Troy Dewar - Director, Investor Relations Peter Kirlin - Chief Executive Officer Sean Smith - Senior Vice President and Chief Financial Officer Chris Progler - Vice President, Chief Technology Officer and Strategic Planning.

Edwin Mok - Needham William Stein - SunTrust Tom Diffely - D.A. Davidson Patrick Ho - Stifel Nicolaus.

Good day, ladies and gentlemen and thank you for standing by. Welcome to the Photronics First Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

[Operator Instructions] As a reminder, this conference call is being recorded, Wednesday, February 15, 2017. I would now like to turn the call over to Troy Dewar, Director of Investor Relations. Please go ahead..

Thank you, Shawn. Good morning, everyone. Welcome to our review of Photronics 2017 first quarter financial results. Joining me this morning are Dr. Peter Kirlin, Chief Executive Officer; Sean T. Smith, Senior Vice President and Chief Financial Officer; and Dr. Chris Progler, Vice President, Chief Technology Officer and Strategic Planning.

The press release we issued this morning, along with the presentation materials, which accompanies our remarks, are available on the Investor Relations section of our webpage. Comments made by any participant on today’s call may include forward-looking statements that include such words as anticipate, believe, estimate, expect, forecast.

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.

Finally 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 our 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 Peter..

Thank you, Troy and good morning everyone. First quarter sales improved from the previous quarter, as an increase in IC sales was partially offset by a lower FPD demand and high-end IC both logic and memory contribute to improve sales with US and Taiwan being the strongest region. Mainstream IC was strong in all regions, despite seasonal headwinds.

FPD high-end sales improved, particularly in Korea, while mainstream demand softened s as customers are focused on volume production of existing display, reducing demand for new masks. Operating profit also improved over last quarter, held by growing sales, operating leverage and a reduction R&D expense.

As an organization, we are deeply committed to controlling costs when sales are declining, but also in sales are increasing, this enhances competitiveness while maximizing profitability and cash flow for our shareholders.

All with improved profitability, operating cash flow was positive with increase in our net cash position, which is important given the number of strategic investments we are making.

Furthermore, the core end of our balance sheet provides us with flexibility, explore strategic growth opportunities in a market that is consolidating at both the supplier and customer levels.

Finally, despite reduced R&D spending, we kicked off a multiyear EUV strategic partnership with a key customer in Q1, which includes, joint technology development, as well as commercial radical supply, we - that we are the merchant market leader in EUV and we have taken the steps to better prepare for potential EUV commercialization at the 7 and or 5 nanometer nodes.

Looking forward in the second quarter, we see mix demand environment. On a positive side, we expect the underlying markets for mainstream IC to continue to exhibit healthy demand trends.

For high-end IC we expect memory demand to improve, whereas high-end logic, particularly 28 nanometer will likely be down as result of additional capacity coming online for a leading foundry with no merchant photomask demand. For FPD we anticipate relatively flat demand before orders for new AMOLED displays begin to ramp at quarter end.

Should our topline improve, we should see margin expansion leveraging our operating model. On the next quarter, we expect to see high-end growth in the second half of the year from the memory side demand should come from at least the next generation of 3D NAND and the transition of foundry memory 2X DRAM.

As a leading merchant mask producer, with the technology we needed by key IDM, as well as the majority of the memory foundries, we are well positioned to benefit from these ramps. In logic, our largest IC customer is working hard to expand their 14 and 28 nanometer production, including a new manufacturing facility in China.

We are the required and are technology and are pleased to meet their photomask need. As a successful increase production for leading-edge nodes, it should drive additional demand for our masks.

Finally, we are expecting meaningful FPD growth in the second half the year with the technology inflection from LCD to AMOLED and other advanced displays accelerating. We will soon receive the first of our new FPD list of tools to increase capacity and expect installation to begin in the third quarter.

This should allow us to grow as industry demand for these advanced displays begins to accelerate.

Longer term, there are several factors that we see is attractive growth drivers for 2018 and beyond, and to in particular technology inflection currently underway for FPD, as downward streams become more prevalent in smartphones and the broad based semiconductor industry investments presently underway in China.

