Good day, ladies and gentlemen. Thank you for standing by. Welcome to Photronics First Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded today, Wednesday, February 21st, 2024. I would now like to turn the conference over to Richelle Burr, Chief Administrative Officer. Please go ahead.

Thank you, Lilian. Good morning, everyone. Welcome to our review of Photronics Fiscal 2024 First 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 we issued earlier this morning, together with the presentation material that accompany 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 and 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. We achieved sales growth compared with last year and both IC and FPD increase with high-end growth being partially offset by soft mainstream demand in both sectors. Compared with the fourth quarter, sales were down due to seasonal trends and four fewer days in the first quarter. Demand was weaker and sales were softer than we expected during the first month of the quarter for both IC and FPD. Demand improved during the quarter, increasing our revenue run rate and giving us confidence that revenue will improve in the second quarter. Earnings improved over last year as operation leverage drove higher gross margins. Our quarter-over-quarter comparison, no varying cost gross margin to fall. Once again, our team has somewhere to control expenses and deliver solid margins even with lower sales compared with fourth quarter. The first quarter earnings were $0.42 per share on a GAAP basis and $0.48 per share on a non-GAAP basis. Operation cash flow improved from the first quarter of last year, allowing us to further strengthen our balance sheet to support our growth plans. I will now like to offer some comments on the overall market, mass market and demand environment. As I stated earlier, mass demand was solved at the start of first quarter for both IC and FPD. Demand improved through the quarter, including the US spike in orders we see ahead of Chinese New Year, which started on February 9th. While still early following the holiday break, we do expect demand trends we saw prior to Chinese New Year to continue in Q2. For IC, we are seeing a growing trend in no migration from customer in Asia as they move to 28 and 22 nanometers to improve performance. The trend is driving tap-out demand for…

Thank you, Frank, for those kind words. I am looking forward to retirement and spending more time with my family and some favorite projects. Although I'm leaving, I'm confident in the company's continued success. The CFO role in any company is a challenging position. In our case, I believe we have met that challenge with the strong support of an excellent finance organization. Eric, our Corporate Controller, who will assume the role of Interim CFO, as one of our Treasurer and both their staffs and our international CFOs and their staffs. The Photronics Board is demanding and supportive and the cohesiveness and commitment of the leadership team to a well-defined strategy of targeted investment and consistent execution will help ensure that success. Now turning to first quarter results. Revenue was $216.3 million up 2% year-over-year and 5% less than last quarter. As Frank mentioned, our first quarter began slowly, but gained momentum as end market demand seem to recover. The first quarter is typically the seasonally slowest quarter in our fiscal year. Slower demand at the beginning of the first quarter exacerbated the seasonal decrease and there were four fewer days than the previous quarter, all combining for the sequential decrease. First quarter IC revenue was $157.6 million, up 1% year-over-year and 4% lower sequentially. High-end revenue increase led by strong foundry logic demand in Asia and high-end revenue in the US. Mainstream revenue was lower due to softness in Asia, in part related to the stronger high-end demand resulting from customers' migration to the more advanced nodes. The long-term growth drivers remain intact as we support customers' technology road maps and investments as they expand capacity to support supply chain regionalization. FPD revenue of $58.7 million improved 8% compared with last year and was down 7% from Q4's record…

Thank you. [Operator Instructions] And our first question coming from the line of Tom Diffely with D.A. Davidson. Your line is open.

Yeah, good morning, and thank you for taking my question. First of all, John, it's been a pleasure working with you, and I wish you well on your retirement. And then I guess I'd like to just kind of back up here and hopefully ask a little bit about just the health of the mainstream business and how you see that playing out in terms of pricing, supply-demand, seasonality, just focused on the mainstream, if you could.

Yes. Tom, thank you. In the mainstream sector, the season low, especially in China and Taiwan market. And in terms of pricing, they are still some -- there are some newcomers into the market in the mainstream. However, we don't see the mainstream business impact this new compensation in area outside of China and Taiwan. So the impact on mainstream pricing, there are some pressure in the Great China area. However, our main business has been migrating to 40 and 22, 28 nanometer. So the portion of mainstream business in our Asia operation are not in a bigger portion. So the increase in product mix has offset the mainstream price pressure in terms of overall branded ASPs.

Okay. So when you look at the last few years, you had the nice ramp-up in first demand? And then because there were supply constraints in the industry, you had nice pricing, nice margins. And then it seemed like the margin got a little saturated. At this point, it feels like the pricing or the margins from the mainstream is in a kind of a stable area where if you look at over the next few quarters, it feels pretty stable for you? Or are we going back to kind of the history in mainstream when we have kind of a seasonal or yearly decline in pricing?

