Ladies and gentlemen, thank you for standing by. Welcome to the TowerJazz Second Quarter 2017 Results Conference Call. All participants are currently present in listen-only mode. Following management's prepared statements, instructions will be given for the question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, August 3, 2017. Joining us today are Mr. Russell Ellwanger, TowerJazz's CEO; and Mr. Oren Shirazi, CFO. I would now like to turn the call over to Ms. Noit Levi, Vice President of Investor Relations and Corporate Communications. Ms. Levi, would you like to begin.

Thank you and welcome to TowerJazz financial results conference call for the second quarter of 2017. Before we begin, I would like to remind you that some statements made during this call may be forward-looking, and are subject to uncertainties and risk factors that could cause actual results to be different from those currently expected. These uncertainties and risk factors are fully disclosed in our Forms 20-F, F-4, F-3 and 6-K filed with the Securities and Exchange Commission, as well as filings with the Israeli securities authority. They are also available on our website. TowerJazz assumes no obligation to update any such forward-looking statements. Now, I'd like to turn the call to our CEO, Mr. Russell Ellwanger. Russell, please go ahead.

Thank you, Noit. Welcome to all of you. Thank you for joining us today for our Q2 conference call. We reported record revenues for the second quarter of 2017 at $345 million, representing a 13% year-over-year growth. In terms of our profitability, we reported a record EBITDA for the quarter of $108 million, up 24% over last year. GAAP net profit for the second quarter was $50 million for an increase of 30% year-over-year. This profitability growth well in excess of our revenue growth was driven by ongoing improvements across all margins for which Oren Shirazi will give details in a few minutes. It demonstrates the strong operating leverage inherent to our business model. In the second quarter of 2017, we generated record free cash flow of $43 million. This further strengthened our balance sheet providing us with financial flexibility to be able to support exciting new opportunities. Looking ahead to the third quarter of 2017, we see continued growth and our expectation for revenues of $355 million plus or minus 5%. We remain focused and attentive to the needs of our broad customer base, working to provide full circle value creation, built upon our market leading specialty technology offerings. Looking in our business breakdown, the total end markets served by all wafer shipped meeting our corporate revenues in the first half of 2017 were for the RF-end market including mobile and infrastructure, about 30%, for power management, including power ICs and power discrete about 30%. For sensor end market including medical, machine vision, digital SLR cameras, cinematography and security among others, about 16%. About 24% of our corporate revenues served various other segments, many of which fall under IOT, such as computing and analog sensors, included here also is aerospace and defense and protection devices. Our first half year-over-year…

Thank you, Russell and welcome everyone. I will start my review by providing our P&L results highlights and then discussing our cash generation debt, share count and the balance sheet. We again reported a very successful quarter with year-over-year revenue growth of $40 million to a record of $345 million resulting in record gross profit of $91 million, record operating profit of $57 million and record shareholder's equity and divisional records in the balance sheet. Overall, year-over-year this increase of $40 million in revenue resulted in $17 million incremental operating profit, $21 million in incremental EBITDA, representing 53% incremental EBITDA margin and $12 million incremental net profit representing 29% incremental net profit margin which is ahead of our target growth model. Gross and operating profit for the quarter were at a record $91 million and $57 million, representing 25% and 43% increase effectively, as compared to $73 million and $40 million gross and operating profit in the second quarter of 2016, respectively. Net profit for the second quarter of 2017 was $50 million or $0.52 per share, basic representing an increase as compared to $38 million or $0.45 basic earnings per share in the second quarter of 2016. I know that the second quarter of 2016 included $10 million, a net gain from the acquisition of San Antonio facility and $7 million financing cost relating to early repayment of the Israeli banks' loans. If we look at earning per share for the second quarter increased to $0.49 per share as compared to diluted earnings per share of $0.40 in the second quarter of 2016. EBITDA for the quarter was at a record $108 million or 31% EBITDA margin as compared to $87 million in the second quarter of last year, up 24% year-over-year. Overall, quarter-over-quarter, our $15 million revenue increase…

