Q3 2019 Earnings Call
Good day, ladies and gentlemen, welcome to the Photronics third quarter of fiscal year 2019 earnings Conference call.
At this time, all participants channel effect on them out.
Later, we'll connect a question and answer session and instructions will follow at that time.
If anyone sure <unk>.
I saw a minute this cost being recorded.
Oh, not like tint judiciary storage space Conference Mr. Troy <unk> you may begin.
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The morning, everyone welcome to our review the Photronics 2000, I can't third quarter financial results.
Joining me this morning are Dr. Peter Cohen, Chief Executive Officer.
John Jordan, Senior Vice President and Chief Financial Officer, and Doctor, Christopher Progler, Vice President Chief Technology Officer, and strategic planning.
<unk> issued earlier this morning, along with the presentation, which are which accompanies remarks.
Available on the Investor Relations section of our web page.
Comments made by you participate on today's call May include forward looking statements that include such words as anticipate believe estimate expect forecast.
These forward looking statements are based upon a number of risk uncertainties and other factors that are difficult to predict.
Actual holds may differ materially from those expressed or implied and we soon obligation to update any forward looking information.
During the course or discussion, we will refer to certain non-GAAP financial metrics.
These numbers are useful for analysts and investors in management evaluate our ongoing performance.
Reconciliation these metrics to get financial results is provided in our presentation materials.
But this time old turn the call over to Peter.
<unk> good morning, everyone.
The press release, we issued earlier today.
Straits once again, the ability of our entire organization, okay. He's in the face of it industry downturn.
<unk>.
Now being reinforced by geopolitical environment.
It has become increasingly uncertain.
Revenue grew 5% compared with the previous quarter and 1% compared with the same quarter last year.
[noise], making 58.
Consecutive quarter of year every year revenue growth.
F.B.D. achieve record revenue histamine for Adelaide radicals remain strong.
We benefited from the additional production capacity.
For my new facility in his say China.
I see retinue improves sequentially on greater demand for mainstream news from Asian foundries.
Well he likes he was flat.
Of course in Taiwan, all set by softness in China.
Margins improved compared with the previous quarter, because we control costs, despite higher start up expenses.
<unk> earnings of 10 cents per share.
In addition, our cash balance grew to 170 $197 million.
Aided by strong operating cash flow.
Covering tennis, when receipt for Italian investments and additional Barrings in China.
Catholics of $20 million with consistent with playing.
As we near completion of our initial Chinese investment.
Actually hitting the end of our fiscal year weirdness per financial position.
Irritate revenues her head is last year's record levels.
<unk> for the fourth quarter puts us on pace to improve on last year's total.
Or cash balance continues to be strong.
Despite paying off our convertible debt and funding our expansion into China.
Or outlook remains positive.
As we strive to hit or fiscal 2020 targets of 630 million in revenue.
80 cents a V.P.S.
Overall business conditions are more challenging today and will be first establish those goals 15 months ago.
But we still believe <unk>, Oh, you mean optimistic about or a long term outlook.
Revenues to China This quarter group.
Representing 25% of total revenue.
And reaching record levels as growth for F.P.D. masks more than offset icy softness.
If P.D. was up 31% sequentially and 61% compared with last year.
With China, now, making up 53% of R.F.P.D. revenue.
We contain it it'd be the vendor of choice any animal in critical market.
In revenues for G. 10.5, plus masks increased.
His or her tape Philly became qualified for more applications.
The demand for large format mask should increase going forward as more panel fats begin production and new designs are released at both new and existing plants.
China I see softness appears to be pardon regularly geopolitical issues.
That are slowing demand for some of our customers.
It is undeniable that the level of uncertainty in China has increased.
As a trade war between the U.S. and China has escalated.
In addition, rising tensions between Korea, and Japan is challenging supply chain for some of our customers.
Well these issues do not directly impact or products, where operations. We are exposed indirectly has more and more of our customers are beginning to feel the impact.
Even though our demand is designed driven and not necessarily tidy units of semiconductors or displays.
Uncertainty can cause some customers to become more cautious.
I saw the rate of new product releases.
That's impacting our business.
We did see some of this in our China I see business since you three.
