艾克爾 (AMKR) 2008 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the Amkor Technology Incorporated fourth quarter and full year 2008 earnings conference call.

During today's presentation, all parties will be in a listen only mode.

Following the presentation, the conference call will be open for questions.

This conference call is being recorded today, Thursday, February 12, 2009, and will run up to one hour.

Before we begin this call, Amkor would like to remind you that there will be forward-looking statements made during the course of this conference call.

These statements represent the current view of Amkor management and actual results could vary materially from such statements.

Prior to this conference call, Amkor's fourth quarter earnings release was filed with the SEC on Form 8-K.

The earnings release together with Amkor's other SEC filings contain information on risk factors, uncertainties, and assumptions that could cause actual results to differ materially from Amkor's current expectations.

I would now like to turn the call over to Mr.

James Kim, CEO and Chairman.

Go ahead, sir.

Thank you, and good afternoon.

This is James Kim, with me today are Ken Joyce, our President and Chief Operating Officer; and Joanne Solomon, our Chief Financial Officer.

We ended the fourth quarter with $549 million in revenue, a 24% decline compared to the third quarter of 2008.

As we noted in our press release in mid January, the macroeconomic trends today are worse than they were even a few months ago.

Companies in the electronics and semiconductor industry including Amkor are experiencing significant declines in revenue caused by the weakness in global consumer demand.

The lack of visibility regarding the magnitude and duration of the current economic downturn makes it difficult to accurately predict our future results.

Based upon the latest available information, we currently expect that our first quarter revenue will decline in the range of 30% to 38% from the fourth quarter of 2008.

Having said that, recent volatility in customer forecast and limited visibility have increased the risks that our actual results may differ from our expectations.

We have confidence in our strategy for managing our business through this downturn.

The key elements of our strategy include a continued focus on cash flow generation, reducing cost, and controlling capital spending.

Close collaboration with our key customers and related prudent investment in new technologies, and a sustained disciplined approach to pricing with the sharing of cost savings with our customers.

We have responded quickly and decisively to the challenging market conditions.

We began our cost cutting effort early in 2008 and our actions to date include significant reductions in headcount, lower the executive and employee compensation and shortened shifts as we continue to align our cost structure with the current downturn in demand.

Our global footprint also has been reduced by disposing of unnecessary factory space and real estate, and the combining operations into several locations.

We are prepared to take further cost reduction containment actions if this downturn is prolonged or becomes worse.

Through packaging innovation and high quality services, we have established strong relationship with a diverse group of customers, most families and IDMs across a broad range of applications.

We continue to build up on these relationships by making selective investments into key technologies.

They need for the advanced semiconductors.

As I've stated earlier in our call, there is significant uncertainty regarding the full scope and duration of the current economic downturn.

We are prepared to make further cost reductions if necessary, but we are also being careful to avoid cutting so deep that we limit our ability to respond when the semiconductor markets return to more normal levels of demand.

Given the depth of our global manufacturing operations and our position as a technology leader, we believe we are well positioned to respond to customers upside when opportunities arise.

At Amkor we a preparing not only to weather the storm but emerge as a much stronger Company when the inevitable recovery occurs.

With that I will turn the call over to Ken to comment on the business before Joanne concludes with a discussion of our recent financial results.

Ken?

Thank you, Jim.

During the fourth quarter, our net sales decreased $171 million or 24% sequentially with unit shipments of 1.75 billion down 30% compared to 2.5 billion units shipped in the third quarter of 2008.

We saw unit and revenue declines across all of our packages and end markets.

Overall, our advanced laminate and FlipChip packages held up somewhat better than our lead freight packages.

While our customers have been managing inventory levels down, consumer demand has been dropping at a faster rate.

In view of the sharp drop in consumer demand globally, we expect continued unit and revenue declines in the first quarter.

We saw price erosion of around 1 to 2% in both the third and fourth quarters.

Going forward, we do not believe it is prudent to reduce price in a weakening economy just to gain market share or fill the factories.

