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Diodes Incorporated (NASDAQ:DIOD)

Q1 2012 Earnings Call

May 8, 2012 5:00 PM ET

Executives

Leanne Sievers – IR from Shelton Group

Keh-Shew Lu – President and CEO

Rick White – CFO, Secretary and Treasurer

Mark King – SVP, Sales and Marketing

Analysts

Steve Smigie – Raymond James

Richard Nelson – Stephens Inc

Chris Longiaru – Sidoti & Company

Gary Mobley – Benchmark

Suji De Silva – ThinkEquity

Ramesh Misra – National Securities

Shawn Harrison – Longbow Research

Stephen Chin – UBS

Operator

Good afternoon and welcome to Diodes, Incorporated First Quarter 2012 Financial Results Conference Call.

(Operator Instructions)

As a reminder, this conference call is being recorded today, Tuesday, May 8, 2012. I would now like to turn over the call to Leanne Sievers of Shelton Group, Investor Relations. Leanne, please go ahead.

Leanne Sievers

Good afternoon and welcome to Diodes First Quarter 2012 Earnings Conference Call. I’m 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’d 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 to of 1994. Actual results may differ from those discussed today and, therefore, we refer you to a more detailed discussion of the risks and uncertainties in the company’s filings with the Securities and Exchange Commission. In addition, any projections as to the company’s future performance represent management’s estimate as of today, May 8, 2012. 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 statement during this conference call will include discussions of certain measure and financial information in 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, GAAP net income to EBITDA and free cash flow, which provide additional details. Also throughout the company’s press release and management statements during this conference call, we refer to net income attributable to common stockholders as GAAP net income. For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 60 days in the investor relations section of Diodes website at www.diodes.com.

And now I’ll turn the call over to Diodes President and CEO, Dr. Keh Shew Lu. Dr. Lu, please go ahead.

Keh Shew Lu

Thank you, Leanne. Welcome, everyone, and thank you for joining us today. Our revenue of $145 million in the first quarter represented a moderate sequential increase and was systemically better than typical season slowness. After the Chinese New Year, we began to see signs of recovery in our end markets. We took advantage of this renewed market strength by sequentially reducing our low margin first good inventory, which helped to support revenue and secure incremental market share gains. Although we reduced our finished goods inventory by 30%, while channel inventory declined 3%. As a result we achieved moderate sequential revenue growth. However, our (inaudible) inventory minded with the increased price pressure and the low iodiration continued to impact margins during the quarter.

Lastly, we believe the first quarter represented the low point in the cycle, and that overall demand will continue to improve across all of our geographies. As such, we have to shift our strategy back to our growth model to occasionally capture additional market share.

With our improved productivity and the (inaudible), we have begun adding capacity for new more advanced package at our Shanghai facility to support our continued growth. As the demand and the pricing environment improve further, we will transition a variable capacity to higher margin product to enhance our product mix and the margins going forward. Our expansion for strong growth in the second quarter further validated the strengthening of our bekins. We are focused on executing our growth model and have the investment and capacity in place to support our further expansion.

The flexibility of our business model has allowed us to constantly deliver profitability, gain market share and even grow regular during down economic cycle. I believe this strategy will continue to produce growth rate that exceed our addressable market as we have constantly now over the past several quarters and years.

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

Rick White

Thanks, Dr. Lu, and good afternoon, everyone. Revenue for the first quarter of 2012 was $144.7 million, a sequential increase of 1% over the $143.3 million in the fourth quarter of 2011 and a decrease of 10.5% from the $161.6 million in the first quarter of 2011.

Revenue was up sequentially due to general improvements and end market demand late in the quarter. Gross profit was $33.7 million or 23.3% of revenue in the first quarter of 2012 compared to $35.5 million or 24.8% of revenue in the fourth quarter of 2011 and $57.4 million or 35.5% in the first quarter of 2011.

Gross profit margin continues to be impacted by a weak pricing environment and higher mix of lower margin products and our decision to strategically reduce lower margin finished goods inventory. Total operating expenses for the first quarter were $28.3 million or 19.6% of revenue including a $2.1 million gain on sale of assets. With that consideration of this gain operating expenses were $30.4 million or 21% of revenue compared to $30.6 million or 21.4% of revenue last quarter and $29.1 million or 18% of revenue in the first quarter of 2011.

Looking specifically at selling, general and administrative expenses for the first quarter SG&A was approximately $22.1 million or 15.3% of revenue compared to $22.6 million or 15.8% of revenue in the fourth quarter of 2011 and $21.4 million or 13.3% of revenue in the year-ago quarter.

