Photronics, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to Photronics' third quarter fiscal year 2021 earnings call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star then one on your telephone. As a reminder, this conference is being recorded Wednesday, August 25, 2021. I would now like to turn the conference over to Troy Doerr, Vice President of Investor Relations.

Thank you, Sarah. Good morning, everyone. Welcome to our review of Photronix 2021 third quarter financial results. Joining me this morning are Peter Curlin, our chief executive officer, John Jordan, our chief financial officer, and Chris Pradler, our chief technology officer. The press release we issued earlier this morning, along with the presentation materials which accompanies our remarks, are available on the investor relations section of our web page. Comments made by any participants on today's call may include forward-looking statements, that includes 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, Colleen. Good morning, everyone. We achieved record revenue in the third quarter as robust design environment led to growing photo mass demand across our markets. This marked the second consecutive quarter of record revenue, as you will hear formally from John in a few minutes. We expect another record quarter in Q4. The overall outlook for the semiconductor and display industries, including every company within these sectors, continues to improve. Among other things, these indicators point to a boost in capital equipment spending by chip and panel makers, that will require photo mass once installed. All signs point to a prolonged period of market strength. This is truly a very positive period for the industry, for photo mass demand, and for photonics. Gross margin improved in the quarter as the benefit from an increase in revenue on fixed cost absorption was aided by price increases for certain mainstream IC nodes. Operating margin also improved. with additional upside due to a one-time gain on the sale of a fixed asset. These results place us within the range of our long-term target model, well ahead of the three-year horizon. A growing top line and expanding profit margins are critical elements of our strategy and validate that we are on the right path. Cash flow generated from operations was strong this quarter. We bought new tools and continued our share repurchased activity. while at the same time increasing our cash balance. The significance of this cannot be overstated. We've invested and we continue to invest in organic growth for our business. These investments are targeted and aligned with our customer's technology roadmaps, supported by long-term purchase agreements that provide assurance that newly installed tools will ramp quickly. This reduces the headwind to gross margins that can arise from underutilized tools, and improves ROIC. The strong balance sheet we have built and maintained positions us to sustain this investment approach. Since 2017, annual revenue has grown 40%. To up the peak quarterly revenue was up 58%. We are on track to achieve our fourth consecutive year of record revenue, growing at a compound annual rate of 10% per year since repositioning the business in 2017. Over that same time period, high-end IC revenue nearly doubled, and high-end SPD revenue increased fivefold. This did not happen by accident. It is the anticipated result of a clear, deliberate strategy to invest in areas that would generate the highest growth while also enabling improved return on capital. From a market perspective, our investment focus has been clear. geographic expansion into China for both IC and FPD, and technology inflection in FPD, particularly a transition to AMOLED and mobile displays. In addition to these macro trends, there are some drivers that are applicable to the photomass sector, expedited use of EUV by captives for ion IC, and industry photomass capacity being sold out in mainstream IC. You also cannot ignore growing nationalism that is spurring capacity buildup in multiple regions, including the US and Europe. All of these factors support our belief that we are in a prolonged period of growth in photomass demand. A key element of our investment strategy is to line our operations with the fastest growing sectors in the markets we serve. In SPD, this has included both mobile displays and ultra-large screen TVs. We have already seen the positive impact of past investments in these growth catalysts on our financial results. To maintain this performance, we continue to focus on high-value and high-growth segments of the market. This includes AMOLED for mobile, which is expanding beyond smartphones into large form factors such as tablets and laptops. AMOLED also enables diverse applications including virtual reality headsets, automotive displays, and even foldable smartphones. In addition to mobile displays, the emergence of premium TVs such as WOLED and QD OLED drives innovation and requires more complex photo masks. Developing technologies such as micro and mini LED will also drive mass demand as they move to high volume production. Industry observers are expecting an increase in installation of display equipment in the next few years. If this happens, then what naturally follows is a period of demand growth for photo masks in order for the new tools to be used for manufacturing. Most of these investments are occurring in China, Korea, and Taiwan. It is no coincidence that these are the very same regions of our FPD manufacturing plants, allowing us to invest in localities that are most closely aligned with our customers' operations. This year, we added three new SPD tools to our global operations. All three tools are now installed, two of the three contributing meaningfully to revenue during our third quarter, and all three are running at capacity in our fourth quarter, ahead of plan. The investments in these tools are supported by four long-term purchase agreements that have incremental annual revenue in excess of $40 million. This is a great example of our investment strategy in action. We secured the business through long-term contracts, installed the tools, and ramped up the full production ahead of schedule, and are now seeing the financial benefit as we generate revenue and profit from newly commissioned tools. And I see a driver of innovation demand has been node migrations. This happens not only at the bleeding edge, but also for mainstream technologies as customers move to smaller nodes to take advantage of lower cost and better performance. The latter has created shortage of supply in the mainstream market that is giving us pricing power in this segment for the first time in my 35 years in the business. Regarding the former, as the leading chip makers, most of them kept its mask operations, using EUV to a greater extent in their IT . A larger percentage of their mask capacity is being dedicated to EUV production. This means they need to outsource more non-EUV masks to merchant suppliers. We have pointed to this trend over the last few years, and we expect that it will accelerate as the leading logic and memory manufacturers move toward advanced modes with progressively more EUV lithography steps. In December of last year, we communicated to you our long-term outlook and strategy, providing a three-year target model. Our performance during 2021 plus our outlook for the rest of the year demonstrates that we are on track to meet or possibly exceed these targets. Semiconductor and display markets are strong. Our revenue is growing. Margins are expanding. We are generating cash. The balance sheet is solid, and we are aligned with several growth vectors to position us for future success. I really like where we are are as well as the direction we are going. We'd like to thank all our employees for your superb effort to generate yet another record quarter for Photronics. At this time, I will turn the call over to John.