Photronics, Inc. (PLAB) Q2 2021 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Photronics Q2 2021 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded, Wednesday, May 26, 2021. I would now like to turn the conference over to Troy Dewar, Vice President of Investor Relations.

Thank you, Whitney. Good morning, everyone. Welcome to our review of Photronics 2021 second quarter financial results. Joining me this morning are Peter Kirlin, our Chief Executive Officer; John Jordan, our Chief Financial Officer; and Chris Progler, our Chief Technology Officer. The press release we issued earlier this morning, along with the presentation material, which accompanies our remarks, are available on the Investor Relations section of our webpage. Comments made by any participants on today’s call may include forward-looking statements. They include such words as anticipate, believe, estimate, expect, forecast, in our view. These forward-looking statements are based upon a number of risk, 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. At this time, I will turn the call over to Peter.

Thank you, Troy, and good morning, everyone. Our Q2 performance was strong as we achieved record revenues with growth across both IC and FPD. The one exception was mainstream FPD where customers continue to focus on current LCD production rather than releasing new displays. This has little-to-no impact on our business, because our FPD capacity was sold out, predominantly making higher value masks for AMOLED and LTPS mobile displays. Business across the semiconductor and display industries was strong for nearly all participants in Q2 driven by wafer starts and/or capital equipment investment. Photomask market has joined the party as design activity as well as installation of new manufacturing lines drove an uptick in demand. We expect this will continue and our position as the largest merchant photomask manufacturer should enable us to continue to invest and grow with these industry trends. Margins improved in the quarter as we were able to leverage higher revenue into expanding gross and operating margins. This has been an area of focus for us. I am pleased with the strong progress we made during the quarter. As we look into the future, we expect margins to continue to expand based on a plan underpinned by three initiatives; the first is to grow our top line and realize the benefits from higher operating leverage once we exceed the fixed cost in our model. There are several opportunities we are pursuing for revenue growth. One is winning the lion’s share of the market in China as our customers execute against the country’s Made in China 2025 policy. This drives demand for both IC and FPD photomasks. We have built and ramped two manufacturing plants in China, both of which are fully equipped with the initial wave of tools and operating profitably with momentum. Beyond those greenfield investments, we are adding point tools to many of our sites to address specific market needs and customer commitments. Finally, we anticipate an expansion of captive outsourcing as EUV technology ramps creating a need for these customers to outsource more of their non-EUV reticles. The second component of our margin expansion is to leverage our market and technology leadership, especially administer mobile displays, driving better mix and better margins. AMOLED panel capacity is growing especially in China as more mobile displays adopt this technology. This includes not only smartphones but also laptops and tablets. There is an increasing proliferation of both manufacturers and products, career-rich environment for new designs and need for new masks. We are the recognized leader now with mask technology. We will use this position to maintain and expand our market share. This will drive higher revenue and product mix, assemble and carry from the best ASPs across our product line. The final piece of our margin improvement plan is to leverage our scale to drive cost out. Two areas we are focused on are materials and equipment maintenance. By far, our largest spend on materials is blanks and we are driving to standardization, thereby eliminating complexity and cost as well as to help newer sectors. For example, G10.5+ to mature, which improves our supplier’s efficiency and cost. On service, we are expanding our use of self-maintenance, allowing us to optimize the amount we spend on service contracts. This lowers total costs and improves uptime, as we can more quickly respond to and fix issues. We operate in a high fixed cost environment. Approximately one-fifth of our cost of goods sold is depreciation. Because of this, in addition to intentionally managing the variable cost items I just discussed above and many I did not, we must make solid investment decisions on spending on capital equipment. This requires a disciplined investment strategy put us in the best path for improving returns on investment. We are now entering the next stage of our investment strategy, which is based on a phased approach. We completed Phase 1 by building two new facilities in China and equipping them with tools to enable initial product ramps. We’re now executing Phase 1A in FPD by adding point tools to supplement operations and selectively expand capacity in China as well as other locations, bringing better balance to our global factory. Our IC Phase 1A will occur primarily during fiscal 2022 with new point tools to enhance operating capacity and efficiency. Due to the nature of the equipment we purchased and the capacity of each tool, this phased approach enables us to effectively manage capacity increases while keeping inefficiencies and bottlenecks to a minimum. This investment strategy is not executed in a vacuum. New investments are timed to come online in a robust business environment along with customer commitments to mitigate investment risk. We have already demonstrated how this approach leads to improved ROI. Before concluding, I would like to briefly address another topic that fairly comes up during investor conversations. Many chip manufacturers have announced plans to develop or expand semiconductor manufacturing in the U.S. and Europe. While it’s premature to discuss the specific impact these new fabs may have on our business, I believe there is reason to be optimistic. If manufacturing of semiconductors increases then there will be an increase in demand for photomask. We have a strong global presence and are partner with these customers to satisfy their mask demands. Again there are many steps between here and there but the impact for us can be meaningfully positive. Through the first half of 2021, we are ahead of last year’s pace. Our outlook suggests sequential growth throughout the balance of the year, which would place us ahead of the record revenue in 2020. More importantly margins are improving and we are on track to achieve our long-term financial targets. We are a manufacturing company. Records do not happen without everyone rolling in cadence. I would like to thank all of our employees for your solid execution against our goals in Q2. At this time, I’d like to turn the floor over to John.