Rather, we will continue to work closely with our customers and suppliers to eliminate costs from the supply chain and share the cost savings with our customers.

Our relationships with our customers are key to the continued strength of our business and over the past decade we have diversified our customer base.

Fabless semiconductor companies accounted for approximately 60% of our total sales in 2008 and we provide services for a broad range of applications in the wireless, consumer, and computing areas.

While our customer base is well diversified, our top 10 customers contributed 52% of our net sales in the fourth quarter.

Before turning the call over to Joanne, I would like to comment briefly about our plans with regard to capital additions.

As Jim stated, discipline with regard to capital spending is critical.

We are operating under a zero base budgeting approach that is focused on specific customer requirements, technology advancements, and cost reduction programs.

In the fourth quarter of 2008, capital additions totaled $32 million as we cancelled or deferred all non-critical equipment purchases in response to market conditions.

Because of these deferrals, we expect an estimated $40 million of capital additions for the first quarter of 2009.

We are currently planning on capital additions for the full year of less than $100 million.

With that I will now turn the call over to Joanne to discuss our financial results.

Joanne?

Thank you, Ken.

While the near term outlook for the semiconductor industry has continued to weaken, our financial position and liquidity remain sound.

We generated $80 million in free cash flow in the fourth quarter and $220 million for the full year 2008.

We ended the quarter with a cash balance of $424 million and total debt of just under $1.5 billion.

In the fourth quarter of 2008, and into 2009, we repurchased $151 million aggregate principal amount of debt due in 2011 with $105 million cash on hand.

The aggregate purchases to date had yields in excess of 20% and improved our liquidity by $58 million as a result of the discount in price and $12 million of reduced interest expense.

Other than annual amortizing debt of approximately $55 million, we have no significant debt due until 2011 when the remaining $289 million of 7 and 1/8 senior notes and 2.5% senior subordinated convertible notes mature.

Fourth quarter gross margin of 18% was unchanged from the prior quarter.

Gross margin benefited by an estimated $20 million from the strengthening of the U.S.

dollar against foreign currency and a $16 million reduction in labor and other costs.

These benefits were partially offset by the accrual of an additional $12 million for the unpaid royalties owed to Tessera in connection with the final reward and royalties for the period.

While we do not expect to be free cash flow positive in the first quarter of 2009, as Jim and Ken noted we have taken steps to improve our cash flow generation, lower costs and control capital expenditures.

In 2008 and to date, we reduced our headcount through reductions in force and attrition by 13% or 2800 employees, with estimated savings of approximately $10 million per quarter.

Income tax expense for 2008 was $32 million reflecting taxes attributable to profits and our taxable jurisdictions, as well as the establishment of an $8 million valuation allowance against certain deferred tax assets in Japan.

For 2009 we anticipate income tax expense of about $1 million per quarter.

Here is a recap of our first quarter 2009 guidance contained in our earnings release.

Sales down 30 to 38% from the fourth quarter, gross margin between 5% and a negative 2%, net loss in the range of $0.34 to $0.49 loss per share.

Operator, we will now open this call for questions.

Thank you, ma'am.

(Operator Instructions).

Our first question comes from the line of Satya Kumar with Credit Suisse.

Yes, hi.

Thanks for taking my question.

Wanted to clarify the cash flow comments you had.

You mentioned it would be free cash flow negative, excluding the Tessera payment what would free cash flow be?

And can you remind me again what was CapEx in Q1?

Sure.

We don't guide specifically with respect to free cash flow.

You're absolutely correct in saying that the largest unexpected, or not unexpected but large out of period payment is with respect to Tessera at $64 million.

We also have a timing of CapEx payments with respect to employee benefit and RIF charges coming out so that does go against it and then depending on where we are within the guidance that would obviously impact it as well.

But directionally can you at least let us know if there's still a run there would you have been free cash flow positive?

Because we have such a large range with respect to our guidance I don't feel comfortable specifying.

Okay.

