Good afternoon, and welcome to Diodes Incorporated First Quarter 2022 Financial Results Conference Call. At this time, all participants are in a 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, May 4, 2022. I would now like to turn the call over to Leanne Sievers of the Shelton Group, Investor Relations. Leanne, please go ahead.

Good afternoon and welcome to Diodes' first quarter 2022 financial results conference call. I'm Leanne Sievers, President of Shelton Group, Diodes' Investor Relations firm. Joining us today are Diodes' Chairman, President and CEO, Dr. Keh-Shew Lu; Chief Financial Officer, Brett Whitmire; Senior Vice President of Worldwide Sales and Marketing, Emily Yang; Senior Vice President of Business Groups, Gary Yu; and Director of Investor Relations, Gurmeet Dhaliwal. Before I turn the call over to Dr. Lu, I’d like to remind our listeners that the results announced today are preliminary as they are subject to the company finalizing its closing procedures and customary quarterly 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-Q for its 2021 fiscal quarter ending March 31, 2022. 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 question. Therefore, the company claims a 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, including Forms 10-K and 10-Q. In addition, any projections as to the company’s future performance represent management’s estimates as of today, May 4, 2022. 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 and non-GAAP terms. 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 you 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’ Chairman, President and CEO, Dr. Keh-Shew Lu. Dr. Lu, please go ahead.

Thank you, Leanne. Welcome everyone and thank you for joining us today. The first quarter represented a continuation of outstanding execution by the Diodes team, especially considering the quarter is typically down seasonally and the recent COVID related lock down in China, most notably in the Shanghai area. We once again set new record across key financial metrics, including the sixth consecutive quarter of record revenue and gross profit, record gross margin that exceeded 40% for the first time in the company's history, and the fifth consecutive quarter of record non-GAAP earning per share. Before continuing, let me first take this moment to extend our well wish to those affected by the lockdowns in China, in particularly our employees and their families. We have been providing relief assistance for impacted employees, including sleeping and shower arrangement at our local facilities. In addition to providing full meal a day, we consider all our employees family members, and it is important to the company to be part in helping them get through those difficult time. Turning back to our result. Our strong revenue and margin performance in the quarter continued to be driving by record achieved in the automotive end market which reached 13% of revenue. The industrial market, as well as for our Pericom product, gross margin expanded 720 basis point year-over-year due to a greater mix of higher margin product along with expanded factory utilization and the loading. Another key factor to our ongoing success has been our content expansion initiatives, and our total solution sale approach resulted in expanding customer relationships and incurring design and momentum. And when we combined it with our diligent expense management, we delivered almost 90% increase in adjusted earning per share over the previous year period. During the quarter, we were also pleased to announce the proposed acquisition of onsemi South Portland, Maine Wafer Fabrication Facility and Operation, which provided additional 200 millimeter wafer capacity for our product to accelerate our growth initiatives in automotive and industrial end markets. We expect this transaction to cross day in the second quarter. The U.S. based facility together with our existing facilities in Asia and the Europe will further enhance our global manufacturing footprint and greatly increase our internal capacity to support our future growth. Looking forward, the growth and the demand for all products remain at higher level across all target end market and the geographies, and we are guiding for our 9th consecutive quarter of growth and our 7th consecutive quarter of record revenue in the second quarter, and also anticipating another solid year of strong growth and profitability for Diodes. With that, let me now turn the call over to Brett to discuss our first quarter financial results and our second quarter 2022 guidance in more detail.

Thanks, Dr. Lu and good afternoon, everyone. As a part of my financial review, today, I will focus my comments on the sequential change for each of the line items and would refer you to our press release for a more detailed review of our results, as well as the year-over-year comparisons. Revenue for the first quarter 2022 was a record $482.1 million, an increase of 0.4% from $480.2 million in the fourth quarter 2021. Gross profit for the first quarter was also a record at $196.7 million, representing a record 40.8% of revenue, increasing 3.1% or 110 basis points from $190.7 million, or 39.7% of revenue in the fourth quarter 2021. GAAP operating expenses for the first quarter 2022 were $103.6 million, or 21.5% of revenue, and on a non GAAP basis were $99.5 million or 20.6% of revenue, which excludes $3.9 million of amortization of acquisition related intangible asset expenses, and $0.3 million of acquisition related costs. This compares to non-GAAP operating expenses in the prior quarter of $100.1 million or 20.8% of revenue. Total other income amounted to approximately a negative $2.2 million for the quarter, consisting of 5.5 million of unrealized loss on investments, 1.1 million in interest expense, 1.9 million of other income, 1.7 million in foreign currency gains and 800,000 of interest income. Income before taxes and non-controlling interest in the first quarter 2022 was $90.8 million compared to $108.8 million in the previous quarter, due primarily to a couple of non-GAAP items that included the gain on the sale of a manufacturing subsidiary last quarter and unrealized loss on investments in the first quarter. Turning to income taxes our effective income tax rate for the first quarter was approximately 18.3%. GAAP net income for the first quarter 2022 was $72.7 million, or $1.59…

