivered better results results better than expectations in Q4, and the entire organization performed well in an environment that remains challenging.
That performance is a testament to the soundness of our operating model the strength of our customer and industry relationships.
The resilience of our employees and our disciplined cost management.
We're encouraged that we've brought the operations to this level and we believe that as we embark on our 2022 fiscal year.
We are well positioned to continue our consistent execution and deliver another great year.
Thanks, very much for your interest in Photronics I will now turn the call over to the operator for your questions.
Thank you as a reminder to ask a question you will need to press star one of your telephone.
Draw your question press the pound key.
Please stand by while we can.
Compile the Q&A roster.
Our first question comes from the line of Patrick Ho with Stifel. Your line is open.
Hi, there. Good morning. This is Brian on for Patrick Congratulations on the execution of results and thanks for letting us ask a few questions.
Maybe the first question.
Clearly that the mainstream IC soda mask revenue was very strong Q on Q can you just maybe first break out how much of that sequential increase was attributable to volume versus pricing, which seems to be having a significant effect on revenue and gross margins.
I think we've commented on that on that in the past Brian.
We've got about two margin points out of our price increases compared to.
Prior to when we.
When we started increasing prices so.
You can you can calculate the difference yeah and I would also point out that if you ive been here 14 years.
The mainstream business over the periods.
Maybe vacillate between $2 65 top end to $240 million on the bottom end.
And last.
Last year.
You know, we had $300 million in revenue in the mainstream segment.
Which is 20%.
Up year over year, we exited the year as you pointed out the $325 million run rate.
Yeah.
Yeah for sure and I guess thinking about just the physical <unk> January.
Our guidance.
And talking I'm thinking about the potential.
Further I see photo basket increases in Europe.
What kind of a favorable benefit do you think.
Materialized in the fiscal first quarter.
So on the gross margins.
We expect them to stay essentially the same revenue increase and the margin difference, who probably stay pretty similar as we are increasing prices as we mentioned.
In the other geographies revenue.
<unk> and <unk>.
The difference in module will stay right around the same.
And as far as the market is concerned.
We're too young to remember the ASIC business.
But when I was young.
The <unk> business.
Then suddenly its content to the ASIC business when companies like let's say logic, we're going great guns.
3% of IC revenue.
It was the best market for mass maker.
And Moores law in FPGA is basically.
Detroit, the ASIC business over many years.
But given the fact that the economic.
The paradigm that was part of Moore's law has derailed what.
What we see happening and what people now called legacy foundry is really a sick market rebounding.
Because it doesn't make economic sense to put more of those transistors on a very expensive dying more so.
So for US this is great because if.
It has put them at risk revenue dollar content per silicon dollar content.
Similar to what.
We saw before.
There's a lot of put a mask revenue leverage and legacy foundry.
So I think the key takeaway from this Brian is the <unk>.
Change and it's essentially a change in the paradigm where the pricing.
The environment is is going to be sustained over at least.
The medium term.
And Uh huh.
Our margins show that benefit and will continue to show that.
Got it got it.
And your I think your fiscal 'twenty, two capex was somewhat flattish relative to what the fiscal 'twenty one was you.
You did add three S. P D tools.
So last year.
So this year given sort of the dynamics in fiscal 'twenty. Two do you expect that to shift that more towards I see relative to F. D D and any other color you can provide on sort of what tools and where you're placing them on the IC side.
Yeah, I think we mentioned that during during the comments.
The tools are designed to supplement the existing capacity in several locations.
And I see and then some significant deposits for tools again, I see tools that we expect to have deliberate and ramp up in fiscal 'twenty three.
So maybe like one one location, where we can say, we're adding a major tool in and major capacity, we're kind of putting in tools that are necessary to get the full benefit out of existing tools.
So where we may be limited with inspection capacity for one of our lithography tools, we need more inspection capacity. So we would add that in and optimize.
The production out of the lithography tool.
Got it got it got it.
Yeah, and maybe one last one.
Yeah. It does it doesn't seem apparent based on the results, but did you see any disruptions direct or indirect in the quarter not only from supply chain, but but really in particular the power outages that are occurring.
In China, and how that sort of factor into your outlook as well.
Yes so.
Yeah.
As far as the supply chain material supply chain is concerned.
Like everybody else had.
<unk> had issues with local suppliers, but unlike most others, we have a global footprint. So if we had a problem with the supplier in Asia.
We reacted to that problem with the supplier.
Existing supplier in the U S or Europe for example, just to give you an example.
[laughter].
So the supply chain.
Even though there was disruption in their business.
Likewise.
If you look at the rolling.
Outages in China.
Cannot afford.
To have our operations.
Go down so we have our own backup power generation as part of our standard.
