艾克爾 (AMKR) 2006 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Amkor Technology second-quarter earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded Wednesday, July 26, 2006.

I would now like to turn the conference over to James Kim, Chairman and Chief Executive Officer.

Please go ahead, sir.

Good afternoon.

This is James Kim, Chairman and Chief Executive Officer of Amkor Technology.

With me today is Ken Joyce, Chief Financial Officer.

Before we begin this call, I would like to remind you that any forward-looking statement made during the course of this conference call represents current view of management.

Prior to this conference call, our second-quarter earnings release was filed with the SEC on Form 8-K.

The earnings release together with our other SEC filings contain information on risk factors that could cause actual results to differ materially from our current expectations.

Our second quarter sales were record for Amkor.

Our performance is reflecting increased unit volumes, increased improvement in our product mix, and progress in our strategic growth area including turn key FlipChip processing, 3-D packaging, and Test.

We remain focused on carefully managing capital expenditures, improving operational effectiveness, and generating free cash flow.

During the second quarter, we completed a series of financial -- financing transactions to address our near-term debt maturities and reduce ongoing interest expense.

These actions have significantly improved our liquidity.

We have outlined these steps in our press release and Ken will review them a little later on.

Our goal is to generate free cash flow sufficient to repay our debt obligations as they mature through 2010.

Our strategic alliance with IBM continue to develop very well.

Amkor is benefiting from IBM success as a leading foundry and as a provider for wafers for new gaming platforms.

We expect this relationship will continue to grow through the year.

We have started to equip our new wafer bumping facility in Singapore and later this year we expect to provide turn-key wafer bump and probe services.

We have also commenced first phase buildout of our new assembly and test factory in Shanghai.

We have accomplished a great deal over the past 15 months.

We have refocused our operating strategy with an emphasis on financial discipline and we believe that is working.

It is the first quarter of 2005 we have achieved a substantial improvement in operating income.

In the past three quarters, we have generated nearly $100 million in free cash flow and have used all of this cash flow to retire debt.

Following the 2004 industry down cycle we experienced an extended period of unusually strong year-over-year growth.

Looking ahead, we expect a more stable business environment.

We believe that during flow of flat to modest growth or for that matter even a slight revenue decrease.

Amkor will be able to enhance our cash flow restraining capital expenditures and by focusing on productivity improvements.

We have a clear focus on enhancing our operational effectiveness containing capital expenditures, building cash flow and reducing debt.

We are fully committed to maintaining financial discipline and we are not going to chase market share at the expense of undermining our business model.

As noted in our earnings release Amkor's Board of Directors has formed a special committee to undertake a voluntary review of company's historical stock option practices.

The committee will be assisted by independent counsel and we do not intend to answer any questions regarding this review until it has been completed.

Ken Joyce will review our first-quarter operating performance.

Ken?

Thank you, Jim.

Our EPS guidance for the second quarter was $0.24 to $0.28 per share.

We reported U.S.

GAAP earnings of $0.13 per share.

We also incurred charges equivalent to $0.14 per share in connection with our refinancing transactions and $0.02 per share from an impairment in our equity investment in Dungboo Anam Semiconductor.

These charges were not contemplated in our Q2 guidance.

Q2 was a record for Amkor.

With 687 million in sales and 2.2 billion units shipped.

While units were up around 2%, sales rose 6% as we continued to enrich our product mix.

We had nice growth in FlipChip, 3-D packaging and Test.

We achieved second-quarter gross margin of 25%, up from 24% in the first quarter.

Second-quarter gross margin was somewhat constrained by approximately $8 million in higher costs principally due to increased labor cost and performance incentives across our factory base.

Less costs associated with the buildout of our new wafer bump and test operation in Singapore and our new assembly and test factory in Shanghai.

We are now incurring higher depreciation expense, labor, and other costs associated with the buildout of our new wafer bumping and test operations in Singapore and our new assembly and test factory in Shanghai.

These costs will pressure margin, gross margin, until we build a critical mass of revenue in these new factories.

We plan to commence production in both of these facilities during the second half of this year.

During the first six months of 2006, SG&A expenses declined by $8 million compared with the same period in 2005, reflecting Amkor's focus on cost reduction initiatives.

This reduction in expenses would have been greater.