And then a question on business trends.

Some of your peers are talking about I know business improving on a monthly basis from the month of January for them to hit their Q1 numbers.

What trends are you seeing on a book-to-bill on a monthly basis?

What end market sectors are you seeing center weakness, or are you seeing any particular sector where you're seeing additional orders or fewer orders?

Satya, the downturn is, as we said in the release is really very broad based.

It's across all sectors, across all product lines, pretty much across all of our sectors.

It's very macroeconomic demand driven.

Right.

But in terms of linearity of the quarter, has the month of January, is the month of February as bad as it was back in January?

What trends are you seeing?

That's certainly something that we poured over over the last several weeks to see if there's any linearity trends and again our guidance is so wide with respect to revenue it's hard to conclude whether we go up from January, flat from January or down from January.

There is just while we get six months customer forecast, it's hard to give any way to actually predict there.

Okay, and there's a cost reduction I think you said $22 million I think on the press release.

How much of that is going to come off COGS, SG&A and R&D?

What are the clean OpEx numbers we should be modeling for Q1?

Okay, with respect to if you compare Q4 to Q1, I would see, I'm just doing the math in my head, about 15 million to $16 million is COGS whereas 6.5 is SG&A and that should get you to the total of 22 if I did the math in my head correctly.

Got it.

Thanks.

And our next question comes from the line of Timothy Arcuri with Citigroup.

Hi, a couple things.

Joanne, just to clarify what you just said, are you saying that SG&A is going to be down by about $6 million in March?

As compared to Q4, that is a fair characterization.

Okay.

Second thing, just to clarify also, so the $64 million Tessera payment, that is coming in the March quarter as well, right?

Yes.

And there's no further payments to them after that?

No.

We're an ongoing licensee of Tessera so we'll have an ongoing royalty obligation which is insignificant, but the final word is behind us.

Right, okay.

And then Jim, one thing for you.

I guess when I compare, if I just look at the SIA data and if I compare your units and look at other big peers of yours and I compare your kind of unit share relative to what the SIA data says and even if I strip out memory, it looks like your share of the overall SIA unit pie in December was down much more quarter on quarter than it really ever was back in you say 2001 downturn, so it looks like there's something a bit different happening this time where it seems like some of the OSATS have declined a lot more and they've lost more share of kind of the overall unit pie during or kind of earlier in the shifting of the downturn.

Is that, is there something different happening this time in that there's more insourcing potentially where all your customers are making a better effort to keep their own factories fuller?

Is that what's happening here do you think?

I think that's a very good question, Tim.

In fact, we were reviewing those numbers just before the conference call, going through our focused model, what happened 2001 to today.

One characteristic I can tell you and again I don't know the reasons or anything.

I have no data, but it dropped much faster than 2001, so again, as you know, nobody really knows our outlook at the moment other than very wide ranges we are giving you because every week our customers forecasts changes, so reliability where they are focused themselves becomes an issue.

So it's a good question but I have never done a study on that so all I see in the downturn is faster than the 2001.

But do you think, Jim, just from kind of a structural perspective, do you think that talking to your customers, is there some change whereby they are going to work harder to keep their own factories full so that maybe off the bottom there's some sort of a different thing for you off the bottom where business might not snap back as quickly because the customers are basically trying to keep their own factories fuller?

You asking several questions together there I noticed because what the snap back is doing us I don't think our customers factory really matters.

If the demand snaps back the way 2001 to 2002 or let's say reshapes, then we'll participate.

On the other hand, because of the overall economy, which Ken explained to you earlier, demand is weak from that angle, then it's going to last for who knows, you know?

Maybe it's a couple more quarters.

So frankly, we are all in the dark at the moment how fast we can recover, but in fact if I'm going to answer you, I think IDMs are swallowing themselves because even though they are pulling back, I feel according to what I hear from our customers, their cost is not coming down because whatever the market is not big enough to send to their factories.

