Photronics, Inc. Q3 2008 Earnings Call Transcript

Aug.14.08 | About: Photronics, Inc. (PLAB)

Photronics, Inc. (NASDAQ:PLAB)

Q3 2008 Earnings Call

August 14, 2008, 8:30 pm ET

Executives

Sean T. Smith - Chief Financial Officer and Senior Vice President

Constantine S. Macricostas - Chairman and Interim Chief Executive Officer

Christopher Progler - Chief Technology Officer

Analysts

Matt Petkun -D.A. Davidson & Company

Brett Hodess - Merrill Lynch

Amar - Stephen Chin

Patrick Ho - Stifel Nicolaus

Jenny Hume - J.P Morgan

Chip Bonnett - FM Global

Jay Deahna - JP Morgan

Operator

Operator

Ladies and gentlemen, please standing by we are about to begin. Good day everyone and welcome to the Photronics Third Quarter Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. After the presentation, we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded on Thursday, August 14th, 2008.

I would now like to turn the conference over to Sean Smith, Chief Financial Officer. Mr. Smith, please go ahead, sir.

Sean T. Smith - Chief Financial Officer and Senior Vice President

Thank you and good morning everyone. My name is Sean Smith, Chief Financial Officer of Photronics. We would like to thank you for joining our fiscal 2008 third quarter conference call.

Before we begin, I would like to remind all participants about the safe harbor provision under the Private Securities Litigation Reform Act of 1995. And thus, except for historical events, the information we cover during this call maybe considered forward-looking, and may be subject to certain risks and uncertainties that could cause actual events to differ materially from those projected. This call will remain archived on our website until we report our fiscal 2008 fourth quarter results after the market closes on Tuesday, December 9th.

Joining us on the call today is Constantine Macricostas, Chairman and Interim Chief Executive Officer; and Dr. Christopher Progler, Chief Technology Officer. Dino will comment shortly on his fast to company’s strategic direction and I will then provide a review of Photronics’ third quarter performance.

On August 6, we pre-announced our results for the third quarter as we reduced our revenue guidance as a result of lowered and forecasted demand for high-end IT products and price softness in the managing segment. While we are disappointed with the demand, we are pleased with the progress we made on our qualification process. We also announced that we will record an impairment charge related to the write-off of goodwill and certain under utilized assets primarily related to mainstream technologies in Europe and Asia. The total charge amounted to 198.2 million or $4.76 per share of which 137.3 million net of tax represented goodwill and the balance 60.9 million net of tax represented the write-down of under utilized assets. In addition we recorded severance charge in connection with our former CDO of approximately $1 million during the quarter.

I will now turn the call over to Dino. Dino?

Constantine S. Macricostas - Chairman and Interim Chief Executive Officer

Thank you, Sean, and good morning, everyone. In terms of current business priorities, Photronics strategic objectives have not changed. The short-term priorities are to gain high-end IC share, while aggressively reducing our cost structure without compromising our core business. We have recently returned from a successful trip to the NanoFab as well as visiting customers in Asia. I am extremely optimistic about our ability to be successful in the high-end with our proven technology as well as in our ability to operate more efficiently.

The cornerstone of the high-end strategy remains the global deployment of our fully operational world-class U.S. NanoFab for memory and logic market. We also continued to drive towards a seamless and globally integrated network that is able to serve the most important photomask market with leading capability service as well as cost. The key part of this strategy includes capability enhancements in Korea and Taiwan to meet the needs of our expanding customer base in Asia.

With respect to strategic progress on our short-term objectives, the U.S. NanoFab operation continues to move quickly on a broad range of high-end qualifications, while concentrating our efforts towards our top five customer opportunities in an effort to increase value. This includes Micron and Micron affiliated companies’, two high-end logic customers. In addition to these 5 key accounts, we clearly have the additional customers engaged in qualification. We remain confident there is still high-end penetration once market conditions improve.

We are enthusiastic about our recent expansion in the alliance network of Micron Technology that has already enhanced the future value of the NanoFab investment, giving Photronics a clear processor (Ph) break opportunity in the critical Taiwan memory market. In China, we continue to see disappointments with our results and we are progressing at a pace that are within our plan. Accordingly, we continue to evaluate options to increase revenues and reduce cost.

