艾克爾 (AMKR) 2005 Q2 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to the Amkor second quarter 2005 earnings release conference call.

At this time all participants are in a listen only mode.

Following today's presentation instructions will be given for the question and answer session. [Operator Instructions] And as a reminder this conference is being recorded today, Wednesday, July 27th, 2005.

I would now turn the conference over to James Kim, Chairman, Amkor Technology.

Please go ahead.

Thank you.

Thank you for joining us today.

I am James Kim, Chairman and Chief Executive Officer.

Joining me today are John Boruch, President and Chief Operating Officer and Ken Joyce, Chief Financial Officer.

I will make some brief remarks, Ken will discuss our operations results and then John will offer some closing comments.

We saw strong revenue growth this quarter.

Driven by improving industry conditions, continued ramp up over our IBM business, the ongoing integration of [inaudible] technology and product portfolio and solid execution accommodating unforecasted upside.

We have built a platform for [inaudible] continued growth in the second half of this year and into 2006 and beyond.

We have the resources in place to accommodate this growth.

Our management team is focused on increasing the profitability of our business.

We believe that as the industry capacity[inaudible] continues to tighten in the second half of this year, pricing will become firm.

We see this as an opportunity to enhance our product mix, expand our margins and increase cash flow.

We're also committed to addressing our capital structure.

Ken Joyce will now review our financial results and outlook.

Thank you, Jim.

Before we discuss our financial results I would like to remind you that any forward-looking statements made during the course of this conference call represent the current view of management.

Today's press release was filed with the SEC on Form 8K prior to this conference call.

This release, together with our other SEC filings, contains information on risk factors that could cause actual results to differ materially from our current expectations.

Second quarter revenue was above our previously announced guidance range as a large number of customers experienced greater than expected demand as the quarter developed.

Business growth was fairly broad based with particular strength in wireless and computing applications.

Second quarter gross margin was impacted by higher manufacturing costs, including increased cost for materials, energy and labor.

We experienced higher factory wages, and in particular, increased use of overtime to service unforecasted customer demand.

During the quarter, gross margin in our Japan factory was impacted by a pricing renegotiation with our largest customer.

However, we expect consolidated gross margin to improve in the third and fourth quarters.

SG & A expenses also increased during the quarter.

Legal expenses were up over Q1 because of increased activity surrounding our previously announced settlement in the Molt(ph)[inaudible] compound litigation.

We expect legal costs to moderate in the second half of year.

Second quarter SG & A expenses also included a total of approximately $2 million in connection with a loss accrual for potential foreign business taxes and exit costs in connection with vacating our Westchester, Pennsylvania administrative offices.

As previously announced, we have now consolidated our financial and information technology operations in our Chandler, Arizona office.

In addition, SG & A expenses in our newer factories were higher as we continue to ramp these operations.

During the second quarter we recorded, in other expense, a non-cash impairment of $2.3 million on our remaining equity investment in [dungvu enung] semiconductors.

Second quarter capital additions of $115 million were focused on increasing our capabilities in wafer bumping, wafer level packaging, flip chip assembly, probe, test and very fine pitch bonding.

We took a hard look at the timing of our spend this quarter and were able to keep capital additions below our original forecast of $145 million.

We are targeting capital additions of 90 million for the third quarter of 2005 primarily to support program wins in these areas.

Quarter ending cash of 228 million reflects the payment of $45 million during Q2 for previously announced settlements with Fujitsu and Seagate related to the [mold compound] litigation.

Here is a recap of our third quarter 2005 guidance contained in our earnings release.

Revenues should be up between 8 and 10% sequentially.

Gross margins should be in the range of 15 to 16%.

We expect second quarter net loss in the range of $0.18 to $0.22 per share.

As our chairman stated, we remain committed to addressing our capital structure.

However, we cannot comment on the timing of any potential capital market activities or any specific financing instruments that may be contemplated.

Let me just say that we have been in consultation with our bankers and believe that we have the ability to access the capital markets.

We are evaluating alternatives and intend to remain flexible and pursue appropriate opportunities as they arise.

Now I will turn the call over to John Boruch for some additional comments.

Thanks Ken.

This was a very good quarter from a revenue perspective with solid execution across the board on new business initiatives and health in the modestly improving industry demand.

We are not particularly pleased with our margin performance even though we achieved a high end of our guidance.

Our margin improvement is being held back by increasing metal and oil prices as they impact our material, gold wire and energy costs.

Also the steady appreciation of most currencies relative to the dollar for the past several years has had a continual negative impact on margins by effectively raising material costs and labor rates.

Going forward, we expect our margins will benefit by higher utilization rates and higher revenues.

But to obtain our target margins at near full capacity we will need to execute plans that can lead to effective higher pricing.

With industry utilization rates forecasted to be at high levels for the remainder of this year, we expect prices to stabilize and even begin to increase.

Also since 2001, the industry along with Amkor has been giving away free services for a wider variety of costly and activities.

We see much evidence that our industry has changed policy and will begin charging for most of these services.

