Good afternoon and welcome to Diodes Incorporated Third Quarter 2015 Financial Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference call is being recorded today, Thursday, November 5, 2015. I would now like to turn the call over to Leanne Sievers of Shelton Group, Investor Relations. Leanne, please go ahead.

Good afternoon and welcome to Diodes third quarter financial results conference call. I am Leanne Sievers, Executive Vice President of Shelton Group, Diodes' Investor Relations firm. With us today from Taiwan are Diodes’ President and CEO, Dr. Keh-Shew Lu; Chief Financial Officer, Rick White; Senior Vice President of Sales and Marketing, Mark King; and Director of Investor Relations, Laura Mehrl. Before I turn the call over to Dr. Lu, I would like to remind our listeners that management's prepared remarks contain forward-looking statements which are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions. Therefore the Company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today and therefore we refer you to a more detailed discussion of the risks and uncertainties in the Company's filings with the Securities and Exchange Commission. In addition, any projections as to the Company's future performance represent management's estimates as of today November 5, 2015. Diodes assume no obligation to update these projections in the future as market conditions may or may not change. Additionally, the Company's press release and management statements during this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms. Included in the Company's press release or definitions and reconciliation of GAAP to non-GAAP items, which provide additional details. Also throughout the Company's press release and management statements during this conference call, we refer to net income attributable to common stockholders as GAAP net income. For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 60 days in the Investor Relations section of Diodes' website at www.diodes.com. And now I will turn the call over Diodes President and CEO, Dr. Keh-Shew Lu. Dr. Lu, please go ahead.

Thank you, Leanne. Welcome, everyone, and thank you for joining us today. Third quarter revenue came in at approximately $209 million, down 4.8% sequentially. The sequential decline reflected a 56% decrease in revenue associated with assembly test manufacturing services, which was included in our previously disclosed guidance, combined with a greater than expected decline in distributor POP sales due to an inventory reduction. Distributor POS was actually a strong in the quarter. When excluding manufacturing services, revenue was down only 1.5% sequentially. As a strategic response to the challenging environment, we took the opportunity to capture market share by securing additional content at key customer accounts, especially in smartphones. Increased sales of those low margin products combined with the lower capacity utilization at our packaging facilities pressured margin during the quarter. Of note, the incremental market share gains positions us more favorable with customer as market conditions improve. Looking ahead, we currently expect this weak environment and the distributor inventory adjustments to extend into the fourth quarter, so we have taken additional measures to carefully manage expense, including reductions in travel and vendor expense as well as a freeze on new hires. Since we are cautiously optimistic for overall improvements in 2016, we expect these actions to be temporary and do not anticipate the need for more aggressive steps. I continue to believe Diodes’ increased focus on automotive, industrial and the high-volume portable and wearable markets will be key drivers of our business in the coming year. Before I turn the call over to Rick to discuss the third quarter financial results, as well as fourth quarter guidance, I wanted to briefly highlight the stock repurchase program that we announced earlier today, in which our Board has approved an authorization to purchase up to $100 million of common stock through the end of 2019. Our strong balance sheet and cash flow enables us to return capital to our stockholders. While continuing to invest in our long-term strategy, we believe this repurchasing program demonstrates our commitment to deliver shareholder value and would offset in part, the dilution result from equity compensation grants, as well as supplement future earnings per share growth. With that, I would turn the call over to Rick.

Thanks, Dr. Lu, and good afternoon, everyone. Revenue for the third quarter 2015 was $208.9 million, a decrease of 4.8% from a $219.5 million in the second quarter of 2015, and a decrease of 10.6% from the $233.8 million in the third quarter of 2014. As Dr. Lu mentioned, the sequential decrease in revenue was due to the expected reduction in revenue are associated with the assembly test manufacturing services, combined with a greater than expected decline in our distributor POP revenue. Gross profit for the third quarter 2015 was $61.6 million or 29.5% of revenue compared to the second quarter 2015 of $69.4 million or 31.6% of revenue, and compared to the third quarter 2014 of $74.7 million or 32% of revenue. Increased sales of lower margin products combined with the lower capacity utilization in our packaging facilities pressured margins during the quarter. GAAP operating expenses for the third quarter 2015 were $51.7 million or 24.7% of revenue, compared to $47.4 million or 21.6% of revenue in the second quarter 2015, and $49.7 million or 21.3% of revenue in the third quarter of 2014. Non-GAAP operating expenses for the third quarter of 2015 were $49.1 million or 23.5% of revenue, excluding $1.2 million of acquisition-related costs and a $1.5 million asset impairment charge for SFAB equipment due the conversion from 6 to 8-inch capacity. Looking specifically at selling, general and administrative expenses. SG&A was approximately $34.7 million in the third quarter or 16.6% of revenue, compared to $31.9 million for the second quarter or 14.5% of revenue in the second quarter 2015, and $33.9 million or 14.5% of revenue in the third quarter of 2014. The main reasons for the increase from second quarter to the third quarter 2015 were M&A related expenses and annual salary increases. Investment in…

