Peter Broadbent – Vice President, Investor Relations and Marketing Peter Kirlin – Chief Executive Officer Sean Smith – Chief Financial Officer & Senior Vice President Christopher Progler – Chief Technology Officer & Vice President.

Edwin Mok – Needham & Company Patrick Ho – Stifel Nicolaus Thomas Diffely – D.A. Davidson.

Ladies and gentlemen, thank you for standing by. Welcome to Photronics second quarter earnings call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, May 19, 2015.

I would now like to turn the conference over to Pete Broadbent, Vice President - Investor Relations and Marketing. Please go ahead, Mr. Broadbent..

Thank you, and good morning, everyone. I’d like to thank you for joining our second quarter 2015 conference call.

Before we begin, I’d like to remind all participants about the Safe Harbor Provision under the Private Securities Litigation Reform Act of 1995 and thus any statement we make during this call, except for historical events, may be considered forward-looking and may be subject to certain risks and uncertainties that could cause actual events to differ materially from those projected, including uncertainties that may affect the company’s operations, market, pricing, competition, procurement, manufacturing efficiencies, and other risks detailed from time to time in the company’s SEC reports.

These statements will contain words such as believe, anticipate, expect or similar expressions. This call will be archived on our website until we report our third quarter 2015 results. Joining us on the call today are Dr. Peter Kirlin, Chief Executive Officer; Sean T. Smith, Senior Vice President and Chief Financial Officer; Dr.

Christopher Progler, Vice President, Chief Technology Officer and Strategic Planning. During our remarks, we will be referring to slides posted on our website under the Investor Relations link. And now, I’d like to turn the call over to Peter Kirlin.

Peter?.

Thank you, Pete, and good morning everyone. Please turn to slide three in our slide presentation. We reported a solid quarter growing revenues at $127.3 million which was the high-end of our initial guidance range. This achievement was a result of strength and demand at the high-end and strong execution from our team.

High-end semiconductor revenues reached a new quarterly record of $41.7 million. Our high-end penetration also exceeded 40% of IC revenues for the first time. Mainstream IT business was down 5% sequentially, due to slower foundry sales that mature nodes in Asia. Flat panel display sales were up 7% sequentially.

Our high-end IC business was [slightly] in the quarter with contributions from memory and 14-nanometer logic. We are clearly seeing the ramp in production for next generation DRAM. While 14-nanometer logic is yet to enter high volume manufacturing, we are benefiting from mass demand for early stage production.

As we stated before, we are fully qualified with our key customers and next generation logic and memory nodes and we have more high-end capacity in all of our merchant competitors combined. So we are pleased to benefit as our customers ramping to full production each of the advanced node.

These high-end radical sets have ASPs in the order of one to several million dollars; it only takes a few sets to turn a routine quarter into an exceptional one. Our FPD business was up on stronger demand for additional LCD panel masks.

New high-end lithography and inspection equipment we are deploying in Korea is being qualified now as expected come online during the quarter. We continue to see increase demand for our customers for ultra high definition LCD and AMOLED masks for both development and production.

We are the first merchant or captive to have the next generation of mask making equipment and we expect to capitalize quickly on the industry leading position with our customers. As a result, we expect to see a ramp at high-end sales with full production as we exit the quarter.

With our strong operating leverage and our diligence on cost controls, we outperformed on our gross and operating margin. As Sean will discuss the operating margin on incremental revenues with 87%, discounting for onetime items we exceeded our target as 50% this quarter.

And we addition up $0.02 related to a tax valuation benefit, we’re generating earnings of $0.14 per share even without the tax valuation benefit we exceeded our original guidance range. Looking forward, 2015 looks progressively stronger for us. 20-nanometer DRAM is now in production.

28-nanometer foundry logic is gaining traction with our specific customers. And 14-nanometer foundry logic is progressing towards volume manufacturing. 16-nanometer NAND and 3D memory on the horizon, we expect to see the business start by the end of the year.

Our capacity is online and we are fully qualified for all of these nodes, all of this business. In FPD, with strong demand for AMOLED and ultra high definition LCDs, we believe the high-end market is expanding and we will have the capacity to leverage this shortly.

So we are optimistic that we layered on all cylinders as our customers go tot full production in the coming quarters. Before I turn the call over to Sean, I’d like to congratulate the team on their excellent execution this quarter.

As they’ve been doing it for some time now, and they demonstrated again this quarter, everyone is fully focused on delivering the opportunities in front of us for the benefit of our customers and our shareholders. Now I’ll turn the call over to Sean.