Also, with the high utilization rates, we will have opportunities to beneficially change our customer and product mix.

On new business opportunities we will be asking for prices that will return reasonable margins.

With all of these strategies, assuming business stays strong, we expect to steadily improve the pricing environment over the next several quarters and a corresponding positive impact to margins.

In closing, regarding our current business outlook for the remainder of 2005, we expect continued growth fueled by a variety of products with flip chip activity being the strongest.

Operator, we will now open this call to questions.

Thank you sir. [ Operator Instructions ] Our first question comes from John Pitzer from Credit Suisse First Boston.

Please go ahead.

Yes.

Afternoon guys.

Congratulations.

Quick question on the Q3 revenue guidance.

If you look at sort of the average Q3 growth you guys have seen coming off of a trough, it's been more closer to the mid teens level.

I'm just kind of curious on the 8% to 10%.

Is there some conservatism built into that?

Or is that the number you see because of the higher than expected Q2?

And then I have a follow-up please.

I think the guidance would have been higher if we hadn't had such a good Q2, John, so Q2 has impacted that.

And our backlog is very strong going into Q3.

We have a number of huge initiatives.

Some steep ramp ups in our new factories such as Unitive and Key Three factory in Taiwan on flip chip, wafer level csp and unichip North Carolina and a pretty big transfer activity from IBM Ireland to our Singapore factory.

So we've had to build some risk into these very, very fast expanding plans for Q3.

And then secondly for Ken, Ken can you remind us where breakeven is?

If I remember correctly I think last time it was about 530 million.

I'm just curious, given some of the constraints you're having on margin expansion whether we need to rethink that.

John that's a good question and I do you think we have to rethink it a little.

Given our current pricing and our current cost structure, breakeven is in the range of around 570 million.

But our objective is really to reduce that breakeven and by effectively raising our prices and reducing our cost.

So that's the goal for right now.

Great, thanks guys.

Our next question comes from Eric Gomberg with Thomas Weisel Partners.

Please go ahead.

Hi, could you discuss a couple of things on CapEx.

The timing of CapEx and equipment delivery versus your actual cash at the door, both how that plays in the second quarter and expectations for the third quarter?

And with the change in CapEx for 3Q, is there any difference in what you expect for the year as a whole?

Well, I think what you're referring to is capital additions versus cash payment.

Is that what you're asking?

Yes please.

Eric, in Q2 our capital additions were $115 million.

Our cash payments were $58 million.

In Q3 as we've indicated in our release, our addition should be around $90 million and the cash expenditures would be around $110 million based on current projections.

We're still looking at our CapEx additions for the total year in the range of around $300 million.

Okay, and based on the midpoint of guidance, where would you expect cash to be exiting the third quarter, assuming no funding?

With no funding I think we'll be around $100 million.

Okay.

Question on gross margin, you talked about this quite a bit already.

Sounds like you think as you get full you will have an opportunity to shift customers and be more selective and potentially raise pricing.

Just wondering; it seems at this point you are pretty full, 85% utilized.

With 90% I guess kind of being effectively full.

Is there anything else you can do structurally to improve the potential for more margin leverage?

Well on the margin side, yes there are a number of initiatives we have in place.

Number one, I think the changing of the mix effectively giving higher margin activity out of our assets, you need to get kind of close to capacity before you start making that happen.

So those activities are underway now.

The impact will be in future quarters, later this quarter, in Q3 and certainly into Q4 and beyond.

So it takes a while to get that in place.

What we're counting on there, though, is a strong industry recovery this year and through 2006.

So, at least a reasonably strong year if that happens we'll be able to effect this mix change.

And to start charging for all these services we give away free.

And then, in pricing our new activity at higher margins which is happening as we speak.

So all of that will affect our margins.

The other thing affecting our margins is we've had these severe ramp up preparations in our bumping operations in North Carolina and Taiwan and our flip chip operations in test and probe in Taiwan.

In our operations in Singapore, test operations there, all in preparation for steep ramp ups later this year and those have been drags on our P&L through the first half of this year.

They will be modulated somewhat in Q3 and certainly looking much better in the Q4 timeframe.

If I could just ask one last thing, I think in the past you've commented that full turnkey in bumping and flip chip carries on average a the lower gross average than the corporate average.

Just wondering if that's something that given tight capacity you might be able to get better margins than you think or as it comes on that also could, I guess, dampen the potential for margin expansion?

We think the pricing for our flip chip activity, bumping and packaging and testing etc. is in the good range.

Certainly above our average now.

What will impact that is whether we supply the material for the flip chip packages or not and that's all over the place right now.

Somewhat undetermined so the more material we supply the lower our margin potential will be, although the cash flow is improved.

So we'll let you guys know.

Right now it's a work in process.

Okay thank you.

[ OPERATOR INSTRUCTIONS ] Our next question comes from Bill Ong with American Technology Research.

Please go ahead sir.

Yes, a little more clarification on the breakeven point on the $570 million.

I assume that's a net breakeven point?

Do you have an operate breakeven point?

And maybe some guidance on below the line expenses like interest and tax rate?