Thank you, Oren. Before we open up the call to the Q&A session, I would like now to add general and legal statements to our results in regards to statements made and to be made during this call. Please note that the second quarter of 2017 financial results have been prepared in accordance with U.S. GAAP and the financial tables in today's earnings release includes financial information that may be considered adjusted financial measures and non-GAAP financial measures under Regulation G and related reporting requirements as established with the Securities and Exchange Commission, as they apply to our company. Namely, this release also presented financial data, which is reconciled as indicated in the table or in the call on an adjusted basis, after deducting; one, amortization in acquired intangible assets; two, compensation expenses in respect of equity grants to directors, officers and employees; three, gain from acquisition net; four, non-cash financing expenses related to bank loans early repayment; and five, other non-recurring items such as acquisition related costs and Nishiwaki Fab restructuring costs and impairment. Adjusted financial measures and non-GAAP financial measures should be evaluated in conjunction with, and are not a substitute for GAAP financial measures. The tables and the earnings release also contained the comparable GAAP financial measures to the adjusted financial measures, as well as the reconciliation between the adjusted financial measures and the most comparable GAAP financial measures. EBITDA is reconciled in the tables from GAAP operating profit. EBITDA is not a required GAAP financial measure and may not be comparable to a similarly entitled measures employed by other companies. EBITDA, the adjusted financial and the non-GAAP financial information presented herein should not be considered in isolation or as a substitute for operating income net, income or loss, cash flows provided by operating, investing, and financing activities per share data or other income or cash flow statements that are prepared in accordance with GAAP and is not necessarily calculated or presented on a basis consistent with the same or similar data presented in previous communications. And now we will open up the call for Q&A. Operator?

Thank you. [Operator Instruction] The first question is from Cody Acree of Drexel Hamilton. Please go ahead.

Thanks for taking my questions and congratulation on the continued progress. Russell, if we could just maybe start with your thoughts on capacity expansion maybe kind of the timing and the type of transactions that you are looking at. Are you thinking about something more like a single fab maximum type acquisition or maybe another JV? Or are you possibly considering maybe something larger given the size of the Company today and the growth rate that you're seeing?

Thank you, Cody, firstly for the good wishes. Good question. As stated earlier in the call, we did see a 26% growth or above 26% organic growth in the first half and the second quarter. It's a, I think an amazing industry leading number and something that's between 20% and 30% organic growth, something we've been able to maintain for a while now. So, the question about capacity increases is a very, very real one. For the short-term, our focus is obviously to continue to take the benefit of the already covered fixed costs that we have within facilities and fulfill to higher utilization levels, which is the reason that on a percentage base, the margin growth is above the revenue growth because the fixed costs has been covered and our growth capacity model has been one that we've been able to through either in the partnership Panasonic, or TPSCo, or through the outright acquisition of a San Antonio fab, it's a loading agreement from Maxim, we've been able to take very, very high capacity facilities that were not fully utilized at a very reasonable if not low cost in a win-win model and have runway to build up a third-party business when from day one you have something accretive to the EPS and the EBITDA. And hence, at this point, as the utilization goes up, the percentage of growth on the margin number is higher than the percentage of growth in the revenue numbers. Uptake, so that being said, we are certainly focused on pursuing similar models. So one thing that we would be going after is still look at is the type of a deal that as you look at the end of 2018 sometime in the beginning or middle of 2019. We would need to have additional…

No, I appreciate the information that left technical that new market, new areas at your Analyst Day you had openly talked about an interest in MEMS. Is that – is that related to that discussion?

MEMS and other types of – I said within the script that we're very interested in sensors, that opens up many, many different areas, I mean not just MEMS itself, but different materials.

And then just lastly, last quarter you raised your RF growth target based on the strength of silicon germanium. In you script, you talked about strength of silicon germanium. Can you parse out how much of that growth is being driven by Wi-Fi versus optical? I know we're getting a lot of mixed data points in the optical markets. Some are seeing strength, a lot aren't, so I'm just curious to see what you are seeing?

We're seeing it in both, in high-end performance for switches as well as certainly within the optical space. Now, I think most people and I'm not sure of anyone that is cleaning weakness within the data center arena within optical. And as stated in the previous call, and I'll reiterate that, that's where we're seeing the biggest uptick is within data centers. And I don't know of anyone that's saying that that are is weak, but whether there would be someone that's saying it's weak or not, we're not seeing any weakness there whatsoever. We're seeing very big demand and at or above our capacity presently.

Very good. Thank you and congratulations.

Thank you.

Next question is from Rajvindra Gill of Needham & Company. Please go ahead.

Thank you and congrats as well on good results. A question on the gross margins, so steady progress there for the second quarter revenue increased incrementally about $15 million and the incremental gross profit increase was $6 million on a non-GAAP basis, so about a 41% incremental. Wanted to get your thoughts on the gross margin progression as we get to third quarter and fourth quarter, how we should be thinking about the incremental margins going to the back half of the year and along the same lines, at what point do you think we'll start to see more higher margin flows occur in the 12-inch fab where the incremental margins are substantially higher in the 65% range, if I'm correct on that?

