Ladies and gentlemen, thank you for standing by and welcome to the Photronics Second Quarter Fiscal Year 2020 Earnings Conference Call. At this time all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded Wednesday, May 27, 2020. [Operator Instructions]. I would now like to hand the conference over to Troy Dewar, Vice President of Investor Relations. Please go ahead.

Thank you, Sarah. Good morning, everyone. Welcome to our review of Photronics' 2020 second quarter financial results. Joining me this morning are Peter Kirlin, our Chief Executive Officer; John Jordan, our Chief Financial 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, and 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. Before beginning our discussion of second quarter results and third quarter outlook I would like to take a few moments to recognize our global workforce for their outstanding response to recent challenges. Beginning in February with our operations in China and extending globally over the last three months, our employees have displayed dedication, commitment, and real customer centric attitude that has enabled us to continue operating to meet customer expectations. As events started to evolve we quickly developed and implemented a game plan to focus on four key areas: employee health, raw material supply, customer support, and tool maintenance. All these are critical for sustaining our global operations. Across our sites we immediately implemented policies to protect our employees through health monitoring, the adoption of known best practices [to not] [ph] spreading the virus, including the use of personal protective equipment and a comprehensive global visitor policy, and enabling small segments of our workforce to work from home in accordance with local requirements. We initiated regular internal meetings to monitor our global supply chain and addressing the issues, and continue to be in direct contact with our raw materials suppliers, logistics partners, and OEM equipment service groups to minimize any impact on our operations. Because of these actions, we've been able to meet all our customers’ photomask needs with the same quality and delivery performance to which they are accustomed. Effectively business as usual. It's been a true team effort and I am very proud of our response. Moving on to the second quarter results, revenue was higher year-over-year driven by FPD as we benefited from stronger global demand as well as more capacity from our new Chinese factory. This enabled us to achieve year-over-year revenue growth for the 11th consecutive quarter. For…

Thank you, Peter. Good morning, everyone. We performed well during the second quarter and managed our business through very challenging circumstances. Revenue of $142.8 million improved 9% compared with the same period last year, albeit down 11% sequentially as some customers particularly in China, pushed out orders. We believe that the order rate will recover and indeed we have already seen improving trends during our third quarter. IC revenue was lower compared with both the previous quarter and the same quarter last year. More than half of the sequential variance in IC revenue was due to lower demand from China foundries as their operations were impacted by the protracted Chinese New Year shutdown. FPD revenue improved over last year as additional capacity in our new Hefei facility expanded output. On a sequential comparison the revenue declined due to softer demand in China as customers pushed out orders, particularly for G10.5+ and AMOLED. We were able to keep our FPD plants running at full capacity, albeit with a mix of product not as favorable to the top line. Both gross margin and operating margin moved in line with revenue trends. During this period of economic uncertainty, we intensified our perennial focus on cost control. We accelerated global cost reduction programs and we are challenging all spend to ensure we are properly prioritizing expenses. SG&A expense in the second quarter was nearly a million dollars lower than the previous quarter, essentially equal to the prior year quarter. Year-to-date SG&A expense declined as a percentage of revenue from 10.6% in fiscal 2019 to 9.1% in fiscal year 2020. Overall OPEX increased nearly 1.2 million from the first half of fiscal 2019, due in large part to increased R&D expenses resulting from the many new product qualifications in several of our operations. Total OPEX…

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

Yes, good morning. Thanks for the question. So I guess going back to the guidance you gave for the April quarter, at that time you were expecting about a $10 million impact from COVID-19, curious what drove a little bit of upside to that, was it domestic China being a little softer or was it the impacts to the rest of the world?

Yeah, the original guidance did not contemplate the virus rolling through Europe and the United States. So if you look at our quarter about 75% of the loss of revenue came from China, the other 25% came from the U.S. and Europe and that was not contemplated in the guidance when we gave it. So that's more or less how the quarter -- the drop in revenues split out.

Okay, and is there any way to quantify the COVID impact you have embedded in your guidance for the July quarter?

