Q1 2023 Photronics Inc Earnings Call

Speaker 1: The conference will begin shortly. To raise and lower your hand during Q&A you can dial star 11.

Speaker 2: You you.

Speaker 3: to the FOTONIC First Quarter Fiscal 2023 earnings call.

Speaker 3: At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. So withdraw your question, press star 11 again.

Speaker 3: Please be advised that today's conference is being recorded. I would now like to turn the conference over to Rachelle Burr, Chief Administrative Officer.

Speaker 4: Thank you, Rufka. Good morning, everyone. Welcome to our review of FOTRONIC's fiscal 2023 first-quarter results. Joining me this morning are, frankly, our chief executive officer, John Jordan, our chief financial officer, Chris Pogler, our chief technology officer, and Eric Rivera, our chief accounting officer and corporate controller.

Speaker 4: The press release we issued on Monday, together with the presentation material that accompanies our remarks are available in the Investor Relations section of our webpage. Comments made by any participant on today's call may include forward-looking statements that include such words as anticipate, believe, estimate, expect, forecast, or in our view.

Speaker 4: 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. During the course of our discussion, we will refer to certain non- GAAP financial metrics.

Speaker 5: Thank you, Richard, and good morning, everyone. I'm pleased to report we achieved revenue of 200 11.1 million in Q1, which exceeded our expectations.

Speaker 5: This was against a backdrop of macro challenges and uncertain industry conditions.

Speaker 5: showing that for Chinese was able to navigate a difficult environment very wear.

Speaker 5: Indeed, the IC photo-marked market has been mixed.

Speaker 5: With strong demand in certain nodes and suffering, demand in others. On a positive side.

We did receive strong order flow from Asian foundries for Lee Ranch nodes from 65 to 45 nanometer.

Let me ask my card.

The IMAX automotive.

H sensor Iot and auto specifics applications.

Our customer long term purchase agreement that we entered a over the last few years.

You'll see us by preserving market share and providing a good mix of product demand.

Have you been remedied.

Yeah.

These agreements have helped us better plan for capital investment.

And handle a period of slowing industry demand.

I don't know MPD site.

Our Q1 fab utilization remained at a high level.

With smartphone display ratio in particular as trends for China panel makers.

These provide a major contribution to our MTBE business grows.

Well, that's consistent we still have strong demand for our <unk> IC is a great driver of photo mask <unk>.

Gross margin and operation margin was slightly softer than Q4 last year.

<unk> maintained a strong label.

Through continuous cost control management and pricing strategy.

John will discuss our financial metrics in more detail later.

Okay.

Looking forward to Q2 outlook.

Based on current order trends and ongoing input from our customers.

<unk> demand to remain stable in Q2.

Resulting in your guidance I guess.

Roughly in line with our first quarter operation results.

Fly ash demand uncertainty beyond Q2 is higher than usual, we continue to work closely with our customers to understand their demand.

And ready to support their business.

In many cases.

Market demand remains steady even during an industry downturn as photo mask demand is there.

And driven and not always on the same cycle as wafer starts or display production.

Longer term.

We'd be there for them as a great place to be semiconductor.

So probably trend.

Steve I have a future and we also as they move around captive mass shop going to grow your photo mask demand.

More of a global dry talk Richard Ization of IC supply will be a positive long term driver of photo mask.

These new fabs require mask.

We believe our global presence.

<unk> Technology Park, Florida and across customer relationship.

Position us well to capitalize on these marquee trajectory over 11 cost.

Yeah.

We have made a good value in <unk> history, which be it will be a challenging year.

I have full confidence info Chinese scrubber again.

And we will continue to support our customers by navigate his throat dynamics as they embark.

And by Essent, guaranty, and wastewater across performance and capability cost and did either.

Okay.

Before turning the call over to a job I would like to offer a few comments on our continued.

Good evolution of export control doors.

Japan and later as well.

<unk> recently agreed to title and registration.

As for our chip manufacturing technology to China.

This may create additional risk floors.

We rely on some Japanese funds from bacteria tour and surface necessary to manufacture photo mask.

We continually review, our import and export practice <unk> comprised with our regulatory requirements.

And work closely with our partners vendors and suppliers to create brands that best serve our customers.

The new administration.

Have a material impact on our first quarter results.

We continue to review that restriction and what impact that may have on our future operations.

With that I turn the call tool child.

Thank you Frank good morning, everyone.

