Photronics, Inc. · NASDAQ:PLAB
Photronics — Investor Day (May 2018)
80 slides from Photronics's investor day presentation, May 23, 2018
Slide 1: Photronics, Inc. Analyst and Investor Day
Photronics, Inc.Global Leader in the Merchant Photomask Industry Analyst and Investor DayMay 23, 2018
Slide 2: Agenda
Troy Dewar, Director, IR Welcome Peter Kirlin, CEO Overview & Strategy Chris Progler, CTO Technology Development High-End Growth Drivers HK Park, GM, China & Taiwan FPD High-End FPD Frank Lee, GM, Asia IC High-End IC Logic Pete Broadbent, VP, US & Europe High-End IC Memory John Jordan, CFO Financial
Slide 3: Safe Harbor Statement
Safe Harbor Statement 3 This presentation and some of our comments may contain projections or other forward-looking statements regarding future events, our future financial performance, and/or the future performance of the industry. These statements are predictions, and contain risks and uncertainti
Slide 4: Overview & Strategy
Peter Kirlin, CEOOverview & Strategy 4
Slide 5: What You Will Hear Today
Q2 Reprise / Repositioning the company Sustainable growth strategyConclusion What You Will Hear Today 5
Slide 6: Q2 2018 Summary
Revenue grew to $131M; up 21% Y/Y and 6% Q/QHigh-end IC biggest growth factor (+83% Y/Y)China revenue doubled Y/Y; up 18% Q/QGross and operating margins expanded on higher revenue and operating leverageNet income attributable to Photronics, Inc. shareholders of $10.7M ($0.15/share)Cash balance of $3
Slide 7: Repositioning the Company
Three large customer challengesMicron produced more memory masks in-houseSamsung Display shifts from LCD to AMOLED and brings highest-end masks in-houseMajor IC customer loses 28nm logic market shareWe’ve overcome challenges by winning business at other customersNew business from foundries that are
Slide 8: A Compelling Investment Thesis
Global leader in merchant photomask industryDelivering growth by leveraging core competences: Operational Excellence, Low Cost Producer, Technology Leadership, Customer IntimacyInvesting aggressively to exploit secular growth opportunitiesChina industry expansion – Made in China 2025Technology infle
Slide 9: Photronics at a Glance
Largest merchant photomask manufacturerUnmatched global footprintInvesting to exploit market disruptions with reciprocal customer commitments Strong balance sheet to fund growth Photronics at a Glance 9
Slide 10: Photomasks are Critical to Electronic Manufacturing
Photomasks are Critical to Electronic Manufacturing 10 ComponentDesign End User Manufacturing Process Photomask
Slide 11: Phases of Photronics Revenue Growth
Phases of Photronics Revenue Growth 11 Phase I: 1969 – 1986Technology StartupOrganic GrowthMostly USPre-IPO Phase II: 1986 – 2002 M&A GrowthMerchant ConsolidationGlobal Expansion Phase III: 2003 – 2017Enter High-End MarketForm Strategic PartnershipsInvest in High-End CapabilityEstablish FPD Presence
Slide 12: Core Competencies Underpin Sustainable Growth
Cost controlSupply chain optimization Low Cost Producer Flexible deliveryHigh yields Operational Excellence Trusted partnerWafer yield enhancement Customer Intimacy Process know-howAdvanced PoR Technology Leader Core Competencies Underpin Sustainable Growth 12
Slide 13: Exploiting/Creating Disruptions Drives Revenue Growth
Exploiting/Creating Disruptions Drives Revenue Growth 13 G7.5 Display Substrate High-End IC Memory High-End IC Logic G10.5+ Display SubstrateAMOLED Mobile“Made in China 2025” The Right Technology … in the Right Place … at the Right Time Micron JV DNP JV UMC Partner B Partner C
Slide 14: Successfully Developing China Business
We already have growing business in China$39M YTD 2018 (15% of total revenue)Growing strong since 2015 (IC +31% CAGR; FPD +62% CAGR)13% of Q2 2018 LTM revenue (8% of IC; 33% of FPD)Manufacturing presence in China should accelerate growthCustomer contracts will help quickly ramp facilitiesInvestment
