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Edited Transcript of PLAB earnings conference call or presentation 14-Aug-17 8:30pm GMT

Thomson Reuters StreetEvents

Q3 2017 Photronics Inc Earnings Call

Brookfield Aug 21, 2017 (Thomson StreetEvents) -- Edited Transcript of Photronics Inc earnings conference call or presentation Monday, August 14, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher J. Progler

Photronics, Inc. - CTO & Strategic Planning and VP

* Peter S. Kirlin

Photronics, Inc. - CEO and Director

* Sean T. Smith

Photronics, Inc. - CFO and SVP

* Troy Dewar

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Conference Call Participants

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* J. Ho

Stifel, Nicolaus & Company, Incorporated, Research Division - Director & Senior Research Analyst

* Thomas Robert Diffely

D.A. Davidson & Co., Research Division - MD & Senior Research Analyst

* William Shalom Stein

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Yeuk-Fai Mok

Needham & Company, LLC, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to Photronics' Third Quarter Earnings Call. (Operator Instructions) As a reminder, this conference call is being recorded, Monday, August 14, 2017.

I would now like to turn the conference over to Troy Dewar, Director of Investor Relations.

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Troy Dewar, [2]

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Thank you, Leah. Good afternoon, everyone. Welcome to our review of Photronics' 2017 third quarter financial results. Joining me this afternoon are Dr. Peter Kirlin, Chief Executive Officer; Sean T. Smith, Senior Vice President and Chief Financial Officer; and Dr. Christopher Progler, Vice President, Chief Technology Officer, Strategic Planning.

This afternoon, we issued 3 press releases. Those releases, along with the presentation material which accompanies our remarks, are available on the Investor Relations section of our web page. 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.

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Peter S. Kirlin, Photronics, Inc. - CEO and Director [3]

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Thank you, Troy, and good afternoon, everyone. Today, in addition to releasing our third quarter financial results, we are also making 2 important strategic announcements, each of which were outlined in separate press releases we issued since the close of market trading. The first was an announcement regarding our upcoming CFO transition. The second is an announcement regarding our next step as we geographically expand our business into China.

I'd like to begin with the organizational change regarding our CFO transition. Today, we are announcing that Sean will be retiring from the role of CFO, the position he's held since 2002. During his tenure, we have grown to be to leading merchant photomask producer, with an extremely strong balance sheet. Our financial position is as good as any time during the history of the company, and our finance organization, under Sean's leadership, has played a key role in bringing us to this point.

I personally want to thank Sean for his support during my career at Photronics, especially during my last 2.5 years as CEO. Sean, I know I speak for many when I say that we wish you well in retirement and you will be missed. Sean's successor will be John Jordan. John is currently interim CFO for Astronova. He was the CFO of 2 public companies prior to that. His wealth of experience will be extremely valuable to us, especially as we continue to expand our business globally. I believe that John will be a great fit with our organization, and he is quite excited to dive into our business, including meeting as many of you as he can over the coming months. Sean has agreed to stay engaged with us through early December to ensure a smooth leadership transition.

Moving on to our third quarter performance. We achieved sequential sales growth, with moderate improvement in both IC and FPD. While this is a positive step in the right direction, it did fall short of our expectations, most notably in FPD, where product mix skewed more towards mainstream, mitigating the revenue impact of increasing unit volumes.

On the IC side of our business, sales were generally in line with our expectations, with stable mainstream sales, growing high-end memory and continued weakness in high-end logic. With a slight uptick in sales, we did see gross margins expand. However, operating margins were lower, as we saw an increase in operating expenses partially related to China, as we have more people on the ground and are shipping more products to Chinese customers.

We have also continued to drive a significant number of qualifications. And as discussed last quarter, this serves to diversify our customer base and/or technology portfolio, which is essential for the mid- to long-term health of our business. On our balance sheet, cash was slightly lower, as we are ramping CapEx to facilitate growth, primarily in FPD. This will likely continue over the next several quarters, as we will see increasing CapEx in China.

