Good afternoon, and welcome to Diodes Incorporated First Quarter 2018 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 May 8, 2018. I'd 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' first quarter 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 would like to remind our listeners that the results announced today are preliminary as they are subject to the company's 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 Form 10-Q for its first quarter 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 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 8, 2018. 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 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 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' Web site at www.diodes.com. And now, I will 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. First quarter revenue was at the high-end of the guidance, primarily driven by strong growth in the consumer, automotive and industrial markets, complemented by revenue in Europe reaching record levels. In fact, our automotive end-market reached 9% of the revenue in the quarter as we continue to benefit from our successful customer and content expansion efforts. Since implementing our automotive strategy in 2013, we have achieved a compound annual growth rate of 27% in this business, reflecting our expanded customer base, increasing pipeline of design wins, and the growing content across multiple applications. The quarter was also highlighted by gross profit dollars reaching a record, growing 33% year-over-year, twice the rate of our revenue growth and contributing to almost 3.5x increase in non-GAAP earnings per share over the same time period. Additionally, EBITDA in the first quarter reached a record $54.2 million or 20% of revenue. The operating leverage in our business model positions Diodes to deliver increasing profit and a cash flow in the coming quarters, as revenue continues to increase at a faster rate than operating expense and approach our target model of 20% of revenue. Looking to the second quarter, we expect to extend our growth momentum with continued strength across our target geographies and the end markets, which we anticipate will result in the achievement of new quarterly records for both revenue and gross profit. With that, let me now turn the call over to Rick to discuss our first quarter financial results and our second quarter guidance in more detail.

Thanks, Dr. Lu, and good afternoon, everyone. Revenue for first quarter 2018 was $274.5 million, an increase of 16.2% from the $236.3 million in the first quarter 2017, and an increase of 2.3% from the $268.4 million in the fourth quarter 2017. Revenue increased in the quarter with Europe achieving record revenue mainly due to strength in the automotive and industrial end markets. Gross profit for the first quarter 2018 was a record $98.6 million or 35.9% of revenue compared to $73.9 million or 31.3% of revenue in the first quarter 2017 and $96.4 million or 35.9% of revenue in the fourth quarter 2017. The 460 basis point year-over-year increase in gross profit margin was primarily due to favorable product mix, increased contribution from Pericom products as well as improved capacity utilization. GAAP operating expenses for the first quarter 2018 were $71.7 million or 26.1% of revenue and $64.7 million or 23.6% of revenue on a non-GAAP basis, which excludes $4.8 million of amortization of acquisition-related intangible asset expenses, $2.6 million of expenses related to officer retirement and a $300,000 credit related to the KFAB restructuring. This compares to GAAP operating expenses in the first quarter 2017 of $64.6 million or 27.3% of revenue and non-GAAP expenses of $57.3 million or 24.2% of revenue, and GAAP operating expenses in the fourth quarter 2017 were $72.9 million or 27.2% of revenue and $64.3 million or 24% of revenue on a non-GAAP basis. Looking specifically at selling, general and administrative expenses for the first quarter, SG&A was approximately $47.2 million or 17.2% of revenue. On a non-GAAP basis, excluding the officer retirement expenses, SG&A in the first quarter was approximately $44.6 million or 16.2%. This compares to $39.7 million or 16.8% of revenue in the first quarter 2017 and $44.7 million or…

Thank you, Rick, and good afternoon. As Dr. Lu and Rick discussed, first quarter revenue was up 2.3% sequentially and up 16.2% year-over-year. Q1 distributor POP was flat and POS was down 6.6%. Europe and North America remained strong with record high POS results. Asia POS is down due to impact of the Chinese New Year holiday shutdown on our customers. Channel inventory increased 7.8% sequentially. As evidenced by our above seasonal results, customer activity remained strong across regions, with solid design activity and design wins. We continue to penetrate our key customer base with an expanded sales footprint, deeper product line and significant cross-selling opportunities with the Pericom product lines. We set revenue record across 4 product category in the first quarter, including connector ASIC, interface, protection devices and signal integrity. We also continued to see strong momentum in the battery management, EPMS, switches, MOSFET and CMOS LDOs, driven by recent design wins on new products. Going forward, we expect our expanded product portfolio, new product introductions and design win momentum will support continued revenue growth. Looking at the global sales in the first quarter. Asia represented 78% of the revenue; Europe, 13%; and North America, 9%. In terms of our end market, consumer represented 27% of the revenue; communications, 24%; industrial, 23%; computing, 17%; and automotive, 9% of the revenue. As Dr. Lu mentioned, our automotive market was a highlight in the quarter, setting a quarterly revenue record and growing 50% year-over-year. Given its strong performance, I want to start my end-market commentary with auto market, which has been a key focus area for Diodes for the past several years and also a area where we are seeing expanded opportunities for growth. During the quarter, we continue our penetration momentum by winning design in with key automotive customers…

Hi. Good afternoon. Question on gross margin, which typically increases sequentially in Q2, and also presumably given the strength at the top line is something that should help gross margin as well. What is the reason for the midpoint of the Q2 gross margin guidance to be slightly down quarter-on-quarter? And is this possibly related to the ramp of your 8-inch capacity?