Thank you, Rick, and good afternoon. As Dr. Lu and Rick mentioned, revenue was down 4.8% quarter-over-quarter due primarily to previously mentioned decline in a large assembly test customer, as well as inventory control in the channel. OEM sales were up 3.5% driven by strength in the communications market with recent wins in multiple smartphone customers. Distributor POP was down 7.5%, as distributors took a more conservative position than expected on the inventory late in the quarter. This reduction in POP, predominantly in North America and Europe, impacted our industrial market in the quarter. Distributor POS was solid, up 10% sequentially and distributor inventory was down 3%. Due to the current market conditions, we expect further pressure to reduce distributor inventory in the fourth quarter. In terms of global sales; Asia are represented 79% of revenue, Europe 11% and North America 10%. Despite the soft market, we maintained a high level of customer activity across all regions and product lines. Design activity and design wins continue to be solid as we remain well positioned to drive long-term growth in more normalized markets. We continue to penetrate our key customer base with a broader product line and continue to see a strong momentum on new products. We also made further progress in our automotive and industrial initiatives in terms of new product introductions and design wins. Also during the quarter, we achieved another record quarter for our logic products, up 68% sequentially, driven by key design wins in the portable space. We also had record quarter for CMOS LDOs, protection and MOSFETs, all driven by new product design wins across broad customer base. Sales also remained strong in the quarter for audio, sensor, LED lighting and bipolar transistors. In terms of our end markets; consumer represented 32% of revenue, communications 25%,…

Great. Thanks a lot Dr. Lu. I was hoping you could talk a little bit more about some comments you guys made in the press release about being cautiously optimistic about this cycle year and obviously it's been a tough environment here, and lot of companies have some pretty soft guidance here. But I think for yourselves, as both ON and Vishay, all kind of seeing this trend of business recovering. And doctor, you’ve been through a lot of cycles. I was hoping you could give us some color on what’s giving you a little bit of confidence, things are improving here and how may be things could play out over the next few quarters in terms of that?

Well, Steve, I think that next year we - I think that we would say, we think it this very optimistically. We think it's going to improve for second half of this year and that's why we still putting capacity and - our capital and capacity ready to take that opportunity. Diodes’ strategy always, we want to gain the market share and we prepare for it and when the market turns, we can take opportunity through significant growth and gain the market share. And that's why we put the capital again ready in our Chengdu site and at the same time we spend money to establish the 8-inch capability and capacity in our Shanghai plant, business plant and all this get ready and when the market situation turns, then we could take opportunity to gain the market share.

Okay. Great, thanks. And it seems like you did typical guidance playbook [ph] where - and software environments, you guys tend to do a good job of going out and opportunistically gaining share and keeping revenue as healthy as possible. Obviously margins hit a little bit as you guys do that, but it typical report covers, given what you outlined about potentially recovering environment. Any thoughts on when we might likely start to see the returns to more normal gross margin levels, expect something in Q2. Is that still the right way to think about that or…

Yes, that's our expectation because now the POP and what actually is existing adjusts their inventories before year-end. So we are going to see the pressure continue for our POP situation. But we are very encouraged to see the POS is very strong in third quarter, so we believe with our business going to continue use their inventory, they are going to continue push the POS. So then, as the next year 1Q, typical slowdown, but I think this thing should be brought back start to flourish their inventory such that everybody get ready for the second quarter growth. And so we are prepared to do in that, so you are right. I think we'll expect the second quarter will go back to our higher GP and our higher utilization rate and we could take the opportunity to regain market share, because we will get our capacity ready for.

Great. And the last question was just, as Mark emphasized on the cost, you guys have really made a big focus on industrial. And I think that tends to be higher gross margins. So I guess the trend too over time back to more normal environment, utilization goes up and you’re also mixing higher, so we should continue to expect that general trend of gross margin over time to try to probably head above on more traditional levels. Is that the right way to think about that?

Yes, actually not just industrial, automotive too. If you look at automotive, we start from 3% to 4% and last several quarters we are up to 5%. And you know that automotive typically ramp up is much slower than the consumer area and we always see that effect. So we believe next year, not just industrial and automotive but both industrial and automotive should have much higher run rate and much better GP.