Civilization package so to speak.
So as a result of that we have been able to manage.
Wherever others have struggled.
So the answer is absolutely not no no disruption.
Okay, great. Thank you.
Thanks Tad.
To ask a question at this time. Please press Star then one are you touched on telecom.
Our next question comes from Tom definitely with D. A Davidson your line is open.
Yeah, good morning, and congratulations on especially great outlet during the seasonally weak quarter.
Quarter.
Peter I am old enough to remember the ASIC.
Our kids back in the Ninety's and early two thousands and it was the heyday for them for your business and hopefully be returned there. So on the mainstream business I'm curious on the Paas, we talked about how the pace of their did not support. The addition of new tools has that dynamic changed and can you go by.
New tools to economically support the mainstream business.
Yes, so to be clear the answer is we still cannot cope with the current pricing.
Install.
Lines to support the.
Mainstream.
Demand.
That's one of the reasons.
Why.
We're reasonably optimistic that the <unk>.
Racing.
The market pricing environment is going to stay strong, but what you can do.
And you know our Capex plan this year is.
As John described it well.
Sure.
We're sprinkling, either lithography and inspection tools around our global network most of them immediately or in Asia, but not all of them.
They try to take advantage of.
It'd be installed tool set.
Just add an incremental bump up.
Where the price of.
As I said, if either inspection and lithography given the other tools that are already in place it makes the.
Allows the told to hit our hurdle rate for return on invested capital. So this is a dynamic.
Situation pricing does not support.
Pull up full lines, but it does support.
And almost every factory, we have one or two tools.
To maximize the value of what we already got.
So that's what we're doing.
Never seen it like this never seen a year, where there's no high end tools bought because theres not going to be.
It's really.
Sprinkle the Sufi dust.
Everywhere, we can to maximize sparkle.
[laughter] alright.
So that's all right.
That sounds like that's kind of good news in the sense that you don't see a big surge of new capacity.
Mainstream side.
Which would put the dynamics over time it sounds like it's going to remain at this limited capacity.
Hopefully the pricing environment for some time to come.
Yeah, and eventually of course, if price goes up and up and up which would be a great thing.
There'll be a dynamic where you know new lines make economic sense and that would be different.
We're no different.
Sure.
How we look at that versus the comparator looks at that of course will be similar but not the same but I think we're still unless they have a different set of tool suppliers. Then we do we're still quite a ways.
From that.
But as I said, our mainstream business so year over year.
You know, 25% and were to bet.
That's considerably above that in the fourth quarter. So there is good.
If there is a lot of growth.
And.
When you listen to Covid.
Things like applied when they tell you that they're now selling more eight inch capacity and of course, they did the Hay day 200 millimeter expansion, it's pretty clear that there's.
There's a lot of capacity that's going to be installed and I think this has taken you know even very seasoned industry executives by surprise, but it's the fact that the economic power of Moore's law has been derailed.
And what was going on for years with eat out the basic market. As you know is hey that assumption was consolidated on a die that had three others because the silicon was almost free.
Not true it's not true so where this goes I think nobody really has a real clear.
Clear.
Picture.
What is clear and I was talking to someone this morning is this segment of our business is going to grow and it's going to grow materially.
And this is great for mask maker, because as I said earlier.
No.
The the mass content of Hastings was always by far the best.
Any product line.
Yes.
Alright that makes lot of sense. So that's my second question on the mainstream business was.
With particular strength or is it just broad based across all categories or is it really the lives of some of these.
That's like power.
Yes.
These are really driving the growth as you talked to equipment guys.
Probably the big driver for incremental equipment purchases.
What your trends are.
No.
Those are very strong sectors.
You know for us as well right because as I sit in my prepared remarks.
It's very clear you know where silicon goes as follows.
And the other good great thing about Evs is boy the display content in those as something special.
Yeah.
Something special.
So not only does it help our ICEE business, which we're talking a lot about but it's a fabulous for display.
Business, which had a new record last quarter and as John Cooley says said, we expect another record in Q1.
That business is screaming now.
Okay and then maybe the final question then for Chris what are you seeing on that.
Technology side for flat panel is it really the move between mainstream or I should say LCD and OLED, where you're starting to see some creep in a mini micro Leds.
So what is the impact from that.
What about side.
Yeah. Thanks.
So I would say no disruptive change.
As we've highlighted in the past, which is a gradual.
Capacity from LCD type displays to AMOLED, but there was a bit of a pause on that in the last year or so because a lot of the panel makers wanted to take advantage of higher LTV.
Despite prices. So there was some capacity put into that but that might argue it's kind of recovered and the trends.
Quite a lot of the capacity or add new capacity for AMOLED.