Revenue increased slightly in the first quarter as both I C and F. P. D. We're up somewhat from the fourth quarter and successfully offset typical seasonal trends, particularly for high end technologies.

Design activity continued reasonably robust our commercial teams have done a great job working with customers to understand their technology roadmap and when borders.

Our global team executed well and delivered.

IC revenue was $156 $6 million up 2% sequentially.

An increase in high end demand, particularly in Asia.

I've said limited softness in mainstream.

The supply demand imbalance continues to support a favorable pricing environment.

And for the most part we're able to maintain a ASP pricing exclusive of premiums established over the last two years.

MPD revenue improved 1% sequentially to $54 $5 million again growth in high end revenue more than offset lower mainstream demand.

High end growth came from improved G 10, five plus demand and continued strength in mobile displays.

Many times the production capacity dedicated to strong demand for high end masks can lead to reduced production of mainstream desks.

Yeah.

Gross and operating margins of about two percentage points less in fourth quarter margins due to less favorable mix and somewhat lower expediting premiums that customers pay to accelerated deliveries.

Although the revenue increase was in high end, both IC and F. P. D. Not all high end business is created equal dip.

Difference in mix, including nature of the product product pricing and margins.

And location of manufacturer, especially related to memory all affect operating margin outcome.

Operating expenses were slightly increased sequentially on higher people costs first quarter SG&A costs are typically higher than fourth quarter due to higher employer taxes and healthcare costs.

SG&A increased from first quarter last year due to overall higher salaries and wages.

Driven by labor market conditions, and health care costs Nonetheless.

Nonetheless, operating expenses remained well below.

The 10% of sales implied in our target model.

Maintaining a tight grip on expenses.

As part of our DNA so to speak.

Non operating loss in the quarter of $14 $4 million resulted primarily from the unrealized loss from month end Remeasurement.

A U S dollar denominated balance sheet items into the local functional currencies in our foreign operations.

The remeasurement exercise produces an unrealized noncash accounting for variations in currency relationships, which can result in either a gain or loss each quarter.

These nonoperating items have been generally favorable over the last two years.

Due to the degree of variation in the fourth quarter and first quarter amounts we provided a non-GAAP presentation to demonstrated operating results. Excluding the FX loss were in line with expectations.

The income tax provision of $12 $6 million and Noncontrolling interest expense of $15 million resulted in net income of $14 million and diluted EPS of 23.

On a GAAP basis.

On an adjusted basis net income was $24 4 million and diluted EPS was <unk> 40 cents.

Last quarter non-GAAP net income and EPS were $31 2 million and 51, respectively. The analogous net income and EPS last year were $14 $2 million.32.

Cash flow generated from operations was $28 million in the first quarter, we invested $31 million in capital expenditures and received $1 billion in government incentives.

For full year 2023, our Capex forecast remains at approximately $130 million, primarily for increased high end and mainstream IC capacity.

Our cash balance, including short term investments was $374 million at the end of the quarter or 340 million net cash after $34 million in debt.

We believe we have ample liquidity for our investments in growth and for resilience against uncertainties, we may face in 2023.

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 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 second quarter revenue to be in the range of $205 million to $215 million.

We anticipate that the current revenue level will be sustained in the second quarter and the ability to maintain revenues at this level ratifies, our belief that the industry is cyclical phase is not necessarily reflected in demand for photo masks.

Based on those revenue expectations in our current operating model, we estimate earnings per share for the current quarter the second quarter.

Range of 30.

To <unk> 48 per diluted share.

We have made a great start to 2023 photo mask demand has been stable and our commercial and operating teams are performing well.

Despite near term uncertainty, we remain optimistic with a positive long term view of increasing photo mask demand. We believe we are the market leader and we plan to continue to grow and carefully manage margins to keep moving towards the attainment of our long term financial Todd.

<unk>.

I'll now turn the call over to the operator for your questions.

Thank you at this time, we will conduct a question and answer.

As a reminder to ask a question you will need to press star one on your telephone and seem to be announced with.

To withdraw your question Press Star one again, please standby, while we compile the Q&A roster.

Our first question comes from the line of Thomas <unk> of D. A Davidson your line is now open.

Yes, good morning, and thank you for taking my call my questions. So John I'm curious when you look at the for the second quarter guidance.

You talked about being stable quarter over quarter, why do you think youre not seeing the typical post Chinese new year ramp in demand and.

Is it just being offset by some other moving parts.

