Diodes Energy CEO Discusses Q2 2011 Results -- Earnings Call Transcript

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 |  About: Diodes Incorporated (DIOD)
by: SA Transcripts

Diodes Incorporated (NASDAQ:DIOD)

Q2 2011 Earnings Call

August 09, 2011, 05:00 pm ET

Executives

Leanne Sievers - EVP of Shelton Group

Dr. Keh-Shew Lu - President and CEO

Rick White - CFO

Mark King - SVP, Sales and Marketing

Laura Mehrl - Director of IR

Analysts

Steve Smigie - Raymond James

Shawn Harrison - Longbow Research

Gary Mobley - The Benchmark

Suji De Silva - ThinkEquity

Ramesh Misra - Brigantine Advisors

Tristan Gerra - Robert W. Baird

Steven Chin - UBS

Christopher Longiaru - Sidoti & Company

Vijay Rakesh - Sterne Agee

Operator

Good afternoon ladies and gentlemen and welcome to Diodes Incorporated Second Quarter 2011 Financial Results Conference Call. At this time all participant are in a listen-only mode. (Operator Instructions). As a reminder, this conference call is being recorded today, Tuesday, August 9, 2011. I would now like to turn the call to Leanne Sievers of Shelton Group, Investor Relations. Leanne, please go ahead.

Leanne Sievers - Investor Relations

Welcome to Diodes’ second quarter 2011 earnings conference call. I am Leanne Sievers, Executive Vice President of Shelton Group, Diodes’ Investor Relations firm. With us today 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 would like to remind our listeners that 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 projection as to the company's future performance represent management's estimates as of today, August 9, 2011. 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, financial information and GAAP and non-GAAP terms. Included in the company's press release are definitions and reconciliations of GAAP net income to non-GAAP adjusted net income, and GAAP net income to EBITDA 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 web cast for 60 days in the Investor Relations' section of Diodes website 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.

Dr. Keh-Shew Lu

Thank you, Diane. Welcome everyone, and thank you for joining us today. Revenue during the quarter increased over $20 million or 14% from the prior year period reaching a rate of $170 million. We gained additional market share due to continued focus on focus on Diodes new products and customer expansion. In the second quarter, Asia and the North American revenue increased sequentially while Europe declined in this region again to showed signs of increasing weakness during the quarter due to the economic instability in a number of European countries.

In fact in May we started to see a general market slow down on a global basis specifically in the consumer computer and LCD TV markets. And these trends continued to accelerate during the last several weeks of the quarter. Orders did not materialize as expected in Q1. As the customer (inaudible) greater currency on the global environment. We believe the current climate also result in weaker consumer confidence during the quarter.

This weakness impact several of our customers that specifically for the US and the Europe market. Distributor inventory base were down slightly in the second quarter. While channel inventory was at the high end of preferred range as we exited the quarter.

In July we experienced continued weakening in the consumer and the computer market and the demand for the rest of the quarter remains uncertain.

Gross margin in the second quarter was also impacted. But softened demand which caused a mixed change to low margin commodity product to support revenue. Additionally there was a slower than expected ramp in productivity due to the change in requirements for replacing operators as a result as previously announced.

Overall it can take longer than anticipated. We currently expect to have full trained operators in place by the end of third quarter. Because of the poor macroeconomic conditions around the world and all unstable market conditions, we have taken actions to minimize the impact on our financials. We have deferred approximately 40% of our planned expenditures for the second half of 2011. Now according to our strategy we are maintaining our current account until we see how the market develops.

Despite those short-term market challenges I am confident that we are well positioned with our customers. We have a broader product portfolio which result in the momentum I in the installed capacity, which will enable us to expand our revenue and the margin as the demand improves.

One other comment I would like to make before turning the call over to Rick is about our Chengdu facility. On July 19, Diodes broke ground for a new productions sites in the high tech industrial development zone in Chengdu, China.

As I have mentioned on previous calls, the Chendu site would be our extension of our manufacturing presence in China. The ground breaking was well attended by local officials. We will begin construction of the initial building in August, with completion in stage for the first half of 2012.

Until the building are completed, we have established a private line in the east facility next to our site in Chengdu was above 100 feet.

The products from this private line has been is in accordance right. And that we shipped approximately 12 million units in June and 37 million in July. We expect outsourcing of approximately 120 million per month during the first quarter of 2012.

With that I will now turn the call over to Rick to discuss our second quarter financial results and the third quarter guidance in more detail.

