庫力索法 (KLIC) 2004 Q3 法說會逐字稿

Good morning, and welcome to the Kulicke & Soffa third quarter 2004 earnings conference call. At this time all parties are in a listen-only mode and a brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference please press star, zero on your telephone keypad. As a reminder this conference is being recorded. It is now my pleasure to introduce your host Mr. Michael Sheaffer, Director of IR for Kulicke & Soffa

Thank you, Megan. Good morning everyone and welcome to Kulicke & Soffa’s third quarter conference call for July 21, 2004. An audio recording will be made of the entire conference call, including any questions or comments that participants may contribute. The audio recording will be available on the internet for a limited time and may be accessed from the K&S website at www.kns.com. The content of this conference call is owned by Kulicke & Soffa Industries and is protected by US copyright law and international treaties. You may not make any recordings or other copies of this conference call; you may not reproduce, distribute, adapt, transmit, publicly display or publicly perform the content of this conference call in all or in part without the written permission of K&S.

Today’s remarks are governed by the Safe Harbor provision of 1995 Private Securities Litigation Reform Act of 1995. Actual results may turn out significantly better or worse than indicated by any forward-looking statements that we may make this morning. For a more complete discussion of risks associated with the operations of K&S please refer to the Company’s SEC filings, especially the 10-K for the year ended September 30, 2003, and our most recent 8-K.

Now it is my pleasure to introduce the host for today’s call, Scott Kulicke, CEO and Chairman of the Board. Scott?

Thanks, Michael. Good morning and welcome to this call. Over a year ago we laid out the major milestones of our plan to remake K&S away from its traditional role as a cyclical player in the semiconductor industry, away from a company that made money only at the peak of the cycle, to a company able to generate good financial results over the whole semiconductor cycle.

It’s been obvious from the valuation Wall Street has put on K&S that you’ve had your doubts about our ability to achieve those goals. This quarter’s results ought to begin to dispel those doubts.

Profitability continues strong with earnings of $22.7m or $0.35 per share. These earnings include a £1.8m non recurring charge for refinancing part of our debt taken just at the end of the quarter. Cash flow from operations was $27.6m. While there’s a tendency to think these strong performances simply reflect peak of cycle earnings, we know they are also the product of all the actions that made up our plan to get K&S to this point. We have streamlined operations; we have reduced product cost; we’ve shed unprofitable products and we’ve refinanced debt. As we calculate breakeven we have reduced our breakeven point by about 40% from it’s peak in 2002.

And we’re not finished. Besides the refinancing mentioned above, and which won’t take in additional savings until the September quarter, we have ongoing initiatives in every major part of the business. These initiatives will continue to generate incremental cost reductions at least to the middle of 2005.

But even with the focus on financial performance, we haven’t forgotten that customer satisfaction is ultimately a function of the performance of our products. We’ve maintained our traditional focus on technological leadership and aggressive product management. We’ve got lots of newer upgrade products in our R&D pipeline, more than we’ve had at any time in my recollection.

I am going to ask Maurice Carson our CFO to explain two of those cost initiatives, the bond refinancing and our new gold financing arrangement. Maurice?

Thank you, Scott, and good morning everyone. Before I get to those two items there are a couple of thing I would like to highlight in the financial statement, and then I will talk about both of those items.

First, our cash flow was very strong again this quarter. We generated $27.6m from operations. With relatively low Capex and the residual $11m from the recent 1% bond offering we finished with cash of $141m. Second, as Scott mentioned, we continued spending control. Adjusting for the extraordinary items in the March quarter we hold our operational expenses flat while continuing to fund all of our key R&D projects. Third, the blended gross margin declined only slightly 50 bps, with Ball Bonder down slightly for factory absorption, but all the other businesses showing significant improvement.

Let’s talk about the bond transaction for a minute. As most of you know if you read our press releases during the quarter we issued $65m of 1% notes that are due January 2010. At the same time we purchased $50m face value of our outstanding 5.25% bonds that were due in 2006. And just done this Monday we issued a call notice for the remaining $54m of the 5.25% notes. Our motivation for executing this transaction at this time was to take advantage of the August 19 call date for these notes. We took the first opportunity we had to retire all of this high interest debt. By calling the 5.25% debt we are committing to using $44m from our cash reserves.

