艾克爾 (AMKR) 2009 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the Amkor Technology Inc.

third 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, Tuesday, October 27th, 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.

Prior to this conference call, Amkor's third 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 conference over to Mr.

Ken Joyce, Amkor's President and Chief Executive Officer.

Please go ahead, sir.

Thank you and good afternoon.

This is Ken Joyce.

With me today is Joanne Solomon, our Chief Financial Officer.

As you know, effective October 1st, I became the Chief Executive Officer of Amkor, and Jim Kim assumed the role of Executive Chairman.

I am fortunate to have inherited a strong business model that has enabled Amkor to sustain profitability and generate positive free cash flow during one of the worst recessions in recent history.

Since the fourth quarter of 2005, through the third quarter of 2009, we have achieved 15 quarters of positive free cash flow and have reduced our debt by nearly $700 million.

We now have a healthy balance sheet and operating cash flow base and we look forward -- we plan to build upon our core strategies.

These strategies include, first, partnering with our key customers to service their semiconductor packaging and test needs, and to develop new technologies in support of their product road maps.

Second, focusing on cash flow generation by closely managing costs and capital spending, in line with consumer demand.

Improving our operating efficiencies and managing our debt.

And third, sustaining a disciplined and competitive pricing strategy, where we receive value for the services and technology we bring to the industry.

I am optimistic about the long-term outlook for the semiconductor industry and Amkor's prospects for the future.

As a leading provider of advanced technology for semiconductor packaging and test solutions, we are well positioned to participate in future industry growth as the worldwide demand for semiconductors recovers from the latest cyclical downturn.

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

I believe that our competitive market position will be enhanced by these efforts, as customers increasingly rely and recognize the value we bring with these new technologies.

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

We had $616 million in net sales, an increase of 22% from the second quarter.

We achieved gross margin of 25% for the third quarter, up sequentially from 20% in the second quarter of 2009.

We benefited from higher levels of capacity utilization, and our earlier cost reduction efforts.

As a part of our strategy moving forward, we are focused on maintaining and improving our profitability through better utilization of our asset base, enhancing our product mix, improving yields, and managing our other manufacturing costs.

Customer demand has been solid, based on current customer forecasts, fourth quarter 2009 net sales are expected to be flat, plus or minus 2% over the third quarter of 2009.

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

Our capital investments are focused on expanding our capacity in line with specific customer requirements, technology advancement and cost reduction programs.

In the third quarter of 2009, capital additions totaled $78 million, and we expect fourth quarter capital additions to be approximately $70 million.

This brings full year capital additions to an expected total of approximately $200 million.

We have increased our level of capital spending during 2009 in response to higher than expected customer demand which has constrained our capacity on several of our product lines.

Our expected 2009 capital intensity of approximately 9% is still at historically low levels, when considered in light of our current depreciation expense.

For 2010, we expect capital intensity to return to more normal levels of 10 to 12%, subject of course to changes in the overall economy and industry market conditions.

As an example of our close collaboration with key customers, last week we announced that Amkor, along with Nokia Microdevices signed a definitive agreement with Toshiba to form a joint venture.

This venture will be named J Devices, supports Toshiba's efforts to transform its business model and divest a substantial portion of its packaging and test capabilities.

Under terms of the definitive agreements, J Devices will be 60% owned by existing shareholders of Nokia Microdevices, 30% by Amkor and 10% by Toshiba.

The transaction is expected to close at the end of the month.

Amkor is expected to invest approximately $17 million to acquire our equity share in J Devices and about $45 million to purchase certain assembly and test equipment from Toshiba that we will lease to J Devices.

Amkor will have the option to acquire majority interest in J Devices in 2012.

This investment strengthens our relationship with an important strategic customer and gives us an opportunity to grow our business.

With that, I will turn the call over to Joanne for further discussion of our recent financial results.

Joanne?

Thank you, Ken.

For the third quarter, unit shipments of $2.3 billion were up 39%, compared to the second quarter of 2009 on the strength of our wire bond packaging services.

Net sales grew 22%, driven by strong seasonal demand, principally in support of wireless and consumer applications.

Our revenues for the third quarter were 14% less than the third quarter of 2008.

Largely due to lower unit volumes for wire bond packaging services and weakness in demand for our FlipChip packaging services.

