Ladies and gentlemen, thank you for standing by. Welcome to the TowerJazz Second Quarter 2020 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, July 29, 2020. Joining us today are Mr. Russell Ellwanger, TowerJazz's CEO; and Mr. Oren Shirazi, CFO. I would now like to turn the conference over to Ms. Noit Levy, Vice President of Investor Relations and Corporate Communications. Ms. Levy, please go ahead.

Thank you, and welcome to Tower Semiconductor Financial Results Conference Call for the Second Quarter of 2020. 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. Tower assumes no obligation to update any such forward-looking statements. Please note that the second quarter of 2020 financial results have been prepared in accordance with U.S. GAAP. The financial tables and data in today's earnings release and in this earnings call also include certain adjusted financial information that may be considered non-GAAP financial measures under Regulation G and related reporting requirements as established with the Securities and Exchange Commission. The financial tables include a full explanation of these measures and the reconciliation of these non-GAAP measures to the GAAP financial measures. Now I'd like to turn the call to our CEO, Mr. Russell Ellwanger. Russell, please go ahead.

Thank you, Noit. And thank you everybody for joining our call today, discussing our second quarter of 2020 business and financial results. Second quarter revenues met our guidance at $310 million, resulting in EBITDA of $82 million and net profit of $19 million. We further strengthened our financial position having achieved records in shareholders equity and total balance sheet. During the quarter, we continued our capacity expansion plan of our 300 millimeter facility as well as certain incremental capability CapEx of 300 millimeter and 200 millimeter as shown by the increased levels of investment and equipment to $63 million to support existing and future capacity and technology demands. Later Oren Shirazi, our CFO will provide an in-depth review of our second quarter financial results, balance sheet and main financial activities. We are guiding the third quarter to be a mid-range of $320 million supported by higher utilization rates which I will review later. Addressing the COVID-19 pandemic and its effects while viewing various regional changes in rates and impacts, we continue to ensure and are committed to provide reliable technology and manufacturing solutions, diligently taking action to reduce health and business risk to our employees, customers, suppliers and partners. We strictly adhere to all government guidelines and our dedicated workforce continues to meet all of our customer business needs. We have implemented many health and safety guidelines within our workplace and ensured flexibility for remote work if and when needed. Visits to and from customers, suppliers and partners; as well as internal employee meetings convened through video conference calls to minimize face-to-face interaction. To date and since the beginning of this pandemic, all of our worldwide manufacturing sites operate without interruption. We have seen and continue to see no material impact on our supply chain. Continuously monitor the situation globally…

Welcome everyone to our call today. To start and in relation to Russell's description of COVID-19, I am satisfied that all our manufacturing fabs operated during this entire period with no interruption. We have not missed any day of production or shipment and have succeeded in managing our supply chain efficiently to avoid any raw inventories shortage. We completed the quarter presenting revenue of $310 million achieving quarter-over-quarter and year-over-year revenue growth, as well as quarter-over-quarter margin growth. As I will show in my balance sheet analysis the company is in a very strong and financial and cash position. Our balance sheet as of June 30, 2020 reflects the current assets ratio of 3.5x. We achieved record shareholders’ equity of $1.39 billion while total balance sheet and total assets exceeded $2 billion. I will now provide the P&L highlight for the second quarter and then discuss our cash flow and balance sheet financial statements. Revenues for the second quarter of 2020 were $310 million, an increase as compared to $300 million in the first quarter of 2020 and $306 million in the second quarter of 2019. Gross profit, operating profit, EBITDA and net profit for the second quarter of 2020 are all higher as compared to the first quarter of 2020. Gross and operating profit for the second quarter of 2020 were $58 million and $22 million as compared to $53 million and $16 million in the prior quarter respectively, representing $5 million incremental increase each or 50% incremental gross margin over the $10 million higher revenue. Net profit for the second quarter of 2020 was $19 million or $0.18 per share basic and diluted an increase as compared to $17 million or $0.16 basic and diluted earnings per share in the prior quarter. The increase in income taxes expenses…

[Operator Instructions] The first question is from Rajvindra Gill of Needham & Company. Please go ahead.