Investment and research and development for the first quarter was approximately $7.2 million or 5% of revenue compared to $6.9 million or 4.8% of revenue in the fourth quarter of 2011 and $6.5 million or 4% of revenue in the first quarter of 2011. We continue to increase our investment in R&D to further advance our new product initiatives. Total other income amounted to $800,000 for the first quarter.

Looking to interest income and expense we had approximately $172,000 of interest income, our cash balances and approximately $123,000 of interest expenses. Also included in total other income was a $200,000 foreign currency and a $400,000 increase in fair value associated with our Aero stock investment. Income before income taxes and non-controlling interest in the first quarter of 2012 announced a $6.2 million compared to income of $4.1 million in the fourth quarter of 2011 and $25.1 million in the first quarter of 2011.

Turning to income taxes. Our effective income tax rate in the first quarter was 10% which is below our values of 17% to 23% due mainly to a change in profitability by country. GAAP net income for the first quarter was $4.9 million or $0.10 per diluted share compared to GAAP net income of $3.1 million or $0.07 per diluted share in the fourth quarter of 2011 and GAAP net income of $19.7 million or $0.42 per diluted share in the same quarter last year. The share count used to compute GAAP diluted EPS to the first quarter was 46.9 million shares.

First quarter non-GAAP adjusted net income was $4.1 million or $0.09 per diluted share which excluded net of tax, approximately $800,000 of non-cash acquisition related intangible asset amortization cost and a $1.6 million gain on their asset sale. We had included in our earnings release a reconciliation of GAAP net income to non-GAAP adjusted net income which provides additional details. Included in first quarter GAAP and non-GAAP adjusted net income was approximately $2.3 million net of tax of non-cash share based compensation expenses.

Excluding share base compensation expense both GAAP and non-GAAP adjusted diluted EPS would have increased by an additional $0.05 per share. Cash both from operations for the first quarter was $13.4 million. Net cash flow for the quarter for $47.2 million due primarily to a draw down on a $40 million term loan and free cash flow was a $1.5 million increase in cash including $6.6 million in CapEx for our Chengdu site development.

Turning to the balance sheet. At the end of the first quarter we had approximately $177 million in cash and cash equivalents. Working capital was approximately $368 million. At the end of the first quarter inventory was approximately $134 million, a $6 million decrease from the approximately $140 million in the fourth quarter of 2011. Inventory days improved to 118 in the first quarter compared to 119 days last quarter. Inventory in the quarter reflects an $11 million decrease in finished goods, partially offset by a $4.1 million increase in raw materials and a $1 million increase in working process.

At the end of the first quarter accounts receivable is approximately $140 million and our days improved to 86 compared to 87 last quarter. Capital expenditures in the first quarter totaled $15.8 million which included Chengdu CapEx of $8.2 million, including $6.6 million paid for during the quarter and $1.6 million remaining in accounts payable. Excluding this amount, CapEx was 5.2% of revenue. As we mentioned last quarter, we expect to complete the construction of our Chengdu facility by the end of the second quarter. We currently plan to begin outfitting the building in the second half of 2012 with equipment additions being made in line with market requirements. For 2012 excluding change of building expenditures, we expect CapEx to be at the lower end of our 10% to 12% of revenue model. Depreciation and amortization expense for the first quarter was $15.8 million.

Turning now to our outlook. In terms of second quarter guidance, we expect revenue to range between $155 million and $164 million or up 7% to 13% sequentially. We expect gross margin to be 26% plus or minus 2%. Operating expenses without consideration of any gain on sale of assets are expected to be slightly lower than first quarter on a percent of revenue basis. We expect our income tax rate to range between 7% and 13%, and shares used to calculate GAAP EPS for the second quarter are anticipated to be approximately $47.2 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 mentioned, revenue for the first quarter increased 1% sequentially led by improvements in Europe and North America, where we saw growth in both OEM sales and POS in the quarter. Asia was down primarily due to typical seasonality in the computing and consumer markets.

However, we continued to increase revenue for our products used in smartphones and tablets as we began to ramp a number of new projects during the quarter. Most of these products helped to partially offset the seasonality across the broader consumer market, and we ended the quarter with only a slight decline in this market. Products for smartphones and tablets continue to be strong growth drivers for Diodes, and we are well positioned with our customers as we further expand our content in these end markets. We also saw solid increases in the industrial segment across all regions and in the automotive segment in North America and Europe. As affected, channel inventory declined another 3% after declining 8% last quarter.