No content news and we think that'll continue unabated for the next three five years.
So those displays are more complicated it's more lithography and bass content as you know.
So that's a positive trend we also see some additional.
Complex technologies going into Tvs.
Cunard is a bunch of acronyms around them most of those drive stronger patterning solutions a lot of them are based on particularly the Korean panel makers desire to differentiate their products. So they are moving down the technology roadmap on the TV side as well, it's mostly LCD based with a very large ones.
And above, but they're adding functionality that's required with saga as well seeing a lot of the prototype designs for those and some are actually hitting the market as well.
Lastly, the micro OLED.
We're getting a lot of attention.
There's a lot of CES, the consumer electronics show displays with whole micro OLED.
Of course this technology is a very interesting one for the display people.
But it still seems quite some way could be used for larger format displays.
The mascot tested Mike.
L. A remains a little bit unclear one thing that's different about it compared to other displays.
Okay.
Those can be assembled is quite a modular format. So if you want to make 100 inch T V. The micro LCD approach tends to allow you to do that by assembling sub modules that are smaller so it might not drive substrate size photo mask, but what it does drive and we're seeing this now.
Circuitry.
Drive the micro Leds, which was kind of a promise to be very very simple simple Christmas tree lights. If you will we're seeing already that that problem is isn't really accurate, but we're going to get it to where the users are going to need it to her.
What is the transistors will be more complicated.
So you should circuits.
So we can think about the OLED trend once its finally adopted mass production, which is still a ways off for larger displays.
A positive trend for masks as well mini Leds that was used quite widely as you know it's taken Lee L. E D backlights from dozens.
<unk> thousand and that's driven some circuitry enhancements LCD screens.
Screens are most of those are a little bit more lower end sorts of masks.
Patterning solutions, but it's driven some demand as well so it's definitely strong technology trajectory for display and is.
We see it most all of them are indicative of both complex lithography.
Higher value basks.
Yeah, Hey, Chris gave you Tom I think the great no answer I.
That's very comprehensive.
I'd like to just chime in on the back of that.
If you look at for example, we've made comments before if you look at rigid AMOLED. It so.
Let's look at so at T. S T.
TV LCD TMT LCD, maybe has 68 NASS levels.
And then you can go to a rigid AMOLED led it's 12 or 13.
And now the most advanced envelope displace has maybe 25 or 26 NASS levels.
He is the specification going up the mask count is going up which is great for sort of mass players right.
One particular customer who will go nameless.
It makes big Tvs.
Right.
And as Chris made comments I think they were right on the money.
On the circuit complexity.
For micro ladies not many but micro so large customer right now they're assembling lets say 110 inch T V.
Say 50, PCB boards on the back.
And it's Christmas tree like like Chris described but not naming them. They have a specific project under way right now to replace those P. C DS with El P. P. S T F Ts.
And.
Just as is the case with the most complex amyloid.
Displays to build this very complex transistor array, which Chris described accurately requires 25 not slow.
So if that market happens to go that way.
Right that'd be great, we would absolutely love that because it would create high specification at high volume that will it right now that's clear that would be too expensive, but if it happens.
This will be very good for our display business yeah. So early on but as Chris said, it's very clear if you want to think functionality.
Same visual experience out of that large display built with micro Leds is gonna be built with mass sets that have complexity, that's similar to the most advanced amyloid.
You know Matt that we make.
I hope the market goes that way it'll be great for us.
Great well I appreciate all the detail on that and I think you'll see this one.
Thank you Tom.
Ladies and gentlemen, there are no further questions at this time I will now turn the call over to Peter Kirlin for closing comments.
Thank you once again for taking time to join US. We appreciate your interest in our company.
This is a great time to be associated with photronics, because we continue to raise the bar on our performance by delivering value to our customers.
Partnering with them to solve all their photo mask requirements at the same time, our financial with Comex is reaching new highs and we believe we're on the right path to create more value for shareholders.
We look forward to updating you always can move forward with.
All of you and your families are wonderful holiday season.
Ladies and gentlemen that concludes the conference call for today, we thank you for your participation and ask that you. Please disconnect your line.
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Good day, and thank you for standing by welcome to the Photronics fourth quarter of fiscal year 2021 earnings conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
Ask the question during the session you will need to press star one on your telephone.
As a reminder, this conference is being recorded Wednesday December eight 2021.
I'd now like turn the conference over to John Jordan, Executive Vice President and CFO.
Thank you Shannon good morning, everyone.
Welcome to our review of Photronics fiscal year, 2021, fourth quarter and full year financial results.
Joining me. This morning are Peter Kirlin, our Chief Executive Officer, and Chris program, 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 webpage.
