Good day and thank you for standing by. Welcome to the Photronics Q3 Fiscal Year ’22 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 that session, you will need to press star-one-one on your phone. Please be advised that today’s conference is being recorded. And I would now like to hand the conference over to your speaker today, Ms. Richelle Burr, Executive Vice President, Chief Administrative Officer and General Counsel. Ms. Burr, please go ahead.

Thank you Chris. Good morning everyone. Welcome to our review of Photronics fiscal 2022 third quarter results. Joining me this morning are Frank Lee, our Chief Executive Officer, John Jordan, our Chief Financial Officer, Chris Progler, our Chief Technology Officer, and Eric Rivera, our Corporate Controller and Chief Accounting 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, or 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 Frank.

Thank you, Richelle, and good morning, everyone. Q3 was an outstanding quarter. We achieved new records in both revenue and profit. Demand for our photomask remains strong for IC and FPD, both high end and mainstream applications. With our global presence, in-store production capacity and deep portfolio of customer partnership, we increased revenue 8% sequentially. Once again, it is our sixth consecutive quarter of record revenue. Gross margin and operation margin also reached 25-year record highs of 38% and 29%, respectively, as we benefit from higher price, operational capacity in most locations, and superior cost control. The net result was earnings of $0.51 per share. Cash generation was also strong and we ended the quarter with $324 million in net cash, positioning us to continue investing in profitable growth opportunities. I am very proud of the entire Photronics organization and what we have been able to accomplish by working together and serving our customers to deliver great results. There has been a pronounced mask capacity shortage since the beginning of second half 2021; consequently, our customers have been dealing with long mask delivery times. Since Photronics full commitment is to our customers’ success and growth, we have evaluated the situation and will be making the next wave of capital investments to closely align with our customers for their technology and production capacity road maps. This strategy has been expanded across geographies for both IC and FPD. These actions will help us continue to build strong partnerships with customers and establish several long-term agreements. Recently there has been some slowdown in customer new tape-out activities more in high end than mainstream. However, our experience has shown that customers will impress mega trends in the market that drive development of new IC and FPD designs, such as the rollout of 5G telecommunications, the expansion of electronics in automotive applications, and of course the continued expanding need for consumer electronics. As a result, we believe the negative impact of any slowdown at Photronics will be minor, as reflected in our Q4 guidance. In the U.S., we join our semiconductor peers in applauding the passage of the CHIPS and Science Act. Photronics, a critical member of the U.S. semiconductor ecosystem for 53 years, is the largest global photomask manufacturer and the only domestic supplier of high end commercial masks, including U.S. trust product through 14 nanometer. In cooperation with CHIPS, we stand ready to invest and support an expansion of our customers’ domestic manufacturing and technology needs. We performed very well in the third quarter and we believe we are on track to have the best year in the history of the company. I’m proud of our team and I want to thank all of our employees for their extraordinary work to achieve the quarter’s results and look forward to accomplishing even more in the future. Thank you. At this moment, I’ll turn the call to John.

Thank you, Frank. Good morning, everyone. Design activity remained strong in the third quarter, driving growth across both IC and FPD businesses. Our operations teams did a tremendous job of meeting demand in an environment that remains challenging. As Frank mentioned, we achieved our sixth consecutive quarter of record revenue and grew the top line at $220 million, up 8% sequentially and 29% compared with the prior year quarter. This quarter’s performance is another data point that we believe validates our growth strategy. We have strategically invested in capacity and capabilities that are aligned with the high-growth sectors of our markets such as AMOLED displays for mobile applications in our FPD business, as well as both mainstream and high end IC nodes. We are pleased with the results and believe we are well positioned to continue to outperform the market. IC revenue of $161 million was 11% higher sequentially and up 37% year-over-year on strong demand growth and improved pricing across both high end and mainstream. For high end, U.S. and Asia demand increased, particularly for 22 nanometer and smaller nodes as demand remained strong and we saw a pick-up for EUV applications. Mainstream demand also continued strong, driven by applications across the industry. The ubiquitousness and continued proliferation of the use of semiconductors in everything we use is widely discussed in the industry, and our customers continue to innovate and bring new products to market, resulting in new design starts and driving the increase in mask demand. Our investments in capacity across the organization expand our operations to supply more masks that enable product development initiatives. There are also selective opportunities for pricing action across our IC business to help capture the value that we deliver to our customers. FPD revenue of $59 million increased 11% year-over-year, driven by…

[Operator instructions] Our first question will come from Hans Chung of D.A. Davidson. Your line is open.

Hi, this is Linda on behalf of Hans Chung. Thank you for letting us ask questions. First of all, congratulations on a great quarter. So I guess my first question, in terms of the moving pieces in the demand environment as well as supply constraints, I was wondering from your perspective if you saw any supply chain issues in the quarter and how much the constraints are limiting you in terms of potential revenue or output, and if any of the constraints are embedded in your outlook, then I have a follow-up.