Rick White

Thanks Dr. Lu and good afternoon everyone. Revenue for the second quarter of 2011 was a $169.8 million, an increase of 14%, a $149.2 million in the second quarter of 2010 and an increase of 5% from the $161.6 million in the first quarter of 2011. The increase in revenue was due to the demand to our products using tablets, notebooks, smartphones and LCD TV.

Gross profit for the second quarter was $55.6 million or 32.8% of revenue compared to $53.5 million or 35.8% in the second quarter of 2010 and $57.4 million or 35.5% in the first quarter of 2011. The sequential decline in gross profit margin was due primarily due to a shift in product mix and lower margin products and reduced fixed cost coverage.

Lower factory utilization than forecasted was the result of a slower than expected improvement in productivity related to manufacturing operators hired to replace employee following the previously disclosed manpower shortages at our Shanghai packaging facilities. So operating expenses for the second quarter were $30.3 million or 17.8% of revenue, which was inline with the 18% of revenue last quarter.

Looking specifically at selling general administrative expenses for the second quarter. SG&A was approximately $22.6 million or 13.3% of revenue, which was inline with the 13.3% revenue last quarter. and an improvement from 14.4% of revenue in the second quarter of 2010.

Investment in research and development for the second quarter was $6.5 million or 3.8% of revenue. Which was comparable to the last quarter of $6.5 million or 4% of revenue and a decrease in the $6.8 million or 4.6% of revenue in the previous year period.

Total other expense amounted to $1.9 million for the quarter. Looking at interest income expense, we approximately $312,000 of interest income on our cash balances and approximately $1 million of interest expense, primarily related to our convertible senior notes.

During the second quarter we recorded approximately $2 million of non-cash amortization of debt discount related to the US GAAP requirement to separately account for the liability and equity component of our convertible senior notes. Also included in total other expenses are foreign currency gains of $400,000.

Income before income taxes and non-controlling interest in the second quarter amounted to $23.4 million compared to income of $20.6 million in the second quarter of 2010 and $25.1 million in the first quarter of 2011.

Turning to income taxes, our effective income tax rate in the second quarter was 20.1%, which was within our guidance. GAAP net income for the second quarter was $18 million or $0.38 per diluted shares compared to $16.6 million or $0.37 per diluted shares in the second quarter of 2010 and $19.7 million or $0.42 per diluted shares in the first quarter of 2011.

The share count used to compute GAAP diluted EPS in the second quarter was 47.1 million shares. Second quarter non-GAAP adjusted net income was $20.1 million or $0.43 per diluted share, which excluded net of tax, $1.3 million of non-cash interest expense related to the amortization of debt discount on our convertible senior notes and $800,000 of non-cash acquisition related intangible asset amortization costs. We have included in our earnings release a reconciliation of GAAP net income to non-GAAP adjusted net income which provides additional details. Included in the second quarter GAAP and non-GAAP adjusted net income was approximately $2.4 million net of tax of non-cash share-based compensation expense. Excluding this expense, both GAAP and non-GAAP adjusted diluted EPS would have increased by an additional $0.05 per share.

Turning to the balance sheet, at the end of the second quarter we had approximately $290 million in cash and our working capital was approximately $316 million. We had approximately $273 million in current liabilities of which approximately $132 million related to our convertible senior notes which are redeemable in October 2011.

At the end of the second quarter, inventory was approximately $129 million, an increase of approximately $6 million from the first quarter. This increase was due to a $6 million increase in finished goods and a $1 million increase in work-in-process, partially offset by $1 million decrease in raw materials.

Inventory days improved to 100 days compared to 105 days in the first quarter of 2011. Accounts receivable was approximately $144 million and AR days were 78. Capital expenditures were $35.8 million during the second quarter which included $4.5 million for our Chengdu site expansion. Excluding this amount, CapEx was 18.4% of revenue compared to 11% in the first quarter.

As Dr. Lu mentioned we are continuing with our Chengdu site development, that have delayed approximately 40% of our second half CapEx not including Chengdu due to market conditions. For 2011, we expect CapEx to be at the low end of our targeted range of 10% to 12% of revenues directed to Chengdu.

Depreciation and amortization expense for the second quarter was $15 million. Cash flow from operations for the second quarter was $32.4 million. Net cash flow was $11.6 million and free cash flow was breakeven including the CapEx investment in the quarter.

Turning now to our outlook. In terms of third quarter guidance, we expect revenue to range between $160 million and $170 million or flat to down 6% sequentially. We expect gross margin to be 32% plus or minus 1.5%. Operating expenses are expected to be comparable to the second quarter on a dollar basis. We expect our income tax rates to range between 17% and 23% and shares used to calculate GAAP EPS for the third quarter are anticipated to be approximately 48 million.