Thank you, Peter. Good morning, everyone. Strong revenue growth in the quarter across our markets enabled us to achieve record revenue of $159.8 million. This is a significant accomplishment in that it demonstrates excellent execution on accelerating demand momentum as new tools are coming online now and over the next several quarters. IC revenue improved 7% sequentially and 16% over last year to $112 million with growth in both high-end and mainstream nodes. Logic demand was the main driver of high-end growth with strong demand from foundries primarily in Taiwan and China. Mainstream demand was also strong and provided pricing power in some nodes. Revenue for shipments to customers in China, which includes both high-end and mainstream technologies improved 23% quarter-over-quarter and 53% over last year. China has been a vital market over the last several years. Since 2018, our revenue for products shipped into China has more than doubled for both IC and FPD. With continued business development efforts and strategic investments, we anticipate continued growth in the region. Demand for mobile displays on smartphones, tablets and PCs was the primary driver of continued strong FPD demand helping to increase revenue 1% sequentially and 4% over last year’s second quarter to $47.8 million. AMOLED and LTPS technologies are in high demand as more consumer electronics now use these higher-value displays. We have benefited from this inflection as the leader in FPD photomask technologies selling masks into many product offerings including premium smartphones that will hit the market this fall. This high-end growth in FPD more than offset decreased mainstream FPD revenue. As we pointed out for the last two quarters, demand for mainstream LCD remains low, as the panel producers maximized output and profitability of current products to take advantage of strong market dynamics. Internally, we prioritized production of higher-value AMOLED and LTPS masks to optimize the financial results from our capacity. Our demand outlook for both IC and FPD is positive with growing confidence as we enter the second half of the year. It appears to us that the trends we’ve been monitoring over the last few quarters are continuing and our expectations are solidifying for sequential growth to continue throughout the rest of the year. As more FPD tools come online during the second half of the year, we expect that they will quickly ramp to full production by the end of Q4. In IC, the E-Beam 9000 in Xiamen is well along in its production ramp and we have a number of tools coming online over the next several quarters to expand mainstream capacity, which should support continued growth going forward. As our top line improved, we were able to leverage that growth into expanded profitability. Gross margins improved 450 basis points to 24.6% and operating margins improved 530 basis points to 13%. The margin improvement is testament to the effect of our operating leverage and cost improvement efforts, together with pricing actions we took on some mainstream IC nodes resulting in sequential incremental margins of 113% and 117% respectively. We are pleased with these results. They show the capability we have to improve – to deliver improved profit margins and places in the range of our long term target model. There is still work to be done, but this validates our progress and strengthens our confidence that we are well on our way to delivering on our targets. Other income in the P&L reflects a credit to interest expense from subsidy receipts in accordance with our China investment agreement, somewhat offset by an unrealized FX loss. Net income attributable to non-controlling interests increased significantly based upon higher earnings from our IC JVs. Improved income and lower share count resulted in $0.17 of earnings per diluted share. Cash was $256 million at the end of the quarter with $114 million in long-term debt. The increase in debt this year was due in large part to new low fixed rate tool leases. We generated $32 million in operating cash flow and invested $56 million in CapEx while also receiving $5 million in government incentives for equipment investments in China. We returned an additional $10 million to shareholders in share repurchases, which brings to 3.7 million shares and $41 million spent to-date of the $100 million authorization that began in September 2020. For fiscal 2021, we’ve increased our expectation for CapEx from our previous guidance of $100 million to approximately $120 million, as we now plan to strategically invest in point tools to increase mainstream IC capacity. Before I provide third quarter guidance, I’ll remind you that our visibility is always limited as our backlog is typically only one to three weeks and demand for some of our products is inherently uneven and difficult to predict. Additionally, the ASP for high-end mask sets are high and as this segment of the business grows relatively low number of high-end orders can have a significant impact on our quarterly revenue and earnings. Government actions to address health concerns for trade policy may also have an impact on our results. Given those caveats, we expect third quarter revenue to be in the range of $162 million to $172 million. Key indicators for our markets suggest that strong demand will continue throughout the third quarter and likely beyond. Thus, we are expanding our capacity to align with these trends and expand our share of the growing market. Based upon our year-to-date performance and guidance for Q3, we anticipate meeting our 2021 revenue guidance of high single-digit percentage growth. Based on those revenue expectations and our current operating model, we estimate earnings per share for the third quarter to be in the range of $0.19 to $0.25 per diluted share. Implied in that model is an operating margin of 13% to 16% on pace to hit our 2021 target. Our second quarter performance was a meaningful step up from the first quarter as market demand grew and our earnings profile improved. We expect another step forward in Q3 further aided by additional capacity. We are pleased with our performance through the first six months of 2021 and look forward to continued success for the rest of the year. I’ll now turn the call over to the operator for your questions.

