Good day and thank you for standing by. Welcome to the Photronic's Fourth Quarter and Full Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded Tuesday, December 13, 2022. I would now like to hand the conference over to your host, Richelle Burr, Executive Vice President, Chief Administrative Officer and General Counsel. Please go ahead.

Thank you, Operator. Good morning, everyone. Welcome to our review of Photronic's fiscal 2022 full year and fourth quarter results. Joining me to evaluate ongoing performance and reconciliation of these metrics to GAAP financial results is provided in our presentation material. At this time, I will turn the call over to Frank.

Thank you, Richelle, and good morning, everyone. Q4 finished strongly to mark a great year. Revenue grew 24% in 2022 as we achieved our fifth consecutive year of record revenue. Both IC and FPD generated strong growth as design activity remained robust. We saw annual growth across nearly all product types. It remains clear that our broad technology portfolio, operational efficiencies, and close customer relationships have made us the market leader. Q4 revenue was less than third quarter revenue, with demand slowing in the high-end large segment. Our investment will be indicated by the current semiconductor industry downturn as design activity remains relatively strong. There was also some negative impact from depreciation of Asian currencies on the FPD business. However, we believe these factors are causing this slower demand to be temporary, and we maintain our positive view on the long-term demand trend. Gross margin and operating margin were essentially flat compared with the third quarter as we mitigated the impact on lower borrowings by closely managing our costs while we continue to benefit from strong pricing. We also realized a foreign exchange gain that John will discuss in more detail later. The end result is we delivered EPS of $0.60 for the fourth quarter. Looking now to the industry outlook, while we believe the demand trends in addition to customer capacity expansions are intact in the long term, the near-term picture is cloudier due to current market uncertainties. Factors such as high-interest rates, rising inflation, and slowing GDP are already having a negative impact on some sectors of the electronic product supply chain and could potentially impact photomask demand. Moreover, adding to uncertainties are the U.S. government's new export restrictions on imports from China on certain semiconductor technologies that may further impact the Chinese IC industry. So far, these actions have had minimal impact on Photronics' business or operations. However, the situation is dynamic, and we continue to monitor it closely. At the same time, we will ensure our compliance with all regulations while taking necessary actions to mitigate the impact on our supply chain and business. Although the near-term outlook is uncertain, we are confident that IC design and manufacturing continue to play a central and expanding role in the global economy. Photomasks are a key element within the ecosystem. We are committed to striving for long-term success. Currently, IC manufacturing regionalization is spurring investment across the world. This new capacity will generate additional photomask demand. We will capitalize on these opportunities from a position of strength. Our customer relationships are built on trust, supported by our technology, service, quality, and global production capacity. This customer relationship, coupled with many long-term purchase agreements, has continued to support our competitive advantage in the business. I would like to thank the entire Photronics team for their excellent performance in the fourth quarter and throughout the full year. We navigated challenges and changes and seized great opportunities as we delivered another record year. Our long-term strategy is intact and on track to achieve our financial targets. I'm proud of what we have accomplished together and believe we can do even better in the future. At this time, I will turn the call to John.