With that said, I will now turn the call over to Mark King.

Mark King

Thank you Rick and good afternoon. As Dr. Lu and Rick had mentioned today our second quarter revenue increased 5% sequentially despite a softening that began in the latter part of the quarter. The increase in revenue was due to demand for products used in tablets, notebooks and smartphones.

The global economic uncertainty began to impact overall demand late in the quarter and particularly the consumer and computing markets. Distributor POP was up 10% sequentially while distributor POS was 7% in the quarter. Inventory days improved slighted from first quarter, but global channel inventory was up and at the top level of our targeted range.

Our new product momentum remained strong and design win activities continue to be at high levels in both quality and quantity. Both of which should help drive revenues and margin expansion once the demand environment improves.

In terms of global sales, Asia represented 74% of revenue, Europe 13% and North America also 13%. Asia and North America increased sequentially in the quarter, while Europe declined due to accelerating weakness in the region. More recently, we are beginning to see similar trends in North America due to weaker consumer confidence, but the situation in Europe is far more pronounced than in other regions. Our end-market breakout consisted of consumer representing 34% of revenue, computing 26%, industrial 21%, communications 16% and automotive 3%.

Now turning to new products, traction remains strong on new product releases and released another quarter of record revenue for SBR and MOSFET products on the discrete side and USB power switches on the Analog side.

We also saw change in bipolar transistors as well as continued success with our LED drivers which showed strong growth quarter-over-quarter. New product introductions and design ends remained exceptionally high and we continue to expect this to be a huge driver going forward.

Looking specifically at the discrete product line, we introduced 63 products across seven product families. The MOSFET product line continued its record growth trend and we saw key design wins ramp for LED TV and smartphones.

During the quarter, we introduced our first fixed scale MOSFET package, which is ideally suited for all supportable applications such as smartphones. Another first for us was the introduction of a range of products package in our new PowerDI3333 that delivers equivalent performance through an absolute package while occupying only 30% of the PCE area also with a lower profile.

In SBR product line, we announced the expansion of the DIODESTAR targeted for high performance applications like LED TVs. We’re also released the first SBR product family specifically designed for automotive applications offering low VF while maintaining high temperature stability and reliability. Notable design wins in SBR included adaptors for portable electronics, printers, and industrial lighting.

Now turning to analog new product introductions, we released 72 new products across eight product families. We also completed our automotive qualification on an LDO series our and LED drivers. New products highlight includes the introduction of the industry small dual output omnipolar Hall effect switch. This micro power device was developed specifically for portable and battery-power consumer electronics such as cell phones and camcords.

Designed activity on our Hall effect switch product line remain strong throughout the quarter with several large wins in major smartphone platform in addition to continued advances in notebook. In the power management area we released our first synchronous DC to DC converters. These highly integrated devices offer a wide operating range while maintaining excellent efficiencies.

We also continue to expand our USB power switch line with the addition of several new 2-amp devices. These high performance products support both USB 2 and 3.0 standards and their wide operating temperature range are excellent for consumer and industrial applications. Design win progress and revenue growth was also notable in our LED lighting products driven primarily by general elimination devices. In fact we are designing to a bubble replacement application for a major worldwide retailer, which recently announced an initiative to invest in energy efficient technology for use in their stores world wide.

Now moving to logic. During the quarter, we also significantly expanded our footprint in the logic market. With the release of several new families of devices, we added Dual Gate logic products to our LVC logic family releasing six of the industry’s most popular function and three different packages including the miniature BFN 1010.

We are the only logic supplier that offer 14 LVC logic functions in an extremely space efficient package. In the second quarter, we also released our first low power, advanced high speed CMOS logic product families. This product is specifically optimized to operate with TCL input voltages enabling communication with legacy circuits which is a capability currently experiencing strong demand.

In summary, we remain positive on our business, although the macro environment remains uncertain, we are confident in the progress we are making with customer expansion, new product initiative and design win traction. Because of the recent market weakness, we have taken necessary adjustments in our business and capital investments until the time the demand environment improves. With that I will open the floor to questions.

Question-and-Answer Session

Operator

(Operator instructions)

Operator

And our first question today comes from the line of Steve Smigie with Raymond James.

Steve Smigie - Raymond James

I guess I just wanted to follow up a little bit on the productivity that you guys have been working with the new employees. Sounds like it is going to be finished at the end of the third quarter. Obviously there is issues here with product utilization due to some slower revenue, but what kind of benefit could we potentially see, gross margin wise as we got into the December quarter from you getting back up to productivity levels.