So there is a lot of talk going on what to do with those factories and maybe first time in our last 40 years of business, I may see real restructuring occurring at IDM level which would influence us.

everybody talks about restructuring through our three or four competitors, but they aren't the restructuring source.

They are the outsourcing guys and I tell you, real restructuring comes through the IDMs in my opinion.

Right, okay.

Thanks, Jim.

Thank you.

And our next question comes from the line of CJ Muse with Barclays Capital.

Yes, good afternoon.

Thank you for taking my question.

I guess first question, can you talk about OpEx and how we should think about that beyond Q1 in terms of some of the cost cutting that you've outlined and where that could go into Q2 and Q3?

You talking CapEx?

No.

On the OpEx.

No, SG&A and R&D.

I can take that one.

Oh, okay.

So we're obviously forecasting a drop from Q4 to Q1 here, specifically with respect to SG&A.

As we announced in some of our public filings, we made some significant cuts to U.S.

based payroll compensation and the executive compensation by reducing salary by 10% and eliminating the bonus for 2009.

So we start to see those savings coming in Q1 and that's reflected in our guidance.

Further cost cutting beyond what we're forecasting for Q1 is clearly within the realm of possibility.

There are two components to SG&A as well.

There's a corporate SG&A and factory SG&A and the factories are working equally as hard to bring down those SG&A expenses.

We had some offsetting things that may keep savings at bay.

One is if we continue to go through our ERP implementation here in the U.S.

so we should see a spike up with respect to a couple million dollars in support of some consulting costs.

So I think that consistent to a downward trend it may be reasonable.

Okay, but I guess you said there's a slight spike up a couple million in Q2 related to ERP?

That's hopefully being defrayed by cost savings.

Okay.

And then I guess along similar lines, can you share with us given the cost savings that you have outlined for 1Q what your EBITDA breakeven is?

Sure.

Looking at EBITDA breakeven for Q1, Q1 includes some reduction in forest charges, separation payments.

If you take those out and then you obviously have to assume a constant mix and no adverse changes from currency so very steady state, EBITDA breakeven would be about between 300 and 325.

And we've really brought down the breakeven point from last quarter as a result of the cost savings that have been implemented so far.

Great.

And then on the CapEx front, you talked about, well the press release said about $100 million and on the conference call you said less than $100 million.

Should we assume roughly around $100 million and you talk about 40 in Q1.

How should we think about the seasonality of that remaining 60 throughout the rest of the year?

It's roughly around the $100 million is what the outlook is at the year right now, based on what our visibility is to our customer orders.

The 40 million for Q1 as we said has been a carryover from year-end where we have actual customer contracts that support that spending and that's why we're moving ahead with that.

How we go forward quarter to quarter as we've said during the call here is very much zero based.

We're looking at everyone very carefully.

It will be really hard to tell until we can see where these orders come in and where the demand comes out from our customers, so it will be very very careful.

We will fund orders in response to solid orders from customers backed with solid contracts.

Okay, and then one last question.

In terms of pricing, I guess can you talk about the pressure you're seeing from your customers and clearly, there is always pressure but do you think that just sharing the supply chain savings that you're getting with your customers is sufficient given where we are at the depths of the downturn?

Any help or color there would be very much appreciated.

Well, it would depend to some extent on the portfolio of products or packages that we have with our customers.

Obviously, some of your older lead frame packages are under more pressure let's say than some of your more leading edge FlipChip or wafer bump type of package so depends the overall mix of what those products are, it depends on the mixes of increased volumes can make a difference with respect to pricing.

But that being said, our overall position with our customers, and I think you'd understand it has to be that our ability to reduce prices is really kind of subject to our ability to one, either increase volumes or two, reduce costs and to the extent that we do reduce costs either with taking costs out of the supply chain we'll share that but to just reduce costs to, I mean reduce prices to fill the factories is a strategy that has not worked in the past and we've learned from that, so we're not going down that road.

We would rather reduce the overhead, take the costs out, idle the factories, whatever we have to do rather than just fill the factory strategy.