However, during the second quarter we commenced our worldwide ERP implementation and we established an accrual for employee incentive and performance bonuses in recognition of both our improved operating performance and the fact that such bonuses have not been awarded for the past three years.

We plan to limit our full-year capital additions to $300 million.

This amount incorporates 50 million for facilities, including our new assembly and test factory in Shanghai, and our new wafer bumping facility in Singapore.

It also includes capital additions supported by long-term supply agreements with customers.

We will continue to monitor business conditions and will adjust this estimate if necessary.

During the quarter, we took several steps to strengthen our financial liquidity.

We issued 400 million of 9.25% senior notes due 2016 and used the proceeds, the net proceeds to repurchase 352 million of our 9.25% senior notes due 2008.

In addition, we issued 190 million in 2.5% convertible senior subordinated notes due 2011.

And used the net proceeds to redeem 178 million or -- of our 200 million and 10.5% senior subnotes due 2009.

The corresponding interest reduction -- interest expense savings on the 178 million represents accumulative interest savings of around $40 million had the notes been held through May 2009.

We also made progress in reducing our debt by using available cash to retire 132 million in 5.75% convertible subordinated notes at maturity on June 1, 2006.

As noted earlier, based on current forecasts, we believe we will have sufficient cash resources available to retire the remaining 142 million of 5% convertible notes due March 2007.

Here is a recap of our third-quarter 2006 guidance contained in our earnings release.

Sales should be flat to up 2% from the second quarter 2006.

Gross margin should be in the range of 24 to 25%.

Third net income per share should be in the range of $0.23 to $0.27 per share.

We will now open this call to questions.

Operator?

[OPERATOR INSTRUCTIONS] Our first question comes from John Pitzer with Credit Suisse.

Please go ahead.

Hi.

It's actually Brian Chin for John Pitzer.

Just a couple questions.

In terms of the volume outside the material -- the material lives in the June quarter, just help us understand a little bit better about the composition of those revenues?

Did they occur kind of midway or did it happen later in the quarter?

Was it unforecasted business?

Perhaps a pull-in from 3Q or can you even clarify what particular end market maybe accounts for most of that strength?

I think it was spread evenly through the quarter, in fact, not necessarily it came in June.

May was the strongest month of the quarter, Brian.

And there's no -- I think still the the orders in the cellphone area were still strong.

Okay.

In terms of the gross margin sort of a little bit below the low end there in terms -- along with the revenues being above the high end, what element -- was it -- was there some element of the mix there that caused that dynamic?

I know you referenced maybe some increased labor costs as well.

No.

It really wasn't a mix issue.

It was that we were bringing on some additional costs during the quarter.

As we said we were starting to ramp up our new operations, our wafer bump facility in Singapore.

We were also ramping up our operations in the Shanghai facility.

And we did have some additional labor costs in there also.

Originally we are going to start at third of the quarter by the way, but we accelerate a little bit in the middle of the quarter that's why we start charging it.

That was a decision based on our customers' demand.

Our next question comes from Timothy Arcuri with Citigroup.

Please go ahead.

Hi.

A couple things.

Number one, Ken, can you give us an update as to what the operating break even is and how the model will scale during the downturn?

And then I have a -- and then I have a follow-up.

We have been in the process mode so we haven't done a lot of focus on the break even, but in view of what our cost structure is, it would be something in the range of 450 million per quarter assuming a gross margin around 20%.

Okay.

And then, if you look at your revenue and if you compare it to year-over-year IC units, the last seven years, it's tracked pretty closely, every single up and down has tracked IC units pretty well.

Now we have year-over-year IC units declining and yet you're still reporting revenue that's pretty good.

And I'm wondering, what's changed this time around?

Is it your game exposure?

What's different today versus the last seven years?

By the way, I haven't seen your report so I -- this is Jim.

I'm really trying to understand myself the question, you know.

As you know, third -- second quarter already unit increased actually.

Right.

And maybe you are right, we are reaching inflection point and as I stated, year-over-year basis probably we are becoming flat.

Or maybe you are right, maybe go down.

But we haven't seen that.

Even third quarter as I announced -- we stated, we expect to have some flat to 2% increase.

So again, I'm trying to understand myself your presentation.