You are right, Tristan. It's -- that's one of the reason. The other reason is we focus significant growth in 2018, evidenced by the guidance second quarter, 9% growth over the first quarter. So, because of that, we’ve to increase the capacity, and I think by -- look at the CapEx number in 1Q, you can see we are adding capacity to support the growth of this year. And therefore it will be -- the company is already impressed. You are correct, you were right, so -- but depreciation will be treated by that way. And therefore, the depreciation from CapEx in assembly line [ph] plus 8-inch of capacity expansion, those will be increased, but depreciation and interviews under audit negative PV. But look at the GP gross profit, GP dollar, we -- actually if you look at the midpoint, the guidance actually up above $8 million from 2Q to 1Q, so the percentage might went down a little bit due to the capacity -- under the capacity, but the gross profit is actually focused at $8 million.

Great. That’s very useful. Next, could you then give us a quick update on 8-inch capacity ramp? And also when we should expect that gross margin to rebound on the basis of the background you just gave us?

Okay. I think the 8-inch -- I think we already said, the focus is ramping up to about 9,000 to 10,000 wafer per month by end of 4Q. So, right now, we look at that 1Q is only total 800 wafer only. Then, Q2, probably ramp it up gradually to probably 2,000, 3,000 at max, then go to 3Q, 6,000, 7,000 a month, then in 4Q -- at end of 4Q probably 9,000 to 10,000 inch wafer per month. And the CapEx is already spent and now, I think we already -- somewhere around 6,000 wafer capacity equipment is already installed. And then we probably have another piece of gear, [indiscernible], will give us the capacity up to 10,000 per month.

Great. Thank you.

Thank you. And our next question comes from Shawn Harrison with Longbow Research. Your line is open.

Hi, everyone.

Hi, Shawn.

Congrats on the results. The increase in channel inventory of about 8% sequentially, do you expect that will be consumed by distribution during the second quarter or do you believe you will need to continue to build channel inventory, or they will build channel inventory, I guess?

No, we won't consume for sure. We already look at the wafer per month is already consumed some, okay? But end of the quarter, we expect it will be -- most of them will consume, okay? And the reason actually is due to the Chinese New Year. Most of our customer during the Chinese New Year is shutdown, the whole week, and so the POS is reduced. And typically our 4Q in Asia POS is always very high. So if we look at U.S. and Europe, the POS is actually record high. So the whole problem -- I won't say the problem, the whole inventory build is actually in Asia, and Asia was due to Chinese New Year of a customer shutdown they’re not using the product. But the design you need is already there and they -- right up in the Chinese New Year, they start to ramp. So much the POS is already start to move. It's really the 1Q role is in February, and then the March that move and April we report is quite well, the POS is quite well too.

Okay. And as a follow-up are you seeing the pricing environment where you are kind of flattish now year-over-year, or you are having any ability to see pricing goes slightly higher? And then as a separate follow-up to, Rick, when do you think you will be in a net cash position? Could you be there by the September quarter?

Okay. Let me answer the pricing, and then Rick answer the cash balance-ish. The pricing, we typically put 2% a quarter declaration [ph] and that's typically our motto. And from the good time or from the capacity time, we now is less than 1%. But very hard to go to customers and say, I want to raise the price. We -- it's very difficult, but we tried to do is product mix. So that's one of key is new product -- driving the new product to replace the old product and typically new product because of the performance, because the cost reduction, typically new product give you a better margin. And by doing that, each year through improved GP instead of go to the customers and say, now, you are [indiscernible] we want to raise the price, that's just in our business, that's not the traditional way to do it. But we can slow down the price reduction and therefore now our price reduction is less than our motto. Rick?

So the issue here is that we’ve debt outstanding of about $222 million and we had cash of $186 million, so the difference is $45 million. So the question is whether we are going to be able to pay down $45 million by the end of the year to just get to a net position. Dr. Lu would like us to do that. He is pushing, but I’m not sure we’re going to be able to do that because we’ve to make some equity injections into our Chengdu facility and so that might preclude us from doing that. But I would say that by the time -- by this time at the end of next year, we should be there for sure.

When you say equity injections into Chengdu, could you elaborate a bit? I’m sorry.

