艾克爾 (AMKR) 2009 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the Amkor Technology Incorporated fourth quarter 2009 earnings conference call.

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

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

This conference call is being recorded today, Wednesday, April 29th of 2009.

And will run for 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.

Amkor's first 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 will now turn the conference over to Mr.

James Kim, CEO and Chairman.

Please 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 first quarter with a $389 million in net sales, a 29% decline compared to the fourth quarter of 2008.

As we noted in our press release, our sales were adversely impacted by the sharp global economic downturn and weakness in demand like other companies in electronics and the semiconductor industry.

Based upon the latest information from our customers, we currently expect that our second quarter sales will be 18 to 22% higher than the first quarter of 2009 as the customers adjust their inventories from historical low levels in the first quarter.

However, we have not seen any significant change in the overall general weakness in consumer demand, and it continues to be very difficult to predict future results in this very challenging and dynamic economic environment.

We believe our strategies for managing through the current downturn are working, and it is our goal to emerge as a much stronger company when the inevitable recovery occurs.

Our key strategies and actions taken in response to the current economic environment include continued focus on cash flow generation, reducing costs, and controlling capital spendings close collaboration with our key customers and related prudent investment in new technology, sustained discipline with pricing with sharing select cost savings with our customers and completion of the recent offering of $250 million in 6% convertible notes and extension of our $100 million revolving credit facility, which has significantly strengthened our balance sheet and enhanced our liquidity.

In the current environment, we are focused on gross margin and cash flow, and have responded quickly and decisively to the challenging market conditions.

We began our cost cutting efforts early in 2008, and have implemented wide ranging, carefully selected cost reduction measures to align our cost structure with reduced levels of demand.

Our first quarter operating results, when compared with the first quarter of 2008, benefited by approximately $55 million from these cost reduction programs.

Approximately 60% of these savings are from labor related initiatives, including significant reductions in headcount, lowered executive and other employee compensation, as well as shortened shifts.

The other 40% was largely driven by lower expenditures for other cost of sales and SG&A.

Clear signs that our strategies are working are reflected by the 12% gross margin we achieved for the first quarter, modest levels of ASP erosion at 1 to 2% and current global cash balance of approximately $500 million.

While we were free cash flow negative for the first quarter by $106 million, $104 million is explained by payments in connection with patent license dispute and employee benefit and separation payments.

We expect to be free cash flow positive in the second quarter, and it is our goal to be free cash flow positive for the full year 2009, even with the typical payment made in the first quarter.

We are prepared to make further cost reductions to align our cost structure as necessary.

But we are also being careful to avoid cutting so deep that we limit our ability to respond when the semiconductor market returns to more normal levels of demand.

Given the depth of our global manufacturing operations and our standing as a technology leader, we believe we are well-positioned to respond to customer upside when opportunities arrive.

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

Ken?

Thank you, Jim.

During the first quarter, our net sales decreased $160 million or 29% sequentially, with unit shipments of $1.2 billion, down 33% compared to the 1.7 billion units shipped in the fourth quarter of 2008.

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

Overall, our flip chip packages held up somewhat better than our wire bound packages.

During the last two quarters, our customers have been reducing inventory levels in response to the current downturn.

While global consumer demand has not appreciated significantly, we expect some increase in unit demand as customers rebalance their inventory from the significantly reduced levels of the prior quarter.

We are concentrating on enhancing our strong relationships with a diverse group of customers, both fabless and IBM, across a broad range of applications.

We continue to build stronger ties with our customers through packaging innovation, high quality service, and selective investments in key technologies they need for their advanced semiconductors.

Leveraging these relationships provides the cornerstone for our other strategic initiatives in managing through this downturn, and emerging as a stronger company in the years ahead.

Consistent with the third and fourth quarters of 2008, our price erosion for the first quarter remained at 1 to 2%.

We continue to believe that it is not 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 select cost savings with our customers.

Over the past decade, we have diversified our customer base.

Fabless semiconductor companies account for about 60% of our total sales in the first quarter and we provide services for a broad range of applications in the wireless, consumer, and computing areas.

Our customer base is well diversified.

And our top 10 customers contributed 51% of our net sales in the first quarter.

Before turning the call over to Joanne, I would like to comment briefly about our plans with regards 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 first quarter of 2009, capital additions totaled $24 million, as we continued to cancel or defer non-critical equipment purchases in response to market conditions.

We expect second quarter capital additions to remain at these low levels, and estimate that our capital additions for the quarter will be approximately $25 million.