The supply chain impact on our output actually is very minimal. We do see some small shortage in FPD blank supply, but we are able to deliver - develop second and third source. So to answer your question, this is not a factor on our Q4 output.

That’s helpful. And I guess as my follow-up in terms of the demand side of things, you noted strong demand in the quarter, but with concerns of potential slowdown in the coming year in different end markets. Are you seeing any order push-outs or any actual cancellations? And then as you think about 2023, obviously, a lot of changes in the end markets. I’m curious how you’re thinking about net effect into 2023 and whether we could see any growth or declines, and--yes, I’m wondering what you think.

At this moment, the mainstream product, we don’t see any slowdown in customer tape-out activities. However, we do see a little bit of push-out in the high-end mass tape-out, not necessarily in all customers, but we do see some slowdown in customer tape-out. For 2023, actually, as John mentioned, our business model, our backlog normally is three to four weeks, so at this moment, we --

So, Linda, we had at the beginning of the fourth quarter, we saw a little bit of push-out from some of our major customers, but from our discussions with them, that demand is going to be coming back. When we put our long-term model together, the 2024 model, as we’ve discussed, we anticipate that there’s going to be a pullback sometime during this cycle. We’re at three years into a pretty good cycle now, and we all know that -- and notwithstanding some people’s contention that it’s different now, it never has been different. So we expect a pullback sometime during our forecast period, and our growth anticipation through 2024 has been muted to factor a slowdown in the industry. Whether that slowdown is occurring now or not, we don’t know. We expect our demand to pick back up during the quarter, and we haven’t put our budget for 2023 together yet, so actually we’re about to do that next week and we’ll have a better feel for what we expect in 2023. As you know from the past, we do well to forecast one quarter at a time, and we never give guidance for the full year or for the following year, so the best we can do at this point is our guidance for Q4 with the knowledge that we have now.

This is Chris. I can make one additional comment. There’s still a lot of capacity constraints in the global photomask industry, which will not be easily solved over the next year or two years. So even if demand pulls back a little bit, utilization should remain quite high in commercial photomask. The other dynamic that often happens is as fabs utilization goes down in the wafer fabs, you tend to see design activity pick up because they’re working harder to try to refill that capacity. So it can be a little bit countercyclical if the downturn is not severe, where design activity improves while fab utilization goes down. So these may give us buffers as well to not see the same kind of impact that some of the chip makers will see.

I appreciate the color. Then as my last question about the pricing dynamics, could you talk a little bit more about pricing changes in the quarter and of course, we saw a good strong quarter-over-quarter growth in mainstream and advanced order mask revenues. Can you maybe break down how much of the growth was coming from the pricing versus volume, which seems to be having a significant effect on revenue and gross margins?

Yes, thank you for that, Linda. It’s difficult to fix and quantify, but the effect is significant. We’ve seen an improvement in the pricing environment for our high-end business in Asia, so we’ve been able to take advantage of that. As you know, we’ve had a very supportive pricing environment in Asia since our second quarter of last year. We used to approach customers to try to put long-term purchase agreements in place and that helped us support our revenue predictions for our investments in China. Over time since then, it’s now more symbiotic and the customers are coming to us for long-term agreements as much as we’re going to them because they want to ensure their capacity going forward to get the masks that they need. So as a result, the number of long-term purchase agreements we have in place continues to increase. Many of those rolled over in March and April, March 15 and April 1, and we got the benefit of those price increases in third quarter. I think if we just look at the differences in gross margin over the time period since the pricing environment started to improve, we can come up with a rough estimation on our own of what that pricing effect has been. We can’t really put a fixed number on it.

Great. Thank you for your time today.

Thank you, Linda. Thanks for the questions.

Thank you.

Thank you. One moment please for our next question. And our next question will come from the line of Patrick Ho of Stifel. Your line is open.

Thank you very much, and congrats on a nice quarter. Maybe first off as a follow-up to the comments you made about the high end market and seeing some push-out, are you able to discern if they’re in marketplaces that are currently weak today, so what I’m getting at is are they in markets like PCs, low end smartphones, consumer electronics where we’ve seen tangible reductions in overall orders across the semiconductor chain, or are you seeing in other markets that haven’t been as for weak?

I think from customer to customer, the situation may be different, but one thing we see, one of the main factors is the inventory build-up in the end user, especially the [indiscernible]. Before the clean-out of the inventory, some customer are reluctant to make an new product, so according to our input and interface with customers, the high end [indiscernible] activity should start to recover perhaps by the end of September or in October, so we believe there is a push-out due to inventory, high inventory, but the design activity should continue, and as Chris mentioned, because wafer fab utilization is a little bit down and that allows customers to have the room to taper pilot activity, so we hope and we believe this is a short term effect.

