Ladies and gentlemen, thank you for standing by, and welcome to the Photronics Q4 Fiscal Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer session.

[Operator Instructions] Please be advised that today’s conference is being recorded, Wednesday, December 9, 2020. [Operator Instructions] I would now like to hand the conference over to Troy Dewar, Vice President of Investor Relations..

Thank you, Jimmy. Good morning everyone. Welcome to our review of Photronics 2020 fourth quarter financial results. Joining me this morning are Peter Kirlin, our Chief Executive Officer; John Jordan, our Chief Financial Officer; and Chris Progler, our Chief Technology Officer.

The press release we issued earlier this morning, along with the presentation material which accompanies our remarks, are available on the Investors 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, 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.

Lastly, before turning the call over to Peter, I invite you all to join us next Monday, December 14, at 10:00 a.m. Eastern for our 2020 Investor Analyst Day. The event, which will be webcast, will include an update on our long-term strategy and outlook. More details are available on our website, where you may contact me with any questions.

At this time, I will turn the call over to Peter..

Thank you, Troy, and good morning, everyone. Despite operating in a very challenging environment, full year revenue in 2020 was $610 million, the highest ever in the third consecutive year of record revenue. FPD achieved record revenue for the second year in a row, surpassing last year's record level total by an eye-popping 32%.

IC revenue in 2020 was the second highest ever, just shy of a record established in 2015. We also achieved record revenue products shipped to customers in China on a consolidated basis as well as for both IC and FPD. It was a great year for Photronics, the achievement of many significant milestones.

For the fourth quarter, revenue was lower as typical seasonality was worsened by geopolitical factors, primarily in FPD, where mobile display demand was constrained by U.S. trade sanctions against Huawei. In IC, we saw strengthening trends among some logic/foundry customers, in the U.S. and Asia. However, memory demand was weaker.

With a combination of these factors, our revenue was down 5% sequentially. With the quarterly decrease in revenue and the high amount of operating leverage in our business, we saw a contraction in profit margin.

Operating expenses stayed under control as we maintain cost discipline in the midst of challenging circumstances thus we're able to deliver $0.10 in diluted earnings per share. We ended the year with $279 million in cash, an increase of $72 million from last year.

This was accomplished even as we spent $71 million on CapEx, investing in future growth, and $34 million on share repurchases, returning cash to our shareholders. I believe these achievements demonstrate that our investment strategy is working, and we are on the path to improving long-term shareholder returns.

Looking back on 2020, the challenges we faced were unlike any in my 35-year career, primarily among them were significant supply chain and customer design team disruption, as governments around the world place restrictions on travel, working conditions and commercial activity to limit the spread of the coronavirus.

In addition, trade restrictions implemented by the U.S. federal government against certain companies in China create their own set of market dislocations. Fortunately, with the development and approval of effective vaccines, and the expected impact of the U.S. election results, it appears these challenges will diminish as we move through 2021.

Regards to the 2020 challenges, I am proud of the way our team responded. They work tremendously hard to take care of our customers and win every opportunity in the market. Due to their efforts, we achieved record revenue, and I'm confident that we have gained market share.

Our 2020 revenue came within just a few percentage points of the target we set three years ago. While we formally rescinded the $630 million gold in May during the higher the COVID driven market uncertainty, we continue to chase this target to maximize our growth.

There are no moral victories, and we recognize there is room for improvement, but I am really proud of our performance. Further, I like our position in the market and the long-term outlook for our business. Next week, we will host an Investor Day, let me preview some of the key points we will discuss during that event.

Photronics represents a compelling investment thesis. We are the largest merchant photomask manufacturer with 11 global facilities. Something none of our competitors can match.

We invest in technology to align our operations with secular market trends, such as the industry's geographic expansion into China, the growth of high-end display technologies, such as AMOLED for mobile applications and enabling of our customers' technology road map to continue introducing new semiconductor nodes and pursue the continuation of Moore's law.

We have invested in models that enables us to invest in growth, which expands our cash flow and strengthen our balance sheet, positioning us to consolidate our market or return cash to shareholders. We believe this will lead to greater shareholder returns.

We have performed well since our last Investor Day in 2018, delivering on main commitments we made then, such as constructing equipping staffing qualifying and ramping two new manufacturing facilities in China.

In addition, we have made further progress against our key initiatives to diversify our business by growing our China revenue, increasing our share of business with customers that have kept in niche shops and increasing our sales of high-end products.