[Operator Instructions] Our first question comes from the line of Patrick Ho with Stifel.

Thank you very much and congrats on the nice quarter and outlook. Peter, maybe first off in terms of the pickup in the mainstream business. That’s not much of a surprise, but I guess I was pleasantly surprised to hear about the price increases. Can you discuss how sustainable they are given current market trends and potential strong demand that goes into 2022, are these pricing increases sustainable?

Yes. So the price increase that – we implemented a price increase in the mainstream in China and Taiwan. The reason we did that is, it is the industry not just our, but the industry’s capacity is sold out. So there’s no place for the business to go. So the business is sticky and our market intelligence tells us that our largest competitor has followed us. So that also points to a price increase that is going to be sticky. And regarding how it impacted our financial performance at the consolidated level was about one gross margin point last quarter and given that the price increase was implemented over the quarter, it should be another gross margin point at the consolidated level for the company in the coming quarter. So with the demand being as strong as it is with the industry – photomask industry and the mainstream being sold out with the competitors, large ones in particular – participating, all that points to a price increase that is going to be with us for quite some time.

Great. That’s helpful. And maybe as my follow up question, you noted that you saw a strong demand on the logic side of things particularly at the high-end or the advanced nodes. Can you discuss what you’re seeing on the memory front as that marketplace starts to show some signs of improvement as well? Is that going to help contribute overall to revenues as well as the margin profile?

Yes. So, just to go back, we actually wrote it in the script and took it out because no one seems to care what happened last quarter or the quarter before the current quarter. But I think what we said last quarter on the call was the logic business, not the memory but our high-end logic business was behaving like, it used to when you had an up-cycle that was heavily loaded at the frontend with an inventory build. And that’s indeed exactly what happened. The mask demand is about a quarter or so lag behind – the ramp in the capital equipment. So our logic business recovered nicely in the current quarter. So we took high-end mainstream business off our high-end tools and replaced it with high-end business, because demand is built in more or less as we expected it to based on long years in the industry. As far as our memory business is concerned, it was more or less level as we would expect it to be. It stepped up last quarter. It leveled. As the memory market improves, there could certainly – it could certainly be reflected in better demand or more demand, not better, but more demand for Photronics. The key for us, right, in managing that high-end business is making sure that we have the capacity in place to handle it. And this current quarter, we have a 9,000 in China that just touched the last month of the current quarter. It was installed in October. We’ve been rushing to get it qualified and should contribute meaningful revenue this quarter and of course in the fourth quarter significantly more. So we have incremental high-end capacity in Asia as needed to address the memory market. Likewise, we have capacity in Boise that can address and will address an uptick in memory demand. So, yes, if memory gets – it gets better. We, I think, have the best merchant technology in memory and we ought to be able to effectively exploit it.

Thank you very much.

Yes. Chris, would you like to make any comments about our position in memory.

I mean, I can just add to as Patrick knows, memory is on a trajectory really – very strong this year. Maybe it’s going to hit a new all-time record, total memory chip market in 2022. So trajectory is very good. Everyone also noticed that the litho equipment spend skewed towards logic. So the memory people do not seem to be adding capacity in lithography that would cause what I would consider oversupply situation, which is often what happens. So market seems very healthy and fairly stable. And with that as Peter said, our memory technology we believe is at least a node, maybe node-and-a-half ahead of competitors. On the commercial side, we have a joint development agreement with a leading memory company working in tandem with them on process of record development. Now for the 1C node, which is a very advanced technology. So memory is a good story for us. The market is stable. As far as the growth potential, that is harder to say. I think memory people are going to keep CapEx and capacity as a little bit muted. So I would say slow, steady increase in node migration in our memory business, which is actually a healthy thing.