Thank you, Frank, and good morning, everyone. Revenue in the fourth quarter was lower sequentially as softer demand trends were experienced in both IC and FPD primarily for high-end products. Our product diversity and global customer base helped mitigate high-end challenges, with mainstream revenue higher for both IC and FPD. We have invested in tool sets for a broad array of technologies and nodes, enabling us to support our customers' technology roadmap across both high-end and mainstream. As a result, fourth-quarter revenue of $210 million was down only 4% sequentially despite the declines in high-end product revenue. Our conversion teams have done a great job of working with customers to identify opportunities, and our operations teams were effective in supporting this demand with on-time execution, delivering the highest quality products that enable our customers' success. IC revenue of $156 million in the fourth quarter was up 25% year-over-year and down 3% sequentially. Although high-end revenue was lower quarter-over-quarter due to some reduction in agent foundry logic demand, that business has been significantly better than last year's fourth quarter due to some increases in capacity throughout the year. Midstream revenue improved on continued strong demand, especially in Asia. FPD revenue of $54 million was down 8% quarter-over-quarter and 3% year-over-year. Demand from mobile display masks was lower as panel makers focused on purchasing current products for new premium smartphones and not releasing new designs. Demand for G10.5+ was also lower during the fourth quarter. We were successful in picking up mainstream business to maintain higher capacity utilization. Gross and operating margins were essentially flat in the third quarter as improved pricing and continued cost discipline offset the negative impact of lower volumes on operating leverage. Gross margin of 38.2% and operating margin of 28.8% are already within our target model range. Based on our outlook and our continued focus on cost reductions, we expect to continue to deliver margin improvement as our revenue moves into the targeted zones with price increases stabilizing in 2023, while the outlook for continuation of premiums may be uncertain. Operating expenses decreased compared with the third quarter as we balanced the need to maintain margins while also investing in resources to support revenue growth, positioning us to continue to grow both revenue and profit. Non-operating income of $11 million was primarily due to FX gains from re-measurement of U.S. dollar-denominated balances in certain locations into the local functional currencies. The income tax provision of $16 million resulted in an effective tax rate of 25.5% for the fourth quarter and 25% for the full year. Diluted EPS for Q4 was $0.60, an 18% increase over Q3 and an 82% increase over the $0.33 of last year's fourth quarter. Diluted EPS for the whole year of 2022 was $1.94, an increase of 118% over 2021, demonstrating the achievements of the entire Photronics team during a challenging and changing year. Cash flow generated from operating activities was $79 million in the fourth quarter, bringing the 2022 total operating cash flow to $275 million. We used this cash to invest in growth by funding capital expenditures of $66 million in the quarter. Full year CapEx was $109 million, net of nearly $4 million in government subsidies. For 2023, regional CapEx is expected to be approximately $130 million as we continue to invest in growth, primarily for high-end and mainstream IC capacity. We also continued to reduce debt during the quarter, bringing our total year-end long-term debt to $42 million, a reduction of $69 million since last year-end. Cash balance at the end of the quarter was $320 million. If we include short-term investments of $39 million, net cash and short-term investments at the end of the quarter was $316 million. Our balance sheet is strong and flexible, allowing us to pursue growth investments, both organic and inorganic, while also preparing to weather potential future economic challenges and uncertainty. Before I provide 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, in the high-end masks segment, a relatively low number of high-end orders can have a significant impact on our quarterly revenue and earnings. Given these caveats, we expect first quarter revenue to be in the range of $203 million to $213 million, as we expect positive demand trends with less-than-typical seasonality. Based on these revenue expectations and our current operating model, we estimate earnings per share for the first quarter to be in the range of $0.40 to $0.48 per diluted share. 2022 was a great year. We grew revenues by 24%, posting our fifth consecutive year of record revenue, expanded margins, which places us within the bottom end of our target range, and strengthened our balance sheet, generating cash, reducing debt, and investing in growth. Looking forward, we believe positive long-term market trends and our leadership position, along with financial flexibility, position us to continue our profitable growth and achieve even greater success for our customers, our employees, and our shareholders. I will now turn it back to the operator.

Our first question comes from Hans Chung with D.A. Davidson. Your line is open. Please go ahead.

So first, it seems like you have a pretty good gross margin for the quarter. I wanted to dive deeper into the driving factors. I know you mentioned some cost management and that the pricing is still favorable. Any detail on that? And how should we think about the gross margin in 2023?

