Good day, ladies and gentlemen, and welcome to the Photronics Third Quarter Fiscal Year '12 Earnings Call. [Operator Instructions] And as a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Mr. Pete Broadbent, Vice President of Investor Relations and Marketing. Sir, you may begin.

Thank you, and good morning, everyone. My name is Peter Broadbent, Vice President, Investor Relations and Marketing of Photronics. We'd like to thank you for joining our Third 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 the 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 be archived on our website until we report our fourth quarter 2012 results. Joining us on the call today are Constantine "Deno" Macricostas, Chairman and Chief Executive 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 Photronic's third quarter performance. During Deno's and John's remarks, 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. In Q3, quarterly sales of $116.6 million, ahead of our revised guidance. IC sales were $90.3 million. High-end sales were $27.4 million, down $3.9 million sequentially. It was offset by an increase in mainstream sales, which were $5.1 million or 9% sequentially. We are pleased that the mainstream business picked up this quarter. We showed increased demand because many of our mainstream customers. It was expected, also was unexpected because of decline in demand from high-end customers in the second half of July. This decline, however, was limited to a few customers, mainly memory companies that scale back orders. Turning to the display side, sales for FPD photomask were $26.3 million during the quarter, down $2 million sequentially. High-end sales were $17.3 million, down $1.9 million sequentially. On the display side, we experienced softness at the leading edge. Demand for high-end FPD declined late in the quarter. We believe this was related to economic uncertainty and slower demand for our advanced devices in mature markets. Due to strong cost control throughout the quarter, we improved our gross and operating margin sequentially by 230 and 190 basis points, respectively. As a result, we generated earnings per share of $0.16, which were within our initial guidance. EBITDA was $38 million, up $2 million sequentially. In summary, despite future economic trends, we believe that we're in excellent position. We have strong global operations, leading-edge technology, a strong balance sheet and we believe we're the most cost-efficient photomask supplier in the market. In the near term, we are focused on strengthening our competitive position in a conscious market. We are seeing momentum in our mainstream customers' orders and our high-end customers have a strong node migration plans. [indiscernible] these advanced nodes that goes both memory and logic. Longer-term, we believe this trend will yield to continue growth and market share gain for Photronics and we remain disciplined in our approach to controlling cost. Before I turn the call over to Sean, I would like to thank the entire Photronics global organization for the effort 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 third quarter of fiscal year 2012, review our balance sheet and cash flow and then provide our outlook going forward. Please refer to Slide 4 for our GAAP to non-GAAP net income reconciliation as we review the third quarter. Slide 5, 6 and 7 show our sequential quarterly and year-to-date IC and FPD revenue performance. As Deno mentioned, third quarter revenue decreased by about 1% sequentially to $116.6 million due to a slowdown during the last few weeks of the quarter principally in high-end IC markets principally related to memory and, to a lesser extent, reduced demand for FPD photomask. Revenues for IC and FPD photomask were $90.3 million and $26.3 million respectively for the third quarter. Breaking out sales geographically, 61% of total sales were from Asia, 29% from North America and 10% from Europe. High-end global IC sales of $27.4 million or 30% of total IC sales for the quarter. This represents a sequential decrease of approximately 12%. As Deno mentioned, while high-end sales were down sequentially, mainstream sales rebounded with a sequential increase of $5.1 million or 9%. Advanced FPD sales were $17.3 million or 66% of total sales. As a reminder, high-end IC revenues consist of revenue derived from SEMI design at and below 45 nanometers and high-end FPD revenues consist of revenue at and above G8, as well as AMOLED-based products. Now let's continue through the income statement. Gross margin for third quarter was 27.7%, up 230 basis points sequentially even on a decreased sales. The improved margin related to improved manufacturing efficiencies, principally labor and materials, coupled with certain manufacturing expenses classified as R&D as a result of increased development and qualification activity at advanced nodes. The 27.7% margin is actually higher than our Q2 2011 margin when we had revenues nearly 10% higher at $133 million. Selling, general and administrative expenses for the third quarter were $11.8 million, down sequentially by approximately $400,000 or 3% due principally to reduce labor. R&D expenses, which consists principally of continued development for our global advanced process technologies, were $5.2 million or up $900,000 sequentially as a result of the increased process development quals at advanced nodes during the quarter. It is important to note that we should begin benefiting from these advanced quals in calendar 2013. Noncash stock comp for the quarter was approximately $900,000. Please turn to Slide 8. During the quarter, we generated operating income of $15.3 million or 13.1% of sales. Sequentially, operating income rose $2.1 million or 16% despite the $8,000 reduction in sales for the quarter as a result of the previously mentioned manufacturing expenses. EBITDA, as defined in our credit agreement for the quarter, was approximately $38 million. This equates to $145 million on a trailing 12-month basis. Also on a trailing 12-month basis, free cash flow was $55 million. EBITDA of $145 million less non-financed CapEx of $90 million. Other income and expense for the third quarter was expense of $800,000, down $200,000 sequentially due principally to favorable foreign currency exchange. During the third quarter, we recorded tax provision of $3.3 million, which was within our guided range. GAAP net income and non-GAAP net income was approximately $11 million, and EPS per diluted share was $0.16, which was the mid-point of our original guidance of $0.14 to $0.18 per share. At the end of the third quarter, we had 1,265 full-time employees. This equates to revenue per employee of $369,000 on an annualized basis. Year-to-date, employee headcount is down approximately 6.3%. Now turning to the balance sheet. Cash and cash equivalents amount to $197 million and our net cash, which is cash less debt, was $19 million or up $7 million sequentially. Our working capital at the end of the quarter was $212 million, which is down slightly from the end of Q2 at $221 million. Accounts payable and accrued liability at July 29 amounted to $91 million, and at the end of the quarter, we had approximately $5 million of CapEx accrued for. Please turn to Slide 9 as we review our capitalization. Total debt at July 29 was $178 million. The principal components of outstanding debt include: $22 million of 5.5% senior unsecured convertible notes, which are due October 2014; $115 million, 3.25% senior unsecured notes, which are due in April of 2016; approximately $16 million for our capital lease obligation; $24 million, 2.5% 5-year term loan relates 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 the Q -- quarter, we do not have any outstanding borrowings on our $30 million revolving credit agreement, which matures April of 2015. Taking a look at our cash flows. Cash provided by operations for the third quarter of 2012 was approximately $45 million. Depreciation and amortization was $20.9 million for the quarter and year-to-date cash provided by operations was $108 million. Cash flow used in investing activities during Q3 amounted to $32 million. It includes $24 million for cash payments for capital expenditures and $7 million from increased investments in our joint venture. Net cash used by financing activities during the quarter, amounted to $5 million and includes $4 million related to the repurchase of PSMC shares. As we look ahead, please turn to Slide 10. We expect our CapEx needs on a cash basis excluding the $25 million for the financed portion of the nanoFab building in 2012 to be in the range of $80 million to $85 million. Our initial outlook for CapEx in 2013 is projected to be in the $70 million to $90 million range. However, we do have the flexibility to accelerate or decelerate our spend depending upon market conditions. Our 2012 and 2013 investments will principally be geared toward high-end, leading edge products for IC and FPD applications in the U.S., in Taiwan and in Korea. This significant high-end revenue increases the market share gains we have seen in 2011, thus far in 2012 have certainly validated our high-end strategy. Our visibility, as always, continues to be limited as our backlog is 1 to 2 weeks. For Q4, we do expect to experience some typical seasonality related to the U.S. and European summer holiday vacation season. We also expect to continue to see a somewhat muted market for certain high-end IC orders as we did during the month of July. So taking this all into consideration, we are projecting revenue for the fourth quarter to be in the range of $114 million to $118 million. Taking a look at taxes. For the fourth quarter, we're estimating tax expense in the range of $3 million to $4 million. And as a result, based upon our current operating model, we estimate that EPS for the fourth quarter of fiscal 2012 to be in the range of $0.14 to $0.17 per diluted share. Please turn to Slide 11. In summary, I'll leave you with a few key thoughts. First, we continue to generate free cash flow and expect to do so in the near term. Second, we are confident that our business model and our ability to weather any short-term softness in the market while continuing to grow our market share at the high end. In Q3, we're able to report improved gross and operating margins on sequentially -- on a sequential basis on lower revenues. We see continued opportunities on our customer business and node migration plans, and we have a strong financial position and excellent technology to capitalize on those plans. And finally, we expect to continue to build on the momentum that we've established over the past few years as a leader in advanced photomask technology. Although our visibility is limited, as always we 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 the line of Edwin Mok with Needham and Company. Y. Edwin Mok: So first question I have just on the near-term weakness, right? How much of that -- I've seen on the press release you talked about the memory being the main contributor there. I guess, 2-part question, right? Can you be a little bit more specific, is it nano, DRAM? And as it relates to specific customer maybe because Micron is acquiring Elpida and, therefore, delaying some migration there or can you give a little color from there?