Turning to global sales, Asia represents 77% of revenue, Europe 12% and North America 11%. Our end market breakup consisted of consumer representing 34% of revenue, computing 26%, industrial 20%, communications 16% and automotive 4%.

Now turning to new products. We continue to execute on our new products initiatives with highlights during the quarter including the continued expansion of our discrete products for tablets and smartphones as well a specific development for the fast growing LED TV market. We also further expanded our standard logic products and although the revenue contribution is still small we are beginning to generate significant revenue momentum for this product family.

Overall the Chengdu activity and the design pipeline remained strong across all regions. Looking specifically at a discrete product line we continue to make progress in delivering value to our customer base in a wide range of applications. Our product introductions totaled 95 new products across 13 product families which was the highest number of quarterly product introductions in the past two years. Diodes continues to target the LED TV target where our market share in backlighting and other power management applications continues to increase.

As a result our BJT and SBR devices now have a glowing presence in many of the leading TV manufacturers in Korea and China with these products being developed and characterize specifically for these applications. Also during the quarter we further demonstrated our commitment to advancing innovation of our discreet products with a launch of a range of relay drivers in our proprietary new smart BJT platform.

Target applications include inductive load driving in automotive and industrial application as well as a wide range of other high volume application in telecommunication, TV, white goods and computer peripherals. These solid state DC and relay drivers improve the reliability of inductive load control circuits and provide a robust driver interface by acting as a buffer between sensitive logic circuits and 3-volt to 6-volt DC inductive relay coils. Additional we continue to expand our MOSFET family of products with new offerings in the low profile DFN2020-6 package.

Within an off forward height of only 0.4 millimeters in a very small footprint these devices provide industry leading performance in a package that is 50% thinner than competing solutions. Notable design wins for our discrete products during the quarter were put tablets and notebook computing, smartphone, adapters, telecommunications and white goods, all high volume applications with potential for further growth.

Turning to analoging product introduction. We released 25 new products across five-product families. New products highlights included the expansion of our portfolio high current USB power switches, specifically optimized for a USB 3.0 requirements. We continue to see outstanding market acceptance for this product line with another quarter of significant design wins, in particular for notebook, LED TVs and set-top box applications.

We also gained further momentum with our emerging family of power switches targeted for use in hot-swap applications, such as HDMI ports, including a major win in a market leading game console. We also released two new two phase pre-drivers for brushless PC motor controls targeted for fan and blower motors in the computing market. These feature rich devices enable excellent performance with flexible control, motor protection and reduced system level EMI, making them very attractive new product offerings.

We also introduced two new general illumination LED drivers, each offering a wider operating range for expanded market opportunities. Our newest high accuracy LED driver has been designed to handle a broad range of applications, including those subject to the greatest variance of input voltage, such as automotive lighting and 12-volt AC power systems, whereas our recently released AL8807 buck topology driver offers 36 volt operating range and supports 24-volt AC lance. Also during the quarter we achieved new LED lighting design wins across a wide range of applications, including off line lighting, flashlights, underwater lamps and smart meter displays.

In terms of our logic product family, we continued our emphasis on expanding this product line with the release of ten very popular quad and hex LVC functions offered in 1410 TSSOP packages. We have begun to generate significant revenue momentum for this product family and secured several major logic design wins in computing and hand held consumer markets, representing a very large volume opportunity for these products.

As we look into the second quarter, we expect improvements in demand across all our geographies to drive strong growth in the quarter. Distributor order rates are expected to increase further in North America and Europe while channel inventory is expected to continue decreasing. We also anticipate continued ramping of new projects for our products used in smartphones, tablets and LED TVs, where Diodes is very well positioned in theses high volume markets. We believe that our continued focus on new product initiatives and robust design win activity positions us for upside for the remainder of the year.

With that, I’ll open the floor to questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Steve Smigie with Raymond James. Please proceed.

Steve Smigie – Raymond James

Great. Thank you. Now Dr. Lu, you guys had a very nice growth at June quarter and I just was wondering if you could take some discussion on where we are in the cycle. I guess in getting a little given the strong growth in June can you still get strong seasonal growth in the September? Do we have that kind of strength at this point in the cycle or is this still too early to see seasonal better growth in September?

Keh Shew Lu

Hi, Steve. We know our cynical cycle is 1Q typically is lower than 4Q and then second quarter is going up and so quarter will be another jump then fourth quarter depend on the market situation could be certainly down or certainly up then for the next year it go down again. Now fortunately this year even most the market went down we are able to take advantage of the (inaudible) market and ship out how finished goods inventory which was viewed in the fourth quarter when we know the slow down and we actually have excess capacity.