We spoke at length over last several quarters regarding anticipated growth in AMOLED displays later this year as the percentage of smartphone, with this type of display growth.

In fact, over the next few years the penetration of AMOLED displays is more furnish [ph] to double While this is exciting, we believe there is only part of the story, migration to high-end and eventually mid range phones will play over the next several years.

Addition to smartphones, other consumer products were expected to adopt the technology, such as tablets, PCs and TVs. There is also potential for this technology display, where emerging applications, such as virtual-reality and automotive.

We appeared to be entering a super cycle for AMOLED and other advanced displays, with our technology leadership and customer relationships, we are positioned to grow with this industry over the long-term. Shifting our focus to China.

By now I am sure you all are aware of the tremendous amount of investment currently underway to expand semiconductor manufacturing in that country. As an example, going to semi, more than 40% for front end semiconductor fabs is scheduled to begin operation between 2017 and 2020 are in China.

Even if we assume a small portion of the plants facilities will be delayed or canceled, this is still a significant amount of growth targeted in one country. Last year we announced $160 million investment over 5 years to build a state-of-the-art facility in Xiamen, China to build IC photomasks.

We will break ground on this facility later this month and expect to begin production by the end of 2018.

Additionally, we have balance sheet that is able to fund organic growth plans, as well as explore strategic M&A that is targeted to consolidating our current markets or extending in adjacent markets that provide synergies and touch points with our proven operating model, technology leadership, outstanding customer service and remain a low cost producer.

I really like the current direction of the company, the near-term demand is showing signs of improvement, and we have additional capacity coming online in the next few quarters to take full advantage of the technology inflection in FPD.

Beyond that we are investing in China and have installed balance sheet to fund these growth initiatives and explore strategic M&A.

Before turning the call over to Sean to provide more detail on our first quarter results and second quarter guidance, we'll like to thank all our employees for their hard work and commitment to improving our company in Q1.

Sean?.

Thanks, Peter and good morning, everyone. First quarter sales improved 2% sequentially, as the increase in IC sales was partially offset by lower FPD demand. IT sales were up 5% with growth being achieved to both high-end and mainstream. High-end growth was primarily in the US and Taiwan, with logic and memory both contributing to the increase.

Mainstream sales increased quarter-over-quarter, which is noteworthy, given the seasonal headwinds we typically face during the first quarter.

FPD sales grew 7% quarter-over-quarter, as an increase in high-end sales was not enough to offset the lower demand for mainstream mask, as our customers focused on producing current product displays, limiting their releases of new mask production.

We think this is a short-term phenomena and anticipate demand as Peter stated, starting to improve later this year with an increase in orders beginning to ramp by the end of the second half of the year in anticipation new AMOLED displays and smartphone.

Last year we announced an additional investment in FPD capacity, which we plan to install in the second half the year. Our new tools will allow us to begin growth – to begin production sometime in the third quarter.

This is a slight delay from our original plan and as we have pushed out the schedule to better align with the current supply and demand dynamics of the market. We are still confident on growing demand in the second half of the year and believe these in-tools set - should set us up to benefit from this trend.

On a year-over-year comparison, both IC and FPD were down significantly, as a result of high-end business which was exceptionally strong during the first quarter 2016. However, our gross margin improved sequentially due to higher sales and lower manufacturing cost and mix.

‘ Operating expenses were also lower by approximately 900k, primarily as a result of lower R&D expenses offset by increased SG&A expenses. As a result our operating margin improved to 7.9%.

Net income was $1.9 million or $0.03 per share and it does include $2.1 million of other expense primarily related to foreign exchange loss as a result of US dollar, and Japanese yen weakened as compared to our foreign sites currencies during the quarter.

Minority interest expense increased by $1.3 million during the quarter, as our JV in Taiwan was more profitable for the quarter, on a sequential base. Just want to remind you also recall in our fourth quarter earnings of $0.08 per share included non-recurring tax benefit of approximately $0.03 per share.

EBITDA was $29 million during the quarter and on a trailing 12 month basis is $129 million. Operating cash generation was $32 million during the quarter and we spent approximately $10 million on CapEx. As a result, our cash balance here is now $330 million with net cash improvement $264 million.