Comments made by any participants on today's call May include forward looking statements that 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 update any forward looking information.
At this time I will turn the call over to Peter.
Thank you John and good morning, everyone.
We ended 2021 with accelerating momentum.
Market environment, a robust design activity from our diverse customer base.
In addition, we strategically expanded capacity in 2021.
Most notably in display with addition of the addition of three new lithography tools.
These factors among others enable us to deliver another.
Order a year of record revenues across the business, including both IC N F. P D.
This is our fourth consecutive year of record revenue.
Demonstrating our ability to drive our top line up.
Sorry, I missed semiconductor industry cycle.
These increasing levels of performance have been made possible by the efforts of the entire team to provide outstanding customer service.
Coupled with solid investment and the right technology and the proper location to position us to win in the marketplace.
In addition to growing the top line, we expanded margins during the quarter.
This was driven by operating leverage.
<unk> ability to realize higher prices and mainstream products.
I'm, the president and focus on cost reductions.
It was just one year ago in December.
And we have communicated our long term target model the gross margins in the high Twenty's and operating margins in the high teens.
Today, we are already operating in the upper end of that model.
While we recognize the need to improve.
We are extremely pleased with the progress that we've made and even more excited about what is possible going forward.
Cash flow was strong for the quarter and the year.
Enable us to maintain a strong balance sheet.
While investing in inorganic growth and returning cash to shareholders.
Since initiating our first share repurchase program in 2018, we have brought back 100 and $828 million of shares.
Reducing our share count by approximately $12 million.
Accustomed to our commitment.
Shareholder value.
Making targeted investments that improve our return on capital is one of the key factors contributing to our success.
Outside of strong end market demand and great execution by our entire team.
Our investment philosophy is built upon aligning operations and technology with specific market trends and ensuring that every decision to invest is backed by customer commitments.
This approach mitigates risk enables us to quickly ramping towards the volume production.
Which helps to ensure we deliver our required returns.
Work remains to be done to further improve return on invested capital.
We're very encouraged by our progress.
Over the last few years, our investment strategy has been focused on mounting a geographic expansion into China.
While exploiting the technology inflection from LCD of amyloid and advanced mobile displays.
Beyond these longer term secular trends, we are now capitalizing on another rapidly growing sector in the IC market.
Mainly in China and Southeast Asia.
That is now being referred to throughout the industry as you know I would say in quotes legacy foundry.
We have been speaking about this for the last several quarters.
As growing demand for masks versus relatively think supply has placed pressure on capacity, providing us with very rare very rare pricing leverage.
These photo mask technologies had been in production for many years.
With a particular focus on the advanced and mainstream.
It spans roughly from 40 to 90 nanometers.
Demand for these notes is tight across the entire photo mask industry.
For us as well as for our competitors, while at the same time more and more IC capacity is being installed.
Which leads us to conclude the favorable pricing will be sustainable.
Demand is particularly strong in China and Taiwan.
And along with our JV partner, we are investing now in the expansion of our facility in Taiwan, while adding capacity across the region to meet this growing demand.
We believe this is a unique opportunity that will play out over the next several years.
And we are positioning ourselves to capture the lion's share of the growth that we see in this segment.
We see several drivers of growth.
In the legacy foundry sector first on.
On the demand side Moores law is essentially come to a halt for most logic applications.
With 28 nanometer being the last node.
Incremental economic benefit was achieved by moving to the next smaller node.
There are very few applications that justify the cost to design develop.
And manufacture it at the very leading edge 10 nanometer and below.
For most applications order.
Through the job effectively.
Including automotive industrial applications and ubiquitous internet of things.
This is crazy renewed drive to install more semiconductor capacity yet to mature nodes.
As the chip market leads.
The photo mass market follows as more and more customers are now differentiating their products based on design rather than next node technology.
This is very exciting for our mass maker as we believe we are witnessing the effective rebirth.
Of the ASIC market.
Second the development of the semiconductor ecosystem in China spurred by that government's 2020 tight 2025 strategic goals.
As quite a significant investment in shipping capacity that these mainstream nodes.
Since our decision five years ago to expand our operations into China working closely with our JV partner, we have built a sizable business there with leading market share.
Revenue shipped into China is presently at a trailing 12 month 12 month run rate of $250 million.
This momentum positions us well to.
Continue growing in this important country.
Finally, the market growth within mainstream nodes is sustainable due to growing nationalism within the semiconductor industry.
After navigating the external shocks and trade agreements and a lot of times companies.
Companies are rethinking their reliance on manufacturing other countries, which is driving investment in domestic chip manufacturing.
We have seen this in Asia.
And are now seeing it in the U S and Europe.
In fact, the supply demand in Virginia.