So we build those unit and be able to shift those units out and gain the market share and get growth. In second quarter we continue that market is warm but it’s not really very hot that we are able to view the capacity on OEM and our new product wafer we are able to see the gain the market share. We just did this go to the recent yield or try to like we haven’t do it but I can tell you in second quarter we perform better in seniority and better in our same-store. Now for third quarter we don’t know yet so we cannot really make too much comment on third quarter.

Steve Smigie – Raymond James

Okay. Thank you. And I guess similarly on gross margin, there was some I think difficult pricing near term and you guys were making some effort to get – to work down some lower margin product. So it seems that then as we go forward – I mean, you have a very nice jump in gross margin at the end of June but then going forward throughout the rest of the year, it seems like you should continue to get gross margin gains as you get better utilization as you no longer have the significant pricing impacts and as you start to mix in some better products. Is that sort of a fair way to think about it?

Keh Shew Lu

Yes. Let me put in more detail. In the past I said last conference call I point out the four key issue affect our gross margin. One is ASP revolution and ASP pressure still continue but we think it move forward that ASP pressure will be release and we should be able to keep the ASP but whatever the pressure in the past quarter in semiconductor it just very difficult to raise the price. And we are not – we do not have any intention to go to raise the price.

This I can say that ASP pressure move forward we going to be much more stabilized than the last two or three quarters. Second thing is the product mix. Due to the demand soft start from probably June last year, already start talking about we are moving our product mix to eodite our excess capacity. And that excess capacity is still there until probably 2Q we are able to (inaudible). But we do not really foreseeing it going to be deftly by end of second quarter. Therefore, we are not moving our product mix. the product mix will keep the same thing.

Now the third one I think is equipment utilization and equipment utilization in 4Q, we take advantage of that equipment utilization and we know first quarter due to the Chinese New Year, due to the shift in the people and short working day, we’re going to have – we are not able to yield as we comment. Therefore, we building ahead some of the units to use in our utilization in 4Q. And in the first quarter we ship out those inventory and we put – we did use our finished goods inventory about 20% and it’s not stacking the channel because the channel inventory actually going down, too. So those is help us to improve the utilization and that’s why we focus third, second quarter our GPM percent will be improve because utilization will be improved, too.

Copper wire conversion, we still continue working on it but it’s not going to be very quickly because the one we can convert, which is still a market we are (inaudible) but for the major customer, they typically won’t convert it until the next model year or next design. So that one is going to be slow until we get it. So those are four affect, which affect our GPM. The one we can really improve is utilization. ASP pressure we believe we are no longer going to be dropping the price but we are not going to raise the price to improve the GPM.

Steve Smigie – Raymond James

Great. Thank you very much.

Operator

Your next question comes from the line of Harsh Kumar with Stephens, Inc. Please proceed.

Richard Nelson – Stephens Inc

Yes. It’s Richard Nelson for Harsh Kumar. Congratulations on the quarter and the guidance, and I just had a few housekeeping questions. For the tax rate, should we expect the 7% to 13% for the full year? And then what is your strategy for OpEx as well?

Keh Shew Lu

Yeah. The tax rate will be that, at that rate 7% to 13% for the year, that’s our projection right now. For OpEx with the revenue growth basically our model is to allow OpEx to go up at about half that rate.

Mark King

SG&A and...

Keh Shew Lu

SG&A, I’m sorry, SG&A, that’s right, to go up about half that rate. So if revenue goes 10%, the SG&A would go up 5%. R&D we allow to grow at the same rate. So that’s kind of the model that we’re...

Richard Nelson – Stephens Inc

That’s great. Thank you for the color on that. And then the other question I had is last year you had some – the labor situation in China impacted the company. After the Chinese New Year, did you see any of that again this year? Or what steps did you take to kind of solve that problem this year?

Keh Shew Lu

Okay. Well situation actually is similar because that phenomenon in China it just after (inaudible) and our people go home and just don’t come back but this year we take some precaution because we know going to be happen. We are not going to repeat the same problem as last year. So like I mentioned we take it a and since we are excess capacity in 4Q last year we actually view ahead some of the commodity units to use in that capacity and that’s why you see in 1Q we ship out finished good and that’s what we have been doing. Second thing is we pay more attention so we hiring the people ahead to the Chinese New Year so this year we start from December last year. We already start to hire people, get started getting training and therefore this year in 1Q we are much smoother than last year.

Richard Nelson – Stephens Inc

That’s great. Thank you. I’ll jump back in the queue.

Mark King

Thank you.

