Q2 2022 Photronics Inc Earnings Call
Okay.
Ladies and gentlemen, please standby.
Your scheduled conference will begin shortly please continue to standby. Thank you for your patience.
[music].
Yeah.
Yeah.
Good day and thank you for standing by welcome to the Photronics Q2 fiscal year 2022 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. As a reminder, this conference is being recorded Wednesday may 25th 2022.
I would now like to turn the conference over to John Jordan Executive Vice President and CFO you may begin.
Thank you Tanya.
Good morning, everyone.
Welcome to our review of Photronics fiscal 2022 second.
Second quarter results. Joining me. This morning are frankly, our recently appointed Chief Executive Officer.
Chris <unk>, our Chief Technology Officer, and Erik <unk>, our corporate controller, and Chief Accounting 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 or 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 Frank.
Thank you John .
Good morning, everyone.
I'd like to begin this morning.
Stadium.
I am to be with you today.
As CEO of Photonics.
Since joining the company in 2006 I have half create.
Operation strategy in Asia.
And the formation of two joint venture with Dai Nippon printing.
The company and also greater geographic expansion of our operations into China.
Turning to our financial results.
Once again deliver a second Greg had revenue in the second quarter.
Improving 8% sequentially, a strong end market demand.
The photo price realization across the IC segment.
And also the continuous production ramping up of our shaman and Hefei operations.
Yeah.
In addition to our top line growth.
We expanded our gross and operating margins.
Gross margin was 36%.
And operation margin, 25%.
The net result was EPS of <unk> <unk>.
Cash generation was also strong as we enter a year with $247 million in cash.
Which position us to continue to invest in it.
Profitable growth opportunities.
Okay.
As CEO .
I am fully committed to continue our organic growth strategy.
Our revenue growth.
The margin expansion.
And also where kit is boroian additional growth initiative.
For our revenue growth.
The growth is achieved by winning more share.
The market right now.
We have been working closely with our customers.
To meet their needs in technology and capacity roadmap.
We are building in partnership with several key cost of us.
We also signed many long term agreements so called L Tpa with our key customers.
These kind of approach so for us very well to make it a critical your basement.
And it helps us too.
To quickly get return on our investment.
Okay.
Recently, the ICL P. The operation into China, a very good example of this approach.
And so the market either for Charlie's has become a trusted partner in case of prior of our customer in both the IC and <unk>.
D.
In addition to our revenue growth all.
Profit ability has been improving continuously.
This is achieved.
Very execution of three major key items the.
The product update on optimization.
Effective cost management.
And operation efficiency it hasn't it.
On top of all of these actions.
We have implemented some pricing adjust strategies.
Based on current market subprime deferred embedded situation.
Okay.
My commitment is to is broad deal strategies.
To further our growth initiatives.
I've been very involved in this process saves joy at Flextronics.
We have a very good relationship with our customers vendors and various partners throughout Asia.
Yeah.
With the emerging trend of global supply.
Supply chain restructuring.
Crude IC manufactured in low cauterization.
Saatchi is matter of USA.
Photonics west identify our activities and relationships.
Our agents.
Auto Geographics.
I am very certain that.
We saw a strong existing global footprint and our successful experience in Asia.
We will be at a fall of hay with this.
Yes.
In our business.
We have performed very well.
<unk> first half off.
20th on Youtube.
And we are on track to have the best.
In the history of the company.
I am very proud of our team.
And together, we will continue to outperform.
Plenty of 'twenty two.
Thank you very much and this time I'd tell them to call it John .
Thank you Frank.
Good morning again, everyone.
Second quarter was another record quarter for photronics, our fifth consecutive record quarter.
Revenue improved 8% quarter over quarter, and 28% year over year as demand across the board remained strong.
We're executing on our growth strategy by investing in technology aligns with market drivers and partnering with customers by establishing long term purchase agreements that enable us to quickly and profitably ramp new tools, while maintaining high utilization on existing tools. This quarter is another proof.
Point that that approach is working.
I see revenue grew 12% sequentially and 30% year over year on strong global demand for our photo masks.
High end demand was driven by foundries in Asia and U S semiconductor.
Semiconductor content and consumer goods continues to increase.
With more chips and electronics automotive appliances, and many more applications new designs continue being released to satisfy this demand.
Advances in communication infrastructure, such as the rollout of five G are another catalyst and demand growth.
This proliferation of chips as a driver of photo mass demand and for photronics as use of semiconductors continues to proliferate and demand growth continues beyond the capacity to supply it.
It creates a change in pricing environment, primarily in trailing edge masks, but also in the high end business that is helping us to further expand margins, which I'll discuss in more detail later.
MPD was down slightly quarter over quarter, primarily due to a decrease in mainstream LCD.