FlipChip packaging services were down 29% from the third quarter of 2008, driven primarily by some weakness in gaming.

We are making progress diversifying the customer base and end markets, supported by the affected FlipChip production lines and expect to grow this business moving forward.

Fabless semiconductor companies accounted for about 53% of our total sales in the third quarter.

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

Price erosion for the third quarter was about 2%.

Our results for the third quarter were negatively impacted by the weakness of the US dollar against certain foreign currencies.

Our gross profit was lower by about $2 million, as a result of foreign currency movement.

In addition, our net income was negatively impacted by $8 million in foreign currency losses for the quarter, and remeasurement of an employee severance plan liability.

Principally as a result of the appreciation of the Korean Yuan against the US dollar.

In October 2009 we offered our employees in Korea the opportunity to voluntarily receive an interim payment under their employee severance plan, up to an aggregate of $40 million.

The program is currently under way, and the final amount of the interim payment could be higher or lower than the $40 million, depending on employee response and other factors.

Our operating expenses increased from $62 million in the second quarter of 2009, to $67 million in the third quarter.

The increase included research and development expenses of $3 million for an impairment charge in connection with the sale of research and development assets in North Carolina.

We still maintain a research and development presence in North Carolina, but now operate in an asset-light model to save cost.

Our income tax benefit for the third quarter was $31 million.

This amount includes $34 million of an income tax benefit primarily from the release of evaluation allowance at our subsidiary in Korea.

Excluding the tax benefits, income tax expense for the third quarter was $3 million, primarily from taxes in foreign jurisdictions and foreign withholding tax.

For the fourth quarter of 2009, we anticipate income tax expense of about $1 million.

Looking ahead to 2010, we expect that our effective tax rate will be around 10%.

Our financial position and liquidity remains sound.

We ended the quarter with a cash balance of $447 million, and total debt of just under $1.5 billion.

We have an aggregate of $86 million of debt coming due through the end of 2010, and remaining $119 million of our 7 1/8% notes and 2.5% convertible notes mature in 2011.

We generated $81 million in free cash flow in the third quarter.

We are on track to be free cash flow positive for the full year 2009, which will be our fourth consecutive year of being free cash flow positive.

During the third quarter, we repurchased $25 million of our 7 1/8 senior notes due 2011 and $49 million of our 7.75% senior notes due 2013 for face value plus approximately a $1 million premium for the combined transactions.

Here is the recap of our fourth quarter of 2009 guidance taped in our Earnings Release.

Sales are expected to be flat plus or minus 2% from the third quarter.

Gross margin, between 23% and 25%.

Net income per diluted share in the range of $0.17 to $0.23.

Our net income guidance for the fourth quarter includes approximately $1 million of our share of anticipated earnings from the joint venture with Toshiba and Nokia Microdevices.

Operator, we will now open this call for questions

Thank you, ma'am.

Ladies and gentlemen, we'll now begin the question-and-answer session.

(Operator Instructions).

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

Please go ahead.

Good afternoon.

Thank you for taking my question.

I guess first question, I was hoping you could discuss your current visibility and perhaps break it down by end market, communications, consumer, PC, et cetera.

And then I guess as a follow-on to that, what your outlook is today for seasonal trends heading into Q1?

Our outlook, we feel solid and optimistic as we go into Q4, that the demand is good as outlined in our guidance.

I think as far as end market distribution, it will be much in line with what you're seeing here in the third quarter, communications and consumer being the leading end market distribution for us.

As we look out into the full year 2010, once again we're optimistic.

As far as seasonal trends, in the first quarter historically that's a seasonally down quarter and we would expect that in the first quarter of 2010.

What is typical seasonality for Q1?

It's down in the -- generally in the single digits.

Okay.

Great.

And then last question from me and I'll turn it over.

In terms of your gross margin guide, if I take the midpoint there for both revenues and gross margin down about 100 BPs, can you help me understand what's going on there?

Is it conservatism?

Is it a product mix?

Is it ASPs?

So it is a combination of factors that brought it down.

We're definitely getting some pressure with respect to the Korean yuan.

We still had the benefit in the third quarter of some subsidies and furloughs which are going away and we're starting to see some of the comp packages at the factory level coming in so I think it's a combination of factors that put the margins under pressure.

Thank you.

Thank you.

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

Please go ahead.