Thank you, Brett, and good afternoon. First quarter revenue increase slightly quarter-over-quarter, which is better than typical seasonality and above the midpoint of our guidance, primarily driven by strong demand across all regions. We could have achieved even a higher level of performance, if we have not been impacted by the China lockdown and COVID-related transportation challenges that limited the product delivered to the customers. Looking more closely at first quarter revenue. We achieved record worldwide POS revenue due to the strength in Europe and in America, both of which have record revenue. Asia also continue to have very on demand, but POS was impacted slightly due to the China lockdown, and the associate product delivery challenge late in the quarter. As a result, distributor inventory in terms of weeks increased slightly quarter-over-quarter due to our distributors not being able to ship product to our end customers, but yet remain at the low-end of our defined range of 11 to 14 weeks. Overall demand and backlog remains very strong across all regions and end markets. Looking at the global sales in the first quarter. Asia represented 76% of revenues, Europe 13% and North America 11%. In terms of our end markets, Computing represented 27% of revenue, Industrial 26%, Consumer 18%, Communication 16% and Automotive 13% of revenue. We achieved the record revenues in Automotive, Industrial and Communication markets. Our Pericom product also set a new revenue record, which is seven consecutive quarters. I would also like to point out that, our automotive, industrial end markets combined total 39% of revenue, which is one step closer to our 2025 target of auto and industrial representing 40% of the total revenue. Now, let me review end markets in greater details. Beginning with automotive market, revenue increased 26% year-over-year and 9% sequential to…

[Operator Instructions] Our first question comes from the line of Matt Ramsay from Cowen.

Congratulations to the team on the results, especially given the operational challenges in China right now. I guess that's my first question for the team and Dr. Lu, can you guys try to give us some sort of quantification of the impact that you've seen to your results, both in the first quarter and the second quarter guidance just given all of the COVID lockdowns in China and in the operational situation over there? Is there's any way to quantify that? I mean it's pretty remarkable that you're able to say -- have been raised quarter given all that’s going on over there. And I just like to understand that impacted a bit better. Thank you.

Okay. I probably cannot give you an exact number. Okay. But, Shanghai is one of our major operation, but it's not only operation, and we have about some of due – through the contract manufacturing to do packaging for us. And we have turned to other measures site, and then we have other for Pericom product crystal and -- factories for assembly. And then we have AOC Shanghai lock down is not a major AT operation for us. Number two, for 4Q or 1Q actually is virtually is only start to lock down about last week of the end of quarter. Therefore, the impact to us is not a major, that's why we are able to see our guidance and perform a record revenue, record profits. And so, the impact is not there. Now, the second quarter, we already go through the airport in the first month of the quarter. So we know how much impact for us. That's why we are able to or we are guiding instead of seasonality typically at this time 5%, we are guiding 3.7%. Okay? But the key thing is, for the future, we still now have clear picture yet. Even today, the Shanghai area still, even at the green zone is still above -- now 50 million people out of the 26 million people in Shanghai area. So you can see, it's not a 100%. It's probably slightly better than 50% or 60% - 65% are reduced. But we have a very excellent execution team over there. When there's a lock down announcement come out, we immediately taken, we so called cross loop operation, and we are able to continue using the people that was locked down in the factory and aggressively go to production, produce the stuff. And then, we watch out the piece part ability and try to get the government, give us a special permission to be able to get some of the wafer, some of the peace part to come to the factory for continuing operation. So I don’t think we’re going to be have a major problem from our operation point of view. I think we have very, outstanding execution team of a day. Now we are more concerned with our customers. We don't know, what's going to be happened in the operations. So this is more concerned from us perform our own operation. Our demand still very strong, our backlog still very strong. And therefore, we believe we can make our guidance.