And was slightly higher thanks to continued strong mobile demand.
Growth in displays for mobile applications offset a decline in G 10, five a large investment.
We expect demand to remain strong for amyloid and L. TPS displays used in mobile applications. Some increase in G 10, five and continued reliable demand for mainstream LCD displays.
Revenue from product shipped to China customers achieved another record quarter, improving 8% sequentially and 58% year over year.
We are the clear market leader in this growing region.
Our first business development and operation expansion initiatives are reaping the benefits we anticipated.
Gross and operating margins improved during the second quarter.
Benefiting from the high leverage in our operating model and well demonstrated discipline and keeping costs low.
Gross margin of 35, 7% and operating margin of 25, 5% of both well within the long term ranges we communicated in February .
We fully expect this business environment to continue well into the future. We have based our investment plans in that expectation and we anticipate that the increase margins will be sustained but the demand supply imbalance due to limited trailing edge capacity.
Our target model, which will take us into fiscal 2024 has been updated to reflect these new growth opportunities and is included in the supplemental slides posted to our website. This morning.
Our approach to these target models is to be realistic without being aggressive although in retrospect consistently improving business conditions in the photo mass space and our execution has suggested that the model should be updated.
The updated target model layers in only the revenue increments anticipated from our currently planned capex investments and the pricing opportunities provided by continuation of the current business environment with consideration at the low end of the target debt at three years.
The strong semiconductor business cycle, the risk of a downturn is increasing.
Income tax provision increased due to the increased earnings and net income to non controlling interest increased with the strong performance of our joint ventures in China and Taiwan.
Changes in foreign exchange rates resulted in an 8 million dollar gain in other income.
Equivalent to approximately seven cents a share.
As a result diluted earnings per share were 49 cents.
We strengthened our balance sheet during the quarter with cash and equivalents, increasing to $329 million and debt decreasing to $83 million, resulting in net cash of $247 million.
We generated $44 million in cash from operations and received $10 million and contributions from our JV partner for IC capacity expansion in Asia.
Capex in Q2 was $16 million and we received a little over a million in government subsidies for investments in China.
This brings our total capex for the year net of subsidies to $33 million, we still expect capex of $100 million in 2022, as we increase our mainstream IC capacity and increase the size of our facility in Taiwan.
Before I provide 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 Asp's for high end mask sets are high.
And as this segment of the business grows a relatively low number.
And orders can have a significant impact on our quarterly revenue and earnings.
Given those caveats, we expect third quarter revenue to be in the range of $205 million to $215 million driven by a continuation of favorable end market demand trends across both IC and F. P D.
Based on those revenue expectations in our current operating model, we estimate adjusted earnings per share for the third quarter to be in the range of 45 to 55 cents per diluted share.
As Frank said, we're on track to deliver the best year in the company's history with strong end market demand strategic capacity expansions higher profitability and a strong balance sheet to support further growth initiatives.
Business conditions in execution by our team across the organization brought us within the ranges of our previous target model and support new projections achievement of that new target model will continue to create and deliver more value for our shareholders.
I'll now turn the call over to the operator for your questions.
Certainly ladies and gentlemen, if you do have a question at this time. Please press Star then one on your Touchtone telephone.
Your question. Please press the pound key please standby, while we cant well the Q&A roster.
Okay.
Yes.
Again, ladies and gentlemen to ask a question. Please press Star then one on your Touchtone telephone.
One moment.
Okay.
Yeah.
And our first question comes from Patrick Ho Stifel. Your line is open.
Thank you very much and Brian first off it's good to hear your voice and congratulations on the job and best of luck going forward.
Maybe a first question on the demand environment, obviously that looks very healthy.
Moving forward in both mainstream and high end IC.
Are any of the recent Chinese market volatility changed.
Changing your outlook at least in the near term in terms of you know potential pullbacks in that region.
Or are you still seeing continued strong demand.
In the IC market in China.
Central a paycheck.
The Shanghai <unk> and knocked off initially.
Slow down on our bid activities.
In China, especially in Shanghai area.
So we do see some.
New product tape outs slowdown.
Initially however, the situation has been.
Gradually recover and recently, we received a new order.
And Youll Taebo startup comment.
So I think there is a impact however, it's short and it shall be a 48 recall that already.
Great that's helpful and maybe as a follow up question for John Obviously, the operating leverage was excellent this quarter are.
As well as the.
Nightclubs and surprised to see the new target model.
Just what gives you confidence because you were looking at some new target model metrics up over 40% gross margins.
A 30% operating margin.
The number that we've never seen from.
The photo Baskin industry as a whole is it more of the pricing aspect or is it a demand and just the revenue growth that's driving this.
Margin leverage.
