Ladies and gentlemen, thank you for standing by. Welcome to the Photronics Second Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, May 15, 2012. I would now like to turn the conference over to Mr. Pete Broadbent, Vice President, Investor Relations and Marketing. Please go ahead, Mr. Broadbent.

Thank you, and good morning, everyone. My name is Pete Broadbent, Vice President, Investor Relations and Marketing of Photronics. We would like to thank you for joining our second quarter 2012 conference call. Before we begin, I'd like to remind all participants about the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995, and thus any statement we make during this call, except for historical events, may be considered forward-looking and may be subject to certain risks and uncertainties that could cause actual events to differ materially from those projected, including uncertainties that may affect the company's operations, market pricing, competition, procurement manufacturing efficiencies and other risks detailed from time to time in the company's SEC reports. These statements will contain words such as believe, anticipate, expect or similar expressions. This call will remain archived on our website until we report our third quarter 2012 results. Joining us on the call today are Constantine “Deno” Macricostas, Chairman and Chief Executive Officer; Sean T. Smith, Senior Vice President and Chief Financial Officer; Dr. Christopher Progler, Vice President, Chief Technology Officer and Strategic Planning; and Dr. Peter Kirlin, Senior Vice President, U.S. and Europe. Deno will first provide a brief review of market conditions and our strategic direction. Sean will then provide a comprehensive review of Photronics' second quarter performance. During Deno's and Sean's remarks, they will be referring to slides posted on our website under the Investor Relations link. Deno?

Thank you, Pete, and good morning, everyone. Please turn to Slide 3 in our slide presentation. It was a tough quarter for us on a number of fronts. We captured demand as it increased through the quarter, we improved our cost profile, we grew our high-end business across both FPD and IC and we secured ownership of our leading manufacturing facility in the nanoFab. Sales for the second quarter were $117.5 million. IC sales of $89 million benefited from strong sales in the U.S., led by growth at the high-end. Our high-end grew to 35% of sales, up from 32% in the prior quarter. FPD sales was $28.4 million and were led by increased high-end demand. Because of our vigilant focus of cost control, we delivered incremental growth in operating margins of 83% and 67%, respectively, on the increased revenue. Earnings per share, both GAAP and non-GAAP, were $0.14. EBITDA was $36 million, up $3 million sequentially. We closed the quarter with a strong balance sheet, with working capital of $221 million. Overall, we're confident of our business model. We're comfortable, and growing at the high-end. We generate good margins and will continue to find ways to improve our profitability. The dynamics of the photomask industry are changing, and we're in a very good position. In general, the stocks are investing; they're growing at the high-end, as is Photronics. We believe this growth is at the expense of our competition. Photronics were aligned with the largest memory of larger customers in the industry who are investing alongside them. We are looking to get more data on this, but based on published analyst reports, we believe that we are now the only merchant photomask company that's growing [indiscernible]. Along -- also we believe with IC and FPD combined, we are the strongest photomask merchant in the market today. In the future, we expect the strong will get stronger and we are poised for growth. We have the financial ability to make investments at the high-end. We'll continue to generate good margins. We expect to continue to take market share. So we're quite positive about our business. We're aligned with strong customers. We're making pragmatic investments in high-end capacity, which is a growth engine of photomask business. Looking forward, we are seeing momentum in our customers' migration to advance nodes. We're qualifying these advanced nodes across both memory and logic. We're diligent of our cost control and disciplined in our approach. Before I turn the call over to Sean, I would like to thank the entire Photronics global organization for the efforts during the quarter. And now I will turn the call over to Sean. Sean?

