Tower Semiconductor Ltd.

Thank you and welcome to Tower Semiconductor Financial Results Conference Call for the third quarter of 2020. Before we begin, I would like to remind you that some statements made during this call may be forward-looking and are subject to uncertainties and risk factors that could cause actual results to be different from those currently expected. These uncertainties and risk factors are fully disclosed in our Forms 20S, F4, F3, and 6K, filed with the Securities and Exchange Commission. as well as filings with the Israeli Securities Authority. They are also available on our website. SARA assumes no obligation to update any such forward-looking statements. Please note that the third quarter of 2020 financial results have been prepared in accordance with U.S. GAAP. The financial tables and data in today's earnings release and in this earnings call also include certain adjusted financial information that may be considered non-GAAP financial measures under Regulation G, and related reporting requirements as established with the Securities and Exchange Commission. The financial tables include a full explanation of these measures and the reconciliation of these non-GAAP measures to the GAAP financial measures. Now, I'd like to turn the call to our CEO, Mr. Russell Ellinger. Russell, please go ahead.

Thank you, Noeid, and thank you, everyone, for joining our call today, discussing our 2020 third quarter business and financial results. Firstly, with regards to the cyber event that we announced at the beginning of September, our IT safeguards had identified a security incident on some of our systems. We took immediate actions to prevent damage, closing our Israeli and US IT systems, hence halting those facilities. In less than a week, all factors were returned to operational capability. Due to the effective procedures, there was no damage to the functional quality of the work in progress, with company and customer data protected. Activities further securing the company's IT environment were put in place. The impact of this event on our operations was between eight and 12 days of new wafer starts, and as the incident occurred during the last month of the quarter during a demand ramp, we lost multiple weeks of full FAB activity levels. This impacted utilization levels for the third quarter, which I will address later in this call. Third quarter revenues were within our guidance range at $310 million, resulting in EBITDA of $79 million and net profit of $15 million. Oren Shirazi, our CFO, will provide an in-depth review of our third quarter financials later in the call. We are guiding the fourth quarter to a mid-range of $340 million, representing 10% quarter-over-quarter and 11% year-over-year growth, or an organic growth of 17% quarter-over-quarter and 14% year-over-year. Looking at our activities in our different business units, within our analog business unit, our silicon germanium optical business has grown throughout the year and is again expected to increase in the fourth quarter. Up to our third quarter, growth was driven primarily by demand for 5G infrastructure. Now, additionally, we see growth in data center demand. In both markets, we build optical transceivers operating at 25 gigabit per second for 5G infrastructure and predominantly at 100 gigabit per second for data centers using high-speed silicon germanium technology. Growth in silicon germanium is supported today by increased utilization of our Newport Beach facility and in the future will be further supported by increased utilization of our San Antonio facility. We continue to see a good flow of new designs in our most advanced technologies targeting 200, 400 and even 800 gigabit per second products to maintain our market as these new standards ramp. At these higher data rates, we also anticipate increased adoption of our silicon photonics platform. We are presently in low volume production at the 100 gigabit per second node with silicon photonics and expect the technology to be adopted more widely in the 400 and 800 gigabit per second transceivers. Our mobile business is experiencing surge growth both in immediate orders and very importantly in longer term customer forecasts. This strength is broad-based and includes advanced products running in our 300-millimeter facility in Japan and 200-millimeter facility in Israel, and also mid-range products running in our San Antonio facility. Last quarter, we provided an estimate of year-over-year growth in this market of 10% to 15%, but based on the strength we see now, we are increasing our growth expectation for 2020 over 2019 to about 25%. Considering that 2019 was reported at over 40% year-over-year growth in RF SOI, these high sequential numbers can only be achieved by very strong increases in market share. Growth in this market will continue as 5G handsets are expected to proliferate over the next several years, and which handsets require substantially, namely 30% to 50% more RF content. Our power IC business is also seeing renewed broad-based strength, both in consumer and industrial products, with automotive demand now stabilized. We anticipate exceeding the expectation we had set last quarter of 20% year-over-year growth for our power IC business. This strong growth is primarily a result of market share gains due to strong technology platforms, which offer industry-leading performance across a broad range of voltages and applications. This along with our updated high voltage 200 millimeter resurf and SOI technologies and industry leading 65 nanometer BCD 300 millimeter offering has driven the present market share growth and enabled a healthy funnel of new design activity for future increases. Our power discrete business, predominantly tier one MOSFET customers, has shown a year over year decline that is consistent with what has been published for the discrete market. New order levels have stabilized, with customer forecasts now increasing, which signals a recovery for this market. Moving to our sensors and displays business unit, first looking at non-imaging sensors, we are steadily growing our manufacturing volume of MEMS microphone products, expecting continued increase throughout the next year, while in parallel co-developing new platform offerings. We have several customer products in platform development stages, such as MEM speakers, radiation sensors, and remote infrared thermal sensors. Our magnetic sensor TMR activity with Crocus technology is expected to ramp to mass production in the first half of next year with numerous state-of-the-art sensors. On the display front, our development program with Aledia has accelerated and is expected to capture a large market share with their unique 3D micro-LED technology. We're also working on micro OLED screens for the VR market. Moving to imaging sensors, we have achieved very good results and expect manufacturing to start shortly for lens type fingerprint sensors. On time of flight sensor front, we also receive very good results from our lead customer sensors and are moving according to the plan to production in the first half of next year. This would be our first product moving to mass production using our 300 millimeter stacked wafer backside illumination pixel level bonding platform. We continue to see weakness in two market segments, the x-ray dental sensor market and the industrial sensor market. However, we begin to see a rebound in customer demand forecasts for industrial sensors. Third quarter 2020 utilization levels were impacted by the cyber event as mentioned. In Migdal-Hemek Fab 1, our 6-inch factory, we had 50% utilization. Fab 2, the 8-inch factory, was at 60%. Newport Beach, California, Fab 3 was about 70%. San Antonio factory Fab 9 was at 60%. Our TPSCO 8-inch factories in Japan, foundry business was at about 60% rate. In our 12-inch factory, we had a 10-point increase in layers processed versus the second quarter. We also increased our photo layer capability by 25% as a result of the previously announced capacity expansion, and hence the resultant utilization was 70%, allowing for Q4 and continued in 2021 revenue growth against a high customer demand. With that, I'd like to turn the call over to our CFO, Oren Shirazi. Oren, please.

