Good afternoon, and welcome to Diodes Incorporated’s Fourth Quarter and Full Year 2016 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, Tuesday, February 14, 2017. I would now like to turn the call over to Brett Perry. Mr. Perry please go ahead.

Good afternoon, and welcome to Diodes fourth quarter and full year 2016 financial results conference call. I am Brett Perry, Vice President of Shelton Group, at Diodes’ Investor Relations firm. Joining us on today call 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’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 subject to revision until the Company files its Annual Report on Form 10-K for the fiscal year 2016. 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 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 February 14, 2017. Diodes assumes 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’s 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 reconciliation of GAAP to non-GAAP items, which provide additional details. Also throughout the Company’s press release and management’s 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’ll turn the call over to Diodes’ President and CEO, Dr. Keh-Shew Lu. Dr. Lu, please go ahead.

Welcome everyone, and thank you for joining us today. Diodes closed out another solid year in which we achieved record revenue and gross profit, driven by increased content at customers, as well as higher contribution from our new products. We also made solid progress of our integration of Pericom Semiconductor throughout the year, which sets the stage for expanded growth opportunity in 2017. Additionally, our automotive revenue reached a record levels, increasing almost 50% over the previous years and then representing 7% of our annual revenue. Over the past three years, Diodes has significantly advanced our automotive strategy through investment in new products and customer expansion. Going forward, we expect to further expand revenue growth and to capture additional share through new product introduction and design wins. Lastly, we end the year with a stronger balance sheet, reducing debt by $36 million, generating $125 million in net cash from operations, and returned approximately 15% of that to our shareholder through the stock buyback. We maintained CapEx at approximately 6% of the revenue, which is at the low end of our 5% to 9 % model. We are continuing to make solid progress on process development at our 8-inch fab in Shanghai. Which we expect to complete by the end of the first quarter 2017. Our collective achievement throughout the year position the Company for continued growth, market share gains and margin expansion, as we intend to reach our goal of $1 billion in annual revenue. Before turning the call over to Rick, let me provide an update our Lee's Summit wafer fab, known as KFAB. As previously announced, Diodes experienced a fire on November 18, 2016, in the wet etch wafer fabrication area, resulting in a temporary suspension of production. The cleanup and the repair costs, coupling with the fab…

Thanks Dr. Lu and good afternoon, everyone. Revenue for the fourth quarter 2016 was $232.1 million compared to $250.7 million in the third quarter 2016 and $214.4 million in the fourth quarter 2015. Revenue for the quarter was down 7.4% sequentially due primarily to the KFAB fire combined with typical seasonality. For the full-year 2016, revenue was a record $942.2 million, an increase of 11% over $848.9 million in 2015. GAAP gross profit for the fourth quarter 2016 was $67.3 million, including approximately $5.3 million of fab expenses associated with the KFAB fire, or 29% of revenue, compared to the third quarter 2016 GAAP gross profit $80.6 million or 32.2% of revenue. In the fourth quarter 2015 GAAP gross profit of $53.6 million or 35% revenue. The sequential decrease in gross profit margin was due primarily to the decline in revenue and the impact on utilization from the KFAB fire. For the full year, GAAP gross profit was a record $286.9 million, or 30.5% of revenue, as compared to $248.6 million or 29.3% of revenue in the prior year. GAAP operating expenses for the fourth quarter 2016 were $61.9 million or 26.7% of revenue compared to $60.7 million or 24.2% of revenue in the third quarter of 2016. And $60.4 million or 28.2% of revenue in the fourth quarter 2015. Looking specifically at selling, general, and administrative expenses for the quarter, SG&A was approximately $39.1 million for the fourth quarter, or 16.8% of revenue, compared to $38.3 million or 15.3% of revenue in the third quarter 2016 and $41 million or 19.1% of revenue for the fourth quarter 2015. Investment in research and development for the fourth quarter was approximately $17.7 million, or 7.6% of revenue, compared to $17.1 million, or 6.8% of revenue, last quarter and $16.4 million or…

Thank you, Rick, and good afternoon. As Rick and Dr. Lu mentioned, 2016 was a record year for revenue and gross profit, including a breakout year for our automotive strategy reaching 7% of revenue and growing almost 50% year-over-year. Looking at the fourth quarter specifically, revenue was down 7.4% sequentially due to typical seasonality compounded by the fire at KFAB. OEM sales were down 4.5% while distributor POP was down 8.6%. We conserved Diodes' finished goods inventory to support future customer orders due to the fire. Distributor inventory in the quarter decreased 4.2% due to normal reductions, while POS was flat. Throughout the fourth quarter, customer activity remained strong across all regions with solid design activity and design wins. With the Pericom integration largely complete, we are well-positioned to drive long- term growth with an expanded sales footprint and broadened product line. Turning to global sales, Asia represented 83% of revenue, Europe 9%, and North America 8%. In terms of our end markets, consumer represented 29% of revenue, communications 24%, industrial 20% computing 20% and automotive was a record 7% of revenue. Let me now provide more detail within each of our end markets. For the consumer market, we released a new quasi-resonant PWM controller with multiple operating modes to maximize power efficiency across a range of load conditions. These devices target AC to DC adapters for set-top box and gaming console applications. Also in the portable consumer space, our PCIe Gen 2 packet switch is ramping up in a Wi-Fi speaker application, and we have seen increasing contribution from our 4 watt Class D amplifiers for Bluetooth speaker applications, including a major win from a leading smartphone and consumer electronics manufacturer. In the set-top box market specifically, we are seeing new market trends for increasing functionality to track usage…

[Operator Instructions] Our first question comes from Tristan Gerra from Robert. Your line in open.