Finally, before I turn the call back to Sean, I want to assure our customers, our employees, our investors that we will commit to long-term global success for our high-end strategy. While in the short-term we do remain cautious for the remaining 2008 into early 2009 as a result of issues prudently affect the semiconductor industry.

In summary, we remain very confident that we can capitalize market condition as they present themselves. Thank you. Sean?

Sean T. Smith - Chief Financial Officer and Senior Vice President

Thanks Dino. Now turning to the results for the quarter. For purposes of our discussions on the operations for the third quarter I will be primarily referring to our operating result excluding the impact of the impairment and severance charges, net sales in the third quarter amounted to a 105.7 million as compared to a 104.3 million in the third quarter last years. Revenues for IT Photomask were 77 million as compared to 85 million in Q3 ’07 or revenue – while FPD revenues were 28.6 million as compared to 19 million for Q3 ’07. The year-over-year decrease in IC sales is related to decreased ASPs principally for mainstream products. The FPD revenue, improvement year-over-year is a result of increased high end unit demand. Sequentially sales decreased 4.6 million or 4.2% primarily as a result decrease high end IC and to a less expense FPD Photomask.

Sales of advanced FPD and IT Photomask, were approximately 19.5 and 8% respectively a total sales for the quarter. Including this percentage our mask sets were semiconductor design at and below 90 nanometers and for FPD sets used to fabricate flat panel products using G6 and higher technology.

On a sequential basis, sales of high end IT mask were down 24% as a result of industry wide slowdown and advance tape out. As we developed our initial guidance for the third quarter, we had anticipated that our high-end IT business would grow sequentially by at least 50%. As a percent of total sales, the third quarter are approximately 63% in Asia, 22% in North America and 15% in Europe.

The gross margin for the third quarter of 2008 was 13.1% as compared to 22.7% in Q3 ’07. The decrease is primarily associated with an expanding manufacturing base including cost associated with our recently opened U.S. NanoFab. Sequentially, gross margin decrease 530 basis points as a result of the reduced sales and increased cost, principally depreciation associated with the NanoFab.

Selling, general and administrative expenses exclusive of the severance charge for the third quarter were 12.7 million as compared to 16 million last year with the decrease related to reduced compensation expense and the U.S. NanoFab cost now being reported in cost of goods sold. On a sequential basis, SG&A decreased 900,000 as a result of the U.S. NanoFab rebidding of cost of goods sold and additionally overhead expenses decreased due in part to cost reductions programs, the reduced compensation associated with reduced headcount.

Year-to-date, consolidated headcount is down approximately 7%. Research and development expenses which consists principally a continued development for advanced process technologies of 4.3 million in the third quarter, sequentially R&D decreased by 300,000.

During the quarter, during the third quarter exclusive of the charges we generated an operating loss of 3.2 million as compared to operating income of 2.1 million for the second quarter of ’08. In our May call we mentioned that our operating cost should plateau in the third quarter as we work to monetize our new manufacturing facilities in the US and Indonesia. While we work through this expansion and customer qualification process, we want to assure you that we are continuously driving to reduce our cost. While depreciation and amortization rose $3 million during the quarter to 28.6 million; our operating cost should decrease in Q4 by approximately $2 to $2.5 million as a result of the charges we took during the third quarter.

Additionally, we continue to assess global manufacturing strategy as our customer base continues to evolve and migrate. If this assessment warrants the management team to decide that there is need to evaluate future facility closures, after redeployment in further work force reductions we will do so. However, all these actions will be predicated by market conditions and customer requirements.

Net other income expense for the third quarter was expense of 2.6 million as compared to income of 900,000 in 2007, and a decrease year-over-year is related to increase interest expense associated with our increase debt year-over-year and decrease investment income associated with reduced investment balances.