We also reaffirm or current plans for capital additions of approximately $100 million for the full year.

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

Joanne?

Thank you, Ken.

Our financial position and liquidity remains sound.

After the quarter, we completed an offering of $250 million, principal amount of 6% convertible senior subordinated notes, due 2014, and renewed our $100 million senior secured revolving credit facility, extending the maturity to April 2013.

The liquidity provided by the new convertible notes and revolving credit facility significantly improves our balance sheet.

The proceeds from the note offering and availability from our extended revolver, together with cash flow will be used to address our debt maturity and operating requirements in future periods.

We have an aggregate $113 million of debt coming due through the end of 2010, and in 2011, the remaining $254 million of 7 1/8 senior notes and 2.5% senior subordinated convertible notes mature.

During the first quarter of 2009, we repurchased $33 million principal amount of debt due in 2011, and recorded a related $9 million gain if the first quarter.

In April 2009, we used $29 million of the proceeds from the convertible notes offerings to repurchase $35 million principal amount of debt due in 2011, and expect to record a related $5 million gain in the second quarter.

We are continuing to evaluate our plans for when and how best to use the remaining proceeds from the convertible note offering, taking into account market conditions, restrictions under our debt covenants and other factors.

Gross margin for the first quarter of 2009 was 12%, down sequentially from 18% in the fourth quarter of 2008.

Reflecting the impact of lower sales volumes and a $6 million charge for workforce reduction.

These declines were mitigated partially by the benefits of the cost reduction initiatives, and the strength of the US dollar against certain foreign currencies.

Income tax expense for the first quarter was $3 million, reflecting taxes attributable to profits in our taxable jurisdictions.

For 2009, we anticipate income tax expense of about $2 million per quarter.

Here's a recap of our second quarter 2009 guidance contained in our earnings release.

Sales are expected to grow 18% to 22% from the first quarter.

Gross margin between 17% and 19%.

And net loss per share of $0.04 to around breakeven.

Operator, we will now open this call for questions.

Thank you, ma'am.

We will now begin the question-and-answer session.

(Operator Instructions).

Our first question is from Satya Kumar.

Please state your company name followed by your question.

Yes, hi this is [Vis Valudi], for Satya.

The first question is regarding OpEx.

If revenues are coming back and maybe -- first thing, how do we model OpEx going into the second quarter and revenues are back at the $5 million level, what level of OpEx should we expect?

With respect to modeling OpEx going forward, we always describe that materials was the only variable cost and that the rest were fixed.

With the magnitude of the cost reduction, the cost reduction efforts that we've gone through, we've shown that both labor and other costs of goods sold are also variable in this downturn.

We will continue to monitor the environment and continue to scale our cost structure in line with demand.

Specifically answering your question, I would expect to see that going backwards up on the balance sheet that R&D and SG&A may be down a couple million dollars from the Q1 level and then we could see some increasing with respect to other costs of goods sold.

I don't know if that helps you model but that's how I would do it.

Okay.

And also you mentioned in the first quarter the ASP pressure, decline was in the 1% to 2% range.

What is your outlook on this, do you expect it to be 1% to 2% or now that revenues kind of coming back do you see any of your peers getting more aggressive on pricing?

Over the past three quarters, it's remained relatively stable and that's our position.

As we said during the call, we're not going to just drop prices to fill the factory.

We don't think that's a sound strategy, so we're going to continue to work with our customers.

Part of our business model on a regular basis is to reduce costs and pass those savings on to our customers, and we do that.

But we think the 1 to 2% is the appropriate range from what we can see at this time.

Okay.

Thank you.

Thank you.

Our next question is from Timothy Arcuri.

Please state your company name followed by your question.

This is [Janeed Ahmed] calling for Tim, Citi.

My question is regarding end demand and production levels.

Given that the restocking is helping the utilization rates right now, once that restocking is complete and demand to moderate from there, at moderate levels, how do your production levels line up relative to the end demand?

Do you think it's below or above, and would it be correct to assume that the revenues could roll back once that restocking is complete?

I think I stated in both press release as well as my conference call, earlier statement, that I think it is very hard to predict the future.

This is -- as we stated, this appears to be inventory adjustment, but who knows.

Second half may be surprise.

Stock market is saying it's hit the bottom but I don't really know so I have to depend on what customers inputs are.

So at this time for me to -- any kind of speculation would be a foolish thing to do.

And in terms of like production levels, so right now you think you're relative to what you assume end demand to be at moderate levels, would you be below or above, in your opinion.