Thanks.

Bill, the 570 million breakeven, which is an approximate, is full breakeven, which includes the interest, so it's a fully levered, if you will, breakeven point.

It assumes a gross margin in the area of around 20%.

Okay any color on taxes and interest just so I can get a sense between operating break-even and net --- qualitative level if you can?

Well the interest is about $160 million a year and that could actually decrease if we did some of the financing activity that we've talked about possibly.

So that would impact breakeven.

Does that answer the question, Bill?

Yes.

That's great.

Thank you.

Our next question comes from Jeff Harlib with Lehman brothers.

Hi, good afternoon.

Can you just --- what were the mix adjusted ASP declines in the quarter and what are you looking at in Q3 and then I guess a follow-up would be SG & A, going forward, I mean it picked up in Q1 and again in Q2.

How much of that is legal and how much do you think the legal will come down?

I'm just trying to get kind of a base rate on your --- for SG & A expense going forward.

Hi, this is John.

I will answer the first part and Ken will answer the SG & A part on the mix ASP etc.

We thought that in Q2 that the prices would stabilize.

They came down a little bit, roughly in the 2% range but overall ASP [per pin] kind of calculation for most of all of our products.

Much of that was created by legacy agreements that were made in 2004, second half of the year or late Q4 of last year.

So we have now looked at those agreements and we're dealing with them so that our forward pricing does not keep falling based on time or on volume.

We've got to stabilize our prices so that impacted our ASPs and I think we'll correct that as we go forward.

Other than that I think pricing in Q2, the prices that were given out by us and our competitors was basically stable to up in trend.

It went up during what quarter?

That's the prices we get out.

When those prices become effective and how they hit the P&L will be in future quarters.

Okay.

So that will be Q3 into Q4?

Yes.

On the SG & A, our legal expense -- outside legal expense in Q2 was $6 million versus 4 million in Q1.

On a historical basis prior to the [mold compound] litigation, we were running less than $1 million a quarter.

So that will give you some kind of an idea.

We believe we're coming to the end of that [mold compound] litigation.

Three of the five cases have been resolved.

Two remaining cases with Fairchild and Maxxam.

We're in negotiations with Fairchild right now.

In addition to that in the second quarter in some of our foreign jurisdictions, we took a loss accrual for $1.3 million for certain foreign business taxes.

That'll be a non-recurring type of expense.

We also had approximately $1 million in Q2 with respect to the closure of our Westchester, Pennsylvania administrative offices.

And then our new factories; as we ramped them up our SG & A there increased around $2 million.

So there are the principle increases.

Some of those, as you indicate Jeff, will start to decrease as we go forward.

And on SG & A, just a little more color on that, we expect SG & A to be flat to downward trending, slightly downward trending over the next several quarters.

Certainly will be down on a percent of revenue basis as we go full head to our revenue growth.

Okay, that's helpful.

And just one last thing: On cash flow for Q2, was there anything else but was unusual there?

Because it looks like you've used around 60 million in cash; 45 of that was the [mold compound] payment.

Were there any other [cash inflows] other than that it looks like your core operations only used modest cash, but if I look at interest and CapEx against EBITDA it's more negative.

No, we managed our cash very closely.

I think if you look at the other side of the balance sheet you'll see that vendor payables are up somewhat and that's in respect to -- we've extended payment on some of our capital additions.

Okay.

Okay, thanks very much.

Our next question comes from Timothy Arcuri with Smith Barney.

Please go ahead.

Hi, I have two questions.

If you look historically, you look at your gross margin whenever your capacity utilization was in the mid 80's, you're gross margins have historically been up in the mid 20's, and we're now about 1,000 basis points lower than that.

You're saying that the remedy here is that you're going to raise prices and that you're going to get lower material costs, but that's not been something that this industry has ever been able to do in the past, so I'm wondering is something structural necessary here?

Do you need to close facilities?

Do you need to actually downsize the Company itself?

I don't think that that's required.

Part of what we've done if you go back and look at our progress over the last two years, with our growth initiatives, we did expand our footprint both with the unit of acquisition, with the IBM alliance where we have new factories in Singapore, and we have to grow into those operations somewhat.

So when you say that you look at the numbers historically, our historical numbers are a little bit different than where we're at right now so the gross margin is being impacted not only by the mix of cost and pricing of our current business but also somewhat by the expansion that we have engendered here over the last year.

And we have to grow into that footprint.

Sure.

Tim, on the gross margin question -- again this is John -- number one it's not an Amkor problem.

It's an industry problem; we all have this problem.

We gave away so much ASP over the last four years since the 2001 downturn that we have not been able to recover any of it over these last four years.

I call that an anomaly because in previous[inaudible] cycles you gave away ASP you got it back in the upturn.

We didn't get it back this particular period for a number of reasons.

So, yes I think structurally all of us have to do some things going forward.

On the material cost side, the material costs want to go up, not down.

We did not promise anything on material costs going down.

In fact, they want to go up.

We're doing our best to keep them flat.

On closing, activity transferring, yes, we're going to do some of that.

