Good day, and thank you for standing by. Welcome to the Photronics First Quarter Fiscal 2023 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to Richelle Burr, Chief Administrative Officer.

Thank you, Rivka. Good morning, everyone. Welcome to our review of Photronics' fiscal 2023 first 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 Chief Accounting Officer and Corporate Controller. The press release we issued on Monday, together with the presentation material that accompanies our remarks, are available on the Investor Relations section of our web page. Comments made by any participant 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. 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 would like to turn the call over to Frank.

Thank you, Richelle, and good morning, everyone. I'm pleased to report we achieved revenue of $211.1 million in Q1, which exceeded our expectations. This was against a backdrop of macro challenges and uncertain industry conditions, showing that Photronics was able to navigate a difficult environment very well. Indeed, the IC photomask market has been mixed, with strong demand in certain nodes and softening demand in others. On the positive side, we received strong order flow from Asian foundries for mid-range nodes, from 65 to 45 nanometer, mainly for the smart card, LED driver, automotive, image sensor, IoT and other specific applications. Our customer long-term purchase agreement that we entered over the last few years benefitted us by preserving market share and providing a good mix of product demand, helping us maintain revenue. These agreements have helped us better plan for capital investments and handle periods of slowing industry demand. On the FPD side, our Q1 fab utilization remained at a high level, with smartphone displays showing particular strength for China panel makers. This provided a major contribution to our FPD business growth and was consistent with the strong demand for our mid-range IC display driver photomasks highlighted above. Gross margin and operating margin were slightly softer than Q4 last year, but still maintained at a strong level through continuous cost control management and pricing strategy. John will discuss the financial metrics in more details later. Looking forward to Q2 outlook. Based on current order trends and ongoing input from our customers, we anticipate demand to remain stable in Q2, resulting in guidance that is roughly in line with our first quarter operation results. While demand uncertainty beyond Q2 is higher than usual, we continue to work closely with our customers to understand their demand and ready to support their business.…

Thank you, Frank. Good morning, everyone. Revenue increased slightly in the first quarter as both IC and FPD were up somewhat from the fourth quarter and successfully offset typical seasonal trends, particularly for high-end technologies. Design activity continued reasonably robust, our commercial teams have done a great job working with customers to understand their technology road map and win orders, and our global team executed well and delivered. IC revenue was $156.6 million, up 0.2% sequentially. An increase in high-end demand, particularly in Asia, offset limited softness in mainstream. The supply/demand imbalance continues to support a favorable pricing environment, and for the most part, we're able to maintain ASP pricing exclusive of premiums established over the last 2 years. FPD revenue improved 1% sequentially to $54.5 million. Again, growth in high-end revenue more than offset lower mainstream demand. High-end growth came from improved G10.5+ demand and continued strength in mobile displays. Many times, the production capacity dedicated to strong demand for high-end masks can lead to reduced production of mainstream masks. Gross and operating margins were about 2 percentage points less than fourth quarter margins due to less favorable mix, and somewhat lower expediting premiums that customers pay to accelerate deliveries. Although the revenue increase was in high end, both IC and FPD, not all high-end business is created equal. Difference in mix, including nature of the product, product pricing and margins and location of manufacture, especially related to memory, all affect operating margin outcome. Operating expenses were slightly increased sequentially on higher people costs. First quarter SG&A costs are typically higher than fourth quarter due to higher employer taxes and healthcare costs. SG&A increased from first quarter last year due to overall higher salaries and wages, driven by labor market conditions and healthcare costs. Nonetheless, operating expenses remained well…

[Operator Instructions] Our first question comes from the line of Thomas Diffely of D.A. Davidson.

So John, I'm curious, when you look at the second quarter guidance, you talked about it being stable quarter-over-quarter, why do you think you're not seeing the typical post-Chinese New Year ramp in demand? And is it just being offset by some other moving parts?

I think I'll defer that one to Frank, who's much more an authority on Chinese New Year and the order rate.