Okay, great. Thanks a lot guys. Appreciate it.

Thank you our next question comes from Gary Mobley of Benchmark. Your line is open.

Good afternoon guys. Thanks for taking my question. I think I heard Rick mention the pending Pericom acquisition just once in brief passing. And I know the shareholder vote is about two weeks from tomorrow and it's fairly well documented different proxies presentations that you’ve got a competing offer out there. Of course Pericom favors your offer. I'm just wondering if - well, if you look at Pericom’s share price, it’s the same equal probability between your offer and Montage's offer. But I'm not asking if you are willing to up your bid because I know you won't respond to that, but I want to ask is if you’re still intent on closing the acquisition and have respective management teams of both companies then working as if the acquisition is going to go through and cost synergies are going to be attained?

Well, let me answer that. Number one, I think that Shareholder Day is not tomorrow, I think the Shareholder Day is in November 20 or - yes somewhere in November 20 or 22, I forget, but it's not more.

The 20th.

November 20. Okay. And what we are hoping, we can win the shareholder vote because I think the ball is - I’ll repeatedly say, we actually have supporting of offers and I believe so, it’s because we do have finance impress and that we can after the close, we're ready. And so our financial is much secure than their finance. And secondarily we don't need this government approval. So I think I agree with their Board that Diodes offer is a superior than Montage's offering. And we hope we should be able to win the shareholder vote.

Okay. And along those lines if I'm not mistaking, you have a $500 million line of credit in place to help fund part of the acquisition that isn't going to be covered by your cash position and Pericom’s cash position. Is that also what’s going to be used to help fund this $100 million buyback through 2019?

Well, number one, our cash position, the $500 million is yes. And to purchase Pericom, we have enough money and I’ll let Rick to answer because we only took a very firm goal.

Thank you our next question comes from the line of Tristan Gerra of Baird. Your question, please.

Hi, good afternoon. Could you talk about the point-of-sale sequential increase that you see at this tee for Q4, and also unless I missed it what inventory days do you see in the channel for this tee in Q3, and what do you think it could be by a year up?

Ladies and gentlemen please standby. Please proceed doctor.

Okay, thank you. I'm sorry, we had technical error here. Something happened to the [indiscernible] cut it out. But let me - with this, let Rick to answer you.

Yes. So Gary, this is Rick. The financing agreement is actually a $400 million credit line which is, we have about $100 million borrowed against that credit line and there is a term loan piece to it, another $100 million dollars. So when we talk about the $500 million, it's really a $400 million credit line and a $100 million term loan that’s focused on the Pericom acquisition. So we have about a $100 million of the credit line borrowed right now, that was based on the BCD acquisition. We've been playing it down over the last couple of years. So that would leave, if you look at about $400 million. And the Pericom acquisition is about $400 million. So if we paid cash, we will use up the credit line and the term loan, but that doesn't include the $130 million of cash that Pericom had on their books at the end of last quarter. So from a Diodes’ perspective, we have about $213 million, they have about $130 million, so that's $350 million in cash. And if you look at the operating cash flow this quarter, it was about $45 million, and yes we spent that on CapEx, but most of that was for the Chengdu expansion and for the 6 to 8-inch conversion in BCD. So those are basically behind us. We believe that those two facilities will start generating operating cash flow, so that the $100 million of share repurchase over the next four years, if you just average it out it’s $25 million. We don't intend to average it, we’re going to buy opportunistically as we have cash available as the price permits. So we think we have enough operating cash - operating cash flow to be able to affect this average of $25 million a year share repurchase.

I think, Gary, the key thing is more cash, large cash flow item like the Chengdu expansion, like 8-inch not established, those the money or the cash is spend in the third quarter and then some in the fourth quarter and then after that it's all done. And therefore we have more capacity to support much bigger operation to generate much more operation cash. And then we'll go back to our typical 7% to 9% - or 5% to 9% capital expenditure and when we stay in that 9%, we believe we can generate enough cash from operation and to pay for this share buyback. So we really don't see any problem to support that, and that's why the Board agreed to pay back to shareholder value.

Thank you. Our next question comes from Tristan Gerra of Baird. Your line is open.

Hi, good afternoon. Could you talk about…

Hi Tristan.

Hi. Could you talk about your expectation for point-of-sale at this tee in Q4 sequentially embedded in your guidance, and then on the same is what inventory days are you seeing at this tees exiting Q3, and what do you think it will be in Q4, given the continued inventory deleveraging at this tees?