It's hard to do at full capacity because you don't want to shut down capacity and upset customers as you transfer lines but long-term, we certainly have plans to take the commodity products out of our higher priced, higher cost Korea factories and put them into China and maybe some in the Philippines.

Going forward and things like that.

But I think we're going to need most of our factories to handle this upturn for the next two or three years so we don't have any particular factory close down plans.

We're going to grow into our footprint.

We're going to work on changing our mix.

We're going to work on getting paid for what we do.

We're going to work on getting some higher prices where possible from our customer base, and that's a very tricky slope to run down.

But all those things we'll have to do in concert with our competitors in order to repair this business model we have and get back to a normal level, which is the mid 20 kind of gross margin performance area.

Thanks, maybe just one more follow-up.

The breakeven, like I said, is up about 170 million over the last eight quarters.

Out of all the acquisitions you've made during that time to increase breakeven by $170 million; can you break out or do you have the information available as to how much revenue has been generated by those acquisitions that have increased the breakeven that much?

I don't have that right here.

Do you Ken?

We don't have that at our disposal right here on this call, and I don't think that is information that we would break out separately.

We don't break out revenue by geographic location or operation.

Okay, thanks guys.

Our next question comes from Mark Bachman with Pacific Crest Securities.

Please go ahead.

Hi, Ken.

Right off the bat here, I noticed your payables are up by about $100 million.

Can you tell me what's going on here?

Are you trying to conserve cash?

Absolutely we are.

Okay how long do you think you'll kind of extend this out so that your payables extend out here?

Well, it depends.

We're paying -- our terms are 45 and in some cases 60 days, so we've been meeting those terms and managing our cash very closely.

Okay.

And then John could you talk about the service business that you're talking about here.

Could you give us an idea of what types of services these are and in general terms what could be the effect on operating margin?

Maybe some guidance, not guidance --- but an idea here of what percentage of rev could these services actually account for?

There are just dozens and dozens or more of these services.

The primary ones are design, substrate design, package designs.

We've been more or less giving a lot of that away for free because competitors have, over the downturn, been using it as a selling point.

That door is being closed.

For modeling, which is very, very expensive and time-consuming, we've been giving most of that away.

That has to be billed for now and those are quite expensive efforts.

We have all the reliability tests.

We have retests.

We have hot and cold test.

We have a whole number of things.

We have fast lot track -- charges that kind of went away and need to come back.

We have small lot charges that kind of went away.

We have gold adders and other things that all went away.

So it goes on and on and on.

Those things, now I don't have the percentage online, but I know per year, these extraordinary things used to account for tens of millions of dollars for Amkor and that basically went to almost nothing here over the last five --- four years.

So I think we can count on tens of millions coming back in once we start charging for all these things, maybe a little bit more.

So it is significant.

Okay.

And then finally going back on what Tim was asking about, your investors are definitely interested on how well these acquisitions that you are doing, how profitable they can be.

Can you give us an update here on your relationship with IBM?

Is your 100 million --- 125 million kind of revenue target still valid and where are we after Q2?

I think you were about $20 million after Q1 if I remember right.

We are right on track with 100 plus kind of numbers for the year with IBM and IBM founding related activity.

They've been now shutting down their Ireland test facility and that's being transferred to our Singapore test facility as we speak with the major impact in Q4.

So that will really help us return that factory to profitability.

It never was profitable when we got it so it will start producing profits as we exit this year. [Inaudible] So that's all good.

So IBM is going very well.

In fact it's going better than we thought.

We have a number of new initiatives we haven't talked about that are very promising.

We'll see how they play out.

The game business that IBM is supporting, both in the Playstation 3 and the Xbox and potentially Nintendo are all areas where Amkor could play a specific role later this year and certainly in 2006 and 2007.

We've got a head start on maybe a number of our competitors[ Inaudible ] on seeing (ph) what the silicon looks like and the designs look like, etc.

So, we're very pleased, and we think the IBM relationship will be better than most of us thought as we go through the next two or three years.

Excellent, thank you.

Our next question comes from Nadeem Janmohamed with Lehman Brothers.

Please go ahead.

Thank you very much.

With respect to sales in Q2 I was just wondering if you could give us a sense of what the contribution was from IBM and I have a couple of follow ups.

Thank you.

I think on track for the 100 million or so for the year.

It's kind of, we have a big rush of activity in Q1 and in Q2 to get this stuff transferred out of our competitors’ factories into ours.

That's been done.

The second half of the year is the foundry business is coming on very, very strong in the mid to later on Q3 and certainly in Q4.

I don't have all those numbers in my mind.

But because of the impact of the foundry business, potentially is to do more in the second half of the year than the first half of the year.

Okay and I guess with respect to pricing, I just want to get a sense as to whether that's already reflected in your 13 week backlog or is that something we will begin to see in the fourth quarter?

The pricing thing, it's a thousand steps.

It's a whole bunch of activity.

We're not going to do anything totally drastic, like across the board price increases.

Those don't work in our industry.

It's a customer by customer, line by line, product by product, service by service effort.