We've been able to do this despite the challenges in 2020, by staying true to our core competency, being a low-cost producer, employing operational excellence in everything we do, prioritizing customer intimacy to become our customers' trusted photomask partner and maintain technology leadership to ensure we can meet all of our customers' needs.

These attributes have served us well for over 50 years, and we remain committed to them heading into the future. Looking forward, we are increasingly optimistic regarding our long-term outlook and have positioned the business for sustained growth.

By delivering the right technology to the right customer at the right time, we intend to expand our leadership position. With plans to increase profit margins enhance cash generation; we expect to deliver even greater shareholder value. We have much more to say next week and I hope you can join us.

Before turning the call over to John to provide additional commentary on our performance and outlook, I would like to thank all the Photronics' employees for their commitment and hard work and wish all a wonderful holiday season.

John?.

Thank you, Peter. Good morning, everyone. As Peter mentioned, 2020 was a record revenue year. The year began on a run rate in Q1 well in excess of the $630 million target we set almost three years ago. And after the COVID related disruption in Q2, we recovered to a run rate still in excess of the target.

Q4 was again impacted by geopolitical influences when the trade sanctions against Huawei suppress the FPD business while that supply chain reset. Nonetheless, $610 million, fiscal year 2020 revenue exceeded the fiscal year 2019 record by 11% and set the third consecutive annual revenue record.

During fourth quarter, our business typically sees a slight seasonal decrease in demand, as the design cycle winds down from recent introductions of new consumer electronics products. Our fourth quarter decline revenue was exacerbated by pockets of softness in some sectors and a negative impact from U.S. trade sanctions against Huawei.

Revenue for the quarter was up 5% compared with last quarter and $0.04 compared with the same quarter last year. IC revenue was particularly strong in China has received a record level of product to customers there. Foundry, logic demand drove the increase as the region continued to be a healthy location for new design activity.

In other geographies, Korea and Taiwan also saw a good foundry logic demand and U.S. logic revenue benefited from an emergence of trusted supplier opportunities for defense applications. The area of weakness for high-end IC was memory, where recovery is not expected until sometime during 2021. FPD mask demand was negatively impacted by two factors.

First, as we discussed during our third quarter call, U.S. trade restrictions against Huawei having a dramatic impact on the China mobile supply chain. As Huawei was effectively prohibited from buying leading edge semiconductors, their ability to release new mobile phones is very limited.

That reduced their demand from new display panels, which reduced demand from masks from their panel producers.

That supply chain is in process of resetting to meet the demand aspect -- that supply chain is in process of resetting to meet the demand, especially in China, and we've seen the market move away from Huawei to other China mobile phone manufacturers.

Huawei recently sold their low end-to mid-price phone division to separate and insulate that business from the U.S. trade restrictions.

Since Huawei was one of the largest suppliers of smartphones by units, the ripple effect of these moves is being felt throughout the supply chain, excluding a meaningful effect on the mobile supply chain, and therefore, our business. As a result, our revenue for AMOLED mask sets was down 21%, sequentially.

The second display trend was the improving profitability of panel producers. Strong unit demand and higher pricing for TV and IT products created incentive for them to continue production runs of existing product to maximize short-term profit. That resulted in a delay of new design releases with driver of vast demand.

Thus, demand for LCD masks for G10.5 plus as well as smaller form factors was down for the quarter negatively impacting both the high end and mainstream revenue. Profit margins on the gross and operating line were lower due to the impact of operating leverage on the results.

Our continued focus on margin expansion should yield improved results next year as we complete the ramp of our IC Phase 1 investment in China and implement our next phase of FPD investment. We will elaborate more on our long-term margin targets during our investor event next Monday.

Below the operating line, other expense of $2.9 million included interest expense and a primarily unrealized effect of the re-measurement of U.S. dollar-denominated balance sheet items of our foreign subsidiaries.

Tax provision and non-controlling interests were in line with expectations, resulting in earnings of $0.10 per diluted share for the quarter. Our cash balance at the end of 2020 was $279 million, an increase of $72 million during the year and $18 million during the quarter.

Significant cash events during the quarter were $63 million generated from operating activities, $34 million of capital expenditures, $18 million returned to shareholders via share repurchases. We repurchased 1.7 million shares of photronic stock during the quarter and $13 million in net proceeds from debt.

We also paid $16 million in dividends to our Taiwan JV partner. Those dividends are generally contributed back to our China JV in future periods. Total CapEx in 2020 was $71 million, less than our $80 million target.

