Good morning ladies and gentlemen, thank you for standing by, and welcome to the Photronics fourth quarter fiscal year 2019 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question and answer session. To ask a question during the session, you will need to press star, one on your telephone. If you require any further assistance, please press star, zero. As a reminder, this conference is being recorded Wednesday, December 11, 2019. I would now like to turn the conference over to Troy Dewar, Vice President of Investor Relations. Please go ahead, sir.

Thank you Joelle. Good morning everyone. Welcome to our review of Photronics’ 2019 fourth 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, 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 Troy, and good morning everyone. We ended 2019 with momentum, achieving record quarterly and annual revenue due to strong design activity across the majority of our customer base, increased capacity as we ramp production in two new manufacturing facilities, and outstanding work by our entire organization to win new business and expand share. In addition to record total revenue, we raised the bar with record quarterly revenue for IC and HFD photomasks, while annual FPD revenues also reached a new high. It was a superb quarter capping off a great year, and I’m very pleased with our performance. With growing revenue and high operating leverage, profit margins expanded. Combined with consistent efforts to control costs, we delivered 13.7% operating margins, better than last quarter and last year despite a larger operating footprint and growing headcount. For the year, operating margins were 9.5%, a remarkable achievement given the challenges we faced, including headwinds from start-up expenses, the semiconductor and LCD industry downturn, and growing geopolitical uncertainty. These outstanding operating results generated EPS of $0.15 per share for the quarter, which is in line with our expectations and included significant foreign exchange loss below the operating line. In addition to record revenue and solid earnings, we maintained a strong cash balance, ending the quarter with $154 million in net cash. Cash generated from operations more than offset our strategic uses of cash during the quarter, including share repurchases. With the bulk of our China investment now behind us and growing confidence in our long term ability to generate cash, we have restarted our share repurchase activity. We see this as an effective use of cash to invest in what we believe to be an undervalued asset while also reducing number of shares of outstanding. We spent approximately $11 million for…

Thank you Peter. Good morning everyone. We saw strength across nearly all of our end markets in the fourth quarter, resulting in record quarterly revenue of $156.3 million, 13% better than the previous quarter and 8% better than the fourth quarter of last year. Sectors that have been strong remain strong and other sectors strengthened during the quarter. Our new manufacturing facilities in China contributed $11.2 million in revenue, further fueling growth. It was a great quarter and demonstrates the benefit of our broad and deep product line-up and global footprint. IC revenue was a record in the fourth quarter, up 12% sequentially and 1% year-over-year. Demand growth was broad-based with increased in logic and memory and across technology nodes, encompassing high end and mainstream. From a regional standpoint, China and Taiwan were notable areas of strength. While revenue of IC products shipped into China grew significantly, up 72% from the previous quarter, the predominance of these masks were produced outside of China. As we have reported previously, qualification for IC products takes nine to 12 months, so production from our new Xiamen facility will be increasing over the next few quarters, providing another leg of growth as those qualifications are completed. Underlying IC market demand is expected to be stable to improving, influenced somewhat by normal seasonality. FPD revenue was also a record 15% higher than the previous record established last quarter. The drivers remain the same - strong demand from OLED displays and increased production from our Hefei facility. We do not anticipate any weakening of these trends, so we expect the growth at Hefei to continue as production ramps. Gross margin improved sequentially, the impact from operating leverage expanded margins to 24.4%. Operating margin also improved to 13.7%, the effect of increased revenue and lower operating expenses.…

[Operator instructions] Our first question comes from the line of Patrick Ho with Stifel. Your line is now open.

Hi, good morning. It’s Brian Chin on for Patrick. Thanks so much for taking our questions, and congratulations on the results. Maybe first question here, Peter, maybe to go back and just clarify something in addition. The $100 million capex for fiscal ’20, which includes the carryover, does that include that potential acceleration you referenced in terms of the phase 2 capacity install on Hefei? Also, would that phase 2 effectively double your output from that facility, and from a timing standpoint, how quickly can you install and ramp that capacity?

Okay, so the $100 million is--the approximate $100 million has a $33 million carryover and, in addition to that, what we would describe as maintenance capex. At our current run rate, that number is--current run rate $625 million, 10% of 625 is $62.5 million, add 33, you get approximately 100, so there is no capex for the next wave in Hefei in that number. The magnitude of the capex will dictate the amount of revenue uplift that we can achieve, so we have not definitively made up our minds exactly how much to invest and when. But our global factories sold out, we have no more capacity, we’re turning business away from multiple customers. We’re the market leader in AMOLED displays, so the demand there is tremendous. There’s no doubt if we invest, we can fill the tools, I think no doubt, so we’re talking to customers, we’re talking to the local government, and we’re trying to arrive at a business plan for the next wave that has the acceptable financial returns that we’re looking for. That’s not done yet, that’s a work in progress. Hopefully we’ll have a lot more to stay about that on the next call, but we’re getting close. Timing of it is more difficult because the long pole in the tent typically can easily run, now anyways, anywhere from 15 to 18 months, so that’s the only challenge we have, is the speed at which our suppliers can respond, but everything else is lining up nicely.