It doesn't work.

Thank you.

Thank you.

Our next question comes from the line of Peter Kim with Deutsche Bank.

Go ahead, sir.

Thanks for taking my question.

You didn't mention anything about how much you expect to lower the R&D expenses in the next quarter, did you?

We'll obviously continue to invest in technology to the extent that there is a salary component.

It would be part of, we would get some savings.

Let me just take a quick look see.

I would suggest you would see just about $0.5 million maybe savings from the fourth quarter levels.

Okay.

With regards to the question previously with respect to the EBITDA rate, breakeven rate in Q1, considering that you're still in the process of taking corrective action in terms of cost reduction, do you see the EBITDA breakeven level declining even further in Q2 or do you think that it's going to arrest at some point?

I think it can decline further from there.

The cost savings that we have included in the first quarter are ones that have already been initiated or are well under way as being initiated so there isn't a lot of risk with respect to those cost reduction initiatives.

There are other things as Jim mentioned in his prepared remarks that we will continue to take a look at depending on the state of the industry, so there are other opportunities to continue to reduce that going forward.

Okay.

And with respect, it looks like during the quarter, you bought back additional debt, about I guess 33 million and 9 million face value roughly?

That's correct.

That's what we bought back.

And so I'm wondering, given that your outlook is, for the current quarter is a negative cash flow, are you still comfortable buying back debt on an ongoing basis or have you decided that maybe it's time to preserve cash?

Our focus has been on the near term maturity so far, so we've bought back exclusively the 2011 instrument.

We did look at debt repurchases from time to time and we do have to obviously balance what our liquidity position is today and what the demands on liquidity are between a maturity date to make sure that our liquidity will remain sound.

So we're obviously prioritizing cash flow, cash flow generation, we're prioritizing making sure that our liquidity is sound so we may or may not move forward with it.

Okay, and last question.

Mr.

Kim, you spoke about maybe your customers potentially looking at restructuring.

In that event, do you see a larger percentage of the packaging and test business coming over the OSATS or how do you see that working out?

Certainly, I hope it comes to us, but again, remember there are three or four sizeable competitors out there who are playing, I think it's very healthy for our sector to have that kind of restructuring happening.

Everyone will benefit from it.

I don't think, there are plenty out there.

In fact you can look at, in fact there are almost scores of them.

I guess more specifically, do you think that when your customers are thinking about restructuring, do you think that they're pondering whether or not they want to shed their own packaging and test capacities internally in favor of OSATS?

Oh, I think that's what's going to happen, especially as many of them with the old factories and their technology is behind so those are the ones that are going to be shared and also, remember they are also cutting back their manpower, engineers and so on so their ability -- and the assembly is not their key aspect.

They need to keep other advanced technology, therefore they are going to be shedding those and where else they going to get those technologies?

Okay.

Thank you very much.

Thank you.

And our next question comes from the line of Eric Reubel with MTR Securities.

Go ahead.

Hi.

Thanks for taking my questions.

Joanne, a couple of quick questions for you and then a follow-up for Ken.

Could you break out the bond repurchases between the 2.5 and the 7 and 1/8?

With respect to the 2009 repurchases or including the 2008 as well?

If you could do both, sort of the additional 10 just for Q4.

Okay, through 2008, we purchased 78 million of the 190 -- sorry [79] of the 2.5 converts, and 40 million of the 7 and 1/8 senior notes.

In 2009, we repurchased a total of 33 million of which 32 million was the senior notes.

Okay, great.

Joanne, what was the fixed and labor cost in Q4 either in terms of a percent of revenue or total dollars?

Sure.

With respect to labor included in cost of sales for Q4 was $80 million, that represents 14.6% of sales.

There's other labor dollars in SG&A but the lions share is in cost of sales.

Okay, and the $12 million that was accrued for Tessera, that's sort of we think about it as a one-time?

There's a piece of it that was out of period relating to the amounts that were owed prior to September 30, that's the $9 million so I would describe that as out of period, $3 million with the recurring royalties associated with the fourth quarter.