And we have to to our cat X. plan yet again.
To better align expenses with revenue.
Consequently, we expect to conclude the initial phase of our cat back soon John Madden in the first half of 2020.
Oh sure we believe the impact of the <unk>.
To be a significant positive for our business.
Because it's significantly increased the resolve or Chinese customers.
To fully localize their supply chain.
And we have tremendous support from local customers with production or anything if both cities, which should provide a tailwind as trade discussions progress.
And we successfully qualify for new applications.
We were more optimistic than ever.
<unk>, Oh, I see an F.P.D. market.
Will be tremendous growth opportunities for us.
Looking at the photo mass market globally, and he asked me and just trying to think positive.
This is in part the result of companies using new photo mass technology as well as design.
To differentiate their products.
This differentiation creates more specialized innovative solutions.
[noise] these trends are great for photronics.
We have formed a global network that is unmatched by any other mass producer.
11 locations of course, U.S., Europe , and Asia strategically located close to customers.
In addition, we had.
Capability through advanced tools at <unk>.
To meet all of our customers technical requirements.
Has the market evolves, we continually evaluate or operations to make sure we're aligned support our customers technology Roadmaps.
With the optical mix.
Of manufacturing assets.
Recently, we have been successful in securing long term customer commitments.
To reduce the risk.
And improve the potential financial return of capital investments.
We're looking to expand upon this approach to developing new business.
Once we complete the initial phase I've been estimating show Ya.
Well you perform well to the first nine months of 2019.
And Q4 looks like it will follow the same trend.
Our financial health is very good.
Addressable market is growing as more fabs come on line.
And he map design activity increases.
Completely how we were performing and excited about our potential to grow and extend our leadership position.
I am very grateful to all or employees worldwide.
For their skill and professionalism.
As well as their willingness to do what it takes.
So we had a very challenging environment.
The results speak louder than any words, possibly could.
Bringing the Chinese facilities on line, if not impossible without the extraordinary efforts at everyone involved.
In the planning and execution of the construction and production ramp.
Over the past two plus years.
We'd like to thank all of our employees for their hard work.
We're off to an excellent start.
The ramp is accelerating.
But I believe that are future is extremely bright in China.
But this time I will turn the color already John to provide commentary on our performance and outlook outlook.
Thank you Peter good morning, everyone.
Revenue in the third quarter was $138.1 million.
<unk> better.
And the previous quarter and 1% better.
In the third quarter of last year.
Our design driven business model and product product diversity.
I've been able to us to continue to grow revenue, despite the semiconductor industry downturn and a challenging geopolitical environment.
We were also beginning to see the impact of our new trying to facilities.
Production together that contributed approximately $6 million in revenue.
I see revenue in the third quarter improve 2% sequentially to 100.2 million.
On demand some agents boundaries for main street nodes.
Hi end was flat sequentially as macro uncertainty continued to weigh on demand.
Compared with two three last year.
She was more run softer logic and memory demand.
Looking forward the underlying demand drivers for I see look positive.
But geopolitical factors may delay.
No recovery beyond the next quarter.
<unk> business continued scrolling the score to setting a record with revenue $37.9 million, 15% better than two two and 30% better than two three last year.
Mobile Gamble that displays are the primary driver would be increasing their customers in Korea and China.
Continued to read these new innovative designs.
We also benefited from an increasing capacity as we rent production in China, including G. 10.5, plus photo masks.
We expect sequential M.P.D. growth in the fourth quarter Gamble that demands should remain healthy and shipments from the new trying to plan. It should continue to increase.
Most module improve sequentially to 22%.
As revenue growth and a more favorable product mix offset the impact.
From China startup activity.
Operating margin improved at 10%.
We had a modest increase in operating expenses do the qualification activity.
In R. and D. expense.
In total China operations were 6 million dollar headwind to operating income.
Although the tax benefit of those costs and the J.B. partnership to reduce the overall impact on U.P.S. two four cents per share.
We expect that.
We expect that effect to decrease going forward.
Other income expense was a modest expenses quarter, consisting of miscellaneous interest expense.
Hi quarter at a one off effects game that did not repeat and two three.
Minority interests, you increase compared with last quarter.