Okay. Was that 15 to 18 months, was that lead time on the tool, just to clarify?

Yes.

Okay, got it, so even if you made the decision in the next quarter, it wouldn’t be producing revenue within the fiscal ’20 horizon, it could be beyond that.

No, not unless we can pull a miracle, but highly unlikely.

Got it. Kind of related to that, the China start-up costs, it looked like a 200 basis point lesser headwind in the fiscal 4Q. What are you thinking in terms of fiscal 1Q, January, and--yes, that’d be my next question.

Hi Brian, good morning. It’ll be less in first quarter. As we said, Hefei almost reached breakeven in the fourth quarter, so we expect that to continue improving, and the effect from Xiamen will be less. Go ahead, Peter?

To clarify that, as John said, Hefei is profitable. We expect it to make money in the quarter and we expect it will continue to make every quarter, so we’re through the knot hole and out the other side and quickly, as I said, sold out, qualification is behind us, so Hefei is making money. Xiamen on the other hand, we can accelerate qualification. The market pull might help us, is helping us, I think, a little in that respect, but no revenue and lots of people and lots of [indiscernible] creates expense, but that expense as we reach the second half of the current year and moving into next fiscal year should rapidly turn to revenue and profit. So it’s getting less, it’s getting less because of the profit we’re generating in FPD, and we’ll turn the corner late in the year, early next, when both FPD and IC are making money.

Okay. Maybe my last question [indiscernible] things out a little bit here, but it sounds like what was more of a headwind now has shifted to a little bit of a tailwind in fiscal 4Q in terms of China and maybe China mainstream in particular, in terms of on the IC side of the business. I’m curious, can you maybe calibrate how your non-China high end mainstream is doing right now, and that encompasses maybe the memory market as well, and also how you--whether you think there’s any temporary, unsustained business coming from China based on, like you said, maybe buffering that might be happening in the China market right now.

No, I think you’ve read my comments wrong. We don’t see the momentum in China diminishing. We don’t see this as a temporary blip on the radar screen. There’s been a strategic shift in the market that in our view is not moving in the opposite direction. China, they have their foot flat on the floor and the market is part of it, but also the government’s behind it and the government doesn’t really have the same profitability requirements that a normal enterprise has, so China is moving to be self sufficient. They see non-Chinese suppliers as strategic liabilities and they ain’t turning back, so this is not a temporary blip. It is a material change in how the business goes, not to diminish. As far as the rest of the business is concerned, this particular quarter, our memory business was up relative to the prior quarter. It was down slightly prior the quarter a year ago. Given our customer base in memory, which is basically foundry [indiscernible] and one very large non-volatile player who’s not really sensitive to the industry downturn, our memory business is going along quite nicely through the last year, down a little but not a material change either way. I do think that when we get somewhere around the middle of the calendar year and the overall memory market, if it improves as many people think, we should be in a position to build on our memory revenues. The way we see the business, the guidance for the quarter is seasonal softness, and to the extent it’s offset by growth in FPD, we get to the top of the range. And by the way, if we get to the top of the range, FPD should be at or above its $200 million run rate that we projected so long ago. That’s kind of how the quarter sits, and we really can’t build on the IC revenue beyond what we have because the Asian network is sold out right now, and China has not yet been qualified so we can’t ship revenue, so there’s no more IC revenue to come out of China. Now, if the non-China business, non-China, Taiwanese business picks up in IC, we can raise our IC revenue bar. Whether the second half of the year is memory getting better or it’s the Xiamen capacity ramping in, we see a nice revenue trajectory for our IC business in the second half. It could be great or it could be good, but it’s going to likely be one or the other.

Got it. Okay, thank you.

Thank you. Our next question comes from the line of Tom Diffely with Davidson. Your line is now open. Tom, if your line is muted, please unmute.

Hi guys, thank you. Can you hear me?

Yes.

Hi, this is Franco in for Tom. Thank you for letting us ask a few questions. You talked about IC coming back in China. Can you speak a little more to it in terms of what is driving the return in spending, is it memory or logic, and maybe a little farfetched but perhaps who the main players behind it are?