Good question, Patrick and essentially yes to all of the above so the.
I'd call it the business environment put it provides us a lot of opportunity for our pricing, though we haven't we've never had before and we've got Ah as as Frank mentioned, we have long term purchase agreements with many customers.
Some of which we've kind of renegotiated and there are others coming up for renewal.
Some are some are one year some are longer than one year and as they come up for renewal the prices.
You know the opportunity is still there to continue.
The price increases so a lot of our locations or add capacity, so where the operating leverage is outstanding.
Outstanding from those locations and then the opportunities.
Created by the business environment.
To improve pricing.
We expect to continue well into the future and I think you know.
You've read the same things that we've read and most of what you read.
Supports that assumption.
Great. Thank you very much.
Thank you Patrick Thank you.
And our next question comes from Hans Chung of D. A Davidson your line something.
Right I agree.
Okay. Thank you for taking my question.
Strong readouts.
First question.
The labor rate.
The pricing adjustment.
Quarter.
But I can that were.
It is across the board.
What kind of magnitude.
We are eating out yourself.
How much can we queue.
Q increase.
Going forward.
Hi, hands us a nice to meet you and thanks very much for the question.
So we don't we don't generally talk about.
The specific amounts of pricing adjustments, because it's it's really competitive information.
But we've been able to increase prices in the mainstream.
Primarily because there is such limited capacity.
And the domain to the mainstream demand is expanding.
So ubiquitously just because of the use of.
Non leading edge chips in everything everything we do but we've also had the opportunity to increase our high end pricing as well for for similar reasons and because of our technology.
Technology leadership.
So without without talking about specific amounts or percentages.
You know the environment is there and we're able to take advantage of it and we expect it to continue going forward I hope does that answer the question.
Yeah.
Thank you and then.
I guess fall off.
So as we move to our you're talking Tomorrow right.
Higher box.
Yeah.
He also.
The price increase.
Overtime, and just just to get it.
To what degree.
No.
In terms of pricing.
We might not see.
C O.
Okay.
Ill stop there.
Two of the Cascade.
Oh, I don't pay all of it.
Now the economy at this moment, but just try to get it right.
How far are we can be here.
I mean, if we can see.
I know that 40% margin.
Yes.
No.
Right now the.
The capacity issue we.
Leave where loss that into next year and these are the <unk>.
Main reason.
Cause is.
Long lead time of that equipment.
Sam as a wafer fab equipment, a photo mask equipment.
To deliver time has become very very low.
So that.
The value increase a lot however on a surprise that it would take time.
To provide some capacity toward our cost down toward a market so we'd be Dave.
Price.
Increased.
That's a very high profit beta T. It.
Will it continue into.
It actually.
Okay.
I might also kind of supplement that with.
A comment about the captives are photo mask business as well with the the amount of investment.
And resources required for the leading edge.
Chips. These days the captives are reluctant to invest in mainstream capacity in there also.
We understand there also inclined to start outsourcing more of that mainstream.
Demand the mainstream photo mass business so.
We're looking we haven't incorporated any of that into our model, but we fully expect that to also be an upside.
To the model.
Got it that's helpful and then.
Last question.
Regarding your capacity.
We're continuing to expand all the T.
So what would be the seawall right in terms of revenue.
This year in that.
I guess just.
Hum.
Okay.
Yeah, well, what will be the DPC labor capacity to market demand.
D C.
Okay. So that so the.
Our guidance for next quarter and one can assume we don't give full year guidance. So a lots of drawing assumption about the fourth quarter and into next year is based on.
The additions to capacity that we've already incorporated into our Capex budget for this year.
So as those tools those new tools come online we've incorporated the revenue the incremental revenue from those tools into our into our guidance expectation and into our target.
Target model, so what we've forecast is essentially capacity.
To the extent, we have it and continue increasing is there are some locations that are that are not operating at capacity and that's based on the geographic demand profile.
But for most of our locations are operating at capacity that capacity will expand as we add those those this year are point tools in mainstream and then next year.
High end tools, they might want to point out.
That.
I mentioned it in my comments, but our long term model target model is based only on the Capex. That's in this year's budget and some of which will be delivered in next year, but there is no capex additional capex.
That we would plan for next year. In addition to what's what's already ordered from this year or 2024. So one can expect the capacity to increase for those capex additions, but again those annoying not incorporated into our target model.
Got it got it okay. Thank you guys.
Thank you and our next question.
Our next question comes from Gus Richard of Northland. Your line is open.
Yes, thanks for taking my questions.
Great quarter.
Could you just give.
Give a little color on the sequential increase in revenue was that.
Mostly price or was there some volume component to that.
It was it was both.
Mostly price, but some volume.
