艾克爾 (AMKR) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the Amkor Technology, Inc.

second 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 open for questions.

This conference call is being recorded today, Wednesday, July 29 of 2009 and will run up 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.

Prior to call this conference call, Amkor's second quarter release was filed with 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 conference over to Mr.

James Kim, CEO and Chairman.

Please go ahead.

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.

Before turning to our financial results, I want to make a few comments about the management's succession plan that was announced at the end of the second quarter.

Under the plan, I will become Executive Chairman of the Board of Directors and Ken Joyce will become Chief Executive Officer and the President effective October 1, 2009.

Ken would also join the board at that time.

I have great confidence in Ken as our new Chief Executive Officer.

I have worked closely with Ken since he joined Amkor in 1997, and you all now him well as his role as Chief Financial Officer for more than eight years and as President and Chief Operating Officer over the last 19 months.

After more than 40 years as CEO of Amkor and its predecessor, I believe this is the right time to make this transition.

Since the end of 2005, we have substantially realigned our cost structure, built our gross margins from the low teens to rates in the mid 20s, achieved a 13 quarters of positive free cash flow totaling more than $850 million and have reduced our debt by nearly $600 million.

We expect to be free cash flow positive for the third quarter and the full year.

And if we are successful in gaining free cash flow positive for 2009, that will be our fourth consecutive year of generating free cash flow, cash under various challenging circumstance.

In April 2009, we completed $250 million convertible notes offering and renewed our $100 million revolving credit facility and our balance sheet and liquidity are strong.

I believe we are now well positioned to the healthy balance sheet and cash flow base as we look ahead to our future operating needs and our debt maturities in 2011 and 2013.

As the Executive Chairman, I will continue to play an active leadership role at Amkor collaborating with Ken and our senior management team as we build upon our core strategies of continued forecast on cash flow generation, closely managing costs in line with the customer demand, controlling capital spending and managing our debt.

Partnering with our key customers and the related prudent investment in new technologies and sustained disciplined approach to pricing with sharing select cost savings with our customers.

I am optimistic about Amkor's prospects for the future.

Our business is tied to worldwide GDP and the consumer spending, and I believe that technology advances will stimulate consumer demand and help drive the recovery in the semiconductor industry when the world economy emerges from current recession.

Amkor's position as a technology leader is an important competitive strength.

We continue to work closely with the several of our key customers to develop and implement increasingly advanced interconnect technologies needed to meet their requirements for smaller semiconductor geometries with higher levels of speed and performance.

I believe that our market position and the long-term value will be managed by these efforts when the economy recovers as customers increasingly rely on and recognize the value we bring with these new technologies.

Turning to the second quarter, I am very pleased with our performance in a difficult economic environment.

We had $507 million in net sales, much better than expected increase of 30% from the first quarter.

We also exceeded expectations with our gross margin of 20%, which is up substantially from 12% in the first quarter of 2009 despite a $7 million charge to exit our manufacturing operations in Singapore.

Our goal is to achieve strong margins even during periods of historically low levels of activity.

The results for the second quarter demonstrate that our strategy of forecasting margins and managing our cost in line with the customer demand is working.

There is still room to improve performance, particularly as our business recovers.

We are seeing improvements in our customer demand for the second half of 2009.

Based on current customers forecast, third quarter 2009 net sales expect to increase 17% to 21% sequentially, deflecting higher than typical seasonal growth.

Gross margin for the third quarter is estimated to be in the range of 23% or 25%.

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

Thank you, Jim.

I am honored by the confidence and trust that has been placed in me by Jim and our board.

Under Jim's leadership, we have established a successful business model and have put in place a talented team of experienced managers and a highly trained and dedicated global workforce.

As we move forward, we will continue to drive and build upon the core strategies outlined by Jim which have served us well.

With regard to the second quarter, unit shipments of 1.7 billion were up 43% compared to the first quarter of 2009.

Our growth was driven by customers adjusting inventories from historically low levels in the first quarter.

Strength in our 3D packaging, principally in support of wireless applications and improved demand for our lead frame packaging services.

In response to a period of unprecedented economic turbulence, our customers reduced inventory levels during the fourth quarter of 2008 and Q1 2009.

During the same period, wafer foundries worldwide experienced historically low levels of utilization.

Our sales dropped more than 46% in Q1 2009 versus Q3 2008.

In Q2, we began to see signs of recovery as unit demand increased.

Our revenues for the second quarter were 27% less than the second quarter of 2008.