Thanks, Deno, and good morning, everyone. I'll provide a brief analysis of our financial results for the second quarter of fiscal year 2012, review our balance sheet and cash flows and then provide our outlook for Q3. During the quarter, we paid approximately $35 million to Micron to purchase the U.S. nanoFab building, which was previously leased at an implied interest rate of 8%. Of the $35 million, $25 million was financed as we amended our credit agreement by adding a 5-year 2.5% term loan. As a result of this transaction, net cash flow will improve by approximately $5 million in fiscal 2013 and our expenses will also be reduced by approximately $5 million annually. Please refer to Slide 4 for our GAAP to non-GAAP net income and EPS reconciliation as we view the second quarter. For purposes of our discussion, I will be referring -- comparing our non-GAAP operating results exclusive of a small charge related to the Singapore restructuring. As a reminder, in Q1, we announced the streamlining of our operating infrastructure in Singapore and expected to record an after-tax charge of $1.5 million to $1.9 million in fiscal 2012, the majority of which or $1.1 million was recorded in Q1 2012. Slides 5, 6 and 7 show our sequential quarterly IC and FPD revenue performance. Revenues for IC and FPD photomasks were $89.1 million and $28.4 million, respectively, for the second quarter. Sequentially, total sales increased by 5% to $117.5 million as a result of the improved high-end business. Breaking out sales geographically, 59% of total sales are from Asia, 32% from North America and 9% from Europe. As Deno mentioned, we achieved sequential improvements in both high-end IC and FPD business in the second quarter. High-end global IC sales were $31.3 million or 35% of total IC sales for the quarter. This represents a sequential increase of 14%. As Deno mentioned, customers continue to invest in new designs, and we benefited in Q2 from a broader global diversification of high-end business. Advanced FPD sales were $19.2 million or 68% of total FPD sales. As a reminder, high-end IC revenues consist of revenue derived at -- from SEMI designs at and below 45 nanometers, and high-end FPD revenues consist of revenue at and above G8, as well AMOLED-based products. Now let's continue through the income statement. The gross margin for the second quarter was 25.4%, up sequentially from 22.7% as a result of the improved revenue, a greater mix of high-end sales and reduced manufacturing expenses related to the Singapore closure and nanoFab building purchase, among other items. The gross margin for the quarter was actually higher than the 25.3% we recorded in fiscal Q4 of 2011 when our revenues were $4.7 million higher. SG&A expenses for the second quarter were $12.2 million, which was sequentially higher by approximately $900,000 due to increased compensation, costs, including benefits. R&D expenses, which consist principally of continued development for our global advanced process technologies, were sequentially flat at $4.4 million in the second quarter. The noncash stock comp expense was $700,000 for the second quarter. Please turn to Slide 8. During the quarter, we generated operating income exclusive of the Singapore charge of $13.2 million or 11.3% of sales. We have continually discussed the leverage in our operating model on incremental revenue with a target of 50%. We achieved an incremental margin for Q2 of 67% as a result of the improved mix, reduced manufacturing expenses related to Singapore and the nanoFab, among other items. EBITDA as defined in our credit agreement for the quarter was $35.8 million. This equates to $155 million on a trailing 12-month basis. Also on a trailing 12-month basis, free cash flow was approximately $70 million, with EBITDA of $155 million less non-financed CapEx of $85 million. Other income expensed in the second quarter was expense of $1 million. And during the quarter, we recorded tax provision of $2.7 million, which was slightly below the low end of our guidance as a result of increased profits mainly in the U.S. for which we have offsetting NOLs. GAAP net income was $8.8 million, with an EPS of $0.14 per diluted share and non-GAAP net income was $8.9 million or $0.14 per diluted share, which was above our guided range of $0.09 to $0.13 per share. At the end of the second quarter, we had 1,277 full-time employees, and this equates to revenue per employee of $368,000 on an annualized basis. Now let's take a look at the balance sheet. Cash and cash equivalents at April 29, 2012 amounted to $192 million and our net cash, which is cash less debt, was $12 million. Our working capital at the end of the quarter was $221 million, up slightly from the end of Q1 at $220 million on 5% higher revenues. Accounts payable and accrued liabilities on April 29 amounted to $81 million. At the end of Q2, we had $5 million of CapEx accrued for, which is down from $9 million at the end of Q1. Please turn to Slide 9 as we review our capitalization. Total debt at April 29, 2012 was $180 million. The principal components of outstanding debt include $22 million 5.5% senior unsecured convertible notes due in October '14, $115 million 3.25% senior secured notes due in April 2016, approximately $17 million for capital lease obligation and a $25 million 5-year term loan related to the nanoFab building and approximately $1 million related to an obligation with a customer who co-funded a tool purchase. At the end of Q2 2012, we did not have any outstanding borrowings on our $30 million revolving credit agreement, which matures in April of 2015. Now let's take a look at our cash flows. Cash provided by operations for the second quarter of 2012 was approximately $28 million. Depreciation and amortization for the quarter was $21.5 million. Cash flow used in investing activities during Q2 2012 amounted to $55 million and includes $15 million for cash payments for capital expenditures and $35 million related to the nanoFab building. Net cash provided by financing activities during Q2 2012 amounted to $17 million and includes $7 million related to the repurchase of PSMC shares, which were offset by the $25 million financing related to the nanoFab building. Please turn to Slide 10 as we take a look ahead. We expect our CapEx needs on a cash basis, excluding the $25 million financed portion of the nanoFab building for 2012 to be in the range of $85 million to $90 million. However, we have the flexibility to accelerate or decelerate our spending depending upon market conditions. We do expect to continue to generate free cash flow once again in 2012, and our 2012 investments were principally geared towards high-end leading edge products for IC and FPD applications. These significant high-end revenue increases, the market share gains as we have seen in 2012 -- 2011, and thus far in 2012 have certainly validated our high-end strategy. Our visibility, as always, continues to be limited as our backlog is typically 1 to 2 weeks. At this time, we expect to experience continued growth. So taking this into consideration, we are projecting revenue for the third quarter of 2012 to be in the range of $118 million to $123 million. During 2012, our tax rate will be impacted by the flow of income from jurisdictions which we may have credits and which upon our limited ability to recognize tax benefits in areas in which we are taxable. Accordingly, we're estimating income taxes for 2012 to be in the range of $14 million to $16 million and for the third quarter, this will equate to a range of $3 million to $4 million. As a result, based upon our current operating model, we estimate earnings per share for the third quarter fiscal 2012, exclusive of the impact of any restructure cost, to be in the range of $0.14 to $0.18 per diluted share. Please turn to Slide 11. In summary, I'll leave you with a few key thoughts. First, we expect to incur top line and bottom line sequential growth in this environment. Second, we are very excited about our potential to capitalize on the high-end growth in both FPDs and IC. We see opportunities to continue to capture high-end market share in 2012 as we execute on our high-end strategy while servicing our mainstream customers. And as Deno stated, we believe we are the strongest combined IC and FPD merchant in the market today. And finally, we expect to continue to build on the momentum that we established in fiscal 2011 and have continued to the first half of fiscal 2012. Although our visibility is limited, as always, we will plan to match our operating infrastructure to the market environment. Now I'd like to turn the call over to the operator for questions and answers.