For the balance of 2017 and into 2018, we expect our markets to improve, with the exception of high-end logic, where recovery is still a few quarters away. The high-end memory business continues to grow, and we anticipate continued volume growth in FPD as we install more capacity. However, it may be another quarter or 2 before product mix turns more favorable towards high-end sales.

In summary, we are still very optimistic regarding the long-term growth expectations of all our high-end markets, but are seeing a slower recovery in high-end logic and high-end FPD, as dictated by our largest customers.

Inherent in our high-end business, both IC and FPD, is significant customer concentration. For example, our largest FPD customer sometimes represents close to 1/2 of our FPD sales. Similarly, our largest IC customer can be approximately 1/4 of our IC sales. While this is good for us when orders from these large customers are strong, it can present challenges for us when their short-term photomask demand slips. And this can happen for a number of reasons, some more obvious than others. Like many suppliers to the high-end semiconductor and display sectors, the amount of customer concentration has increased through industry consolidation, either through M&A activity or due to technology attrition, as fewer companies can justify the investment required to design and manufacture high-end products.

For merchant photomask companies, there's an additional complication, as more of the industry is being served by captives. This means we must invest in areas which complement the captives, so we can sustain leading market share by providing high-technology masks and great customer service, so they are better served by relying on a merchant rather than installing more production capacity. This theme of customer concentration is important to understand as it helps to explain the short-term volatility we experienced in our high-end business and the reason why our China investments are so essential.

One year ago, we announced an investment to expand our IC manufacturing presence into China. At the time, we spoke of the growing importance of this country to the semiconductor market and our customers' desire for us to establish a manufacturing facility there. Today, we are following that up with the next logical step, a new FPD manufacturing facility to serve the growing customer base in China. We have entered into an investment agreement with a high-tech zone in Hefei, where we will build the largest and most technically advanced display mask factory in the country. We're installing the most advanced mask writing equipment for display, allowing us to produce masks up to and including G10.5+ and advanced displays such as AMOLED. I'm very excited about today's announcement, as I believe the growth potential for the display market in China is as attractive, potentially even more so, than the semiconductor market.

Currently in China, there are 27 display fabs in production, with approximately 15 more being constructed or planned. Many of the new fabs are high-end fabs, targeting large-format LCD displays for TV or AMOLED displays for mobile application. China currently occupies third place in global panel production, but is projected to move into first place in the next few years. Today, there are no merchant display photomask producers in China that provide the advanced technology we plan to offer. We will be the first, and I believe this first mover advantage will help us to gain a market-leading position in China's growing display photomask market.

We selected Hefei for 2 reasons. First, the leadership in the city, as well as the high-tech zone, were most welcoming of our proposal and demonstrate the value they see in the establishment of a photomask manufacturer in their area by providing us with attractive incentives. Second, Hefei's central location places us to serve customers in the region, as well as throughout all of China. Along with the investment agreement, we have also secured customer commitments from 2 of the largest domestic panel producers in China. These commitments will help us to offset the risk of the investment by providing significant volumes for our new facility, which enable us to hit profitability targets quickly.

Because of these commitments and the technology we will install, we anticipate that our Hefei facility, once ramped, will be our largest FPD facility in terms of sales. We were the only mask factory in the country capable of making G10.5+ masks. These masks will be in high demand due the increasing capacity of G10.5 panel production in China. ASPs for these mask sets are much higher than we -- any product we currently sell, which gives us confidence regarding the sales outlook for our new facility. FPD qualification times are much shorter than IC. And based on the benefits of lessons learned in Xiamen, we expect the timeline of our FPD initiative to be significantly shorter than IC and are planning to be in production early in the spring of 2019.

Regarding our IC project in Xiamen, we are pleased with the progress of our construction and activity continues to ramp there as we move forward with our project plan. The closing of our joint venture with Dai Nippon is on schedule, and we anticipate closing this transaction in Q4. Even though we are facing short-term demand challenges, we don't want to lose sight of the long-term opportunities that we're working hard to develop. High customer concentration, short lead time and limited visibility carry short-term volatility in our financial results.