Based on our latest projections, we anticipate spending $80 million to $100 million in CapEx this year, including the balance of our FPD investment in $20 million to $30 million towards our China IC investment. This is a little lower than our previous projections, as we now believe some of our cash flow will occur in 2018 instead of 2007.

We continue to explore areas to increase the amount of deployed capital using China which we have effectively reducing our cash flow - outflows for investments in future years. Before providing second quarter guidance, I would just like to remind everyone that our visibility is always limited, as our backlog is typically one to two weeks.

Also, demand for some of our products is inherent lumpy and difficult to predict. Finally, our high-end business has grown, ASP for these masks are higher and relatively a fewer number of high-end orders can have a significant impact on our sales for the quarter.

Given these caveats, we expect second quarter sales to be in the range $105 million to $115 million. This range assumes improved mainstream IC sales, mixing with high-end IC and FPD - flat fee sales, with orders for new AMOLED displays ramping at the end of the quarter.

Based on this revenue expectation and our current operating model, we estimate earnings for the second quarter to be in the range of $0.01 to $0.07 per share. 2017 is starting off on a good note, and we are cautiously optimistic that we will continue to achieve sequential growth throughout the balance of the year.

We believe we have tremendous opportunity to build on our market and technology leadership, as well as we continue to explore ways, ease our balance sheet to produce sustainable, profitable growth. Thank you for your interest. I will now turn the call over to the operator for questions..

Thank you. [Operator Instructions] Our first question comes from the line of Edwin Mok from Needham. Your line is now open..

Great. Thanks for taking my question.

So first question I have on the guidance, you mentioned kind of mix outlook for the high-end IC side, just curious, you know, what is driving the weakness in the logic side, and based on your commentary I assume that you know, the weakness in logic is awaiting the improvement in the high-end memory, is that correct?.

Yes. We do in the coming quarter expect high-end memory to be up, it was up in the prior quarter sequentially. For memory markets it’s looking you know, quite good to us. As far as logic goes, the quarter started out – our Q1 started out, they are pretty strong in Taiwan.

Moving into the calendar year here in January, there is a very large foundry that brought incremental 28 nanometer capacity online in January, at the same time, they reduced silicon wafer pricing.

And what that is done is creating a – it’s created a dislocation through the 28 nanometer business and the foundry market and of course there is been a competitive response now by our customers. But until the market settles we've seen a drop in PayPal [ph].

So we right now is unsure – we're unsure exactly how quickly the market you know, reallocates the demand again, given that dislocation. And that was how we expected, it’s never happen in my career before with this particular company. Thought I am speaking about to tell you, at the end my two notice board [ph] brought more capacity online.

But I think the good news in all of that is it clearly demonstrates that the 20 nanometer nodes has more legs than anyone you know, might imagine. So that’s what happened and you know, situation that is dynamic..

Okay, great. That's helpful color there. On the investment side, I guess two questions, right.

First is, it sounds like you guys pushed out FPD tool in installation by [indiscernible] mentioned just because the demand - market demand is a little weaker so you don’t follow with that factors, is that the only reason, is that - do have any issue getting the equipment in place and are you still expecting to start - that to start contributing revenue of fiscal third quarter? That’s the first one.

And second thing, simply, are you pushing all the China investment as well, because you now guide for lower number?.

As far as FPD goes, you know, since we ordered that equipment more than a year ago, there is been a lot of dynamic change, not in AMOLED, but in the LCD market.

You know, almost every quarter for the last three quarters running, there's been significant news that change the demand profile for new devices, first in 42 inch displays and 21 inch and smaller displays and last quarter with Foxconn [ph] basically announcing they were not going to supply their panels and either TV makers to create yet another shift in demand.

So when we look at our FPD business right now we are not running at full capacity and the additions as you might remember are not technology, they are capacity. So as we always do we try to stage you know, additional CapEx with demand, so that we can maximize the return on investment. So, we're right now and operating at full capacity.

So we pushed out delivery, so it's timed with demand. As far as China goes, we have not changed our investment plans there at all, we are running to the plan we set when we made the announcement late last summer..