This is Chris. I would say more DRAM-specific on the memory side, and we don't really want to comment on specific customers. But a few of our strategic partners and larger customers are experiencing some weakness as you know, and the segment is still a little bit weak. Also, there are some changes in manufacturing strategies for certain of our customers as well, so that could be part of the impact. Y. Edwin Mok: I see, great. And then -- but I noticed that your mainstream IC revenue was actually up sequentially on the quarter, right? Even though you have some weakness on the high-end. Why -- what drove the sequential improvement there?

Generally, our -- the buying patterns of our mainstream customers are driven by the size of their profits and therefore their R&D budget. And what we said last quarter was that going into the quarter, mainstream customers, although still tentative, were becoming more optimistic. I think that situation still is generally true where, on the margin, they see their business improving not as much as they'd like, of course, but overall there's momentum in the mainstream market and their order patterns are reflective of that. In this quarter, generally because of the vacation season in Europe largely but also in the U.S., designers go on summer holidays and the tape-out volume diminishes. So our guidance contemplates that, which is something we see every year. But on the margin, which is directionally, the point of view of our mainstream customer base is positive. Y. Edwin Mok: I see. So derived cost in your guidance, it's flattish sequentially, are you expecting mainstream to come back in the new, better high-end business in this quarter?

I think, generally, Edwin, the guidance is reflective of both our high-end IC and FPD business and mainstream business. And we don't specifically give targets when we provide our guidance. But generally, as Peter stated that the environment, overall environment was better in the quarter for our mainstream business than the previous quarter. Y. Edwin Mok: Quickly, move on to -- on the logic customer, any comp progress you can report especially on the 20-nanometer and beyond. Are you guys seeing any benefit from customer struggle to move deposits at PSMC and, therefore, moving to other customers?

I can make a few comments and then Peter and others can comment as well. I think the short answer is, yes, we are seeing I would say additional pressurization on quals, particularly more at the advanced nodes because there are some concerns about both capacity and yield. So that's generally been a positive trend. Some of the manufacturing utilization we lost a little bit of the memory work. We took full advantage of that and we did accelerate actually a few of our high-end logic quals using that capability in that capacity. So that was also kind of a positive outcome of some of the quarterly activities. So short answer is yes, more activity there. The 4 largest foundries definitely seem fully committed to stay on roadmaps, 20-nanometer production and they all have roadmaps down to '14. So a pretty good situation there right now.