Great. Thank you very much.

Thank you, Patrick.

Your next question is from the line of Gus Richard with Northland.

Yes. Good morning. Thanks for taking the question. I just want to dig into CapEx a little bit. Could you give us the split this year and for the last quarter from FPD and IC?

Yes. So I’ll answer the question generally. In the current quarter, we have – in the current quarter – the last quarter, we – as I mentioned we have a 9,000 was installed actually in October coming online. In the current quarter, we’re adding capacity predominantly in FPD with one litho tool being installed and it’s actually advanced laser writer in Taiwan in the IC market. So this quarter is dominated by FPD with one what I would call opportunistic head to the mainstream IC business in Taiwan where the market is strong. So someone else, one of our competitors are captive, they changed their mind about that order. And it was a tool that was already built in the IC side business and we were very anxious to grab it, so we did. The fact that our CapEx planning for the year. I guess, as far as FPD is concerned, those three tools that are being installed in the current quarter or next quarter, we announced them, jeez, more than a year ago. They’re targeted at the AMOLED market more or less where we’re sold out. And they’re backed by – at the time we announced, they were backed by three contracts with no more than $40 million a year annual business commitment. While in the current quarter we actually got another customer to sign a three-year contract for AMOLED capacity that raises that commitment blow up to $55 million, which means the tools are sold out for the foreseeable future as soon as we can get them running. Yes. So that’s kind of a quick summary of where the money is going.

Okay. And then in terms of your IC spend some of it’s going to go through living edge, some of our new capacity, some of it’s going to go for debottlenecking of mature. How much can you increase your mature output by debottlenecking some of your lines?

Yes. That’s it. That’s a point in time question, Gus, because right now, again, right, the mainstream – what’s unique about the mainstream market versus the high-end is normally the first two reticles need to be delivered within 24 hours, so that you can’t build them and ship them, not effectively. They got to be build locally. So where the mainstream market is sold out is China and Taiwan, China and Taiwan, I’m sorry. We can by debottlenecking lines raise our mainstream capacity somewhere in the $30 million to $50 million without having to install new lines. That’s about as much I think as we can possibly hope to get it. If the mainstream market being sold out would become a global phenomenon, that would be a different question and I don’t have a good answer to that question right now.

Got it. And then last one for me. With the increase in CapEx, will it be a headwind you’ve got the pricing uplift in gross margins in the coming – in this quarter. Is there any headwind from increased depreciation in the current quarter due to the added CapEx?

If there is any, they will be very fleeting because when the tools are installed they can immediately be loaded. The good thing about mainstream is – the high-end is difficult because qualification times are 9 to 12 months, mainstream qualification time is usually 30 days or less, sometimes zero. So we may see a little phase lag in one quarter. There may be depends, right, in one quarter, there might be a little bit of a drag, but in the next quarter it will be completely gone and likely not at all. Margins will be diminished in the first quarter for that particular tool. But given how quickly mainstream tools ramp is it would be a very fleeting effect.

Excuse me, Gus, some of the tools are coming off depreciation. They’re reaching the end of their depreciable life. So that kind of offsets the increases from some of the new tools.

Okay.

Yes, obviously, our objective is always to minimize or eliminate effects and we have, as I reiterated, we always have cost reduction programs running. I just got off a two hour conference call last night, where we discussed our global effort. But anyways, the best place in this company. FPD is better than IC generally, but mainstream IC is even better than FPD from the standpoint of speed to qualifications. So for us, like Nirvana, is to be adding mainstream tools because if you add them into a strong market they ramp to volume very quickly and that’s where the margin leverage is.

Okay. The question is generic across all your CapEx including FPD, but my take away from your answer is you’re going to see minimum headwinds from increased depreciation in the coming quarter? Is that correct?

That’s correct.

Okay. That’s it for me. Thank you.

Thank you, Gus.

Your next question is from Tom Diffely with D.A. Davidson.

Yes. Good morning. Thanks for taking my question. First question is on the flat panel display business, obviously very healthy today. Talk about capacity constraints, a strong AMOLED market. But I’m curious what the activity is like for the Gen 10.5 and is it enough to fully utilize those tools for what they’re best at?