So you -- maybe you can help us.

On another point, Tim.

Our units were up 2% for the quarter, our sales were up 6%.

So you're actually right that we do have an enrichment of the mix going on and we have done very well in the FlipChip area and the wafer level processing and some of the -- so there is a little bit of change going on in our model.

Our next question comes from Jeff Harlib with Lehman Brothers.

Please go ahead.

Hi.

Good afternoon.

I was wondering if you could talk a little bit more about the business environment, the industry was very tight now it appears growth is slowing.

Can you talk a little bit about the pricing and -- in the market and also whether your customers are starting to invest more in packaging or not?

I'll answer first your last question.

I don't believe so.

I don't think our customers are necessarily investing.

As far as the pricing environment, business environment's concerned, we have not seen any price erosions.

We are still able to pass through the add-ons such as material increased costs and so on.

So it has been rather unusual, again, I have to go back to supply and demand issue.

I think the capacity's time because of our past experiences, I -- everybody's cautious about expansion.

And they are all going through new package area and so on.

Maybe that's helping us maintain supply and demand side.

I think that's why as I say, I believe -- when I say softness, simply we are not able to grow at the pace that we are growing year-over-year in the past.

Not 40% a year, you cannot grow every year -- every quarter like that.

On the other hand, we reach this in our level of $685 million level quarter, which is fairly -- that's the highest level we have ever reached and if we can maintain that level, which is pretty good.

And so the quarter appears to be, as I say, flat to 2% up.

It all depends really on the whole economy, I believe.

Our business is now more and more depends on not just the U.S.

As I keep saying around the world.

Therefore U.S. economy may go down like everybody says second half to 2% level, whatever, economists are saying, but if -- or the economy can stay a little higher than that I think there may be surprise growth.

Again, I really -- I cannot answer that question to you other than softness has -- we have to define the softness.

Softness means it's growth rate is slowing down, absolutely I agree.

But the level of -- activity is concerned, I don't see any slowdown at all.

Okay.

And just follow-up.

Ken, on the SG&A side, do you see -- do you see the absolute level building from where it is to fund some of these other expenses?

I think it's going to be flat to down slightly.

Okay.

Thank you.

Our next question comes from Andrew Biggs with Susquehanna International Group.

Please go ahead with your question.

Thanks, guys.

Wanted to follow-up on your comments about gross margin and if you look at the numbers it is about $9 million below where I thought it would be.

Obviously 1 million is depreciation and the rest it sounds like is labor.

So I'm wondering if you could reconcile what seems like a bit of a paradox you're investing in human capital for revenue growth in the back half of the year and into '07 but you've also stated a willingness to walk away from business if the pricing's not right if you're not getting the right kind of ASP for it.

So how do you reconcile a situation in which there's pricing pressure in the back half of the year, but you still need to increase your revenue base to justify the additional personnel?

By the way.

It's not additional personnel.

I -- you know what to us in the very -- remember we have various locations.

Some locations we have labor contracts and so on which says if there is output increases or certain metrics, and you have to issue some bonus and so on.

Unfortunately, we missed some of those.

And we going to be more careful in the future.

So we haven't increased any census I don't believe.

Very, very small.

Very small, really.

So I think it is more overlooking of the cost on our part.

I think maybe another way of rephrasing your question, if we could, is -- I really don't think we're at the maximum operating leverage.

We continue to work on improving our asset productivity and achieving cost reduction targets.

We will have to absorb some additional costs associated with the ramp of our new factories in China and Singapore, but once these costs are absorbed we should be able to further enhance our operating leverage.

Really, once the revenue gets generated out of our Singapore and China factory, which we think we going to start generating revenue in the fourth quarter, we start improving.

I really think unless again softness generates our ASP to come down or something, the way I look at it, we probably able to maintain or improve over the time.

Okay.

And then just one follow-up to that.

Is there kind of a drop-through level on the gross margin that you could guide to or you feel comfortable with given the current state of employee compensation, et cetera, if you're able to continue to grow your revenues?

The incremental gross margin is -- should be in the range of around 40%.

Now, that being said, we are slowly expanding our manufacturing capacity in China and we have successfully migrated some of our production lines into China from our higher cost locations.

So -- and this process will continue and -- we're looking at always ways to bring that cost down.

