Photronics, Inc.

Good morning, ladies and gentlemen, and welcome to the Futronix first quarter fiscal year 2021 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your touchtone telephone. As a reminder, this conference is being recorded Wednesday, February 24, 2021. I would now like to turn the conference over to Troy Duar, Vice President of Investor Relations. Please go ahead.

Thank you, Jerome. Good morning, everyone. Welcome to our review of Photronics' 2021 first quarter financial results. Joining me this morning are Peter Kerlin, our Chief Executive Officer, John Jordan, our Chief Financial Officer, and Chris Prodler, our Chief Technology Officer. The press release we issued earlier this morning along with the presentation material which accompanies our remarks are available on the investor relations section of our webpage. I would like to note the press release had inadvertently omitted the bottom half of the balance sheet. The version on the 8K is correct and we will be correcting the press release. Comments made by any participants on today's call may include forward-looking statements that include such words as anticipate, believe, estimate, expect, forecast in our view. These forward-looking statements are based upon a number of risk, uncertainties, and other factors that are difficult to predict. Actual results may differ materially from those expressed or implied, and we assume no obligation to update any forward-looking information. At this time, I will turn the call over to Peter.

Thank you, Troy, and good morning, everyone. We achieved sequential growth in the first quarter, defying seasonal trends that demand improve across many sectors. Most notable improvement was observed in the high-end FPD where strong AMOLED demand for new mobile displays led the increase. High-end IC was modestly lower, with slight improvements in mainstream IC and FPD. Typical seasonality indicates that Q1 revenue would decline sequentially, so an increase of 2% demonstrates self-performance by our global team. John will offer more insights into the details shortly, but I'd like to make some general observations on what we are seeing in our markets. Over the last 18 to 24 months, there have been tremendous supply chain disruptions, driven by a combination of trade policies and economic lockdowns resulting from COVID-19. In our view, these government mandates move the market in ways that were not easily anticipated. In some cases, the impact has been positive for industry, such as the trend to do more of what we do every day remotely, spurring demand for work-from-home electronics, Conversely, many automotive manufacturers suspended or severely curtailed vehicle production last spring. When automobile manufacturing recently returned to normal levels, solar capacity had shifted to work-from-home applications, with another effect being chip shortages. The semiconductor industry is quickly reacting to these demand dynamics, creating what we believe to be an inventory-driven semiconductor upcycle. pending the installation of additional capacity, particularly at the high-end logic nodes. Semiconductor manufacturers are focusing their resources on increasing output of needed chips and not on releasing new products. Therefore, new design activity has been constrained in what to us resembles a semiconductor industry cycle of old, where the uptrend in our business flags the capital equipment suppliers by one to two quarters. Once the new tools are installed with the resulting capacity online, as inventory levels are replenished, the dam breaks and a wave of new design flows. Shifting gears to FPD, the trade policies implemented by the U.S. over the last few years have clearly impacted the electronics industry in China. Up until late last year, these policies had little impact on our business. to where that changed when Huawei was placed on the denied entity list last fall. As a leading manufacturer of smartphones in China, Huawei had its own ecosystem of suppliers. When their ability to purchase leading-edge semiconductors was severely constrained, it effectively froze their new product roadmap. The impact on us was a dramatic drop in demand for PhotoMask to build their new display panels. Fortunately, the end market demand for those phones did not disappear. As we move through Q1, we start to see a resurgence in new designs from alternative phone manufacturers, and recently, the very first tape out for Honor. Furthermore, significant amounts of new AMOLED display manufacturer capacity is being brought online by our customers in China this year. And moving forward, We expect a significant rise in AMOLED photo mass demand that should continue throughout 2021. Returning to our first quarter results, gross and operating margins were lower for this period. There are several reasons for this, and John will provide details during his commentary. But the bottom line is we must do better. We positioned our operations at the high end of the market in delivering mass that are critical for the production of leading-edge devices. Based on these factors, our margins need to improve. We know well what is required to accomplish this and we are committed to deliver the results of investors as well as we expect. Moving to the bottom line, earnings per share were 13 cents. Our cash balance was steady and our strong balance sheet continues to provide superb flexibility in managing our value creation strategy moving forward. We held our investor analyst day in December. If you attended the live event or listened to the archived webcast, thank you for your interest, and I truly hope you found the presentation helpful. If you've not yet listened, I encourage you to do so. During that event, we reviewed the commitments made during our 2018 Investor Day and how we performed against them. We also looked ahead as our investment focus evolved to maintain alignment with market trends. The two areas we highlighted were advanced display technologies and China market growth. We have three new FPD mass running tools that will be installed during 2021. These will bring us additional capacity to serve our customers who manufacture advanced panels. These investments should provide us with sequential growth in capacity and therefore revenue during the second half of 2021. As stated before, we have entered into three multi-year purchase agreements that collectively represent a business commitment in excess of $40 million annually to support these investments. We often comment that the display market is very dynamic. This includes development and adoption of new technologies. The increased penetration of AMOLED displays within smartphones is one example. As manufacturers compact combat, rather, plateauing sales by offering premium options such as upgraded displays. Similarly, the introduction of 5G requires a premium display consistent with 5G capability and feature set. The resulting transition from LCPS to AMOLED requires masks with more layers. The most basic rigid AMOLED mask set has only 12 layers, while the most advanced can have up to 25. Not only does the number of layers increase, but there are more critical layers within each set, further enhancing the value we provide. Similarly, high-end technologies are expanding into the large-screen TV market. We are seeing the ramp of G10.5 plus form factor, which has come to dominate the production of standard LCD panels for large-screen TVs. With this transition largely behind us, we are currently seeing the commercialization of various OLED displays intended to capture the premium sector of the TV market. An alternative approach combines a conventional LCD with a mini-LED backlight to create a similar visual experience. These technologies are good for mass demand, as they require more mass layers and more critical layers per set. creating more complexity and higher value. As a display for the mass marketing technology leader, we are well-positioned to benefit from these trends. Shifting to the Chinese IC market, we're in the process of qualifying the final Vitho tool from our initial phase of investment in Xiamen. The installation of this tool was delayed six months because the supplier self-imposed travel restrictions in response to COVID-19. The tool is targeted at production of high-end photo masks. Our expectation is that we'll begin to generate revenue by the end of the second quarter and ramp through the back half of the year. China remains a key region of expected growth for the semiconductor industry, and our presence there should position us well to grow with the market. Over the last three years, our IC revenue of product shipped to China has grown at a compounded annual growth rate of 60% and is currently running slightly above $100 million annually. We anticipate that our business there will continue to grow and we will remain the merchant photo mass market leader in China. We are off to a strong start. I would like to thank all of our employees for your good work during the first quarter. Looking forward, I continue to believe that 2021 will be one of the best years ever for Photronics as we invest to support growing end markets, expand our business in advanced display technologies, enable our global customers to meet their product roadmaps, and improve profitability and cash flow to facilitate continued investment in projects that improve our return on capital. At this time, I will turn the call over to John.