Operator

Your next question comes from the line of Chris Longiaru with Sidoti & Company. Please proceed.

Chris Longiaru – Sidoti & Company

Hey, guys. Congrats on the quarter and the guidance.

Mark King

Thank you.

Chris Longiaru – Sidoti & Company

My first question is for Mark. Can you elaborate a little bit more what you’re seeing in Europe and what areas there are weak and what areas might be surprising?

Mark King

Well Europe is probably the most uncertain market that we’re experienced and although our first quarter was quite strong in Europe relative to fourth quarter we had a major inventory adjustment in the channel in the fourth quarter that continued some small decrease but within actually improved order rates and improved POS rates in Q1. Second quarter is in line with our guidance. I think I mentioned in the speech that we expect continued improvements in Europe although in the last two weeks we get a little bit more nervous as we seen a little bit of adjustment, possible adjustment in the Euro that could have some impact but so I think it’s a little uncertain but we don’t see dramatic change in the order rates.

Keh Shew Lu

Yeah. The key things is how many percent of our rate is in Euro instead of U.S. dollar.

Mark King

12%. Actually probably of the 12% and probably 10% of it is in Euro, yeah.

Chris Longiaru – Sidoti & Company

And what’s in terms of the...

Keh Shew Lu

A more concern because if Euro due to the election of the French and make the Europe very weak then you’ll see affect us because our revenue will be go down.

Chris Longiaru – Sidoti & Company

In terms of that weakness, how much in relative terms, how sensitive is that revenue to the shift in the Euro? Can you give us an idea?

Keh Shew Lu

Well, I mean, the only thing – about 10% of our revenue globally is in Euro. So the impact of that percentage change, whether it go to 128 or – that’s where the impact will be.

Keh Shew Lu

We really don’t know probably the Euro it change rate in the U.S., that is the one – if U.S. significant Euro change, ratio change, that cause a problem.

Chris Longiaru – Sidoti & Company

Just in terms of utilization because now you’re starting to add capacity again, where were you last quarter? And with the added capacity, what is your number going to look like for June? I would imagine it would be a little bit lower?

Keh Shew Lu

Okay. Well, we adding capacity so that the area reach newer and advanced package because that’s the area our new product start to ramp. So when we say we adding the capacity, that is the area to support the new product, support new design win. But from the commodity area, which is majority of capacity, we still not fully yield as yet.

Chris Longiaru – Sidoti & Company

Okay. Okay. And then just so all these new products have a little bit of a higher gross margin, too, than the corporate average, I would imagine?

Keh Shew Lu

Yes.

Chris Longiaru – Sidoti & Company

Okay. Great. That’s all I have for now. Thank you, guys.

Keh Shew Lu

Thank you.

Operator

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

Gary Mobley – Benchmark

Hi, guys.

Keh Shew Lu

Hi, Gary.

Gary Mobley – Benchmark

How are you?

Keh Shew Lu

Very good.

Gary Mobley – Benchmark

Dr. Lu, I know you might not answer this question because you always try to emphasize expansion and gross profit dollars versus gross margin, but I’m hoping to narrow you down on a number here. Now in the past you’ve delivered gross margins as high as 38% roughly, and now we’re down 25%. Just wondering when we might get back to the low 30% gross margin level and what the quarterly revenue level needs to be to achieve that goal.

Keh Shew Lu

Well, I think back I mentioned our gross margin percent is due to those four factor I mentioned about. Okay. So it’s ASP ratio I think is there. It’s stopped so we are not going to but the key one really is the organization. So we are looking at if the market’s stable then we can change our product mix to erudite the standard product then we can improve our margin.

You ask me that’s not my focus anyway. My focus is on GPM dollar and as long as we can continue into our GPM dollar we probably continue try to gain the market share even 10%, 15% product, our GPM percent product business. Why now take it? So I do not really spend the time or really focus on how do we get the GPM percent higher. I’m more how do we continue improve GPM dollar and therefore improve an interest share.

Gary Mobley – Benchmark

Okay. That’s fair enough. With respect to your labor cost in China my understanding is that BoxCon has a large facility right across the street from Chengdu and is that a lot of highly publicized labor wage increases in China. So I’m just wondering what sort of labor price increases you’re having to deal with on a year-over-year basis and how that might trend for the balance of the year. And how impactful that is to your overall cost to goods sold?