Yes. Thanks for taking my questions. I appreciate it. Just a question on the organic sequential growth and organic year-over-year growth rate. I was wondering if you could provide that information given some of the end markets that you talked about.

So I think Russell talked about that most of the organic growth was in the SiGe in Newport Beach for the datacenters and 5G and in Uozu it's RF SOI. So, Russell, if you want to talk about it.

No. I'm talking about the actual number both the organic, sequential growth number and the organic year-over-year growth number.

We'll get back to on that very shortly. I don't have it off the top of my head.

Okay. So you're seeing some strength in 5G -- on the 5G and datacenter and that's continuing. Where are we in terms of the kind of the capacity expansion to support this demand? And you also mentioned that San Antonio facility is above Newport Beach so maybe you could talk a little bit about what are the steps we are taking there to make sure you have adequate capacity.

So if you recall we built out quite a bit of capacity in 2018 and stated that we would be building additional 30 plus capacity in 2019. At the time that the datacenter had pulled back a bit. We did complete the capacity build out and as stated we also within that built capacity in San Antonio. So off of the present start levels we could go somewhere about I'd say 30% -35% higher off of the right now very high start levels that we're at.

Okay. Great. And on the mobile side you talked about the mobile market kind of slowed down given what's happening with COVID. I'm not sure I heard it. Did you -- are you confirming your 10% to 15% year-over-year growth in RF SOI despite the market pullback? I just -- I didn't hear that part and how is 5G helping you kind of offset that potential unit weakness in the overall market.

Yes. We are restating a growth of 10% to 15% year-over-year in RF SOI so that is what I stated and stating that that was against a backdrop according to analysts of a market that has about a 20-point pullback. So I think that that's quite substantial and certainly indicative of gaining substantial market share. The 5G rollout is certainly helpful because of more content. I don't have tremendous granularity at this moment as to how many parts are specifically going into a 5G phone versus ITE, but as stated as the 5G rollout continues with the percentage of content growing within that, that has a benefit for everybody. But I believe that 10% to 15% year-over-year revenue increase is very, very much driven by the market share increases that we have and as stated we had started the year believing much, much higher. But it has pulled back, the market has pulled back but in spite of the market pulling back we will still recognize growth. To your previous question, I apologize. On the year-over-year it was a 0% on the organic because of a pullback very strong within discrete and the present outlook would be a 5% increase in organic quarter-over- quarter in Q3 versus Q2 but still backfilling against a substantial decrease in discrete market.

The next question is from Achal Sultania of Credit Suisse. Please go ahead.

Hi. Good afternoon. Russell, can you help us understand these new contracts or projects that are ramping up on the sensing side. You mentioned the fingerprint and the time-of-flight project. Can you provide a bit more color as to how should we think about the size of those opportunities? Is it confined to one customer at this point or you're already engaging with multiple customers on those two design wins? And how should we think about that opportunity in 2021 when those projects start to ramp up? And then secondly just if you think about the RF part of your business for mobile specifically smartphones like can you help us understand what exactly are you involved in on the RF side? Is it switches? Is it LNAs? Is it multiplexers, duplex cells, what kind of products are you making and how should we think about the adoption of RF SOI in terms of smartphones going forward in 2021? Is it like going to be a significant part or is it still going to be a fairly small part of mix within total smartphones, 5G smartphones?

Okay. So the long question, I recall the second part very clearly that was what are we doing within the mobile platform for the RF content. So on that we serve a variety of different power amplifiers with silicon germanium, including standalone low noise amplifiers. We have combined switch LNAs that we do with 65 nanometer RF SOI. We have a lot of two-way radio switches that we're doing in general at 200 and 300 millimeter and that is all RF SOI. We have -- for LNA switches and the PA controllers, so that's the bulk of what we're producing within the RF content. And antenna tuner sorry, also antenna tuners and within the antenna tuners we have in addition a line that we're producing with MEMS.