Sean?.

Thanks, Peter and good morning, everyone. I’ll provide a brief analysis of our financial results for the second quarter of fiscal year 2015, we review our operating results, balance sheet, cash flows and our forecast going forward. Please turn to slide five, six and seven which show our sequentially quarterly IC and FPD revenue performance.

As Peter stated, second quarter revenue was approximately $127.3 million at the high-end of our range, guided range. Revenues for IC photomask were $103.8 million up $2.3 million sequentially. As Peter mentioned, we saw solid demand for high-end memory mask as well as increased FPD sales during the quarter.

Revenues for high-end IC photomask which ware 45-nanometers and below were $41.7 million or 40% of total sales, a new record for Photronics. Sequentially, high-end IC revenue was up $5.3 million or 15%, primarily related to increased high-end sales in the U.S. and in Korea.

Mainstream IC sales during the quarter was $52.1 million, a sequential decline of $3 million primarily related to softness in the foundry mainstream logic sales in Asia. Revenues for FPD photomask were $23.5 million up 7% and $1.5 million sequentially. The increase was related to higher mainstream FPD orders that Peter alluded to.

High-end FPD revenue for the quarter was $15 million which was down modestly for $400,000 on a sequential basis. Bracing Q2 sales out geographically, 67% of total sales were from Asia, 26% from North America and 7% from Europe. Now, let’s continue to the income statement. Gross margin for the second quarter was 26%, up 320 basis points sequentially.

The increase was primarily related to the following items; one, increased volume, two, reduced variable costs primarily consumables and increased manufacturing efficiencies, three, reduced depreciation sequentially up $1.4 million and four, certainly manufacturing costs we allocate to R&D related call activity.

Selling, general and administrative expenses for the second quarter increased by a modest $400,000 to $12.5 million.

R&D expenses, which consists principally of continued development for our global advanced process technologies and qualifications at advanced nodes were $5.8 million up $1.1 million sequentially, due principally to increase leading edge foundry logic and FPD development costs.

During the quarter, we generated operating income of $14.9 million or 11.7%. This represents an increase of 230 basis points from the first quarter that amounts to an 87% incremental margin on a sequential basis. Pad depreciation remains flat. The incremental margin would have been 51%.

EBITDA, as defined in our credit agreement for the quarter was $34.8 million or $139 million on an annualized basis. Other expense net for the second quarter was $1.5 million, up sequentially by $200,000.

During the second quarter, we recorded tax provision of $1.3 million, which includes the reduction of foreign tax NOL valuation allowance of $1.5 million that was no longer be needed. Excluding the valuation allowance adjustment, income tax expense would have been $2.8 million which was within our guided range.

Minority interest expense was $2.1 million for the quarter and primarily relates to our partner share of PDMC’s profits for the second quarter. Minority interest expense decreased $1.1 million during the quarter.

GAAP net income was $10.1 million or $0.14 per diluted share and includes $1.5 million or $0.02 per diluted share related to the reduction of the tax valuation allowance I previously discussed. At the end of the second quarter, we had 1,510 full-time employees, which equates to annualized revenue per employee of $337,000.

Now turning to the balance sheet. Cash and cash equivalents at the end of the quarter amounted to $176 million. Our net cash, which is cash less debt, was $39 million at the end of the quarter, up $10 million sequentially. Working capital at the end of the quarter was $151 million as compared to $144 million at the end of Q1.

Accounts receivable at the end of the quarter were $97.6 million down $1.6 million sequentially and other current assets were $24.7 million down $4.2 million sequentially, primarily as a result of reduced prepaid expenses.

Accounts payable and accrued current liabilities at quarter end amounted to $153 million, down $14 million sequentially, primarily as a result of reduced accrued CapEx. At the end of the quarter, $56 million of CapEx was accrued for, which was down $10 million sequentially. Please turn to slide nine as we review our capitalization.

Total debt at quarter end was $137 million. The principal components of outstanding debt includes $115 million 3.25% senior unsecured notes, 50% of which are due April 2016 and 50% which are due April, 2019 and approximately $22 million in capital lease obligations. Our leverage ratio improved to 1.01 times during the quarter.

During the quarter and through today, we have not borrowed on our five-year $50 million credit agreement. Taking a look at cash flows, cash provided by operations for the second quarter 2015 was approximately $36 million. Depreciation and amortization was $19.5 million down approximately $1.4 million sequentially.

