Good day and welcome to the Photronics Q4 FY ’23 Earnings Call. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference is being recorded Wednesday, December 13, 2023. I would now like to turn the conference over to Richelle Burr, Chief Administrative Officer.

Thank you, Michelle. Good morning, everyone. Welcome to our review of Photronics fiscal 2023 fourth quarter results. Joining me this morning are Frank Lee, our Chief Executive Officer; Chris Progler, our Chief Technology Officer; John Jordan, our Chief Financial Officer, and Eric Rivera, our Chief Accounting Officer and Corporate Controller. The press release that we issued earlier this morning, together with the presentation material that accompanies our remarks, are available on the Investor Relations section of our web page. 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 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 will turn the call over to Frank.

Thank you, Richelle, and good morning, everyone. The Photronics team had another outstanding year in 2023, and delivered record revenue for the 6th consecutive year. Over that six-year period, we have achieved a compound annual revenue growth rate of over 12%. For full 2023, revenue grow 8% year-over-year, while the photomask market overall was flat. And the semiconductor industry overall is expected to contract by up to 12%. The Photronics year-over-year revenue growth once again offers testimony to the tendency of design driven photomask demand to be less cyclical than the industry in general. Most recent indications from industry leaders and from our customers is that the current semiconductor cycle contraction should transition to the next phase of growth around the middle of next year. Thus, if phase cycles and current observation can be considered indicators, photomask demand should resume a more robust growth phase during Photronics second to third fiscal quarters. Margin for the quarter and year were also outstanding. We achieved an operation margin of 28.5% for the first quarter and 28.4% for the full-year 2023, the best year in the history of the company. The combination of the following has continued to support the sustainability of this margin level. The high operation leverage, stable pricing from our long-term purchase agreement, our focus on delivering the best quality mask, and our driving for being the low-cost producer. As a result of the solid operation results and the contribution from below-the-line items, we earned in Q4 $0.72 per share on a GAAP basis and $0.60 per share on a non-GAAP basis. Strong cash flow was generated in 2023, contributing to a stronger balance sheet and increasing our cash position with reducing debt. We continue to invest in growth position us to continue the past several years strong performance. To summarize, we achieved another record year in 2023, growing revenue in [flat] (ph) market. Our team performed well and our customers continue to trust us as their photomask partners. We are investing in high return projects and are positioned to continue to outgrow the market and create value for our shareholders. I'm proud of our accomplishment and excited about our future. And I would especially like to express my gratitude to the more than 1,800 employees that have worked hard to achieve these results. At this time, I will turn the call over to John to discuss the results further.

Thank you, Frank. Good morning, everyone. Our fourth quarter finalized another great year for Photronics. In my comments, I'll first discuss the fourth quarter results, then the results for the full fiscal year. Fourth quarter revenue of $227.5 million increased 8% over fourth quarter of last year and 1% sequentially. Photronics fourth quarter always ends on October 31, which may add or subtract days to the standard 91-day 4-4-5 fiscal calendar. This year, fourth quarter was boosted by an extra two days in the quarter. It was our second highest quarterly revenue ever, only 1% off the record established in Q2 of fiscal year 2023. Our revenue into China in Q4 declined from 53% of total revenue in Q3 to 44% replaced by revenue with other customers. It might be worthwhile to add some further color regarding the China business. Although we derive a good portion of revenue from China, as do others in the semiconductor and display industry, what makes the China business somewhat unique is that there is a significant number of new designs and fabs in China driving photomask demand. And since there is a much smaller captive market in China, the preponderance of the photomask production is being provided by merchant manufacturers like Photronics. The business by major category, IC revenue of $164.5 million in the fourth quarter was up 1% sequentially and 5% year-over-year. Our high-end revenue defined as IC masks using 28 nanometer and smaller technology drove the increase with 27% sequential growth, which more than offset the reduction in mainstream revenue. High-end revenue was strong in foundry logic in both U.S. and Asia. The 9% decrease in mainstream revenue resulted in large part from lower delivery premiums due to somewhat moderated demand and more normalized lead times for those products. For the FPD…

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

Yes, good morning. I appreciate the chance to ask a question here. First question on the mainstream market. Could you just talk a little bit more about the health of this market in terms of both demand and pricing?

Okay, Tom. The mainstream business is especially in the [legacy] (ph) foundry business, as many foundry companies report has slowed down quite a bit with very kind of low wafer-fab utilization rate. And with the slower market demand, our premium charge in this product segment has reduced since Q4 last year 2023. So I -- we believe the mainstream business slow may continue for another quarter or two. However, the business from 12 inch wafer-fab seems to stabilize and start to recover in terms of photomask demand. So I think our compound ASP should be able to sustain even our premium charge in the mainstream has reduced to certain low level.