Yeah, well, if you look at our year, right, Q1 was just shy of a 160 million, so we were at a 640 clip. If you look at the second quarter, we had a V so February was 48 million, March was 44 million, and April was 51 million. So when you look at our guidance for the current quarter and you look at the April number, it doesn't take a lot of imagination to determine where it came from.

Okay, and it sounds like you're not seeing any end market demand disruption outside of the delay you saw from the design activity early in the quarter or I guess in the March timeframe?

We saw a big dip, right, in March we saw the hangover from the Chinese New Year shut down, which I think we all know extended several weeks beyond what was originally intended. Plus, the effect of U.S. and Europe starting to be felt so that was a big dig. Where we sit right now, right, I would still say that our overall demand it's down mid-single-digits as a result of the overall economic hangover from COVID-19.

Okay, great. And…

Yeah sorry Tom, relative to what it would have been absent it.

Okay, and then reading your comments on the Commerce Department, it sounds like your withdrawal of the full year guidance is really a COVID impact not any impact from the new Commerce Department rulings?

That's absolutely correct. I mean, no one knows what the fall will hold. I think the only thing that we can say definitively is the virus will not have left the spotlight. So what this profile looks like in the fall is anybody's guess. But what I will say is, if you look around Asia; Korea, Taiwan, China these are significant markets for us. Somewhere between [78%] [ph] of our revenue is coming from the Asian market. And when you compare their ability to manage the virus this spring versus the West, it was still very favorable. So, if the fall is a replay of the spring, everybody should do better because everybody should be better informed. And, we're hopeful that the effects will be quite modest in Asia. Don't really know about Europe and North America, so this is why we're withdrawing the full year targets. We do that with lots of disappointment because it's very clear we were with 11 quarters of year-over-year revenue growth and Q1 being what it was we were well -- we were in fact ahead of our plan to hit the [6.30 and $00.80] [ph]. Having said that, the current quarter is a significant step up so we're cautiously optimistic.

Okay, I understand. And then finally for me, just maybe technology question probably for Chris I guess, if the industry moves to adoption of mini LED, how does that impact the photomasks?

Hi, sure, thanks Thomas. Mini LED that's technology with a larger size OED, as you know, and it's mostly applicable to applications, kind of very large TV signage, that sort of thing. And then it's kind of dynamic backlighting and regular displays. So in both cases, they need driver circuitry. They're not as complicated to operate as organic LED but still, the driver circuitry is fairly complicated and we see a pretty healthy mask profile from mini LED particularly for the dynamic backlighting. There you're going to need some additional circuitry to make those work. The micro LED those are kind of direct drive LED, similar to AMOLED, but using inorganic LEDs. Same kind of story on the surface LED, they are relatively easy to operate but to get the right control on the displays, you'll have to operate current and voltage just like OLEDs. So we see pretty strong profile for lithography and mask demand from micro LED as well. Comparable kinds of mask counts but for some of the integration schemes, perhaps even higher.

Okay, great. I appreciate that. Thanks for your time today.

Thank you. Our next question comes from the line of Gus Richard with Northland Securities. Your line is now open.

Yes, thanks for taking the questions. Just quickly, can you talk about the normal linearity in the quarter and was Q1 unusual in that respect and kind of what is typical linearity in Q2?

Yeah Q2 if you compare our business, right, has a cardiogram, the cardiogram has the most year-over-year correlation based on the deal for the holiday season of products. So if you look at our business where we see normally a definitive profile is Q1 is typically a down quarter, Q2 and Q3 step up for the holiday season and then Q4 just steps down as a result of the holiday season. So Q1 is the lag of products not being in the pipeline. Q2 there's more, Q3 there's even more, and then Q4 incorporates the holiday. So that's the normal cardiogram for our business in a year. So based on that, Q2 should have been up, but obviously it was not. A typical quarter, there's some statistical variation month to month that normally with the exception of January, always being down relative to December and February, there is no systematic month to month variation within a quarter.