However, we're excited about the long-term opportunities we see across the high-end markets, particularly in China. Geographic expansion, along with technological advancements, are providing us with the opportunity to gain market share. It's very clear that China will become an increasingly important region for us, and it's imperative that it execute well against our business plans in order to establish a successful enterprise within that country. I'm confident in the team we have in place to accomplish this and reassured by the fact we have built a balance sheet to enable these investments. I remain optimistic about our long-term outlook.

I will now call -- turn the call over to Sean for more details on our Q3 performance and Q4 guidance.

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Sean T. Smith, Photronics, Inc. - CFO and SVP [4]

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Thanks, Peter, and good afternoon, everyone. Third quarter sales were up $3.3 million sequentially due to increased IC sales of $2.5 million and increased FPD sales of $800,000. The increase in IC sales were principally driven by strong growth in high-end sales of $23.7 million, up $1.7 million sequentially, primarily due to strong high-end memory demand. The high-end memory market has been positive for us during 2017, and this quarter marks the third consecutive quarter of sequential sales growth in high-end memory.

High-end logic, on the other hand, has been soft, as our large IC customer has experienced market share loss in some of their advanced nodes, particularly 28 nanometers. Our customer does expect a recovery, but that has been delayed until 2018. So any meaningful uptick for us in high-end logic is likely a few quarters out. As forecasted, we did remain sold out of capacity in FPD. However we experienced a higher mix of mainstream relative to high-end, limiting the sales growth we were able to achieve. Within high-end, we did see good growth in AMOLED demand, especially in China. Looking forward, we now expect to capitalize on the ramp of high-end sales to begin in 2018.

With our increased capacity, we will be poised to benefit from this demand increase when it materializes. Speaking of our capacity increase, the first of 2 writing tools was installed during the third quarter, and the second tool will be installed during Q4. On a year-over-year comparison, IC and FPD sales were down 7% and 16%, respectively, due primarily to decreased high-end business.

Gross margin improved sequentially due to higher volume. Operating expenses, including SG&A and R&D, increased by $1.8 million, principally due to increased qualification activity, and to lesser extent, additional expenses related to our growing business in China. We are seeing additional operating expenses as our activity in China starts to gain momentum, plus we experienced higher freight costs as we're importing more products to customers in the country. As a result, our operating margin was 4.7%.

Sequentially, tax expense was lower, as certain nontax benefits were realized. Additionally, foreign currency exchange loss we experienced in the second quarter did not repeat. Minority interest increased $1.1 million sequentially, as our JV in Taiwan returned to profitability. Net income was $4 million or $0.06 per share, more than double the net income in Q2. EBITDA was $28.5 million in the quarter and $111.3 million for the last 12 months.

Operating cash generation was $27 million for the quarter, and we spent approximately $25 million on CapEx. As a result, our cash balance now stands at $341 million, with net cash at $277 million. Based upon our latest projections, we anticipate spending approximately $110 million in CapEx this year, with approximately $45 million towards our China IC and FPD investments.

As implied by our guidance, CapEx is expected to increase significantly in our fourth quarter as we spend more on China. Also, while we are not giving precise 2018 guidance at this time, directionally, we anticipate CapEx to be higher next year. Fortunately, we have a strong balance sheet that will allow us to spend on our investments. We also plan to take on some China-based debt over the next year or so to help fund our investments there.

Before providing fourth quarter guidance, I want to remind everyone that our visibility is always limited, as our backlog is typically 1 to 2 weeks. Also, demand for some of our products is inherently lumpy and difficult to predict. Finally, as our high-end businesses grow, the ASPs for these mask sets are higher and a relatively few number of high-end orders can have a significant impact on sales for the quarter. Given those caveats, we expect the fourth quarter sales to be between $108 million and $116 million. Based on this revenue expectation and our current operating model, we estimate earnings for the fourth quarter to be in the range of $0.03 to $0.09 per diluted share. As we enter the last quarter of our fiscal year, our near-term business outlook is mixed. High-end memory is looking good, and we are increasing our FPD capacity to grow our business in that sector. However, the timing for recovery in high-end logic and high-end FPD is still uncertain.