During the third quarter we recorded a tax provision inclusive of the 7.2 million benefit associated with charges of approximately 200,000, a net loss exclusive of the impairment and other charges with 6.4 million or $0.15 per share for the third quarter. As we exited the third quarter we had approximately 1440 employees claims the sales of $294,000 per employee on an annualized basis.

Now taking a look at our the first nine months of fiscal ’08 operating results, net sales for the first nine months were 319.2 million a decrease of approximately 700,000 from the first nine months last year. IT sales declined 8.4% to 238 million as a result of reduced ASP’s for IT mask principally for mainstream products. The decrease was mitigated by an increase of $21 million or 35% year-over-year sales of FPD Photomask principally at high end.

Year-to-date gross margin decrease to 17.2% from 24.9% as a result of increased manufacturing base and reduced ASP’s. SG&A decreased 3.3 million to 43.6 million, and R&D cost were 13.1 million for the first nine months as compared to 13.3 million last year.

Net other income expense was expense of 6.3 million in '08 compared with income of $1 million in '07 as result of increased interest expense, reduced investment income. For the first nine months of 2008 we recorded tax provision of approximately $3 million. And for the first nine months our net loss exclusive of the charges amounted to 11.8 million or $0.28 per share.

Now taking look at our balance sheet at the end of July, cash and short terms investments at the end of third quarter amounted to 79.6 million with working capital at 65.3 million, a sequential improvement of approximately $23 million.

Accounts receivable decreased 7.4 million as compared to the end of the second quarter due to the decreased sales during the quarter and the balance sheet does include the impact of the goodwill write-off of a 138.5 million and the asset impairment charge which reduced net PP&E by $66.9 million. Accounts payable and accrued liabilities at July 27th ’08 amounted to 99 million as compared to a 117 million at the end of the second quarter.

Total debt at the end of July was approximately $229 million. The principal components of outstanding debt include approximately $123 million outstanding on our revolving credit balance approximately $30 million of foreign term loans and approximately $76 million in capital lease obligation.

Taking a look at our 2008 and 2009 capital needs, we do feel confident that our significant CapEx spending is behind us and we expect to continue to generate quarterly cash flow from operations as we did in this quarter.

We are also in the process of meeting with our financial providers and reviewing various options and alternatives for additional financial flexibility should we determined be needed. Of course, the type and term is subject to negotiation.

Minority interest at the end of the third quarter amounted to 53.7 million, which primarily relates to minority interest in the equity of our 57% owned majority subsidiary PSMC. Our book value per share was approximately $10.44 at the end of the quarter. In general, this equity aggregated $435 million.

Taking a look at our cash flows, cash flow provided by operations for the third quarter was approximately 30.8 million and amounted to 65.9 million year-to-date. Cash flow using investing activities during the first nine months of '08 amounted to approximately 94.3 million of which 95 million represents cash payments for capital expenditures. Total CapEx for the first nine months of ‘08 on an approved basis was a $117 million and includes our capitalized Nanofab lease obligation.

Taking a look ahead, our short-term visibility has always continues to be limited, typically one to two weeks. Turning to our outlook for the fourth quarter many industry factors reflected continued softness and we expect a series condition continue perhaps to Q1 of '09, while we are not providing any specific guidance for Q1 of '09, I would like to remind participants on today’s call that our first quarter which ends in January includes the holiday periods.

Based upon on best analysis our revenue guidance for fourth quarter of '08 is in the range of 103 to $108 million. Capital expenditures for 2008 on a cash basis are forecasted to be approximately 115 to $125 million with a vast majority of the CapEx already installed. Most of the new installed CapEx relates to the US Nanofab and additional high end capacity in Korea.

Our initial cash to CapEx needs for fiscal ’09 are the range of 50 to 65 million. However, we like to -- and provide to you this morning and we do maintain a significant degree and flexibility in how we invest capital into our organization. So if that trend accelerate or decelerate we can move quickly to optimize our competitive position.

For the remainder of ’08 our cash rate always will be impacted by the flow of income form jurisdictions which may have tax holidays or credits and upon our limited ability to recognize tax benefits in years in which we are taxable. directly at tax benefits in the years which we are taxable. Accordingly, for the fourth quarter of fiscal 2008, this will equate to a range, tax amount range of tax amount range 1 to $1.8 million.

