Ladies and gentlemen, thank you for standing by. Welcome to Photronics Third Quarter Fiscal Year 2024 Earnings 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] Please be advised that today's conference is being recorded on Thursday, August 29, 2024. I would like now to turn the conference over to Eric Rivera, Chief Financial Officer. Please go ahead.

Thank you, Michelle. Good morning, everyone. Welcome to our review of Photronics Fiscal 2024 Third Quarter Results. Joining me this morning are Frank Lee, our Chief Executive Officer; and Chris Progler, our Chief Technology Officer. The press release we issued earlier this morning together with the presentation material that accompanies our remarks are available on the Investor relations sections of our webpage. Comments made by any participants on today's calls 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. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We're under no duty to update any of the forward-looking statements after the date of the presentation to conform these statements to actual results. 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'll turn the call over to Frank.

Thank you, Eric, and good morning, everyone. Third quarter sales came in lighter than we expected due to soft demand from Asia foundry as the strong order rates at the beginning of the quarter lost momentum. Lingering macro uncertainty and customer concern on elevated inventory caused some to limit or defer releasing new designs. As a result, photomask demand slowed, resulting in lower sales for both IC and FPD. High-end logic mask orders decreased while our memory business improved in the quarter. High-end FPD improved due to demand for AMOLED mask used for mobile displays as companies prepare for model release in a recovering smartphone market. Compared with the second quarter, gross margin decreased due to the impact of lower revenue. Operation expenses were slightly lower than the second quarter. EPS was $0.55 after adjusting for an FX gain, non-GAAP EPS was $0.51 higher than last quarter and the same as last year. We continue to generate strong operation cash, giving us added flexibility to invest in growth while also maintaining a strong balance sheet. As a result, we are announcing an increase of our existing share repurchase program to $100 million. Eric will share details in few minutes, but we believe this is the right time to restart our share repurchase activity and enhance our capital allocation framework. Based on our optimism in the long-range photomask market, we are also evaluating several growth options, including strategic expansion, partnerships and other possibilities in US, Europe and Asia. We are maintaining flexibility to act quickly in support of our global customers and partners while remaining disciplined to ensure our investment meet financial objectives. I am very pleased with the way our team has performed during the quarter. They have taken care of the customers while managing costs and maximizing cash to…

Thank you, Frank. Third quarter revenue of $211 million was down 3% sequentially with market softness across both IC and FPD. IC revenue decreased 3% quarter-over-quarter. High-end was lower as improved memory sales were not enough to offset lower demand from logic foundries in Asia. Compared with the third quarter of 2023, high-end improved on strong US sales. High-end growth continues to be a factor for us as we see customers migrating to smaller design nodes, including 22 and 28 nanometers to take advantage of the cost and performance benefits. At the leading-edge, our specialty EUV business continues to grow. Year-to-date high-end IC revenue is up 23%, demonstrating our success in growing this segment of our business. Mainstream once again achieved sequential growth as demand improved, particularly in the US. This further validates our belief that Q1 of this year was the bottom of the mainstream downturn and we anticipate additional growth going forward. FPD revenue was lower sequentially as well. On a positive note high-end resumed growth with improved demand for mobile AMOLED displays. Overall display industry dynamics remained somewhat soft, largely due to the same factors that are impacting semiconductor demand. As uncertainty abates, we anticipate achieving above-market growth due to our leading technology, scale, market share and strong customer relationships. Overall, our gross margin was 35.6%, down slightly as we would expect given the softer revenue and our level of operating leverage. Blended ASP held up well as price increases implemented in previous years hold firm. Our long-term purchase agreements continue to provide protection against downside risk during times of market softness, helping us maintain market share and pricing. Delivery premiums, which were meaningful last year are no longer material to our results as lead times have normalized. Operating expenses were slightly lower quarter-over-quarter with operating margins…

Thank you. [Operator Instructions] And our first question will come from Tom Diffely with D.A. Davidson. Your line is now open.

