Tower Semiconductor's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Tower Semiconductor Ltd. (TSEM)

Q2 2012 Earnings Call

August 9, 2012 10:00 AM ET

Executives

Noit Levi – Director, IR and Public Communications

Russell Ellwanger – CEO

Oren Shirazi – CFO

Analysts

Jay Srivatsa – Chardan Capital Markets

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the TowerJazz Second Quarter 2012 Results Conference Call. All participants are currently present in a listen-only mode. Following management’s prepared statements, instructions will be given for the question-and answer-session. (Operator Instructions) As a reminder, this conference is being recorded August 9, 2012.

Joining us today are Mr. Russell Ellwanger, TowerJazz’s CEO; and Mr. Oren Shirazi, CFO. I would now like to turn the conference over to Ms. Noit Levi, Director of Investor Relations and Public Communications. Ms. Levi, please go ahead.

Noit Levi

Thank you, and welcome to TowerJazz financial results conference call for the second quarter of 2012. Russell will open the call followed by Oren with a discussion of our results in the second quarter of the year.

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 Form 20-F, F-4, F-3, and 6-K, filed with the Securities and Exchange Commission, as well as filings with the Israeli Securities Authority. They are also available on our website. TowerJazz assumes no obligation to update any such forward-looking statements.

Now, I’d like to turn the call to our CEO, Mr. Russell Ellwanger. Russell, please go ahead.

Russell Ellwanger

Thank you, Noit. Welcome to our second quarter 2012 results conference call. During the call, I’ll review our current areas of focus and why we believe these focuses will provide a base of several diversified growth engines for the future. However, I will begin by discussing the capital notes, the history and present status and then because this past month saw the one year anniversary of the Japan Nishiwaki facility acquisition and as next month is the four year anniversary of the Jazz merger, I’d like to review the activities and return on each of those.

So I’ll begin with the description of the notes. In 2006 and 2008 our two lending banks, Bank Hapoalim and Bank Leumi converted debt into a vehicle of capital notes and as part of this restructuring of the bank debt the Israel Corporation invested new money into the company. In all, the three capital note holders invested 550 million in cash and/or debt conversion and received capital notes convertible post-split into 27 million shares comprised of 14 million being held by the Israel corporation and 6 million being held by each of the banks representing $20.70 price per share underlying each capital note which is more than 2x of the current stock price.

For capital notes are solely an equity vehicle which each note being able to be converted into one share. There is no coupon associated with the notes nor any type of strike price. It is important to mention that under Israeli banking law, each bank has restricted to hold not more than 5% ordinary shares in a company of which it is a debt holder. Hence the banks cannot convert and hold more than 1.1 million shares underlying its notes. Bank Hapoalim and Bank Leumi asked the company to file a registration statement with the SEC in order to register 2.7 million and 3.0 million ordinary shares underlying capital notes respectively which would be issued if either or both banks wish to convert their capital notes or portion thereof into shares. The company fulfilled its obligation to the banks by following the registration statement and the shares underlying the notes were approved for registration by the SEC.

The company views the banks as knowledgeable and experienced stakeholders who have expressed no intention to immediately act on this registration in the market. The Israel Corporation has not requested that any portion of their notes be registered and as formally stated that it does not intend to sell or traded shares at the present time and as well has expressed its belief in the company’s strategy and growth plans.

The company continues discussions with the three noteholders towards potential solutions that will be positive to all shareholder but cannot commit to the timing or degree of participation or if there will be any participation at all.

So, now to refer to the first anniversary of the Japanese fab acquisition and the fourth anniversary of the Newport Beach Jazz merger. In June 2012, we celebrated the first anniversary of the acquisition of the Nishiwaki, Japan facility from Micron. For this facility, which included a three year binding revenue contract, we paid 40 million cash and 15 million stock. A full ROI of the cash and equity investment was achieved through the first nine months of Nishiwaki cash creation.

In addition to the nine months ROI, we own a facility that can produce 60,000 wafers per month with an asset value recently appraised by a third party expert at $160 million. Within this first year, we have generated from synergies consolidations and a head count resizing which is more in line with our foundry activities, a reduction in operational cost by approximately 30 million per annum. This should result in a steady state operational market increase of about 10 points against the previous baseline performance of this facility.

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