[Operator Instructions] Our first question comes from Stephen Chin with UBS.

This is Mahavir Sanghavi for Steven Chin. Just a clarification question, Sean. So the increase in the cash CapEx, is that driven by the Micron nanoFab purchase?

Actually, that's correct. The -- last quarter, we had guided $75 million to $80 million and this quarter, we're guiding $85 million to $90 million. Primarily, the increase is solely related to $10 million cash portion of the non-financed building purchase. So we haven't changed our core CapEx plans for fiscal 2012 and we do expect, when we announce Q3 guidance, to get further granularity into the -- into our future CapEx plans as we get into the end of 2012 and to 2013.

Great. And then what's impacting the mainstream business? Is it just the low volume or aggressive pricing?

I'll give a few key points and then I'll turn it over to Peter Kirlin for further discussion. But just as a reminder, we do recognize that it is down year-over-year, but it is still a cash cow for the company. We firmly believe we're not losing share. It's a profitable piece of our business, and we scaled our infrastructure with Singapore and some other selected moves to maintain our margin leverage. And Peter, maybe you can get some of further granularity on that.

Yes. Regarding the mainstream business, it very much goes as our customers go, so there's always exceptions. But if you look at the mainstream customer base generally without pointing to single customers, if it was out there publicly, it's very clear that most of them called the bottom end of market and they're in the first calendar quarter, which is generally the first fiscal quarter for most of those semiconductor manufacturers. They are all more or less or largely projecting incremental growth going forward. So we have, I think, some optimism regarding our mainstream business for next quarter and the second half of the calendar year. Having said that, I think what we've also said generally is the high-end continues on whether the semiconductor business is soft or strong, and I think our high-end numbers clearly reflect the fact that, that part of the business has remained vibrant regardless of overall market condition. So we're -- we go as our customers go. And they right now, looking forward, are generally optimistic for the mainstream, which is a nice change.