Due to our financial discipline and low-cost manufacturing approach, we are confident in our ability to maintain profitability until those markets fully recover and are prepared to serve our customers as their mask demand increases. Longer term, we are investing in our future by investing in high-growth, high-return projects to create more value for our shareholders.

Before we turn the call over to the operator for questions, I would personally like to thank Photronics' board, Deno and Peter, for a tremendous run. I also want to thank all the employees at Photronics for their support. I have never been associated with a company from top to bottom that has as much dedication and desire to succeed. Best wishes to the entire team, global team, for continued success in the future.

Thank you for your interest. I will now turn the call over to the operator for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question is from William Stein with SunTrust.

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William Shalom Stein, SunTrust Robinson Humphrey, Inc., Research Division - MD [2]

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As I recall, the -- your initial foray into China for IC later turned into a joint venture. Now you're entering the China market for flat panels. Is that likewise likely to become a joint venture as well? Or is this more likely to remain a wholly-owned business for you?

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Peter S. Kirlin, Photronics, Inc. - CEO and Director [3]

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Well, we always have to keep an open mind regarding industry consolidation. So -- and we keep an active dialogue with all the industry participants to that end, which we'll continue to do. Having said that, the demand profile for FPD in China is really quite compelling. So the bar would be, I think, very high for us to entertain sharing the profitability we expect to see from that activity with another party, but it's certainly not out of the question.

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William Shalom Stein, SunTrust Robinson Humphrey, Inc., Research Division - MD [4]

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And then one follow-up, if I can. Peter, you've noted in the past that often when there's a new geography that starts to ramp, that oftentimes, it's sort of easy for companies to be lured into thinking that it's all new growth and that it often or always in the past has wound up being just a transition from one region to another. Is that what you believe is going to happen with the flat panel display market, that perhaps it goes from, I think the majority may be in Korea today, that it moves to China? Or is this different this time, and you actually see new growth in this market?

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Peter S. Kirlin, Photronics, Inc. - CEO and Director [5]

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Yes, we would -- again, everything is a matter of degree. We think China for FPD, on a relative scale, is more white space, based on the end market demand itself in China, plus the dramatic proliferation of displays in almost everything that we touch. So there'll be some shift, certainly, of large-format displays to Chinese because the G10.5+ is inherently much more efficient for manufacturing displays of 55 inches and greater in size. But beyond that, we see, I think, growth in the display market, at least in China and Korea. The Japan market is clearly in secular decline and it's likely that the Taiwan market will be as well.

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Operator [6]

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Your next question is from Edwin Mok with Needham & Company.

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Yeuk-Fai Mok, Needham & Company, LLC, Research Division - Senior Analyst [7]

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So first question I have on your guidance, just want to be very clear. If I listen to your commentary, it sounds like everything is kind of not changing dramatically from this quarter to the next quarter. But you have a new [FPD2] coming online, so just wondering why the midpoint of guidance is flattish? Is there any kind of more mix shift we should expect in IC or anything that you can point to?

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Peter S. Kirlin, Photronics, Inc. - CEO and Director [8]

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Well, what we see, I think, in FPD in the current quarter in front of us is up -- photomask sales in FPD are driven by new product development and new product launches. Nearly all of the flexible AMOLED capacity in Korea is going to be running volume production for 1 or 2 customers. So we actually see the market in Korea in the current quarter to being down significantly. Running against that, last quarter, China sales represented more than 25% of our FPD revenues. So we expect unit growth in China in the coming quarter, and running against that is a significant downdraft in Korea. And then, the quarter following that, I think everyone in the business knows, there's a tremendous amount of capital being installed in Korea as we speak. So there should be significantly more AMOLED capacity available to the market in Korea as we approach the end of 2018. And of course, that new capacity is going to require new designs to sell it. So over the next 2 quarters, that's kind of the market as we see China growing -- continuing to grow, and Korea, with a shift to high-volume manufacturing in the current quarter and then reverting back to more of a product -- a typical demand environment in the final calendar quarter of the year.