So, as you can imagine, right, the situation is extremely dynamic. So the team has been very creatively as well as aggressively to minimize the impact.

And I would like also for the more color on that is the, that lockdown going to be in a Sunday in the future? The key question you have, how can we come back really quickly and then so the employee overdose that is our priority. So we're taking care or employee, not only for him to yourself, but also for their family. So they appreciate a company's effort, and they work very hard to make our goal. So this is a one thing I want, I put a note on that.

I understand it's a very fluid situation all the way around. My follow-up question, Emily, I think you've touched on it at the very end of your prepared script, which is the ability to continue to add capacity. I know you guys are going to be adding capacity at GFAB in Scotland over time, and now you've gotten the deal to acquire the fab from On Semi, I guess it may support some of the products that they're walking away from in some parts of their business. So if there's any way we can get a quantification on magnitude and timing of the additional capacity, you're going to be able to bring online sort of outside of Asia that would be really, really helpful.

That is separate from two one is wafer fab, one is AT, because we both is very tight on the capacities. And if you took that from wafer fab, I think either we can say we are lucky or we have a good planning. If you look at the GFAB we purchase in year 2019. That facility, we supporting the Texas Instruments and that support is coming down 10% a year that loading cannon 10% a year. Therefore, we already start to qualify Diodes report to ramp it up in that area, in I mean in that site. So you can see when this is when demand or our commitment to the Texas Instrument are down 10% each year, we can go up 10% to support our on demand. And number that day are 10% and compare with our number of days, then wafer is much more than, what we're talking about 10%. So that is GFAB. Then, obviously, you already know our acquisition for the wafer from On Semi. And that we expect to cross next month or end of this month, that's what we expected. Okay. And then we would start to move in our technology, and we may not be immediately available, but we think up to one year, we should be able to, again, increase significantly of our wafer capacity, wafer flip capacities. So, these this and another one actually is expected to, and we ramp it up, as we almost ramp up now. So, if you look at the continue output, then you'll be much better than last year, because that's the adjust stuff on body law to ramp it up. So, that's another one, then the one in the intake a fair, which is we purchased from LSE, we continue increase the capacity, because originally at the beginning of last year, we are only 50% out then end of 4Q last year, we are going to 90, but at the same time, we continue it in the capacity. So overall, when I give you all this, when you can see, we still have a potential continue grow for our own need. Then from AT point of view, again, AOC AT, they are no fully loaded and we're going to using that to load in it, and we start to offload some of the need, okay, go to these unloaded all the AOC capacities. And at the same time, it's at our Shanghai fire and I was turned to where we are continue it in capacity. And actually, we are looking at the knee and continue increase the capacity. So, capacity is very tight, but I can, we are able to continue increase and then supporting our strategic customers. And at the same time, by this kind of support, we are able to develop a very strong relationship with our strategic customers. And so I think that's how we can continue grow for our own business.

Our next question comes from the line of Tristan Gerra from Baird.

A quick follow-up question regarding your [indiscernible], South Portland, Maine fab. Could you remind us is that 4-inch, 6-inch are you planning on making 8-inch upgrades? And also, are you into a foundry service commitment or is the production going to go straight to your product and how long does it take to qualify your own product, if you could talk a little bit about the transition that you expect there.

Okay. Hi. This is Gary. And first let me ask you a question and the -- wafer is actually a inch equipment. Okay. So, in the short-term, we do have a plan to continue support on business and just like the case we did for the GI go through our GFA. And at the same time, we are qualifying our, we will transport our technology and the process for internal wafer fat to the new way for fat. And also, we are qualifying our product, especially like analog, those kind of advanced technology device into this wafer fat. So to me and you probably take one and one and a half hour to get our product qualified and production that wave fat at the same time probably the service going down and down. So, that's probably our plan.

Well, we have the amendment to support on -- fully supported for one year. And so our loading probably won't go down. But we will take that here and start to put in the process, the technology to support our own product and give the customer notification, and then start to ramp it. So, the timing is just right, because we support them when they go down, we can start to go up hours. So this is, it's like what we do with -- we committed to support GI and then come down 10%. So we ramp it up each year. And so we know how to do it. And I think the GFA acquisition come out to help us adapt. And I believe that, this effect in demand should be help us similar way the like -- helping us.

Yes. Definitely.