Got it. And then just a couple of quick questions. What is the key assumption embedded in the guidance? Is the assumption that the mainstream business, you expect it to grow Q-over-Q in the July quarter?

Mahavir, we're not going to -- we haven't typically provided that level of granularity with respect to guidance. But as Peter said, we are optimistic that it will improve, perhaps to the second half of 2012. But we certainly have the upside -- certainly, if upside comes, we have the infrastructure in place to react to improving business conditions. The high-end has been very strong for us. Even in our truck quarter of Q1, it continues to be strong. So to the extent the mainstream business "snaps back", we certainly can react to it very quickly.

Got it. And one last question, do you have any exposure to Elpida and do you expect any positive impact from Micron purchase of Elpida?

Chris, why don't you handle that question?

Okay, Sean, sure. Today, no, we don't have any exposure to Elpida. That is, they're not a current customer. To the extent there's a transaction there that one of our larger customers benefits from, we can speculate that they may change in the future, but we really do not have any particular information right now we can comment on. I think all we can say is any opportunity presented to us, particularly one that was not existing prior, could have potential and we will do everything we can to maximize any opportunity that's given to us in that space.

I think we're very confident that we're capable of building any photomask that Elpida or their affiliates would need.

Our next question comes from Krish Shankar with Bank of America.

I have 2 of them. Either Sean or Deno, relative to the [indiscernible] telegraph issues at the foundries of the leading-edge from the yield and all the other challenges, does it actually slow the design tape-out?

Sorry, Chris, we couldn't hear the beginning part of that question.

I was trying to find out with all the issues the foundries are having at the leading edge with the yield and other challenges, is that actually slowing out design tape-outs for leading -- for next-generation technologies?

Chris, why don't you jump in on that?

No, I don't think it's really slowing down. In fact, you might see a little bit of the opposite, since photomask tend to sometimes increase in volume when companies are working on yield and new designs and respins. You can sometimes see a counter effect there. I don't think we've seen a downtick on the foundry side. In fact I would say the opposite, particularly for non-TSMC foundry, probably stronger demand profile. And that may have something to do with some of other companies looking around for alternative suppliers.

Okay. And then when you look at it longer-term from the -- when EUV starts rolling in, how does it impact the mask industry both in terms of number of masks needed and also what would the pricing be for EUV related for the masks?

The EUV in particular, the cost for photomask or a single EUV mask tends to be higher because it's a more complicated mask. However, it's usually replacing a double patterning or triple patterning layer. So the total cost for the layer to deliver may not change that much. As far as the merchants go, we expect a fairly gradual pickup in EUV over the next few years, 2015, 2016 potentially, the market's starting to grow and become more substantial. With that said, we are gradually increasing our R&D effort, although today it's still a relatively small fraction of our total. Both in our JV and our own facilities, we do have a few stronger initiatives in EUV. We're talking to the other suppliers, the equipment companies, the resist companies to make sure we know what the infrastructure looks like, and we're in constant communication with our customers to make sure we can match into their roadmap. So we do think, from a business side, there'll be a gradual transition, though.

Is it fair to ensure to assume that a decrease in the number of layers would be offset by the increase in pricing?

Yes, that's what kind of I was trying to say in my first comment. That's right. Generally, the single -- the cost of a single mask should be -- will be higher. But the total number of levels per set -- mask set likely will go down because you're replacing some double and triple patterning layers. So the aggregate may not change much. And of course, the mask set prices go up generally with each node anyway, so I don't think you're going to see a dramatic change in the node pricing models for masks as the EUV comes online.

Just to provide a little more granularity on that. EUV will only be used for the most typical layers. So if a mask set is 40 layers, you'll be able to count the number of EUV layers on one hand. So given the pricing volume trade-off that Chris just talked about, it's actually a trade-off over only a subset of the total radicals in any one order. So it's really, for us, a marginal impact.

Our next question comes from Patrick Ho with Stifel, Nicolaus.