Our next question comes from Tom Diffely with Merrill Lynch.

Please go ahead.

Good afternoon.

A quick question on the capital spending plan.

It sounds like you have 100 million left for the balance of the year.

What do you expect as far as linearity in the third and fourth quarter and what do you expect to spend it on?

Is it going to be test, wire bonders, facilities, bumping?

Well, again, if we project our future -- the way we said about Q3 and what we think of the Q4, probably we will end up spending less than hundred million.

I mean based on what we know.

But going to detail is very difficult.

But we do know we have some special projects where we may have to spend some money for Test and I know some in the FlipChip area again, front-end side.

Yes.

But other than that, really basically -- and again IT area.

Infrastructure kind of thing.

So overall I really think second -- I cannot give you like what the third quarter is going to be and fourth quarter.

I rather give you like total amount would be definitely less than 100 million.

Okay.

And then going back to the margins.

The margin outlook for 24 to 25% down a little bit looks like sequentially.

Is that also driven by increasing depreciation, or is it going to be a mix or pricing issue?

No.

This is more to do with the S3 in China, in Shanghai where we are spending.

We are investing and by accounting rules we have to start taking charges now rather than later.

Normally in the old days probably wait until fourth quarter then revenue start coming in so you can balance it.

But we have to start by the new -- the auditors under the new different accounting rules and so on we have start taking charges in second quarter that's why we had the second quarter has a little bit of effect and we anticipating third quarter the same way.

So we are taking some cautious -- cautiously projecting that.

But once we get the revenue out of it, I think we can improve our margins.

Our next question comes from Chris Blansett with JP Morgan.

Please go ahead.

Hi, guys, did you include the two new facilities in the overall count for utilization rates yet?

We have, yes.

So I mean did that bring the overall number down or are you kind of taking a portion of the new facilities?

It's a very, very small portion of the new facilities.

And then I guess, could you give us the breakout of your stock comp expense and what your estimated interest expense is for next quarter?

I guess stock comp for this quarter and interest expense for next quarter.

Sorry, I missed the first part.

The interest expense we're looking at around 42 million for the quarter.

42.

And then stock comp for the reported quarter?

$1 million.

And I forget.

Do you guys break it out or not?

We do not, it's in SG&A, but it's broken out in the footnotes to the financials.

All right.

And then I guess the last question is, I mean a lot of your peers are looking at getting into multichip packaging for memory products in a very large way and I wasn't sure if you guys are also going down this path or if you're just generally looking at that as in the overall picture where you might have mix, logic and memory in the same package, or, how do you compare to their plans?

We are talking to some customers, yes, we are.

So -- all right.

Thanks a lot then.

Thank you.

Our next question comes from Peter Kim with Deutsche Bank.

Please go ahead.

Hi.

Thanks for taking my questions.

Could you give us a little bit of clarification on the S3 and your Singapore facilities ramping?

When do you expect that facility to come on line and what is the capacity ramp that you're projecting?

Let's see.

I believe, Singapore will be -- again, I could be wrong, but I think roughly about 4,000 wafers or something, about going up to 8,000 wafers.

And the primary bumping is the front-end part as you know and the Test.

Probe and so on.

And then back end assembly will be done and Test will be done at the other sites.

When do you expect the capacity to start.

Q4 as I say, Q4 is where we are starting, yes.

And you're starting with 4,000 wafer starts.

Yes.

Could you -- do you have a breakout for the legal expenses for the quarter and what's your outlook for the legal expenses going forward?

Sure.

Well, we think that the legal expenses are starting to moderate somewhat.

And for the quarter it's -- hold on.

I can give you that here.

I think it's around 3 to $4 million. 2.6 million.

But -- I was going to say.

Fine.

Yes.

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

Please go ahead.

Hi, guys.

I was hoping you could talk a little bit about the way your customers' rolling forecasts have gone?

Historically when you've had kind of a flattish Q3 you've usually had a fall-off in Q4 and just wondering what your rolling forecasts look like and what your best guess would be, the direction of 4Q up or down.

Well, seasonally as you know, Q4 is normal.

Q3 is the peak and Q4 comes down and it depends on the year but normally I assume about 5% down.

Then it goes -- follow the Q1 to go down a little further.