Okay, great. Last question I have, I think Peter you mentioned, you expect the super cycle which is always awards for that AMOLED space, you know, based on kind of your commentary it sounds like in second half you expect stronger demand from that side of the market and probably benefiting you guys.

Just curious are you seeing that mostly from very concentrated one or two customer or you starting to even start to have potential custom in China or starting to you know, talking to them and you expect to generate revenue from those customers too or is this to more [indiscernible] from the top one or two customer in that space?.

There is – it depends on whose numbers you want to look at and I use the word AMOLED, and other advanced displays, I would AMOLED and OLED and maybe even you know, Samsung, you know, Quantum Dot displays into the general bucket of nine LCD technology, new display technology.

If you look at that most market forecasters, have growth rates in excess of 30% for the next several years in front of us and right now there is - there is business developing outside of Korea in that general category of advanced displays.

We have a sales guy right now meeting with the customer you know, try and do generate their first orders in China for advanced display products. So we see this phenomenon as being prevalent in literally all markets where displays are built and fabricated..

Okay, great. That’s all I have. Thank you. Appreciate it..

Thanks, Edwin..

Thank you. Our next question comes from the line of Stephen Chin from UBS. Your line is now open..

Hey, guys. This is Neon for Stephen. Thank you for taking my question.

So following up on the AMOLED display outlook for the second quarter, you mentioned orders starting to ramp in the second quarter and strengthened in the second half of the year, without really try to forecast a number can you maybe describe the magnitude that we should see in the increase to more of an incremental or more of a step up function?.

Chris?.

You want me to take that one, yes, sure.

So the question was AMOLED, whether there is going to be kind of step function increase or gradually ramping over next couple of quarters and you know, there is one significant product driver for AMOLED over the next two quarters, which you are aware of, one of the variance of the Apple phone, so that’s going to obviously push a pretty large spike in demand.

But just to amplify Peter's point, we see a lot of companies now looking at AMOLED for a variety of different sorts of products. So it’s kind of a prototyping product demo phase going on now. So I don't think we can be specific to say you know, is it going to step up significantly one quarter versus others.

But I think the forecast would suggest a pretty strong and fairly rapid ramp on the AMOLED side. But I wouldn’t be comfortable to break it down by quarter..

Yes. Just to add to Chris's point, we don’t for competitive reasons, don’t breakout our FPD sales, so – but I would agree with what Chris said, and what Peter said, that we do expect it to ramp up..

Okay, thanks. I appreciate that. And then as a follow-up, looking further into 2017 from a semi cap companies have been pretty positive on the logic and bands, including a relative increase in DRAM for 2017.

Can you talk about how that factors into your outlook for IC photomask?.

Yes, we certainly – on the memory side of our business, we are now saying what I would describe as the increased activity before I know, really starts to ramp. So what you see is you know, reached in of certain levels in pilot you know line, radical sets to improve yield or as a result of the design change.

So in treating NAND we're seeing you know, that kind of activity at the present time. And we're also starting to see last quarter, we start to see the very first tape outs of the 20 - 2X nanometer foundry, DRAM foundry business. So we're very bullish on – we'll see in memory over coming several quarters.

As far as logic goes, we're - I think we're positioned well where we need to be with all our customers. For us it really - the demand we'll see is really a function of how well our customers do competing with the 800 pound gorilla, because it’s clear that the 28 nanometer node, there is tremendous demand for it.

There's more and more demand for 14, but really for us, you know, is competitive struggle our customers have with one company and our business is directly hitched to how successful they happen to be..

Thanks..

Thank you. Our next question comes from the line of William Stein from SunTrust. Your line is now open..

Great. Thanks for taking my question.

Guys I just want to make sure I understand, I think the previous guidance on CapEx was $100 million for the year, now its 80 to a 100, and I think you cited push outs in production for FPD, does that relate to ramps in AMOLED that you now expect the timing to be pushed out or is it that – or is it some other factor?.

I'm sorry I just didn’t understand this?.

I don't think it does, well, its – the AMOLED, the FPD tools are coming in this fiscal year, I think some of the timing related to some of the investors as we paid for is pushed out, but its not related to FPD at all. The other question I answered it, its not related to our plans in China either.