As a result based upon our current operating model we estimate that the loss per share for the fourth quarter of fiscal '08 to be in the range of $0.16 per share to $0.08 per share.

That concludes my prepared remarks. Now, I’d like to turn the call over to the operator before we begin Q&A.

Question and Answer Session

Operator

Thank you, sir. [Operator Instructions]. And for our first question we will go to Matt Petkun with D.A. Davidson & Company.

Matthew Petkun

Hi, good morning. Sean, could you share with us what your views will be from a revenue perspective for the Nanofab this year, I think the previous target was 50 million, well it could be off on that and were probably kind of below that obviously, but how does that look for this year and then obviously Q1 of next year soft, but any views as in terms of the opportunity they grow that business next year?

Sean Smith

Sure Math. I will take a short and then I’ll also see if Chris can add any color and also Dino as well they were both recently out there. We had probably six months ago math mentioned that we would expected Q4 to achieve excellent Q4, we would achieve a run rate of approximately $15 million in the NanoFab. We obviously are not going to achieve that as a result of current market conditions, but we are not going provide any specific guidance at this point in time. The good news is – I’ll let Chris elaborate further on it, the process technologies there, we are qualified to engage with these customers and we feel confident that once the markets turn we will increase those orders as a comment. Plus Chris, if you would like to…?

Christopher Progler

Sure I can add a little bit additional. We have sampled a lot of masks, we are selling masks obviously out of the NanoFab very good reports in the customer base, we believe the technology is quite sound, we have the capacity, so we really are involved in evaluating the market trying to tune our customer profiles and jump on any improving market conditions we can. Probably the most optimistic thing we see near term is related to some of my conductivities in Taiwan with the memory companies there that potentially top sense with new fairly large mass market for us that we did not have anticipate having access to previously. So, that’s one we are working very hard to understand and capitalize on.

Matthew Petkun

Okay. Thanks. And then, Sean, what are your expectations from a depreciation perspective and your guidance for Q4?

Sean Smith

Math our depreciation settled down approximately 2 to $2.5 million from where we were at the end of Q3. You know, as a result of the he write-down of those underutilized assets, we don’t anticipate going forward our depreciation to increase – it’s upon the best available information we have right now.

Matthew Petkun

Okay. And then obviously a lot of this is mix related but, would there will be a goal to get the company to reduce its break-even on a GAAP basis from the top line perspective?

Sean Smith

Absolutely.

Constantine Macricostas

Yeah, definitely we’re getting to that. Our goal is to reduce cost every item in the P&L statement are going to be looked at intensity. It’s not to reduce cost. And, we hope of course the top line to increase and definitely our goal is to going back to, how we’re making a profit.

Matthew Petkun

Okay. And then, one more question before I would let other people jump in, the tax that you said for Q4, Sean?

Sean Smith

Yes, there was one sorry, skipped a little bit it was $1 to $1.8 million.

Matthew Petkun

Expense?

Sean Smith

Yes, sir.

Matthew Petkun

Okay, thank you.

Sean Smith

You are welcome.

Operator

Our next question we go to Brett Hodess with Merrill Lynch.

Brett Hodess

Good morning. Can you illustrate a little bit more on what you think the break even is now and what revenue level you think you can get the break even level down to?

Sean Smith

Sure, Brett. For Q3 our break even given the Q4, breakeven on the operating income line was approximately $109 million and you had anticipate about 122 -- 111, 112 where we had some other cost savings initiatives in there. For Q4, we estimate to be on the operating income line, to be approximately $105 to $106 million. And we do have plans to set every line item on our -- our P&L is under scrutiny to reduce that even further without compromising our ability to achieve profitability and high-end growth. So, from a bottom line perspective, obviously with the guidance -- at the high-end of the guidance at $0.08 per share, we’d probably have to be at about under the current operating environment somewhere in the 109 to 110 but we’ll get that done even further as we move forward.