Yes, and the only thing I would -- I would like to add 2 things. One is we have a very demanding logic customer, which is I think very good for us because when the foundries come looking for advanced technology nodes, we already have it really with the bow wrapped around it. So our larger quals are going along in the founding space very nicely. So that's the good news. I think just from a revenue perspective, those quals which are well underway right now are -- we see them as 2013 given the length of the qual as 2013 of revenue upside. So the good news is there is more of it. I would just -- as you think about our business, it's a 9-month process that we're in the sort of the first 1/3 of the process right now is how I will describe it. Y. Edwin Mok: Great, that was extremely helpful. Last question I have is, I guess a question on margins, right? So why did you spent a lot, it sounds like you get some benefit from the single wall restructuring there. Just to clarify that, if that's largely in the model already? And then the second thing that's -- I think Sean, you previously talked about kind of incremental margin you generated from incremental revenue. I assume that your business improved beyond October quarter and get back to that $130 million from Asia [ph] you've done previously a few quarters ago, right? Do we expect some of the kind of incremental margin, which I'll call them micro[indiscernible] node migration of 30%, is that -- am I correct on that?

Sure, Edwin. Speaking to margin expansion during the quarter, certainly, we have benefited from a couple of activities earlier in the year. One is at Singapore, which is baked into our guidance going forward, plus the nanoFab building. Additionally, with a lot of other incremental items that we continue to work on cost controls and minimizing our exposure to any downturn. We do believe, still continue to believe and have demonstrated when we have incremental revenue, you should have at least -- our target's at least a 50% drop-through and we are poised for that. As we do that, we'll continue to work on extracting cost, improving on manufacturing efficiency and being as lean as possible.

Our next question comes from the line of Krish Sankar with Bank of America Merrill Lynch.

Sean and Deno, when I look at your October guidance, which is roughly flattish, what is the trend between IC and FPD? Does one grow sequentially or are they all flat?

Krish, without providing giving specific guidance because it's -- FPD is a little bit more -- tends to be, as some people refer to, a little bit more lumpy. But that -- our guidance is reflective of where we think the flat panel market will be in the IC market going forward to the extent that some of our certain applications snap back, i.e. high-end IC or high-end FPD, we certainly have the capacity to handle those orders.

All right. And then the guidance range of roughly $4 million, is it fair to assume that some in the upper end to the lower end is going to be a function of high-end IC?

If we come in at the lower end, not necessarily. Because it's a combination of our entire book of business. But our goal obviously is to achieve -- is to get closer to the high end or exceed it, but that's what we see today.

Okay. And then my final question, I mean, thanks for the guidance on -- or kind of color on 2013 CapEx, $70 million to $90 million, it just seems like -- and I understand the argument to invest in the business. How do you think of the long-term CapEx either at the post record sales or how do you look at it? Because it seems like the CapEx run rate is at a pretty high level and it doesn't seem to be easing off anytime soon.

Well, I think our target as we've spoke about in the past, our goal is to try to have it less than 20%, closer to 15% of sales. That said, some of the items that Chris and Peter refer to with respect to advanced quals, the tools related to those advanced quals and the capacity is very expensive. And because we have the opportunity for the future in the near term without providing guidance to 2014, we do -- we will match our infrastructure to the opportunity in the marketplace.

Unfortunately -- this is Deno, it's a capital-intensive business. And to stay competitive, we have to invest. That's why we have some depreciation also too, and our EBITDA is so high. And -- but definitely have free cash flow or we're going to have free cash flow at the end.

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

Sean, maybe first would be in terms of the margin profile, you guys did a really good job there. First, do you believe a lot of the efforts there are sustainable where you can keep it at these type of levels again at this revenue range? And secondly, you mentioned some of the manufacturing efficiencies and improvements there. Can you just give like one specific example of what type of actions that helped the margin profile at least on that front?

Okay, I think if -- to the extent that our revenue is flat, we would still maintain the margin profile going forward. We do not expect our cost to increase. We have a series -- and I'll turn it over to Peter, and he can give in some more detail, but we have a series of cost containment, operational efficiency projects ongoing. There's a lot of nickels and dimes without minimizing the process, but it's a daily effort. Peter, do you want to provide?