Looking back we exited fiscal ’03 with almost $15m of annual interest expense. After we complete the call of the remaining 5.25% notes we will exit ’04 with under $2m of annual interest expense. The cost for this improvement was an additional 2.3m underlying shares. The sum of all of these transactions we’ve made over the last year is accretive to the P&L. Ultimately the market decides, but we see this as a very positive trade off for our investors.

Finally, let me take you briefly through the financial statement impacts of the change in gold financing that we announced two weeks ago for our bonding wire products. As we mentioned in our press release we made this change to strengthen our relationship with our gold supplier and to improve our income statement. However, the new agreement does change the timing of how the company accounts for the value of the gold on the balance sheet. In the financial statement you see this quarter you see the value of the gold for this period $11.8m in inventory and a similar amount in accounts payable. The two numbers are offset exactly. The key point here is this does not change the timing of when we set the price for the gold or when we pay for the gold. Except for a few consignment customers we still set the price we pay for the gold at the same time and at the same amount as what we charge for gold. There is no additional risk taken by the company relative to gold price fluctuations. What you see on the balance sheet has no impact to the risk profile of the Company.

Scott?

Thanks, Maurice. Before I open the floor to your questions I want to spend a few minutes looking ahead. The last few weeks has seen a mild panic in the semiconductor space as some investors tripped over each other in their attempt to not be the last one fully invested when the cycle turns. Our perspective on the cycle is that IC unit volume is still growing, although not at the pace of six months ago. This is reflected in our guidance for the September quarter of revenue in the $175m to $195m range.

That guidance is based on a Bonder forecast that is down a little reflecting the slower rate of IC unit growth. Material sales incrementally up because IC units are still growing, and test revenue down some. The test revenue in the September quarter will be down from June’s $37m and is more about a non-recurring revenue spike in the June quarter than any industry-wide trend. During the spring one of our biggest Test customers implemented a sudden change in their product road map, driving a spike of business for K&S. We’ve helped the customer get through their transition and now our Test business will settle back in trend line we laid out for you when we described our Test ‘get well’ plan. We’re making good progress in Test.

Back to Wall Street. In all the hand wringing about revenue momentum we believe Wall Street has lost sight of underlying value which is measured by profitability and cash flow. By those measures K&S is doing well and is undervalued.

Megan, we’re happy to take a few questions.

Thank you, sir. (Caller Instructions). Our first question is coming from Bill Lu of Piper Jaffray.

Hi, Scott.

Hey, Bill.

A couple of question for you. One is, if I look at the Packaging and Material sales the revenue levels are quite high but yet margins are a little lower than what is been in the past. Can you comment on that?

Part of that is a mix issue. We’ve done really well in Wire, which you know is our lowest margin product, but we’ve taken a lot of share there, especially in the Taiwanese market. But that’s about the only thing that’s going on there that’s not obvious.

Okay. And then if I look at the Wire Bonder sales, it looks like for next quarter or the fiscal fourth quarter, if I assume that materials are up a little bit again, Test is down slightly, it looks like it’s down maybe 10% or so, how comfortable are you that that’s a steady level going forward to the next several quarters?

First, I’m not going to touch with a stick anything beyond the September quarter, Bill. I mean you’re trying to trick me on that question. As regular listeners to these calls know there’s very little long-term visibility in the Bonder business. We won’t know how many bonders we’ll actually shift this quarter until about the second or third week in September it is that volatile a business. And as for the September quarter, right now we are managing inventory on the assumption that it will be flat quarter-to-quarter. As for the December quarter we are right now managing inventory on the assumption that it will be flat, but we have very little data beyond September – actually very little data into September right now.

Just to follow up on that, you talked about --

And by the way, so nobody over-reacts to that, that is not unusual, I would have said the same things a quarter ago about the June quarter.

Sure. And then you’ve talked about in the last conference calls about this top down, bottoms up forecast, can you just give us an update on what you’re seeing on that right now?