Yeah. So it's really like you say, the more the mix of the growth will be, the more it will be from Uozu factory from the 12-inch, the higher gross margin incremental, it will be. So, in this, therefore the second half of 2017, I would expect the incremental margin to be continue to extend with what we show here, which is 45%, 48%, 50% incremental and towards the end of the year and mainly in the beginning of 2018, first half of 2018 as much as we see the Uozu ramping up with its 60% plus incremental gross margin, then the weighted average depended – should go to like 55%, 57% incremental gross margin.

And another question on the gross margin, you know a competitor of yours saw increases in their cost of goods sold related to increased wafer pricing due to shortages and tight supply of 200 millimeter wafers. I was wondering, if you can maybe talk a little bit about that in terms of your supplier base, you seem not to be seeing that, are you more diversified on your supplier base? And then if you could elaborate a little bit on that and how you look at that dynamic affecting the margins going forward?

So, we had, just a few weeks ago, there was the Semicon Show in San Francisco at the Moscone Center and it's a very big day for our operation or week for our operations team to meet with many, many suppliers. Among the different suppliers that they had met with, and I was there for one short time, I met with some – on the silicon side, one of our major suppliers as well. So, overall, I think we're in pretty good shape with silicon suppliers as far as relationship based, I don't think we see any shortage at all. We've had a couple that have asked for some increases, but and they are really not prohibited increases. If we were to look, I believe for the blended 2017 cost of silicon, it's probably less than our blended 2016 cost of silicon. So, we have a good relationship and good activities for efficiency. Some of it deals with some multiple qualifications of different suppliers. We do have in specific one supplier who has asked for a very strong increase that we are in discussion with still. I'm personally in discussion with. But I believe in the big picture, that we would not see an impact in our gross margin as whatever if there was going to be some Q4 impact in COGS due to silicon, or a Q1, Q2 2018 impacted the COGS doing silicon, we'd very aggressively go after other GL accounts in order to take that cost out. So, and I think the big think about anything dealing with costing is truly being very proactive and smart and looking at an overall summary of what is the cost and having programs with suppliers, so where you are not really holding them over a barrel as far as cost reduction, but long-term programs are both benefit from by driving efficiencies. And I think we're fairly good with our major suppliers to do that.

Okay great. And last question on the Panasonic agreement, I know it's up for renegotiation, or up for renewal in Q1 of 2019 and you are actively in discussion now. I was wondering if you could kind of walk us through how you are thinking about that agreement in the future, without maybe going into specific numbers or anything like that, but how the agreement could potentially change versus the prior agreement?

Okay. So, basically there is no doubt that Panasonic will continue demand products from those factories. Those factories were built by Panasonic more than 100 years, that Panasonic is leader of electronics, maybe the founder of electronics in Japan. The foundry idea is not broadly used in Japan, so it's pretty common that the Japanese IDNs manufacture by themself. And the fact, the Panasonic will continue to demand quantities of wafers in significant amounts from those factories is unquestionable and it's a negotiation that we have like any other customer. Possibly then at better environment because any customer is used to outsource to maybe a few vendors and the Panasonic is used to manufacture in Japan, the products at least that are manufacturing in TPSCo fabs. So, I don't think there is any problem to assume that quantities will remain the same more or less, and it's just a matter of negotiation like any other customer.

Thank you.

The next question is from Richard Shannon of Craig-Hallum. Please go head.

Hi, guys. Thanks for taking my questions. I'll echo the great execution, keep up the good work. It guess my first question that organic growth, the number you mentioned 26%, I think is both of second quarter and first half number which is obviously a great number relative to the semiconductor growth markets. I guess two questions there. As you look through the rest of the year or as far as you'd like to, Russell, can you give us a sense of how you think the organic growth rate can trend going forward and are there any meaningful differences within the major functional buckets as you've split out over the last few quarters relative that – whatever that overall organic growth rate expectation is?

To begin with, I agree, I think 26% is quite an amazing number and I am very pleased that we've been able to do that. It shows having chosen the right markets and having capabilities and relationships with customers that allow us to grow with them in the right markets. The areas that have grown the strongest in the first half of the year and the second quarter of the year have been pretty much across the board, everything that we do which we had stated at the beginning of the year that all of our businesses we would see a 25% or greater growth in with the exception of the RF space, which we have said at the beginning of the year coming into it, that we had thought it would be somewhere in the mid-single digit and then we increased that to be some to ex-that or so at the last quarter and said that we've maintained it. So, on the RF side for some good reasons, we didn't want to do something that would have required us to do in order to have very, very strong double digit growth. But on the area of CMOS image sensors and the area of power management both discrete and PMIX, and some other areas of IoT. Our sensor business having really come from not very much is growing very good. So, across the board with everything other than the RF, we are seeing very strong double digit organic growth. Probably year-over-year we would expect to maintain in the 20s for Q3 and Q4.