That's the seasonality of each year.

But last year of course we didn't have that downturn, it was Q4 was going up.

Again, this year Q4 really depends again, overall consumer market, I really think consumer market and everybody saying is going to be soft that's why I believe our customers are and their end customers are adjusting right now for expectational just slowness.

That's why we are seeing Q3 to be normal.

Q3 should go up by sometimes 7%, 8%.

But we only say flat to 2% because of that.

And hopefully by adjusting all this in the long run, we may not have that huge cyclicality sometimes you experience in Q4 and Q1.

But even in your rolling forecasts in recent weeks you've been seeing moderations lower?

I am going to be -- take that side.

However, again, there are a few items which indicate, as I told you, Q4 is where we're going to have this FlipChip line is going to start.

So application today is a lot of these various product lines and that could surprise us, frankly.

Our next question comes from Eric Reubel with Miller Tabak Roberts.

Please go ahead.

Hi.

Good afternoon, gentlemen.

A question on -- if you could give a little more color on the customer financed CapEx.

How's that going and where do the customer advances stand on the balance sheet now?

That's -- Ken, do you want to answer that?

Sure, I can.

It's actually running well on schedule, Eric.

We've received to date around $45 million in customer advances.

It's reflected in two places on our balance sheet and it's in -- there's about -- once again about 45 million in recorded liabilities and it's in two areas.

Hold on a minute here, I'll get it.

Two sections of the balance sheet.

It's in accrued expense for the current portion of 15 million and the balance is in other noncurrent liabilities. 23 million.

Great.

And on pricing and mix you talked about units being up 2% and revenue up 6 and part of that was the mix.

Can you talk a little bit specifically about average selling prices?

We had been seeing prices increase, has there been any moderation or is it all mix?

Again, on the price.

You have to be careful.

Remember, we -- now we are able to -- now we have -- that's what I've been doing for 15 months, actually, is to able to test -- increasing materials to the customers.

And you -- one can look at that as increase in price but it really is not an increase in price per se.

Our next question comes from David Duley with Merriman.

Please go ahead.

Yes.

Just a couple questions from me.

When you talk about you're flat to up 2% in the third quarter, could you give us an idea of what you think the end market segments will go?

And then on the -- I know you don't want to answer questions about the stock option stuff, but I'm just curious.

Did your Board voluntarily wake up one day and decide to do an investigation or were they prompted by this by one of the justice or SEC?

Well, let me answer your first question on the stock options.

We have not been contacted by any regulatory or enforcement agency.

The review that our Board of Directors has initiated is totally voluntary on our part.

And other than that, we won't make any comments on the call.

Okay.

And then the end-market stuff?

I imagine it would stay pretty much the same, to be honest.

Really, just to answer that question.

Because we have really -- very difficult to -- in our customers I don't think even know that question really.

You know.

Okay.

Well, let me approach it another way.

Are you seeing inventory in any of the end markets that makes you think any of those particular segments would be stronger or weaker than the others?

For instance, I think cellphone area, I think definitely again.

Not all entire cellphone market, but some of them have a moderate basis maybe they overbuilt some models more than others and so on.

Those things are going on.

I think that kind of inventory adjustment is going on.

Our next question comes from Sundar Vadarajan with Deutsche Bank.

Please go ahead.

Just on the CapEx front once again.

I know you guys have said, it's not going to be more than 300 million, but in terms of when you look at the second half, if you need to pull it down, how much flexibility do you have given what you've already committed in terms of CapEx?

Essentially if I don't have to spend anything I don't have to spend any.

But as I say there are some few projects we need to spend.

That's why I say it's going to be definitely -- I don't see anything really, maximum 100 million, but I really think it's going to be much less than that.

You think it's going to be much lower than 100?

Oh, yes.

And as far as the -- the customer funded CapEx goes, how is that working?

Is this part of stuff that you already capitalized and what does that liability represent and how does that kind of play through your financial statements?

Once again, as we mentioned to Eric, on the call a little earlier Sundar, we record the liability of the customer advance on our balance sheet until that portion of it, which will be earned.

We -- most of these are new contracts that are -- and monies are not earned at this point.

As it's earned it'll be taken to income and reduced from the balance sheet.

And we decide whether to spend the money or not.