Sean, maybe in terms of the guidance for the July quarter, can you just kind of, on a broad basis, characterize where you're seeing, I guess, growth between advanced versus mainstream IC masks?

Sure, Patrick. We believe that we will see, at this point in time, sequential growth in the high-end to the extent further demand continues to come in higher than where -- we certainly have the infrastructure in place to handle more high-end business and mainstream business as we move forward. Our guidance is based upon what we see today. And as Peter pointed out on the mainstream side, we do expect that to be a little bit stronger in the second half, hopefully, some of that falls into this quarter. So we're optimistic about our opportunities.

Okay, great. Maybe just going to the FPC -- FPD side of things. Obviously, it looked a little bit stronger than we all expected. In terms of the advanced FPD, are you seeing that from traditional business or are you seeing any pickup on the AMOLED side of things?

Well actually, as Deno alluded to in his prepared remarks, we did see high-end growth in FPD in arguably somewhat of a soft market. And we can say without providing too much granularity for competitive reasons, we did see growth at both -- sequential growth in both G8 and AMOLED-based products.

Great. And final question for me again, bigger picture just related to the EUV versus double patterning. Have you seen any pickup on your end in terms of double-patterning type of techniques over the masks related to that because of delays in EUV? Have you seen any pickup, I guess, either in design or even mask sets for those type of processes?

I think on the R&D side, I would say yes. We have seen that most all chipmakers we work with are now exploring multiple patterning solutions to needs that last longer than they had anticipated, given some of the delays in EUV. So on the R&D side, definitely seeing higher volume there, even 3, 4 masks kind of flows per level. To the extent those move in to production, then the overall volume should increase driven by those patterning strategies.

Our next question comes from Edwin Mok with Needham & Company. Y. Edwin Mok: So kind of on the last question, but not related to EUV. Have you guys seen any activity being done on the 3D NAND or 3D DRAM memory technology? And where do you think that process is coming?

This is Chris. I can make a few comments without giving specifics. We have seen increased activity on 3D across multiple customers, particularly on the NAND side. I think it's ahead. The DRAM side, a little more complicated in how you scale that to 3D architecture. And of course on the microprocessor side, there's work on 3D on the transistor level. So the short answer is yes, I think all the major memory companies are working very hard on this and looking at it. And NAND seems to be the most serious potential move into that architecture. Y. Edwin Mok: Great. And then second question regarding the high-end growth on the IC side, right? How much of that is driven by kind of the logic side because all these comes from moving to -- basically the 45 will be on node, but how much of that is driven by memory shrinking?

Yes. Right now, near -- the lion's share of the high-end growth is being driven by our penetrating more and more of the logic customer base. Our flash business has remained very -- it's been steady -- very true and very stable. DRAM, still we're looking forward to a snapback in it, and the growth is really logic. Y. Edwin Mok: Great, that's very helpful. So that's good penetration there. Third question I have for Sean is based on your guidance, it seems to implied pretty healthy offering or margin improvement there. I was wondering how much of that is reduction versus just gross margin improvement?

I think, Edwin, it's a combination of both gross margin improvement and OpEx. We certainly did see a little spike in SG&A during the quarter. We expect that to pull back a bit. And certainly, once the costs are fully -- with respect to Singapore, fully baked into the model and plus the savings from the nanoFab and other detailed, I'm not going to get into that level of granularity, but cost savings initiatives, primarily on the manufacturing side is providing the leverage to the model. So we're still targeting as we move forward based on sequential revenue growth, a drop through -- a target drop through of both 50% at the gross and operating margin line. Y. Edwin Mok: I see, great, yes. Just -- actually one question I have was if any come one-time either restructuring or impairment charges that you expect in the coming quarter?

At this point in time, we don't anticipate any significant one-time charges. There may be a small amount related to Singapore coming through that's part of the restructuring cost. We certainly don't expect any significant cost at this point in time. Y. Edwin Mok: Great. And then last question I have is you mentioned that you did some buyback on PSMC during the quarter. I was wondering what drove that decision to buyback PSMC and given that your stock is [indiscernible] of your book value, any thought about buying back your own stock?