Okay, great. And then how should we look at the analytic pricing plans? Obviously, there were a number of price increases last year industrywide. Do you see those price increases slowing a bit later this year? And how do you view that for your company relative to the whole industry?

I think, overall, the market situation didn't change much from the last time we talked, right? The demand and backlog still extremely strong. So, there is still an imbalance between supply and demand overall, right? So during this kind of market condition, usually you don't get much of the price pressure, but more on the supply pressure right? So we don't really expect the price pressure would come down. What we talk about also, with the price increase, Diodes always take a more strategic view. So, we want to work with the customers very closely, only pass down the cost to the customer. In return, we can expand our customer relationship. We can continue to grow our content within the bond, within the customer. So we are seeing a lot of good traction and a lot of success, and that will continue to be the Diodes strategy moving forward.

Thank you. Our next question comes in the line of William Stein from Truist Securities.

Thanks for taking my questions. Congrats also on very good results and outlook, considering all the disruptions that are going on. And I want to follow-up on that topic with regard to the COVID lockdowns. Are you experiencing this effect on your business more as a matter of supply of materials and piece parts? That's disrupting your ability to manufacture? Or is it just simply a disruption capacity in the plant? Or is it more of a disruption in the ability to ship to customers or customer's ability to take the product? And I'm trying to figure out whether it's, I guess, sort of more viewed as by issue or demand issue?

Well, I've done the most effect is the people. None. Well, we are able to get the supply or building material, because we look ahead, and we are able to negotiate a special permission with the government to give us the, to get us the wafer shipment from our fab, or building material, the frame more compounds from our supply. So we today till today, I don't think we really get affected by the building material. And I think that should give the credit for our management team over there, because they watch it very closely, they take a proactive action to get the building material way ahead of time to fail to prevent any shortage of manufactures problem. But the key thing is really the manpower for weed when you duck down, the people cannot come in. And so the people, they walk in there 40 days. So fortunately, we have to shift for the people. So why shift work in two hours. And then when they're off, they go to sleep in the hour, arterial office area. Then we build in the shower room, for them to take in the shower, we provide them each shift, we provide them two meals. So they can, they walk in on two hours, after they come back come down, they will rest two hours. And then after the shift, the other shift over, they go back. But we don't have enough people. Originally, we only have about 50%, 60% of the people today to be there. But then when they start to lose that know all that area was released. But we -- can't we started then who is in the release room contact them and then ask them to come back to work. And immediately when the zone was released from the COVID-19 clean, then we'll ask them to come back and they will quickly come to work. And now way we can start continue increase our manpower. So even today, we are not 100% of the people yet, but we are able to produce majority of our needs.

Yes. So let me add additional. So from this, I would say both supply and demand, definitely, there's some impact. Right. So from the supply side, just like Dr. Lu mentioned, the manpower, the labor definitely have impact on us. Definitely, there's a reduced, I would say, output overall. But on the other side, you look at the demand, I think I talked about it the logistic challenges. Some of our customers also have reduced output capacity as well. That's actually the reason I talked about in Asia POS end of Q1. It was not a record, but still very, very good. Because overall, as the company, we have a globally record POS, that's also kind of impacted because the logistics on the inventory side, a little bit impact over there. So I would say combination of both, and what we've been doing is actually very aggressively and very creatively to finding different ways to overcome the challenges.

Appreciate that. If I have one follow-up, I would imagine, factory utilization is extremely high right now. But I wonder if you can quantify that maybe across the network of factories that you have, if that's a sensible thing?

Well, I think one of the things that we're continuing to see is that, across the, as we've mentioned, across the fabs, we're running mid to high 80%, which we call full, some are higher than others, at the same time in the 80s, our highest running 80s or in the mid-90s. And as we address that, were taking multiple pronged efforts to increase capacity as Dr. Lu went through a little bit earlier.

Well, and within, we are probably talking about this, one thing I do need to mention to you is I'm more concerned is our customer. Okay. I just get the report, first come with [indiscernible] which is closest quantum in Shanghai area, right? In Central, they just announced they're going to shut down, duck down seven days from today. So, that is more and more concerning. Well, our customer may not be able to --

Right. It's a very uncertain that for us to match our customer because even a government, our customer side announced a shutdown, and they have to shut down. So in other words, they probably cannot use our product to feel anything. But I think baskets products ability to ship our backlog to different customer who can able to, who is able to bail, that's why we can reduce our risk to this kind of production.