So what I was trying to understand, that's helpful. So what I was trying to understand is that obviously in those categories whether it's PAs or LNAs, there is a market which is split between gallium nitride silicon germanium RF SOI. So, how are you thinking about the adoption of these different technologies and what kind of suits you the most when it comes to where the market moves with what kind of chemical compound the market adopts?

Though it certainly the gallium arsenide PAs are a mainstay for a variety of applications beside GPAs are aimed at different activities. And a lot of that deals for example, with Bluetooth PAs. The LNAs itself and these standalone LNA banks are, I believe, predominantly done in silicon germanium and that's where we have very strong capability and offering and then the integrated CMOS LNA with integrated LNA switch is it's done with RF SOI and in our case, so and the PA controllers are RF CMOS, when I believe we're standing very strong and all of the offerings that we have there. On the switches themselves and antenna tuners are dealing with RF SOI and I believe that's -- the whole market is with RF SOI. If you recall some four or five years ago a plus minus that was predominantly in gallium arsenide preempt and that move totally to the RF SOI because of the reduced cost and improve performance. So, that is, I think at this point, all switches for all practical purposes that are done with RF SOI. As far as, other than significant amount of business for us. It certainly is. It's a big business and we see 2021. As stated with a 20-point pullback, we're seeing a 10 to 15-point increase in revenue year-over-year. We stated that 2019 over 2018, we saw an over 60% increase in year-over-year, which is certainly much, much bigger than the market itself grew. So, obviously a function of market share and the 35 points delta this year against the market pullback and what we're showing, obviously also indicative of market share increase. Our customers are very strongly indicating return to not just normalcy, but a return to growth in the beginning of 2021. And they're very, very bullish about their forecasts. So, I believe that it will be a very strong growth engine for us throughout 2021. And an area that we're continually working on to actually increase capabilities and capacities. Does that answer your second question? I hope it does.

Yes, I think that was really helpful. And then just coming back to the first one that was on fingerprint and time-of-fight design -- took out. So, what is the scope? Like what is the size of the customer traction that you're seeing and, and how should we think about that opportunity in 2021?

It's multiple customers that we're doing with the fingerprint, both the one to one under OLED and the other more standard under LCD screen fingerprint. So, multiple customers where you're looking at several tens of thousands of wafer opportunity within that space. And it's a question now of us showing our capabilities, we're stating that the first volume productions will be shipped in the fourth quarter. And then those parts that we're shipping have to have differentiated benefit for the customer, the customer has to show differentiated benefit within their respective markets to grow, but it can be quite substantial. And as stated, for us, one of the beauties of that market is that we were able to very, very quickly develop and qualify flows because of a very, very strong and diverse CIS core that we have throughout the company. So CMOS image sensor throughout the company, and take advantage of a market need. As far as the time-of- flight, there's a variety of applications are going out for time of flight. It's predominantly at 300 millimeter. And it's focused with backside illumination and stack wafers. And that is also more than one customer with blue chip customers that are signed up on long-term agreements. Of course, we have to perform, but that is a very, very substantial market for us.

The next question is from Mark Lipacis of Jefferies. Please go ahead.

Hi, thanks for taking my questions. Russell first one. I have a couple questions. First one for you. I think when you talk about visibility from your clients, or do you -- are you the view that your clients are taking orders from their customers on a non cancelable non-refundable basis? And is that how you -- is that how you guys are normally operated -- operating? And then on the same topic when you're getting orders from customers, are they asking for short lead time windows or are they asking you to run hot batches a waiver through your FAS because they also are getting orders with requests for short lead times?