Cash flow used in investing activities in Q2 2015 amounted to approximately $28 million, which is primarily all CapEx. And net cash used by financing activities during the quarter amounted to approximately $2 million. Please turn to slide 10 as we take a look ahead.

By taking a look at CapEx, we expect our 2015 cash CapEx needs to be approximately $110 million. We do, however, have the flexibility to accelerate or decelerate our spend depending upon market conditions.

And our 2015 investments were principally geared towards high-end leading edge products for IC and FPD applications, and we do expect to continue to generate free cash flow once again in 2015. Our visibility, as always, continues to be limited as our backlog is typically one to two weeks.

We are projecting the revenue for the third quarter of 2015 to be in the range of $124 million to $133 million. We also expect our depreciation and amortization expense to increase this quarter to approximately $2 million to $2.7 million as additional tools come online.

During 2015, our tax rate will be affected by the flow of income from jurisdictions for which we may have credits and upon our limited ability to recognize tax benefits in areas in which we are taxable.

For the third quarter of 2015, this will equate to a range of $2 million to $3 million, and for fiscal 2015, we estimate total taxes will range from $9 million to $11 million. As a result, based upon our current operating model, we estimate earnings per share for the third quarter of 2015 to be in the range of $0.06 to $0.13 per diluted share.

In summary, I’ll leave you with a few key thoughts. First, we expect top and bottom line improvement in 2015. Second, we expect our EBITDA continue to grow in 2015. Third, we’re confident about our business model and our ability to grow market share at the high end.

We see continued opportunities in our customers’ businesses and node migration plans, and we have a strong financial position and excellent technology to capitalize on those plans. And finally, we expect to continue to build on the momentum that we have established over the past few years as a leader in advanced photomask technology.

Now, I’d like to turn the call over to the operator for questions and answers..

[Operator Instructions] Our first question comes from Edwin Mok with Needham..

Hey, thanks for taking my question, and congrats on a great quarter. My first question actually on the guidance range. I noticed that the range is maybe a little bigger than what you historically guide for, the $9 million from top to bottom.

Any reason for bigger range?.

Edwin, the principal reason for the wider range as Peter alluded to, as our high-end business grows, a few orders can make rebred the quarter.

So, we thought it’d be prudent to widen the range, we expect or we strive to get the high-end of the range but obviously with the increased quarter-over-quarter 15% of the high-end IC business which ASPs row in excess of the $2 million at times, that’s the reason, principal reason..

I see, okay that’s helpful to clarify. And then you mentioned on the prepared remarks that there is some slow business on the mainstream side mostly due to the foundry business in Asia.

Can you give us more color related to that and is that more temporary or do you expect improvement this quarter, anything you can provide for that?.

Edwin, if you look at the first half of the year, our mainstream sales year-over-year were up $8 million. Last quarter, we basically had the full effect of Chinese New Year’s embedded in Q2, so we see that as a temporary, not a permanent phenomenon..

I see, so some seasonality, okay that’s helpful. Peter, since you’re answering, so I have a question regarding the kind of the memory foundry opportunity you guys are seeing, right, we saw a few of these Taiwan customers to expect to more specialty memory using licensed technology from your partner or your JV partner there.

I was wondering where we are on that opportunity, do we expect to start seeing revenue from those and how meaningful do you expect that to become?.

Yeah, where that stands for us today, for example, what I would almost call it legacy now. I mean we have business at foundry memory for what is legacy. We’ll call it 80 Series technology which is 35-nanometers in Taiwan.

I think that it’s common knowledge that power chip is right now working on ramping what we call 90 Series which is 25-nanometer and you just broke ground for a 100 Series which is 20-nanometer. So today its legacy business and the ramps we expect to see for 25 and 100 are 2016 event.

So it’s actually beyond any of the remarks that I alluded to in the script..

I see, okay that’s helpful.

So basically these guys are moving down the technology curve and that’s how you should expect to see some incremental benefit from that in 2016?.

That’s right and I think the other point that’s significant is the reticle intensity of foundry memory is two to three times that on a memory revenue dollar of normal high volume memory, because the product runs tend to be much smaller.

So, it’s striking as it might be a customer like power chip could have reticle revenues approaching a customer like Inotera, even though they’re much smaller because of the reticle intensity of the foundry memory business..

Okay, great. One last question and I’ll let the other guys ask. I think the midpoint of guidance kind of implied that either your costs go up or your margin is coming in a little bit.