Brett Hodess

Okay. And then, you commented on the business environment and the lower level of mask starts, has that intensified the competitive environment as well at this point? And are you fighting pricing pressure and things like that in addition to the lower volume?

Sean Smith

I can make a few comments on that Brett. I think the short answer is yes. In this kind of environment, you do see increased competitive pressures, more competition for qualifications and for the tape-outs that are coming out. On the positive side, we’re better positioned then we’ve ever been to compete, particularly the advance nodes. So, competition is high but we’re also offering a more competitive product into the market. The bottom line now is, the number of tape-outs and the volume of high-end masks getting pushed out into the merchant mask industry is just not where we’d like to see it right now.

Brett Hodess

And then my final question on the FPD side. The business there was pretty good in the quarter and -- but now with FPD prices falling off, do you expect to see a weakening in that area or is that still going to be better because of new design activity or what not?

Sean Smith

We do expect it to be down slightly or down seasonally down through Q4 and that’s embedded in our guidance Brett. We did -- we have had a fairly good year in FPD year-over-year obviously but still a significant part of our business we do expect it to be somewhat softer during this quarter.

Brett Hodess

Great. Thank you.

Sean Smith

You’re welcome

Operator

[Operator Instructions]. We go next to Stephen Chin with UBS.

Amar

Hi this is Amar (Zaman) calling in for Stephen Chin. Hi, Sean.

Sean Smith

Hi Amar.

Amar

Hi, just a few questions. First of all, your gross margin declined by 500 basis points while revenue declined by 4%, can you talk about that a little bit?

Sean Smith

Yeah, certainly. It’s primarily related to two factors. We did have increased -- we did have increased depreciation during the quarter and we also had the full quarter impact of the NanoFab being open. Back in Q3 -- back in Q2 we only had a half -- basically half a quarter impact of that being open. So, the costs that were previously in SG&A were fully turned in depreciation in Q3. Additionally, we -- our high-end mix was down I believe from about -- on IC’s business from about 11.8 million to approximately $8 million. So we had some unabsorbed cost impacting the margin, the primary factors.

Amar

Okay. Thank you. Thank you for that explanation. And just more kind of, broadly on the market itself. For FPD’s how do we see -- you recently -- you just mentioned that you expect FPD business to be down going into the next quarter, but looking further out we had to buy materials, I was excited flat panel order was down 75% quarter-over-quarter and then expect quarters to be flat at that level going forward. LG this morning said that they expect a slowdown in FPDs in the second half of this year, going into 2009, at least first half of ‘09. How should we think about FPD, especially advanced FPD Photomasks business going -- for the next two quarters for Photronics?

Sean Smith

Let’s -- Hong Jeong, can you elaborate a little bit on that please?

Soo Hong Jeong

Sure, I can make some comments. I think, FPDs for the high-end really depends a lot on design activity, new form factors and all sort of things. We do believe that the leading edge panel makers are going to continue to try to design their way into new products. We don’t see a serious situation as we did a few years ago where a lot of the big panel makers just put a complete freeze on new design and R&D activities. So we do have -- we are still seeing some pretty good demand for high-end mainly attached to new designs, new form factors, and new displays. In terms of volume in the manufacturing lines, I think we have the same information you have that most of the large panel makers are forecasting some softness there. So that will hurt us on the repeat orders and production mask side.

Amar

Thanks. Thanks for that. Then just finally, a quick one for Sean. What was the options expense in the quarter?

Sean Smith

I’m sorry, can you…

Amar

How much was options expense in the quarter?

Sean Smith

Well, compensation -- stock compensation expense was approximately $800,000.

Amar

$800,000 and should we expect that to be stable going forward?

Sean Smith

It’s been about 7- $800,000 the last few quarters. I don’t anticipate at this point in time any significant fluctuations there, but we will report as things do change.

Amar

Okay, thank you very much.

Operator

We go next to Patrick Ho with Stifel Nicolaus.

Patrick Ho

Thanks a lot. Sean, can you just give a little more, I guess, color in terms of the advanced IC declines? Was it at -- what technology node was it at, was it more the 65 nanometer node or was it more than 90 nanometer node type?