I think we are projecting between different regions and so forth, the POS to be similar to what we talked about from our guidance, okay. But we do expect a little bit more deleverage - and I didn't get the last part of your question, it was kind of garbled. I wasn't sure what you were saying about - were you asking about what do we expect on the distributor inventory?

Correct, yes. So the point-of-sale that you expect in Q4 sequentially, and also where are we in terms of inventory days at this tee? Where do you expect this would be by the end of this year, given the continued deleveraging?

Yes, I would expect that the POS to go down similar to our guidance and our inventory to follow it. I think our inventory percents down lagged a little bit due to timing in the third quarter, so I think we are actually in October we saw a little bit - I'm only seeing data from North America, but inventory was down already in October. So I think we'll see a decent inventory decline in this quarter and it will be kind of the POP and inventory decline should be relatively similar in those periods. So I don't think we’re going to see a dramatic decline, probably maybe a little bit more possibly in Asia than in North America and Europe, but kind of moderate declines in POS in Q4, but with very stringent inventory control from the major distributors at least.

Okay. And then if we exclude the BCD, where do you stand in terms of utilization rates currently?

Excluding BCD?

Yes.

Yes. So basically SAT, the Shanghai Assembly & Test was a little bit lower than what we had put in at 95% which is our preferred level, but OFAB is running well and KFAB about where they have been in the past.

Okay. Thank you.

Okay. Thank you.

Thank you. Our next question comes from the line of Christopher Longiaru of Sidoti & Company. Your line is open.

Hi guys. Thanks for taking my question. Last quarter when you talked about the manufacturing service revenue hit that you expected, I think it was in the high single digits. Was that where it kind of shook out and what is in your expectation for 4Q?

Well, number one…

The manufacturing service revenue dropped significantly, I think we said somewhere around - I mean, somewhere over 50%.

I was talking about in dollars. Sorry about that.

I don’t know. I don’t think we ever quoted in dollars. So I don't want to make a mistake in trying to quote it in dollars. But I do believe that it's stabilized up slightly in this area or flattish and we expect it to maybe normalize to a new - maybe increase a little bit and get a little bit more stable again around the second quarter, okay. But again I believe that there will still be - in this soft period, I think will be pretty flattish over the next two quarters then will rise again. Never sure it's going to hit the peak again ever, okay. But I believe we are in - I think that the worst of that is behind us at this point.

Okay. And so I think the last question was excluding the BCD FAB, which I think has been running around halfway utilized. Was that where it was this quarter around and can you give us kind of an expectation for that as well?

Yes. The SFAB, we call FSAB, the BCD FAB, Shanghai FAB. One is slightly below 50%, 1, and SFAB 2 a slightly above 60% that's all in the [indiscernible]. So you're correct. And that's where affect our GP and we do try to improve that but when the market turn, those FAB will be up. The key thing is this FAB-1 can be now the traditional commodity business but SFAB-2 is coming on the new product ramping up. We have been confident that the last several years with take order from BCD, we start to make all our new design - yes, new product new design using BCD FAB-2 technology. And when those new product released and start to ramp, then they will start to load it up the SFAB-2. And so I think if you think you hear what Mark talking about, we haven't have a lot of new product announced and new product design win. We hope next year can significant improve first two loading built to the new product. And first one loading will be based on when the market turns and we start to gain the market share, we can start loading those FAB.

And just in terms of the gross margin, I know you like to focus on gross profit but just in terms of the gross margin, how much of the pressure is due to just mix and how much of it is due to that loading being down?

I think that number one, the loading went down especially SFAB loading cost us is above probably...

It's probably about 1.5%.

1.5%. Okay. Somewhere around that. And if the SFAS loading cost - then sure SAP [ph] or assemblies because the business - because the service, assembly test service went down significantly lows will affect our GP total cost our loading down. Okay. So when you consider both of them that's why costs went down from 31.5%...

To 29.5%.

29.5%. So that 2 percentage point really majority is due to BCD and some due to the SAT.

That’s right.

And yes, we do have some mix change to try to gain the market share to deal like the excess capacity but the cost - due to that action our GP is slightly going down but our loading is SAT do not went down very much.

Okay, that makes a lot of sense. And just can you comment on - I think you made relative commentary on inventory weeks in the channel this quarter and what you're collective expectations were Mark. But can you just give us what the numbers were? If you already did, I missed. But my apologies.

Yes, I didn't really - I don't think I said it, but it’s under 3 months but it's continuing to go down and again I think the timing I think it actually - the POP impact will be seen more this quarter from the inventory going down. So I think the inventory is correcting itself for what is believed to be a softer quarter, okay. So I don't think our inventory was really out of whack but it's just at this point everybody just says, okay, let's pull in the range and preserve cash. No, I don't think it's any inclination about our inventory but more rather just the climate of the industry.

And that would give you guys more of the confidence that you have in 2016?

Yes.

Correct.

All right. That's all I have. Thank you guys.

Thank you. Our next question comes from Shawn Harrison of Longbow. Your question please.

Hi everyone. I had a question, I guess, Rick for you specifically on operating expenses. They were up in dollars sequentially, you taking some cost mitigation actions. As we get into 2016 as those cost mitigation actions go away, want do operating expenses normalize to either on a dollar basis or anything you could provide would be helpful.

Okay. So if you look at the - let me just pull my sheet here. So if you look at the third quarter, the operating expenses included several items that to were abnormal including the M&A activity that we did with Pericom. And I detailed these in the release. And then we also had an impairment charge for the BCD 8-inch ramp capacity. And so those two items, if you take those out, then we were basically - we are going to be flat from third quarter and fourth quarter. We don't see those repeating next year. So I would assume with the activities of hiring freeze and reduced travel and those things that Keh-Shew talked about that we would be able to at least maintain those levels in the first half. Of course then you'll have actions associated with salary increases as you see in the third quarter, one of the big increases from the second quarter were salary increases. So we'll have same activity next year.

Okay. And then just as a brief follow-up, while I still have you. Taxes, what do you expect them to normalize in 2016?

Well, yes, so I would say that they are going to be somewhere between 25% and 30%.

Okay.

That’s where we were…

Then finally, I guess either Dr. Lu or Mark, the POP dynamic has it - I just want to be clear. It accelerated in terms of additional inventory correction actions during the month of October, that's what you've been able to see so far?

In our guidance we've got an expectation of deceleration of POP, okay. And people are conservative in these periods. The good thing is our POS has remained strong, but in the fourth quarter, you’re going to expect a normal fourth quarter decline in POP. So that's what we tried to inform you late in our guidance and we think we are right in that area. But again the activity is quite strong. We were actually quite pleased with our third quarter POS. So if you really take out some of the adjustment you look at our OEM and POS, we had a relatively strong quarter, but we live with POP. So that's where we are. So actually we think that our business is tracking reasonably well.

Okay. Thank you.

Thank you. Our next question comes from the line Suji Desilva of Topeka. Your question please.

Hi guys. With the moving parts in the supply chain here, can you talk about what pricing trends you're seeing, if they are normal or whether you're seeing really pricing pressure?

I think there was - first of all, we always see pricing pressure in our industry. There is a very, very clear expectation for the major customers that you're going to drop every quarter, so we live with that. And yes, I would say that pricing pressure is there. In the normalized customer base, I don't think we are seeing it. I think in the commodity areas there is some new energy from a few suppliers in the commodity areas that is very aggressive. There is other people that brought on new capacity on and they're trying to fill it. So yes, the commodity space is very, very competitive right now and we definitely seeing some things that we really didn’t expect to go on again. But there is some pretty good pricing out there. So we’re trying to navigate through that, but I think the products that we’re focusing on, I think we are well positioned and we are not seeing - everybody protects their important products, okay. So nobody wants to see any unnecessarily erosion. So there is not big price war is going out there in the things that we are out designing in and so forth. But on the commodity areas in SOT-23and some of those areas, yes, it's a very, very competitive environment.

Okay, great. And then the CapEx, just to be clear, is the change in CapEx behind us or is the remaining CapEx spend on Chengdu or other unusual CapEx as we go into 2016 timeframe?

I think it's behind us but some of them would happen in the 4Q.

Yes, that’s right.

And 3Q and 4Q, then after that it’s behind us. And 8-inch, the capital again is going to be after the 4Q, then will be behind us. So I don’t see any major particular item next year. And that’s why we are going to return some of the cash generation from operation to the shareholders.

Okay. And then last question on the smartphone market. You're winning some good OEM progress there. Can you talk about your diversification amongst the tier ones and the China smartphone OEM, just to understand how diversified you are in your exposure versus exposed to certain program ramps? Thanks.

I think we’re still pretty focused in the major players, but we’re getting more and more product into China cell phone and it’s a big focus for us. So I think we’re actually from a design win perspective are doing quite well and our revenue is growing quite well across the board. So I think our program there is working, and I think we'll continue to make progress as we release more and more products for that space.

Great. Thanks guys.

Thank you. And at this time, I'd like to turn the call back over to Dr. Lu for any closing remarks. Sir?

Thank you for your participation today. Operator, you may now disconnect.