Slide 15: Investing in China Operations
IC FPD Location Xiamen Hefei Investment Amount $160M $160M Cleanroom Size ~2,500 m2 ~4,500 m2 Ownership Structure Majority-owned (50.01%) JV Wholly-owned Technology High-end, mainstream, logic, memory Up to G10.5+, AMOLED Production Start First half of 2019 First half of 2019 Spring 2019 Incremental
Slide 16: Driving Sustainable, Profitable Growth
Repositioning the companyImproving high-end revenue China investmentsFPD technology inflections Strategic photomask partnershipsAdjacent market M&A Driving Sustainable, Profitable Growth 16 Short term (6-12 months) Medium term (12-36 months) Long term (36+ months)
Slide 17: Acquisition history timeline
Tau Labs, Inc.1986 Gould/AMIMask Shop1987 Master Images Inc.1987 Motorola AustinMask Shop1987 NCR Mask Shop1988 National SemiMask Shop1990 Rexotech, Inc.1990 Perkin-Elmer1990 Philips NijmegenMask Shop1990 Hyundai InfineonAMD/AMTC IBM Europe Hewlett – Packard DuPont NanoMask Inc.1988 SGS-ThomsonMask
Slide 18: M&A Criteria
Photomask industrySignificant market shareAdvanced technologyValuable manufacturing assetsAdjacent marketsRevenue diversificationSynergies to business modelFinancial benchmarksMeets ROIC hurdlesAccretive to earnings and cash flow M&A Criteria 18
Slide 19: World Class Management Team
World Class Management TeamSignificant Industry Experience 19 Name Title Years withPhotronics Yearsin Industry Experience Peter Kirlin, Ph.D. CEO 10 33 Chris Progler, Ph.D. VP, CTO, and Strategic Planning 18 30 HK Park GM, China and Taiwan, FPD 13 23 Frank Lee, Ph.D. GM, Asia IC 12 38 Peter Broadben
Slide 20: A Compelling Investment Thesis
Global leader in merchant photomask industryDelivering high-end growth by leveraging core competences: Operational Excellence, Low Cost Producer, Technology Leadership, Customer IntimacyInvesting aggressively to exploit secular growth opportunitiesChina industry expansion – Made in China 2025Technol
Slide 21: Technology Development
Chris Progler, CTOTechnology Development 21
Slide 22: Trends Guiding our Technology Portfolio
China’s IC and display aspirations and investmentsDiversification in mid to high-end IC applications – the 4th Industrial RevolutionNew lithography intensive display form factors and enhancementsIncreased focus on process of record and integrated solutionsComplexity, cost and scale drive consolidati
Slide 23: Photronics Patterning Leadership
IC: (Data, IoT, AI)Introduce EUV productionInnovate to extend previous nodesFPD: (AMOLED, G10.5+, VR)Accelerate IC type mask techLarger substrate, finer dimensionAP: (Fan Out, Panel)Introduce FPD type mask techSubstrate and resolution roadmap Photronics Patterning Leadership 23 Tech Adoption in Lith
Slide 24: IC: Investing in Technology Opportunities
Type 2017 2018 2019 2020 Logic 10nm 7nm 5nm (EUV) DRAM 1x 1y 1z + new architectures 3D-NAND Gen 2 Gen 3 Gen 4 + new architectures LVIP to Mass Production Optical Mask Scaling on Existing Equipment EUV Device Masks Entered 14nm logic, 20nm DRAM, 3D-NAND production (2014)First with advanced EBM 9000 w
Slide 25: FPD: Widening Tech Lead
25 Type 2017 2018 2019 2020 TV UHD(4K)QD LCD UHD(8K)QD OLED Mobile(OLED) QHD(6xx ppi) UHD1(8xx ppi) UHD2(12xx ppi) Mask Size 8.5G 10.5G LVIP to Mass Production Entered FPD phase shift mask technology for AMOLED (2013)Delivered Quad HD masks for OLED (2014)Qualified slit type (2010) and half-tone typ
Slide 26: AP: Establishing New Products and PoR
26 Type 2018 2019 2020 WLP/Panel Fan Out Mask resolution and registrationApplication specific lithography extensions9” and 14” to panel size Heterogeneous Integration Sampling custom mask solutions for AP litho challengesPreparing resolution enhancement infrastructure (mask, software, design)Evolve
Slide 27: Partnering with Our Customers for Success