Yes. So, last quarter the G10.5 market was frozen. There was virtually no demand across the industry. In the current quarter, we’re expecting market demand to pick back up in G10.5. With our FPD capacity if we’re not building G10.5 we’re generally with those tools building AMOLED reticles, which maybe it hurts the top line a little bit, but it improves the profitability. So it’s a balancing act, but I guess the answer to your question those tools – our FPD factory was – capacity was completely consumed in the quarter, the 82% high-end is the highest number I can remember here in Photronics and I’ve been here for almost 13 years now. So the mix of the business was really good and that was essentially with the frozen G10.5 market. So we’re as I said expecting and already seeing actually as we sit here, we’ve already shipped or either shipped or head in with more G10.5+ business now that we did all quarter last quarter. So that’s the market is coming back.

Okay. That’s great to hear. And then just a broader question, Peter when you look at the margin structure of a wholly-owned flat panel display business that joint venture on the IC side. How do you decide when to make the investments in your Phase 1As between the two and is there a market difference between margins with the wholly-owned versus the JVs?

Generally there’s a lot of moving – there’s a lot of moving pieces in our various businesses high-end, mainstream, FPD, IC over a long period, right, or integrated over time. If you look at the mainstream business, right, depreciation is really low. Materials costs are higher as a percent of revenue. IC it kind of washes out. In the FPD business, it’s a much more dynamic market. So demand and pricing for different products tends to move much more rapidly than in the IC business and in FPD in one occasion, we actually have pricing power for spring periods. But then market swings again. So anyways when we look at our investment decision, generally, what we’re doing is looking at where our capacity is fully utilized. So we prefer that obviously add tools into technology nodes and locations where we had the highest confidence, we can ramp those tools to volume quickly. And one of the key factors in that is do we have customer commitments, contracts or not. So over the last several years, we’ve aspired to get customer commitments to load our tools before we actually buy them. So – and as you pointed out, there’s some financial ramifications to whether we make investments in wholly-owned businesses or joint ventures. So it is a very complicated matrix that we go through when we decide to make incremental investments. The general guiding principle that the very highest levels, our ROI and market share and there’s a whole host of issues below that that are considered, but it’s not straightforward.

Okay. That makes sense. And then I guess along the same lines, John, when you look at the minority interests in which we assume that we have sequential growth through the end of the year, would you expect that line item to continue to rise as well?

I think so Tom.

Okay. And then last…

Go ahead.

Last question then, when you look at the $120 million of CapEx, I think at some point you had said that once you get that capacity installed you would already have enough capacity to meet your long-term your three-year target model?

I think what we said was, we would have enough capacity to get into the bottom third into the matrix, right for a three-year target model. Yes.

Okay, great. All right. Thanks for your time.

Thank you, Tom.

[Operator Instructions] Your next question is from the line of Orin Hirschman with AIGH.

Hi, congratulations on the progress. Just a very general question. One of the things that obviously had an impact in Q1 and Q2 was that the industry like you said the semi-industry was so busy trying to make the most of the existing products that were being shipped. Can you just reiterate has that process begun to change a little bit where all those on the busy R&D designs, which is a positive for you and the industry as a whole?

Yes. There is a dynamic shift occurring in our IC business particularly in logic where particularly in the foundry business, the customer will not release a new design unless they can get wafers, doesn’t make any sense. So historically if you look back 15 or 20 years ago when the industry is very different when we would see an industry up-cycle, mask demand would always phase lag and uplift in the semiconductor industry because the wafer’s step was to replenish inventory. So we’ve seen that before as the industry matured and growth generally compounded annual growth industry came down that phenomenon slightly over ship actually over time damped. This cycle in logic and not in memory and IC look like the old days and our business here we are a quarter later is behaving like the old days where we’re starting to see a shift. So yes, it’s a dynamic shift in the business and in FPD, there were different drivers why the business at the beginning of our first quarter was a bit soft and those had more to do with U.S. sanctions continually retching up against Huawei and their impact on the mobile display market in general. That’s also worked its way through. So we aren’t seeing those effects in our business today. It’s more dynamic and more in line with the industry tone just generally.

One follow-up question on that point on the flat-panel AMOLED, the screen is obviously getting much more complex with features built into the screen like fingerprint recognition, et cetera. Has that played into your mask demand?