Due to increase revenue and earnings at our Taiwan J.B.
Partially offset by losses from our China.
This resulted in that income attributable to platonic sink shareholders at $6.3 million or 10 cents per diluted share.
Or cash balance increase $30 million during the quarter to 197 million.
We generated $26 million in cash from operations received 12 million and government incentives from China.
And borrowed an additional $14 million in China for equipment purchases.
Not section of the quarter was $20 million brings the year to date tool.
Yeah.
160 million.
Hello kept next to the year is expected to be 185 million as we near completion of the initial phase about China investment.
The remainder of the China I see investment will be completed in the first half of 2020.
Before I provide fourth quarter guidance over your intimate reiterate the reminder, that our visibility is always limited as our backlog is typically only one to two weeks.
And demand for some of our products is inherently and even in difficult to predict.
Additionally, the A.S.P.'s for high in Massachusetts or.
I know, it's a segment of the business grows a relatively low number looks high end daughters can have a significant impact.
When our revenue and earnings for a quarter.
Lastly, Oh cautioned that any development from the ongoing trade discussions between the U.S. and China.
For growing tension between Korea, and Japan could potentially have an adverse impact on our industry before our results.
Given those caveats, we expect fourth quarter revenue to be in the range of 143.
$251 million.
We assume that or I see mass markets will be stable to improving and F.P.D. will see continued strength in the envelope from mobile displays.
We also anticipate a larger contribution from my new China facilities.
Based on this revenue expectations in our current operating model, we estimate earnings for the fourth quarter to be in the range of 11 cents 17 cents.
Per diluted share.
We are pleased with our performance in the third quarter as we have grown revenue meeting our expectations in an environment.
It has become progressively more challenging.
We are positioned to finish the year ahead of last year's pace with two new production facilities in the important trying to market.
A balance sheet has remained healthy even as we have made significant investments.
Future growth.
And we are poised to deliver on our commitments as we enter 2020.
Oh now turn the call over to the operator for your questions.
Ladies and gentlemen, if you have a question at this time. Please press Star then the number one key.
<unk>.
If your question has many <unk> please press the pound.
Our first question comes from Tom definitely would be damaging.
Now.
Yes, good morning, and a great out what can the snow tough environment right now.
So Peter I guess, when we look at the the slow down or the geopolitical risk in China does that impact I'm more on the high insider than mainstream side is there any way to discern a word that the biggest impact will be.
Yeah I.
It is now.
More.
What I would describe it as you know broad based.
Hi, <unk> basically spent the first half of August in China.
And you know if you look back yeah.
Two or three months ago.
No. They trade war was obviously going on.
But it really wasn't present.
And the active dialogue.
You know now it's on the tip of every you know almost every customers you know Tom.
So.
It's you know generally affecting.
Their local market.
And particularly with there were threats that were in place while I was in China regarding.
Ah the additional 10%.
It was hanging out there.
Regarding you know the largest export market yeah. Some of that is.
Yeah at the present time damp down.
But you know who knows what a you know tomorrow's Twitter she will.
Bring so it's very hard to.
For anyone to quantify.
You know as I said in my remarks, you know, it's a short term drag you know long term, it's a clear accelerant for the China market.
Yeah.
It's an excel or in that.
Is shared not just by the customers, but by the government as a whole so.
Yeah Wong term undeniably it's positive.
You know short term.
It is.
Part like I said hard to really gauge.
In the next few months.
The real impact you know looks like because it's a dynamic situation.
Okay, I guess, just one more following up on that.
Have you seen it impact your four key new customers for the two Chinese facilities as well.
C. Knowing came pack in the P.D.
At all.
You know in fact, if I located a P.D.A.
I you know, we can't say, we're pretty good coffee.
That that market through the end of the calendar year.
Not just the end of our fiscal year is going to be very strong.
So.
No impact in.
P.D., Yeah, one of our.
<unk> largest Chinese.
Heisey customer has far away as a very large customer.
So you know there is an impact there.
And you know anyone would you know expect it.
But.
Yeah.
Aside from.
Yeah, Yeah aside from that.
Not a lot of additional headwind.
Okay. That's very helpful. John a question about the cost structure with the delay in spending on the last traunch topics.