If I can squeeze one response question into that does guidance contemplate the potential for these additional sorts of ongoing shutdowns or if we see more news, such as what you just described, should we be more concerned about your guidance? Thank you.

So I would say we actually built in all the, as of today, what we know already into our guidance, right. So if the lockdown situation in China get worse or the situation dramatically change overall, but overall, we consider the strong backlog we consider strong book-to-bill ratio and strong result from Q1. That's actually the reason we still provide a really strong guidance for Q2 overall.

But to be overall, what we assume is what we know to you today. And we make assumption, great to see Shanghai area, like I said, at the beginning when they shutdown. But at the like beginning of this month, they start to reduce some from their total 16 counties. Okay. And the start from one county, two county and every two, three days, one more, two more. And until today I just mentioned to you is about 15 million people out of 25 million is in the release. So we tracking very closely every day, and the current assumption, our guidance is based on what we see today.

Right. And the other thing, keep in mind that, I also talk about it. Even China, maybe there is some slowdown, but we are extremely, extremely strong in Europe and North America. From the statement point of view, automotive industrial continue to be very strong. All the capacity, a lot of devices can be actually used in multiple applications, multiple regions and multiple customers, that's actually how we manage, and that diversify some of the risks that you talk about. So, I would say, our guidance is definitely, what we base on as of today to provide it to you.

[Operator Instructions]. Our next question comes to the line of David William from Benchmark.

Good afternoon. Thanks for taking the questions and congrats on the continued progress. I wanted to ask maybe first, Dr. Lu, if you have seen any changes in the customer order patterns, or maybe any of the behaviors there? Are you seeing anyone that's being maybe a little more cautious or conservative in terms of their inventory stocks or what they are trying to produce, just kind of given the backdrop that it seems like we are heading into with inflation and slower consumption?

David, this is Emily. Let me, answer the question. So first of all, from the order behavior point of view, we didn't really see any significant change, right? So overall, like I mentioned, the backlog is extremely strong book-to-bill ratio very high. All in all, if I look at the POS record revenue end of Q1, that actually has a good story to tell, right? So the market still extremely strong. There are some pockets of slowness, the low NPCs I talk that maybe China consumer demand a little bit softer. But since, like I mentioned, all the capacities shared. So when we have really, really strong demand from the other area, so it's not a concern for us overall.

Okay, fantastic. And then if I just kind of think about your revenue guidance, it's a fairly nice step up about, I guess, $18 million sequentially. Is that driven more by capacity that you're bringing on or is this more pricing because it seems like you have been fairly capacity constrained and just kind of curious how that revenue, what the makeup is there.

So I think if you think about it, we talk about product mix, right, that's one of the strategies that we be enforcing, continue to expand our product into the newer application, different customers. I would say, really that's a key point. Capacity, we have ongoing expansion just like Dr. Lu mentioned before, whether it's FCI or assembly size. So, we do ongoing increase in quarter-over-quarter. So I would say, all-in-all together with the business, that's reason that we provide a strong guidance for Q2.

Okay, fantastic. And then maybe just one last quick one for Brett. As you think about the margin progression, particularly now that you're north of that 40%, kind of the longer-term target. How do we think about the margin trajectory here? And should we maybe expect a more aggressive target range as we head through the year?

To answer that question as well. So, when the margin improvement, one of the key things that driving factor for that is actually product mix improvement. So if we continue to execute what we've been doing, and continue to show the result, I do believe you will continue to see margin continue to improve over time. So you're not I don't, we talk about how sticky this products are, I think it's more than ever more sticker than now, especially with our building very, very strong customer relationships.

David, one thing I think you're talking to referring to is we are very, we've represented our 2025 plan very openly. And that plan was modeled on essentially, to get to a goal of $1 billion of gross profit. We said, a reasonable model is 2.5 billion of revenue and 40% margin. And I think what we would say as we look at it now, is that, that plan is still very focused on gross profit of a billion dollars. And we continue to expect our margin traction to exist. And we continue to think that -- well, if you were to model it today, maybe that suggests that the revenue doesn't have to be as high, but we will continue to be focused on our gross profit dollars in our goal.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Dr. Keh-Shew Lu for any further remarks.

Thank you for your participation on today's call. Operator, you may now disconnect.

Thank you. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.