Okay. Great, excellent to hear that. My second question Russell, is on your power management businesses that doing quite well here. I'd love to get a sense of what's current market applications that are driving that business today? And then a lot of your discussion both today, and I think you mentioned this increasingly in the past couple of conference calls is increasing exposure to the automotive market. I know that's a market, it takes a while to turn on, but why don't you gives us a sense of where you think the automotive exposure is today, and whether that will be a much larger part of your power management business in a couple of years or whatever timeframe you'd like to discuss?

Yes, certainly. The end market applications for the power, I think we've talked about quite a bit. It's really the overall motor drivers, AC-DC converters, everything across the board there within power management, what we have within there is really a very, very good industry best Rdson and that drives efficiency, which allows our customers to basically design a smaller part and hence off of those smaller parts to be able to get the higher margin off of an 8-inch wafer. So that's the big drive there as efficiency allows both us and our customers to share on margins and our customers tend to be more successful in their end markets. The area that we see strong demand and big growth in right now is that a battery management, and that's why I talked about higher voltages and that's an area that is within automotive and I think that we are gaining very, very strong presence within the battery management arena. I believe I had mentioned at the last conference call that we had a very big upside order within battery management because the device that we had made had some very succinct benefits from lithium-ion batteries, allowing a greater stacking of battery cells. So, we see across all conventional power management applications and I mean they are very conventional that we see – that's where our big growth is, but it's because of having a very, very efficient platform. And then the battery management which is a big driver within the whole electric vehicle that is where we see a lot of capability and customer attraction with present. Now your second part of the question was what Richard you asked something, what was it specifically you are asking about automotive?

Just to see how much of your power management business could be automotive in a year or two? I know those are long tail businesses you have to think longer-picture, longer term, but how big could automotive been in a couple of years for you?

We have already some very, very lead customers within automotive, within power managements. How much of the power management business itself would be automotive? I don't know. I really haven't put that thought into it. I don't necessarily want to give a number that is in base in fact or thought. I would say on the lower end that we could probably be driving at least a 20% share of automotive end applications. Some of it really does depend a bit on the growth of electric vehicles. The electric vehicle itself is driving a lot of what we have gained good market share with our customers and with a very lead customer for the battery management. So the electric is what's really putting huge requirement on power management for these stacked battery cells. So, providing that's the customers that we have in that field to maintain their market share, and that that electric vehicle will grow as per forecasted. I think a 20% would be at the low end of the percentage of our power management that would be in automotive and bigger numbers to go to. If you wish, we'll take this as an action for our next interaction be at the conference call whenever and I'll give you some ranges of what we think the automotive segment would be. But again, I think the 20% is not an overly aggressive number at all, but I wouldn't want to give numbers without having put a lot of direct call into the question.

I think people would appreciate that. I think automotive is becoming a more interesting topic, so we look forward to hear more about that in the future. Russell, my last question is on 3D-sensing augmented reality. I am curious when you expect that to become more of a notable part of your business and what applications are driving? Is it mobile that we are hearing about from certain large OEMs maybe introducing at this year versus automotive another applications. I am curious where you are seeing that coming from initially?

We have quite a bit of activity there with some outstanding customers and we're not yet allowed to press release with. I would see the augmented reality probably starting to ramp at the latter part of the 2018 time frame and continuing well beyond. We – again, the customer that – one lead customer that we're working with there, we're not allowed to specify, but if they take off, it will be pretty amazing and I think we're really leading or we're working with somewhat of a leader within this space.

Okay, looks like an increasingly interesting topic of discussion once we'll bring up in future conference calls. I think that's a good start. I think that's all the questions from me guys. Thanks a lot. Appreciate it and keep up the good work.

Thank you.

The next question is from Lee Meyer of Lord Abbett. Please go ahead.

Hi. Thank you very much for taking my call and congratulations on great set of numbers. My question is on the Japan fabs and utilization there. You had mentioned that in the second quarter utilization was around 50%. It seems as though it's been in that range for a while. When should we expect the utilization there to lift off and how should we expect to see that lift off over the next couple of quarters?