Does that mean that the.
The cost structure that were seen next quarter doesn't fully represent the true cost of China that those costs will go up over the next couple of quarters.
Well.
The delay is is tool that's going to be delivered during 2020, so the depreciation associated with that would come in 2020 times. So.
You know to the extent that that's into the future it's not reflected in next quarter.
But you know that would also bring.
Revenue with it so.
Okay.
<unk> is it.
You know to advertise over multiple years that a isn't too great on clearly basis.
<unk> want to repeat that time, thanks, 200, if it's going to be a a material impact to the costs structure when it hits the books or if it's going to be advertised over a long period of time, where it's not too.
At that point.
No. It's it's advertised over a long period, so the impact of that to loan wouldn't be material.
Okay.
Finally, just a question for Chris what do you look at the high Yeah, D.S. roughly two thirds of flat panel one third of the I.C. business that you have is that ratio fixed based on your tool set or.
Hi, again portion go up with demand if need be.
I don't think it.
Based on the tools that I think it can the high end portion couldn't go up I'd say, particularly on the I.C. site.
Perhaps more than the S.P.D. side, there may be some a little more constrained on S.P., even on the icy side definitely.
We have capacity at the high end to.
Deliver a larger fraction of or I see revenue with our existing tools.
And we have made some investments this year and John alluded to one next year, which.
Allow us to grow share and grow our present, a revenue on behind as well so.
Really fixed.
We do tend to.
Sometimes run more mainstream or let's call them over and masks on higher end equipment.
If necessary based on the dynamics of the market.
There's a little of that going on but not not too much I think we have a lot more room to grow the high end with the existing tools that.
Great. Thank you thanks for your time.
I can't even get a question. Please press star and then one.
My next question comes from Patrick <unk> Airlines now.
Hi, Good morning, and this is Brian challenge for Patrick out with thanks for letting us ask a few questions and graduations on the results maybe the first question I have for you.
Looking at that 630 million fiscal 20 sales target I'm kind of curious how much.
Flat panel sales out of the Chinatown Sheltie sort of assumed in that revenue level and for a baseline can you give us a sense exiting this fiscal year so in Cisco for Q.
You know how much roughly revenue you expect the child facility to contribute on the flat panel side.
Yeah. So Brian we you know 15 months ago right when.
I think we set the target out there.
We.
Book and said, we expect it about 150 million.
I've incremental revenue coming from.
The combined.
China factories.
Oh, we didn't not qualified to split.
Between P.D.
And I see.
Yeah coming additive.
The current year.
We do not expect the China factory.
Yeah to have maximized its revenue on the F.P.D. friends yet.
In the fourth quarter.
We're still.
We're still.
You know qualifying.
Customers for specific products and R.S.P.D. fab.
Well, we had said that x. seeing the fourth quarter, we expect the qualifications to essentially be complete with F.P.D.
So moving and the next fiscal year.
The P.D. facts should be largely you know running production or the number of qualifications happening.
Consistent with what we see and are there any factories in Taiwan.
And Korea Nothing's changed about that by the end of this year. This year this fiscal year.
You think.
Quality done.
We're making good progress Oh, we got a lot of customers now qualified in China.
So.
Q1.
First quarter, where you know her fey.
He is running a full capacity having said that.
As a the ear moves on.
We expect the.
More G. 10.5, you know.
Demand in a form of new factories.
Hi to come on line and that would change the revenue next send her fey and given additional revenue.
<unk>.
So that's kinda the trajectory on N.P.D. as far as ice. He goes you know we this corridor, we just you know.
Muscled out the first heretical sets at the end of the corridor. So it was not a material contributor to revenue don't expect to be this quarter you know either.
But when you date a here is we you know push cap decks.
You know out in the next year.
And you know.
This was you know to 10, we get that back to 185.
So you kinda qualifies dematic Catholics push out it was it's not trivial.
But what we can do and what we've done for years his mix and match.
So we can you know bill certain reticles of set and China, Oh, there's a elsewhere most likely Taiwan.
Where the bowl for that activity is underway right now a small amount in Japan because of course D.M.P. is our partner.
So we can use the mix and match strategy. So we don't Miss any revenue opportunity.