We ended up going with the bottoms up forecast in terms of the revenue guidance we just gave you. We have a little bit of upside – well actually we had some upside potential in terms of the way we’re managing the inventory. But we decided to stick to the conservative route.

But is the top down forecast still looking up, or has it come down a little bit?

Tops down view of the industry says it will see renewed momentum in the fall, but that’s not the guidance we’re giving you, that’s our model of the industry, and the industry doesn’t always conform to our model.

Got it. Thank you.

Thank you. Our next question comes from John Pitzer of Credit Suisse First Boston.

Good morning, Scott, just a couple of questions. You said that you expect unit growth to continue but not at the same torrid pace. I just wonder if you can share with us what unit growth you were using prior to today and what unit growth you’re using going forward to underline your assumptions? Second, could you just talk a little bit about the pricing environment and your view of your market share trends over the last couple of quarters? Thanks.

Okay, let me talk about pricing environment. There’s always pressure on pricing, that’s the world works. We don’t see anything extraordinary. We are pretty happy with the pricing of the bonders and we went and got a Nu-Tek -- a price premium for the Maxum Plus when we used launched that. That price increase has been accepted by our customer base and is pretty solid at this point. You will see average price changes quarter-to-quarter based on customer mix. You will see some price changes quarter-to-quarter based on the blended average of Maxum Plus’s versus Nu-Tek’s versus a handful of customers who are still buying Maxum’s. So you will see some quarter-to-quarter movement around there, but in terms of prices for individual customers for specific model configurations they have been steady and there is no downward pressure. A little downward pressure in the materials business, but again nothing to write home about; nothing that’s out of the norm.

Your question about IC unit growth – well we use the same numbers that are published by everybody else for our tops down model for the industry. For our bottoms up models we actually use the customer-based forecast, and they don’t always correlate as has been the ongoing dialogue with you guys for the last six or eight weeks. So I’d just be repeating the numbers that you can get from the OSI or the SIA or Dataquest or any of those other people.

Are your bottoms up different from the tops down right now?

They certainly are in the Bonder business. On the Materials business I don’t know, I haven’t actually gone back and tried to validate that very much. In the short term we typically default to the bottoms up forecasting.

And then just your view on market share in the bonder world?

We strongly believe that we’ve taken share in the last six months. The Maxum Plus is a great product. The Nu-Tek has done some damage to our competitors. We think that we’ve absolutely taken share.

Great, thanks, Scott.

Thank you. Our next question is coming from Brett Hodess of Merrill Lynch.

Morning, Scott. Scott, I was wondering if you saw any change between IDM’s and your Test and Assembly subcon customers? We had heard at Semicon last week, and even TI said last night in their call that some of the IDM’s have been picking up spending relative to the subcons on the back end stuff. Is that something that’s affecting your business at all?

It ebbs and flows, and I don’t know that there’s a pattern that you can discern. We’ve seen some significant orders IDM’s -- you're talking about presumably the bonders side?

Right.

We’ve seen some IDM orders, we’ve seen some subcon orders, you know, everybody seems to be moving forward with the exception of one or two companies that have company specific issues. But putting aside those very tiny number of individual companies, our traditional customer base is all more or less behaving normally and there’s no discernible pattern one way or the other.

The second question, Scott, given the revenue outlook for the coming quarter, can you talk a little bit about how you are going to be managing your operating expenses at this point?

Aggressively. As I keep saying, we’ve made a tremendous amount of progress in reducing breakeven; we’ve taken 40% out of it from the peak. We are still not where we want to be. We had a contentious staff meeting yesterday, for instance as part of our pulling together our plan for fiscal 2005. We talked about more things we have to do, more costs we have to cut, more productivity enhancements we have to get both in the factories and in the operating expense line. So across the board as good as we’re getting to be in terms of managing the company for profitability we think there’s room for incremental improvement; substantial incremental improvement from here.

Thank you.

Our next question is coming from Edward White of Lehman Brothers.

