M&A Announcement

Aug 8, 2019

Good morning and welcome to Diodes Incorporated's conference call regarding its proposed acquisition of Lydon Semiconductor Corporation. At this time, all participants are in a listen only mode. At the conclusion of today's conference call, instructions will be given As a reminder, this conference call is being recorded today, Thursday, August 8, 2019. I would now like to turn the call over to Shelton Group, the investor Relations Agency for Diodes Incorporated. Brett, please go ahead. Good afternoon, and thank you for joining our conference call to discuss the proposed acquisition of Lydon Semiconductor. I'm Brett Perry, Vice President of Shelton Group, Diodes' Investor Relations firm. With us today are Diodes' President CEO, Doctor. Keshu Lu, Chief Financial Officer, Brett Whitmire Corporate Secretary, Rick White, Vice President of Corporate Operations, Julie Holland, and Director of Investor Relations, Laura Murphy. If you have not yet received a copy of the press release, you can access a copy on Diodes' website at www.diodes.com under the Investor Relations section. There's also a slide presentation that we will be using in conjunction with this call that may be accessed through the webcast link on Diodes website and is also posted as a PDF in the Investor Relations section. The slide presentation and management statements during this conference call will include discussions of certain measures and financial information in GAAP and non GAAP terms. Before I turn the call over to Doctor. 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 looking statements in response to your questions. These forward looking statements include, but are not limited to, statements related to the benefits Of the proposed transaction between Diodes Incorporated and light on semiconductor, these forward looking statements are based on information available to Diodes and light on semi as of today, August 8, 2019, and current expectations, forecasts and assumptions involve a number of risks and uncertainties. Actual results may differ materially from these forward looking filings with the SEC. 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 and assumes no obligation to update these projections in the future as market conditions may or may not change. For those of you unable to 60 days in the Investor Relations section of Diodes' website at www.diodes.com. And now, it's my pleasure to turn the call over to Diodes' President and CEO, Doctor. Keshu Lu. Thank you, Brett. Welcome, everyone, and thank you for joining us today. We are very excited about today's announcement regarding the proposed acquisition of Live Own Semiconductors by Diodes. In addition to offering substantial financial synergies and an attractive rationale for the customer employee and the shareholders of both companies. I believe this acquisition is another significant milestone on Diodes Pass toward achieving our next strategic financial goal of $2,500,000,000 revenue and $1,300,000,000 gross profit by year 2025. As we As we will discuss today, this transition meets all of our acquisition criteria. And will also be immediately accretive to both GAAP and non GAAP earnings per shares. As Brett mentioned, there is a slide presentation available on our website. I have asked Judy Holden, our Vice President of Corporate Operations to review this presentation with you as a part of today's call before we It's my pleasure to be here today. Diodes Acquisition of Layton Semiconductor creates a company with even greater scale and a well aligned product offering as well as the opportunity for financial and operational benefits for our long term high volume discrete analog logic and mixed signal products, cost effective wafer fabrication and packaging capabilities, a strong global presence, a broad product and customer base with a well developed global sales channel, and a strong base business in the consumer, computing and communications market with an emphasis on expansion in the industrial and automotive markets. LightOn Semiconductor has a broad portfolio of discrete power devices, analog power ICs, and hall effect devices plus a full range of contact image sensors, a leading market share in Bridges for ACDC applications, an installed base of wafer fab and assembly capacity that is currently underutilized and a large ownership stake in diode stock, holding over 15% of our outstanding shares. When combined, the consolidated company will offer a broader footprint of discrete and protection products and expanded business base in Asia including Diodes participation in the contact image sensor market, operating and administrative synergies, access to incremental manufacturing capacity for both wafer fab and assembly and financial value with positive impact to revenue EBITDA and earnings per share. Let me now provide an overview of light on Semiconductor's business from a corporate manufacturing and financial perspective. As an Asia based supplier of Green Power Semiconductors, specializing in discrete and analog products, light on Semiconductor has an extended portfolio of product lines including rectifiers, protection products, photo diodes, as well as power ICs and hall effect devices. In addition, Lydon offers a full range of contact image sensors that support a wide variety of computing industrial and financial equipment applications. Lydon's target markets include system power and switching power applications, in the communications, information technology and consumer electronics arena. LightOn Semiconductor is a publicly held company that