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Yeuk-Fai Mok, Needham & Company, LLC, Research Division - Senior Analyst [9]

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Great, thanks for explaining that dynamics. They're actually very, very helpful. So moving onto the new China facility that you talked about and this $106 million CapEx, is that a way to go and think about -- I think you mentioned on the call you expect it to be your largest production facility, right? So if I understand that correctly, then that means you would expect this facility at fully ramp to add like, what, 50% -- more than 50% increase in incremental revenue? Is that a good way to think about it? And you said it will start producing in kind of early 2019, right? How long does it need to fully ramp or fully consume that $106 million CapEx?

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Peter S. Kirlin, Photronics, Inc. - CEO and Director [10]

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Well, given the customer commitments that we have, we expect that within 1 quarter or 2, that facility will be at full production. So we have very strong commitments from customers. Regarding the revenue potential, yes, it's certainly more than 50%. Sean, would you like to make some comments about what you think -- what we think China is going to contribute?

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Sean T. Smith, Photronics, Inc. - CFO and SVP [11]

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I think if we look at both entities, Peter, we would expect, once both entities, the IC and FPD, are fully ramped, our top line could grow as much as, if not more than, $150 million. Significant growth opportunities in both areas.

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Yeuk-Fai Mok, Needham & Company, LLC, Research Division - Senior Analyst [12]

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Okay, great. That's extremely helpful. Last question just on -- Sean, you talked about, maybe just stick with you -- I want to talk about the OpEx. You talked about this quarter, you have some additional headcounts in China, also some R&D program. But if I did the math correctly on your guidance, you imply OpEx will come back down a little bit in the coming quarter. Is there a new range of OpEx that we should think about? Or how do we kind of think about OpEx longer term?

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Sean T. Smith, Photronics, Inc. - CFO and SVP [13]

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Well, Edwin, it's a good point. We haven't specifically guided to OpEx. It did increase during the quarter, primarily related to increased quals that Peter mentioned and we talked about at the end of last call. We certainly pride ourselves, and the company has historically, on keeping costs low and trying to, as we add costs into the system, vis-à-vis China or somewhere else, we try to extract costs out elsewhere. So I don't think we have a fundamental change just yet. Certainly when both facilities in China are up and running, we'll have to establish new benchmarks and targets as we move forward. But I don't think we're straying from what we have prided ourselves and the company has prided themselves on over the years.

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Yeuk-Fai Mok, Needham & Company, LLC, Research Division - Senior Analyst [14]

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Great. Just lastly, Sean. It was a pleasure working with you all these years. And good luck with your retirement and hopefully, you can go to a lot more baseball games.

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Sean T. Smith, Photronics, Inc. - CFO and SVP [15]

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Edwin, thank you very much. I will say just in closing, there's a tremendous team here globally. And they will be successful. And my kids are counting on them to be successful.

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Operator [16]

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Your next question is from Patrick Ho with Stifel.

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J. Ho, Stifel, Nicolaus & Company, Incorporated, Research Division - Director & Senior Research Analyst [17]

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Sean, I want to extend my personal best wishes to you. It's been a pleasure working with you all these years. And I guess, it gives you more time to watch, I guess, the Yankees and Red Sox, and see if that gives you more time to enjoy or not enjoy what happens there. So in all seriousness, I do wish you the best.

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Sean T. Smith, Photronics, Inc. - CFO and SVP [18]

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Patrick, thank you very much.