If we have a capacity, we don't have to spend it.

But we took it at that time we saw we may need it.

So some areas we are -- we are going to invest in the third and fourth quarter because we have committed to the customer we got the money.

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

Please go ahead.

Yes.

Hi, Ken.

Can you give us a status of what's going on with your litigation with Tessera?

Really that's in its very early stages so I can't really comment.

They've just I think agreed to the arbitrators.

Our agreement with Tessera is governed by arbitration.

And once again they've just agreed to who the arbitrators are so we're very early.

I can't comment further than that.

It -- doesn't arbitration though go rather quickly as compared to a lawsuit?

That's not been my experience.

It could.

But who knows.

I mean it depends.

I think there's some very complicated issues involved here whenever you get into areas of not just contract law but patents and infringement, it just doesn't seem to move as quick as others.

And then Jim, I'd like to go back to your -- when somebody asked about your break even at 450 and about a 20% gross margin.

Don't take too much on that.

We really don't have a model.

Really -- I was already looking at Ken.

Because I haven't envisioned of going that direction so we have not prepared unfortunately.

So please, I do not really wish to discuss that.

And maybe we will visit that for next meeting, but right now, I do -- I don't know.

That's the right answer.

All right.

Are you talking about on the break even, Jim?

Yes.

Well, I have a structural question.

It's not so much pinpointing those numbers there, it's just if I go back to Q3 of last year, you did 550 million, but you really only had a gross margin of 16% so I guess what I want to understand is the structural changes that have taken place in your business for you to think that you can get a 20% gross margin on a much lower revenue number.

Well, okay.

Let me answer this way.

I -- this -- I'm going to use this occasion really if you don't mind because I know many of you have some -- a lot of credibility issue with what Amkor does in the future, what we did in the past.

So I have to admit.

All the skeptics and doubt there.

So I want to use this occasion to explain something to you, why I cannot answer that question.

I -- yes, I do worry about the downturn.

So I look at the model.

And my model is a very simple one currently because -- let's say next year really as hypothetically again, it's a true hypothesis because there's no -- nobody knows what next year's going to be.

It could be going up by 10%, 15 or it can be going down by 10%.

But let's suppose we talk two models.

One going down.

Let's say 2.6 billion or even 2.5 billion.

That's the worst situation, we go to 2.5 billion which is very unlikely.

But we are doing about 24, 25% margin.

But let's assume because the softness ASP model or whatever the reason our gross margin actually dropped to 22.

Our EBITDA dropped to 20%.

You talking about 500 million or 550 million EBITDA.

So obvious first question is--You got to take a bit of interest, right, which 500 or be 300 million.

If it is 350, if it's 550 will be 400 million.

So under the current Amkor environment, I am really disciplining my people to worry about the free cash flow.

Now, next year if we realize 2.5 billion there's no reason for investment other than maintenance or some structural since we need to improve we should do that.

Other than that that means our investment will be less than $100 million.

That means out of 300 or 350 million we are going to have roughly 300 -- $250 million cash left.

So my focus is going to be how to reduce our balance -- debt.

That is -- has to be our primary goal.

I really worry about profit less.

If we do that, profit will take care of itself.

And in the past Amkor has not done so and I really like to commit to you that's my personal goal.

Now, danger however will come suppose after next year the dollar and then go to 2008 and suddenly market goes by 30, 40% again.

That's the time everybody try to scramble to take the market share and that's the way it used to be.

But I'm telling you, this again is a hypothetical situation.

But if that happens, my instructions to my management will be, okay, whatever the cash flow we get EBITDA there, minus interest rate, and I'm going to take 200 million or 250 million cash-free.

Then the remaining money I'm going to say hey, now you have to negotiate with the customer to spend it spend it.

And if that's not sufficient to satisfy our customer I'm going to go back the way I did this year and last year.

I'm going to go revisit our customers, hey, we have a technology, we have a footprints, factories, we have a people, would you like to use me?

Let's work together.

That's let's share the risk and let's invest together.

That's the kind of model I'm going to pursue.

That's why maybe we enable look into what the break even point is.

I really think we are ready to now have this firm financial discipline, so that Amkor will get back and as I say, if you do that, if you really can generate $200 million a year free cash flow, five years you are going to be billion plus some interest savings.