But if you look at the revenue, revenue level we're running at now, our core business does not require any additional capital investment. So you know, again, we are very focused on making sure that we only - that we spend what we need to spend to put ourselves in a competitive positions we need to be to maximize our market share.

But we don't spend because we have a planned spend. So the adjustments you are seeing in our CapEx plans related to the overall tone of our business is not related to our strategic initiative any way, shape, form or fashion..

So one other follow-up, the ramp at the big handset customer that you already cited, it sounds like there's no meaningful concern that that won't ramp, that’s still on track to deliver some revenue in the current quarter and then I assume it will grow after that.

And then maybe just one question connected to that, I would assume that the expectation is that that ramps not only in fiscal '17, but then in fiscal '18 as more SKUs are added and so overall volumes required to produce rides [ph] is that correct?.

Yes, that’s correct. We can't make any and wouldn’t make any commentary about the plans to that customer, if you read the popular press, ones in a year always there will be actually two generations released in September, will be the 7x generation, which is – and there will be the 8, but there will only be one, that's what a lot of people think.

But normally when there is - when there's a name, there is a companion, and when is that companion going to release, so who knows, but I don't think it will be following September.

So we very much expect to see demand step up for September, but there's probably another product release somewhere between this September and next that would create additional demand for that customer alone.

And you know, Chris and I made other comments about other handset makers trying to push this new technology into their high-end products, which is an addition and above what I just discussed..

Great. That's helpful. Thank you..

Thank you. Our next question comes from the line of Tom Diffely from D.A. Davidson. Your line is now open..

Yes, good morning. So maybe just a quick follow-up to that, it seems like the main driver of the AMOLED, that timeframe hasn't changed.

So I'm just curious what you think drove the timing for your business to be pushed out a little bit and the end market seem to be pretty stable?.

Yes, we don’t see our business being pushed out in the advanced or display arena. The business is low right now, relative to what we expected a year ago is in the LCD.

That's where the softness sits, and it's a result of a large - it’s a result of the actions of one or two large customers making decisions about whether they want to stay in the market or not, and the capacity that would generate a lot of new products in the LCD space and yet to come online in China.

So the advanced display market is healthy and good, basically there isn’t any difference than we expected. But where the market has softened is in the standard display arena and given that we don't need the capacity as soon as we thought we would. So we've stepped to be you know coincident with the market..

Okay.

So it sounds like the new tools that you're getting, you have existing capacity to assume the high-end space for AMOLED and the additional tools were just for additional capacity, not additional capabilities?.

That’s correct. We – our investments were to balance our lives and I think we mentioned there was two steps before we said that in our capacity addition. And so we will work them into the business. So as the demand that we see in front of us you know ramp, because our objective is to fill those tools as quickly as we can once they are delivered. So….

Okay….

Yes, that’s what we plan to do..

Okay, that makes sense.

And then I was just a little unclear on the high-end logic side, is that like you said UMC was adding some extra capacity that hit the pricing and that's somehow lower the demand, I didn't quite catch the logic there?.

No, I wasn't referring to UMC, I was referring to 100 pound gorilla capacity..

Okay..

I don't know whether that’s new, or whether it was repurposed, but that capacity addition, and attached with that is you know, along with it came a price reduction in the silicon and silicon pricing and that caused market share shift..

Okay.

So those customer you are lined with lots a little share, perhaps and then cost you a little bit of business?.

Yes, that’s correct, but I think it affected more than just one of our customers..

Okay. All right. And then Sean, I don't have moral summary right now, but it sound like the revenues went up, margins went up and net income went down, was that strictly just because most of the increase in revenue was driven out of the your joint venture where you share the profits or were just something else….

Yes, Tom, actually our operating margin - growth in operating margins went up and we did – I think in my prepared remarks, we did say we had a foreign currency issue – issue but unfavorable….

Okay….

And last question, if you remember we had a favorable tax adjustment. So from an operating perspective, everything improved..

Okay. All right. And then when you look out to China, it sounds like you are expecting a new facility to come online in the second half of '18.

What is your view for growth in China over the next year that I assume you'll see a lot of other locations?.

Yes, we are presently serving the China market out of primarily three locations, Taiwan or nanoFab and or our facility in Korea. Its right now is a market that is – that’s in a growth mode and you know, we're working hard to develop the business there with what we feel is an unfair competitive advantage because we're going to be locating there.