In comparison, signalling further recovery, we expect that the gap in revenues for the third quarter between 2008 compared with 2009 will narrow further.

Based on the midpoint of our revenue guidance, revenues are expected to be 16% less than the peak revenue levels for the third quarter of 2008.

Fabless semiconductor companies accounted for approximately 56% of our total sales in the second quarter, and we expect that the percentage of fabless customers for the third quarter will drop as IDM demand continues to strengthen.

Our customer base is well diversified and our top 10 customers contributed 54% of our net sales in the second quarter.

Consistent with the past four quarters, our price erosion for the second quarter was about 2%.

We do not believe that it is prudent for us to reduce price or chase low margin business in a weakening economy just to gain market share or fill the factories.

As demand improves, we believe we are well positioned to achieve profitability while keeping our capital investment needs in balance with our customers' demand.

Our capital investments are focused on specific customer requirements, technology advancements and cost reduction programs.

In the second quarter of 2009, capital additions totaled $27 million as we continued to cancel or defer all noncritical equipment purchases in response to market conditions.

We expect third quarter capital additions to be approximately $70 million, which is still at low levels when considered in light of our current depreciation expense and expected demand for the second half of the year.

We increased our expectations for the full year capital additions to approximately $150 million.

The increase is largely attributed to increasing the capacity of our wafer bumping operations in support of advanced inter technologies.

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

Joanne?

Thank you, Ken.

As Jim and Ken noted, the near-term outlook for the semiconductor industry has improved, and our financial position and liquidity remain sound.

We generated $69 million in free cash flow in the first quarter and are on track to be free cash flow positive for the full year 2009.

We ended the quarter with a cash balance of $455 million and total debt of just under $1.6 billion.

During the second quarter of 2009, we repurchased $144 million principal amount of debt due in 2011 and recorded a related $8 million gain in the second quarter.

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

Gross margin for the second quarter of 2009 was 20%, up sequentially from 12% in the first quarter of 2009, reflecting the impact of improved sales volume, sustained cost reduction and a $7 million charge for plan to exit Singapore manufacturing operations And I just want to correct one thing I said in my prepared remarks earlier.

We generated $69 million from free cash flow for the second quarter.

I apologize for that.

Continuing on with respect to gross margins, gross profit was also reduced by about $1 million as a result of foreign currency movement.

In addition, we recorded a $6 million foreign currency loss for the quarter, principally as a result of the appreciation of the Korean yuan against the US dollar.

Here is the recap of our third quarter 2009 guidance contained in our earnings release.

Sales are expected to grow between 17% to 21% from the second quarter.

Gross margin is expected to be between 23% and 25% and net income is expected to be in the range of $40 million to $55 million or $0.17 to $0.22 per diluted share.

Operator, we will now open this call for questions.

Thank you.

(Operator Instructions).

And our first question comes from the line of Peter Kim with Deutsche Bank.

Please go ahead.

Hi, thanks for taking my question.

First, I wanted to ask about the Qualcomm issues that occurred during the quarter.

I was wondering if you would be willing to size the business and talk about how long you think you can carry that business.

Could you give us some clarification on that, Peter, with respect to the Qualcomm incident you're referring to?

I think that Qualcomm during the quarter said that they -- with regards to the at the Tessera issue that they had, that they moved some of their capacity to Amkor.

I was wondering if you could size that business and talk about how long you expect to hold that business.

So we see Qualcomm as a total customer and we wouldn't want to comment on how much business was shifted to us.

It's really hard for us to tell what was shifted versus what was intended to be with us.

This has been part of a long-term strategy of Qualcomm, so this wasn't a short-term decision based off of the ITC ruling.

So there's no way for us to bifurcate it.

Qualcomm is a very important customer of ours and they will continue to be -- we expect that they will continue to be a very important customer of ours even after -- as the years progress.

Okay, and then could you talk about the mix of revenue from the flip chip capacity?

Considering that over the last year or two, I think that you've noted that most of your capital spending was going towards adding capacity in the flip chip area and yet your revenue as a percentage from flip chip has remained relatively steady as a percentage of total, and I was wondering if you could talk about what kind of returns you expect from continued investments in this space.

That's a great question.

Flip chip is a very interesting business line and when you look at the data that we provided in the press release, it doesn't entirely tell the whole story.

We have talked in the past that part of -- some of our customers consigned substrates to us, some of them ask us to procure substrates.

We had a significant demand increase with one of our customers that actually consigned substrates to us, so the average selling price actually goes down.

So our utilization with respect to flip chip is very high, it's one of our advanced technologies.

We see exceptionally strong demand and we will continue to invest as well in support of that strong demand.

By the way, Peter, on the flip chip, flip chip is a broad application, by the way.

There is a wide band to the -- it has effect to the bumping areas, so I don't think,you can really -- just looking at the gross data, you're going to be able to allocate that way, because like bumping, which is related to flip chip also, you have to understand.

Thank you.

Thank you.

Our next question comes from the line of [Olga Levinson] with Barclays Capital.

Please go ahead.

Hi.

Thanks for taking my question.

First question, I guess one of your competitors this morning talked about 3Q revenues being up each month every single month and then likely down in the fourth quarter.

I just wanted to get your thoughts on how you see your fourth quarter in general terms and given some of the share gains you've seen in the last few months, how is Amkor positioned relative to the industry?

We normally don't give beyond this quarter, as you know, so I don't think we can violate that rule.

But I did state in my script that I expect the second half to be strong.

That obviously, remember, starting from the lower level, and I think this continuation of second quarter's growth will continue we said third quarter is going to grow by 17% to, I believe 21% A very -- I think in order for me to project what the fourth quarter is going to be, there are -- remember, some economies that are saying we could have a double dip or something like that.

Who knows?

Nobody really know.

So I don't think I can give you that specific to each month how it's going to look like.

There is some speculation by some analysts that fourth quarter will be down by 10% and so on.

I don't think we are in a position to say anything of that nature other than, let me emphasize, I think last six months have taught us Amkor's management team how to manage any kind of a situation that arise to us.

If it drops 10%, we will manage it and still be a profitable company.

If it goes up, then so be it, then we will benefit from a low cost structure that we have.

I think that's the best answer I can give to you, because I think we cannot predict beyond this quarter.

Okay.

And then on the raised CapEx guidance, can you talk about the drivers for that decision and whether that was fueled by new wins and just some advanced technologies where you didn't have the equipment or just greater confidence in the outlook for 2010?

Just how to think about that.

Let me answer before Ken does.

Our CapEx is very much a (inaudible) environment.

Remember, depends on -- because we have excess capacity so overall, I don't think, as I said in many times, we do not need to realty invest huge amount but accept new technology.

Time like this always new technologies getting introduced, and that area we need to continue to invest in new technology.

So most of the investment we are making, and as I say, we have been very low investment at the first quarter -- first half.

Third quarter we gave $70 million guidance and as a whole year, $150 million because of there has been new demand coming from new technology area.

And in addition to that, Jim, in conjunction with what you're saying, that's very much in line.

The investments that we are making in Q3 as we indicated in our press release, a lot of that will be in support of wafer bumping technology which is quite expensive and does support and enable our smaller geometries and inter connects on the flip chip side.

So it's an expensive type of an investment, it's advanced technology and as Jim said, that's where we are investing our money.

Also in the earlier flip chip, as you know, the flip chip is such a broad area, some areas require new technologies which require more (inaudible) patches and so on.

From a finance perspective, the I only thing I would add is depreciation expense for a full year is about $300 million, so CapEx of $150 million is much less than just the run rate of a depreciation burden.

Good point.

Thank you.

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

Please go ahead.

Hi, this is (inaudible) for Satya.

Congratulations on your strong results and guidance.

Actually, Joanne, can you please give the breakup of your COGS for gross margin?

You typically break it up for materials and labor.

Sure.

For key key Satya?

Yes, that's right.

For Q2 materials was about $205 million.

Direct labor was about $66 million, and depreciation and no COGS -- other costs of goods sold, sorry, was about $132 million and if I did my math right, that should total the $404 million.

And then you also mentioned the pricing is kind of holding up your pricing in -- the second quarter was down 2%.

How do you see that?

Do you still see that to be the case, or do you see an increased pricing in the second half as compared to the first half?

Satya, this is Ken.

I believe that the pricing is remaining rather stable as we go forward.

I think there's been rationality in the industry overall, and we expect that to continue.

And at the higher level, what do you think the longer term capital (inaudible) for your business is, especially that you're riding your flip chip lines which may be more (inaudible), so do you see around the 10% as what you had mentioned earlier or do you see that --

I think it could be a little less this year, but as we move forward, I think in the 10% to 12% range is probably the appropriate capital intensity range.

Thank you.

(Operator Instructions).

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

Please go ahead.

Hi, congratulations on a good quarter.