It takes a while to do so we think the impact will be slow and steady as we go through the next three quarters.

Okay, thank you.

Our next question comes from Murali Abburi JP Morgan.

Please go ahead.

Thanks for taking my call.

A couple of questions: the pricing renegotiations that you talked about in Japan, with your largest customer there, that impacted your gross margins, that's going to impact your margins on an ongoing basis not just for Q2, right?

Yes temporarily it has more than the future quarters.

What we need to do is reduce our head count because of lower activity in that factory.

As you know in Japan that's difficult to do and we are working on ways of doing that right now.

And I think we'll be successful but not sure whether it'll be third quarter.

Most likely before the end of the year.

It takes a while to do that.

And then we have some interesting new business that we've partially funded in that factory that could really help the gross margins as we go out of this year into 2006.

So we think we certainly -- it will get back to what it used to be, and we're hopeful that going forward in 2006 it will get a little higher than our normal gross margins.

All right.

And then you talked about the dollar [inaudible] hitting your gross margin line.

Just curious as to what percent of [ inaudible ] your costs (inaudible) in dollars versus revenue?

Dollar depreciation (ph)?

It's impossible almost to ascertain that.

It's a steady increase in gold wire cost which we have been unable to pass along to our customers.

It's a steady increase -- we pay our wages in foreign currencies and we bill in dollars.

You can imagine the impact there.

Taiwan and Korea have gone up 35% over two years here --- two and half years.

So that's all right down to our costs.

Nothing we can do about it.

We bill in dollars and we collect and pay in wan.

Same with yen in Korea and [inaudible] same with Taiwan NTs etc.

So those things all work against you.

We haven't quantified them all but it's very big numbers obviously.

It’s an interesting margin percentage point.

And then on the other side, where we're buying material in areas like Japan and Korea, where the currencies are going up dramatically and those customers pay -- their costs are in [inaudible] currency -- we're buying it with dollars often, okay.

So again, that pressure is pretty strong to increase prices.

All right, just one last question on my front.

If you look at your first half CapEx what percentage of that was in test versus packaging?

I guess on the test side, almost half.

Almost half?

Okay because I’m curious for the last few quarters here your test portion of your revenues has still been running in the 9 to 10% range, not much increase.

Do you expect that to still be in that range or given your CapEx estimates that would go [inaudible] up in the out quarters.

We think it will slowly climb especially as we bring in our flip chip activity and do probing and testing for this activity.

And then our Singapore test activity grows, that it'll start getting up in the teens as we exit this year or early next year.

All right, thanks guys.

Our next question comes from Andrew Biggs with Susquehanna International.

Please go ahead.

Thank you, good afternoon.

What was flip chip as a percentage of revenues in Q2, and what's your expectation for Q3?

In Q2 it was around 8% of revenue.

How about in Q3.

It'll probably be slightly higher than that.

What's your current flip chip capacity?

Eight inch and twelve inch.

Our capacity --

Per month.

If you're talking about the bumping lines in Taiwan, twelve inches around 16 to 18,000 wafers per month.

I forget the eight inch off hand.

We haven't changed that.

Okay and one last question.

You obviously mentioned your goal to shift your capital structure over time.

Do you have a specific goal in mind say in terms of debt to total capital?

Like some benchmark the end of 2006 that you'd like to achieve?

I think we'd like to get our total debt down to around $1 billion.

Okay, and then if I could just ask one more question could you give us an update on substrate pricing?

And expected trends in the second half of this year and what you're seeing in terms of supply and how that's changing right now?

We saw the whole supply chain and the price tighten up when ASE had their Chungli fire earlier in Q2.

That influenced some of the vendors to raise some prices modestly.

We didn't see a big impact on those price increases, very modest.

But we feel strongly that the substrate vendors as their supply tightens up will do the same thing we're doing and try to change their mix to be higher profit customer in product mixes and do some price raising.

And we expect that to come in the second half of the year.

Amkor is – going to be prepared to pass those along to our customers.

I think our customers will understand.

Okay great.

Thanks a lot guys.

And our next question comes from Eric Rubel with [inaudible].

Please go ahead.

Hi.

Good afternoon.

Another question on the gross margin, gentleman.

I calculate the drop through for the quarter at around 32%.

Is there a significant change in the model that’s happened as a result of the switch to flip chip that will affect the drop through in a significant way going forward?

It possibly could in the future but in the near term it won't have a significant impact.

Your 32% incremental gross margin is right in-line.

And then a couple of other questions.

The balance sheet, short-term payables going up -- I'm sorry short-term maturities went up, is that all due to the 575 number going current?

Apart(ph) from everything else going on.

You're exactly right.

It's the 233 million of '06 converts that are reclassified from long-term to current.

And then one last question you mentioned a write-down to the [don blue] equity investment.

In the past how many shares do you still own and do you expect that that could be a source of cash in this fiscal year?

We owned 4.6 million shares -- would it be cash this year?

The last time we sold them, if you recall, we sold a large block of shares for $22 million actually in the second quarter of last year.