That led to pricing strength in Asia.
Now being replicated in Europe.
And we are beginning to take pricing action in this region as well.
Well, our European business is much smaller than Asia.
It is more biased towards the mainstream and we anticipate pricing actions will raise sales and margins in this region as well.
Okay.
In summary, there are several catalysts of course, our business to drive sustainable growth, let's put them as demand for both IC and SPD well into the future.
We have made investment decisions in the past that enabled us to benefit from these trends propel.
Propelling us the outstanding performance, we achieved in the fourth quarter and throughout the full year of 2021.
We have the widest range of technology and unparalleled global footprint that enables us to respond quickly.
Dynamic market and any customer request.
Record revenue expanding margins and strong cash flow position.
Position us to continue to make prudent investments that we believe will allow continued growth.
I am very proud of the entire team and what we're able to achieve this year and I'm optimistic that 2022 will be even better.
At this time I will turn the call over to John.
Thank you Peter and good morning again.
Record fourth quarter revenue of $181 million was driven by the same enablers, we've seen throughout 2021.
Strong demand growth and new designs for semiconductors and displays that are enabled by our leading technology unparalleled geographic presence and strategic investments to expand capacity.
Fourth quarter revenue improved 6% sequentially and 21% compared with last year demand strength was broad based including both IC and S. P D and across both mainstream and high end products.
Both I C N F. P. D also posted.
Record revenues for Q4, and the full year.
And I see the high end business grew primarily from logic demand for major foundries memory demand remained fairly stable.
The mainstream revenue increase was driven by the demand profile that Peter commented on in the pricing actions, we've enacted since earlier last year.
We believe these market trends are sustainable and expect to continue IC growth with more investments planned in 2022.
<unk> strength was driven by displays for mobile applications as well as a recovery in mainstream LCD demand.
We've stated before that the LCD photo mass market was soft as customers focused on mass producing existing products to ship into their strong display markets. Thus, we're not releasing new products.
We saw this trend start to shift in the fourth quarter as panel makers began to introduce new product designs to maintain or expand market share.
This recovery together with continued strength in mobile displays and the full year benefit of our tools installed during 2021 instills confidence in 2022 will be another record year for F. P D revenue.
Demand for products shipped into China was strong again setting a record in Q4 and for the full year.
On a consolidated basis, China now represents 37% of our total revenue.
In F. P D photo mask demand in China continues to increase those panel makers look to expand their presence in the global market.
IC sales to China customers are driven primarily by.
The high end of the mainstream technology.
And we've established a market leading position.
And that merchant dominant region.
Margin expansion in the quarter enabled us to deliver the best gross and operating margins since we before we began repositioning the business in 2016.
Gross margin of 28, 7% and operating margin of 18, 5% position us solidly.
The upper end of the three year target model, we presented about a year ago at our Investor day.
Achievement of these margins results from technology leadership, consistent reliable delivery constant focus on cost reduction and insistence on disciplined expense control.
Well we're in coverage they encouraged by this performance, we recognize the need to execute consistently and we expect to be able to continue generating gross and operating margins in the target ranges.
Below the operating income line other income increased due primarily to unrealized foreign exchange gains primarily from remote remeasurement of monetary assets and liabilities at our international locations.
The income tax provision increase was consistent with the increase in earnings and the net income to Noncontrolling interest increased with the strong performance of our joint ventures in China and Taiwan.
Earnings per diluted share was 33 cents for the quarter.
And 89 cents for the year with $61 million and 62 million diluted shares outstanding respectively.
Cash and equivalents were $277 million at the end of the fiscal year with $112 million in debt and net cash of $165 million.
Our balance sheet has remained strong throughout the year and as we discussed earlier in the year that increased from to low interest rate equivalent leases and equipment purchases in China.
Operating cash flow was $38 million in the fourth quarter, bringing full year operating cash flow to 100, and 451 million, 5% better than last year.
Capital expenditures of $17 million in the quarter, but brought the full year capex totaled $203 million net of nearly $6 million in subsidies received and slightly below our previous projections.
As some payments were deferred into 2022.
During fiscal 2022, we expect to spend above about $100 million in capex for point tools to supplement and expand existing mainstream IC capacity.
And for initial deposits on tools for delivery in fiscal 2023.
We believe our capital allocation strategy is having a tangible impact on shareholder value. We again spent $12 $5 million in the fourth quarter repurchasing 937000 shares of our stock, which brought total repurchases for the year to $3 9 million shares for 48 million.
Cumulatively, we have spent $66 million of the kind of.
Current $100 million authorization.
As Peter mentioned, we've repurchased an aggregate of 11 8 million shares for $127 $5 million since we began the repurchase initiative.