Great, that’s helpful. Maybe my follow-up question for you, John, in terms of CapEx, obviously customer demand is quite high both--you know, particularly in the mainstream IC business. Is there any nuances or differences in the type of CapEx you need to acquire for either the high end versus, say, mainstream, and does that affect the overall CapEx dollars, or are they kind of fungible, the type of equipment you buy?

They’re hardly fungible, Patrick - thanks for that question. During my comments, I mentioned that our CapEx for next year will increase, and as I also mentioned, we’re having our planning meeting next week when we’re going to determine just what that increase is going to be. As you’ve observed over the past several years, we’ve been doing very well with our investments. The criteria that we use to make sure that our investments are going to produce improvements in ROIC have been effective in making sure that we do exactly that, and we’ve seen the result of that scrutiny over CapEx and we’ve seen the improvement in ROIC. We’ve already--as we’ve mentioned in prior calls, the CapEx for this year was primarily for mainstream and also deposits on high end tools for IC for next year, and there are going to be a lot of tools delivered next year. We’ve expanded a couple of facilities and we’ve got high end logography tools, inspection tools, etc. to really expand our high-end capabilities, especially in Asia. We did that in the U.S. last year and we’re going to do it in Asia next year. To the extent they’re available, we’re also buying point tools for mainstream, as we’ve discussed previously. As specific as I can be, we’re buying almost full lines if you put everything together to expand our capabilities in high end IC. They aren’t full lines, but if we took the tools that we’re putting in each of the lines and put them together, we’d wind up with real expansion in our high-end capacity.

Patrick, this is Frank. Actually, in Taiwan, we are building a fab expansion and the facility will be ready by the end of this year, and after the clean room is ready, we do have several writer and inspection tools move in next year, including the high end and also the middle end tools, so we do have some CapEx in 2023 to meet our customer demand.

The only other thing I’d add, Patrick, is we can run mainstream products on high end tools - I mean, the capability is there, it just doesn’t make sense economically for cost reasons. We really look very, very hard at price on midrange tools and productivity. We also look at that on high end tools, but capability tends to be the overriding decision factor in how we look at CapEx. The high-end tools and cost of ownership, ROI, those sorts of things get a lot more scrutiny for midrange mainstream tools, so the capacity is a little bit fungible and if we need to, we can run lower end products on higher end equipment, but that isn’t really the right way to operate the fab.

Great, that’s really helpful. Thanks again.

Thank you, Patrick.

Thank you. Again, to ask a question, please press star-one-one on your phone. One moment for our next question. Our next question will come from the line of Gus Richard of Northland Capital Markets. Your line is open.

Yes, thanks for taking the question. Just real quick on the slowdown and takeouts, is there any regional impact on that? Is it China or Asia in general, or just across the board?

Actually, China we don’t see any slowdown, a little bit slowdown in other regions. China activity remains very strong, so that’s why our China operation still runs at over capacity. The slowdown is other regions and, as I mentioned, we do see some coming back recovery happening.

Okay, thank you. Then as I recall over the last few decades, is your Q4 a seasonally down quarter or is it typically up?

Gus, if we didn’t have incremental revenue coming on from CapEx additions during the year, Q4 typically would be lower seasonally than Q3. But for the last several years starting with the big investments in China, Q4 has benefited from the incremental revenue from CapEx during the year, so it’s been stronger. In this case, we don’t have as much incremental revenue coming on and we also have the dampening effect from foreign exchange in a couple of the locations where they record revenues in the local currency and then they have to translate them into dollars, so we know the dollar is strong so that’s giving rise to some muted translated revenues.

Got it, and then the last one from me, when I look at your FPD revenue of--you know, it was flat sequentially, it’s had nice growth over the last few years, I’m just wondering, are you at a point where you’re fully utilized and there’s not much upside in that part of your business until more capacity comes on, and if so, when would you expect that incremental supply to come on?

In FPD, we are forecasting more on the higher profit product and our booking is over-capacity, but at this moment we finished our first major capacity expansion in Hefei last year, so at this moment we focus on making profit and we’re kind of cherry-picking our orders for the time being before we make a decision for the next wave of investment.

Got it, very helpful. That’s it for me. Thanks so much.

Thanks for joining the call, Gus.

Thank you. I see no further questions in the queue. I would now like to turn the conference back over to Frank Lee for closing remarks. End of Q&A:

Thank you. Thank you for joining the meeting this morning. We performed well in the third quarter and we are on the way to delivering another record year. End market demand remains strong across the business and our entire team is working hard to serve our customers. I’m proud of our achievements this year and we look forward to continued success in the future. Thank you.

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