We have conditioned ourselves to be able to meet any surge coming in the market or any downturn.

We are very, very well positioned ourselves to manage that.

That's what we have done the last six months and I'm very, very comfortable with what we have done and as Joanne explained earlier, our costs will be well contained.

Therefore, even if there's a very significant increase in demand, we are able to handle any increase.

At the same time, if the economy's bad and it goes down again, we already have seen the low point, I believe.

Okay.

Thank you.

That's helpful.

Thank you.

Our next question is from Peter Kim.

Please state your company name followed by your question.

Hi, this is Peter Kim with Deutsche Bank.

So I just wanted to follow up on this question about the average selling price.

I understand that your position of trying to maintain the 1 to 2% declines, but I was wondering, are you seeing pricing pressure on the competitive level?

And do you think that it's having any kind of a market share implications?

We always see pricing pressure and I think we respond on a customer by customer basis, as I think our competitors do too.

I think that -- I don't believe we're losing market share.

In fact, I believe we may be gaining market share in some of the high end products.

That being said, there is some low margin business in which we've chosen not to participate.

There have been some cell phone developments in China that were announced over the last couple of quarters and we've chosen not to participate in that low margin business.

For my follow up I wanted to ask about the Toshiba signing of an agreement, potential joint venture going forward.

I was wondering, does this -- will this expose you to NAND flash packaging and test business?

At this time, on this particular subject, that we had the joint press, I think Toshiba is a very important customer and we are supporting them in their efforts to address their back end operations business, not to do with the NAND flash.

The details of the arrangement are currently being negotiated so we cannot disclose anything further.

Thank you very much.

Our next question is from Olga Levinson, please state your company name, followed by your question.

Olga Levinson from Barclays.

Few questions.

I guess basically through the end of April now, given your guidance for 18% to 22%, can you talk about the linearity there on a month by month basis, whether you see a really strong April followed by flattish or down May and June or gradual month over month improvements?

Olga, it was a little bit hard to hear your question but we'll certainly try our best to answer it so if we didn't capture it all, please follow up.

The second quarter, the linearity is very much back end, so it has a lot to do with how strong May and June are.

Okay.

And from an end market perspective, can you talk about what's driving the growth or which areas you expect under, over performance?

That, again, as I say, I think, for us, anyway, based on the orders coming from customers, appears to be inventory adjustment, not from a final demand point of view.

Again, we will know more about it as time goes by, but we are not convinced this increase is coming from final demand.

Okay.

And then just a quick question.

Does your gross margin assume any restructuring charges?

Restructuring charges in Q1 for $6 million, the gross margin guidance for Q2 does not include any significant restructuring charges.

Okay.

And there aren't any included in the EPS guide either?

That is correct.

Okay.

Thank you.

Thank you, Olga.

Thank you.

Our next question is from Eric Reubel.

Please state your company name followed by your question.

MTR Securities.

Thanks for taking my questions.

Joanne, could you drill a little bit into the gross margin during the quarter, the outperformance relative to other fixed costs and labor versus the drawdown in inventory in Q1.

What was sort of the relative -- if you could benchmark the relative outperformance on the materials side or the fixed cost labor side and how should we be thinking about that in the guidance for Q2?

I'll take a crack at it.

I mean one of the things with respect to guiding margins in a volatile environment that we have to consider is currency.

And one of the things that we're having a hard time forecasting is is when and how quickly will the Korean yuan appreciate.

When we gave guidance we had certain assumptions that it would recover quicker than what it is recovering.

So that does create some of the overperformance.

Let me add something to you.

This is James Kim.

First of all, as you look at the cost, remember material is really variable expense mostly.

Therefore, I think it's -- I think 37, 38%, 40%, depends on the product mix happens that particular quarter.

The rest depends.

Another thing, depreciation, remember, is almost that amount you cannot change.

It's already been past investment.

So if you take those two out, the main thing actually is labor and other costs of goods sold.

If you notice Q1 and compared to Q4, last year's Q1.

You will see significant change occurred in the labor expense area and other costs of goods sold, and I think that's the model you can project the future.

Okay.

I hope I answered your question.

That's helpful.

You've talked a lot about how the current revenue, the book for the quarter seems to be driven by inventory replenishment.

Can you talk a little bit about which if any end markets are kind of seeing the best restocking right now?

This is Ken.

How you doing today?

Good, thanks.

It's been pretty broad-based.