So we'll do our best to maximize our market share with our existing manufacturing footprint so our new facility ramps..

Okay. Thank you..

Thanks, Tom..

Thank you. [Operator Instructions] Our next question comes from the line of Patrick Ho from Stifel Nicolaus. Your line is now open..

Thank you very much.

Just first clarification on some of the comments you made regarding the new capacity additions on the display side of things, am I right to take away from it that the new capacity that you're putting in place in the third quarter of your fiscal year is related to LCD or is it kind of just swing capacity that could also be used for AMOLED if that demand tends to be higher than you are currently forecasting?.

Yes, the capacity that’s gone, or that we're installing can be used for either high-end LCD or AMOLED it’s either or, it's not capability, it is limited to one product type..

Okay. That helps.

And maybe as a second follow-up questions for either yourself, Peter or Chris, AMOLED is a little bit of a different process from your traditional LCD, are there any different lead times, do you get better visibility with AMOLED or you know, is the process still close enough to the LCD where it's the same kind of lead times that you previously have gotten?.

Thanks, Patrick. This is Chris. It is a different process. It’s certainly more complicated from a photomask and lithography perspective. The lead times in terms of order volume that sort of thing, there are fewer products, so to some extent tends to be easier to forecast.

But I don't think it's fundamentally different AMOLED versus LCD in terms of lead time. But the process time is longer for both the panel maker and the masks and there are fewer products, but aside from that I don’t see a fundamental difference between those two..

Great. And then final questions for me, and maybe for Sean, you guys did a really good job on the OpEx once again, R&D came in a lot lower than expected.

Is that a sustainable rate or you know, was that kind of an anomaly quarter you see kind of trend back to some more normalized levels as the year progresses?.

Maybe I'll let Chris talk about that..

Sure. I can comment on that Patrick. And partly the step down was due to we completed a fairly large long-duration 14 nanometer qualification project, so that kind of stepped it down to kind of breather to some extent on the particular work for that particular customer. We have three or four other things that are in the pipeline.

Peter, mentioned we're doing a little more R&D on the EUV side, 710 nanometer logic in the next node of memory. As we enter into qualifications on those they tend to be R&D mask intensive and I think you will see the R&D spend go up to more historical level.

So I don't think it - we would not classify it as a trend, more of a cyclical or a recycle, R&D cycle sort of step down..

Great. Thank you very much..

Thanks, Patrick..

Thank you. Our next question comes from the line of Tom Diffely from D.A. Davidson. Your line is now open..

Yes, just a quick follow-up on that one, Chris when you look at EUV because its mirror [ph] based instead of lens-based going forward, is that a completely new set of tools for you guys, as well?.

It's not completely new, Tom, but there are a few tools that are EUV specific. For the most part we've developed workarounds for those tools, particularly for early production and development on EUV. So we don't see it driving significant CapEx in the early stages.

If EUV goes into full mass production, there could be some incremental CapEx associated with it. But generally we worked hard and interacted with our customers to develop workarounds for a lot of the EUV specific tools and it seems to be very effective approach. So the incremental CapEx is modest right now to cover the EUV products we want to supply..

Okay.

And it sounds like you've bee on different consortiums on EUV for several years and is this partnership new then and its very customer specific?.

It is new and it is very customer specific.

So generally you know, among the - all the customers we interact with an EUV, the tone is shifting a little bit from development to production readiness and this particular partnership is kind of geared towards that sort of trajectory, moving a little bit of pilot and starting to anticipate potential production usage.

So it's a multiyear agreement and it is connected to specific devices, as opposed to engineering grade, R&D masks..

Okay, great. That’s very helpful..

Thank you. Ladies and gentlemen, there are no further questions at this time. I would now like to turn the call over to Peter Kirlin for closing comments..

Okay. Thank you once again for joining us this morning. We are encouraged by the start of 2017 and our optimistic that we have the opportunity to invest and grow our business throughout the year. As we complete our FPD investment, and begin our China IC investment.

This is a very exciting time for Photronics and I look forward to updating you as we move forward..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect..