Good afternoon, and welcome to Diodes Incorporated's Fourth Quarter and Full Year 2018 Financial Results Conference Call. At this time, all participants are in listen-only mode. At the conclusion of today's conference call instructions will be given for the question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded today, Wednesday, February 13, 2019. 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' fourth quarter and full year 2018 financial results conference call. I'm Leanne Sievers, President of Shelton Group, Diodes' Investor Relations firm. Joining us today are Diodes' President and CEO, Dr. Keh-Shew Lu; Chief Financial Officer, Rick White; Vice President of Worldwide Sales and Marketing, Emily Yang; and Director of Investor Relations, Laura Mehrl. Before I turn the call over to Dr. Lu, I'd like to remind our listeners that the results announce today are preliminary as they are subject to the company finalizing the closing procedures and customary quarterly and year-end review by the company's independent registered public accounting firm. As such, these results are unaudited and subject to revision until the Company files its Form 10-K for the fiscal year 2018. In addition, 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 more detailed discussion of the risks and uncertainties in the company's filings with the Securities and Exchange Commission including Form 10-K and 10-Q. In addition, any projections as to the company's future performance represent management's estimates as of today February 13, 2019. Diodes assumes no obligation to update these projections in the future as market conditions may or may not change except to the extent required by applicable law. Additionally the company's press release and management statements during this conference call will include discussions of certain measures and financial information in GAAP to non-GAAP term, included in the company's press release are definitions and reconciliations 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 90 days in the Investor Relations section of Diodes website at www.diodes.com. And now, I'll turn the call over to 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. I'm pleased to report that 2018 represented the best performing year in Diodes' history with the achievement of record financials. 15% organic revenue growth, driven by continued market share gains and a 75% increase in non-GAAP profitability over the prior year. Our ongoing focus on automotive and industrial sectors result in annual revenue growth from those target markets of 38% and 29% respectively and combined is 35% of total revenue. Additionally, our Pericom business excluding frequency control product grew 24% year-over-year to almost 10% of revenue primarily as a result of our increased content in high-end PC, server, storage, and the data center market. During 2018 we made significant progress on Diodes position at key customers and gaining shares, not only within product line, but also across multi applications at the same customer. In fact, some of our largest customers use Diodes content in nearly all product they offer, which provide greater diversification for Diodes as well as a deeper relationship with those customers. Our Pericom products have also provided us greater leverage creating extensive opportunity in new end equipment and applications as well as additional cross-selling opportunities for our other product offerings. More recently, I'm also pleased to have announced the proposed acquisition of Texas Instruments' wafer fabrication facility and operation located in Greenock, Scotland or GFAB. This facility is about 320,000 square foot and has the potential monthly capacity of approximately 256,000 8-inch equipment diodes. Also as a part of the transition, Diodes and TI will enter into a multi-year wafer supply agreement, in which Diodes will continue to manufacture TI's all the products from GFAB, as TI transfers those products into its other wafer fabs. This proposed acquisition now will with our strategic plan for…

Thanks, Dr. Lu and good afternoon, everyone. As part of my financial review today, I will focus my comments on a sequential change for the fourth quarter, as well as select full year results, and would refer you to our press release for a more detailed review of our results, as well as the year-over-year and full year comparisons. Revenue for the fourth quarter 2018 was $314.4 million, a 2% decrease from the $320.9 million in the third quarter 2018. This 2% sequential decrease is significantly below our normal seasonality. For the full year 2018 revenue was a record $1.2 billion, an increase of 15.2% over $1.05 billion in 2017 and well over the growth of our served markets. Gross profit for the fourth quarter was $114.2 million or 36.3% of revenue compared to $115.2 million or 35.9% of revenue in the third quarter of 2018. The sequential increase in gross margin was primarily due to improved product mix, as well as the continued 8-inch ramp at our Shanghai fabrication facility as SFAB2. For the full year gross profit increased 22% to a record $435.3 million or 35.9% of revenue as compared to $356.8 million or 33.8% of revenue in the prior year. GAAP operating expenses for the fourth quarter of 2018 were $70.3 million or 22.4% of revenue and $65.8 million or 20.9% of revenue on a non-GAAP basis, which excludes $4.5 million of amortization of acquisition related intangible asset expenses. This compares with GAAP operating expenses in the third quarter 2018 of $69.4 million or 21.6% of revenue and $65 million or 20.3% of revenue on a non-GAAP basis. Total other expenses amounted to approximately $1 million for the quarter, including $2.3 million of interest expense. Income before taxes and non-controlling interest in the fourth quarter of 2018…

Thank you, Rick, and good afternoon. Looking more closely at fourth quarter revenue distributor POP was down by 6% and POS decreased 9.8% sequentially. But yes, POS was up 16% year-over-year. Outside of Asia, POS remains strong, channel inventory increased 5.6% sequentially driven primary by Asia region in preparation for the pre-Chinese New Year deals as is typical at this time of year. Outside of Asia, channel inventory was flat. Looking at global sales in the fourth quarter, Asia represented 79% of the revenue, Europe 10% and North America 11%. In terms of our end markets, industrial was once again our largest representative end market at 25% of revenue. Consumer represented 24%, communication 24%, computing 18% and automotive 9% of revenue. Starting with automotive market growth continues to be strong especially in Asia, with 2018 revenue increasing almost 38% over 2017 to 9% of total revenue. Diodes continues to secure new design wins across multiple products including MOSFET on the brushless DC motor, electric power steering, water pumps, power windows, electric horn, infotainment, battery management and advanced driving assistance. In addition, USB power delivers being added to automobiles, which is driving design wins of our solution in infotainment and mobile wire and wireless charging applications. Additionally, our diodes and rectifier products has seen solid momentum in the automotive space, driven by the need for a robust electric discharge protection in the connected cars. We also saw strong demand for day time running light and body control modules as we continue to introduce new products like bipolar junction transistors, and LED linear controllers. In the industrial market, we also achieved strong full year growth of more than 29%, accounting to approximately 25% of total revenues. During the quarter, we secured multiple new design wins for our normal density trench MOSFET technology,…

[Operator instructions] Our first question comes from the line of Gary Mobley of Benchmark. Your line is open.

Good afternoon, everybody. Thanks for taking the question. I want to start with a question or a clarification for you, Rick, you mentioned in your prepared remarks Q1 revenue guidance of $302 million, in your press release it reads $305 million, so I'm just hoping to point exactly what it is?

Well it's $302 million.

$302 million. Okay. So to my second question down 4% sequentially is better than seasonal nobody in the industry is doing better than seasonal in the first quarter. So why go on a limb with a sort of guidance and that's truly backed by demand indicators and what not. Could you give us a sense of how you guys are faring so much better than the industry right now?

Okay. I think we always talking about the seasonality somewhere around down 5% to 10%, but similar to last year we do see a very strong demand for our product especially winning from content increase. I think during the speech you can see we are gaining more shares not just the more new product, but we do actually gain more shares from content increase. So even when we see some of the application to slow line in one Q1, but due to the content increase our effect by the seniority reduced.

Okay. I did have a follow question about your GFAB acquisition. So obviously perhaps doesn't deal with TI strategy and perhaps it's the reason they're willing to sell it. So I'm just wondering what the arbitrage is that you're betting on here what don't they see in this facility that is going to benefit you strategically or financially?

I don't want to speak for them, but obviously they're spending their 12-inch fab and they are moving to the smaller geography, but for Diodes since we are - we do have a need for more capacity for 6-inch, but especially we really don't have enough capacity for our 8-inch products. So this is just the right match between the two companies when we move the product portfolio into the 8-inch it really suit us from the usage point of view. I think during the speech you can see we do build in significant revenue and profit GP data increase in the future and this fab will be able to provide us the peoples, the skill, the capacity and also it's going to be very positive for either to Diodes operations.

Okay, that's helpful. Thank you everyone.

Thank you. Our next question comes from Shawn Harrison of Longbow Research. Your line is open.

Hi, everybody congratulations on the strong results and guidance.

Thank you, Shawn.

Dr. Lu, didn't see in the press release for the TI facility that you're acquiring, the purchase price is that something you can provide to us? I'm just trying to figure out that you pay a lot to get the accretion and I know you usually like to bargain.

Number one, we do have agreement with TI the detail of the purchasing cannot be disclosed. So - but two things I do can able to tell you, one is, it meet my M&A criteria remember my one of the key M&A criteria is need to be accretive within one year and fortunately this acquisition it provide immediately a cushion. So now that's what I really pay attention. Number two, we always say this is insignificant on the material.

It's immaterial.

Immaterial.

So from both TI and Diodes perspective were classifying this as immaterial and therefore the contracts and the details of the negotiation will not be disclosed.

Got you. That's helpful enough. On your current 8-inch capacity, the FAB2, where are you at right now in terms of production versus kind of I know that the target level, which is what 12,000 wafers a month or something like that?

Yes, if you remember it start from beginning of last year or actually we start working on 8-inch capacity in SFAB2 since 2017. The first production is in March of 2018 and we are able to ramp it up to about 9,000 wafer a month by December 2018. And we are hoping - we start to continue ramp it the maximum capacity in SFAB2 is only 12,000 a month 8-inch capacity. And so, when we're talking about this, this 8-inch capacity is for MOSFET for SBR. So typically somewhere around the probably five six days per layers. So 256,000 wafer 8-inch increment layers.

Layers.

Layers. It's a good addition to our discrete especially MOSFET and SBR capacity increase.

So in the fourth quarter the goal was to get to between 8,000 and 9,000 and that's actually where we got to in SFAB2.

Okay. And then how quickly will you be able to port your customer base into that fab and have it qualified. Is it within the first half of this calendar year?

No, no way. First, we need to develop the process, which may not be taking that long, but if you remember on our SFAB2, we actually take one whole year of 2017 to move in the equipment, develop the process and fortunately on this site equipments already there and we probably need like six months to implement the process, then it probably take another three months to do qualification, to do this one. And so we'll put it up the product notice to the customer and I may say probably currently I expect maybe end of the year we will start to notify our customer give them the sample. But to future event, the customer need the approval and all this one so it probably take a while. And that's why it's important for us to continue supporting TI, TI's need and keep the fab loaded. Then the time when TI demand go down, our demand will go up and it's able to give us accretive immediately and continue.

Right. So for the customer qualification it really depends, I would say range probably from one quarter to three, four quarters depends on the customer. So it's going to take some time.

Yes, and especially, this fab we expect to support automotive and industrial and that call it designing or the grand for the acceptance for a customer to agree to convert it take a while. And somewhat automotive required one year or one and half year. And so it's really very critical for us to be able to continue support TI, while we take time to bringing our product so we don't want to run into a problem of the capacity is empty or capacity is wasting.

Got you. Thanks so much.

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

Hi, good afternoon. Follow-up question on this fab from TI. What's the margin profile for the foundry business that you're offering to them, is that below corporate average?

No, I cannot. Tristan, like I say we cannot disclose and we have agreement with TI, the detail of the operation cannot disclosed, but I am going to emphasize one more time it's accretive immediately, okay.

Okay. And then, once you get full access to that fab, presumably few years what percentage increase does that bring relative to your current total production today? How much incremental capacity percentage wise is this fab going to give you once you have full access in a few years?

This I cannot - like I say I cannot really give too much of detail, but I can still you now today the 8-inch is almost fully loaded and some of the 6-inch it probably is not fully loaded. But the key thing is we do not have with agreement we're able to accretive immediately. Therefore any additional will be the gain any additional loading from Diodes will be the gain. Now, I probably cannot tell you how much gain because then we are disclose too much of the detail. But loading from Diodes will be able to show more profit, that's for sure. Right.

Yes, so Tristan, one thing we can disclose and the GPAD currently has over 8,000 wafers per month of 8-inch capacity plus approximately 13,000 wafers per months of 6-inch capacity. And if you go through that whole process, that's what we put in the press release, which the total capacity is approximately 256,000 8-inch equivalent layers per month.

And I wanted to mention when we talk about 8,000 wafer that's use traditional CMOS wafer, like 20 layers, but for Diodes product especially for MOSFET and for the SBR is not the same number of layers that's why instead of using wafer, 8,000 wafer are used in total 260 layers a month and the reason is the product is different and typically CMOS all product number of layers is much higher, in average probably 18 to 20 layer to our discrete, which is much, much less, and that's why I give you a way to use in the layer.

Okay, that's useful. And then a quick follow-up on an earlier question. Is it too early or are you able to see initial order activity now that the Chinese New Year is over. And specifically what type of backend capacity do you have, last year you had more labor coming back from the Chinese New Year that you expected and therefore you had probably little bit more capacity than you expected. How is that shaping up relative to demand basically starting this week with post Chinese New Year?