The pricing environment has been very good, so our pricing is stronger than it has been historically. We expect that pricing to maintain. We have seen that even as demand is still strong, but not quite what it has been, the pricing holds up. We have pricing agreements across the board in Asia, and they've held, as I mentioned, as demand is not quite as strong. We have had premiums as people gain the ability to move up from mainstream products, which has been much more extended than it had been historically. Those premiums are less predictable, but through the fourth quarter, both pricing and premiums have held up. So a combination of changes in mix with some of our operations taking on more business and improving their margins, along with sustained pricing strength, we think will keep us within the margins that we've been experiencing.

Okay. And then next question, I know you mentioned the recent impact from China, the restriction that minimized our business. But you also mentioned there are still some uncertainties. Can you provide more understanding on the potential risks from the new China export control? Any indirect impacts?

So far, Hans, there are a couple of factors. One is our business in China is primarily mainstream. Most of the restrictions that are issued are meant to prevent leading-edge technology from leaking into the Chinese military. These restrictions have, to some extent, affected us, but we've been able to understand and work with them. So, the restrictions have affected us minimally over the past three years since they started imposing them. If they stay targeted at leading-edge technologies, we're likely to remain unaffected. We put in a lot of effort to understand the restrictions as they are imposed and ensure compliance, so far, there hasn't been much effect. There has been some, but very minimal, and we expect that to continue. As restrictions continue to be issued, we'll keep assessing how they affect our business and work within the new regulations. Hopefully, we'll continue to experience similar minimal effects, because they primarily target leading-edge technologies, where we're not engaged.

This is Chris. I might add one thing to that. If there is a positive side to this, since leading-edge technology has been somewhat restricted in China, a lot of that capacity can now be deployed to midrange and mainstream. This is creating a fairly healthy design pipeline in mainstream nodes in China. I'm just observing that in the local facilities. Those nodes are particularly sweet spots for us, given how we're tooled up there. So, that's a fortunate positive outcome for our local business.

Thank you. One moment for our next question. Our next question comes from the line of Gus Richard with Northland Capital Markets. Your line is open. Please go ahead.

About six months ago, the photomask segment was spun out and sold to private equity. I'm just wondering, given that transaction, how has that affected the market, or has it remained the same?

Gus, thank you. We don't see a major change in the business model since their spin-off. They have made major capital investments and even announced some projects in Texas, but nothing has materialized. From the customer side and our side, we haven't seen a real difference.

Got it. In terms of the $130 million in CapEx, can you provide a little bit of color on that? Is it for de-bottlenecking, or are you getting some high-throughput tools for mainstream, or is it going to be for high end? Can you give some context on where you're investing?

Sure. Actually, in the past 15 months, the equipment lead time in photomasks has also become very long, similar to the semiconductor business. Some tools were actually ordered one and a half years ago. The tools that are arriving are mainly to serve the mainstream business expansion, and some are replacements for tools that are at the end of their life. So, we are doing certain tool replacements in addition to the mainstream business expansion. The new tools are expected to perform better with higher throughput. Thus, we anticipate not only replacements but also some new capacity added to our overall production capacity.

Got it. Lastly, you talked about demand softening a bit. Can you put that in context of lead times? Lead times have stretched quite a bit from days to, I think, weeks or months. How has lead time changed over the course of the quarter?

The softening demand actually started two to three months ago, particularly in the high-end segment. However, this doesn't really impact our fab utilization; we still have enough work. Of course, the lead time to the customer has been reduced as the backlog level is lower. However, there are certain signs that the demand for high-end products is starting to come back. At this moment, it's a bit too early to be precise about the recovery. However, we do see high-end demand beginning to rebound based on our input from sales and customers.

Thank you. I'm showing no further questions at this time. I would like to hand the conference back to Frank Lee for any final remarks.

Thank you, Operator. Thank you for joining the meeting. I'm very pleased with our performance in 2022 and proud of the way our team has responded to the challenges of a changing environment. We are well-positioned to continue our success in the future, and I look forward to updating you as we continue to make progress. Thank you for your interest, and have a good day. Thank you, everybody.

This concludes today's conference. Thank you for participating. You may now disconnect. Have a great day.