Yes, the demand in China really is both memory, logic, high end, mainstream. It’s very broad-based. It’s big customers like Wally [ph] or SMIC and it’s many other smaller customers with factories that are ramping and coming online, so it’s really quite broad. I think generally speaking, some real bright spots are the movement of the display driver business between nanometers and--you’ve heard a lot about how strong the AMOLED market is, how vibrant the display business is. There’s a big shift underway right now at the 28 nanometer nodes that’s pushed the display driver business down there. 5G is an unbelievable driver in the China business right now, both in country and then the movement of the China mobile products down there, what is it, the gate and road initiative, the China manufacturers are really following the money around the world as China expands its global footprint. Automotive applications are a real driver in our business, consumer products. It’s really hard to point to any one specific market, but generally IoT, mobile 5G and display all are hitting on eight cylinders in China right now, and Taiwan, because--and Korea is feeding into that too because it’s the non-U.S. supply chain.

All right, thank you for the color. As a follow-up to Brian’s question on capex earlier, when you remove the carryover from this year, you’ve got roughly $70 million. Is this the ballpark that you’re thinking about moving forward as the maintenance level, or what are your thoughts on that?

Yes, I think our view of maintenance capex is about 10% of revenue, so that for us, we see as a good target going forward, maybe a little more some years, maybe a little less others. I’ll just remind you, a leading edge lithography tool is $40 million, so you don’t need to buy many of those to be at 10%.

Yes, okay. Thank you for that. Right now you have four customers with long term agreements in China. How many of these customers do you have the capacity to serve over time?

Well, we’re taking care of all of them. I think to quantify it, what we said was it represents about $300 million of business over a three-year period, so that’s $100 million a year on average. Right now, that’s between 15% and 20% of our revenue, which is on one hand a really nice, solid base load, but it’s not something that overwhelms our global footprint on the other. One of the reasons that Hefei is such a success story for us is we ramped it into an over-sold manufacturing network and we have been working to put our IC factory in Xiamen into the same scenario. You want to ramp into an over-sold condition so that as the business comes or as the capability comes, you can sell it, so we feel right now--you could say on one hand, it’s lucky, but on the other hand, the factory, we’ve been working on it for almost three years, we’re exactly the same spot on Xiamen that we were two quarters ago in Hefei - we can sell everything we can make.

Okay, thank you. Lastly, thank you for the color regarding the headwinds in China. You said that the effect has been concentrated and relatively small. Can you quantify what you’re baking into your guidance for the first quarter?

No, the headwinds in China were in Q3. We mentioned that the business was impacted. What happened over the summer as some very prominent companies got put on restricted trade lists, there was disruption in the product development road maps, but generally the Chinese electronics manufacturers came to the conclusion that by buying from Chinese companies or Taiwanese companies, and perhaps if they have Korean companies, they can build their products. They don’t quite work as well as they thought they might, but they work well enough. When they came to that realization, we saw a real acceleration in our Asian IC business, an acceleration that for me was really remarkable. That happened in the fourth quarter, so Q3 was a slight headwind, Q4 was a significant tailwind. Regarding Q1, there is this--the whole world in the electronics business works on a product development cycle targeted at the Christmas holiday season. Some people don’t celebrate it, but generally there’s a huge product cycle that goes on every year to have the shelves full for the holiday shopping season. For our business, what that means is this quarter, which includes Christmas, is sort of a lull. We work on a cardiogram where Q1 is typically the lowest, Q2 and Q3 are the highest, and Q4 typically slides down between Q1 and Q3. That’s how our business works every year in a flat market. If there is industry upturn, it sits on top of that cardiogram; if there’s industry downturn, it sits on top of that cardiogram, so for us Q1 is normally the seasonally slowest quarter. The guidance at the bottom of the range reflects that. That’s what we’d look like in a flat market with seasonality put on top - 5% down. But what John said and what I reiterated is we could be flat, which is 5% up, depending on how strong the growth in FPD is in the quarter to offset the normal seasonality across the entirety of the business. That’s how the guidance comes about.

All right, thank you so much.

Thank you. Ladies and gentlemen, there are no further questions at this time. I would now like to turn the call over to Peter Kirlin for closing remarks.

Thank you for joining us this morning. As we move into a new year, our business is performing and we are well positioned to continue growing into 2020 and beyond. We’re the leader in the merchant photomask industry with tremendous market position and leading technology. Our operations are aligned with several secular growth trends such as the adoption of AMOLED for mobile displays, and we have a proven investment strategy that is driving profitable growth. Finally before closing, I would like to take this opportunity to once again thank all our employees for their outstanding contributions throughout this year and to wish everyone a safe and happy holiday season.

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