Okay. Tristan, you can see we give the guidance today that in the Chinese New Year actually just over a couple of days ago. And so, we do already know how many people come back during the Chinese, which means last week, the Chinese New Year is last week. And New Year is already over Sunday, last Sunday. So we give the guidance and that guidance is already in consideration of the capacity, the supporting. And so I think that guidance reflect the people performance and the people return from the Chinese New Year. My point is not going to be a big surprise anymore.

Okay, thank you.

[Operator Instructions] Our next question comes from the line of Edgar Roesch of Sidoti. Your line is open.

Yes. Congratulations on finishing up a terrific year.

Thank you.

Well, this is great. And I wanted to ask you a little bit on the automotive side. Certainly some premium growth being seen in newer systems, whether it's ADAS or connected driving applications. I would assume that more traditional automotive systems like power steering, windows and alike would be a good bit slower. But could you just speak about, how the growth trended throughout 2018? And what you're seeing going into the first quarter here?

Right. So this is Emily, maybe let me address the question, right. So even with some of the traditional applications that you mentioned, like the power steering, the windows and stuff like that. We also see a lot of change over there implemented brushless DC motor and with this change that which we've been emphasizing for the last few quarters, we start seeing a lot of content improvement, especially on the diode side. So that's really what we've seen. So now, switching from the traditional to the newer models, even is the same function, but it really enriched a lot of features and functionality kind of really helping the content expansion that we've been talking about.

Okay, terrific. Thanks for that. And then Dr. Lu, just as you continue to mix up in the more complex devices, do you see that 7% R&D budget being adequate? Let's say, a couple of years into the future, or would we expect that to maybe grow a little faster than revenue at some point?

You remember when I go to talking about 2025 we're hoping always driving the GP up to 40% and revenue $2.5 billion you remember that is the same we're talking about, building that same I do intend to increase our motto of R&D to 6%. And you'll probably say 1% more, but don't forget 1% is the print [ph] is that 20% of the total R&D numbers, okay? And number two is, we have to growth on both R&D on both discrete and analog. So discrete, the R&D we'll keep the same as the revenue growth. And so therefore, I don't see a need of significant increase our R&D from our business model. And I think, 6% - 7%. Yes, from 5%, 7%. So, it is a good increase and I think that the key thing really is efficiency of the use in the R&D money. Okay. I'm doing, I've been driving how to more effectively to use in R&D money. And so far Diodes able to efficiently increase our efficient control of using our R&D money. And another thing that we purchased Pericom, and Pericom product their IC product is in the - in 50%, 60% GP. And if you take the Pericom, I am talking about IC, Pericom IC, now increasing frequency control product and in Emily speech you already know our Pericom actually grow 24% of the IC, Pericom IC increased 24% last year. So we are not increasing the R&D money, we keep about the same and you can see that even with that we are able to grow 24% last year. So to answer your question, I think we are very well to utilize our R&D money.

Yes, thank you for that. And then one last one, I understand that the additional Chengdu investment was kind of prescribed in the agreement. Is it geared towards eventual expansion of any kind or is it just change in the equity ownership structure?

He is talking about the Chengdu, equity investment that we talked about in the fourth quarter. What's that going to be spend on in the future expansion?

Okay, that we do - we have two items, one is constantly CapEx increase to support our need for the capacity expansion. Now we still continue, the another big money is the building. If you remember at the beginning when we Chengdu phase 1 we build up one manufacturing building, one R&D building and one painting [ph] building. And we kind of are using up all the majority of our manufacturing building. So, we do plan to go to next phase, which is building another five floor of the manufacturing floor. And that is the one going to consume a big money and I am just think try to see we can fully utilize our space and see there a little bit on our building expansion. So, it's still ongoing and when we have a need we will start to building up the next manufacturing building.

Thanks for that and have a good evening. Thanks.

Thank you.

Thanks, Ed.

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

Thank you for your participation on today's call. We are looking forward to providing another update on our business next quarter. Operator, you may now disconnect.

Thank you, sir. Ladies and gentlemen this concludes today's conference. Thank you for your participation and have a wonderful day. You may disconnect your lines at this time.