Dr. Keh-Shew Lu

It will depend on the demand okay, what we say now is we put enough capacity in third quarter. Our people should be productive by end of September. So if the (inaudible) come in strong then we will have the opportunity to gain that 10%. Right now we are positioning ourselves, we have enough capacity, we have enough productivity of our workers by end of September. Then it really depend on what the market will be look like 4Q.

Steve Smigie - Raymond James

And Dr. Lu last cycle in 2008 when things got pretty bad, you were sort of one of the first out there to cut back just CapEx, so I think to let people go as well. It seems like although you’ve cut back CapEx, you haven't really made a decision to start cutting back the workforce. So does that mean you feel a little bit more comfortable that this might be a shallower revenue drop over the next few quarters or so.

Dr. Keh-Shew Lu

Yes, you are correct. Because we uncertain, but I don't think we are now at a state you say to let people go. So what we do is, we cancel the 4Q capitals and we put in a whole candidate and therefore we say 40% of our second quarter, second half capital was stopped in the day and then we just say no more increase in income. Okay now we are now watching it. Now if the situation gets worse, then what we do is, we’re not hiring, we just you know stop hiring. Then attrition would take care of that automatically.

And at this moment, we assume we want to keep that kind of level of the people so we won’t run into the problem if the market return, we don’t have enough people to run the equipment. Capacity is already there. So we don’t want to run into that problem, have the capacity, have the equipment and no people to run it.

Steve Smigie - Raymond James

Last question is just your guidance for September is down a little bit, obviously normally through a normal environment would be up a decent amount, what does that suggest in terms of holiday orders and what happen as we go into the fourth quarter. So if we start to see holiday orders pick up, could that number potentially go up a little bit and then as we go into the December quarter, normally December will be down for September, but since we didn’t have the big spike up in September, would that mean we wouldn’t have as much of a drop-off in December?

Dr. Keh-Shew Lu

You’re right. What you say is exactly in my mind how to let that. You know currently by where we see today, we put that midpoint based on what we see today. Now, it’s a holiday which is coming out strong. Obviously we’ll go to the high-end and is the worse than what we see now then we go to the low end. If you don’t have a good third quarter then obviously the fourth quarter will not be good either. So I think you said that right.

Steve Smigie - Raymond James

Okay, thanks a lot guys. I appreciate it.

Dr. Keh-Shew Lu

Thank you.

Operator

And our next question comes from the line of Shawn Harrison with Longbow Research. Please proceed.

Shawn Harrison - Longbow Research

Hi, good afternoon. Really in new market you have some of the statistics available, just you had some commentary and distributor POS versus POP, how that tracks not for the entire quarter but may be in the June, July timeframe, did that gap widen and how much of that are the weakness that you are seeing you believe is actually underlying demand versus may be an inventory correction, any commentary on both of those things and it will be helpful?

Mark King

I think that June and July were relatively soft. I think you could see some conservative moving channel POP. But I think you might have seen, I think the June POS was pretty reasonable and July was relatively soft, but in North America specifically, Asia I think was reasonably okay. So I think if you look at North America and Europe, they are a little bit more pronounced. You had the holiday season in the first part of this month. So you may have lost a week and from a POS standpoint. So I think in all in all July was a relatively soft month.

Shawn Harrison - Longbow Research

Okay. And then just kind of a – I am sorry.

Mark King

And Europe is looking like the typical year up that we haven’t seen for a couple of years.

Shawn Harrison - Longbow Research

So some of this suspect normal seasonality within Europe with may be North America a little bit weaker than that?

Mark King

Right.

Shawn Harrison - Longbow Research

Okay, very helpful. And then the second question, I guess, with getting back to seasonality, you are worse than seasonal in some geographies. How would you describe the pricing environment. I know, it’s been relatively benign now for a number of quarters, in part because we have seen better than seasonal growth?

Mark King

Surprisingly enough we have, obviously we are seeing a little bit more quote activity and a little bit more duplicate quote activity. But it seems that the costing environment has made the competitive base a little more sensitive to movement and price. So, we haven’t seen a great change. So, I don’t think it’s normally. I mean, I don’t think we are seeing as much pressure as we might expected based on the news. But some of the news that we are seeing right now is pretty new. So, maybe it’s still a little bit uncertain.