Partnering with Our Customers for Success 27 ThePLABPoR * Process of record 7 high-end PoR* relationships across IC and FPDCritical for ROI on capability investmentsCustom design tools to strengthen connectionsDelivering measurable end product yield enhancementsStriving for virtual captive modelCust
Slide 28: Why PoR Partners Trust a Photronics Built Mask
Mask 1 Mask 2 Successful mask for high yield on complex device has many factorsProcess Capability – right specs, pattern quality, no critical defectMask to Substrate (wafer, panel) Know-How – simulate, characterize, improveReproducibility – matching, transfer, ramp and volume experienceProtection –
Slide 29: Technology Matching and Moving: A Competitive Strength
Mask 1 Mask 2 Powerful know-how for inter-mask matchingSite to site transfers for expanding productionCaptive process signatures for backupWithin site ramp, reproducibility and yieldHybrid inter-site process supportRecent success stories25nm DRAM, 3D-NAND, 14nm logic: US to Taiwan22nm to 7nm logic:
Slide 30: Technology as a Tool to Support Business Growth
Technology as a Tool to Support Business Growth 30 High-End34% Mainstream66% High-End66% Mainstream34% Growth Investment Cycle
Slide 31: Technology Summary
Tech and innovation keys to ROIC, even as Moore’s Law slowsProven leadership roadmap across all key lithographic applicationsIC extensions, FPD rising complexity, AP stage settingPartnerships and PoR bring differentiated technology to productsResults, trust, know-how and consistencyDelivering integr
Slide 32: High-End FPD
HK Park, GM, China and Taiwan, FPDHigh-End FPD 32
Slide 33: FPD Recent Performance
Aligning with market driversMobile transition to AMOLEDLarger TV screensHigher resolutionExtending technology leadershipLeading portfolio of advanced mask writersLeveraging IC know-how for FPD process developmentGrowing presence in China33% of revenue Q2 2018 LTMShould accelerate with Hefei producti
Slide 34: Strategic Priorities
Align global footprint with dominant geographic panel technologiesMost advanced AMOLED technology in KoreaLarge format (G10.5+) LCD TV in ChinaEstablished mainstream producers in TaiwanSuccessfully establish China operating presenceHefei manufacturing facilityG10.5+ masks for large screen TVIntegrat
Slide 35: Leveraging Technology Leadership for Mobile Display
Mobile devices moving from LCD to AMOLEDSuperior visual characteristicsLower power consumptionEnables flexible formatPreferred for VR/AR devicesIncreases mask complexityMore mask layers per setTighter specs on each layerQualifying P-800 in Korea1st to qualify this advanced mask writerProduces highes
Slide 36: Improved Glass Efficiency for Ultra-Large Screen TV
65” 65” 65” 65” 65” 65” 65” 65” 95% G10.5+ Improved Glass Efficiency for Ultra-Large Screen TV 36 2940 mm x 3370 mm 2200 mm x 2500 mm 1950 mm x 2250 mm 1500 mm x 1850 mm 75” 75” 75” 75” 75” 75” 94% 65” 65” 65” 64% 75” 75” 73% 65” 65” 88%
Slide 37: Driving Growth in FPD Market
China represents fastest growing display region64 fabs in production, under construction or being plannedLargest display producer (Korea 2nd)Photomask opportunities in China are attractiveWide range of display technology, including AMOLED & G10.5+No merchant photomask producer with high-end experien
Slide 38: Existing China Display Fabs
34 Existing China Display Fabs 38 Image from https://commons.wikimedia.org/wiki/File:China-equirect.png LCD (25)AMOLED (9)G10.5+ (N/A) Photronics LocationsFPD KoreaFPD Taiwan We are qualified at all existing fabs.
Slide 39: New China Display Fabs in Production by 2022
30 New China Display Fabs in Production by 2022 39 Image from https://commons.wikimedia.org/wiki/File:China-equirect.png LCD (7)AMOLED (15)G10.5+ (8) Photronics LocationsFPD KoreaFPD HefeiFPD Taiwan
Slide 40: New Hefei Facility
New Hefei Facility 40 Construction complete by end of fiscal year 2018.Tool move in during fiscal Q119.