Keh Shew Lu

Okay. Now like I say labor problem in China nobody can escape from there. We just need to deal with it. But socially I think in the past once I’m talking about is every 10% labor cost increase in China. It affect us GPM percent somewhere around 0.5% to 1%. And that is really short-term because short-term but then long-term is trying to improve the productivity. You try to improve your organization to offset that portion. So that’s the life with it and we just need to work it out and it’s not major. I won’t say it’s major because somewhere around 0.5% to 1% every 10% improve, increase.

Gary Mobley – Benchmark

Okay. That’s helpful. Mark, you mentioned a 3% sequential decrease in channel inventory for your parts out there, following an 8% decline during the fourth quarter. I would imagine your inventory in the channel always decreases sequentially in those respect to quarters, so I’m just wondering if you can give us some relative metric, like days of inventory, to give us a better sense of what’s out there in the channel?

Keh Shew Lu

Yeah, I don’t have days in front of me. I think that we’re probably globally just about, I don’t know, 3.2 months, which is probably pretty accurate. We probably have – we’ll probably see a little bit – probably flat to downish again in this quarter and then probably further down in third quarter, as the demand increases. We’re kind of in our pattern. Actually, the end of the first quarter you might start generally seeing inventory ramping a little bit, preparing for later in the year, so I’m not sure that ramping down in the first quarter is generally our trend, okay? So I think we were a little bit over and people are still a little bit sensitive to inventory in the channel, so we’ll be flattish to down and probably down again in the third quarter slightly and then we’ll start to normalize our pattern again.

Gary Mobley – Benchmark

All right. Thank you, guys.

Operator

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

Suji De Silva – ThinkEquity

Thanks, Hi, guys. Nice – congratulations on the guidance here. Dr. Lu, in terms of the capacity, I’d have the sense that it was flexible around the low margin on the high-margin products, and I’m surprised you’re having to add capacity at the high end. I thought you would just mix up as the demand improved. Can you describe where you’re adding the capacity again?

Keh Shew Lu

Like I say, we are adding at the newer and more advanced package, which is, if you want to call by call, it’s a high end or higher GPM type of capacity for the multi-standard and the capacity, since it’s still under yield lights, we are not putting any capacity – many effects some of the – if I can convert some of the increment for the support in higher, then we well, but not everything you can convert, tender, tester, trim and form, you cannot convert. Manual, you can.

Rick White

You might say it’s kind of a partial add. Some of the areas are very convertible under the new areas, but some things we need different or it may be a different precision level than our historic product. So we’re making sure that we position those so that we don’t miss any of the upside demand opportunities that we see in front of us.

Suji De Silva – ThinkEquity

Okay, maybe I can ask a different way. What percent of your capacity is specific to the lower margin products –?

Keh Shew Lu

Yeah, I don’t think it’s that easy to say and I just don’t think we could really get into that kind of granulation. There’s just areas that with certain packages that require certain different types of handlers and/or this that we’re trying to make sure that we have upside capability on. And as we go forward this is the type of equipment that we’ll buy and our standard products will move toward this as we progress.

Rick White

But you know like without our new package we announced like POWERDI(r) type of package. POWERDI(r) type of package like those new package we announced, those is good package and advanced. If you remember our presentation we are talking about Diode move to the thinner, smaller package. And best type of package. POWERDI(r) is a great example. And like other, those – old

Keh Shew Lu

Some of our – most of our historical stuff is wire bonded and some of our newer products use CLIP, okay, which gives a different type of performance and so on. So there’s just portions of each area of the manufacturing that we need to add to position ourselves to capture this demand.

Suji De Silva – ThinkEquity

Okay. Quick last question on the second quarter, the guide. I think you said the damage inventory will stay flat to down. Is most of the demand here sell-through customers increasing demand or is it some re-stocking at the customers? Thanks.

Rick White

I would say it’s through demand. I think we’re going to be supporting demand in the quarter.

Keh Shew Lu

Yeah. I think Mark always say we expect the second quarter that the inventory will continue going down. So you could see based on that statement you should be sell-through.

Suji De Silva – ThinkEquity

Terrific. Thanks, guys.

Operator

Your next question comes from the line of Ramesh Misra with National Securities. Please proceed.

Ramesh Misra – National Securities

Hi. Good afternoon, folks. First question in regards to balance sheets. I guess cash went up mostly because of this $42 million draw down. Can you tell me a little more about it? You just paid down your debt about three quarters ago now you’re borrowing money again. What are your thoughts – why are you increasing...

Keh Shew Lu

Yeah. It’s a flexibility issue. When you have $200 million of cash from a convertible note you have lots of flexibility. And we paid that down and we just decided we wanted to have some additional flexibility for general corporate purposes, M&A, CapEx if we wanted to do it, those kinds of things.