Tom, I'd like to supplement that a little as well just in terms of pricing. So as Frank mentioned, the premiums have essentially not quite disappeared, but eroded significantly. Nonetheless, the pricing, I sort of compare it to the inflation picture in the U.S., where the inflation rate has tapered off to 3%, 3.5%, but nonetheless the prices are still 17% higher than they were two or three years ago. So we've wound up with the same situation with IC pricing where although the premiums have really almost evaporated, the pricing is still at a level, and I kind of referred to that in my comments, where we're still able to maintain this upper 30%, you know, mid to high-30% gross margin level.

Okay, maybe just to follow-up on that, is pricing still below where it would cost to buy a new tool in the marketplace to build extra capacity? Such that it should remain a fairly stable market for you over the next few years?

Yes, actually as Tom mentioned our price for mainstream has increased by quite a certain percentage two years ago and during these two years the price erosion is very minimal, even the premium [Indiscernible] charge. So for mainstream business our major capital investment basically will be in replacement for the end-of-life tools. There will be not much new capacity, especially in the machine area. So the only capital spending will be for end-of-life tool replacement and current pricing will sustain our current margin level.

Okay. Thank you for that. And then I’m just curious, on the high-end IC side, what are some of the end market drivers that you're seeing for it?

The end market.

End market drivers.

We see a lot of demand still from the AMOLED driver IC, which use 22 to 28 nanometer technology. And this is our strength. We are a major merchant mass supplier for these technology nodes and the applications basically are mainly for driver IC. Chris, you want to add some comment to this?

Yes, thanks, Tom. It's pretty wide, actually, but like some of the companies we follow, auto is down. Some others like TI, we're pretty good. Auto demand, but definitely that's still driving some tape out activity, particularly in the compound semiconductor area. A lot of the FAS utilization is kind of bottom, but it's running pretty low still historically in the maybe high-60s. So there's a lot of new product development going on in consumer electronics and those fields that you're driving tape out demand, but not so much wafer volume. Particularly in Q4, there was a fair amount of design activity on the consumer side. Industrial is still pretty weak. Everything around these so-called AI ecosystem is pretty healthy. So we don't build a lot of photomask sets, although some for direct AI processors. But all the ancillary chips that go around these AI applications were quite strong, as you can imagine, falling in the industry. So there's no segment that I think we see really spiking back strong, but it's relatively broad and a lot of design activity to try to refill wafer capacity, because inventory's also been worked out. So there's some reorders and things like that and pipeline as well. Memory's still pretty weak. Overall pricing stabilized, but memory's still pretty weak. Particularly our 3D-NAND business was down fairly strongly and has not fully recovered yet.

Okay. Yes, no, I mean, the reason I asked the question is, you know, we've basically heard that most of the segments are bouncing along the bottom here. And it's -- I guess, pretty impressive you've been able to keep your revenue flow as you have despite the slowdown. And, you know, most people expect that starting maybe mid next year, we start to see some recoveries and it puts you in a good position for that. So I guess on that same front, where do you see capacity constraints right now and where are you going to focus the $140 million of CapEx?

Our major investment will be, number one, as I mentioned, the end-of-life tool replacement. The other one is we are positioning ourselves to the demand in 22 and 28 photomask demand, especially in China and also we are going to enhance our U.S. shop capacity and capability. So some investments will be in the States for Boise and Allen sites.

Okay. Great. And final question maybe for Chris. A few years ago, you talked about the EUV consortium and how you're part of that. Any update on how that activity is going or what potential role you might play there?

I mean, overall, our EUV business continues to grow year-over-year and even quarter-over-quarter. The OEM side of that business is probably the strongest and then class of products we call fab products is also fairly strong, because there's a lot of EUV scanners entering the industry. And then the third category, device masks, either prototype and demo mass, also growing. So consistent with ASML's reports, we see a lot of strength in EUV and the merchant market gradually evolving up, and we're in a pretty good position for that. As far as consortia, we're still in discussions with various groups, you know, we’re pretty well plugged into the New York CREATES program, and they just announced a very large state-sponsored funding infusion into that project. There's also a consortium forming in Japan. We are starting to have conversations with as well around the Rapidus project. So nothing I think we can announce right now, but there's two or three different avenues we're pursuing now to join on to these consortia initiatives.

All right, well, great. Well, thank all three of you for your time today.

Thank you, Tom. Thanks very much for coming onto the call.

Thank you. [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.

Thank you, Michelle. Thank you for joining us this morning. We performed well in 2023 and are positioned to continue this performance in 2024. Long-term, our end markets are expected to grow significantly. As the merchant photomask leader, we are in a great position to continue to outgrow the market, leveraging our competitive advantage to serve our growing global customers. I'm proud of our team's performance in 2023, delivering record revenue and firmly establishing Photronics as the merchant photomask partner of choice. We are optimistic regarding our future growth opportunities and look forward to updating you as we make progress. Have a good day, and 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. Good day.

Thank you, Michelle.

Thank you.

You’re very welcome.