Good day, ladies and gentlemen. And welcome to the Photronics’ Third Quarter Fiscal Year 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Troy Dewar, Director of Investor Relations. Please begin.

Thank you, Laura. Good morning, everyone. Welcome to our review of Photronics' 2018 third quarter financial results. Joining me this morning are Dr. Peter Kirlin, Chief Executive Officer; John Jordan, Senior Vice President and Chief Financial Officer; and Dr. Christopher Progler, Vice President and Chief Technology Officer and Strategic Planning. 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 participant on today's call may include forward-looking statements that include such words as anticipate, believe, estimate, expect, forecast. 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. During the course of our discussion, we will refer to certain non-GAAP financial metrics. These numbers are useful for analysts, investors and management, to evaluate our ongoing performance. A reconciliation of these metrics to GAAP financial results is provided in our presentation materials. At this time, I will turn the call over to Peter.

Thank you, Troy and good morning everyone. We achieved another quarter of solid growth with 22% improvement over last year's Q3 revenue and 4% sequentially increase over our strong Q2 results. End market demand is robust across nearly all of our markets and we are realizing the benefits from successfully repositioning the business to take advantage of growing markets in China and demand from captives. We have now achieved sequential revenue growth for five consecutive quarters and double-digit year-over-year growth for the last four quarters. It’s rewarding to see the Company achieve near record performance while stepping up consistently. Year-to-date revenues up 18% and we are on track to have the best year in the history of the Company. Previous two years’ were challenging and it has taken a lot of work by the entire organization to reach this level again. I’m extremely pleased with what we have achieved so far in 2018 and the team is focused on continuing to build momentum as we look forward to the completion of our China factories by the end of Q4, and the expected revenue ramp in the second half of 2019. IC and FPD both achieved sequential and year-over-year growth, with high-end IC being the biggest contributor to the improvement. Gross and operating profit improved as we achieved margin expansion through operating leverage and cost containment. Net income was $13 million or $0.18 per share at the very top of our expectations. In addition, our cash balance improved on strong operating cash flow. We are at a great point at this time in our China investment trajectory and feel increasingly confident in our ability to finish these projects on time and on budget; further, as we highlighted during our recent investment day, our cash generation should significantly improve once the Chinese…

Thank you, Peter, and good morning everyone. Third quarter 2018 continued the resurgence of the business after repositioning the Company during 2016 and 2017. Operating results improved over our strong second quarter and positions us to hit record revenue levels for this fiscal year. Revenue of $136.4 million is the second highest quarterly revenue in the Company's history with growth in both IC and FPD. Sequential revenue growth over what is typically a seasonally strong quarter was boosted by strong industry demand and our successful repositioning of the Company to take advantage of unique and strategic opportunities in the market. Revenue recorded by our existing Photronics operations from product delivered to customers in China, as Peter mentioned, has increased significantly during the past year. The cost recorded by our new China start up operations nearly entirely independent of those revenues are increasing as we hire resources and begin paying operating expenses when the new facilities are completed. The effect of those costs on Q3 results was inconsequential. I’ll discuss the anticipated effect on Q4 results when I discuss guidance later. IC revenues improved 26% year-over-year and 5% sequentially, driven by strength in high-end up 94% year-over-year, primarily due to our customers’ new designs for logic chips particularly 28 and 14-nanometer. We're also seeing the positive results from targeting China and captive producers. IC revenue from deliveries into China has increased three-fold since last year and now represent 16% of IC revenue. Revenue with customers with captive mask shops has increased 2.6 times and represents 29% of total IC revenue. We believe these trends are sustainable and as we assess Q4, we anticipate that demand will keep revenues at these at current levels. FPD growth was driven by displays used in mobile applications, specifically LTPS and AMOLED. We classify LTPS as…

Thank you [Operator Instructions]. Our first question comes from Tom Diffely of D.A. Davidson. Your line is open.

So first question on the cost, John, you just alluded to the impact on the cost side to the margins for China expansion. Is that evenly shared between flat panel and IC?

No, it isn’t common. As you know, the IC facility is a joint venture so it’s a mix and a share of the loss with the joint venture partners. So it's a little more complicated than it even share.

I guess my question then was if it is on the joint venture side, does some of that get offset by the non-controlling interest what we see that dip down due to that increasing cost?

Yes, and we have some of that actually in this quarter, a small amount. But in Q4, it gets a little bigger. So the minority interest that we shared for the Taiwan facility gets reduced somewhat by the minority interest and the loss in the China facility.

And the $0.06 impact the maximum impact is going to be the quarter before revenue starts rising?

Well, we haven’t actually disclosed which quarter it is, but it could be.

And then maybe question for Chris on the high end flat panel tool that you just started to get some revenues from. Is this tool more aimed at the leading players in Korea? Or is in situation where the tool is very well for new Chinese customers that increase their window, so to speak, on the production to help them increase yields?