Actually, the pricing I mentioned went up in 2021 and '22. So even we adjust the price a little bit right now, however, they are still much higher than before. But at this moment, the pricing of mainstream has been stabilized, and we are not trying to adjust the price because the market in high-end of the mainstream, especially in 40-nanometer area are growing. So that consumed a lot of our capacity. And we have no need to further adjust our price in mainstream. So going forward, we will keep our mainstream pricing stable. Of course, the premium charge at this moment disappear. However, as I mentioned, we are focusing on the branded ASP, which basically depending on the product mix.

Okay. No, it sounds good. It's encouraging. Moving over to the flat panel business, you talked about some OLED strength and how that helped your advance. I'm curious, what are you seeing in the Gen 10.5 range? Is that still fairly light or fairly soft for you?

It's still very light. Most customers are focusing on AMOLED product and the total cap of G 10.5 remain very, very low. So actually, in terms of profit margin and the -- and overall production output is more beneficial if we are focusing on AMOLED product instead of G 10.5.

Okay. Great. And I'm not sure if Chris Progler is on the line, but I did have a question -- as the -- as you start to look at mini and micro LEDs for flat panel displays, how that impacts the photomask market?

Let's say, so the mini LEDs that's, just a more sophisticated backlight. There's not a big impact on those in the photomask market except for the switching layer or the transistor layer, those mini LEDs let you take advantage of more advanced TFTs or transistor level. So it's driving, I think, a more sophisticated at advanced switching layer, and thanks to mini LEDs although the formation of the mini LEDs is not really photomask intensive. For micro LEDs, it started off to be a relatively simple technology to integrate that is relatively few patterning steps. What we're seeing in most of those products are in prototype or early production phase, actually, a fairly dense set of photomask and patterning requirements to build those micro LEDs. They're proving to be a little harder to control than initially anticipated. So I think it's a good trend, positive trend on the micro LED side for photomask, especially if it drives more applications for displays, not a game-changer by any means or a tremendous driver, but I think it's should be viewed as a positive trend for display mask making.

All right. Thanks, Chris. And since I have you on the line, any update on activity that's going on with you and EUV? I know you've been part of some consortiums. But curious if there's any what we call regular business in that space at all for you?

Yes. So I think in '23 and '24 our EUV customer base expanded modestly. There are a couple of more companies we work with that are starting to dip their toes in the water on EUV using pilot masks and things like that. So we see the customer base expanding. We're doing a few demonstrations on running flows with EUV masks versus optical masks for one memory customer to compare with the yields might be under EUV. So I think the customer base is starting to expand a bit. The strongest part of that business for us has been our primary customer who is an OEM. That business has been very strong, consistent with what their OEM products and the takeup in the industry. And then as far as the advanced nodes, we did strike up one new relationship on EUV, which we should not have liberty to talk about on this call, but it's so far been a fruitful interaction and maybe we'll have a little more to say about it over the next few calls.

Great. I appreciate it, Chris. And then last question for John. When you look at the capital spending of $140 million this year, how much of that is I guess, sponsored or do you have contracts to kind of guarantee a certain level of production if you're going to spend that level of money?

Yes. So as we've discussed, over the last several years, Tom, for every major capital investment we get, we have -- first of all, we have an investment analysis that supports at least our threshold IRR. And we drill down on the revenue line and those analyses to make sure that the revenues are just not numbers on an Excel spreadsheet. They're supported by either customer commitments or pretty good assurances that, that business is going to be there, the request from customers for us to increase capacity and not promises, but assurances of future orders to support the investments. And of course, as you've seen, our ROIC from 2017 at about 1.5% has increased to 13% to 14% over the last several years. So that strategy of supporting the investments and making sure that we've got the revenues to support them has been effective in the total turnaround in our ROIC.

Great. Well, thank all three of you for your time today. And John, once again, congratulations.

Thanks, Tom. Thanks for coming and calling for the questions.

Thanks.

Thank you. And there are no further questions in the queue at this time. I will now turn the call over to Frank Lee for any closing comments.

Thank you for joining us this morning. We are entering the second quarter from a strong position with demand growing across our markets and a solid financial position to support our growth investments. We have a great market position with leading share and technology. We expect to grow to continue growing market share and improving profit margins. I'm proud of our team's performance and confident we are on the way to another new record year in 2024. 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 line at this time.