Thank you. And then just talking about the expansion of the entities list by the Commerce Department. You guys made some comments that you don't see that impacting you and I was just wondering how you walked through that analysis or do you have low exposure to those companies and where do you think you can get around the regulations?

Yes, actually it's quite -- it's so far away or it is the major poster child so -- and the affiliate -- the companies affiliated with them. Right, that's already well in the rearview mirror. Then, when you step away from that there's a complicated gauntlet you have to run regarding AIR code and it's quite complicated. So each customer and the products they sell require a separate assessment. So, we have several individuals or at least one individual that is really an expert in this side of the company. So they've been through the new regulations and relative to the prior ones there's really only two customers of concern for us right now. We're working to try to determine what we can do for them. If we can do nothing it still should not have a significant impact on our revenues. And you kind of take it to the highest level, why is that so? Well, the why is that so is we're building the radicals all around the world. Our factories, our IC factories in Taiwan and in China use technology that was largely developed in Asia, and if not we have a giant Japanese partner where we can use Japanese technology to get the job done. So, right now we're I think in pretty good shape. But there's still a lot of dialogue by the way, going on to clarify exactly what the wording in the rulings means. So that's why in my prepared remarks, we were quite careful to say we're still, along with others in industry, working to get complete clarification on specifically what the wording means.

Got it. And then just remind me on say, your top couple of IC customers, how big would they be, are they 1% or 2% of revenue on an annual basis?

Oh, if you look at our top five IC customers in a quarter, typically they're more than 50% of our revenues and that number varies, right. I don't know if we break that out but, we do at the top of our business have a high customer concentration. But I'll tell you that we have, in a typical year more than 600 customers. So we have a broad, very broad and diverse customer base but at the very top, there's a significant amount of customer concentration.

And just to be clear is that I would imagine it's mostly dominated by FPD customers as opposed to IC?

They're full FPD customers in the top 10 than IC, that's correct.

Okay, alright. That's it for me, thanks so much.

Thank you. Our next question comes from the line of Patrick Ho with Stifel. Your line is now open.

Thank you very much and glad to hear everyone is well. Peter, maybe just as a follow up from your prepared remarks, can you discuss your manufacturing situation and I guess with all the new rules of social distancing and all of that, how it impacts your core capabilities? And maybe as a second part of that question is how much do you believe that some of the lost revenues and the pent up demand that started to come back now in the July quarter, how much of it do you believe is made up in July or does it carry over a couple of quarters where you make up that lost revenue from the April quarter?

Yes. So as far as our manufacturing operations are concerned we -- I don't know if you want to use the word fortunate, but I would use that word from the standpoint of knowledge is power and that is in Asia, right. This is not the first corona virus the Asian community has had to deal with, right. Since 2000 there's been six -- three significant corona virus epidemics in Asia. There was the Middle East Respiratory Syndrome, there was the Swine Flu, and there was SARS, right. So there were three. And the best practices in health to operate in a corona virus infected community were already known to or particularly our Taiwanese operation. So we took that playbook and we rolled it out around the world, right? So rolling out that playbook or manufacturing output is the same today as it was three months ago, as it was three months before that. So we have not seen any degradation in our top line as a result of the virus. We had a lot of supply chain disruptions we had to actively manage through, but we were able to do that. And again, we're -- we still think of ourselves as a small company, but we have a really dispersed global footprint. So when we are having problems with particularly materials in one location, we would buy them and all -- we would buy them in another and re-export them ourselves. So by being flexible and acting as a global team, we did not have any manufacturing disruption, zero, nada, nothing. So -- and we were already, preparing for the fall. We would be foolish not to because we know something is going to happen, we just don't know what. But what we do know is we're going to…

Now, fair enough. Thank you very much.

Thank you. Ladies and gentlemen, that concludes the conference call. Ladies and gentlemen, that concludes our question-and-answer session. I would now like to turn the call back over to Peter Kirlin for closing remarks.

Thank you once again for your interest in Photronics. If you understand the current environment is creating uncertainty for all of us that has caused disruptions to our daily routines, despite all of this we are encouraged to see demand recover and look forward to updating its progress throughout the rest of 2020.

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