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J. Ho, Stifel, Nicolaus & Company, Incorporated, Research Division - Director & Senior Research Analyst [19]

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My first question goes on the display side of things, because although that I see the uptick in the Chinese market, especially on the AMOLED side, you do have a large customer that is ramping their capacity, as well as their business in terms of their uptick. Can you explain what I'm missing there, especially in the near term, when they're seeing an uptick, particularly with 1 customer ramping up their OLED-based displays as well? What am I missing in terms of the uptick that should be occurring at least over the next couple of quarters?

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Peter S. Kirlin, Photronics, Inc. - CEO and Director [20]

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Yes, what's going on there, Patrick, for us, is as I mentioned in my prepared remarks, they're a tremendous -- historically, a tremendous fraction of our overall FPD revenues. And what's happening in the FPD market is it's -- presently, it's very fluid with many moving pieces. As far as that large customer goes, their AMOLED business is really bifurcating into what the industry describes as rigid and flexible. And they also have their own captive. So they can pick and choose what fraction of their business they decide to outsource. And it's no surprise that the ASP of the flexible AMOLED mask is substantially higher now than the rigid ones. So in the current quarter, we saw an unusually high concentration of rigid AMOLED mask from that customer and very few flexible ones. And again, I'll just say it one more time, this is what, for us, makes the movement into China so essential, because there is no credible competitor there in the high-end domestic. And we clearly have very -- as a result of the partnership with that customer, very excellent technology, and we need to maximize the value of it globally. So hence, the -- our focus to shift our footprint. If you look at the display market, it can give you some more color. We think that photomask market for displays this year, presently it looks like it's going to be back to 2015 levels. And almost all the contraction in the market has happened in Korea, with some contraction in Japan. The merchant market in Korea shrunk even more year-over-year, I'd say between 20% and 30%. So for us, it's quite essential that we aggressively grow our business in China.

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J. Ho, Stifel, Nicolaus & Company, Incorporated, Research Division - Director & Senior Research Analyst [21]

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That's helpful, Peter. Maybe then as a follow-up in terms of the high-end logic. I understand where some of the weakness is coming from. But at the same time, one of your Korean customers is starting to become more active once again, particularly at the leading edge. Can you discuss how you're looking at that market segment, whether it's a timing of when your large Korean customer ramps up their next-generation leading-edge IC masks?

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Peter S. Kirlin, Photronics, Inc. - CEO and Director [22]

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Yes, well, I'll make some comments, and then maybe Chris can chime in. We're clearly working with that customer to best support them. And we do see, I think, some upside as they aggressively go after the foundry market. The other thing I will say is our high-end revenues net were up, as Sean described. But memory was actually up more and logic was down more, and that's kind of hidden in the numbers. And the problem in the logic market was in Taiwan. So Korea, quarter-over-quarter, was pretty stable. So Chris, you want to make some comments on the qualifications, et cetera?

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Christopher J. Progler, Photronics, Inc. - CTO & Strategic Planning and VP [23]

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Yes, I can make some general comments and on -- then also on that specific customer's situation. So yes, Patrick, the number -- we have a large number of qualifications going on now, 14-nanometer logic, doing some 7, some 5 -- actually, very little on 10-nanometer, so far few engagements on that. And on the memory side, we have 2x, a 1x, 1 wide DRAM qualification. So really, a robust pipeline on those things. I think the memory, the strength in the DRAM market, has sucked up a lot of write capacity inside captives. So getting back to that particular customer you asked about, what was maybe a year ago kind of a slow-rolling qualification for them in high-end logic has really accelerated over the last, I'd say, 3 to 6 months. So they're needing external capacity for logic in a much greater way than they had in the past. So that is picking up momentum. Partially, it's DRAM sucking up a lot of their internal capacity, and partially, it's them ramping, I think, more aggressively some of their high-end logic nodes. But as we know, the timing of when these things become significant, commercial opportunities is always difficult to call. And I can also say that the U.S. manufacturing site of that particular customer seems to be in the mode of running more logic applications for some of these, I'll say, marquee customers. So that's a great opportunity for us, because we have the only high-end merchant site in the U.S.