We sold those at around $5 a share.

That would be kind of an indicated value of what we would like to exit with.

Right now they're trading around $2.24 per share.

Okay, great, thank you.

Our next question comes from Peter Kim with Deutsche Bank.

Please go ahead.

Hi thanks for taking my questions.

I hate to beat a dead horse but your breakeven numbers, you specify this being gross margin of 20%, is that a reasonable gross margin? [inaudible] Is that something that you think you can achieve at $570 million per quarter?

I absolutely do.

It depends on -- as you know there are a number of assumptions in breakeven analysis and clearly one of them for us that is critical is the mix and the pricing.

And the contribution margin that is associated -- we have a very diversified product line.

Depending on what the mix is in any one quarter and what the contribution margin is within that quarter, yes, 20 is an achievable margin percentage.

You can possibly hit 570 by Q4.

That's correct.

So you think that's a reasonable estimate?

Well, we're not saying anything about Q4 [ INAUDIBLE ]even and we should be able to do 570 in that Q4 provided the business keeps growing.

If I could just get more question in.

Regarding your maximum run rate, you talked about your 85% utilization.

I don't know exactly how to read that but in terms of dollars, what is your maximum current capacity and what do you expect your capacity to be by year end?

That's probably a better way to look at it utilization rates are very, very difficult to talk about.

Because you talk about tests and assembly a whole host of other things, so.

So in terms of maximum revenue capacity?

We have about $2.4 billion that we've already approved that's coming on this year kind of in existing (ph) capacity.

That's the number I have in my mind in place.

2.4 billion a year.

$600 million a quarter.

An achievable rate.

It's a very, very good mix, and it's a very high utilization rate.

But, it's a achievable.

Excuse me.

Okay great, thank you.

Our next question comes from Eric Mildred with the Banc of America Securities.

Please go ahead.

Hi you guys have talked about getting paid for the services and raising prices, but I thought you had said that your largest customer in Japan had renegotiated you guys down.

How do those things reconcile?

Well, you renegotiate in downturns and you raise prices in upturns.

We're just entering what we consider an upturn, so.

The worm will turn eventually.

That's all I can say about that.

It's all timing.

Whenever your factories are threatened to become empty you've got to do something with pricing if that's the critical issue.

Therefore we did it.

It's the right business decision.

Obviously when your factories start filling up you've got to start giving some pricing leverage back and we take action like that, that's sellable to our customers and that's the intention of Amkor going forward.

So that's how I can answer your question, it's all timing [inaudible]and troughs and peaks.

And just two others.

There's no way to reconcile the increase in materials as well as energy and over time, how much that might have cost you in the margin?

No, we haven't drilled down to exactly what that means to us.

Okay and then just lastly, the question came up about the balance sheet and by the end of '06 and, Ken, I think you said you'd like to get down to $1 billion in debt; that's a long way away from where we are today.

How do you propose getting there?

I think, Eric, that that was in response to an optimal capital structure question that the gentleman asked.

I think that's what he had asked me what would be the optimal.

And that's what I responded to.

Obviously we don't have an exact plan.

We're looking at different alternatives.

I'm not saying that we're going to be down to 1 billion by the end of 2006.

And you did say about a 100 million of cash at the end of the third quarter and since that’s the minimum level of comfortability for you guys to run, I assume you expect to be free cash flow positive in the fourth quarter?

It depends on where the CapEx and the working capital comes out.

So we could possibly dip below 100 million in the fourth quarter?

Absolutely, yes, unless once again that's predicated upon no additional financing.

That 100 million also does not consider drawing down on the $30 million revolving line of credit that we have available.

Thank you very much.

Our next question comes from [inaudible] with Citigroup.

Please go ahead.

Hi, I just want to try to figure out what the tone of the market is.

Can you give us an update on -- I guess you kind of phrased it like orders versus take rates, and how that differential has been trending at least in the last quarter?

All of our data is very indicative of the semi industry going forward and very predictive in what our data has been predicting has been for the last quarter or so.

A couple quarters is that the semi industry is in a rebound phase and it will be growing here for a least the rest of this year. [Inaudible] The die(ph) starts versus the forecasts are quite strong, quite high so it’s a very narrow range there --- this indicates the continued strength in semi-conductor customers[inaudible].

All kinds of new opportunities, new projects, we basically we have more than we can put our hands around right now in most areas.

There are a few areas that need to be sold out yet but they're the older products but lots of opportunities out there.

What we see is a pretty robust market.

Related to that, you get six months rolling forecast all the time and let's just say that the second quarter was obviously sounds like better than expected.

So have those – what’s called the sort of gross six month forecast sort of adjusted down appropriately with that or is the six month forecast actually building in aggregate?

We think this time of year, normally the weak months start rolling into six month forecast which is January --- a little bit of December and January and February, which are the weakest booking months and billing months.

Structurally there are less billing days so the backlog is decreased accordingly.

Even with those rolling, the six month forecast number is still going up.

The last thing attached to all of that; is it with, kind of, it's call additional new programs or sort of flexing existing programs and folks are just upsizing it?