Hi good afternoon. It looks like you've reduced pretty nicely channel inventories, if we look at your POP versus the point-of-sales. How much of that was due to the Kansas City production disruption? And if so, would you try to rebuild inventories as production comes back in line later in Q1 and Q2?

I would say that 50% of that, or some percent of that – I don't have it actually quantified to, but there was some percentage of it was due to the fire. And some of it was generally due to end of the year inventory reductions, but we had a little stronger POS than expected in Asia, so it's hard to really quantify all of it. Yes, we do expect to – actually, we expect to see a little bit more inventory decrease in this month and through February and maybe start to be able to build again in March and beyond, but we still have some restocking that will be required from the FabTech incident.

I think our FabTech priority will be supporting the customer on the sole-source product. And therefore, I'm putting the priority to support the customer demand and sort of build up the inventory in the channel, it will be second priority. And therefore, I probably don't expect that was done in 1Q. Maybe when we go into the second quarter we have enough capacity, then we'll do that. But right now, the priority for the KFAB is supporting customer demand for the sole-source product. At the same time, start building some inventory, prepare for the shutdown. Those would be the priorities.

Great, and then just a quick follow-up. So presumably your gross margin should benefit as you start rebuilding. And I'm assuming that it's more the Q2 type of trend, but any comment around that would be great. And then also, in terms of timings of when the savings begin, I'm assuming it's going to be 2018, first half of 2018.

let me answer your first question. Really the capacity utilization issue, other than in the KFAB, is our site because KFAB cannot support enough wafers such that the assembly site production is really sold out. So when we're talking about utilization cost, it's really coming from both: coming from KFAB production and coming from assembly. So, that is what happened to the first quarter, because we basically lose one full month of the wafer output. But then, when we start to ramp it up and we gradually go back to the run rate before we have a fire. And when that happens, then the assembly capacity will be start to realize. And so, I would expect the second quarter – we don't give a guidance yet, but I would the second quarter, our backend utilization to be back to normal. And then to answer your second question – okay you were talking about when benefit would be start to come back. And we start to develop the transfer the technology, the process, to house our SFAB. Now, the one transfer back to the OFAB. Some of our technology already existed in OFAB and then we transfer the product line to OFAB. Those should be they power this year after the qualification. It should recover those. But for us to develop the process in the SFAB, Shanghai fab, we would expect to gradually qualify some in the second quarter, end of second quarter; some will be end of third quarter, and that's our current schedule. And so I would expect, but this year requirement will try to build inventory because from the KFAB. Because it takes time for customers to approve the technology in the Shanghai fab. So I expect in the first quarter of next year, we will start to ramp in our SFAB for those products. And probably, depending on the customer approval time, I would expect probably second half of the next year to fully recover.

That's very useful. Thank you.

Thank you.

Thank you, our next question comes from the line of Steve from Raymond James. Your line is open.

It is Vince Celentano on for Steve. I wanted to follow-up on the KFAB shutdown. So should we expect in 2017 and 2018, off there to be maybe a decrease in OpEx in each year, given all the shutdowns as well as the severances?

I wouldn’t think so, because most of the KFAB expense is in the cost of goods sold area. Some of it will transfer and be cut down a little bit because of the engineering and those level but most of their cost is in the overhead line.

Okay, great. And have you seen any impacts yet from the ON-Fairchild acquisition as far as any particular industry looking now for a second source? Have you guys seen any impact?

I think we see these consolidations, whether it be ON and Fairchild or IR and Infineon, we see a lot of opportunity from all of those. As the vendor base shrinks, customers are looking for a new vendor to fill those positions, so we view those as both opportunistic situations for us.

Okay, great. And just one quick follow-up, if I can sneak one in. It looks like last quarter your share-based comp dropped down to about $1 million. Do you expect that to return to a more normalized level starting in the March quarter?

Yes, it will. That has to do with some changes we've made in the executive compensation. And we will – when we do the proxy you will see that we have a new executive compensation which will put us back to a more normal situation.

Okay, great. Thank you.

[Operator Instructions] We will be taking our next question from the line of Shawn Harrison from Longbow Research. Your line in open.

Hi good afternoon. Rick, if I may, you went to the buyback this quarter. In preceding quarters it was focused in on debt reduction. How would you expect to deploy excess free cash either in the first quarter or 2017?

First quarter of 2017, it's going to be debt reduction.

And then what's the decision-making process as you move throughout the year, between debt pay down versus buyback?