Okay.

You announced a $50 million China facility during, just recently during taking place here in Q1.

I assume that came from kind of your basket of foreign borrowings.

What kind of additional flexibility do you have there and also with respect to the U.S.

first lean revolver, what can you do to kind of extend the maturity on the U.S.

facility?

Absolutely.

We did just close a working capital loan in China for $50 million, so that supports the working capital of China, which would in turn provide additional liquidity into the Amkor ecosystem.

Right.

So that helps shore up, that helps provide short-term liquidity.

With respect to, there is a basket for additional foreign borrowings so we do have ability to do more and then with respect to the first lean revolver, that matures in November 2009.

We are in communication with the institutions to work on alternatives.

Okay.

And lastly, Ken I just have a quick one.

There's been kind of some talk about orders improving in January, maybe some talk about rush orders at some of the other OSATS.

Your comments I kind of take that there's really in your perspective of the trends, you can't really draw any significant trends about future linearity based on what you've been seeing through January.

I think that's a fair statement.

I did read some of the press releases that you're talking about, the rush orders.

I think they were in China and I think that was with TSMC, and I believe they announced the packaging was going to ASE, so we would have not benefited from that but with that being said as far as the linearity in Q1, we really can't comment on that right now.

Okay, great.

Thank you.

Yes.

And our next question comes from the line of Mike Lanier with AIG.

Go ahead, sir.

Good afternoon.

Can you -- do you have a feel for the weakness you saw, you're seeing in Q1?

How much of that might have to do with all the shut downs in production as opposed to actual drop in demand?

Well, I don't know how to distinguish that because I'm sure those types who shut down, they didn't see the demand but remember, in the supply chain we're at the bottom, so it has to stop from consumer demand.

As I said earlier, consumer demand comes down, that reflects the distribution channel and ultimately the manufacturers, so it is wide throughout and I reading the same things you read, many of the foundries and IDMs are shutting down or slowing down their fabs so that's affecting us and I'm sure will affect us in the future, their direction will affect us also.

One other point, Jim, as a point of reference is about 60% of our mix is with fabless companies and about 40% is with IDMs.

The IDMs have been internalizing in the near term but as Jim said the good story is as we get through the year I think that's going to create a lot of opportunities for the OSATS as they divest of some of these non-core operations.

I think you've seen that a number of IDMs have made announcements that they are going to be closing packaging operations around the world and I think that will create some opportunities for us as we go forward for the entire sector.

By the way, what was the -- I think you gave a quote on, or did you on utilization in Q4 and given your guidance for Q1, what would that infer?

Utilization for Q4 was 61%.

It's a hard number to forecast but I would infer that utilization be about 40%.

And when the demand has come down, has the mix changed?

Is most of the damage on the simpler packages versus the more sophisticated?

Is there a trend in that area?

It's been very broad based, as we said.

This is really very much macro demand driven, so it's affecting all of your product lines, all of your end markets, quarter-over-quarter as we indicated in our release I believe is that some of the more advanced packages fared a little better in the mix between Q4 and Q3, but that's not going forward.

Going forward it's very broad based.

And the $100 million CapEx is, how does that compare to what you would consider maintenance CapEx?

Well, that includes maintenance CapEx, and the thing that you have to remember is that our installed capacity is far greater than the level of demand that we see, we're not giving guidance for the full year but from what we can see, the level of installed capacity far exceeds the demands that we'll meet.

So the level of 100 would indicate handling maintenance CapEx plus some individual orders that may come along.

And right now, you don't have any plans to shut in any material capacity so far?

Could you rephrase that for me?

I mean, are you -- do you currently have any plans to actually mothball some capacity to just kind of shut it down for an extended period?

Well, we've been doing some factory combinations, and that's been publicly announced.

We did it in 2008 and we'll continue to do it this year.

Joanne talked about some of the restructuring charges so yes, we have done some of that.