You will see most likely a substantial increase in the fourth quarter as well as the first and second of next year. The point that is slightly misleading when I talk about utilization rates in Japan is that we're continually ramping more, but the utilization goes against a total photolithography. So, the photolithography capability is very, very high in those factories. The actual capabilities wasn't necessarily as high as the photolithography. So, within having a very, very big amount of capability, the photo layers themselves were much higher than the other bottleneck tools within the factory. That becomes one of the difficulties of talking of utilization. If I was going to be talking utilization against bottleneck tools rather than talking utilization against photo lithography, you'd be seeing substantially higher numbers in the Panasonic factories, I'm sorry in the ex-Panasonic factories and the TPSCo. So, you know you'd be dealing somewhere about 72% to 76% for two of the three instead of dealing at the 50% average that we had talked about. So, you are dealing, the reason that the numbers don't look as impressive is really as we're dealing with the very, very high photo capacity, not necessarily are you seeing in those utilization numbers the increases that we're seeing in the revenue number out of those factories. But even against the utilization on photolithography in the Q4 I believe you will see a big uptick in that utilization number as well as then Q1 and Q2 of next year.

Okay, great. And my last question just relates to sort of the minority interest expense that you booked in the second quarter and I'm just curious as to how that is calculated, you know looking at the utilization of the Japan fabs and Panasonic's stake in that JV, I would have thought that the payout would have been a little bit higher just based on what might have missed our for what those fabs could be earning. I'm just – could you give us any color at all on what goes into that number?

Yes, sure it's Oren. So, of course it is 49% of the net profit from the TPSCo and that net profit is a result of the low double digit margin committed contract we have from Panasonic which we said is brining low double digit margin – EBITDA margin from – plus the very nice incremental margins that we'll bring from the sales, probably which we in the past said between 40% to 50% incremental. Now, consider before you calculate the net profit, the depreciation. So, when we acquired TPSCo and is in the financial statement, there was a valuation to which one of the TPSCo assets in the fab and it came out to be a total of about $250 million of value of the fixed assets, which were many the equipment tools. And this is being depreciated into the P&L and although actually, we as TowerJazz didn't pay $250 million, you know that we paid to buy the fabs only $8 million, still on their accounting balance sheet, this appeals like a $250 million CapEx gross. And once we started the activity, it start to be depreciated in to the P&L. So, those depreciation costs which are not cash because we – and they were never cashing the past even, because we never paid for them. Still accounting, in the TPSCo P&L, we record depreciation cost of the relative part of the $250 million and this is actually answering your questions why the profitability of TPSCo itself is lower than what is by the model or by the economic model. Economically, the profitability is very nice, double digit percentage of the $90 million to $105 million revenue a quarter of Panasonic plus 40% to 50% on the [indiscernible], yes of course the R&D, M&A, G&A and all that and also less this accounting deprecation. So, basically for example in Q2, the net profit of TPSCo before tax, before minority was about $5 million, then you have a tax provision of about 30%. So, it's about $1.5 million resulting in $3.5 million of net profit after tax and before minority. And now minority gets $1.7 million and we are left with $1.8 million, and that's mathematics.

That's great and just curios, how many years are you depreciating that $250 million over?

So most of the machinery and equipment is 15 years, so it is about $16 million a year right, I mean $250 million divided by 15. But some of them is – for example hardware, software IP, tools, cut tools, they are only for four to five years. So, maybe weighted average is 12 years, so it's like $20 million a year total, so $5 million a quarter.

Perfect. Thank you very much.

Welcome.

The next question is from Lisa Thompson of Zacks Investment Research. Please go ahead.

I just wanted to just follow-up on the automotive market. It seems like that's a huge theme going forward. Has that – has the location of those customers or potential customers changed at all, what you are considering about adding capacity and also the second question is, is there any more interest in product made in the U.S. from customer demand?

So, Lisa the automotive question that I answered was specific to power management. I mean automotive we have activities from actually all of our business units, not just the power management. The amount – the biggest amount of automotive that we have right now is actually within the RF business unit and that's for radar and it's for collision avoidance. We have…

Are those customers in the same geographies as traditional customers?

They are certainly in the geographies of automotive makers. But in the case of the bulk of what we're doing with radar, it's in Asia.

Okay, so that doesn't change your thinking any, that is because you are interested in Asia before?

Yes. I guess, I'm not necessarily understanding the question I suppose, but the – that portion of automotive that we're doing is into again it's driven by a big customer capability and necessity and that is within Asia. Within power management, we have quite a bit of power management that we serve, that we serve through the San Antonio factory and those are customers that are located predominantly within Europe and within the United States. As far as, I'm not talking about the end automaker, I'm talking about the integrator that's buying the parts.

Right.

In the case of the – they made sensors, we have again a variety of activities going on within image sensors. One of our customers and the longest term customer is a U.S. customer in the Midwest of the U.S. and other activities going on also within Asia.

Okay. Great. So, it's spread out. Thank you.

Yes.

There are no further questions at this time. Mr. Ellwanger, would you like to make your concluding statement?