Hi, Scott. Following on from the last question, can you talk a little bit about some of the specific issues that will be important issues in the cost structure for the September quarter? I mean specific things that you’re doing, or specific things that are just going to be showing up and cropping up that we ought to be looking at as factors that are more evidence that the operational progress is improving?

Well first, these improvements come in fits and starts; it’s not even quarter-to-quarter-to-quarter. For instance in September versus June about the only big one that you will see will be reduction in interest expense, associated with the refinancing that we just did. I’m sorry, go ahead, Maurice.

There will on be -- half of that will come through -- half of the remaining part will come through because of the bonds call on August 19.

Yes, so we will get half a quarter of interest rate reduction there in the September quarter, then you will get the full amount in the December quarter. I can give you a smattering of the kinds of things we’re talking about, and this is not a comprehensive list. We’ve announced internally for instance that we’re going to start to consolidate a lot of the back office operations of the company in a shared service center in Malaysia. There will be an efficiency pick up and a cost reduction associated with that. That doesn’t really kick in until the March quarter financially, and that will include IT as well as other back end operations. So there’s that class of work. We’ve announced internally about moving saw blade manufacture to China; that’s late in the year next year. But there’s a lot of run up and a lot of work that we have to do to make that happen. We’ve still got a lot of work to do in the Test ‘get well’ plan.

We have started to outsource socket manufacture in Asia away from its traditional in-house manufacturing, machine shop operations that we do in our Haywood facility. The lease on the Haywood facility runs out at the end of the year and that overhead gets crammed into the San Jose Probe Card factory and taking up space that’s vacated with Probe Cards move to China. So there’s all that kind of stuff. I mean I could go on and on and on about this stuff, but there’s lots of things that will happen. It won’t be even every quarter; some of it will have some front end expenses that will actually drive you in the opposite direction in the short term. But a quarter or two later you will start to see the cost savings of it. Not a lot in the September quarter except the half a quarter of interest rate reduction, more in December, more in March, more next June.

Now, the ‘get well’ program in Test, when is the quarter in which we will see the -- really begin to see the big benefits from that? Is that more December or more in the March quarter?

It will be some of both. It will be incremental. It’s not a clipped function, not a step function reduction in cost. Along with that is also we expect to see some market share pickup based on the pricing and the performance of the China factory. You will start to see cost reduction even in September on the Package side. The other part of the Test ‘get well’ plan that we’ve talked less about is the new product side. We have got a lot of very exciting new products coming down the pipeline in Test, especially advanced vertical probe cards to go with the memory and high end logic segment. Also some stuff in the Package Test side.

And then finally, is the commitment there to keep that focus on cost even if revenues accelerate. So if you see the opposite problem, if you start to see revenues really accelerating again can you continue to hold the line on costs if that were to occur at some point say over the next 12 months.

That’s an easy one. We’ve all been around long enough to know that this is a cyclical business and yes, there is this handful of optimists, and I guess you and I are probably 50% of the club with this handful of optimists who think there’s life left in this cycle. And we may see some revenue acceleration, but we know we have to get in shape for the next real downturn which is going to come. We will continue to squeeze costs. I would point out to you and to all investors, go look at the website; in the investor relations section one of the charts you’ve got there is breakeven point versus revenue. And you can see over the last three or four quarters revenue was going up and breakeven was going down. We can make those two trend lines go in opposite directions, and we will continue to do so.

Great, thanks, Scott.

Thanks, Ed. Next question.

Our next question is coming from David Duley of Merriman Financial.

Good morning. I was wondering if you could talk about what you see the utilization rates of your bonder [fleets] had, and what is currently the lead times for wire bonders?

Okay, lead times for wire bonders – I’m going to give you a longer answer than you wanted for that question, Dave, because for me to say well seven weeks or eight weeks it’s kind of misleading. The way we run the wire bonder production is that we try to always hold down to just a few week of delivery, some capacity that’s unallocated. And we pencil customers in who place big orders, we pencil them with parts of the capacity for an extended period of time. But always there’s some slack in the system so if some other customer needs a few bonders quickly we can accommodate them; we don’t say, oh you go to the very back of the queue, you have to wait 12 or 14 weeks. Even though we may have some bonders scheduled out as long as 12 or 14 weeks.