Ramesh Misra – National Securities

What are the terms on this debt?

Keh Shew Lu

It has to do with expense.

Rick White

Expansion?

Keh Shew Lu

No, the money is (inaudible) for Chengdu expansion.

Rick White

Yeah, yeah, yeah. Sure. So that’s part of the CapEx that we did.

Keh Shew Lu

Yeah, yeah.

Rick White

It’s actually it’s just an adder to the credit line that we have with BoA anyway.

Keh Shew Lu

So it’s actually cheaper than...

Rick White

It’s actually cheaper than the credit line. I think it’s LIBOR plus 125. And the convert was like 2.25 and we’re at LIBOR plus 125 so that’s about 1.5, 1.6, something like that.

Keh Shew Lu

It’s cheaper money and...

Rick White

(Inaudible) tenure.

Keh Shew Lu

So we just said take advantage of that and using it.

Ramesh Misra – National Securities

Okay. Any thoughts in terms of acquisitions, M&A opportunities?

Keh Shew Lu

Well, we don’t have any major M&A right now under working.

Ramesh Misra – National Securities

Okay.

Rick White

But we’re still open to it. We’re talking to investment bankers and everybody on a weekly or not quite a daily basis, but periodically. So we’re open to it as the...

Keh Shew Lu

If the opportunity is there, we’ll take action, but right now we don’t have any one under contract.

Ramesh Misra – National Securities

Got it. In regards to Chengdu, Dr. Lu, you had last quarter you had said that you are holding off expanding capacity over there. You’re still kind of continuing to add a little bit. Any update on your thoughts in regards to the build out of Chengdu.

Keh Shew Lu

Okay. I think now speaking to that, we are to say we finish the build in by end of this quarter and then we will start to do our to put the facility, outfit the building...

Rick White

Outfit the building with electricity, Murphy, clean room, that kind of stuff.

Keh Shew Lu

And we’re hoping just to get it ready next year. Because the power, it take about 9 months to 10 months. So I think we finish the building, we start to do the power line and we started getting ready so whenever the market turn and when we see really the need, then we can take advantage of that. And right now, (inaudible) detail item like power, we want to start to do the power line, to bring the power in. So this is what we’re doing.

Ramesh Misra – National Securities

Got it. In regards to the capital constraints in China and demand in China, what do you think over there? Do you think the worst is now behind us over there? Or is it still kind of a little bit murky?

Rick White

This is a very difficult question for me, okay? I pay more attention to our market or our customer.

Keh Shew Lu

I would say the demand is rising as with the other regions in the second quarter. I don’t think that there’s any great march forward. But I think that the demand is stable to up.

Ramesh Misra – National Securities

Okay. So you would feel a little better about China than Europe at this point, in terms of recent developments?

Keh Shew Lu

Well I mean, yeah. I think Europe is swirling within its own economic...

Rick White

Economic issues

Keh Shew Lu

Economic turmoil and so the question is how people respond to that. I think the underlying issues really haven’t changed that much. We just have to see how the – everybody handles it going forward and that will probably sort out in the next month or so.

Ramesh Misra – National Securities

Got it. And then finally in regards to the industrial segment, well at least here in the U.S. we have been seeing more positive signs from the industrial market. In Europe, I guess since a lot of it kind of export or re-entered to China it’s still kind of a little bit cloudy. So what are your POPs and outlook in regards to the industrial end market going forward?

Keh Shew Lu

Yeah. I think it looks pretty good. I think we’ve seen some of the improvements that we’ve been talking about in North America have been driven by the industrial segment. Actually we were up in all regions in the industrial segment in the first quarter and I think we see solid advancements in Asia in the industrial segment in Q2. You know we do a lot of business in power supply with our SBR products so we’re making some good traction there. And again Europe is a big industrial marketplace so how Europe goes, we’ll see that going forward.

Ramesh Misra – National Securities

Okay. All right. Thanks very much, folks. That’s very helpful.

Operator

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

Shawn Harrison – Longbow Research

Hi everyone.

Keh Shew Lu

Hi Shawn.

Shawn Harrison – Longbow Research

I just wanted to follow up on smartphones and tablets. A lot of conversation at the beginning of the call and just kind of the growth there and the growth outlooks. What percentage of revenues do those products represent right now, and maybe, where could they run over the next 12 months as a percentage of sales?

Keh Shew Lu

Yeah, we really don’t break that out. But as you can see, our consumer sector, we’re 34% consumer. So that’s a strong segment for us, along with smartphones, tablets. LED TV is also a strong thing. So we don’t really break out those two categories as a percentage of revenue.