We probably be coming up with $1.2 billion, $1.3 billion free cash flow to pay debt and that's my personal goal at my age and everything, that's what I want to achieve before I retire.

Now, that -- I share Jim's enthusiasm but it's a highly hypothetical model.

It is a hypothetical model.

That Jim's giving you.

With respect to break even, as you know, one of the assumptions in break even is, is that sales are linear and mix is linear over a relevant range and our mix is anything but linear so it's very important from quarter to quarter calculating break even.

The other thing is with respect to the cost structure, the cost structure a year ago versus the cost structure right now is very different.

We've done a lot of cost reduction both in our factories and at the corporate level to take costs out of the organization.

So I think if you have a hard--.

We're going to go back however -- because we are not ready today we are definitely going to go back and review that question and next time we have a conference call I like to answer that question to you.

Our next question comes from Dave Egan with Lehman Brothers.

Please go ahead.

Hey, guys.

One of the questions I was interested in is do you think that over time at least in the second half of the year you're going to continue to be able to enrich the product mix?

Oh -- well, depends on product mix.

I mean -- yes.

Once you go to FlipChip and so on these are, yes, absolutely.

Okay.

And then, in terms of actually -- what you're thinking about.

You got it up flat to plus two.

What -- if the product mix is actually getting better so that ASP's rising that way so you're thinking that units are likely to be declining?

I don't think that we're saying units are declining but they probably would be in the area of flat to up slightly.

Probably stable what it is.

I don't see any much changes really, yes.

Our next question comes from Bill Ong with American Technology Research.

Please go ahead.

Yes, hi.

As a possible measurement of volatility uncertainty, how frequently are customers changing your rolling forecasts currently versus their rolling forecasts changes earlier this year when the business outlook was a lot better?

I think rolling forecast basis -- over the long-term -- we go by six months.

Yes, there has been definite softness, yes.

One time they were very high now they adjusting to it, yes.

Are they changing it fairly frequently now?

Like, maybe weekly versus perhaps every several weeks?

We been always changing weekly, yes.

Therefore, yes.

Weekly changes, yes.

All right.

Thank you.

Our next question comes from Lance Vitanza with Concordia.

Please go ahead.

Thanks for taking the call.

Are you seeing any change in the proportion of Test and assembly that the OEs are sending to outsources.

I didn't get the question.

Is testing increasing from the outsourcing?

We have been stable, really still we are maintaining about roughly 10%, right.

Not much change.

Then the -- just as a follow-up to an earlier question.

Could you go into a little bit more detail on the ASPs.

I wasn't quite sure how to interpret your answer regarding the pass through of the increased materials cost.

But maybe just for the major product categories, could you give me a sense for what ASPs have done and -- or did in Q2?

Again, has been very stable.

Really there hasn't been much change.

It's been very firm, yes.

And it's really a favorable pricing environment for us because historically, we've experienced somewhere between 2 to 4% price erosion per quarter.

Now, the last two quarters we've actually had ASP increases and as Jim indicated we're in a stable environment right now so we're still being able to pass on the--.

Again.

Let me tell you.

The reason I think again is -- I don't have a clear, clean analysis, but that is due to our ability because of environment and remember material costs have been going up, okay.

Most of the material costs gold and copper and so on.

And we are able to pass through that to customers.

So I like to say that we are not necessarily increasing prices is what I'm telling you is.

We are passing through the cost.

Thank you.

Our next question comes from William Matthews with Canyon Capital.

Please go ahead.

Hey, guys, you may have gone over this already but I just wanted to hear the detail again.

Can you kind of go over capacity utilization for the more advanced packaging designs?

I assume it's close to 100% and kind of what the capital spending is going forward to that and how you see maybe ASE is still kind of vying for business with capital in the advanced packaging stuff?

Even the advanced package area, like FlipChip and other areas, I think we have -- this year's concern other than what we have committed to the customers and what customers' advance payment and all that kind of thing.

We are pretty much done, actually.

Now, as I say, second half we're going to invest some more.

So -- I mean that's the answer I can give it to you, really.

Is -- I hope I am answering your question.

Well, I'm trying to get a sense of is there -- how is that resulting in business awarded from the OEs, is it requiring -- is there competition to spend capital in the advanced packaging in order to get the business.

