Good day, ladies and gentlemen, and welcome to the Photronics Q1 Fiscal Year 2019 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions for the participants will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded on February 21, 2019. I would now like to introduce your host for today’s conference, Mr. Troy Dewar, Head of Investor Relations. Sir, you may begin.

Thank you, Jeremy. Good morning everyone. Welcome to our review of Photronics 2019 first 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, 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 participants 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 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. 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 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. Revenue for the first quarter of 2019 was mostly in line with expectations. We achieved year-over-year growth despite fewer days this quarter as an increase in high-end was somewhat offset by weaker mainstream. On a sequential basis, revenue was down 14% due to seasonal weakness, the shorter quarter, and macro industry headwinds. Whenever IC high-end grew, our mainstream was down compared with last year. On a sequential basis, both high-end and mainstream declined due to seasonality and uncertainty related to industry, economic and geopolitical concerns through an order activity. We saw weaker high-end memory demand although we believe this is not related to order timing and neither market-driven. High-end logic remained soft. Looking into the second quarter, we expect to see a pickup in memory [indiscernible] in logic is less clear. Regarding the latter, we don’t expect to see material deterioration, the recovery may be beyond the second quarter. While we experienced lower demand across many parts of our business, high-end FPD was a notable exception. Our FPD business is in a very strong competitive position, the industry’s leading technology and our target relineup anchored by P-800, which offers superior resolution tools. Once again, AMOLED revenues were up sequentially to the extent that they now represent approximately half of our total FPD revenue and more than doubled compared to last year. The mainstream FPD revenue was down as we devoted more mainstream capacity to building the non-critical layers of the AMOLED mask sets and experienced competitive pressures associated with an oversupply market. FPD production capacity was sold out throughout the first quarter. Looking forward into the second quarter, we expect our FPD business to grow, driven primarily by mobile display with additional capacity coming online as we bring up production in China in…

Thank you, Peter. Good morning, everyone. Revenue of [$124.7 million in the first quarter], was a 1% improvement over the same quarter last year as high-end growth more than offset weakness in mainstream products. Sequentially, revenue declined 14%, reflecting our anticipated combination of seasonal softness after a record quarter, and in the face of macroeconomic headwinds there were also six fewer days in the first quarter than in the fourth quarter due to reduction of October 31 as the fiscal year end. High-end IC improved 4% year-over-year primarily due to increased market share in a weaker market. IC revenue overall decreased 14%, from the previous quarter with similar declines in both high-end and mainstream. The drop in mainstream was mostly in Asia, particularly, Taiwan and China where macro uncertainty impacted some customers’ cadence of new product designs. Within high-end, we experienced declines in logic as new designs for advanced applications such as smartphones were down, and memory due to order timing from a large customer. FPD high-end was up 14% compared with last year’s first quarter, once again void by AMOLED. We have currently established ourselves among the leaders with this technology, and we have benefited from expansion in industry demand. AMOLED growth was somewhat offset by a decline in demand for G8.5 masks used for large-screen TVs and lower demand for LTPS LCD screens in mobile applications. Both are trends that we have long anticipated and why we have positioned our FPD portfolio to align with growing AMOLED and G10.5+ secular demand. Gross margin was 20.9%, impacted by both the revenue level and China start-up costs. Operating expense was higher due to increased compensation expense, China start-up activity, and R&D expense for qualification work on several high-end products. As a result, operating margin was 6.5%. Below the operating line,…

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

Yes, good morning. First of all, I was wondering if there some way to quantify the impact you’re seeing from the macro headwinds right now? I know it’s tough this time of the year because of seasonality, but any way to figure out or to calculate on what the actual impact is?

Yes, I think Thomas, as you said, are quite tough to quantify. We aren’t seeing any impact first of all in the FPD business. We are gaining market share in a shrinking market. So there is no effect in FPD. I see typically, a downturn impacts our business to a level of between 5% and 10%, that’s a typical number for our IC business in a downturn. So I think that’s the best we can do. Yes.