Shawn Harrison – Longbow Research

Okay. Yeah, I mean, is it something that we could, over the next 12 to 24 months, approach even half the consumer business? I’m just trying to get an idea.

Keh Shew Lu

I really don’t think we’re going to dissect that.

Shawn Harrison – Longbow Research

Okay. I guess, second thought, I’ll just, on end demand, what you talked about, kind of like, I guess, what’s good, and some questions within Europe, maybe any end products that you’re selling into, or end markets that we’re just not seeing the upturn yet.

Keh Shew Lu

In Europe specifically, I mean, I think we’ve seen some decent expansion in our business in the automotive sector. And, maybe a little bit in the Consumer sector, and some TV applications and so forth. And I think the Industrial segment actually did, in Q1, increase over Q4. I was kind of, when I said I wasn’t sure, I was really talking about the outlook for Q2.

Shawn Harrison – Longbow Research

Okay. And I guess, to maybe just the notebook/PC market in general, is your expectations for the rest of the year. Is it, are we going to see growth or are you, kind of, a little bit more tempered?

Keh Shew Lu

No, I think that we’ll see, I think we’ll see muted growth in that segment in, for the balance of the year, or through its normal cycle.

Shawn Harrison – Longbow Research

Okay. And then just one final follow-up. Rick, the tax rate being lower for this year, as we move into 2013, was this kind of a permanent structural shift in terms of where taxes will be, or does it rise, maybe, as end demand continues to improve?

Rick White

Well, I think in general, our tax rate has been higher historically. And I would think that we would move back more to the historical perspective, going forward next year and beyond.

Shawn Harrison – Longbow Research

Okay. Very helpful. Thanks so much.

Operator

Your next question comes from the line of Stephen Chin with UBS. Please proceed.

Keh Shew Lu

Hi, Steve?

Stephen Chin – UBS

Hi, everyone. Thanks for taking my questions, and nice job on the guidance as well. I have a couple of questions on the end markets, for Dr. Lu or for Mark. I guess, going back to the commentary on smartphones and tablets, I was wondering if you could talk or give us a little more color on, I guess, what the products growth in those two end markets or two park areas are helping to drive. Is it more commodity streets that you’re selling to those products or is it customers? Is it discrete or potentially any increase in analog content in those smartphone and tablets?

Keh Shew Lu

I think that we’re strong. I mean I think we’ve seen a lot of action in our BJT products. I think we’ve seen a lot of action in our MOSFET products. We see that marketplace is a strong place for our logic business. So we’re trying to attack with our product line across the board. Yeah we sell commodity products into that area but we’re very much more focused on our premium product in those end equipments.

Stephen Chin – UBS

Okay. Got it. Then also as far as notebook, just following up to the previous question on notebooks, any comments on how a demand surrounding new product cycle such as Intel’s ID Bridge and maybe even comments a little further into by looking out to Q3 for example around back to school? Any comments around longer term demand, medium term demand and also key demand in other areas such as Asia?

Keh Shew Lu

Yeah. To be honest with you we kind of follow that month to month. The notebook cycle is not something you can, I don’t know. We don’t see it predictable outside of what we see in the next 50 to 90 days and we see some improvements in the sector. We see opportunities for our growth in those sectors through new design wins and new products that we have going into that product in our U.S. base switch area and some logic areas and then the MOSFET product area. So overall demand sometimes when I look at our revenue versus the overall demand I’m really more focused on what I see our revenue flow to be and I see some growth opportunities there and not as managed – I don’t have to watch the unit output as quite as much. So other people might have a better vision of where that’s going to be six months out.

Stephen Chin – UBS

Okay, got it. And just one last one. On ASP pressures that you mentioned earlier, is that expected to do a bake in the current quarter or into second half? And was this because of competitors that started to cut pricing in order to move product or is it you’re assuming direct customers are looking for more price concessions? That would be helpful.

Keh Shew Lu

Well customers are always looking for price concessions. That’s their job. And yeah when utilization’s down, there’s the ASP pressure, okay, and as people get out of mix they sell things that they don’t normally sell. So yeah we believe and we hope that demand stabilizes and as we go to even nominal growth that ASP pressures will be alleviated. We always have ASP pressure. Our goal is to change our ASP mix as well as the improved market should help that situation.

Stephen Chin – UBS

Great. Thanks, Mark.

Operator

And at this time I’d like to turn the presentation back to Dr. Lu for closing remarks.

Keh-Shew Lu

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

Operator

We thank you for your participation in today’s conference. You may now disconnect and have a great day.

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