Hi, this is [Louis Balui] is for Satya Kumar.

Your CapEx at the beginning of the year, $100 million you bumped it up to about $200 million.

Most of your peers have also bumped up CapEx.

Heading into a seasonally slower season for 1Q, what type of pricing pressure do you anticipate the next quarter, next couple of quarters?

We think that the pricing pressure has been relatively modest.

It's been in the 1 to 2% range and we see no reason why that would change.

Okay.

Also, the number of FlipChip units are down in this quarter as compared to the prior -- previous quarter.

Is there any reason for that or can you just elaborate a little bit more on that?

Yes, absolutely.

In our prepared remarks, we did try to answer that.

Some of those FlipChip lines were very dedicated to gaining and just a few customers so we didn't have as good of a diversifying portfolio of customers to manage any weakness.

So that's part of the reason why those units are down but we are taking steps and have made in-roads to improve the profitability going forward on those lines.

Okay.

And last one.

Breakup of your COGS, can you provide that information?

Sure, absolutely.

For the third quarter of 2009, materials was about 39% of revenues, labor was about 13% of revenues, depreciation was about 10% of revenues and other COGS was about 13% of revenues.

Okay.

Sounds good.

Thank you very much.

Thank you.

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

Please go ahead.

Hi, thanks for taking my questions.

I was -- considering that there is a weakness in your FlipChip and recently you I guess you've been investing heavily in FlipChip capacity, what's your outlook for your capital spending?

Do you anticipate investing further in FlipChip or do you believe that there's growth in other segments and you will adjust the CapEx accordingly?

We'll adjust the CapEx accordingly.

The FlipChip as Joanne said was attributable to weakness in one particular area but we continue to experience good demand in other areas where FlipChip is there.

The CapEx once again adjusts relative to where the business is coming.

We had very good growth in chip scale packaging and we'll probably be spending some more money in that area.

Okay.

And then if I could ask about the announced joint venture that you have with J Devices now, I was wondering, considering that you already have pretty large exposure to that one customer, Toshiba, and that completing this transaction will probably increase your risk to that customer, do you believe that this is a long-term beneficial acquisition?

Oh, absolutely.

This is a -- we have a long -- Toshiba is a long-term, strategic customer of Amkor.

In the short term, we're only a majority -- I mean a minority interest holder in the Company, so we're an investor and it will strengthen our relationship.

I think if you think long-term, it allows us to help them to transform to an asset-light model and provides growth for us at good levels of profitability with a customer that we have excellent relationship with.

Thank you.

Thank you.

Our next question comes from the line of Tim Arcuri with Citi.

Please go ahead.

Hi.

This is Peter Karazeris for Tim Arcuri.

Wanted to ask, I guess some of your competitors have talked some about customers shifting to copper from gold in their packaging, and I'm just curious how you feel like you're positioned for that and if you see that as well in your customer base?

We are.

We're seeing some of it and we're deployed into copper as well as gold.

Obviously, as gold prices go up as they are now, you see more interest in the copper wire.

But we are invested there.

We're servicing some customers there and we're doing a good amount of research in that area too.

And then as far as you talked a little about gross margins, one of the things pressuring in Q4 would be some expenses coming back in, people related expenses or basically salaries.

How much -- I think you had something like $80 million of expenses you had taken out per quarter this year, you had $60 million that were expected to come back.

Can you just give us how much of that will be kind of back in your numbers in Q4 and how much you expect to come back in 2010 and the timing of that.

The easiest way that I can explain it is when I look at the normalized fixed operating costs for Q3 2008 versus Q3 2009, we still show a savings of about $40 million, so of the costs that came back.

$15 million of that savings is from reductions in force which are more permanent in nature and any headcount increases would only happen further down the line based on demand.

The balance of the $25 million, how it comes back, as demand increases, the remaining costs may begin to return.

Ken mentioned in his prepared remarks that we continue to take steps to align our cost structure with demand to make sure that we sustain and improve on our profitability, so we will take steps so that those costs come back very slowly.

But as demand does come back, it will put pressure on getting those costs back earlier.

Great.

Thanks.

Thank you.

Our next question comes from the line of Dave Duley with Steelhead Securities.

Did you guys have any 10% customers during the quarter?

We had one 10% customer and we have not named who that is yet.

Do you typically disclose that in your filings?