was established in 1990. It is listed on the Taiwan Stock Exchange and is headquartered in Taipei. The company has over 2300 employees with its product development operations and business management teams based in Taiwan and sales offices in Taiwan, China, and the U. S. LightOn Semiconductor has internal wafer fabrication plants in Xinchu and Ki lung Taiwan, and in Shanghai and Wuxi, China. Lydon also has product packaging and test facilities in Kyung, Taiwan and in Shanghai and Wuxi, China. They offer wafer foundry assembly subcon services to external customers from these manufacturing facilities as well as supporting a significant percentage of their own production requirements. In terms of financials, light on semiconductor reported revenue of approximately $247,000,000 in 20 18 $41,000,000 in gross profit. Their cash and short term investments were $91,000,000 as of the end of 2018. LightOn Semiconductor's business profile supports our rationale for the transaction and will benefit Diodes' business and expand our product portfolio. The rationale for this transaction includes the extension of our and photo diodes, plus additional discrete power devices such as IGBTs and MOSFETs. Diodes and light on Semiconductor will be the world's largest supplier of Bridge products for ACDC applications, a focus market for both companies. Sees to increase profitability. Also, we will be able to leverage Diodes' extensive sales channel, providing the light on product lines expanded sales opportunities through exposure to Diodes' larger customer base across additional market spaces. Diodes will be able to use light on's wafer fab and assembly test capacity to provide headroom for our growth, while allowing increased manufacturing flexibility, including more opportunities for internal dual sourcing. Financially, the transaction allows the recapture of over 15% of diodes shares outstanding currently held by light on Semiconductor. This business combination will be immediately accretive to revenue acquisitions. We have a successful track record of integrating acquisitions, including Fabtech in year 2000, AnachIP and APD Semiconductor in 2006, ZTEX in 2008, BCD and PAM in 20 team and Pericom in 2015. The terms of the acquisition include a purchase price of $42.5 NT Dollars per share for a total consideration of approximately 4.28 $1,000,000. The acquisition is expected to close in April of 2020. The boards of both companies have approved this transaction, which is still subject to approval by Lydon's shareholders, as well as other customary closing conditions and regulatory approvals. Turning now to manufacturing. The light on manufacturing infrastructure includes wafer fabs in and in Shanghai and Wuxi China. Lydon runs a variety of process technologies in these wafer fabs including a TVS process with ultra low junction capacitance, both trench and rugged planar, shot key technology, Superjunction MOSFET processes up to 6.50 volts and an IBGT technology rated to 1200 volts 40 amps. Lydon's analog wafer BCD, bipolar and CMOS capabilities. These wafer fabs offer a combined capacity of approximately 1 160000 6 inches equivalent wafers per month. Light on Semiconductor has product packaging and test facilities in Kiliang, Taiwan, and Shanghai and Wuxi, China. They build SMA, B and C pack as well as capacity for over 500,000,000 units per month. This incremental wafer fab and assembly capacity will allow diode additional manufacturing flexibility and the opportunity for internal dual sourcing across multiple locations for supply risk reduction and operational efficiencies This transaction provides Diodes with a larger revenue base as well as the ability to drive significant increases in earnings per share due to the recapture of light on holdings of over 15 percent of Diodes shares outstanding. We expect this transaction to be immediately accretive. When looking at pro form a results based on a calendar year for the combined company, revenue for second quarter 'nineteen would have been approximately $370,000,000 $1,500,000,000 for the trailing 12 months. Gross profit for second quarter 'nineteen would expand to approximately 128 $1,000,000, with a trailing 12 month figure of nearly $500,000,000. Gross profit margin would decrease for the combined company based on light on Semiconductor's current manufacturing utilization. We expect the gross margin to improve as Diodes introduces additional loadings and capabilities to these facilities. Non GAAP earnings per to $3.29 on a trailing 12 month basis. These EPS figures in include the interest cost from operational synergies forward in executing Giodes strategic growth plan to achieve $2,500,000,000 in revenue $1,000,000,000 in gross profit by year 2025. As you can see from the chart on this slide, the combined company's trailing 12 month revenue of $1,500,000,000 represents an implied compound annual growth rate for revenue of over 11% suggesting that that, that this transaction puts us well on the way to achieving our revenue growth goal. Similarly, the progress toward our profit, our gross profit goal of $1,000,000,000 by 2025 is even more encouraging. As this transaction would allow us with an implied compound annual growth rate that is Lydon's low overhead spending rates would average down our operating expense rates for R&D And SG And A creating further favorable impact to To conclude, Diodes focus continues to be on generating profitable growth through a combination of manufacturing cost leadership, high volume end market focus, strong customer relationships aggressive new product