So really it's just simply inexpensive push out.
And then you know hopefully with that two quarter shove.
Ah well beyond that nonsense.
Or at least I would describe as nonsense cold trade war.
And we'll be able to.
Pick up without a lot of disruption with how I see.
So I see by middle of next year.
<unk> be through the qualification you know phase and ramping revenue.
You know strongly.
And that is because we're right now using a mix and match strategy to not lose momentum.
Okay, alright, thanks, Peter that I appreciate the color maybe again, just taking against that 630 million top line target for next fiscal year.
Can you remind us again sort of what the cap ex assumption is against that revenue level and also what what you envision through the full year, what the gross margin and Andrew E.D.S. strike would be relative to the startup cost throughout the fiscal four year.
Yeah, well I think well we have you ever historically said was we expect maintenance cab text would be about 50 million.
Right, but now you've heard we push some Catholics that was expected this year into next so you can.
Kind of work the simple math.
On a yourself.
You know John also commented we see this quarter as being you know the inflection point for.
China drag on E.P.S. I'll turn it over to John John do you want to.
Yeah, if you want to add something or maybe give them more direct.
Or expansive answer.
Yeah, so as as I mentioned the effect this quarter words, four cents, a share and as our revenues increase in China and offset some of these.
Cost of goods to fixed costs will will start generating more.
Profit so that for such should decrease going forward.
Okay. So maybe like you know lessen the 10 cents.
<unk>, perhaps through the full fiscal next year.
One would hope we we expect to be profitable enshrine overall after this quarter.
Okay.
Got it I'll, maybe one more thing in terms of the I.C. side.
Just curious if there's a way to quantify what that drag was on on the top from a revenue perspective and fiscal three q. and are expected and Cisco for Q. and also.
Yeah, Peter if you have any sort of commentary about how the memory actually so I'm asking businesses training, there's obviously been some reduction in output.
Recently, and just kind of curious you know what you're seeing in that part of the business.
Thank you.
Yeah.
Or.
Oh, I see Oh revenues in China.
Went back to keep one level. So we we lost the growth.
In cute too.
Q3.
Again, it's a very fluid.
You know dynamic.
Ah you know market.
We're not expecting.
We're not expecting as John says guidance.
The market to deteriorate more than it you know has on that you know I see fraud.
So that's the best I can do that.
Again, you can do that simple math annual.
No what kind of a drag that was on the top wind it basically represents anyways. So.
Yeah, that's that's pretty straightforward as far as memory goes you know the downturn in memory as I think everyone is aware it's been very severe.
Or memory business.
<unk> held up.
Pretty well on the face of.
Right in the face of the downturn, it's been up and down a little bit quarter to quarter.
You know, we're not expecting it memories going to materially improve on till.
<unk> until calendar year 2020, exactly when encountering here 2020.
I think right now is hard to predict.
Yeah.
<unk> improved till next count here, but not necessarily be a drag incremental dragons.
Yeah, not necessarily not change materially right because Ah you know our customer base is yeah.
Pretty good diverse.
Right. We have the best we think at least we have the best food I mean, it's technology.
From memory, you know globally.
We do as I think others expect hand to recover in advance and D. Ram.
But again, it's tough to know.
Exactly when that happens, it's a 2020 event.
Time will tell exactly.
You know exactly what because we all are operating environment.
We are we have been normally industry you know cycle.
And you know just remind you when we put our targets.
Can't please 15 months ago, we explicitly say they contemplated downturn.
Which were in.
But we didn't contemplate the extra noise, you know going on with trade wars, and Weaponizing photoresist and the rest so nobody knows.
At least though we I.
Talk to.
What that means.
Next week, let alone next year.
Okay.
Thank you Peter.
And at this time I'm showing no further questions I think you're trying to call over to Peter.
<unk>.
<unk>.
Thank you for taking your time to join US This morning.
We are pleased with our performance this quarter and belief we have done a great job of maximizing our business.
The current environment.
At the same time.
Or we can do to exploit the opportunities ahead or picture looks good and we are well positioned the king.
<unk> 2020 and beyond.
[noise].
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program you may now disconnect everyone have a great day.