Am I understanding this correctly?.

We did mention, Edwin that we expect our depreciation cost to increase as tools come online, so that’s a factor. We did have a number of tools during this past quarter come offline and we have projected some of the tools coming sooner. So it’s just a timing issue, there is no other cost increases basically built in with the model..

Great that’s all I have, thank you. Appreciate it..

Thanks Edwin..

The next question comes from Patrick Ho with Stifel Nicolaus..

Thank you very much and also congratulations on the nice quarter. Peter, maybe first off in terms of the mix ahead for 3Q.

How do you see high-end IC? Do you see similar mix or do you see shifts in terms of logic and memory for the current quarter?.

You know, really, the 20-nanometer DRAM has pegged the business at a higher level where we are presently sitting. One of the interesting things about last quarter was that high-end logic was almost flat quarter-over-quarter. There was a mix shift from 28 to 14.

We don’t see that as being permanent so next quarter, particularly if we reach the high-end of our guidance we’d expect that growth in the revenues would come from logic. Harder to call whether it’s going to be 28 or 14. If I had to guess I would guess that 28 is going to be sequentially up..

Great that’s helpful. And maybe Sean, in terms of the capacity that you have online you’ve mentioned in the past about the flexibility to shift capacity depending on regions of the demand.

Have you seen any shifts over the past few quarters as necessitated these type of changes or has it been pretty much where you’ve expected I guess where you placed a new high-end capacity?.

I think it’s been as expected and perhaps I’ll have Chris allude to that but we’re set up pretty well in Boise, in Taiwan and in Korea for leading edge or high-end logic and memory, and we’re putting the precision tools FPD tool online this quarter in Korea.

So we believe the choices that the team has made where to deploy the capital has going to be continue to prove fruitful for us as we move forward.

Chris do you have any color?.

No, not too much more to add. I’ll just say we have a good amount of qualified capacity. The other thing we’re doing Patrick is matching capacity across sites particularly at the high-end riders, so we can move work around a little more effectively and not impact cycle time that helps us on our global utilization of our high-end tools.

So we think we’re in good shape with capacity and also with qualified capacity and intersite matching as well..

Great and a final question for me, with a lot of different leading edge opportunities particularly IC for whether it’s DRAM, as you mentioned NAND and logic, how are the qualification time for customers? Do they become a little more extended or are they still at the normal kind of track rates you guys have seen in the past in terms of the qualifications?.

This is Chris. Yeah, Patrick, we’re not seeing big trends in those getting shorter or longer. They’re still taking a good amount of time but actually it varies pretty widely.

If for example, we’re matching to an existing process say at a captive things can go a little bit more quickly because we have a cooperative situation there and we can get qualified, a little more rapidly.

If we’re doing process of record type development and collaboration with a new customer that tends to take a little bit longer because the customer themselves are also kind of finding their way on process technologies, but they are long complicated calls but I’d say that’s not stretching out.

It’s still three, six months on the short side, it could be a year or longer on the long side, so it’s a wide gap and it really depends on the scenario..

Great. Thank you very much..

Yeah, one thing I want to add to Chris’ comment because I think he is being a little too modest. As we’re emerging as the technology leader, we have a higher number of qualifications under way now where the customer doesn’t have an internal captive.

And as Chris did say, those take longer because they’re trying to “find their way” so we’re actively engaged and Chris is leading that activity with higher number of non-captive customers, which we need to be as the industry leader..

Great, thank you very much..

Thanks, Patrick..

[Operator Instructions] Our next question comes from Tom Diffely with D.A. Davidson..

Yes, good morning.

So when you look at the four or five big drivers you have for revenue going forward, I was wondering if you could look at the differences between them and maybe give us a feel for what you think are the biggest drivers this year and then what are the biggest drivers on a long-term basis and these are the 20-nanometer ramp in Taiwan, 14-nanometer in Korea, flat-panel and the memory.

So just between those drivers, what are kind of the near-term versus the long term opportunities?.

Well I think Tom, starting with FPD, that one is right in front of us. And we’re, we work – the Korean team did a very good job in getting those tools installed without as you saw in the quarter disruption to revenue that’s not easy because there is a disruption in the clean room. So the high-end, the Next Generation of capacity is installed.

We’re qualifying customers and there’s a lot of market suction for that capability which is capacity too but it’s the next wave for the FPD industry. So that one is as soon as we’re qualified literally which we expect to complete maybe mid quarter, we expect to load that capability quickly, so that one is here..