We'll disclose it in -- it's an annual requirement so we'll disclose it beginning with the fourth quarter.

Okay.

And you talked about being capacity constrained in some product lines and I imagine that's where you're spending some CapEx dollars on.

Could you talk about which product lines or areas you're capacity constrained and what you are spending the 70, $80 million per quarter on at this point?

Absolutely.

So the lines that are constrained are principally the chip scale packaging, so things that we always tend to describe as our advanced packages.

When I look at our entire CapEx spend for 2009, about 40% is being spent in support of the chip scale packaging, about 20% in support of bump, and 10% in support of test.

The other balance is in support of line balancing some of the other lines as well as enhancing our ICF infrastructure and some other facility costs.

Okay.

And which segments were ahead of plan in the current quarter?

I notice you threw up 22% sequential growth which was better than you expected.

Which areas showed the most upside to your expectations.

It was more or less in line with our expectations.

I think we had guided up 21 so we were just over what we had guided.

But the strength comes principally from wireless and consumer.

Okay.

One final thing from me is do you have an idea of what your CapEx dollars will be for 2010 versus I think the $200 million you said you're going to spend in 2009?

In our prepared remarks we had talked about 2010, we would expect a capital intensity more like 10 to 20%.

Sorry, 10 to 12, sorry if I startled anybody, 10 to 12% capital intensity for 2010.

Ultimately, what we spend is going to be in line with the demand we see.

Thank you.

Thank you.

Our next question comes from the line of David Phipps with Citi.

Please go ahead.

Hi, thank you.

My questions have been asked and answered.

Thank you, David.

Thank you, sir.

(Operator Instructions).

And our next question is from the line of Eric Reubel with MTR securities.

Please go ahead.

Hi, thanks for taking my questions.

If you could comment a little bit, there's been some talk about possible double ordering and component shortages in some of the EMS channels.

Was curious if you could comment in the context that you're seeing some constraints on some of your lines.

Are there particular kinds of end markets that are really driving the component shortages and what's your view on double ordering?

Well, we don't see any double ordering.

I mean, we're always looking for that, Eric.

Communications and the wireless area has been very strong for us.

The broad based consumer market has been very strong for us.

As Joanne had indicated a little earlier, we've seen a lot of strength during the quarter in chip scale packaging and when we talk about chip scale, as you're aware that's very small form factors going into either a wireless device or some small consumer device.

We track that and there may be some out there but we don't believe that we've seen any in our channel so far.

If I could just ask one on J Devices, kind of historical context going back to the first JV with Toshiba.

I believe that the plan was to in some way penetrate the Japanese packaging market which was largely captive.

Does this transaction that you're entering in today, does it kind of move the ball forward in your ability to gain traction in getting those captive customers to outsource more, a little bit, if you could give a little color on that and where you got to Oate, with and how does this change the game?

Oate as you know, it was really truly a win-win.

It was for Toshiba and outsourcing their back end to Amkor and it was good for us in that it was always very profitable and cash flow positive transaction.

So good from both standpoints.

This once again moves the entire framework of our relationship with Toshiba further because as they transform from an IDM into this asset-light on the back end, that's what we'll be serving in the short term.

Nokia Microdevices does have some other third party business but that's not the focus of this JV.

The focus of this JV right now is to support Toshiba.

Okay.

Thanks a lot.

Thank you.

Our next question comes from the line of Philip Armstrong with RBC Capital Markets.

Please go ahead.

What is the $86 million of debt coming due at the end of 2010?

It's largely foreign financing, financing that we have at our subsidiaries.

Obviously you paid down some bonds, reduced debt, continue to do that.

Is that something you're going to continue to do?

From time to time we look to retire debt ahead of maturity, but other than that, we'll retire it at maturity.

So the $400 plus million in cash you've got, what's the minimum you need to operate?

You know, what we've been saying is that the minimum operating cash is to keep money moving around and having a comfortable cushion, about $200 million.

We also have $100 million revolver that we have liquidity here in the US so total minimum liquidity of about $300 million.

Okay.

Great.

Thank you.

Thank you, and at this time, I show no further questions.

Please continue.

Great.

Thanks everyone for your time and attention and we look forward to next quarter.

Thank you.

Thank you, ma'am.

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

Thank you very much for your participation.

You may now disconnect.