introductions, product portfolio expansion, innovative process and packaging technology, as well as select strategic acquisitions. Light On Semiconductor is another key milestone in this growth strategy, and we look forward to the Our first question comes from the line of Sean Harrison from Longbow Research. Your question please. Hi, good afternoon guys. Just to start off real quick, will you be financing the deal and what rate of debt should we assume? I'm sorry. Your voice is very loan. Let me let me turn on. How are you going to finance? And what's the greater debt? Okay. I will maybe need to bring you back to our history, okay. In 2015, when we purchased our Pericom, we have $100,000,000 of debts and we are able to finance another $400,000,000. So we make up the total $500,000,000 of the fundings to purchase PayOC. Since 2016, January, and we have been paid down our debts. And so far, now up to end of second quarter this year, our tax now is less than $150,000,000. And therefore, now with our EBITDA, we are now capable to border the money up to probably 900,000,000. But we already make our finance arrangement with the bank. So we should be able to, finance the $428,000,000 needed in our press, therefore, of 150,000,000 of our current existing loan, So we had a commitment from our bank group who agreed to finance those money for us to you. Moving on to the synergies, is there any way you can quantify a goal and maybe talk a little bit about the timeline and where do see the synergies exactly. Any help would be helpful. Thank you. Well, the 109, I think, is we're going to we are now focused, get the shareholder of the Dione, you know, semi shareholder to approve it. And we target it somewhere around November 8th. It's for the new shareholder approval. And then after that, we expect the closing, to enter the beginning of April 2020. Okay? And, I would like Julie to answer the questions synergies. So we expect to see synergies from a product perspective in terms of being able offer a broader sales channel to the light on products, in addition to a broader customer base. And exposure to a broader market range. On the manufacturing side, we're expecting to, invest in their facilities to allow, to develop some additional capabilities that will allow us to increase their loadings factors and their overall utilization, which will I believe increase the overall efficiencies of the combined company. Okay, great. Thanks. I'll hop back in the queue. Thank you. Okay. Thank you. Our next question comes from the line of Tristan Gerra from Baird. Your question please. Hi, good afternoon. So looking before any type of synergies, what else is accretive to earnings on the slide that shows almost $0.55 in accretion. Is there anything in addition to the share we purchase? Is it also due to tax synergies or any other factors, again, before any type of cost cutting or synergies between the two businesses? Well, actually, when we do that calculation, we don't even consider any synergy to it, okay? Or what we really do is take the pest trailing 12 months. And then we based on that, and then the profit generated by both company and and that including the profit generated by their subsidiary of ombre or their ownership from the ombre Okay. So all the profit, it is together, minus the interest payment for us, to acquire AOC. So we make assumption, the money is needed is a 4 $28,000,000, the interest rate we're going to pay, we take those costs inside there and the tax benefit we're going to have. So when we add all those together, it show us we can accretive immediately And that's the one in Judy, the presentation show that just the EPS alone is very good, very accretive. And so we do not even put any synergy in consideration. And if you started putting the synergy there, then if the accretive will be even much better. That Judy or Yeah. So this is required. So basically what Keshu was describing was the methodology we used to come up with that number from a profit standpoint. We took on bright light on and on bright plus diodes profit we subtracted out the tax effect of the interest and we also included the 15% reduction in our share price. And so the combination of all those factors is what's driving that $3.29 on the consolidated balance sheet there or P and L there. Okay. And then, light on has some 3 inch fabs and 1 4 inch fabs. Is it too early for you to talk about potentially upgrading those fabs to 608 inch? Well, Those 12, those 3 inches 4 inches is a spatial wafer. It's for the TTP and for some kind of some of the breach. So it's not the traditional, we talked about 6 inches discrete. So those too fab is for the special purpose of the, you know, GPP and breach and nodal and 4 inch is good enough to support those kinds of product. And they are that we can loading even more because we do, Diodes do have the bitterness in that area too. And today, it I don't know if you remember or not. We have a 51% owned of the company, public company called Ares, dial on 51% and Ares last year purchased a company 60% of the company called Yashin. And Yashin is produced. Those are GPP type of wafer and 4 inch wafer too. So by LSC and then Ares Yacin, we were able to consolidate altogether and make a much, big revenue of big business out of those products. So that is the one, you know, our plan we would do after we take over, then we try to free out how to make 1+1 larger than 2. Then the other one, 6 inch which is the one way under load it, you know, they are loading is, you know, less than 50% is somewhere around 50%. Of the capacity is only loaded. And