Next year, we forecast CapEx of about $100 million as we complete the Phase I investment in Xiamen and execute the next phase of our FPD investment in Asia. Our strong balance sheet has enabled us to invest in China and returned $79 million through share repurchases since 2018.

Looking forward, we have plotted a course that would generate sufficient cash from operations to continue to invest in organic growth and return cash to shareholders. In parallel, we will be actively open to M&A opportunities in the photomask space to extend our market and technology leadership, we will share more on Monday.

Before I provide first quarter guidance, I'll remind you that our visibility is always limited as our backlog is typically only one to three weeks and demand for some of our products is inherently uneven and difficult to predict.

Additionally, the ASPs for high-end mask sets are high and as this segment of the business grows a relatively low number of high-end orders can have a significant impact on our quarterly revenue and earnings.

Geopolitical risk related to government actions to address health concerns or trade policy may have an impact on our operations, the operations of our customers and suppliers or end market demand resulting in an adverse impact on our industry and therefore, our results.

I will also point out that our first quarter will have two more days than the fourth quarter. Given those caveats, we expect first quarter revenue to be in the range of $145 million to $155 million.

Underlying market demand in many sectors is healthy and improving, driven by trends in remote work and education, although geopolitical headwinds remain due to trade restrictions and government actions to limit travel and business activity. The midpoint of our guidance implies revenue essentially flat with Q4.

Based on our revenue expectation and our current operating model, we estimate earnings for the first quarter to be in the range of $0.07 to $0.14 per diluted share. 2020 was a challenging year, and it appears many of these challenges carried into 2021.

However, our workforce has responded well all around the globe, and we are in a solid position financially to be able to continue to invest in capabilities and technology to drive growth, while taking meaningful steps to improve profit margins and optimize returns.

Our initial outlook for fiscal year 2021 suggests that revenue growth will be high single-digit percent and the operating profit growth will be similar to the 23% growth we achieved in 2020. Again, please join us on Monday to learn more. I will now turn the call over to the operator for your questions..

[Operator Instructions] Our first question comes from Patrick Ho with Stifel. Your line is now open..

Maybe first off, Peter, in terms of the mainstream IC marketplace.

Can you just help reconcile a little bit of the commentary I've been getting in terms of high utilization rates for many market segments within the trailing edge geometries, and I guess just the kind of the mixed outlook you're talking about on that side of things?.

Yes.

So if you look at our mainstream business this year, Patrick, can you look at it at the 100,000 foot level, it's been pretty stable quarter-to-quarter, right? Revenues of high 60s, $67 million, $68 million, maybe that $70 million, if you peel back that remarkably stable trend, right, what has happened during the year is a rotation of the business from the U.S.

and Europe into primarily Taiwan and China. So our mainstream business is demand profile is shifting with, as I said, with the West seeing the market diminish with growth in the Far East. We think that rotation is more or less run its course, and we see upward demand in the foundry logic business in Asia. And we expect that to continue and strengthen.

Actually, as we move through next year and into the following year, so there's been a shift. We think the shift is more or less complete, and we're actually really bullish on the market opportunity in China and Taiwan. And you'll hear a bit more about that next week, but it's a clear target for us for growth..

Fair enough. And maybe as my follow-up question on the memory side of things. I concur that the current environment for most of the memory market continues to be soft. But at the same time, you do hear of the industry transitions, both in terms of DRAM as well as NAND towards next-generation devices.

Can you reconcile a little bit of typically the shift to next-generation nodes and layer counts, that's usually a positive driver for Photronics in terms of design wins.

Can you reconcile, I guess, a little of what's going on there versus some of the softness that you're seeing in the near term?.

Yes, it's interesting because, again, if you look at our IC business, year-to-year, we've had a lot of -- our business has been sold through right, this year, where we've had two -- we would describe as pretty healthy quarters by Q1 and Q3. And those quarters have been at about a $640 million run rate, which is great, but we've had Q2 and Q4.

Q2 was basically driven down into the high 500 on a run rate basis by COVID. And Q4 was driven to just slightly below $600 million by basically trade war impacts. So our business has been schizophrenic from, what I would describe as, strong and normal to profoundly influenced by external factory.

Through that, our memory, likewise, has been a sold through the year up and down. And the only real material trend you can see if you look year-over-year, our memory business is down, which I think reflects the overall state of the memory industry.

From the perspective of our customers, we're expecting our memory business to step up significantly next year, particularly as we get into the early spring. So, we see this as more or less where we are as near-term belly.