Sean Smith

I think it was basically, mostly DRAM is 65 nanometers, but there was some slight softness in the 90 nanometer as well, principally in Europe.

Patrick Ho

Okay, great. And Chris, I know you mentioned that you just got back from the NonaFab, in terms of the technology and some of the challenges that you guys have been, I guess addressing over the past year, what are some of the technology challenges still ahead for you guys in terms of qualify or getting new customers onboard?

Christopher Progler

I think the main challenge we see for new customers is in the absence of a real strong demand, many customers are reluctant to qualify multiple suppliers. So for process of record customers, those where we have the first in position, particularly with Micron, IM Flash and some of Micron’s new partners. We’re in very good shape there. We have the capability and the technology. We really need to just anticipate and react when the demand improves.

But in the current environment, where we’re not process of record because demand is pretty soft, the customers tend to be less aggressive with qualifying second sources. And so, we’re pushing instead of there being a pull from the customer side. And things are going very well, I think they’re very pleased with what they see. We get a lot of complements on our capability but there is not that intent pull to qualify multiple sources because they don’t anticipate the need just yet. So, I think that’s our biggest challenge on the short term side. Longer term, we continue to be concerned about cost of new equipment, capital equipment for next generations of nodes and utilization of that equipment, particularly for sub-45 nanometer mass technologies.

Patrick Ho

Okay, that actually provides a lot of color. And I guess just following up on that, I assume when you mean like for those that are second source type of customers, those were some of the logic ones you mentioned. I guess going forward, when demand picks up will you be ready to ramp as the demand picks up, whenever this next upturn hit?

Christopher Progler

We believe so. The customers even the logic customers remain supportive. We are still working through qualifications. We are not running into any serious problems with those qualifications. It’s just not that strong pull you need to really push these things to closure. But we expect, when their business improves, their tape-out volume increases, they need second sources. They’ll turn up the intensity on that, and we are definitely ready. We have not had any warning signals from our customer base. We lack any technology components to deliver those high-end logic masks.

Patrick Ho

Great thanks a lot guys.

Sean Smith

Thank you.

Operator

We will go next to Jenny Hume with J.P Morgan.

Jenny Hume

Hi Good morning, just a couple of questions. Could you guys give the geographic sales breakout?

Sean Smith

Jenny, I can repeat that. Just bare with me for 1 second. Sales in Asia were 63%, 22% in North America, and 15% in Europe.

Jenny Hume

Okay great. And then how much revenue did you generate from the NanoFab last quarter?

Sean Smith

We do not disclose that for competitive purposes we are certainly, but we did mention we did not have the robust interest that we had expected for the Q3, we did make significant progress as Chris talked to and Dino also spoke about with the qualification process. So, we are disappointed certainly in the short-term, but we are very confident in the long-term once that market comes back we can serve those customers and we will see our revenue go up.

Jenny Hume

Okay. And just to once there, how many customers are qualified FD NanoFab and how many have rented volume?

Sean Smith

Chris?

Christopher Progler

We have officially qualified I will say between three and five customers I don’t want to give the exact number. In terms of customers that we have shipped to revenue probably about five customers we shipped to and I think three of those in volume.

Jenny Hume

Okay.

Christopher Progler

And we have three additional qualifications we are working on, but I can’t declare those complete.

Jenny Hume

Okay. And the three you are working are those logic or memory?

Christopher Progler

They are logic.

Jenny Hume

Okay, great. Thank you.

Christopher Progler

Thanks Jenny.

Operator

And we will go next to Chip Bonnett with FM Global.

Chip Bonnett

Good morning. Yeah, few questions if I could and just a follow-up on the qualifications because you’ve thrown out some numbers before and each quarter they had gone up a little bit. So, could you just review that one more time as to how many customers are qualified or that you are in the process of qualifying, please.

Christopher Progler

In general or just for

Chip Bonnett

To Nanofab

Christopher Progler

To Nanofab. Sure, we have five customers that we consider qualified that are related to including Micron, Micron affiliates we have three others that I would say are in mid to late stages of qualifications, but we can’t really consider those closed. We do actually have a couple of others that are we should sample masks, test masks and you could say are in the early stages of qualification, but just reiterating my comment previously in the absence of their business needing multiple sources of supply for photomasks we just not getting that pull. So a little softer on that last couple. So total five, plus three that are moving along plus a few more that we believe that will take it more seriously once their business requires it.

Chip Bonnett

Okay. So..

Christopher Progler

That should be pretty consistent with what we’ve said previously.

Chip Bonnett

Okay. Yeah, that makes better sense to me now. When we are in a better environment do you see that number building much more than a 10 or 11 type of customer number or is that probably about the number that a customers you’ll have in the shift to matter of building volume

Christopher Progler

Our intend to for the NanoFab we try to get that, small number of customers are purchasing volume, this is really the best model or facility like the NanoFab. So small number, but small I mean, 5 to 8 that commit volume that really are strategically align to the NanoFab and could benefit from the kind of capability we have there. That volume is doesn’t exist from those customers, because the market conditions then we will catch the wider net and qualify whatever customers are valuable even if its relatively small volume. So we are remaining flexible but our ideal situation is relatively small number less than 10 are really strategically committed to the operation and we will purchase volume.

Chip Bonnett

Okay good that’s great color thank you. In terms of the high end, you have talked about the weakness there and I am just trying to parse out how much of that weakness is from volume and how much is stemming from pricing at this point?

Sean Smith

Jeff its mostly from volumes not related to pricing, we don’t believe during the quarter an high end we lost in share its just as Chris alluded to earlier the customer requirements demand wasn’t there and most – a lot of our customers have taken some cost reduction measures, therefore reducing design activity or need to tape out during this point in time.

Chip Bonnett

Okay. There was a comment that the environments got more competitive in this light volume environments, so that’s, that was what was picking upon in terms of pricing?

Sean Smith

I think what we are trying to articulate there and maybe Chris can add on is, with respect to activities for some of the other qualification process there isn’t a need today where some of that, not secondary, but other types of customers because they don’t have the demand, so they are not investing at time and resources with the call process.

Chip Bonnett

Okay. So basically it’s fair to say it’s really a volume issue and not so much pricing issue at this point?

Sean Smith

That’s correct.

Chip Bonnett

Okay. You talked about reducing cost and I am just wondering what your plans are there and what ability you think you have because it seems in recent memory anyway you guys have been trying to focus and buckle down on your expenses for a while and it seems at this point you might be down to almost the muscle?

Christopher Progler

I don’t believe that really. There is always a room for improvement. And as I said earlier, we are going to look – looking with the intention to grow P&L statement. There are opportunities in materials; the opportunities all over the company really. So addressing issues one by one and trying to reduce cost. There are a lot of opportunities, if you believe on that basis.

Chip Bonnett

Okay. Is it more, you know, you mentioned materials, you know, do you foresee having to reduce headcount in any meaningful way or what other avenues you’re going to pursue to continue to get expenses down?

Constantine Macricostas

Anything significant, very small percent is very -- not worth mentioning. There will be some small headcount here, very small.

Chip Bonnett

Okay and just lastly you talked about some of your facilities maybe not been fully utilized, I think the China facilities not doing as well as you expected. Can you – and you took some impairment charges as well but can you talk about, you know, what facilities you think are running well and other ones that utilization is well below plan and you may have to take further measure?

Sean Smith

I don’t think at this point in time should we want to comment any specific facilities other than what we talked about in text. But that said, we continue to review our manufacturing network, we will deploy the asset to where the work is and if those decisions are made that we need to close or consolidate, we will do so. What we need to do as well is protect our relationship with our customers to ensure that we don’t compromise our global business as result of one decision or decision on one or two manufacturing facilities, but we’re continuously looking at that, Dino has got, Dino is in the process of reviewing all the facilities with us and some ideas we are going to take a look going into Q4, but at this point in time we don’t want to comment on a specific locations.

Chip Bonnett

Okay. Thank you.

Operator

[Operator Instruction]. We go next to Jay Deahna with JP Morgan.

Jay Deahna

Thanks very much. Can you hear me?

Sean Smith

Yes.

Jay Deahna

Okay. Yeah, question for Dino, Dino how long do you plan on doing the CEO thing, just go around and what is your plan for bringing in a new CEO, are you going to look to hire internally or externally? And then for Sean, Sean, if this downturn lingers somewhat clearly into the April quarter, do you start getting concerned about some of your debt convents, what would trigger some concern on that. And then the last one is, you mentioned your China facility in the prepared remarks, can you sort of expand on what’s happening there?

Constantine Macricostas

I’ll take the first question, Jay. I see that point with a search committee through individuals from the Board of Directors as they are interviewing various executive search from and the process of picking up one of them. And I would say within a six month or so we’ll see we have a new CEO in the company -- in my age, my goal is not to stay for too long as a senior of the company.

Sean Smith

Okay. And then Jay, I will comment, with respect you, if the downturn is prolong we’d obviously have to make certain other changes in our operating structure to ensure that and work with our financial providers to ensure that we are in compliance with our debt covenants. We do monitor them and have opening relationship obviously with our financial providers. And we are working on a number of different various scenarios in case things do not pan out the way we feel they would. With respect to China, quite frankly, we are disappointed with the available market there. It hasn’t developed that we had anticipated – no fault of our folks, the operations has improved. It is primarily a mainstream marketplace and it can today it isn’t where we thought it would be say 3 or 4 years ago.

Jay Deahna

So, are you going just going to sit with underutilized capacity because it’s a potential large growth market overtime or is there something that could be done to improve the lack of overhead interruption there?

Sean Smith

There is a number of alternatives, we are taking to look at, we obviously cannot afford to continue with that burden going forward if we don’t generate the top line but no firm decision have been made, but we are working on a number of different scenarios.

Jay Deahna

Could one of those scenarios be just removed the equipment in just kind of sit there with the building at a minimal cost structure and these equipment are more housing get back to a later seat on eliminate your opportunity in that market?

Constantine Macricostas

Jay, there is a lot of option. But at the present time, we cannot comment on these options, because it affects the employees, we don’t want to say exactly what we are going to do. I did believe as Interim CEO my future is very helpful for the company right now, really because that’s why it can be best to help the company. But, I don’t want to elaborate right now what our game plan is right now.

Jay Deahna

Okay. I’ve got one last question for you Dino, if you look at Photronics, it’s a pretty straight forward business you make photomasks for semiconductor industry and now for the flat panel industry, there’s really no great discussions about diversifying into other businesses and what not. So it seems like you mandate is pretty straight forward and your objectives are pretty straight forward. So given that scenario why is it that the average life cycle of the CEO of Photronics is somewhere in the two to three range and it just keep kind of changing all the time. What is driving that and what can change that so that the company can get some stability because clearly when CEOs move in and out people below the CEO moves in and out that creates disruption.

Constantine Macricostas

The whole thing is below the CEO, we have – we have currently any turnover below the CEO. Unfortunately CEO -- CEO sets the tone and CEO set the pace. And unfortunately we have not been very fortunate to find the CEO with a passion and hungry. It seems on the surface a straightforward business, but it is not – it’s a difficult business, it takes special skill set to survive in this environment. And also, I can say really we are hopeful this time we have a better luck, because definitely my desire is not keep coming back to Photronics -- company of my age. Definitely as you say -- I don’t agree with you, that’s a straightforward business. It’s a difficult business to run. People that came in did not survive for too long just to jump in and find out how difficult it is.

Jay Deahna

Okay. Thanks very much.

Sean Smith

You are welcome.

Operator

And with that ladies and gentlemen we have no further questions on our roster. Therefore Mr. Smith I’ll turn the conference back over to you for any closing remarks.

Sean Smith

Thank you for your attention and participation in this morning’s conference call. We look forward to talking with you guys again at the end of our fourth quarter and our December conference call. Thank you and have a good day.

Operator

And again ladies and gentleman this does conclude the Photronics third quarter earnings conference call. We do appreciate your participation and you may disconnect at this time.

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