Okay. And you talked about the impact of the China start-up being $0.03 per quarter to $0.06 per quarter. Is that just the flat panel facility at this point or is that both facilities?

That’s both, Tom; both facilities, that’s a combination.

And what was it in the reported quarter?

I think we said $0.04 before the effects of our FX recording and $0.02 net.

Okay. So it sounds like you expect that to disappear or to be profitable in China by the end of the year. Does that just require a ramp on the flat panel side to get to that break-even?

Essentially, that’s what’s in our plan. Both plants should be online by the end of the year and our budget shows that we should be profitable overall.

Okay. Great. And then, recently Applied Materials talked about how there has been a little bit of a slowdown in the equipment ordering of Gen10.5, but I assume your customers are already in place running product and so the impact of you should not be too dramatic?

Yes so, we’ve been -- we started construction of our FPD facility last December and we’re [going to start] this evenly possible and sometimes I think even faster than that, to bring that factory online by the end of March. And the reason for that is, if you look at the landscape later, BOE a year ago brought their first G10.5 factory online in Hefei. This April -- March-April timeframe, CSOT’s first factory in Guangzhou will start its volume ramp. So that timing as you can see, is not for two, it is with where we’ve been driving on our factory to be online. And then BOE’s second G10.5 factory [indiscernible] first reticle set early summer. So we’ve worked very hard to positioning our factory in Hefei to take advantage of the second and third factories coming online; one, from the point of view of being there for the volume ramp; the other from the point of view being PoR. So the delays in our softening in the G10.5 equipment spend has basically been from -- with maybe with one exception, companies we would call or describe as second-tier players. The companies that we have contractual commitments with are the strong players, the winners, and it’s -- to the best of our knowledge, they have impact of one bid on their timetables. So no, it doesn’t affect our business plan because our business plan is based on the winners; was, is and remains based on the winners.

Okay. Great. Thanks. And then finally, when you look at AMOLED and the potential that’s really ramping up over the next few years in China, yes, it seems to be a big incremental opportunity for you. Do you have the capabilities or will you have capabilities to serve that out of the same Chinese facility you are doing 10.5 then or is that going to be served or would that be served out of Korea?

Yes, it will be a -- it will be a mix and match. Right now, there is no one in the business that can make the quality reticles that we do out of our Korean site and we’ve been building FPD reticles there for 20 years, more than 20 years. Historically, Samsung has been our partner, they remain the technology driver despite all the great progress by a number of Chinese manufacturers. So best technology generally is created by your toughest customer. So as long as our toughest customer is in Korea, our best reticles are going to be made there.

Okay. Thank you very much.

Thank you. And our next question comes from Patrick Ho with Stifel. Your line is now open.

Thank you very much. Peter, maybe as a follow-up to your prepared remarks regarding China and some of the macro headwinds you’re seeing there, you noted that you’re seeing it in their foundry logic segment. Are you seeing any on the memory side of things given that their ramp-up of memory, particularly in the NAND side, has been slow to transpire given some of the yield issues that they’re working through?

Yes, so as far as China goes, in our prepared remarks, I -- maybe I will turn it over to Chris to make one or two quick comments. First, one thing that surprised us in the quarter was, we more or less expected our memory business to move along as it was, but we had some orders pushed out. As I sit here, those orders have materialized. So right now, we’re swimming in memory reticles. And our memory business today is really dominated by large multinational, large multinational manufacturers or foundry memory manufacturers in Taiwan is what dominates our memory business. We happen to be -- PoR is what we believe to be the most advanced, domestic NAND flash manufacturer in China, and of course, we have some memory business with some of the other players in China. But certainly the speed at which they move will be a governor on the rate of which our high-end memory business can grow in China. Chris, do you want to -- is there anything else you want to add to that, Chris?

