Photronics, Inc.

Good morning, ladies and gentlemen, and welcome to the Photronics Q2 2021 Earnings Results Conference Call. At this time, all the participants are in a listen-only mode. Later, we will conduct a 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 call is being recorded Wednesday, May 26, 2021. I would now like to turn the conference over to Troy Dewar, Vice President of Investor Relations.

Thank you, Whitney. Good morning, everyone. Welcome to our review of Photronix 2021 Second Quarter Financial Results. Joining me this morning are Peter Curlin, our Chief Executive Officer, John Jordan, our Chief Financial Officer, and Chris Proggler, 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. 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 risks, uncertainties and other factors that are difficult to predict. Actual results may differ materially from those expressed or implied, and we assume no obligation to update any forward-looking information. At this time, I will turn the call over to Peter.

Thank you, Troy, and good morning, everyone. Our Q2 performance was strong as we achieved record revenues with growth across both IC and FPD. The one exception was mainstream FPD, where customers continue to focus on current LCD production rather than releasing new displays. This had little to no impact on our business because our FPD capacity was sold out, predominantly making higher value masks for AMOLED and LTPS mobile displays. Business across the semiconductor and display industries was strong for nearly all participants in Q2, driven by wafer starts and or capital equipment investment. The photo mass market has joined the party as design activity as well as installation of new manufacturing lines drove an uptick in demand. We expect this will continue, and our position as the largest merchant photo mass manufacturer should enable us to continue to invest and grow with these industry trends. Margin has improved in the quarter, as we were able to leverage higher revenue into expanding gross and operating margins. This has been an area of focus for us, and I am pleased with the solid progress we made during the quarter. As we look into the future, we expect margins to continue to expand based on a plan underpinned by three initiatives. The first is to grow our top line and realize the benefits from higher operating leverage once we exceed the fixed cost in our model. There are several opportunities we are pursuing for revenue growth. One is winning the lion's share of the market in China, as our customers execute against the country's Made in China 2025 policy. This drives demand for both IC and FPD photo masks. We have built and ramped two manufacturing plants in China, both of which are fully equipped with the initial wave of tools and operating profitably with momentum. Beyond those greenfield investments, we are adding point tools to many of our sites to address specific market needs and customer commitments. Finally, we anticipate an expansion of captive outsourcing as EUV technology ramps, creating a need for these customers to outsource more of their non-EUV radicals. The second component of our margin expansion is to leverage our market and technology leadership, especially amassed from mobile displays, driving better mix and better margins. Panel capacity is growing, especially in China, as more mobile displays adopt this technology. This includes not only smartphones, but also laptops and tablets. There is an increasing proliferation of both manufacturers and products, creating a rich environment for new designs and therefore new masks. We are the recognized leader in AMOLED mask technology, and we will use this position to maintain and expand our market share. This will drive higher revenue and product mix, as AMOLED carries some of the best ASPs across our product line. The final piece of our margin improvement plan is to leverage our scale to drive cost out. Two areas we are focused on are materials and equipment maintenance. By far, our largest spend on materials is blanks, and we are driving to standardization, thereby eliminating complexity and cost, as well as to help newer sectors for example, G10.5+, to mature, which improves our supplier's efficiency and cost. On service, we are expanding our use of self-maintenance, allowing us to optimize the amount we spend on service contracts. This lowers total cost and improves uptime, as we can more quickly respond to and fix issues. We operate in a high fixed cost environment, Approximately one-fifth of our cost of goods sold is depreciation. Because of this, in addition to intensely managing the variable cost items I just discussed above, and many I did not, we must make solid investment decisions when spending on capital equipment. This requires a disciplined investment strategy to put us on the path for improving returns on investment. We are now entering the next stage of our investment strategy, which is based on a phased approach. We completed phase one by building two new facilities in China and equipping them with tools to enable initial product ramps. We are now executing phase 1A in FPD by adding point tools to supplement operations and selectively expand capacity in China, as well as other locations, bringing better balance to our global factory. Our IC Phase 1A will occur primarily during fiscal 2022 with new point tools to enhance operating capacity and efficiency. Due to the nature of the equipment we purchase and the capacity of each tool, this phased approach enables us to effectively manage capacity increases while keeping inefficiencies and bottlenecks to a minimum. This investment strategy is not executed in a vacuum. New investments are timed to come online in a robust business environment, along with customer commitments to mitigate investment risk. We have already demonstrated how this approach leads to improved ROI. Before concluding, I would like to briefly address another topic that freely comes up during investor conversations. Many chip manufacturers have announced plans to develop or expand semiconductor manufacturing in the U.S. and Europe. While it's premature to discuss the specific impact these new fabs may have on our business, I believe there is reason to be optimistic. If manufacturing of semiconductors increases, then there will be an increase in demand for photo masks. We have a strong global presence and are prepared to partner with these customers to satisfy their mass demands. Again, there are many steps between here and there, but the impact for us could be meaningfully positive. Through the first half of 2021, we are ahead of last year's pace. Our outlook suggests sequential growth throughout the balance of the year, which would place us ahead of the record revenue in 2020. More importantly, margins are improving, and we are on track to achieve our long-term financial targets. We are a manufacturing company. Records do not happen without everyone rowing in cadence. We'd like to thank all of our employees for your solid execution against our goals in Q2. At this time, I'd like to turn the floor over to John.