Photronics, Inc.

Good day, and thank you for standing by. Welcome to the Fortronics Q1 Fiscal Year 22 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentations, there will be a question-and-answer session. To ask a question during that session, you press star 1 on your telephone. As a reminder, this conference is being recorded Wednesday, February 23, 2022. I would now like to turn the conference over to John Jordan, Executive Vice President and CFO. Sir, the floor is yours.

Thank you, Chris. Good morning, everyone. Welcome to our review of Photonics' fiscal 2022 first quarter 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. The presentation material contains non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures may also be found at the end of the presentation. Comments made on today's call may include forward-looking statements. These forward-looking statements are based on a number of risks, uncertainties, and other factors that are difficult to predict. We refer you to the documents we file with the SEC for a discussion of the risks that may affect our future results. 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'll turn the call over to Peter.

Thank you, John, and good morning, everyone. I am pleased to report strong sales and earnings for the first quarter, a period that is typically seasonally soft. As in-market demand was strong and our global team worked hard to deliver another record quarter or fourth in a row, demand activity remains elevated across the semiconductor and mobile display industries. We are clearly benefiting from the investments in capacity and capability that have positioned us to outgrow the markets. We are seeing an acceleration of the trends that drove us to achieve record performance in 2021, and are confident that 2022 will be even better for Photronics, our customers, our employees, and our shareholders. While it's great to see the growth in revenue, it is even more rewarding to see our profitability step up over the last several quarters. Our long-term investors know that we repositioned the business nearly five years ago and launched an initiative to build new IC and SPD factories in China. both larger than any other existing facility in the company. The result of this has been record revenues for the past four years running, with a clear line of slate to a fifth in 2022. On the other hand, our profitability was compressed as we built and ramped these two new facilities. We experienced the typical invest-to-grow scenario for a manufacturing company, where short-term financial pain is traded for long-term gains so long as the team executes. Our FPD factory ramped the full Phase I capacity in FY20, and our IC factory did likewise in FY21. With the initial ramps complete, the Power Rail long-term model is now coming into view. We set a new three-year financial target model at our December 20 investor day. We targeted gross margins in the mid to high 20s, and operating margin in the mid-to-high teens, which represent prior peaks for Photronics. Our recent results have rendered the December model obsolete, as we have operated in the upper end of the range in the second half of 2021, and we were well above it in Q1. As a result, we are announcing new long-term targets to reflect our current performance and the leverage in our new business model. I will say more about this in a few minutes. In addition to strong growth in revenues and profit, operating cash flow was up 125% over last year. This further strengthened our balance sheet, enabling us to continue pursuing our investments in profitable growth to expand our leadership position and improve our return on invested capital. This has been a major objective of our investment strategy, and we are making progress on improving this metric. Our investment strategy is supported by three pillars, revenue growth, margin expansion, and exploration of strategic partnerships. Our success in growing revenue depends on having the right tools in the right location with the right technology at the right time, coupled with solid execution and strong customer relationships. One measurable result of this approach has been our expansion in the market in China, which is the most rapidly growing geographic market today for semiconductors and displays. The Chinese customers are growing fast, and we are growing faster, with a 36% CAGR over the past three years. As a result, products shipped to China represented 40% of our trailing 12 months revenue at the end of Q1. In addition, we are leveraging our technology leadership in AMOLED displays, and their penetration into smartphones to grow our FPD business. These displays are becoming more common across premium as well as mid-range phones, as performance advantages are well known, and the cost of basic AMOLED displays comes down. For the most advanced displays and premium smartphones, the mask intensity is increasing to enable the expanded functionality of displays, such as embedded touchscreen and fingerprint sensor, which is great for us. Looking forward, We expect the FPD photo mass market to be flat in 2022 with growth in 2023 driven by industry investments in Korea and China. We're investing in new FPD capacity with orders placed for tools that should come online mid 2023. To support these investments, we have recently signed customer supply agreements that are expected to add 10% to FPD revenue. and we are in conversations regarding additional agreements to add 10% more. A recent development feeding into our growth is the resurgence of legacy semiconductor foundry demand. We view this as the rebirth of the ASIC market. It has placed increased demand in the mass sector as industry supply growth has been limited historically. This has caused least times to expand and has created pricing leverage in this sector for the first time in decades. We are sold out of mainstream capacity in Asia, and to better exploit this opportunity, we are investing in incremental capacity by installing point tools at several of our factories, including the expansion of one of our facilities in Taiwan to make additional clean room space for these tools. We believe the growth and legacy foundry, coupled with the mass and intensity of this segment, plus strong pricing leverage, positions us to profitably grow in this sector. The legacy family sector is driving revenue growth as well as margin expansion, the second pillar of our investment strategy. Sustained pricing strength is evident globally as we implemented double-digit price increases in Taiwan and China in 2021 and are actively raising prices in Europe and Korea. A significant driver of gross margin improvement in Q1 was pricing, which we believe is sustainable, giving us confidence to invest in capacity expansion and raise our long-term targets. As we grow our business, the inherent operating leverage in our model will further expand margins and drive improved financial performance. Finally, we are continually exploring strategic partnerships to grow our business inorganically. This pillar focuses on opportunities that would extend our position as the market leader by either bringing capacity or capability to help us better serve our customers. We have a history of successful M&A and joint venture formation and believe this can be an important piece of future growth. Before turning the call over to John to review our financial results and provide guidance, I'd like to take a moment to present our updated target model. As I mentioned earlier, we provided a three-year target model in December of 2020. Due to strong market dynamics and our successful execution, We achieved those targets within one year and are now operating well above them. In order to help investors understand where we are heading, we are providing updated targets elaborated in the supplemental slides on our company website. We have increased the revenue ranges to reflect strong demand and continued investment in capacity. Margins at both the growth and operating level are higher as we anticipate mainstream I see pricing benefits to be long-lasting. We've established a strong moat with AMOLED technology and FPD. And we continue to target 50% incremental margins. So, for our new long-term model, we see gross margins reaching the mid-30s and operating margin in the mid-20s. This improvement in profitability should produce higher cash flows in EPS, including earnings approaching $2 per share and free cash flow of $200 million annually, elevating the financial profile of our business and ultimately creating greater value for our shareholders. I'd like to emphasize that this level of financial performance has never been achieved by the company, yet is right in our line of sight, and our review represents transformational change to our business model. This is the gold medal for all the hard work by the entire team over the past five years. I want to take a moment to thank all of our employees for your sustained effort and the shared sacrifices it took to get here. I am humbled by what you have accomplished and it is truly an honor to lead you. In conclusion, we have made a great start to 2022, performing above expectations and raising our long-term outlook. End market demand is strong, and we are investing to increase capacity to better serve our customers. We have a great team that continues to exceed expectations, and I'm confident that our best days are right in front of us. At this time, I will turn the call over to John.