Total shares eliminated from the diluted share count. If we include repayment of the convertible issues is over 22 million shares for an aggregate of $242 million. We believe there is significant value in P lab equity and we continue buying we plan to continue buying under.
This authorization.
Before I provide first quarter guidance I'll remind you that our visibility is always limited as our backlog is typically only one to three weeks and demand for some of our products is inherently uneven and difficult to predict.
Additionally, the Asps for 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.
Given those caveats, we expect first quarter revenue to be in the range of 178 $286 million.
Photronics fiscal first quarter is normally a slower quarter due to seasonality.
But as we've discussed throughout our commentary and market demand factors are favorable across both IC and SPD and we expect them to continue into 2022.
Thus, we're expecting the strong demand to more than offset the seasonal weakness and contribute to a stronger first quarter and carried through the remainder of the year for another strong strong single digit annual revenue increase.
Based on those revenue expectations in our current operating model, we estimate earnings per share in the first quarter to be in the range of 27 to 34.
For diluted share.
We delivered better results results better than expectations in Q4, and the entire organization performed well in an environment that remains challenging.
That performance is a testament to the soundness of our operating model the strength of our customer and industry relationships. The resilience of our employees and our disciplined cost management.
We're encouraged that we've brought the operations to this level and we believe that as we embark on 2022 fiscal year, we are well positioned to continue our consistent execution and deliver another great year.
Thanks, very much for your interest in Photronics I will now turn the call over to the operator for your questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
Australia question press the pound key please stand by while we.
We compile the Q&A rosner.
Our first question comes from the line of Patrick Ho with Stifel. Your line is open.
Hi, there. Good morning. This is Brian on for Patrick Congratulations on the execution of results and thanks for letting us ask a few questions.
Maybe the first question.
Clearly that the mainstream IC photo mask revenue was very strong Q on Q can you just maybe first break out how much of that sequential increase was attributable to volume versus pricing, which seems to be having a significant effect on revenue and gross margins.
Yes.
Think we've commented on that on that in the past Brian.
We've got about two margin points out of our price increases compared to a.
Prior to when we.
When we started increasing prices so.
You can you can calculate the difference yeah and I would also point out that if you I didn't hear in 14 years.
The mainstream business over the next periods.
Maybe vacillate between $2 65 top end and $240 million on the bottom and.
Last year we.
We had $300 million in revenue in the mainstream segment, which is 20%.
Year over year, we exited the year as you pointed out the $325 million run rate.
Yeah for sure and I guess thinking about just the physical <unk> January.
Guidance.
And talking and thinking about the potential.
Further I see photo mask increases in Europe.
What kind of favorable benefit do you think.
Materialized in the fiscal first quarter.
On the gross margins.
We expect them to stay essentially the same revenue increase and the margin difference, who probably stay pretty similar as we are increasing our prices as we mentioned.
The other geographies revenue the increase in the.
The difference in module will stay right around the same.
Again as far as the market is concerned.
You're too young to remember the ASIC business.
When I was young.
The ASIC business.
<unk> content to the ASIC business when companies like LSA logic, we're going great guns.
About 3% of IC revenue.
It was the best market for mass maker.
And Moores law in FPGA is basically.
Destroy the ASIC business over many years.
But given the fact that the economic.
The paradigm that was part of Moore's law has derailed, what we see happening and what people now called legacy foundry Israeli AC market kind of rebounding.
Because it doesn't make economic sense to put more of those transistors on that very expensive dying more.
So for US this is great because if.
It has put a mask revenue dollar content per silicon dollar content bids.
Similar to what.
We saw it before.
There's a lot of fed him ask revenue leverage and legacy foundry.
So I think the key takeaway from this Brian is the change.
Change and it's essentially a change in the paradigm where the pricing.
The environment is is going to be sustained over at least.
Medium term.
And.
I think our margins show that benefit and we will continue to show that.
Got it got it.
And your I think your fiscal 'twenty, two capex is somewhat flattish relative to what the fiscal 'twenty. One was you did add three F. P D tools.
So, but last year and so this year given sort of the dynamics in fiscal 'twenty. Two do you expect that to shift that more towards I see relative to F. D D and any other color you can provide on sort of what tools and where you're placing them on the IC side.
Yeah, I think we mentioned that during during the comments.
The tools are designed to supplement the existing capacity in several locations.
And I see and then some significant deposits for tools again, I see tools that we expect to have delivered and ramp up and in fiscal 'twenty three.
So maybe like one one location, where we can say, we're adding a major tool in and major capacity, we're kind of putting in tools that are necessary to get the full benefit out of existing tools, So where we may be limited with inspection capacity.
For one of our lithography tools, we need more inspection capacity, so we would add that in and optimize.