Good questions, Mark. The answer to the first question is the contracts that we have really are very dependent upon the customers and the type of business we're doing within the power discrete. Our customers are, for the most part held to a forecast very closely. That doesn't mean that we don't give a lot of leeway, it's partnerships and within what we do with those discrete, it's more or less source everything that we sell. So the ability then to be malleable, if someone's demand is really down and to hold them to a previous forecast, nominally that doesn't help either person if they don't need the wafers. So you work out a deal and you try to come up with something that's a win, win for both people. In the case of our standard foundry business, from the moment that we start wafers, customers must take the wafers or at least take them to an inventory point of when they say stop the wafers. So, once away first started in the fab are normal Ts and Cs is that obviously if a customer wishes to cancel something, they can. But they would take it to the inventory point of when they would cancel it, which for the most part doesn't make much sense for a customer. Now, depending on the customer themselves, the Ts and Cs can vary as to if they want to put some on hold, how long can it be on hold for before they either have to pay to that inventory point or until the wafers have to be completed through the line. But again, that depends on the customer, the Ts and Cs relationship and the amount of business but that's predominantly how the Ts and Cs would set about customer on giving…

Yes, that's great color. Thank you for that. And I have a follow-up if I may. I have a question on the automotive business. Can you remind us roughly what your automotive exposure is and is it mostly in discrete? And the reason I ask is that, it seems like, a number of companies are calling in Q2, the bottom for the automotive business. It seems like the factories are coming back online and, a large bank in the US. I think last week or two weeks ago reported June quarter on auto loan origination is at the highest levels ever. So, it seems like automotive is somewhat spring, potentially spring loaded and ready to go once the factories come back online. And I wonder just if you could remind us the exposure there where whether the customers are starting to give you any visibility on in that vertical market. And that's all I had. Thank you.

Good question. So as you're well aware, we have a long-term agreement with Maxim in San Antonio. A good portion of that factory serves automotive, and that's not what I mean Maxim is a big automotive player, very good automotive player. We can't say exactly how much of that is serving automotive or not serving automotive. But in that regard, the contract is a very solid contract. So we would not see something going down or coming back up as it's a contract on an amount of volume that's purchased. And I think Maxim just released to have very good financials, I believe. So I think that's a good thing. But so that's one area of automotive. In the other areas of automotive that we do. We have silicon germanium for safety; we had a press release that we serve Denso in Toyota with SiGe for radar. And I believe that we see good visibility and very strong optimism for upticks there. The other area that we serve very strongly, as stated in the call, is electric vehicle battery management. And I have not yet seen a big rebound in that. And then we have a diversity of other automotive products that we make, but that any single one in any single end market is not necessarily big, but the combination is reasonable.

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

Russell thanks for taking my questions as well. Maybe I'll follow up on the topic of our RF SOI, obviously had a nice growing share in that business a few years ago. And then I think due to perhaps some aggressive competitive pricing, you backed off a little bit here and now you've really seen nice resurgence here, including with some share gains here. Do you know what your share position is, relatively speaking? If you can, if you do, can you share it with us? And is there any natural limit to where that could go?

The second part is easier to answer. The natural limit, I would say not. We have extremely strong advanced flows at 200 millimeter that are being used for some of the most advanced activities in the world. And then we have a 200 millimeter, obviously, we have a lot of factories, a lot, I think a reasonable amount of factories that 8-inch and the utilization numbers that I just gave was for example, the factory and Migdal Haemek was at 70% utilization. Some of that delta of the 70 to the model is because of a downtick right now in our RF SOI. So we, grow that, we've also talked about the fact of adding capability CapEx at 200 millimeter. A reasonable amount of that capability CapEx is again for very advanced 200 millimeter RF SOI capabilities and platforms. So I don't see it a 200 millimeter that we have a really foreseeable boundary that we can't get beyond. I think from the growth that we've had, we can continue to grow at even at last year's rate at 50% for a number of years and not run into a gate depending on how we would like to set up the factories on the mixes that we are running in the factories. The 300 millimeter is a little bit of a different story. We've expanded our 300 millimeter capability will probably need further 300 millimeter capability in the end of 2021, 2022 timeframe for not just RF SOI but for other areas as well. At this point without further expansion, either organically or inorganically, whatever form that might take, we would probably hit a wall at the end of 2021 on 300 millimeter growth in our RF SOI. But that is not our plan to hit that wall.