No, I mean just to say regarding macro headwinds and that sort of thing, I don’t think that’s been a big factor on the Chinese memory ramp. It’s more related to just the challenges of getting those factories into mass production. So I think they continue to work on it. They’re making progress. If anything, the current pricing climate in memory is forcing them to shrink a little bit faster to stay competitive and add more layers on the 3D NAND side. So we’re seeing a little more aggressive pursuit of the technology among these Chinese memory foundries. But generally, I think it’s just proven to be more challenging than many anticipated to get those fabs really in mass production. So we are seeing, I would say, kind of slow, steady engagement with that community and we do expect eventually the yield situation to rectify itself and to see the production ramp, but it’s kind of independent of any macro problems or headwinds.

Great, that’s helpful. Maybe for either Peter or John, in terms of the CapEx spend, given the expectations of a strong display ramp and that’s an area where I believe you’ve got a lot of opportunity, how flexible are you in terms of your CapEx spend where if I -- China IC remained sluggish because their challenge is internally, how flexible are your CapEx in terms of, could you shift some of that only to display given the promising outlook you have in that segment?

Yes. Patrick, because you’ve been around the Company a long time, one of the things that has most historical, I think they compete as a small company in an industry of large players, is we are very flexible and we do our very best to move to focus our investments where the opportunities lie. I think it would be overly pessimistic right now to think that we would pull back on our IC investment in China. We see some -- on the logic side, some partners -- potential partners moving pretty aggressively and we want to be there to support them, to ensure that with the exception of SMIC, the China IC market remains merchant. That’s also one of the reasons why we partnered with DNP. We walk into all the Chinese customers, particularly the foundry logic, and we tell them look, together Photronics and DNP is a $1 billion mask company. You’re trying to compete with TSMC, so once you let us handle the photomask challenge, you can focus on the silicon because you’ve got big enough job in front of you, with that already. So as I said, right now, FPD is sold out. We’re going to bring capacity online into the sold-out business [IBO]. Our IC business is not sold out, so we are trying to adjust our timing to be beyond the downturn, so that when the capacity comes online, it’s coming online into a very strong market. So that is the only message we’re trying to send and nothing more. Now going back to FPD, your comment about the opportunity. Yes, it’s big and I expect although not sure that by the end of the year, the capacity we’ve installed in Hefei will be sold out. So that means, if we want to maximize our revenue growth, additional capacity will be needed. The good news is, Hefei will -- is now sitting at the point where the rest of our business sits and that is, we don’t have to add a whole line, we don’t have to add a coder, an etcher, a metrology tool. All we need to do is, add [indiscernible] inspection. So the capital efficiency of incremental CapEx goes up, as far as revenue generation is concerned. So yes, we’re actively right now evaluating what we need to do to maximize our growth, but also our financial returns at the same time. So we are in a very strong position. In AMOLED, we want to build on it, exploit it. We do have incremental capacity coming online, should address G10.5 and also our AMOLED market position. So we’re feeling pretty good about what we’ve done, the timing of what we’ve done -- what we’ve done and maximizing our growth quarter-by-quarter by quarter-by-quarter as we go.

Great, that’s helpful. And maybe as a final question from me, in terms of -- for John, in terms of OpEx management, given the ramp of the two China facilities as the year progresses, how do you look at your OpEx trends? How much that could go up as 2019 progresses? Thank you.

For the first quarter Patrick, we’re probably not going to be increasing a lot. We’ve got a pretty good head start on the resources that we need to put into both China plants. So it will be increasing somewhat, but I think we’re at a pretty good run rate where we are.

Great. Thank you.

Thank you. And I am showing no further questions in the queue at this time. I’d like to turn the call back over to Peter Kirlin for any closing remarks.

So in closing, I thank each of you for your time and interest in Photronics. We’re in a great position to continue growing this year as we bring production on our new China facilities. I look forward to updating you on our progress.

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation and ask that you please disconnect your line.