The production out of the lithography tool.
Got it got it.
Yeah, and maybe 111 last one.
Yeah. It does it doesn't seem apparent based on the results, but did you see any disruptions direct or indirect in the quarter not only from supply chain, but but really in particular the power outages that are occurring in China, and how that sort of factor into your outlook as well.
Yes so.
As far as the supply chain and material supply chain is concerned you.
We like everybody else.
<unk> had issues with.
Local suppliers.
Unlike most others, we have a global footprint. So if we had a problem with the supplier in Asia.
We reacted to that problem with the supplier exist.
Existing supplier in the U S or Europe for example, just to give an example.
[laughter].
So the supply chain.
Even though there was disruption they didnt fit with our business.
Likewise.
If you look at the rolling.
Outages in China.
We cannot afford.
To have our operations.
Go down so we have our own backup power generation as part of our standard and the facilitation package so to speak.
So.
As a result of that we have been able to manage wherever others have struggled.
So the answer is absolutely not no no disruption.
Okay, great. Thank you.
Thanks.
To ask a question at this time. Please press Star then one are you touched on telecom.
Our next question comes from Tom definitely with D. A Davidson your line is open.
Yeah, good morning, and congratulations on especially great outlook during the season.
Great quarter.
Peter I am old enough to remember the zinc markets back in the nineties.
And it was the heyday floor.
For your business in the house will be returned there so on the mainstream business.
I'm curious you know in the past some talks about how the pricing there did not support. The addition of new tools.
That dynamic changed and can you go buy new tools to economically support the mainstream business.
Yes, so to be clear the answer is we still cannot cope with the current pricing.
Install new lines to support the mainstream.
Demand that's one of the reasons you know.
Why.
Reasonably optimistic.
The pricing.
The market pricing environment is going to stay strong, but what you can do.
And you know our Capex plan this year as John.
John described it we're.
We're sprinkling, either lithography and inspection tools around our global network most of them immediately or in Asia, but not all of them.
They try to take advantage of.
The installed toolset.
And just add an incremental bump up.
Where the price of.
As I said, if either inspection and lithography given the other tools that are already in place makes the.
Allows the told they hit our hurdle rate for return on invested capital. So this is a dynamic.
Situation pricing does not support.
Full up full lines, but it does support.
And almost every factory, we have one or two tools.
To maximize the value of what we already got.
So that's what we're doing never seen a year like this never seen a year, where there's no high end tools board, because theres not going to be.
It's really.
Sprinkle the fufu dust.
Everywhere, we can to maximize sparkle.
[laughter] alright.
Alright.
That's kind of good news.
You don't see a big surge of new capacity added on the mainstream side.
Which would hurt the dynamics over time it sounds like it's going to remain in this limited capacity and hopefully the pricing environment for some time to come.
Yeah, and eventually of course, if price goes up and up and up which would be a great thing.
There'll be a dynamic where you know new lines make economic sense and that will be different for different or.
How we look at that versus the comparator looks at that of course will be similar but not the same but I think we're still unless they have a different set of tool suppliers and we do we're still quite a ways.
From that point.
But as I said, our mainstream business have a year over year.
You know, 25% and where to baked.
That's considerably above that in the fourth quarter. So there is.
There is a lot of growth and.
When you listen to companies like applied when they tell you that they're now selling more eight inch capacity and of course, they did the Hay day 200 millimeter expansion, it's pretty clear.
There's a lot of capacity that's going to be installed and I think this has taken even very seasoned industry executives by surprise.
But it's the fact that the economic power of Moore's law has been derailed.
And what was going on for years with eight out the basic market. As you know is hey that function was consolidated on a die that had three others because the silicon was almost free.
Not true it's not true so where this goes I think nobody really has a real.
Clear.
Picture, but what is clear and I.
I was talking to someone this morning is this segment of our business is going to grow and it's going to grow materially.
So and this is great for a matchmaker because as I said earlier.
The the NASCAR intent of Asics was always by far the best in any product line the best.
No that makes a lot of sense then my second question on the mainstream business.
As you know it was are you seeing with particular strength or is it just broad based across all categories or is it really the lives of some of these segments like power needs.
These are really driving the growth you talked the equipment guys.
Probably the big driver for incremental equipment purchases.
Here's what your trends are.
No.
Those are very strong sectors.
You know for us as well right because as I said in my prepared remarks.
It's very clear you know where silicon goes as follows.
And the other good great thing about Evs is boy the display content in those as something special.
Something special.
So not only does it help our ICEE business, which we're talking a lot about but it's a fabulous for our display.
A business, which had a new record last quarter and as John Cooley says said, we expect another record in Q1.
That business is screaming now.