Okay. And I guess that leads to my last question here. Russell is on 300 millimeter, how do we think about that expansion here, whether it's internal and at Uozu or maybe some other internal approach versus getting some access externally. I know you've talked about a prior partner who I think has recently dissolved or disintegrated. So that seems to take that opportunity away. Where do you think you're going to get that and how soon do you need to make some sort of decision or activity here that will kind of provide that certainty as you get to calendar '22?

I'm not sure what you're referring to about having talked about a partner that dissolved away. I don't know of any partner that we talked about for 300 millimeter, publicly. I don't know of any that's dissolved away. So I'm not sure Richard maybe we can talk about that later offline if you have some questions there. I don't believe we ever said something like that. But the organic growth, we've done a lot of internal exercises as to what it would take and cost to grow a substantial amount internally and we could, we can go almost to 3x the present capacity with organic investment. And we might go ahead and do that, it is expensive. We're also pursuing other inorganic activities of a variety of different models and we continue to pursue those. And more than that I can't state without staying -- getting into things that I don't want to release that are not yet released, some because of maybe agreements of not talking about things before they're a done deal, and others because it doesn't make a lot of sense to talk about things before you know that they're going to happen. But, obviously, we've had, I think a good track record of M&A that were beneficial to both the seller and the buyer, and we're working on those models continually be at under whatever condition that might be. At this point, we were asked last quarter I believe in this -- in the Q&A if the COVID environment enhances or decreases the M&A activity landscape. And I would say from an opportunity standpoint, it enhances it from a get the deal done standpoint, the decreases it, right? It's not simple to complete a deal when you're not face to face with people. If that's where you're at. So are there things we're working on?

Mr. Ellwanger, your line has been muted.

I'm sorry, I don't know where that cut off, the phone muted automatically. I don't know why. Could you please tell me where you stopped hearing me, because I do apologize.

Russell, I think is what the last five to eight seconds.

Okay. So anyway, what I was stating is we have, I believe have plus minus or six plus minus months to make a strong decision, if we don't move forward in an avenue of doing things in organically to invest organically.

The next question is from Krish Sankar of Cowen. Please go ahead.

Hi, thanks for taking my question. I told them Russell, if I recollect correctly, I think in the prepared comments, you said that your silicon germanium revenue output is going to grow 20% year-over-year. Is it predominantly driven by the 5G data center ramp? Or are they also gaining market share on top you've already high two-third market share in that segment?

So, you're correct. We enjoy a very, very high market share. I -- there's more customers that come into the market. And those that enter into the market are not yet necessarily very, very big on a revenue basis. So an increasing market share on a revenue basis, I don't believe that we have increased our market share substantially as we already enjoy a very, very high market share percent. And if you -- for example to go from a 60% to a 65%. Now, that's a five point it's a 12% increase in share, that I don't know it's a little bit hard to measure. But we do enjoy a very, very high market share within the high end SiGe optical. Now that being said, the growth that we see really is around 5G built out with existing customers and certainly datacenter very strong with existing customers, as well as other activities with data streaming. So, those are the major reasons that we see the growth right now.

Got it. Very helpful. And then just as a follow up, and it's not a big part of your business today. But I think end of last year, you guys announced a partnership with Aledia, a media on micro LED. When you think from a realistic standpoint, that business takes off or when you think micro LED gets into mass production?

I think that, that's not unfair for you to ask me at all, it would be improper for me to answer it. Aledia is, the only press release customer that we've talked about with nanowire micro LED, if you will. So, anything that I would say there is very related to them. And I don't think that I should talk very specifically about any single customers market. So, it's, I think that that would not be proper for me to answer. And if I was Aledia, I probably wouldn't be very happy if somebody was talking about something that could be reflected back to be my market very strongly. So I apologize, but I, I don't think it's proper for me to answer the question. Talking about Aledia, however, I'm just specifically, I think it's an incredible technology and I think they're moving on very well.

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

Hi, Oren. I just have some quick, quick housekeeping question. So, you talk that sales at Newport Beach in Japan are increasing substantially. So, does that change your thinking on the tax rate this year at all? Is it still 4%?