I think we have a lot of, 5 inches 6 inches product 9 outside to the foundry, and we believe they are capable to support us in that area. Now we do need to spend the time to qualify the process qualified the product and reduce production. But from long term, they will able to load in that factory and they were able to provide us additional capacity to support our growth in the futures. Okay. That's very useful. And then last question for me. Does the acquisition change significantly your mix, your percentage mix of discrete versus analog products? I don't think we'll be significant because some of their revenue due is in error too. And some of the revenue is the module, we call it's a CMOS sensor, but they call Content image sensors. Okay. Those are not discrete. So if you look at, you know, they take all those out and then that some of the revenue is coming from foundry. So if you look at their revenue, yes, there's majority is a discrete, but if you consider analog and, content image sensor, plus contrary, it is not going to change significantly of our ratio between analog and discrete. Our next question comes from the line of Gary Mobley from Wells Fargo Securities. Lied on took the Diodes equity stake about 20 years ago to establish a North American distribution footprint. I find it ironic that day you're buying them to establish their sales footprint. My question is, what is the equity value of the On Bright equity stake worth today for Line On? Well, They own 31% of, on brand, okay? But the stock price going up and down every day. So it's very difficult to tell you exact the equities. But I would say somewhere around 9 90,000,000. 90,000,000. 90,000,000 U. S. Dollars. So let me get this straight. You're buying light on for $428,000,000. They have a $300,000,000 equity stake in diodes. A $90,000,000 equity stake in On Bright and $91,000,000 in cash? I think your math is too good. And I should not comment on that because, you know, we going to the other side, their shareholder need to approve these transitions. So we don't want all I want to say is, yes, it's accretive immediately and accretive to our P and L, accredited to our earning per share, but, you know, don't forget they are shareholder into both for this. And so I guess it's fair to assume that you're just going to retire the diodes' shares that's going to be up from this transaction straight to treasury, right? Well, this is really important for us Okay. The key thing, let me explain. I think you go with me to the the investor meeting all the time. And they always ask me, why our shareholder of diodes and mine sell diodes stock? And I need to spend a lot of time to explain because they need to pay the dividend for the money they make, but Diodes don't pay the dividend. For the money we make and they consolidate. So they need to sell DialStar to be able to pay the dividend, making by Diodes. And, you know, I always need to then sit around and explain why our parent company is selling our stock. Is because they have a need. It's not because they have no confidence in Diodes. And so this really very, very critical for me to get those shares back. And when we get those shares back, we put in treasury stock and that will reduce our outstanding shares. So you can think in would span that kind of money to buy our share back. And I think that's why I feel very excited about these acquisitions. Okay. Last question for me. One other comment about Keshu's evaluation We did have evaluation done by, outside firms. We did have a fairness opinion and the $42.50 that you see and the value was within the guidelines of the valuation and the fairness opinion. So It sounds good, but it did meet the it fell within the parameters of the both the valuation and the fairness opinion. Understood. Yes, I think it's very important because the finance opinion from our side and from their side actually indicate the price is a fair to both side. Okay. All right. And so you talked about absorbing some of light ons unused manufacturing capacity see and I believe your CapEx intentions are typically what 5% to 7% or 5% to 9% of revenue annually. I'm assuming that maybe you can spend towards the lower end of that range with you shifting some of your needed capacity to light on? Well, we still keep the same kind of ratio, okay, 5% to 9% target midpoint at 7%. And so I would still go to be thinking similar because we just acquired the defect from, from TI. And that defect from DI, we may need to put some CapEx in to be able to convert from TIs, you know, wafer process. To Diodes' spatial wafer process and spatial wafer wafer requirement, okay? So I said, and and with this one, the same thing, we're going to take a look of their need of, you know, to bring a diodespatial process equipment, to support our need. So yes, it will be reduce some of our capacity or our CapEx needed, but don't forget that is we're going to bring some of the wafer needed outside to inside, to improve the gross margin too. So we are praying both, right? We cannot just say, okay. We stay everything outside. So we by using this, by putting the CapEx in the range, the business model range, I put it up 5% to 9% we should be able to support some of the growth need internally instead of 100% redial on outside. And this does conclude the question and answer session of today's dot program. I'd like to hand the program back to Doctor. Lu for any further remarks. Thank you for everyone for joining us today. Operator, you may now disconnect. Thank you. And thank you ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.