Okay, and then in terms of the long term purchase agreements is that still primarily at P. D or is it starting to spread out into the IC business.
Actually start with IC.
Because if we do have.
Kind of agreement, we saw certain key foundry customer for several years.
But right now we are expanding our customer base to sign the contract so.
His moment at Cava, both IC and <unk>.
Customers.
Okay got it.
Just roughly how much of your revenue is under a long term purchase agreements.
Yes, we feel we don't really we don't really report that number of yes. It is.
It's a pretty substantial amount, especially in Asia.
Okay got it and then.
This is the first time I've heard you mentioned high end pricing.
Proving is that correct.
Beginning the price increases in the high end beginning to catch up with mature can you talk about the those two segments of IC.
So how they are behaving.
Yes, the price increase actually started I see.
In the mainstream market.
However, the capacity shortage situation start to migrate into high end IC area also sells.
This year, we started negotiation with our key high end IC customer and new price stock effect here they call effective at the beginning of Q2.
Yes.
Understand thank you that's very helpful and then.
In terms of capacity utilization.
And I see mature versus mainstream or are you basically both of those running flat out now or do you have incremental capacity in the mainstream.
We have built in the incremental capacities standby staff highway, but as I mentioned the tour daytime is becoming an issue so the capacity incremental.
It has.
Has to be done.
Quarter by quarter, but not.
At the same time.
I see and then last one for me.
You know in terms of the foundries outsourcing.
I am sure they are busy with the UV masks.
Sort of are they outsourcing 14 nanometers and above.
Where is the breakpoint on on what the outsource and sort of how how do they think about.
You know what when they put out into the merchant market.
Yeah.
The amount of our source non captive Haas increase year by year.
And.
With the quote a man in the high end.
<unk> also showed off our.
Mastery in middle and capacity.
And we do have a cost to them a pocket at ball.
Some kind of a long tail of also.
Agreement. So we are in the process.
Okay until customers.
Yeah.
All of these kind of outsourcing strategy.
And keep in mind, because the outsourcing by the foundries is not limited to mainstream there's also.
We also do high end work for foundries.
Right, what I was trying to get out is there.
You know I think you are capable 14 nanometers and I'm.
Wondering is is there outsourcing up to that level.
Yeah.
14.
Okay.
Is there any plans internally to.
To be capable of doing it like a 10 nanometer mass center.
You know I think that's it.
Or or now or certain layers.
Okay.
Chris.
Hum.
Yeah, I can make a comment goes to 14 logic is pretty healthy.
Outsourcing among the foundry captives.
The idea so that node is you know pretty well placed into commercial that's making I would say that.
Seven eight nanometer node just are starting to.
It looked like qualifications.
Will initiate so maybe some started last year.
Some will continue this year and we have capability for those nodes as well.
Can you do the EU, the mask blanks as well at Max as well or just the other layers.
We are gonna UV process, we since 2017, we've had a joint development agreement with IBM.
In New York, So we build all of their U V masks.
Admittedly kind of a pilot line, but they go through full.
The device demonstration full yield down to kind of 28 nanometer pitches five nanometer node plus mask. So we have a solid I would say front end E V capability.
Tronox and we're delivering those masks not at huge numbers, but in iron units every month as far as when he would be really transitioned to commercial basketmaking at large I think that's still a couple of years away.
Seeing kind of the tier two people now put it.
E V tools by tier two I mean, the second adopters are putting in single unit of UV systems. So it's starting to become a little more pervasive, but it's still fairly fairly narrowly confined to a small number of designs and of course.
The large phase III.
Everybody knows TSMC.
Samsung and Intel for E U V. They're still building most all of them as internally. So I think we will get there we watch the market closely you evolve our capability.
The IBM partnership, but I think probably at least three years out before the U V goes full commercial.
That makes complete sense. Thanks, so much yeah.
Sure.
Ladies and gentlemen, there are no further questions at this time I would now like to turn the call over to Frank Lee for closing comments.
Thank you. Thank you for joining this morning.
China is in a great position and we are continuing to move forward.
We will achieve our long term goals.
Very confident that photronics employee across the work, we're continue to exceed expectations by delivering quality products and outstanding service.
Have you and us to achieve our long term target.
I am looking forward to maintain speaking with many of you in the near future.
Having a great day and thank you very much.
Yeah.
Ladies and gentlemen that concludes the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.
Okay.
Yeah.
Okay.
[music].
Yes.
[music].
Yeah.
[music].
Yes.
[music].
Okay.
Yes.
[music].
Great.
[music].
Yes.
[music].
Good morning.
Uh huh.
[music].
Yes.
[music].
Thank you.
[music].
Yes.
[music].
Yes.
Okay.
Yeah.
[music].