Joanne, could you breakout the bond repurchases in the quarter between the two 2011 issues?

Sure, absolutely.

In Q2, we repurchased -- let me just make sure I've got the right face amount.

$68 million face of the convert, the 2.5 % convertible due 2011, and we bought in the second quarter $76 million of the 7.125 senior note due 2011.

Great.

Thanks for that.

Question -- another question for you, Joanne.

If I look at sort of the incremental drop-through in the quarter, it definitely moved up into the 50% range.

If I look -- and I would imagine that that happens with a nice improvement in utilization.

If I look into Q3, it looks like the incremental gross margin is kind of coming down to the midpoint of guidance, back into the 30% range.

Is there not a lot more capacity utilization to capture?

Is that why the incremental gross margin is coming down?

When we look at all the cost savings that we did over the past year to two years, I would suggest that our fixed costs came down looking at Q3 '08 versus Q2 '09 by about $80 million cost savings in comparison.

$15 million of that with savings from RIFSs, and so the balance of that, the $65 million -- hopefully we can convert more of that to permanent, some of that to temporary.

Q3 '09 we are seeing about fixed costs coming up about $25 million, and I would say that's more attributed to fixed costs that tend to be more variable, whether it's over time, repairs and maintenance and supplies.

So that's probably explaining what's going on with incremental margin, is that there's some costs coming back in the third quarter.

Thank you.

Our next question comes from the line of James Croom with Regiment.

Please go ahead.

Good afternoon.

You talked about being free cash flow in the third quarter and then for the second half.

Is there any elements of cash flow that are not pure earnings like changes in working capital or something like that that we need to be aware of?

Nothing that I would describe as unusual.

There's clearly movement in cash conversion, but there is -- I wouldn't say that there's something atypical that's driving.

And then as the cash builds, does the use of cash start to change?

I mean, clearly, it seems like one is increased capital spending, but are there other priorities that are now coming into focus?

We are very fortunate that our liquidity is as strong as it is.

There's always a question with respect to how to use cash and what your minimum cash balance is.

We clearly look to the debt maturities we have coming out in 2011 and 2013 and to the extent that there's opportunities to repurchase it or somehow or otherwise get them back, taka look at that as a possible use of cash.

CapEx, we clearly look at capital investments but that has less to do with our liquidity to the extent we have more liquidity, we wouldn't automatically spend more on CapEx.

It would have to be based off the strategic positioning of the business.

So it's -- we are very fortunate and the fact that we are in turbulent times, the idea of having a bit more of a nest egg is certainly more comfortable to us.

Thank you.

(Operator Instructions).

And our next question comes from the line of Chris Smith with SCM Advisors.

Please go ahead.

Hi.

Thanks for taking the question.

Maybe I missed this, but did you mention what capacity utilization was this quarter?

I -- we didn't mention it yet.

It is in our selected table on the press release.

We wound up the second quarter at about 66%.

For the third quarter we are forecasting it to be about 77%, high 70s.

Okay.

And switching gears back to demand, clearly, sequentially demand has improved pretty meaningfully.

I'm just curious how you would characterize demand.

Some of your competitors have said it's more inventory restocking, some have said they actually see real end demand.

I'm curious to hear your comments.

I don't think anybody going to really know other than I think it's definitely a mix of them.

Absolutely, there is inventory destocking occuring, especially in the third quarter, you have to know.

Normally inventory increases in our third quarter, so second quarter was definitely just tried to fill the inventory.

But I think that is still continuing but at the same time,we all have a fact for emerging economies, especially in Asia, the demand -- final command is increasing, so I think it's a combination of that.

Thank you.

Your next question comes from the line of [Ross Strello] are RBC Wealth Management.

Please go ahead.

Mr.

Kim, I have followed your company for many years, and I just wanted to say congratulations.

I know you probably had some pretty rough times back in 2004 and 2005 and the turnaround that you've done is great.

Thank you very much.

And also congratulations on naming Ken Joyce as the new CEO.

Yes.

(laughter)

Thank you.

I'm sure there was some tough times along the way and you guys have had a great turnaround so once again, hats off to you and congratulations.

Thank you, Ross.

Thank you.

Thank you very much.

Thank you and management, there are no further questions.

We will turn the conference back over to you for any closing comments you might have.

Closing, right?

Thank you for participating in our conference call.

I want to extend a special thanks to our investors and analysts that have been following Amkor since we went public in 1998.

Goodbye.

Thank you.

Thank you.

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