Yes, I think you can already see that in Q2 financial, we showed very nice, very positive and good incremental gross profit margin and operating profit margin and EBITDA margin incremental to 50% to 60% because of the SiGe and also Japan like you mentioned. And indeed, you see that the text line went up because and I also refer to that in my prepared comments, this is why I felt that indeed, the increase associated with Uozu, the 300 millimeter RF SOI and SiGe is in sites which have a tax rate of 21% to 30%, as opposed to power the discrete and the tops business that was more in Israeli sites that had the much less tax rate.

Okay and the corollary to that is we should expect minority income to increase sequentially as the year goes on?

Yes, yes. So again, the growth and operating and EBITDA incremental margins will be better than the average and then there will be an increase to the tax and non-controlling more than the model. But eventually of course, all that is very beneficial to the net profit because the growth is in the most high margin business units that we have.

The next question is from David Duley of Steelhead Securities. Please go ahead.

Yes, thanks for taking my questions. I was just wondering in the second half of this calendar year in the September and December quarters, what would you expect the CapEx levels to be? Will they go back down to the $45 million run rate? Or will we still stay at these elevated run rates that we're currently running?

Yes, we will stay in this level and even go up as we mentioned already in the last year. Once we approved, actually we released it in July last year. The $100 million CapEx for Uozu and we also spoke about additional CapEx for the BSI backside elimination for Japan and also, we spoke about QT9 [ph] I think we said $20 million. So, all-in-all, it's more than $120 million CapEx that we are buying to satisfy existing demand. Those tools actually, almost all of them already arrived and are in final installation phases, some of them already installed and this payment of $120 million is in the beginning, we were thinking it will be spread more linearly in this year as you see from their financials, you can assume that it had like less than 50% of this amount already in Q1, Q2 was paid, a little bit more than 50% of this amount will be added to the $42 million to $45 million regular model. So you can expect for Q3, Q4, in addition to the regular model, more than 50% of the $120 million, which means that it's a little bit higher amount than was in Q1, Q2.

Okay. And what can we expect for gross margins in the third quarter?

Okay. So you should expect that whatever we had in Q2, Q2, gross margin, the baseline against the $310 million revenue. So we mentioned the increase for the mid-range guidance is $10 million for the revenue. We mentioned that it will be mainly from SiGe and also which means that it's 50% plus or even 60% incremental gross margin.

Okay, so the drop rate should accelerate here in the upcoming quarter because the mix of SiGe is higher.

Yes.

Okay. Final thing for me. Could you just give us the dollar revenue number for SiGe now, so we have a base number? And also, did you have any 10% customers during the quarter? Thank you.

So on the SiGe; it's about $40 million. I don't want to give the exact number, it's a little bit north to $40 million SiGe revenue. And the second question, a 10% customer, other than Panasonic we don't have. Panasonic, I mean I guess you will -- you know that it's between $70 million to $85 million per quarter. So it's about 25%, right.

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

Certainly. Firstly, I thank everybody for their time and their interest in the company for attending the call. I really thank the analysts for their questions, thought they were very good questions, enjoyed the dialogue. In the short term, we will be participating in the Jefferies 2020 Virtual Semiconductor IT Hardware and Communications Infrastructure Summit, again September 1st and 2nd. We will also be holding virtual NDRs during September and October for which additional information will be provided shortly. And just as a very last comment, although times are a little bit difficult right now, we obviously stay very positive and optimistic about the ability of people to pull together and make things happen. As a company, we see that very strong in the company. We've been able to continue with all that we can control or attempt to control and I think execute pretty flawlessly. We've completed our semi-annual global business alignment meeting within the past several weeks and very encouraged with how we're sitting with our customers, with the excitement of the market, with existing and new platforms and the overall partnership with the company and within the company with the customers. So we look forward to completing the year strong and to seeing a very strong resurgence as everything gets back to previous trends and patterns and having the market share growth be able to be very, very evident on top of a core business that's back at normal run rates. With that I thank you all very, very much and wish you to stay safe and healthy. Thank you.

This concludes the TowerJazz second quarter 2020 results conference call. Thank you for your participation. You may go ahead and disconnect.