But we're optimistic, given what we see in the market for a rebound in the memory business and our particular customers have pretty aggressive plans for no transition next year, which is really, as you point out, what drives our revenue in that industry. So yes, so that's a quick summary..

And I'm showing no further questions in the queue at this time. I'd like to turn the call back to Peter Kirlin for closing comments..

Okay. Thank you for joining us this morning, and we look forward to reconnecting next money during our Investor Day..

Before we sign off, speakers, I do see two other participants join the Q&A queue.

Would you like to continue to take their questions?.

Of course, yes..

Understand. Our next question comes from Tom Diffely with D.A. Davidson. Your line is open..

This is [indiscernible] for Tom this morning.

I guess I wanted to ask how much conservatism do you, I guess, are you including in your first quarter outlook? I understand that right now, obviously, the geopolitical headwinds are difficult to sustain, but any color on the actual quantifiable specificity number?.

Yes. So if you look at our business, normally, Q1 seasonally is down maybe 5% off of Q4. So the midpoint of our guidance reflects a flat quarter. So our businesses -- our markets are improving. So, we pegged the guidance to basically improving improvements in our market to offset seasonality.

That's what we've done, if you look at our IC business, right, first, demand trends in Asia, pretty solid. If you look at FPD, right, last quarter, we estimate that the industry -- our industry photomedicine industry may be brand at about 70% utilization in FPD in terms this is internally what we estimate. That's the worst quarter, I can remember.

My memory maybe goes back three to five years, I'm getting old, but it was a really sour quarter for FPD. Likewise, the month of November through Thanksgiving remains sour. Right around Thanksgiving, the FPD market started to rebound and it continues to improve. Now, could it -- what will it do, right? We don't know.

So, we're trying to kind of age between a normal market and what was a terrible market. Our utilization was probably $15 million percent above the industry average last quarter, but it's the first quarter in several years where we haven't been sold out. So that's kind of our market. That's what we see and that's our guidance..

Thank you so much for the color there..

Yes, I would also add, unlike prior years, right, before the new revenue recognition rules, right. Every plate we have in the line has a percent completion associated with it, right. So, our business is a complete reflection of what the market is.

We're not a capital equipment company that runs with backlog that can pull some tools into this quarter that would ship next quarter with a week two to in backlog, right. Our business is an exact representation of what the market gives us. There's no ability for us to manage our WIP or our backlog to strength in one quarter at the expense of another.

Management has no operational discretion whatsoever comes in. We make it, then you guys see exactly what the tone of the business is real time..

Thank you. Our next question comes from Gus Richard with Northland. Your line is now open..

Real quick on SMIC which has just gotten banned, are you seeing customers migrate their business to other foundries? And is that helping the mainstream?.

Well, I think to the extent that happens over time, right. Yes, first of all, SMIC is a customer of ours. They're not a big customer because they have their own captives, but they're customer. Anything that harms the customer for us is a negative. We don't like to see any customer harmed in any way by external factors that are not driven by the market.

So, I think that would be the first comment. We wish SMIC, like all our customers well, and it's our culture, regardless of where a customer sits in the world to all run through walls to help them be successful. That's really what we want.

Having said that, it is true that if you shift market demand from a customer that builds the -- a significant fraction of their own photomasks to customers who buy them on the merchant market, that's going to create demand for Photronics, but it's not a happy way in our mind of seeing our market expand..

Got it. And then, there's been a number of companies that have planned to or have listed on the star market where valuations for semiconductor-related companies are significantly higher than the U.S.

Is that something you guys might consider? Or any thoughts there?.

Well, we can -- we constantly, relentlessly, look for ways to increase shareholder value. And this is one of many possibilities that we either have or intend to consider a move like that has some potential upside, and it could have potential downs depending on what happens on the geopolitical front.

Yes, so we're aware of that we're looking at it, but we're a company generally that's been around for 50 years, and we're normally slow to move to new trends because that's typically a good way to get a lot of hours in your back.

So, we're very aggressive with market, so we unlike others, have really rushed headlong into China, because we see, that's where the growth is in our industry. So, from an execution perspective, we're very aggressive from the standpoint of, what I would describe as other trends, we generally like to see others move forward.

Look at the outcome of that and evaluate both of them the minuses based on some kind of history and then make an informed decision. So that's where we are..

Okay, thank you for that..

Yes, that looks interesting, but it's early in the games, yes..

Yes. Okay, this is for me. Thanks so much..

Thank you and I'm now showing no further questions in the queue at this time..

Okay, so thank you for joining us this morning and we look forward to reconnecting next Monday..

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program. You may now disconnect..