Yes, really it’s both -- it's still only one of a kind in the fields, so it’s giving us a real competitive advantage and we’re getting broad interest among both of those groups, you mentioned for capability of this tool. And we have shipped masks to both of those groups for the highest end application. So I think it’s pretty broad-based and we’re leveraging it for PORs and new products as we speak.

And then it seems like perhaps the biggest news or the most exciting part of the business is with the captives right now you had 29% of the business. How stable do you see that business or how volatile do you think it will be on a quarterly basis?

I think if you look at how that business has evolved over the last year, it’s been a consistent ramp quarter-by-quarter. I think now where we sit with the captives we've reached a period of stability for the next quarter or two. But having said that, I think we see more room to run in that marketplace as we move into the early part of next year or next fiscal year.

And then finally, John, it looks like the R&D spending has come down a little bit in recent quarters. I would have expected that to go up with some of these new programs over time. What do you think the steady state is for R&D overtime?

Tom, I’m not sure there is a steady state, it depends on the qualifications that we do. So in those periods when we’re doing more qualifications, you’re going to see higher R&D expense and then the following periods benefit from those qualifications on the revenue line so it will vary. And even at its highest point, it's still a pretty low percentage of revenue comfortably.

[Operator Instructions] Our next question comes from Patrick Ho of Stifel. Your line is open.

Maybe as a follow-up to Tom's question regarding the captives. Given that you obviously helping to support some of their IC ramps, Peter, maybe you can just give a little color. What happens when I guess from a capacity standpoint internally for them when they see demand go down, bringing stuff back in house to keep their fabs full. How do you adjust for those forecasts potentially down the road?

Yes, so the first point I would make is before the Micron JV ended, our revenue to captives was really dominated by Micron and the affiliates. Today, effectively that similar revenue stream is split across a number of captives. So as any one adjusts their plans the impact to our business is significantly muted. So we have the benefit of diversification with that customer base. The other thing that we can't discuss in great detail but in some circumstances we have actually contractual commitments from them that extend over multiyear periods to act is the second set of shock absorbers against a downturn in the business. And then I think the final thing I would say is the other -- your source of revenue diversification. If you look at our business and you do the math around the commentary, you will see that our revenue to captives was about $30 million and our revenue to China was about $30 million. So that’s just $60 million of significant chunk of our overall top line. And as far as China goes as everyone knows, they’re operating with a different set of criteria regarding any industry downturn. Our customers there have objectives that go beyond the normal profit and loss statement in the business. So we see the combination of diversification of the captive customer base, the contracts where we’ve been able to get them in place. And then finally the fact that the ramp in China should more or less be downturn proof as three significant shock absorbers on the business should do industry rollover.

And maybe as my follow-up question for either Chris or John. With EUV in the high-volume manufacturing on the horizon over the next year or so. How do we look at both your investments and qualifications related specifically to EUV? I understand a lot of the CapEx right now is obviously due to the China initiative. But how do we look at EUV in potentially bringing on new tools for that as some of those customers begin to go into high volume manufacturing?

We have made a few incremental investments for EUV at our Boise nanoFab. They’ve been relatively small and they’re dual use platforms 193 and EUV. And as we had announced, we do have a joint development program with IBM and we are working on some advanced logic tape outs. As far as when we would need to or want to do a turnkey -- fully turnkey EUV line, we’re still quite a few years out from needing that. Most of our initial EUV work is going to be hybrid flows where we will do some steps maybe a captive will do other steps. And then we will do early production early prototyping. But I think the full turnkey line, the investment you're talking about is still quite a few years away. So we’re stepping up. We have a lot of development going on. We’re making smaller incremental investments. But we wouldn’t really project any large CapEx expenditures to support our EUV strategy right now. But we’re definitely in the game and we have a great product and we’re shipping samples to at least three or four different customers.

And just going back to our Investor Day, this call there was a lot of commentary about the repositioning of the business. A significant component of the repositioning was to build and continue to build our book of business in China as we ramp our facilities there. So the next I think maybe three years, China should provide a nice growth trajectory for the company coupled with basically the mobile display shift into AMOLED. So we’re trying to take advantage of what we described as technology dislocations. China, the mobile display shift into AMOLED and the large panel shift from G8.5 to G10.5, so three technology dislocations, we’re actively trying to manage to grow our business over the next two to three years. I think EUV lines up pretty nicely beyond that time window for the leading merchant to ride another technology dislocation. And as Chris said, we are prudently investing and again, the investors don’t see this but we have to develop the customer relationships and due to business development we need to support the investment when it comes time to do it. So EUV for us is now fitting as the next leg of potential growth in our business, but it’s in our view right now, sitting beyond the China ramp.

Ladies and gentlemen, there are no further questions at this time. I’ll now turn the call over to Mr. Peter Kirlin for closing comments.

Thank you once again for joining us this morning. We are very pleased with how the Company is performing and optimistic that 2018 will be one of the best years in our history, and that 2019 will be even better as we launch production in China. Thank you for your interest and your support.

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. and ask that you now disconnect. Everyone have a wonderful day.