Yes, good morning, and thank you for taking a few questions. Eric, I was curious when we go through the results and how earnings kind of held in there despite the weaker revenue, it looks like a combination of tax and the non-controlling interest were the big drivers there. Maybe you can talk about each one, on tax, why did it fall as much as it did? And then on non-controlling, did the China percentage fall quite a bit? And if that's the case, is the profitability in China not where you want it to be quite yet? Thanks.

Sure, Tom. Thanks for the question. So from a tax perspective, what affected tax was the jurisdictional mix of earnings. Similar to the non-controlling interest. So, our non-controlling our joint ventures didn't perform as well as we would have liked them to perform. So as a result, there was less income attributed to them. However, that was offset by some of our wholly owned subsidiaries. So as our wholly owned subsidiaries, as the mix between earnings between our wholly owned subsidiaries and our joint ventures goes more towards our wholly owned subsidiaries, shareholders of Photronics Inc. benefit from an additional EPS gains.

So maybe to summarize, when you do projects in North America or outside of Asia, the tax rates are better and the profitability is better?

So even within Asia there's certain jurisdictions that just have different tax rates. So as that jurisdictional mix changes, as you have more income in lower tax jurisdiction, you benefit from a tax perspective.

Okay, great. And a couple more here. So I noticed that SG&A was up quite a bit quarter-over-quarter, despite the revenue dip. Maybe a little color there.

Sure. So our SG&A was primarily increased due to professional services fees that were incurred during the quarter.

Okay. I guess that leads me to my next question. Any update on the general counsel dismissal and does that have any impact outside of the customer service?

No, there was certainly no. There was certainly no impact to our financial results. No significant impact I should say. No update further than that though at this time.

Okay. And then just one broad question. When you look at the margin structure on the mature the mainstream business and how over the last few years it's ramped nicely. It kind of peaked maybe a year ago. Is the mainstream business still healthy from a price point of view or has the softness in the overall transaction run rate put it back into its old kind of sequentially declining on an annual basis?

Tom, this is Frank. Our mainstream business actually is very stable because as we reported several times in the call, in the mainstream manufacturing side, there are many end-of-life tools. So with that we have to replace the equipment to add capacity. But in general the capacity for mainstream segment is not increasing. So that enabled us to keep the stable price.

Okay, great. And then I don't know if Chris is on the call, but I do have a kind of a technology question.

Yes, I'm here, Tom.

Oh, hey, Chris. So I guess two things. First, are you seeing any or what do you think the longer term impact is, if any, of Apple canceling its micro display project? And then how do you see OLED ramping into flat panels of a larger size over time?

Yeah. So the micro display, we don't really see much impact. Micro display, we didn't have it marked up as a big growth driver for Photomask. So to the extent companies like Apple decide not to commit to micro display, does not really change our outlook on the FPD market. As far as the OLED, definitely we see the Gen 8.6 form factor starting to go into production next year we believe. One of the large panel makers already has that fab. And we're talking to them about shipping initial masks into that. And we do think we'll be in a good POR position for that those high form factor masks. And the ASPs for those because they're tough masks to make AMOLED at Gen 8.6, much harder, much more complex than LCD. We'll see really good ASPs on those products.

Okay. And I assume that you have a bit of a technology advantage over some of your newer peers in that space as well?

Yeah. For sure, in FPD, we think we have pretty strong technology lead. The other thing we see on AMOLED is a lot of take up of so-called advanced masks, things that you know not to use jargon but phase-shifting masks and the types of technology that really helped IC evolve through Moore's law. We're seeing the adoption rate on those for flat panel increase quarter-over-quarter. So really good take up on our higher end masks to get more performance on panel. So we think our tech leadership here is going to be a big advantage.

Great. Okay, well, thank you, Eric, Frank and Chris. Appreciate your time today.

Thank you, Tom.

Thank you.

Thank you.

Thanks. I show no further questions in the queue at this time. I would now like to turn the call back over to Frank Lee for closing comments.

Thank you. Thank you for joining us this morning. While demand has been soft through the first nine months of 2024. We have done a good job of maintaining margins and generating strong cash. I'm proud of the way we have performed. Looking longer term, there are several megatrends that should support market growth. As the leading Photomask producers, we are well positioned to grow as demand improves, creating value for our customer, employees, and shareholders. I look forward to updating you on our progress. 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. Thank you.