We haven't had that issue.

In fact we have been -- customers have some -- these are the areas where customers advanced payments.

Okay.

How about market share between yourselves and, say, some of your competitors?

I'm not fighting for market share really.

I no longer -- Amkor, I'm really instructing all my managers -- market share is not the issue.

How each product, how each customer we deal with, I am really measuring them based on the profitability.

Okay.

Great.

Thank you.

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

Please go ahead.

Hi.

Ken.

Did you give the D&A expectation for the third quarter?

We did not, Eric.

But it would be around 70 million.

Okay.

Great.

And then given the 3Q guidance, where do you expect the cash balance to end up at the end of the quarter and what is your comfort level these days as to where the cash balance should be?

At first I think we'll end up somewhere in the range of -- depending on -- business levels and customer advances.

Our target's somewhere in the range of around 170 million at the end of Q3.

And, as far as our basic comfort level.

It remains pretty much where it's been for quite a while.

It's $100 million.

Okay.

Thank you.

Our next question is a follow-up from John Pitzer.

Please go ahead.

Hi.

Brian Chin again.

Just -- a question going back sort of the expense reductions.

I remember earlier in the year you were thinking about taking out 30 million in terms of operating expenses '06 versus '05.

I think last quarter you scaled that back to about 15 million.

If I just look at what the run rates are for OpEx in 2Q, as I sort of flatten them out the rest of the year, overall in 2006 you're going to be running about the same level of operating expenses.

Just wondering, you probably need to take out about 7.5 million per quarter to kind of stay with that 15 million overall expense reduction.

Just -- what currently is the plan and how do you expect to execute on this?

And is there even more opportunity to take cost out of -- we're looking at sort of more of a flatter second half environment.

We've looked at some changes as we went forward.

One thing, as I told you earlier in the year, we discussed and we talked about putting in a new ERP system and we are moving ahead with that.

It's -- so there's some additional costs coming in there.

We have really reduced costs quite a bit.

But we put some new programs in place as it -- we also indicated on this call, we've had no employee incentives for the last three years.

We've put something in place this year, so there's been some additional add-backs.

So I guess what I'm saying is we have achieved a lot of savings.

We've had to implement some new programs to stimulate our growth and we've made some investments there.

It does look like it's leveling out but that being said we are working on what we're calling next steps within the organization.

So probably on the next call I can give you some more definitive information on what we're going to take out.

But again you also have to look at the percentage of the SG&A versus revenue and as -- we had this year compared to last year we had the significant increase in revenue.

But percentage-wise it's definitely impacting us bottom line.

And I -- we going to continue to do that.

Okay.

Maybe just one more question for Ken.

Ken, under the if converted method just how much interest expense are you adding back to net income in the June quarter.

2.1 million.

Okay.

Thank you.

Our next question is a follow-up from Dave Egan.

Please go ahead.

Hi, guys.

I -- that last question actually answered what I was wondering about.

Thanks.

Okay.

Our next question is a follow-up from Lance Vitanza.

Please go ahead.

Hi.

Could you give me capacity utilization in the quarter, please?

84%.

Thanks.

Our next question comes from Chris Cook.

Please go ahead.

Yes.

I was wondering if -- I may have missed this.

Did you guys give expectations for capital expenditures in the third quarter?

We did.

We think it's probably in the range of around 50 to $60 million.

Okay.

So my guess is then you guys see a very -- a fairly large use of working capital in the third quarter?

If cash is only going from 140 some odd million to 170?

Well, I--.

Hang on.

We're looking at some numbers here.

It depends on the timing of the CapEx.

I mean where we're at right now -- I -- there will be a use of working capital in the quarter, but we don't see it as that large, quite frankly.

Okay.

Then it would seem to me you would be able to build a lot more cash than--.

I think we will.

I think Ken is -- I'm not a CFO, but I think there may be a little more cash, but most of it will fall in the fourth quarter I think.

Okay.

Thanks.

Mr. Kim, there are no further questions in the queue at this time.

Please continue with your presentation.

Thank you very much.

I will talk to you again next quarter.

Ladies and gentlemen, this does conclude the Amkor Technologies' second-quarter earnings conference call.

You may disconnect.

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