Shawn Harrison - Longbow Research

Okay. And then just –

Dr. Keh-Shew Lu

No. If you look at the building material, you know, gold price, everybody is facing the same problem. Okay, and then if you look at the labor shortage, the labor cost increased in China. Again, everybody see the same problem. And therefore, I think people cost is automatic going up. So, the price pressure is actually there.

Shawn Harrison - Longbow Research

Okay. That’s very helpful. And then, just Rick, a quick clarification. I think you drove on the credit facility in this quarter for the first time in a while. Anything just behind that?

Rick White

No. That was just. Yeah, that was just a short-term deal in China. I am pretty sure that’s already been paid back. So, it’s not a long-term deal.

Shawn Harrison - Longbow Research

Okay. Thanks everyone for the answer.

Rick White

Okay.

Operator

And our next question comes from the line of Gary Mobley with Benchmark. Please proceed.

Gary Mobley - The Benchmark

Hi guys. I have three questions all relating so much to the gross margin. First I am just hoping if you can confirm firm this. I am assuming your European mix, product mix is higher margin since mostly pre-tax rate and then second its gold interconnect with high price of gold a problem for you to this day or at the time I should say and or you switched over to copper and then Rick could you give us what’s the utilization rate, manufacturing utilization rate, was in the quarter and then what the outlook is for the third quarter?

Rick White

One number to gold okay I think gold price continually going up and we know that and that’s why we continue putting all efforts to convert from gold to copper. Okay. I think that will cancel each other from the effect and we continue to go into that as a part of the cost reduction amount. But activity-wise that I mentioned by end of September we should be back to 40 trained operator and we should be able to get to be fully productivity. Now we will continue improve that productivity you know, it is just part of cost reduction by continue to improve the productivity but we should be back to this normal in September and moving forward should be better and from the commodity we try to do as you said the fully yield our capacity. So we’d change if the demand is not there then we will change the product mix to go to commodity product to fully utilize our capacity. So you know depend on really the market which is very uncertain for us but if the market turn as we believe then we should be able to move to high end of the product mix. But if they continue a softness then we would try to fully utilize it then the product mix will go the other way. What we don’t know. Our guidance is all we have to give the guidance and that’s what we see and we would do.

Mark King

Gary the other question that you mentioned was the Europe margin and the territory carries higher margins. So that would have an impact on the margins.

Gary Mobley - The Benchmark

And the last question that I have, can you give us a rough approximation which are analog mix was in the quarter and then as well whether you are generating any revenue from the logic products at this point in time.

Mark King

You know we really don’t get into the break out of the analog and discreet but I think it is running pretty consistently with what its always done and we continue to make break through in the logic market and we continue to win new design wins. I believe we have been stating and we are still on track to starting to see some decent revenues towards the end of the year.

Gary Mobley - The Benchmark

Thanks

Operator

And our next question comes from the line of Suji De Silva with ThinkEquity. Please proceed.

Suji De Silva - ThinkEquity

Hi guys can you start with may be by the end markets what we think our third quarter will be roughly?

Mark King

High end markets

Suji De Silva - ThinkEquity

First is overall consumer computing which will be in line about?

Mark King

I think that will be relatively consistent with computer and consumer running between you knows 64 to 65% and then you will get the 30– you know they are running right between 32% and 34% and so forth so I think it will be relatively consistent.

Dr. Keh-Shew Lu

Yeah consumer is 34%, computing 26%, actually industrial is 21% which is not bad and now communication has gone down to 16%. So if you look at it you know in the industrial now it’s outperform than communications.

Richard White

Right. So we think that probably the computer and consumer segments, the total will be relatively consistent. The others will just move a little bit and there will be some movement between those two segments during the quarter.

Suji De Silva - ThinkEquity

And then you talked about I guess China being a little bit stronger in demand versus Europe and the U.S., do you see any swelling in the China demand domestically or is that something you continue to sell lower margin product into healthy revenue in the third quarter?

Dr. Keh-Shew Lu

We need to be careful when we say China, its actually China manufacturing because our revenue is really go through the manufacturing in Asia and that you know when we said Asia is strong, we are talking about the manufacturing not the consumption in China because that's a different story.

Suji De Silva - ThinkEquity

Dr. Lu do you have any views on the end demand in China, the trend there?

Dr. Keh-Shew Lu

Well, really I was told, you know when I was in Asia last couple of weeks, actually I was told that China actually is – because the inflation is up significantly; expendable money actually is best and so people don't have the extra money. So the consumption actually is going down and unlike 2009 the China government spent about the money to satisfy the products such that people can afford to buy and this time the government do not really spend the money. They probably try to control the inflation making them spend the money to satisfy the product. Okay, so this time is different or unlike the 2009, if you remember the year 2009 twice the China government putting the money and get the people to buy the product quite good and those product.