Well it really ends-up being how much money we have available. A lot of our money is overseas and it's dependent upon the availability of getting that money to the US. And so, we have a methodology of paying off the debt by not bringing that money back directly to the US. So it's -- if the money is here, we can use it for stock buyback. If the money is overseas then we have to use it for debt repayment.

Okay. And then as you bring the 8-inch capacity online maybe I missed this, I'm sorry. But do costs ramp up as you bring that online exiting the first quarter, so there will be an incremental drag as you load that business? Or is the cost of ramping that already within the guidance here in the first quarter?

When I say qualify in the first quarter, we may not ramp it in the [Audio Dip]. Expect to build a technology by end of first quarter. Then we need to get the sample. We need to get PCN, and we probably won't start to ramp production right away. Now, if we had the loading, then it might a little bit hurt. But from when we started loading it, start to ramp it, after you fully ramp, it won't cause the problem. And we're slowly getting the capacity. The first chunk of the capacity is 1000 wafers per month. It's not a big capacity. We just carefully develop the technology, develop the product, the PCN, get the customer to accept it. Then when the production started and when you fully utilize that capacity, then we're going to expand that capacity to the next step. So, you won't see a major cost problem when we ramp up that capacity, that capability. For long-term, it's going to be good for us.

Perfect. And then lastly, if I may, Mark, I believe you said Asia was a little stronger exiting the year than anticipated. Was that because of the early Chinese New Year, or are you seeing signs of true underlying demand accelerate in the signs you are seeing from distributors and customers?

Yes, we had a solid fourth quarter with POS in Asia as compared to the rest of the world. And signs are that, going into first quarter and beyond, that that business is relatively strong.

Yeah actually right after the Chinese New Year, since the recover, our customers recover is quite strong.

That is very helpful.

That's why when we give the guidance, we really look at, is KFAB – actually today, our problem is a supply issue, not a demand issue. As I said, our big problem is the KFAB wafer support issue. And from business point of view, if we can get KFAB effective production back to normal support, we should it should be looking good.

Perfect. Thank you, Dr. Lu.

Thank you. Our next question comes from the line of Lena Zhang from Summit Redstone. Your line is open.

Thank you. Thank you for taking my questions. Regarding the KFAB transfer process, given that there are 5-inch and 6-inch facilities in the KFAB and their utilizations you provided on the September quarter, and it seems that only the Shanghai fab can take all of the products from the KFAB. So, if after you fully shut down the KFAB, would you please provide us some estimates for the percentage of the outsourcing?

I don’t think we have exactly those percentages now. But I think that the Chinese 6-inch fab is not the only opportunity. There is some movement around between multiple different products, some moving out of our OFAB facility into outsource on our SBR products, all bipolars. Really, the center of our bipolar technology is located in OFAB. So, the transistors will go there. We've had a very long relationship, for 20 years, with a Japanese supplier, and a lot of our products are already qualified in those locations. So, I don't think everything is required to go there, but it definitely will help our utilization in our SFAB facility going long-term.

And actually, we are going to transfer some of the product from our SFAB1 to the SFAB2 to clear some rooms to move the demand from – to move the requirement from KFAB to SFAB1. So at the end, you're going to have both SFAB1, SFAB2, and including OFAB, that will all help the utilization. So that's why when we put it with – after all these move was completed, we should see the benefit of $11 million to $13 million. That's because the utilization of our – all our internal fab will be all helped.

Thank you. And the next one is – yes, you did mention cost saving after fully shut down the KFAB. But this cost savings included negative impact for the increasing of outsourcing?

I don’t know.

Well, it includes the costs associated – so the way that analysis was done is we took the SFAB wafers and cost, the KFAB wafers and cost now. And then we said okay, what happens when the SFAB wafers go up? That we go to the outsourcing facility, and then we compared the cost after that. And that's the $3 million to $3.5 million a quarter that we put in there for – I think we said $11 million to $13 million. So, that includes the cost of those outsourced wafers. But in the analysis, those outsourced wafers are not as significant as moving the product to SFAB1.

I see. But also, if I remember correctly, last quarter earnings call you mentioned the utilization rate of 85% is considered as fully utilized, right?

Yes.

Okay. Lena, let me correct some of the things, okay.

Okay. Thanks.

In the beginning of last year, or 2015, SFAB capacity is much bigger. And because when we – at that time, when we see the demand is not there, we actually cut the capacity. We return the fourth floor and move out some of the equipment, reduce the capacity almost one third to improve the utilization. Then, when we see we are going to – we're going to reduce that is we have a difficulty to the new. We actually go back to asking to take the fourth floor, that space back. And therefore, now we have enough space. And after KFAB is shut down, we'll move some of the KFAB equipment into the SFAB. Therefore, when we took inventory in the third quarter, that utilization, that capacity will be different from the capacity at the end we're going to have, because we will have more space and we will move the equipment from KFAB to SFAB.

Thank you. That's very helpful. Thanks. That's all I had.

Thank you. I'm seeing no other questioners in the queue at this time, so I'd like to turn the call back over to management for closing remarks.

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

Ladies and gentlemen, I'd like to take the time to thank everyone again for your participation in today's conference. This now concludes the program and you may now disconnect your phone lines at this time. Everyone, have a great day.