Slide 41: New Hefei Facility
New Hefei Facility FAB Office Building Front Door FacilityBuilding 41
Slide 42: How We Win
Become G10.5+ market share leaderExtend AMOLED technology leadershipEstablish China market share leadershipIntegrated global manufacturing facilities with outstanding customer service How We Win 42
Slide 43: FPD Outlook
Key Success FactorsHefei rampG10.5+ launchWill be our largest FPD facilityAMOLED mobile display technology inflectionDiversify customer concentrationFPD revenue expected to double over next 3 years FPD Outlook 43 2017-2020 CAGR: 29%
Slide 44: FPD Summary
Repositioned the businessChina investment on trackInvesting to exploit industry trendsBusiness expected to double over next 3 years FPD Summary 44
Slide 45: High-End IC Logic
Frank Lee, GM, Asia ICHigh-End IC Logic 45
Slide 46: High-End IC Logic Recent Performance
Repositioning the businessStrong demand from Asia logic foundriesKorea IC revenue up 24% YTDRevenue to Taiwan foundries up 58% YTDExpanding penetration at captive manufacturersIncreasingly seen as trusted technology partnerHigh-end capacity and capabilityClose proximity to customer High-End IC Logic
Slide 47: Successful Partnership with DNP
Two JV’s serving AsiaTaiwan JV, PDMC, formed in 2014China JV, PDMCX, formed in 2018Combines technology, know-how and customer relationships of two leading merchant mask producersReduces risk of Xiamen investmentFacility should ramp more quickly due to complimentary sales organizationsAllows us to co
Slide 48: Shanghai Technology Forum
Large group of customers, suppliers, partners, and local officials in attendanceJV seen as technology partner for advanced IC manufacturingChina producers eager to have local source of high-end photomasks Shanghai Technology Forum 48
Slide 49: Strategic Priorities
Leverage JV’s in Taiwan and China to win market shareMaintain and extend market leadership in TaiwanBuild China market share into leadership positionDraw on combined technology, experience, and customer relationshipsIncrease business globally with large foundries and IDMsPrevent formation of additio
Slide 50: Driving Growth in IC Market
China represents fastest growing semiconductor regionGrowing domestic producersInvestments by multi-nationalsMore investment needed to meet national targets2022 forecast is 17%China government target is 40% by 2020, 70% by 2025Photomask opportunities in China are attractiveWide range of nodes in log
Slide 51: New China 12" IC Fabs
23 New China 12” IC Fabs 51 Image from https://commons.wikimedia.org/wiki/File:China-equirect.png Photronics LocationsIC KoreaIC XiamenIC TaiwanIC Boise (not shown) Logic (17)Memory (6) Innotron (M) Nexchip (L) YMTC (M) Samsung (M) AOS (L) Unigroup (L) GF (L) SMIC (L) Intel (M) SMIC (L) Cansemi (L)
Slide 52: New Xiamen IC Facility
New Xiamen IC Facility 52 Construction complete by end of fiscal year 2018.Tool move in during fiscal Q119.
Slide 53: New Xiamen IC Facility
New Xiamen IC Facility 53 FAB Supporting Building Office Building FacilityBuilding
Slide 54: How We Win
Technology leadership in both logic & memoryDevelop high-end capacity and capabilityObtain PoR for new nodes (28nm, 14nm)Customer relationships that lead to business partnershipsProximity to large customers (fast delivery, comprehensive customer support)Act as virtual captive, providing joint develo
Slide 55: High-End IC Logic Outlook
Key Success Factors“Made in China 2025” expansionNode migration (14nm, 10nm, 7nm)Captive business penetrationLeverage JV & partnership to compete more effectivelyWin majority market share of growing foundry demand Cross-site collaboration to serve global customers High-End IC Logic Outlook 55 2017-2
Slide 56: High-End IC Logic Summary
Repositioned the business to grow high-end market shareChina investment on trackGrowing business globally with logic foundries and IDMsJV’s in China and Taiwan allow us to compete more effectivelyIncreasingly seen as business and technology partner High-End IC Logic Summary 56
Slide 57: High-End IC Memory
Pete Broadbent, VP US & EuropeHigh-End IC Memory 57
Slide 58: High-End IC Memory Recent Performance
Repositioning the customer baseExtremely strong memory demand – revenue to top memory customers up 78% YTD vs. 2017High market share with specialty and emerging memory foundriesBenefitting from Micron technology foundationTrusted technology partnerHigh-end capacity and capabilityTechnology, global e
Slide 59: Repositioning Boise
We have replaced nearly all of the revenue lost from Micron insourcingStrong diversity of high-end customersCost structure improved during downturn – more profitable at same revenue levelRobust qualification pipeline – PoR development with key memory customers Repositioning Boise 59 Customer Transit
Slide 60: Strategic Priorities
Maintain and grow market leadership in Asia memory (DRAM & 3D-NAND)Provide virtual captive technology, capability and customer serviceIncrease high-end business with foundries (China, U.S.)Integrate global high-end manufacturing locations to better serve customers Strategic Priorities 60