What we can say about that, Patrick, is PSMC is a publicly traded company in Taiwan. We have majority share of approximately 57%, and they've elected because of their stock price to buy back treasury shares in the open market. And as a result, that flows through our consolidated cash flows and balance sheet. And as a result, our own shipment increased from 57% to 67% approximately. And if you look at our income statement, the minority interest or net income attributable to noncontrolling interest is a deduction for us, which means some of that's going to our -- the minority shareholders. So to the extent we own more, that number should decrease as we move forward. Y. Edwin Mok: And buyback for your own stock?

At this point in time, depending upon our capital needs as we look forward, we don't have any present plans to do so. However, the full environment, we always look at all options.

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

Sean, first a quick clarification. Do you expect the margin leverage or the incremental fall-through to be 50% or 60% going forward?

We're still targeting 50%. Obviously, if we have a quarter that did 60%, we'll be very pleased.

Okay. And is there a big difference between the high-end versus mature mainstream business on that margin leverage?

Not necessarily at this point in time. Every incremental dollar is -- would drop about the same. But certainly, the velocity would be -- the absolute number would be higher because the revenue is higher attributable to high-end business. But we're pretty much agnostic once we move forward and reach -- when we reach our breakeven to get the revenue in. So as Peter alluded to earlier, to the extent things really snap back or improve on the mainstream side, we have the capacity to handle the work. Then at the high-end, we have the capacity to handle the work if it comes it, whether it be IC or FPD.

Okay. And it sounds like the mainstream accelerated nice through the quarter. There's no reason to believe that doesn't continue that trend is there at this point?

No. We -- hopefully, it does -- continues to improve. Certainly, we had a little bit of a slow start in Asia in the beginning of the quarter related to Lunar New Year, but we expect it to improve over the [indiscernible] quarter.

Okay, yes. And all the trends we're hearing from the outside is that -- that kind of mainstream business across-the-board has gotten a little better and so it should be nice quarter-over-quarter improvement, I would think. So looking at the cash flow over the last year, it looked like you were $70 million of free cash flow. Is there some way to quantify whether -- what advantage you had to facility ownership at the time and the Singapore closure was in place?

Well, I think what we could say to that, Tom, is that we said in the press release is that we would expect to save approximately $3 million to $4 million in cash related to the Singapore closure on an annualized basis, so that's one number. And then on the nanoFab building, we are saving -- we probably stated that we're saving $5 million annually on cash flow.

Okay, that helps. Okay, and then finally when you look at the capital spending plans for the year, I assume that at this point, that builds in the expectation for growth at the high-end as well, and so if there's continued growth to the high-end, that number doesn't go up unless it's some spectacular growth somewhere.

That's correct. We're currently evaluating, as we said on our last call, our plans for fiscal 2013 and '14. And as we make those decisions, Deno and the team makes decisions on where to spend and deploy the capital, we'll provide updated guidance. We do expect to get further granularity, our first outlook into 2013 when we close Q3.

Our next question comes from Chris Blansett with JPMorgan.

This is Bill Peterson calling in. My question is more, if you consider the full year, and I guess I may be speaking calendar year, it looks like it could be down. I'd like to get an indication on what you -- how you view the overall photomask market, particularly for semiconductors? And then the second part question to that, assuming your trajectory and market share, where would you think you would end up relative to your competition as the #2 position within reach?

This is Chris. I could make a quick comment on the overall market. As we've stated previously, market growth as a percentage of semiconductors has historically been 1% to 1.5% of semiconductors. So to the extent that is growing, overall photomask should grow but modestly. And so it's a relatively flat market, most of the large gains come through market share wins, node transitions and acquisition of new customers. In terms of Photronics opportunity, I'll bounce it back to Sean and Deno to make some comments on that.

With this opportunity is basically, as Chris said, gaining market share. But as I mentioned earlier, the strong become stronger. And we do believe we're in a position to continue to gain market share and then capitalize the opportunities coming along.

Ladies and gentlemen, I'm not showing any other questions at this time.

With no other comments, I'd like to thank all the participant on behalf of the management, and thank you for participation. Have a good day.

Ladies and gentlemen, that concludes this conference call for today. We thank you for your participation and ask that you disconnect your line.