Welcome, everyone, to our call, and thank you for joining us today. We released our third quarter 2020 results today and provided a strong Q4 2020 revenue guidance. Before analyzing the P&L results, balance sheet, and cash flow reports, I wish to comment on the cyber event. Since Russell already described the event and its impact on the business and utilization, I will only relate to the financial implications of it. Obviously, these quarter results were impacted by the manufacturing disruption, which caused lower utilization and reduced starts and moves in the factories, and resulted in lower revenue than we could have achieved, lower work-in-progress, WIP, and hence higher COGS and lower derived margins. The event had no impact on our cash flow report or balance sheet, save from its impact on having lower WIP as an asset in the balance sheet. I will now provide the P&L highlights for the third quarter and then discuss our cash flow and balance sheet financial statements. Revenues for the third quarter of 2020 were $310 million as compared to same figure in the previous quarter and $312 million in the third quarter of 2019. Gross and operating profits for the third quarter of 2020 were $53 million and $19 million, respectively, as compared to $58 million and $22 million, respectively, in the prior quarter, and as compared to $58 million and $23 million, respectively, in the third quarter of 2019. Net profit for the third quarter of 2020 was $15 million, or $0.14 per share, basic and diluted, as compared to net profit of $19 million, or 18 cents basic and diluted earnings per share in the prior quarter, and to $22 million, or 21 cents basic and diluted earnings per share in the third quarter of 2019. Analyzing income tax P&A lines, our $3 million increase in income tax expense in the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, resulted in 6% all-in effective tax rate in 2020 as compared to 1% in 2019, mainly due to the higher revenues and profits we generated from the Japanese factories, where the tax rate is approximately 30%, as compared to 21% from profits we make in the States and 7.5% in Israel, which 7.5% has no cash impact due to the NOLs we have in Israel. In addition, in 2019, we received certain tax credits resulting in a low 1% all-in effective tax rates. The increase in the Japanese factory's revenue and utilization also resulted in a higher non-controlling interest amount in 2020 as compared to 2019. Regarding the additional capacity expansion in Ouzo for the future, since it is fully Tauer's funded investment, Tauer will enjoy all the incremental margins and the minority rights are not expected to significantly increase, despite the associated revenue that will be generated from such investment. I would now like to describe our currency hedging activities. In relation to the Japanese yen, since the majority portion of TPS cost revenue is denominated in yen, and the vast majority of TPS costs cost in yen, we have a natural hedge over most of our Japanese business and operations. In order to mitigate part of the remaining yen exposure, we executed zero-cost cylinder hedging transactions. The zero-cost hedging transactions hedge the currency fluctuations to be contained in a narrow range as compared to the spot exchange rate. Hence, while the yen rate against the dollar may fluctuate, the impact on our margins is limited. In addition, in relation to the Japanese yen impact on the balance sheet, we have a natural hedge on Japanese yen cash and Japanese yen loan balances due to the extent the loan's amount does not exceed the cash amount. This helps to partially protect us from potential impacts of yen fluctuations. Lastly, in relation to fluctuations in the Israeli shekel currency, we have no revenues in this currency. Since approximately 10% of our costs are denominated in the Israeli currency, and we have some liabilities denominated in shekel, we also hedge a large portion of this currency risk by A, engaging zero-cost cylinder transactions to mitigate exposure resulting from our NIS-denominated costs, and B, investing a portion of our cash in Israeli marketable securities denominated in the Israeli currency to mitigate exposure resulting from our shekel-denominated liabilities. Looking at the balance sheet, we present a strong and stable financial position. Our shareholders' equity reached a record of $1.41 billion. Total assets and balance sheet totaled $2 billion. Our cap table consists of 108 million outstanding ordinary shares and an additional 2 million ESOP-related shares, resulting in a fully diluted share count of 110 million. Current assets ratio, defined as current assets divided by short-term liabilities, was 4.1x. Short-term debt in the amount of $87 million, which is included in the balance sheet, includes approximately $40 million principal payments of the venture, Series G, to be paid during the next 12 months, and approximately $50 million of other debt liabilities. And a last Note on the cash flow report, in the third quarter of 2020, cash flow generated from operations was $69 million, as compared to $67 million in the second quarter of 2020. Investments in fixed assets, mainly for CAPEX, were $67 million, which included payments relating to the 12-inch FEB capacity expansion program. In addition, we repaid $26 million of our debt during the third quarter of 2020. During the nine months ended September 30, 2020, we generated $204 million cash for operations, invested $192 million in fixed assets, mainly for CapEx, and paid $56 million of debt. And now I wish to turn the call back to the operator. Operator?