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J. Ho, Stifel, Nicolaus & Company, Incorporated, Research Division - Director & Senior Research Analyst [24]

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Great. And final question from me. As you build up both of your Chinese IC and display ramps, is there a way to, I guess, use the ramp-up of people, both -- for both of those sites? Or are they kind of their own, from an OpEx perspective, their own -- basically, are they their own businesses that you have to ramp up? Or can you be fungible in ramping up the OpEx on both those ends?

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Peter S. Kirlin, Photronics, Inc. - CEO and Director [25]

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Yes, they'll be -- we have a similar situation right now in Taiwan, where we have an FPD factory and we have an IC factory. And there is some benefits, because typically, in the country, you have 1 senior professional in the functional support areas. And then a junior-level individual sitting in the other factory. Maybe you have 1 senior and 1 junior, and then in 1 location, the junior individual in another. So there is some overlap and benefit on the OpEx side, also on the sales side. Beyond that, as we -- as I've mentioned in my prepared remarks, we've learned a lot in Xiamen regarding what we need to do to build a facility in China. And some of the people, as you construct a factory, they're involved in the early stages, not involved in the later stages. We're kind of creating a pipeline of experience from IC to FPD that should, I think, make the FPD project run, a, more smoothly, and b, faster, because of that. So there's a lot of leverage in the facilities construction. And then there's modest leverage when we're in full-blown operations in both sites.

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Operator [26]

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(Operator Instructions) Your next question is from Tom Diffely with D.A. Davidson.

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Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [27]

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Yes, I'd first like to echo Patrick's thoughts. And Sean, it's been a pleasure working with you over the last 15 years. You truly have been one of the class acts of the space and will be missed going forward.

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Sean T. Smith, Photronics, Inc. - CFO and SVP [28]

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Thank you very much, Tom.

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Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [29]

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So maybe just jumping on the flat panels displays side. I was curious, at this point, can you couch the number of customers you're working with, where those customers are in their development projects and when do you think they get to kind of large-scale or full-scale production that would benefit you the most?

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Peter S. Kirlin, Photronics, Inc. - CEO and Director [30]

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Well, as far as China is concerned, last quarter, we shipped AMOLED mask sets to 4 customers. I think those are the only 4 customers in China right now with AMOLED in what I would call a developmental mode. It's hard to gauge how quickly they will ramp. I will say, one of those 4 actually ordered a second set of masks within the quarter and in fact, it ordered a mask that in the prior quarter, they were the first. So it kind of feels like we're 2 quarters away maybe from starting to see a significant ramp of the most -- of the leading edge of that customer base. But that's very hard to tell at the present time. But there's a lot of -- so there's a lot of factories in China, and most of it right now tends to be G6 and smaller. But some of it is G6 LTPS, so it's pretty complex technology. So it's funny, because if you -- our mainstream FPD business grew last quarter. It grew in units and it grew in ASP because of the LTPS mix in China. So anyways, if you look forward, most of the -- or nearly all of this wonderful bubble that's going through the equipment space, has yet to run volume in the photomask space. So we look at China. And from the second half of 2018 onwards is when we really expect to start to see the ramp. The ramp will be in AMOLED, it will be G8.5 and greater. It will be G10.5, G11, but there's a big wave coming.

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Christopher J. Progler, Photronics, Inc. - CTO & Strategic Planning and VP [31]

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And maybe I can make -- to make one other comment, Tom. This trend we've been talking about, I would say almost the last year or 2, on the complexity of the FPD masks using more things that people are used to on the IC side, like OPC and phase shift, generally increasing the value of the mask, that's really happening and accelerating. So we are starting to see FPD masks, although large format, look more like advanced IC masks. Not like today's, but that trend is continuing. And that's important because that puts a lot more value into the patterning in the mask technology from an ASP and lithography perspective. So that trend seems very -- really solid, for sure.

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Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [32]

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Okay. And it sounds like industry projections are for roughly 20 new OLED fabs over the next several years. It sounds like you will at least be in position to serve almost all of those?