Suji De Silva - ThinkEquity

Okay, that helps and last question Dr. Lu, I remember to the last downturn a few years ago you referred to, you said that building capacity and CapEx strictly for you to be able to gain share has that came out of the downturn. At this point in time, you’re trying to modulate your cap expense, is that sort of a difference in the strategy here or is that a timing that we’re earlier in this downturn?

Dr. Keh-Shew Lu

No, no, no. Nothing will change. You just more careful, okay we continue putting the capacity because our strategy is always growth, profitable growth. So we always want to mature and put enough capacity to gain the opportunity in the market end. So our plan is to put in additional capacity in 3Q and 4Q, but now since we see the 3Q is not as strong as it has been forecasted then we just did that 4Q and so if for some reason or if the 4Q cannot be destroyed and 4Q, its okay, its good then we have enough capacity.

And on the other hand since operator now is – by September they are fully trended, their productivity can be fully utilized then we have additional output capacity available. So when I look at both, I say okay, we have enough room for the growth if the market turns. Then I say stop putting more capacity.

Richard White

And so you have to remember that we only delayed and we delayed, we didn’t cancel. We delayed 40% of the capacity and so we still have the other 60% that we are planning on putting in place. So it’s more of a modulation rather than knee-jerk reaction.

Operator

And our next question comes from the line of Ramesh Misra with Brigantine Advisors. Please proceed.

Ramesh Misra - Brigantine Advisors

In terms of the inflationary pressures in China, how that begun to impact salaries for your operators or do you anticipate that to trend up as the year progresses?

Dr. Keh-Shew Lu

Well, the salary, they do publish the minimum salary every year and our facility in Shanghai and Shanghai in April raised their minimum salaries. And we react to that actually before that, so remember last conference call or three months ago when we started seeing – we go to the people going into Chinese New Year. We cannot hire the people in January; we will go ahead raise the salary in February with above the minimum wage published by Shanghai City in April. So we already had those costs in and those we should not see any more raise until probably next year when the City raise the minimum wage again. But we are trying to take action ahead of that such that you know, we won’t lose the people and we are able to recruit the right people.

Ramesh Misra - Brigantine Advisors

Okay. That is helpful. In regards to the changes in the PC business, the ramp in tablet, are you seeing a benefit from that, are you seeing strength in tablets offsetting the weakness in notebook or PCs?

Mark King

We see that the tablets so far added into our business, okay. And we see strength in the notebook area; we see continued opportunity for growth for us in the notebook area as well as the tablet area. And the PC is not as, except for a couple, a narrow customer base, the PC isn’t as important to us any longer.

Ramesh Misra - Brigantine Advisors

And then finally, I missed your commentary on CapEx. I am sorry I joined the call a little late. Can you just remind us again what Q2 CapEx was and the amount that you are dealing on your Q3 CapEx?

Richard White

So we said the capital expenditures were $35.8 million during the second quarter. And that included about $4.5 million for our Chengdu site expansion. And that was 18.4% of revenue versus 11% in the first quarter. We are continuing our Chengdu site development, but we have delayed about 40% of our second half CapEx, not including Chengdu and we expect that our CapEx will be at the low end of our 10 to 12% of revenue model not including Chengdu.

Dr. Keh-Shew Lu

I think that for now we really need to take to Chengdu CapEx separate from our operational CapEx because Chengdu you know you start from beginning and we’re going to build in a [billion] and that’s hopefully we won’t be greedy until probably one year date and so we always put Chengdu separate from our CapEx for production.

Ramesh Misra - Brigantine Advisors

Okay. And just a little clarification on that Rick, if your pushing out 40% of your second half CapEx shouldn’t it be below that 10 to 12% that you usually target?

Rick White

No, not necessarily, if we were at 12% last time and we pushed out you. Remember it’s 40% of the second half amount that we’re planning our spending with our Chengdu.

Dr. Keh-Shew Lu

Yeah and Ramesh you need to remember the way we typically in the first half spend more than the second half. Okay. Because the nature of our business and we typically have much bigger growth in second quarter, in third quarter and than fourth quarter typically is little slightly down. So to be able to achieve that kind of running rate, you put more money in the first half especially in the second half and then second quarter. Okay, in the first half especially second quarter because you will get ready for big event in third quarter.

Rick White

Yeah so we spend 11% in the first quarter and we spent over 18% in the second quarter.