I think for Amkor, a good majority of our backlog and our growth so far is on very specific wins with very specific customers and large programs that are coming on board.

We've seen some help from the general market but I wouldn't call that help from a general market robust yet.

It's increasing but at a modest rate, so for us it's a very specialized and very targeted kind of wins on major programs.

And most of the stuff we went after in the last six months, our team, which is really performing well, has got big hits.

Great, thank you.

Our next question comes from [Matt Mateptic] Emporia Advisors.

Please go ahead.

Hi just two quick questions.

The first, just wanted to confirm the 45 million or so on the [epoxy mold] litigation.

Those payments were actually made in the quarter?

That's correct, they we're made into Q2.

So are there any accrued payments that will be paid in Q3?

We have a loss contingency set up of an additional $5 million.

Okay.

And then on the other side of the 5 million, does that wrap up the [epoxy mold] issue or are there other potential suits that you think could surface?

I do not think anything new will surface at this point in time.

And we have the two remaining cases, one with their Fairchild and one with Maxxem that we talked about.

Right, okay and then lastly on the strong revenue growth in the quarter, how much of that do you think was pulled forward from Q3?

None.

Great.

Okay.

Thanks a lot.

Our next question comes from Todd Diffely with Merrill Lynch.

Please go ahead.

Yes.

Good afternoon.

Could you please talk about the depreciation trends over the next couple of quarters?

I was a little surprised they it stayed flat at 61 this quarter.

As you know we are retiring some assets as we're bringing new assets on.

But think if you look back last year, it was probably in the high 50 range so it's come up a little bit.

It could go up into, as we go out in Q3 and 4, but not significantly.

Okay.

And then the capital spending plan for the year is still in the 250 to 300 range?

300 million is the range we're looking at.

300?

All right, thank you.

Our next question comes from Avi Bennis with JP Morgan.

Please go ahead.

Thank you.

Free cash flow this quarter was better than we were expecting and it looks like a lot of it was from this working capital shift and the payables that you talked about.

Yet next quarter looks a little worse than we would have anticipated.

Do you see a reverse in that trend from -- on the working capital?

Yes, you will see that reversed somewhat in the third quarter.

Okay, so basically most of the shift that we're seeing is you're not --- you're pushing payables out from --- 60 days to 90 days just got pushed from one quarter to the next?

We didn't say we announced the 90 days, I think we said 45 to 60 days.

There is a little bit of an extension there, yes.

Thank you.

Our next question comes from Krishna Rangarajan with CRT Capital.

Please go ahead.

Thank you, my question is with respect to your cash guidance at the end of Q3.

You mentioned 3Q cash balance would be 100 million, that could be about 130 cash burn net of 110 in use of cash from capital expenditures [inaudible] you get about 20 million in operating cash burn [ inaudible ].

It's a little bit surprising that despite higher revenue, higher gross margin guidance, your operating cash born in Q3 is going to be greater than that in Q2, which was $11 million.

Could you reconcile that for me please?

There's a lot in what you said there, but basically, as I say we're indicating that we're going to pay out about 110 million in CapEx, even though we're saying that our capital additions will be 90.

Because will be paying some of the CapEx that was extended out in Q2 will be paid in Q3.

So, once you see that, you'll also see probably a little negative change in the working capital there.

And, I think if you tweak your model on those two regards, I think you'll see the answer.

Secondly, with respect to your debt balance, at what point Ken as a CFO you would say that we have deliberated considerably enough regarding [ inaudible ] the cash.

Is that three months before the '06 has come due?

Is it six months before?

Where would you draw the line?

We've been actually -- we wouldn't wait 3 to 6 months.

As I kind of indicated in our conference call remarks, we've given this a lot of serious consideration.

We've been talking for months actually with our bankers to come up with what is it the right structure.

What is the right form of instrument?

What is the timing of the deal?

We're evaluating those alternatives and we want to remain flexible.

And we will pursue the appropriate opportunity, but I can tell you we aren't waiting for three months.

We've been working on this long and hard for a couple of months now.

All right, thanks.

Our next question comes from Andrew Rue with OTA Asset Management.

Please go ahead.

Thanks for taking my question.

Quick question.

The U.S. dollar has strengthened a little bit versus other currencies.

I know it's only four weeks into the quarter but if it stayed at this level is it the kind of thing that's coincidence in its effect on gross margin.

So, would it help you or does that not matter?

Well, if it stayed and got a little stronger, that would be good for us in that it would be effectively cost --- a wage reduction in our offshore factories because we bill in dollars and we pay in foreign currency.

So that would be good if the dollar appreciated.

Okay and then your gross margin guidance, do you contemplate any of that?

We did not.

Because we do not know where it's going to go.

It's hard to predict.

You gave an indication --a vague indication on Q4 revenue that it would be up anyway.

Gross margin in Q4, do you have any initial expectations for that?

No, it's too early yet.

We'll see what all of our initiatives result in as we go through Q3.

But we do have the operating leverage and we would expect improvement if the right mix is there and the sales go up those margins should improve also.