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Peter S. Kirlin, Photronics, Inc. - CEO and Director [33]

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Yes, that's clearly our goal. This quarter, for the first time, China -- revenues in China were more than 10% of our total revenues. And as I said, in FPD, they were more than 25%. We believe there will be a halo effect of the fact that we are making an investment in China before we're actually up and running. So it's, I think, not unreasonable to believe that we could reach a market leadership position in China before we even actually start manufacturing there.

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Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [34]

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Okay. And then, just on a near-term basis, you talked about how the mix was a little unfavorable, higher in rigid versus flexible. I guess it wasn't clear, do you expect that mix to come back towards flexible over time? Or did you think it was going to stay kind of rigid for a bit?

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Peter S. Kirlin, Photronics, Inc. - CEO and Director [35]

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Well, yes, what we said was for the current quarter, most of the AMOLED -- flexible AMOLED capacity is in very high-volume production with no room for product development. If you look at the industry, just projections generally, the amount of flexible AMOLED capacity in Korea, projections are more than double by calendar year-end. So not only will the big bubble of the September product release should be through the system, but there'll be a lot more capacity looking for products when we reach the end of the calendar year. So we -- based on that, we think the mix will shift back, but we'll see. But generally what happens in FPD, when there's high volume runners, mask demand goes down. And when volumes abate, mask demand goes up, and we expect to see that situation as the year -- as we -- as the year ends, both because a lot more capacity is coming online and the volume bubble should be through the system, both working to our benefit.

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Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [36]

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Okay, now it makes sense. And just moving over to the...

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Peter S. Kirlin, Photronics, Inc. - CEO and Director [37]

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And just Tom, and hence the reason for delaying the second tool and putting it into production, at some point in this quarter, or maybe not even until the -- early into next quarter. The installation will start in the fourth quarter, whether it finishes or not, we will see.

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Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [38]

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Yes, okay. Okay. And then switching over to the IC side of the business. Obviously, it sounds like there's a lot of qualifications going on right now. What's been the typical lead time between qualifications and kind of the revenue drivers for production?

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Christopher J. Progler, Photronics, Inc. - CTO & Strategic Planning and VP [39]

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Yes, this is a question we get often, Tom, and it's a complicated one. We usually guard-band it, I think, 6 months from qual start to revenue would be kind of benchmark for speed. Sometimes it can take 18 months or longer. So don't mean to give a wishy-washy answer, but it's pretty complicated. And it varies by the number of levels we're qual-ing, if it's a new node or a repeat node. But I would think you could say 12 months from start is a pretty good target for qual begin to revenue first set sort of opportunity.

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Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [40]

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And is it similar for both memory and logic?

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Christopher J. Progler, Photronics, Inc. - CTO & Strategic Planning and VP [41]

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It's pretty similar, yes. Logic tends to be a little bit longer. Those quals tend to be more complicated, just because of the variety of layouts and structures customers use. Memory tends to go a little quicker. But generally, it's not dramatically different.

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Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [42]

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Okay. And then finally, I'd like to end with a little zinger for Sean on the operating model. But unfortunately, it's working pretty well right now.

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Sean T. Smith, Photronics, Inc. - CFO and SVP [43]

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Okay, thank you, Tom. Yes, and Tom, just to add to Chris's comments, FPD, unlike IC, is usually 30 to 60 days. It's a much quicker qualification. So that's also, again, one of the reasons why we expect our FPD facility to ramp quicker, because the qualification is much shorter.

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Operator [44]

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

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Peter S. Kirlin, Photronics, Inc. - CEO and Director [45]

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Thank you once again for your interest in Photronics. As you can tell, these are exciting times for us. We are managing through short-term demand challenges in some of our high-end markets, while also investing in our future growth with the construction of 2 new facilities in China. Our balance sheet remains strong, positioning us to make investments in growth we have planned over the next few years. Finally, as our changing leadership team works together towards achieving our corporate strategic objectives, I'm confident we will be successful. I look forward to updating you as we make progress.

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Operator [46]

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Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation and ask that you please disconnect your lines.