Ramesh Misra - Brigantine Advisors

You know historically Dr Lu you’ve managed to outperform Diodes’ both in upturns and downturns, looking forward to 2012 and what do you see as the main drivers of you being able to do better than the broader market?

Dr. Keh-Shew Lu

Well we sure want to be repeat what we have been doing and so number one, we put enough capacity. So we’re always putting capacity at demand. And we’re watching very closely even now today in third quarter, our demand is not there, but we already have additional capacity there. Okay, so we get just get ready. We have a lot of new products and if you go through Mark’s comment we will continue pushing the new product and a lot of design win, so all though what we have been doing on the design win, on the new product and the capacity is always going to help and I just give you couple of MOSFETs, I think you know we have been doing for growth more than enough every body in the MOSFET and the SBR especially the new version of SBR, we call (inaudible), those kind of SBRs 600 volts, those are the one going to be the driver of our growth in the future and on logic we have a lot of effort and a lot of design win in logic , it is small and even you grow quite well, it won't be there.

I mean it won't be there, but it will be another drive force, then LED driver business have been doing quite well too. So we do have several of the key driver for our growth next year and I just need to make sure we have enough capacity such that we want to be quick and take opportunity to gain the market share instead of get capacity limited again.

Operator

And our next question comes from the line of Tristan Gerra with Robert W. Baird.

Tristan Gerra - Robert W. Baird

In terms of your mix in the quarter you talked about a mix shift, could you talk about what was the change in units sequentially in Q2 and also is mix affecting the Q3 revenue guidance.

Dr. Keh-Shew Lu

What was the question?

Tristan Gerra - Robert W. Baird

First of all what was the unit difference with.

Rick White

The unit increases between the first quarter and second quarter. We don't normally give that kind of information out, right. The details of the unit output.

Dr. Keh-Shew Lu

We don't give the detail of the unit output but obviously our second quarter unit is more a deputy member in 1Q, we actually don't have enough capacity due to the main shortage and due to the Chinese New Year shorter working day in 1Q February Chinese New Year and the shorter working day, perhaps we do for the people during Chinese New Year. So our revenue in 1Q actually make it up by shipping the finished goods we have in the inventory, in our own inventory to make up the revenue. You go to the second quarter the units obviously is up significantly, you know, you don’t have anymore is good to ship it out and so our revenue and actually grow 5%. So you took at the rating and grow 5%, the units is more than 5% rate and like we don’t break up to how many but I can tell you it’s more than 5% revenue growth.

Tristan Gerra - Robert W. Baird

Thank you Dr. Lu, that’s very useful. Just a quick follow-up, so when we look at the Q3 revenue guidance, should we expect another mix shift which basically would be an offset to your unit growth because it would impact of all ASPs or would you say that your revenue guidance is pretty much in line with what you expect to say – I’m trying to put this in relation with some of the other guidance that you know from peer companies.

Dr. Keh-Shew Lu

Okay, the guidance is really, we move the mix downward such that we can fully utilize our capacity. If the market turns, then obviously, we can move our mix upwards and so it’s really depends on how the market. Right now our midpoint of revenue and GPM is based on what we see it today and then depend on – it could up or it could be down.

Tristan Gerra - Robert W. Baird

Okay and then quick final one and sorry if I missed it. Could you talk about the utilization rate expectation in Q2 sorry inventory days of distributor in Q3, I mean your expectation what it is in Q2?

Mark King

I think we’re seeing that it should come down a little bit in Q3. Actually days we hope to improve the days and the raw inventory and create a decrease. That’s the expectation.

Tristan Gerra - Robert W. Baird

Okay. And would that be the case at the distributors as well?

Mark King

Yeah. So, we believe the distributor days would decrease as well as the raw inventory dollar.

Tristan Gerra - Robert W. Baird

Great, excellent.

Dr. Keh-Shew Lu

Youth are now very conservative too. The orders since we are in the POP, than the order obviously would be slowed down in the POP.

Mark King

So it shouldn’t take as long to get right back in the track.

Tristan Gerra - Robert W. Baird

Very good, thanks again.

Operator

And our next question comes from line of Steven Chin with UBS. Please proceed.

Steven Chin - UBS

Hi guys. Thanks for taking my question. Actually the first question is more for you, can you share your refreshingly back from a trip to Asia, I was wondering if you could put some color on what your customers and the Taiwan in to your direct customers what they’ve been saying quantitatively and qualitatively about end-demand and whether you can put that to previous industry cycle. The industry cycle does it seem like we are currently in a recession or negative consumption from a perspective or is it still too early to tell for overall consumptions is actually declining significantly for quarter and few more specifically.