It plays into it beautifully. If you look at our rigid AMOLED display like – that we would have seen in the leading edge mobile phone say five years – three to five years ago take maybe 12 to 13 [indiscernible] to make that display. If you look at the leading edge AMOLED display today, you can easily – the number, the net counts of somewhere around 20% could be as high as 25% levels. So the net counts almost doubled because of the added features that are being built into flexible displays today. So yes, that’s a very positive. I didn’t speak to that. That’s a very positive trend in our AMOLED business. And of course, there’s a very large Korean customer of ours that is leading the charge on building more and more complexity and more and more capability into AMOLED displays.

Okay. And the last question is a two-part question. It’s just in terms of capacity across the industry in both segments. Obviously, it’s a very tight, documented and digitize another places the segment that you’re describing. It’s almost no secret although I’m sure there’s a little bit secret here and there in terms of competitors including you in that group knowing they want a lot and left. On the merchant side knowing whose ordered what in terms of capacity. So knowing that the lead times on these tools will continue to stretch, that’s reflective of price increase that you put in which or price increases in recent times whatever. Where does this all go in the next few quarters? Could you continue to see price increases just because there just isn’t capacity across anybody on the merchant side period? And again it plays into the last question if you’re going to need more men as I think what we order and everybody is sold out across the board, what does that mean as well?

Okay. Well, I guess – yes, so the price increases we put in the last quarter implemented were in mainstream IC in Taiwan and China. This is where the market is. The market is oversold. If you look at the FPD business, I don’t believe or we don’t believe anyone of our competitors was sold out in the prior in this – in our Q2. The reason for that is although the AMOLED business is very vibrant. The LCD business is not so. What is happening in the LCD business is the industry as a result of G10.5+ and its impact on the display business, nearly everyone a year ago, LG is probably public company or as you know or no go look. They’re all losing money. Because the inherent cost to produce a G10.5+ is substantially lower. So China invested in G10.5+, prices dropped dramatically on large format displays for TVs and everybody lost money. And COVID created an upsurge in demand for IT displays, in particular which is the same capacity it’s used to make TV displays. And all of a sudden, everybody is now making money. If you look in the last 12 months, the price of a 32-inch display has tripled, tripled and the price of a 65 or 55-inch – 75-inch display has doubled. So all those – although our customers in the LCD market that we’re starting are making hay while the sun shines so to speak, trying to replenish their balance sheet. So the demand for new mats in LCDs is actually not all that strong. We are the technology leader by a mile in the FPD market. It allows us to be sold out when no one else is. So yes, I do think if you look at the industry that we’re going to see LCD panel prices peak maybe in the third quarter and then again we’ll start to slowly leak away. That actually will be a very good time for the matchmakers because when that happens, the industry’s response again and we’ve been doing this for a very long time is to try to win market share with new products. So there will be a design, there will be a design bubble that actually occurs when panel prices start declining in the LCD sector. And I suspect that that time, the entire industry for FPD will be sold out and that will be the time to raise prices there.

Okay. Thank you very much.

Your next question is a follow-up from Tom Diffely with D.A. Davidson.

Yes. Thank you for the follow-up question. This is more of a technology question maybe for Chris. So early you talked about how the rise of the EUV is absorbing some of the capacity of the industry and perhaps leading to some overflow work for you. So the question is do you use standard writing tools to create these masks? And if so could you possibly do an EUV mask set over time?

Yes, thanks, Tom. So the EUV mask today are built with the standard writing tools that’s what we use. And also it’s probably the largest use case for this kind of new generation of so-called multi-beam mask writing tools, so those both participate. Most of the highest end kind of captive EUV mask today are built on multi-beam mask writing tools. For Photronics, we have a fairly robust development and I would say revenue generating pilot program on EUV already. And we use our standard writers for that. We’re a development partner. It’s been publicly announced with IBM in New York. We built – we don’t know, but we think the vast majority of the EUV masks. I think you’ve seen in the announcement that they just made on a 2-nanometer transistor demo. So we are embedded in the EUV kind of learning and development cycle in that way. And we’re using kind of our core high end tool set today for that. For commercial mask making turnkey EUV line, we think that has some bit of time to evolve. We’re watching it closely. And at that time more than likely multi-beam source of EUV writing systems will be necessary really to meet the cycle times and productivity for those EUV masks.

Okay, great. Thanks, Chris. Appreciate it.

Yes. Yes. You’re welcome.

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

We are glad you were able to join us this morning and appreciate your interest in photonics. The first half of 2021 has been marked with good market demand, strong performance across our organization and improving financial results. We anticipate the second half of 2021 will be even better and look forward to updating you on our progress.

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