Slide 61: Memory Market Dynamics
Strong memory growth trendDiversity of technology, applicationsCurrently dominated by large, captive producersMerchant opportunity with emerging memory producers, foundriesMost emerging memory production in Asia (Taiwan and China) Memory Market Dynamics 61 China New Fabs - $70B+ Investments Company
Slide 62: New China 12" IC Fabs
23 New China 12” IC Fabs 62 Image from https://commons.wikimedia.org/wiki/File:China-equirect.png Photronics LocationsIC KoreaIC XiamenIC TaiwanIC Boise (not shown) Logic (17)Memory (6) Innotron (M) Nexchip (L) YMTC (M) Samsung (M) AOS (L) Unigroup (L) GF (L) SMIC (L) Intel (M) SMIC (L) Cansemi (L)
Slide 63: How We Win
Technology leadership in both logic & memoryDevelop high-end capacity and capabilityEstablish PoR for new nodes (DRAM, 3D-NAND)Joint development for next generation nodesCustomer relationships that lead to business partnershipsAct as virtual captive providerCross-site collaboration and integrationGr
Slide 64: Mainstream – Steady IC Contributor
Stable demand – less cyclicalGood margins and cash flowLow consumer of capitalVery competitive – more like a commodity marketAuto and IoT driving analog growth Mainstream – Steady IC Contributor 64
Slide 65: High-End IC Memory Outlook
Key Success Factors“Made in China 2025” expansionNode migration (DRAM, 3D-NAND)Strong market driversMaintain leading market share with specialty foundry producersCross-site collaboration to serve global customersMainstream stability, growth of auto, IoT High-End IC Memory Outlook 65 2017-2020 CAGR:
Slide 66: High-End IC Memory Summary
Repositioned the businessBoise performance back to JV levelsGrowing business with Asia specialty memory foundriesExtending technology leadership, developing partnerships High-End IC Memory Summary 66
Slide 67: Financial Model & Outlook
John Jordan, CFOFinancial Model & Outlook 67
Slide 68: Early Observations
My observations coming from outsideLean, no-frills well-organized businessTransparent across boundariesDevoid of unnecessary redundanciesAll key players are respected industry experts with years in the industryInsistence on operational excellence and maintaining a death grip on costPassionate respec
Slide 69: Performance Improved During 2nd Quarter
Performance Improved During 2nd Quarter 69 *Net income attributable to Photronics, Inc. shareholders +6%Q/Q +21%Y/Y +270 bpsQ/Q +650 bpsY/Y +210 bpsQ/Q +660 bpsY/Y +60%Q/Q +10XY/Y +80%Q/Q +6XY/Y +67%Q/Q +5XY/Y
Slide 70: Performance Improved During 1st Half
Performance Improved During 1st Half 70 +17% Y/Y +400 bps Y/Y +420 bps Y/Y +4X Y/Y +4X Y/Y +4X Y/Y *Net income attributable to Photronics, Inc. shareholders
Slide 71: Positive Growth Outlook
Key Success Factors“Made in China 2025” – new facilitiesFPD technology inflectionsRepositioning the companyNode migration (logic & memory)Growing business with captive producersIC JV’s in China and TaiwanStable mainstream businessCross-site collaboration to serve global customers Positive Growth Out
Slide 72: Strategic Priorities to Improve Shareholder Value
Disciplined focus on investments to improve ROICMaintain strong balance sheet through China investment periodFinancial stability through economic downturnFlexibility to invest in other growth opportunities (organic or M&A)Continue to drive cost out to improve customer value proposition and improve s
Slide 73: Solid Financial Fundamentals
Strong operating cash flow generatorPowerful operating leverage: target 50%Positive free cash flow every fiscal year since 2009Solid balance sheet Solid Financial Fundamentals 73
Slide 74: Free Cash Flow Much Stronger Post China Investments
Free Cash Flow Much Stronger Post China Investments 74 *Free cash flow equals operating cash flow less capex
Slide 75: Reducing Risk of China Investment
Reducing Risk of China Investment 75
Slide 76: Clear Capital Deployment Priorities
Fund organic growthGeographic expansion into ChinaTechnical investments to maintain leadership positionExplore strategic M&APhotomask industry – IC & FPDAdjacencies to increase revenue diversificationDebt repaymentConverts mature in 2019Incurring local debt in China Clear Capital Deployment Prioriti
Slide 77: Financial Summary
Clear path to profitable growthPrudent stewardship of balance sheetFinancial model to grow income faster than revenueFinancial targetsRevenue $630M & EPS $0.80 by 2020Operating margin > 15%Minimum $100M net cashImprove ROIC – no projects accepted below hurdle rate Financial Summary 77
Slide 78: A Compelling Investment Thesis
Global leader in merchant photomask industryDelivering high-end growth by leveraging core competences: Operational Excellence, Low Cost Producer, Technology Leadership, Customer IntimacyInvesting aggressively to exploit secular growth opportunitiesChina industry expansion – Made in China 2025Technol
Slide 79: Questions?
Questions? 79
Slide 80: Thank you for your interest!
Thank you for your interest! For Additional Information:R. Troy Dewar, CFADirector, Investor Relations203.740.5610tdewar@photronics.com