And then my final question is there is another company that reported today in the U.S. had indicated that July even though it was early in the quarter had been strong.

Are you seeing that?

Or is it kind of a continuation of what you saw in June even though it's only four weeks.

July is better than June.

Okay, thank you.

Our next question comes from Jesse Pichel with Piper Jaffray.

Please go ahead.

Good afternoon, John and Ken.

Can you hear me?

Would I be it correct to assume that most of your growth in Q2 was from the fabless customers?

And if that's true, when did the IBM's start to fill up and get outsourcing?

And I have a follow-up question.

I think it was pretty even mix on Q2, fabless versus IBMs because of the nature of the programs we went after and are winning.

So it's a good mix between the two.

I think going forward somewhere in Q3 around here -- the IDMs are filling up and they're going to come after a lot of capacity in our industry and it's not there.

So, I don't know where they're going to get it.

There's no [inaudible] about commodity kind of stuff, analog and digital stuff has been lagging the general increase that's been lagging when that was in overspill from the IDM as it normally does during upturns.

We've normally found a home for it in our industry.

I don't think it's going to happen this time.

So, I'm not quite sure what they're going to do.

Ken, are you baking in a price increase in to your cash burn and cash balance assumptions there for Q3?

We have not at this point in time, no.

And John, just to build on what you were saying before, you see a lot more cycles than anyone else.

And it's not a rub, but [laughter].

What makes you think there that this is really end market growth and not just putting some inventory in place ahead of the seasonal uptick?

Do you think this is a sustainable growth?

There's a seasonal uptick here, but if you play in the right areas, if your playing in the leading edge graphics in CPU for the gaming business, if you're playing strong with the PC in Intel's of the world, who are growing nicely.

If you're playing well with Qualcomm and CDMA.

If your playing well with Nokia and the high end phones, etc, then you're going to see a lot of opportunities, so this year next year and beyond.

If you're not, you're not going to see a lot of opportunities.

If you have a strong flip chip technology and production base, I think we do and getting stronger then the market is moving in that direction.

If you have a strong wafer [inaudible] CSP position in technology, I think we do, that will grow well.

So those areas that will grow independent of the general market.

Basically though were still calling on a general market revival because 2005 was basically a stall or downturn year depending on who you're listening to.

And that's a correction year for the semi industry.

And normally, I'm saying almost always, we will see a couple of three years of growth after that kind of correction or stall and 2006 will be the first year after the stall.

So we're calling for a pretty good 2006 and 2007.

How good, who knows?

You know, but I think there's growth there.

Thanks very much for that color.

That’s helpful.

Today's conference was scheduled to last for one hour.

At this point we have time to take two more questions.

Our next question comes from David Nelson from Four Points Capital.

Please go ahead.

Thank you very much.

Quick question I guess on the acquisition side.

Just to kind of dot some i's. [Inaudible] You guys made some acquisitions obviously Unitive and the IBM.

In some of your language you've also said you have some earnout payments as well as the potential to use your option to purchase some stock at the end of the year in '05.

Are you guys planning on doing like a 50 some million dollar; that's what I estimate at least, you guys could have to payout or could payout.

Would you or are you seeing that this year?

No.

What we do have is in the third quarter on the Unitive acquisition in the U.S.

Unitive, North Carolina.

We have a second and final installment payment due that's about $16 million in Q3.

And in Q4 to buy out the remaining 40% --- we acquired 60% of the unit of Taiwan's operations.

To acquire the remaining 40% we anticipate making a payment of $18 million in Q4.

Is that reserved for currently or is that just going to come out of cash balances then?

No that's fully set up and reserved for.

Okay.

Second and final question is I read recently I guess Intel has been adding some Far East testing facilities and things like that.

Is that anything that's competing or given the fact I know you do work for them as well.

Is that something you feel might eventually take work away from you all or not?

No.

I think because Intel's microprocessor business has been so strong that's an area that they will support 150% all the time.

It's actually, that activity's actually displacing some of their chip --- older chip sets and communication business that they are quitting internally.

So, and the communication business seems to be growing also.

So we don't play the mega processors; we play the auto with Intel and Intel business has been quite good and looking quite promising.

So we don't consider those a threat.

We just think that's just an ongoing expansion of Intel still ruling the world in their areas.

Okay.

Thank you very much.

And our next question comes from [inaudible].

Please go ahead.

Hi, can you explain a little bit more in terms of --- I know you had some restrictions in terms of timing, but the question was asked you generally don't feel comfortable operating in $100 million of cash.

It seems like with the timing of it being achieved somewhere in the third quarter is it safe to assume something will be done by then?

I don't really think we can comment on that.

I can now tell you that we are working with our bankers; we're look at our alternatives.

Before year end we're hoping that we'll be able to do something in the capital markets.

Okay, we're going to wind it up.

We appreciate everybody being on the call with all of your questions.

We're looking forward to a good quarter in Q3.

Thank you.

That does conclude the Amkor second quarter 2005 earnings release.

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Thank you again for your participation in today's conference, and you may now disconnect.