I think I will defer that one to Frank Who's much authority on.

Chinese new year and the order rate.

Typically.

A lot of Teva had paid us before Christmas or Chinese new year.

Yeah.

So that had a deferred because of that.

Although our industry environment so.

Do we see some mass tree and tape out.

Yeah.

Star total increase.

But.

On the higher side.

We have initiated.

They recover a strong ricardo yet, but accordion toward our input.

Cost coming out and found ourselves with.

<unk>.

The Tampa may start to happen they.

I can tell you that quota.

We need to continue.

Monetize situation.

Okay. Thank you.

And then in your prepared comments you talked about growing nationalism what regions. In particular are you looking at there and when do you think the capacity will be in place to benefit T lab is kind of your ongoing business.

Hi, Tom This is Chris.

All the regions have programs to expand their domestic supply chains for semiconductors, everyone. Every major producing region has that so we're looking at all of them.

U S and Europe in particular.

Seem to be wanting to install significant amounts of new capacity.

Racking that we're meeting with customers. We're looking at also an opportunity to apply for incentives ourselves to expand our networks there as.

As far as when that might materialize I think you have to look at probably three years two to three year horizon at a minimum.

Probably four to five years to really achieve the full.

Entitlement of those those kind of government initiated program. So we're seeing a little bit of it frankly already or some companies are trying to get ahead of the curve by expanding capacity, but I think you should think about probably a three year horizon before it's really takes hold.

Okay. Thanks, Chris.

Chris follow up with <unk> question, Yes.

And maybe a little bit more of the Japanese technology restrictions.

Is it too early to tell but what nodes does that include and what is your percentage of business that those potentially advance nodes.

I think for the most advanced nodes.

<unk> in particular.

See that having a large impact on our <unk> business is actually growing.

Year over year, we expect it to happen again this year, but it's mostly to support Oems equipment manufacturers R&D programs piloting that sort of thing. So we don't have a big exposure to <unk>.

Production impacts from <unk>, although it is growing for us.

In the mid range nodes of course today I think as you know.

Scanner companies are still selling.

Mid range scanner. This is really deep UV $2 48, and dry a RF at immersion into all regions around the world.

If that was severely curtail then that has a major impact on <unk>.

Future capacity at those nodes because a lot of our key mid range products fit into those nodes. So that we do have to watch.

Closely does not seem to be happening right now, but it could.

In the future. So we keep an eye on it for sure I guess one of the ideas is that.

World will still need those chips.

And those tools don't go to one region Theyre going to go to a different region and it gets back to this regionalization opportunity, we see so that would be the.

No response, if you if you asked how will you make up for it the ideas those fab those chips are going to be built someplace and.

We certainly are plugged in on all regions of the World and we'll try to take advantage of that there may be another comment or two from a from Michele on this particular topic. She is working on it very diligently every day.

I think that's where I think everything will settle down and we're still waiting to see that you know, what actually Netherlands, and Japan finally again here.

Okay. Thank you both I appreciate that extra color and then final question John .

Talk about capex of $130 million this year.

Yes that would surprise you talked about the mainstream expansion that we are still at a point, where the pricing in the mainstream market did not support the acquisition of new tools for that space.

So.

Thats.

Good memory.

You're absolutely right, but as we mentioned I think at the beginning of last year.

You know there is still point tools that we can we can supplement our existing lines with and to the extent that.

Those are available there are other used tools on the market that we may be able to pick.

Pick up that.

Much less than new price and.

For the most part uneven produce anymore. So to the extent we can scavenge.

Tools like that we will.

Also supplement the existing lines. So it's really just on a point tool kind of exception basis.

Okay well. Thank you all for your time this morning.

Tom Thanks for getting up so early to call in.

Just another day on the West coast here.

Yeah.

Yeah.

Yes.

You asked a question the only depressed.

One one on your telephone.

Ladies and gentlemen, there are no further questions at this time I will now turn the call over to Frank Lee for closing comments.

Alright, thank you.

Thank you for joining us. This morning, we have made a push value in <unk> history, and we are working hard to serve our customer and control of our operations. So we can maintain our revenue and margins we remain optimistic on our long term demand outlook for photo knots.

And believe we can maintain our position as a market data.

You again for your interest and have a great day. Thank you.

Ladies and gentlemen that concludes the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.

Yeah.

The conference will begin shortly.

Lower Johan during Q&A, you can dial one one.

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Okay.

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