Is that with the expenses of some of the older tools though?.

It really isn’t, because if you look at our revenues in the FPD space, we’ve been basically flat because we’re capacity constrained but we didn’t want to add capacity when we saw new capability really right on the horizon. So we waited to add capacity in the FPD space until the Next Generation of capability was available to be purchased.

And that also fits with our largest customer there historically has been Samsung, and they’ve just installed and ramped or are ramping a new line based on the Next Generation of lithography and FPD.

So they have new steppers, they have enhanced resolution, and we’re the first whether it’d be merchant or captive to bring mass to that market that can really exploit the capability of that new tool set for AMOLED in particular.

So, as you know right, we try to time our capacity to market need and I think in this case we got it exactly right, so that’s right in front of us. And then stepping back from that, it’s quite hard to predict exactly which IC driver impacts a quarter, DRAM is well in hand and we’re comfortable with it.

It’s engaged right, the gears are spinning and it puts the business at a different revenue level. As far as the other transitions are concerned, 14-nanometer clicked up nicely for us in the quarter but surprisingly 28 clicked down and it was no loss of market share I assure you that.

With the advanced IC nodes we’re now in a realm where our customers are struggling with yields and as they make progress, they order more radicals and as they step backwards, they order fewer. So, the key for us is we have a lot of drivers and they’re all sort of saw toothed in the IC space and they’re all pointed upwards.

So I think over a quarter we can expect to see an up lift but it’s very difficult to predict exactly where it’s going to come from because it’s really gated by wafer yield..

All right, and then when you look at the mainstream business being a little bit softer than normal, at what point do you think that business stabilizes and starts to grow with the whole internet of things transition we expect over the next few years?.

Yes, well as I said, the mainstream for the first six months is up $8 million year-over-year, and we continue to see that the price of finished eight inch wafers rise.

So,we are pretty bullish on the mainstream market, so what we saw this quarter we see as temporary, we don’t see it as permanent and again I’ll just say year-over-year our mainstream business is performing well..

And then Sean, when you look at the R&D line, it sounds like there is more qualifications going on.

Would you expect the R&D line to grow over the next few quarters with these engagements?.

Tom, it’s hard to say, but I don’t think – I think this past quarter was the high R&D line or amount that we’ve had in long time and I don’t think it’ll go much higher than that. But I think as we turn some of these tools on those costs will come down. So, I don’t think so, I think it’ll get back to a more normalized level..

Okay.

And then when you look at the qualifications of 14-nanometer FinFET, if you have to qualify a second customer with the same process, is that a quicker procedure qualification timeframe? Or because it’s a new customer, does that still take an equally long period of time?.

If it’s a similar, Tom, if we can use a similar mass process, it’s definitely quicker. It doesn’t mean its fast but for sure it’s quicker because we can come in with a initial data set, initial processes that are qualified at a different customer.

We do some modifications to those in all cases and very few of these processes are plug-and-play for multiple customers. But if it is a modification of an existing process flow, it’s definitely faster and more cost-effective to do the next call..

Great.

And then Sean, when you look at just overall capacity, can you quantify that on a quarterly basis or you had $150 million quarterly run rate with capacity? Obviously, it’s mix-dependent, but is there some kind of a rule of thumb within that?.

Yes, Tom, depending upon the mix, we certainly can do in excess of a $150 million.

We want to also be careful about giving too much detail to the outside world with respect to our competition, but we certainly have the high-end FPD tool comes online and the leading-edge litho tools that we already have in place and the call activity, we’re very optimistic about our ability to grow the top line..

Okay. And it sounds like in the out-year, you expect CapEx to come down after the kind of a high level this year.

So, would you need to see revving our business above that $150 million mark to be more aggressive on CapEx for the out-year versus current expectations?.

We did at our analyst meeting that we did expect, as of right now, our 2016 CapEx to come down in comparison to what we spent this year. If we do see an opportunity and depending upon the mix to increase that because we want to grow the top line even more and we have a customer engagement, we will do so.

But we haven’t had any firm plans as of yet for 2016..

Okay.

And then finally, what is your cash CapEx to-date so far this year? Out of the $110 million, what did you spend so far?.

Just bear with me one second. Within our cash flow statement, $68 million..

Right. Okay. Thank you..

Thank you..

Well, ladies and gentlemen, there are no further questions at this time..

Okay. Thank you, everyone for participating in this morning’s call..

We thank you for your participation and ask that you disconnect your lines..