Photronics, Inc.

Good day, and thank you for standing by. Welcome to the Photronics fourth quarter fiscal year 2021 earnings conference call. At this time, all participants 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 1 on your telephone. As a reminder, this conference is being recorded Wednesday, December 8, 2021. I would now like to turn the conference over to John Jordan, Executive Vice President and CFO.

Thank you, Shannon. Good morning, everyone. Welcome to our review of Photonics fiscal year 2021 fourth quarter and full year financial results. Joining me this morning are Peter Curlin, our chief executive officer, and Chris Progler, 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, John, and good morning, everyone. We ended 2021 with accelerating momentum in a market environment of robust design activity from a diverse customer base. In addition, we strategically expanded capacity in 2021, most notably in display with the addition of three new lithography tools. These factors, among others, enable us to deliver another quarter and year of record revenues across the business, including both IC and FPD. This is our fourth consecutive year of record revenue, demonstrating our ability to drive our top line up the entirety of a semiconductor industry cycle. These increasing levels of performance have been made possible by the efforts of the entire team to provide outstanding customer service, coupled with solid investments in the right technology in the proper location to position us to win in the marketplace. In addition to growing the top line, we expanded margins during the quarter. This was driven by operating leverage, the ability to realize higher prices in mainstream products, and the present focus on cost reductions. It was just one year ago in December when we communicated our long-term target model, the growth margins in the high 20s and operating margins in the high teens. Today, we are already operating in the upper end of that model. While we recognize the need to improve, we are extremely pleased with the progress that we have made and even more excited about what is possible going forward. Cash flow was strong for the quarter and the year. enable us to maintain a strong balance sheet while investing in organic growth and returning cash to shareholders. Since initiating our first share repurchase program in 2018, we have brought back $128 million of shares, reducing our share count by approximately $12 million, a testament to our commitment to creating shareholder value. Making targeted investments that improve our return on capital is one of the key factors contributing to our success. Outside of strong end market demand and great execution by our entire team. Our investment philosophy is built upon aligning operations and technology with specific market trends and ensuring that every decision to invest is backed by customer commitment. This approach mitigates risk enables us to quickly ramp new tools to volume production, which helps to ensure we deliver required returns. Work remains to be done to further improve return on invested capital, but we are very encouraged by our progress. Over the last few years, our investment strategy has been focused on mounting a geographic expansion into China while exploiting the technology inflection from LCD AMOLED and advanced mobile displays. Beyond these longer-term secular trends, we are now capitalizing on another rapidly growing sector in the IC market, mainly in China and Southeast Asia, that is now being referred to throughout the industry as, you know, I would say in quotes, legacy foundry. We have been speaking about this for the last several quarters as a growing demand for masks versus relatively fixed supply of has placed pressure on capacity, providing us with very rare, very rare pricing leverage. These photomask technologies have been in production for many years, with a particular focus on the advanced end of the mainstream, a range that spans roughly from 40 to 90 nanometers. Demand for these nodes is tied across the entire photomask industry, for us as well as for our competitors. While at the same time, more and more IC capacity is being installed, which leads us to conclude the favorable pricing will be sustainable. Demand is particularly strong in China and Taiwan. And along with our JV partner, we are investing now in the expansion of our facility in Taiwan, while adding capacity across the region to meet this growing demand. We believe this is a unique opportunity that will play out over the next several years. and we are positioning ourselves to capture the lion's share of the growth that we see in this segment. We see several drivers of growth in the legacy foundry sector. First, on the demand side, Moore's Law has essentially come to a halt for most logic applications, with 28NMB being the last node where incremental economic benefit was achieved by moving to the next smaller node. There are very few applications that justify the cost to design, develop, and manufacture at the very leading edge of 10 nanometer and below. For most applications, older technologies do the job effectively, including automotive, industrial applications, and the ubiquitous internet of things. This has created a renewed drive to install more semiconductor capacity at the mature nodes. As the chip market leads, the photo mass market follows as more and more customers are now differentiating their products based on design rather than next-node technology. This is very exciting for a mass maker as we believe we are witnessing the effective rebirth of the ASIC market. Second, the development of the semiconductor ecosystem in China spurred by that government's 2025 strategic goals, has caused significant investment in chip capacity at these mainstream nodes. Since our decision five years ago to expand our operations into China, working closely with our JV partner, we have built a sizable business there with leading market share. Revenue shipped into China is presently at a trailing 12-month run rate of $250 million. This momentum positions us well to continue growing in this important country. Finally, the market growth within mainstream nodes is sustainable due to growing nationalism within the semiconductor industry. After navigating the external shocks of trade agreements and lockdowns, companies are rethinking their reliance on manufacturing other countries, which is driving our new investment in domestic chip manufacturing. We are seeing this in Asia and are now seeing it in the US and Europe. In fact, the supply-demand inversion that led to pricing strength in Asia is now being replicated in Europe, and we are beginning to take pricing action in this region as well. While our European business is much smaller than Asia, it is more biased towards the mainstream, and we anticipate pricing actions will raise sales and margins in this region as well. In summary, there are several catalysts across our business to drive sustainable growth of photo mass demand for both IC and FPD well into the future. We have made investment decisions in the past that enabled us to benefit from these trends, propelling us to the outstanding performance we achieved in the fourth quarter and throughout the full year of 2021. We have the widest range of technology, an unparalleled global footprint that enables us to respond quickly to dynamic market in any customer request. Record revenue, expanding margins, and strong cash flow position us to continue to make improvements that we believe will allow continued growth. I am very proud of the entire team and what we're able to achieve this year, and I'm optimistic that 2022 will be even better. At this time, I will turn the call over to John.