Dr. Keh-Shew Lu

Okay. Number one, most of our customers in Taiwan is actually building the product for the major U.S. and Europe company. So if you are talking about all high, even LG, Samsung and most of our direct customer is building the product for US and Europe. When that supplement, they nobody really know whets going on. They tell me. It’s in Asia. If you would look at Asia marketing sale, it’s not better what we feel but the problem is they are waiting of the order from the major customers in US and Europe. And when they ask them, what is it going to be your loading the --. We are watching the US market too. So, when not talk to my people, they kept saying. You go back to US, until we go over there. Okay? So, actually based on that, and nobody really understand what will be Christmas sale this year. So, they are waiting for the Christmas orders. Christmas building order from the major customer in US and Europe. Everybody is waiting.

Steven Chin - UBS

Got it. And then…

Dr. Keh-Shew Lu

And this is the deflection I don’t know. I don’t think now, okay, I am going to say yes, but I don’t know. But everybody is waiting.

Steven Chin - UBS

Okay.

Dr. Keh-Shew Lu

But don’t forget, Christmas will become and so someday somebody is going to order for the Christmas than we will not. Okay?

Steven Chin - UBS

Okay. Understood. And then next question I have was for Mark. In terms of the, do you see in the conservative market and to the degree that you can differentiate where your parts are going in to the end market? And any commentary on whether or not the amount of market just by your customers whether they did see directly demand orders for seasonal quarter for PC and consumer or is there sort of potentially some conservatism in the expected demand for Q3?

Mark King

I think there is a certainty in the expected demand for Q3 and you know obviously we’re very consumer and career base whether it be LCD, TV set-top box whether it be tablets, smartphones and so forth you know that seem that where the most question might be is in notebook and the most question might be in LCD and LED TV okay, those could be the things. I think that the smartphone business, I think tablet business all those remain pretty firm. But obviously, the numbers in some of those other categories are quite large. If that answers your question.

Steven Chin - UBS

Yes. That’s very helpful. And then last question for Rick regarding the CapEx once again, for [term view] is there a dollar estimate for full year on how much you expect to spend there and secondly is that sort of for the P&L or that can be capitalized?

Richard White

All the CapEx will be capitalize and so it won’t have any impact on the P&L directly. Of course we got 100 people there and we’re producing products so those will impact our P&L as well. As far as a specific number, we’ve said that we will invest about $50 million, $45 million I think in Chengdu and you could assume that most of that initial investment would go towards buildings and infrastructure development.

Steven Chin - UBS

Okay, perfect thanks and good luck for the next quarter guys.

Operator

And our next question comes from the line of Christopher Longiaru from Sidoti & Company. Please proceed.

Christopher Longiaru - Sidoti & Company

Hi guys. Most of my questions have been answered I just want to ask specifically, and it were a couple of months out from the Japan disaster I wanted to just see how that specific market is going for you and if you see anything unusual there you know based on just rebuild going on?

Richard White

And I don’t think we have seen any issues there and we’re still seeing some impact on raw materials coming out of there so hopefully that will settle down and help us get our costs back inline. But outside of that I do believe there is still some opportunity for crossing products from people that have difficulties with Japanese I mean during that period so we see some opportunity in that area, but I think outside of that everything is pretty stable.

Christopher Longiaru - Sidoti & Company

Okay. That’s all I have for now thanks guys.

Dr. Keh-Shew Lu

Thank you.

Operator

Our next question comes from the line of Vijay Rakesh from Sterne Agee. Please proceed.

Vijay Rakesh - Sterne Agee

So just to get the numbers what was the CapEx before and what is it now after you push out 40%?

Richard White

You want to know what the CapEx was before we pushed it out and versus what we haven’t pushed out. If you just look at the 10% to 12% of whatever the revenue is that you have estimated for the year and you can see what we spent for the first half and you can figure that out. We don’t want to give you the specific numbers associated with that.

Vijay Rakesh - Sterne Agee

Got it. And then you mentioned the inventory channels are a little high, how many weeks was it versus and where do you see normal levels at?

Mark King

Yeah we would like to have at three or just below three and I think it was running at about 3.2 to 3.4.

Vijay Rakesh - Sterne Agee

Got it. Okay good. Thanks guys.

Operator

Ladies and gentlemen, this concludes today's question-and-answer session. I would now like to turn the call back to Dr. Lu for closing remarks.

Dr. Keh-Shew Lu

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

Operator

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a good day.

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