Yes, and high-level -- Patrick, the kind of efforts we work on daily to take cost out of our products. One type is that traditionally, you manage the supply chain. You would continue to put the same pressure on our suppliers as we feel more customers maintain competitiveness. That's traditional. The other thing we do day in and day out is a small activity to take content out of what we produce, shifting certain parts of business mix onto more fully depreciated tools to -- all the way to the smallest things like, for example, when we ship our product in the old days, every part of the ship went with a paper company of some electronics CMC. Well, today more and more of our customer base, for example, that's done electronically so there's an active effort day in and day out with every customer to paperless transactions. That can give you a long list, all the way to the cardboard boxes we ship the product down and how do you -- finding incrementally lower cost way to ship our product. So anyway, it's a very long list of small activities where you eat the elephant one bite at a time.

Patrick, you think it's tied down in our business is labor cost, material, depreciation, like a nanoFab, you have high depreciation. Mature business, very low depreciation, high material cost and labor cost. We've been able to -- as Sean said many times, 3 years ago, we have about 1,300 employees. Today, we have less employees, and we've been a 40% of business. So our labor cost, we're controlling very well. Material cost, improving yields, use the right place for the right technology. It's -- the energy, we're focused very much on energy cost, because our electric bill is about $15 million a year, so be able to reduce it significantly. Sean done a great job of course -- financing the nanoFab. Again, I can go on and it's a bunch of these pages. Anyway, I don't want to bore you with all the details, but you give them a cross section.

That's helpful. Maybe my next question in terms of the overall environment and, I guess, what you're seeing out there. I understand that some of the weakness in the memory market, I don't think that's a tremendous surprise at this point of the game. But as the quarter results and potentially the outlook highlight, the mainstream business has actually increased and held up pretty well. Given that there's still a lot of uncertainties in the overall SEMI market, I guess what are you seeing out there from your customers? Is it potentially share gains that are giving you this boost? Because if you look at some of the other customers out there, there's clearly a high level of caution still as we enter normally this seasonally strong period.

Well, Patrick, certainly in the mainstream market quarter-over-quarter, the revenue uplift was driven by an increase in units. And I think there's little doubt if you look at our performance of our mainstream business over the last 3 years, we've been on an systematic upward unit volume trend in a market that is down in units. So without a doubt, we're getting market share and we're doing it the old-fashioned way, which is to provide better product at a competitive price. That's what we do and that's historically what we've done.

Okay, great. Final question for me, Sean, you talked about the CapEx for next year and I know it's obviously a very fluid situation as you enter the following year. But where at this point do you think more of the CapEx is going to be focused towards? Is it going to be advanced ICs or potentially even advanced FPD given that you're doing more work on the AMOLED side. At this point of the game, where do you see some of the CapEx being targeted?

I think generally, our CapEx needs to track towards the bulk of the CapEx requirements for the near term related to the high-end IC, primarily in 3 locations: Boise, Idaho, Taiwan and Korea, and to a lesser extent, to FPD. But as we see the opportunity, we may get back to more of a 75%-25% split down the road. But right now in the near term, it's certainly on advanced quals and product opportunities for high-end IC.

Our next question comes from the line of Christopher Blansett with JPMorgan.

This is Bill Peterson calling in for Chris. I guess, one question I have is are you seeing any sort of, let's say, insourcing from some of the major memory our foundry players given maybe they're not selling their own masks houses as much as they perhaps they thought they would.

Insourcing, do you mean larger utilization of internal captives or maybe just clarify...

Like outsourcing [indiscernible].

Oh, increased outsourcing?

My question, yes, Chris hit the nail on the head the first time, are the captive guys bringing more of their own tape-outs internally given the relatively weaker outlook?

I mean not right now. We've seen probably a disproportion of investment in capability in a few highest-end captives that's for sure over the last year or 2, I think, compared to the merchants and I'll say the weaker captives, the few strongest that disproportionately invested more. It's mostly been capability and roadmap enablement sort of investments. How that translates into the future, outsourcing strategies remain a little bit unclear, but for sure, they still have active merchant programs. We work with all the large captives and we don't see any large dynamic change in that situation right now.