The other thing we take a look at as Jim mentioned in his prepared remarks is really compressing work weeks so that in essence takes capacity off the line without removing it.

Just a couple more.

One is where is your comfort level with cash?

Where do you -- what level of cash?

It's a great question.

It's a question we ask ourselves every day.

We describe minimum cash of around $200 million.

The challenge is you have to focus on both positive and negative contingencies.

You made the assumption that you have limited access to the market, so it's the how low can it go, how low would you let it go.

$300 million total liquidity, that is an estimated internal benchmark we use from time to time but I would describe cash between 100 and 200, more closely to the 2.

And when we look at the cash that's on the balance sheet now, where is it?

How much is freely available for you to push around without taking a big tax hit or without strings attached?

It's largely freely available, it is around the globe.

We have cash around the globe and in our largest factories are in Korea and the Philippines and obviously working here in the U.S.

So that's the principal locations of cash.

The last one is if you know, stays ugly, EBITDA gets really de minimus, when do you start, do you have covenants that could be tripped in this environment?

We don't.

We're very fortunate in that we have covenant light instruments, both the bank debt overseas as well as our public debt here in the U.S..

We do have a restricted payment basket that, because of the goodwill impairment charge we no longer meet their restricted payment test but we do have some strategic and other baskets available even for restricted payments.

And our next question comes from the line of [Jake Seminy] with Morgan Stanley.

Hi, I had on clarification on the CapEx.

You said in 2008 the CapEx is $342 million but there's also a change in related accounts payable of $44 million so CapEx is really $386 million, so when you say next year CapEx is going to be $100 million is that $100 million plus some reduction in payables or is that the fully loaded number?

So there are two ways to look at cash.

One is, is when you bring it into your factories and you add it to your install base, the other is when you pay your vendors for that CapEx.

The 342 is the CapEx that we've brought into our factory, to the extent it's a change in payables that we paid the vendor during the year.

Similarly when we talk about the $100 million, that's what we're bringing into the factories.

The payments to vendors are actually a little bit higher.

So including the timing of the payments what do you think that you are going to be for 2009 in aggregate?

We don't typically guide to that but -- I would say around $40 millionish maybe carrying in.

Okay, so it's really more like $140 million fully loaded?

On the cash.

Yes, but cash you're also paying, that is the next 45 days also.

Jim is right.

To the extent it's in the fourth quarter there could be a tail that goes into 2010, so it's really hard to give guidance for the year on that.

I understand.

I just want to make sure I understand apples-to-apples.

$100 million is apples-to-apples with the 342 and then there's going to be some other payables that's comparable to the 44 but not--?

Okay, and then could you give some color on what you think the depreciation and amortization expense will be in 2009?

Sure.

Let me just take a quick look.

I would expect that depreciation and amortization to start to come down because of the lower levels of capital intensity we're investing at a lower rate than our depreciation.

So I think for Q1 depreciation and amortization would be about $80 million, that's total depreciation and amortization, not just what's in COGS.

Okay.

And our next question comes from the line of Sunny Sekhon with JPMorgan.

I just had a question on the RFP basket.

You mentioned RFP basket is zero.

Can you purchase debt further with the RFP basket being zero?

Yes, hi.

We would still be permitted to do further debt repurchases to the extent there's the convert is a subordinated instrument so that would have to go against a basket unless there was a like-for-like refinancing or with equity and for some other flexibilities but that's correct.

And so you cannot convert, you cannot purchase converts but you can purchase seniors as much as you--?

So we're freely able to purchase the seniors.

We have some limitations with the amount of converts we would be able to buyback.

Great, thank you.

(Operator Instructions).

We would ask that you limit it to one question and one follow-up question, please.

Our next question comes from the line of Oliver Corlett with RW Pressprich.

Go ahead.

Thanks for taking the question.

Just to go back on the pricing one more time.

You're forecasting a gross margin of 5% or between 5% and negative 2% for the next quarter.