I think the reaction was there was an initial pullback across all sectors and I think we're seeing a rebound in really very broad based rebound across all the end markets.

For us, the consumer market is generally a little weaker than some of the others but it's a pretty broad based rebound.

And then I just get -- my one last question is on the pricing side.

In the past we've sort of seen a lot more aggressiveness on price coming out of a downturn, but in the quarter ASPs were really well managed.

Is this sort of a sustainable industry trend that we can expect here, or how do you sort of account for the better behaved prices?

Well, we sure hope so.

We think there's probably -- there's been some learning by all the members of the OSATS that you just can't drop prices and fill up the factories as we call it.

We just don't see that as a strong strategy.

That being said, I think we try to offer competitive prices to our customers and work with them to reduce costs.

That's part of our model.

But it's a day-to-day struggle, to be honest with you, Eric.

We work every day to reduce costs and share our cost savings with our customers the best we can and make a reasonable profit for our shareholders.

Very good.

Thanks, gentlemen.

Thank you.

(Operator Instructions).

Our next question is from Scott Russian.

Please state your company name followed by your question.

Liberty Mutual Group.

Clarifying question.

If I look at the statements of cash flows, there's $43 million under purchases of property, plant and equipment and you stated that CapEx was $24 million I believe.

What's the difference between the two?

We disclose both cash paid CapEx which is what you're seeing on the cash flow statement, versus what we added to our fixed asset base in the first quarter, so the way to look at is is the $24 million number represents what was delivered to our factories and we plugged in.

$42million represents what we actually paid for in the quarter so some of that -- almost all that equipment was actually delivered in Q4.

Okay.

And then the second question I had was the $113 million in maturities through 2010, what does that consist of?

Sure.

The maturities that we have in 2009, 2010, are foreign debt.

It is -- we have loans in Korea, Taiwan, as well as the working capital facility in China.

Okay.

Is all that on the balance sheet or is there some that's not on the balance sheet?

It's all on the balance sheet.

Okay.

Thank you.

Thank you.

Our next question is from Josh Lipchin.

Please state your company name followed by your question.

Hi.

Thanks, Eaton Vance.

As we look to this restocking and the order book you have, how long does it take to restock and do you have any directional visibility into the third quarter?

Have a little trouble with the question there.

Could you rephrase that for us a little bit?

Sure, no problem.

Do you -- as you look into the third quarter, from what you're seeing from customers, does the restocking trend continue?

Could you see growth potentially in 3Q versus 2Q?

Thank you.

First of all, we don't give guidance on Q3.

Let alone Q2.

We are having difficulty even giving you a proper Q2 number so we don't try -- and also remember, we don't restock anything.

We are the service, manufacturing Service Provider to our customers until they -- they give us about six months forecast so we do have some general ideas but I don't think we are privy to release that at this time because we don't really know how they change week to week.

I hope I answered your question because it's not traditional inventory stocking.

No, I understand.

With respect to the utilization, do you have a forecast for utilization in the second quarter?

It's obviously a hard number to forecast and we left the quarter at 45% utilization for Q1.

I shouldn't say we left the quarter.

That's what it was for Q1.

We're forecasting as best we can the utilization will be 55%.

Okay.

Great.

Thank you very much.

Thank you, Josh.

Thank you.

Our next question is a follow-up question from Olga Levinson.

Please go ahead.

Hi, just quick question.

What are you assuming for interest expense in 2Q and through the rest of the year?

With the offering that we just completed, that did bring up our interest levels.

Implicit in our guidance for Q2, we have about $31 million in interest expense, and we would expect that to trail down Q3 and Q4, assuming that we do not use the proceeds for further debt repurchases.

So to the extent that we do use the proceeds to buy back debt, then that interest expense number would come down.

Thought so.

Okay.

That was it.

Thank you.

Thanks, Olga.

Thank you.

Our next question is a follow-up question from Satya Kumar.

Please go ahead.

One quick follow-up.

What percentage of your COGS are material and labor?

The percentage of COGS that is material and labor was 41%.

Sorry, materials was 41%.

Labor -- I apologize, Satya.

Material was about 39 to 40% and labor, which includes risk charge, was about 16.5%.

The risk charge was $6 million as a reminder.

Okay.

Thank you.

Thank you.

I'm showing no further questions.

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

Thank you, everyone, for joining the call.

We appreciate your time and look forward to our next quarter.

Thank you.

Ladies and gentlemen, this concludes the Amkor Technology Incorporated first quarter earnings conference call.

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