Okay. And then I guess, if you consider the CapEx outlook for the rest of this year and then the next year, what would you say a quarterly sort of revenue run rate would be -- you consider to be at full capacity?

Certainly, I would say as we look at, Bill, our model today, we certainly have the installed capacity do well in excess of $145 million depending upon the mix. And as we bring higher-end tools online, that capacity should go up. But it's market-driven, it's mix-dependent, but we certainly believe if there was a "snapback" at any point in time during the quarter, we should have the installed capacity to handle whether it's high-end and/or additional mainstream product flow.

Okay. Final question, this R&D expense, that we should view that as a one-time -- this 20% increase in the quarter was just a one-time event?

No, I think what you will see from an R&D perspective, as Chris mentioned earlier, we have some I think pretty exciting work going on in the high-end logic space and that's not a single-quarter event. So what I'm expecting is this qual to be up over, up over the next 1 to 2 quarters.

I think to Peter's comments, looking forward our R&D expense should at -- should be between $4 million and $5 million. And some of those costs they're just as I mentioned -- we mentioned in the prepared press that it's just the reallocation of installed capacity that was $4 million to COGS line. So it doesn't really change too much of our operating income but it provides us -- I mean, another way to look at it to the extent that number is up, it should bode well for us in the future.

[Operator Instructions] Our next question comes from the line of Steven Chin with UBS.

This is Mahavir Sanghavi for Steven Chin. Just a question about AMOLED. You have a leading position as the #1 AMOLED supplier. I'm wondering if you could share with us when we could see some of your other customers that are perhaps sampling that you could start to ramp up on the AMOLED side. Can you give us any color on that?

Chris, do you have any comments [indiscernible]?

Yes, specifically it's difficult to provide input on some of the customer adoption roadmaps. You can only say that the users or the companies that wanting to put AMOLED display into mass production definitely has gone beyond the leader today. I mean there are probably 3 or 4 different companies now that are looking at various versions of AMOLED displays types. Now one of that would be in our production mode, it really -- some of it we don't know and the rest that we probably should not comment right now.

Got it. And then the second question about the EBITDA target. Sean, if I remember correctly, you had targeted something around $175 million during the year. I'm wondering if that's the number that the management [indiscernible] guides to?

That's our goal to get back to that level, Mahavir. Obviously we're -- we had down quarter in Q1, which was our 12th quarter, and this quarter was down a bit. But we don't believe the EBITDA based upon what we're forecasting will go down on a trailing 12-month basis significantly from where we're at today. Our goal is to get that back up and to the extent that we're generating the targets that we're looking at, we certainly should be at a minimum of $140 million on a trailing 12-month basis. But our goal is to get it back over $150 million and then up to the $175 million level. We're not backing off on that.

Got it. And then one last question, just a clarification. You said the fourth quarter -- fiscal fourth quarter is typically seasonally weak for you guys. And you're guiding flat q-over-q. I'm just trying to get a sense of whether you think some of your memory weakness in the third quarter comes back in the fourth quarter, or am I reading too much into that.

I think the comment that we made as Peter alluded to, typically, we see a slowdown in European sales and to a lesser extent, in the U.S. sales because we saw a mainstream pickup, we just have to caution everyone about that. We do have a significant toehold in mainstream business in U.S. and Europe. But we didn't provide any granularity about the mix with respect to memory, high-end or FPD. We believe based upon what we see today that with the range that we provided, we should be able to hit and we'll keep our eye on it. So we have a number of different customer and revenue opportunities we work on in a lot of different areas.

At this time, I'm showing no further questions. I would like to turn the call back to Deno Macricostas for any closing remarks.

In behalf of the management, I'd like to thank all the participants for participating in this conference. Thank you, guys, have a good day. Thank you.

Ladies and gentlemen, this does conclude today's conference. You all may disconnect and have a good day.