It's kind of hard for me anyway to see that that wouldn't include a fairly large decrease in average selling price.

Would that be, could you tell me, do you have any kind of cost related guidance on how much of that forecast on your sales is down due to price and how much to volume?

I don't think we can break that down like that, because our fixed base is so large, that's why gross margin dropped as the revenue drops.

It's not necessarily the price itself.

You have a modest depreciation, other courses were sold, material maybe only through (inaudible) so maybe a little variable but they are a huge base, therefore as your revenue drops sharply like we are experiencing, that drops right down to the gross profit and gross margin.

Good.

Material and labor tend to be what, in sort of 50 to 55% range?

No, 38 to 40% area it has been for a long time.

Materials and labor I mean.

Right, materials 38% and labor is around 14, 15.

So are you saying that the rest of the costs are typically fixed?

Well, no, not necessarily, but the cost of goods sold can be also a variety of factors we can influence a little bit.

That's what we are doing.

Right now, it used to be labor was very much fixed but we've been cutting labor costs significantly in the last 12 months.

Right.

And I also remember from the last downturn there was a tendency to give away a lot of services to customers, sort of as an inducement to stay.

Is that also kind of factored in and do you see that happening this time around?

I don't think so.

Again, we all learned from last downturn that reducing the price didn't serve anybody.

That's why I can't explain to you clearly how we are handling those and oh, yes, of course there's a strong price pressure everyone is facing but we are wiser this time, so we are trying to manage that better this time.

Last time, we didn't react quickly to the cutting costs or labor because everybody expected a large reshaped kind of recovery.

Right.

There was also a big bulge in CapEx before that downturn, I think it wasn't really as bad this time around was it, industry wide?

That's correct.

There's less installed capacity this time than there was at the last downturn in 2001.

That's absolutely correct.

Okay, thank you very much.

And we have a follow-up question from Satya Kumar with Credit Suisse.

Go ahead.

Joanne, I just wanted to clarify on gross margins, the clean gross margin for Q4 should exclude that $9 million additional accrual for Tessera?

I'll leave it to you as to what to normalize but I would say that was out of period.

Right.

Three is the real ongoing expense on that front, right?

I wouldn't necessarily describe that as ongoing expense because it's obviously contingent on volume, but that was what it was for the period.

All right, and what interest expense should we model in Q1 on the other income?

For interest expense, I would expect after we effective to the repurchases it would be about $28 million a quarter.

28, okay.

28.

Yes.

And lastly, I think earlier, you'd mentioned that labor was $80 million, 8-0.

That's a drop of 27% sequentially if my math is right on that.

How much of that is just currency related savings versus the costs that you're actually taking out?

That's a good question, actually.

Yes, I mean, the numbers we gave in the press release break out the margin impact between how much was add back versus how much was savings so I would say we would follow that same trend.

The Q4 was $80 million and I think when we look at Q1 labor, we would expect a rate of about $78 million but that includes about $5 million for a RIF charge so a normalized labor going forward would be 73 or 70.

Excellent, thank you very much.

We also have a follow-up question from Timothy Arcuri with Citigroup.

Go ahead, sir.

Hi, Joanne.

Can we expect any more restructuring charges in the March quarter or in June as well?

Yes, it's a great question, so we announced the ones that we know and have been announced.

We continue to look at our workforce and make sure we stay right sized for the current environment, so then potentially we could have something that we're not anticipating guidance.

Tim, unless there's a huge, again market condition change downward, then obviously there might be but I think I made in my prepared remarks that I also look at the possibility of market going up too.

So I think we have done what we have to do.

It's more importantly how we implement all of these cost cut programs over, nothing can be done over one month or two months but hopefully we didn't have three, four, five, six months we can implement everything.

So you're going to see continuous cut in our expenses.

Okay, thanks.

And I am not showing any further questions at this time.

I will turn it back over to management for any closing remarks.

Thank you very much and I will talk to you again next time.

Bye.

Ladies and gentlemen, that does conclude our conference for today.

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