Okay. So that would be the final question then for Chris what are you seeing on that.
Technology side for flat panel is it really the mood between mainstream or I should say LCD and OLED, where you're starting to see some creep in a mini micro Leds.
So what is the impact from that on the mass side.
Yeah. Thanks, So I would say no disruptive change beyond the trends.
Trends, we've highlighted in the past.
The gradual pivot of capacity LCD type displays.
It was a bit of a pause on that in the last year or so because a lot of the panel makers wanted to take advantage of higher LTV.
Display prices so there was.
Put into that but that might argue it's quite a recovered and trends.
To close a lot of the capacity, you're adding new capacity.
Alright.
Great News and we think that'll continue unabated for the next three five years.
So those displays are more complicated it's more lithography in that context.
No. So that's a positive trend we also see some additional comp.
Complex technologies going into Tvs.
Cunard is a bunch of acronyms around them most of those drive stronger patterning solutions a lot of them are based on particularly the Korean panel makers desire to differentiate their products. So they are moving down the technology roadmap on the TV side as well, it's mostly LCD based with the very large ones.
And above, but they're adding functionality that's required and while the saga as well we're seeing a lot of the prototype designs for those and some are actually hitting the market as well.
The micro OLED.
We're getting a lot of attention.
There's a lot of CEO.
Even electronics show displays with whole micro OLED.
Of course this technology is a very interesting one for the display people.
But it still seems quite some way being used for large format displays.
The mascot tested micro Leds remains a little bit unclear one thing that's different about it compared to other displays.
These larger displays.
Kind of modular format. So if you want to make 100 inch T V. The micro OLED approach tends to allow you to do that.
Sub modules that are smaller.
Might not drive substrate size photo masks, but what it does drive and we're seeing there's no circuitry.
Drive the micro Leds, which was kind of a promise to be very very simple and simple Christmas tree lights. If you will we're seeing already that that problem is isn't really accurate.
Two of the users are going to need it to current and voltage.
There'll be more complicated compensation circuits.
So we can think about the trend once its finally adopted mass production, which is still a ways off for larger displays.
It'd be a positive trend from that as well.
Mini Leds that was used quite widely as you know it's taken Lee L it'd be back lights from dozens.
And that's driven some circuitry enhancements LCD screens.
Screens are most of those are a little bit more lower end sorts of masks.
Patterning solutions, but it has driven some demand as well so it's definitely strong technology trajectory for display and as we see it most all of them because of a more complex. This argument.
Higher value basks.
Yeah, Hey, so that Chris gave you Tom I think a great answer.
Very comprehensive.
I'd like to just chime in on the back of that.
If you look at for example, we've made comments before if you look at rigid AMOLED Ed. So let's look at so at T. S. T a.
Uh huh.
T V LCD TMT LCD, maybe has six to eight NASS levels.
And then you can go to a rigid AMOLED led it's 12 or 13.
And now the most advanced envelope displace has maybe 25 or 26 NASS levels.
So not only is the specification going up the mask count is going up which is great for sort of mass players right.
One particular customer who will go nameless makes.
It makes big Tvs.
Alright.
And as Chris made comments I think they were right on the money.
On the circuit complexity.
For micro ladies not many but micro so large customer right now.
I'm going to say 110 inch T V.
Say 50, PCB boards on the back.
It's Christmas tree like like Chris described but not naming them. They have a specific project under way right now to replace those P. C DS with LTE P. S tmt's.
And.
Just as is the case with the most complex amyloid disc.
Displays to build this very complex transistor array, which Chris described accurately requires 25 nice level.
So if that market happens to go that way.
Right that would be great. We would absolutely love that because it would create high specification and high volume that will it right now that is clear that would be too expensive, but if it happens.
This will be very good for our display business yeah. So early on but as Chris said, it's very clear if you want the same functionality.
Same visual experience out of that large display built with micro Leds is going to be built with mass sets that have complexity that similar to the most advanced <unk>.
Masks that we make.
I hope the market goes that way it'll be great for us.
Great well I appreciate all the color on that and I think you'll see the tax one.
Thank you Tom.
Ladies and gentlemen, there are no further questions at this time I will now turn the call over to Peter Kirlin for closing comments.
Thank you once again for taking time to join US. We appreciate your interest in our company.
This is a great time to be associated with photronics, because we continue to raise the bar on our performance by delivering value to our customers.
Partnering with them to solve all their photo mask requirements at the same time, our financial performance is reaching new highs and we believe we are on the right path to create more value for shareholders.
We look forward to updating you as we move forward and I wish all of you and your families I wonder if the holiday season.
That concludes the conference call for today, we thank you for your participation and ask you. Please disconnect your line.