Yes, we’ve a commitment to the Chinese government, that we will invest so much money from an equity standpoint. It was one of the original things we agreed to back in five years ago.

Five years ago. The key thing is we both -- they keep us [indiscernible] and we kind of buy above them, but they give us the money back, okay? And so we’ve some commitment is by each year, how much money we will put in for expansion.

Yes. So it has to do with expansion. So as we’ve talked about previously, we’re continuing to slowly expand the capacity in Chengdu, and this helps fund that capacity expansion.

Okay, perfect. Thank you.

Okay.

Thank you. [Operator Instructions] Our next question will come from Edgar Roesch with Sidoti. Your line is open.

Yes, hi. Nice quarter. Congrats.

Thank you, Edgar.

I wanted -- I had one follow-up on capacity in the CapEx, sort of the pacing in 2018. I mean, would you think that you can stay ahead of demand with the additions you are making or would you expect maybe you are going to get on allocation with any products in the second quarter? Do you have any thoughts on that?

Well, I hate to say it, but currently we still have some of the product and the allocation, okay? So we will continue that situation, and -- but we do foresee the market's type since last year, and we’re putting the request to put in the CapEx. And it just started coming by day part [ph] of 1Q, and we’ve installed that and then we’re going to start ramp in Q2. But that's just enough to support the expansion, because -- for the -- for this year, and we will still see the capacity is quite tight on certain package.

Okay.

I will also say that, Ed, if you look at the first quarter we did about $31.5 million worth of CapEx on a cash basis and that’s higher than our model. as I mentioned in my speech, it's to front load this for the capacity expansion. And during the year, we think we will go back to the 5% to 9% model that we’ve had on a yearly basis. So to answer your question, it's going to be more front-loaded than it is back-loaded.

Yes, so our model -- we still want to keep our CapEx expenditure at our model, which is 5% to 9%. Now, in 1Q, we’re more than 10%. It is front-loaded and because typically our [indiscernible] in second quarter and third quarters, okay? So by the first -- fourth quarter is too late to put in the CapEx to support this year.

That’s right.

Okay. Thank you for that. And then on the packaging side, just kind of on a broader level, you’ve had so much success in the automotive side. Are you finding that your packaging is as big of a differentiator and leads to the product wins in that end-market as much as it has historically for Diodes?

Well, yes packaging is one of the key technology we’ve in our automotive. And I discussed, we are -- since installed that strategy back to 2013, we’re now in mix CAGR at the 20% for the last five years. So [indiscernible] view, our strategies are working and our -- from the product, from the packaging, from -- since we’ve been doing, it is successful. So we are going to continue the similar effort to continue grow ourselves quickly in automotive. And as in DC, I think we’re target at 9% and we’re going to achieve better than 9% and then move to 10% probably next year.

Yes, so just to add a little bit that beyond the packaging, I think performance and features are also very, very important. This is also a direction we continue to invest in technology and working closely with the customer to really find the perfect solution for their applications.

Okay. Thank you. And then one quick one. I don't know, I was looking through my notes, but the purchase accounting adjustment that you’re including in the Q2 guidance, Rick, is for Pericom and other acquisitions. Is that a fairly typical adjustment or did something trigger that particular adjustment? Thank you.

No. That’s an adjustment we’ve made every quarter for many quarters.

Okay. All right. Thank you.

Yes.

Thank you. And we’ve a follow-up question from Tristan Gerra with Baird. Your line is open.

Hi, again. Could you mention the percentage of your product portfolio that has lead times exceeding 12 weeks, and give us a range of how far lead times are stretching, and also how does that compare with the quarter ago?

Well, actually, product really -- the DTAM really based on the product. For example, most of the telecom product other than crystal and …

Oscillators.

… oscillators, most of the telecom product because the wafer fab coming from foundry and packaging from [indiscernible] the DTAM is low compared with Diodes product. And Diodes product typically are wafer fab. The number of Mux is very less than telecom product start from Diodes [indiscernible] MOSFET probably [indiscernible] and telecom product 20-something layers. So the DTAM on the wafer fab makes significant difference. Packaging has not done much different, except they are outside, and the Diodes product is we do it all internally, therefore, we can shorten the DTAM a little bit. But majority the DTAM really coming from foundry wafer and because none of there are significant different between the discrete and the telecom product.

Right. So I think in general supply is still very constrained, and we really do not see a significant change from our overall lead time situation point of view.

Great. Thank you very much.

Thank you. And I’m showing no further questions at this time. I'd now like to turn the call back to Dr. Keh-Shew Lu for closing remarks.

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

Thank you. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program, and you may all disconnect. Everyone have a great day.