Typically, a lot of tape-outs happen before Christmas or Chinese New Year. This year, it's slightly different because of the overall industry environment. So we do see some mainstream tape-outs start to increase. But on the high-end side, we haven't seen the recovery -- a strong recovery yet. But according to the input from our customers and from our sales, we believe the tape-outs may start to happen later in the quarter, but we need to continue to monitor the situation.

Okay. And then in your prepared comments, you talked about growing nationalism. What regions in particular are you looking at there? And when do you think the capacity will be in place to benefit PLAB in kind of your ongoing business?

Hi, Tom, this is Chris. All the regions have programs to expand their domestic supply chains for semiconductors, every major producing region has that. So we're looking at all of them. U.S. and Europe, in particular, seem to be wanting to install significant amounts of new capacity. So we're tracking that. We're meeting with customers. We're looking at also opportunities that apply for incentives ourselves to expand our networks there. As far as when that might materialize, I think you have to look at probably a 3-year -- 2- to 3-year horizon at minimum, probably 4 to 5 years, to really achieve the full entitlement of those kind of government-initiated programs. So we're seeing a little bit of it, frankly, already where some companies are trying to get ahead of the curve by expanding capacity. But I think you should think about probably a 3-year horizon before it really takes hold.

Okay. And then maybe, Chris, a follow-up on this question. maybe a little bit more on the Japanese technology restrictions. Is it too early to tell? But what nodes does that include? And what is your percentage of business at those potentially advanced nodes?

I think for the most advanced nodes, the EUV in particular, I don't see that having a large impact on us. Our EUV business is actually growing year-over-year. We expect it to happen again this year. but it's mostly to support OEMs, equipment manufacturers, R&D programs, piloting, that sort of thing. So we don't have a big exposure to production impacts from EUV, although it is growing for us. On the midrange nodes, of course, today, I think as you know, the scanner companies are still selling mid-range scanners. This is really Deep UV 248 and dry ARF at immersion into all regions around the world. If that was severely curtailed, then that has a major impact on future capacity at those nodes because a lot of our key midrange products fit into those nodes. So that, we do have to watch pretty closely. It does not seem to be happening right now, but it could in the future. So we keep an eye on it, for sure. I guess one of the ideas is that the world will still need those chips. And if they -- those tools don't go to one region, they're going to go to a different region. So it gets back to this regionalization opportunity we see. So that would be the response, if you ask how will you make up for it. The idea is those fabs, those chips are going to be built someplace. And we certainly are plugged in on all regions of the world, and we'll try to take advantage of that. There may be another comment or two from Richelle on this particular topic. She's working on it very diligently every day.

I think that's right, Chris. I think everything you said is accurate, and we're still waiting to see the -- what actually Netherlands and Japan finally agree to.

Okay. I appreciate that extra color. And then final question, John, you've talked about CapEx of $130 million this year. I was surprised you talked about the mainstream expansion. I thought we were still at a point where the pricing in the mainstream market did not support the acquisition of new tools for that space.

So -- and that's a good memory, Tom. You're absolutely right. But as we mentioned, I think at the beginning of last year, there are still point tools that we can supplement our existing lines with, and to the extent that those are available. There are other used tools on the market that we may be able to pick up at much less than new price. And those, for the most part, aren't even produced anymore. So to the extent we can scavenge tools like that, we also supplement the existing lines. So it's really just on a point tool kind of exception basis. Thanks for getting up so early to call.

Just another day on the West Coast here.

[Operator Instructions] Ladies and gentlemen, there are no further questions at this time. I will now turn the call over to Frank Lee for closing comments.

All right. Thank you. Thank you for joining us this morning. We have made a good start in 2023, and we are working hard to serve our customers and control our operations so we can maintain our revenue and margins. We remain optimistic on the long-term demand outlook for photomasks and believe we can maintain our position as the market leader. Thank you again for your interest, and have a great day. 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.