So if a guy needed six bonders we could probably get them to him in less than a month. If a more normal pattern, somebody comes in and says I want 50 Bonders and I want five a week, we can say okay we can start to give you five a week in six weeks or eight weeks. So when I talk about lead times it’s a kind of a weighted average lead time as opposed to absolute if I wanted one Bonder. And weighted average lead time is running the way it always runs in six to ten week range. And that’s because we engineer it that way, and the product group manages capacity and incoming inventory on a very tight basis and very short [root] basis, so we can always balance and meet customer expectations.

Did you have any customers come in and try and utilize the slack this quarter?

Well as I said earlier, we’ve had a couple of customers come in with noticeably large orders. That’s not unusual. We still have some capacity and we still have upward mobility in the schedule if the marketplace demanded it.

Okay, and the utilization rates?

Utilization continues to bounce around between 75% and 80%. It had been trending down for a few week, and last week it spiked up, but it’s still always in that range. So it’s basically noise level movement in the 75% to 80% range.

You mentioned that you’d taken some share in your gold wire business, and it might be difficult to answer this question, but if you look at the chart that you showed Semicon West with the gold wire certainly showing increases…

Let me interrupt you. For those of you that don’t know what this chart is, it’s also on the website and it’s K&S market data gold wire shipments, and it shows a 13-week moving average of gold wire shipments in feet of wire. So that’s what’s Dave’s talking about.

And that’s a good indicator of the number of leads bonded, correct?

It’s a good -- yes of [total IO], although it perhaps overstates it simply because we have been gaining share in that business.

Okay. Well I guess what I’m trying to get at is, do the trends in that business support your overall claims of unit growth in the foreseeable future?

Yes, we think so. We think that part of the steepness of that slope is IC unit growth; and the other part of it is market share. So I’d roughly split it for -- in terms of the growth --

Did you have any 10% customers either in the order book or the revenue…

Dave, wait a minute. You and I know about the chart we’re talking about, let me try and give some texture for everybody else that’s out there. I mean if I go back to say the start of this fiscal year, 1 October, gold wire shipments again measured in feet of wire are up about 45%. So part of that is units and part of that is share growth. If I go look at the similar chart for capillaries over the same time period they’re up about 25%. So capillaries we don’t think we’ve gained much share, a little bit but not much. So this data would suggest that total leads are up perhaps 20%, 25% and anything above that in the wire is share growth.

Okay. Thank you, Scott. I’m sorry I cut you off, but were there any 10% customers in the order book or the revenue side?

[ASE] is typically our largest customer and they were probably just over 10% or somewhat over 10% of both bookings and shipments. I’m wondering about in different segments you get different breakout, so I wonder if that bit unnamed microprocessor manufacturer might have been pushing the 10% range. I don’t mean the Test side, I mean…

On the Test side and maybe overall.

Maybe overall -- I don’t know, we don’t worry about that much on a quarterly basis, but ASE continues to be our biggest customer in their expansions. I mean their actual fiscal results in terms of revenue have been great this year, and they are still growing; they’re still taking equipment on an aggressive basis to support that growth.

Thank you.

Next question, Megan.

Our next question is coming from Michael O’Brien of Bear Stearns.

Michael O’Brien: Good morning, Scott. Two questions on the bottoms up forecast. You talked a little about the tops down and how maybe it’s changed a bit. Has your bottoms up changed much since much since the mid quarter, better/worse?

When we gave you the mid quarter we gave it in terms of percentages around the current quarter shipments. The actual hard numbers we just gave you kind of narrowed that range. It pulled the top down a little and pushed the bottom up a little bit. So we’re just tightening as we go forward. And presumably when we give the next mid quarter we will tighten it up again as we get closer to the end of the quarter.

Michael O’Brien: So no real appreciable change to…?

No, nothing surprising, it’s just you narrow the range as you get closer.

Michael O’Brien: How about from a bookings perspective for September on the Bonder side? Can you give us any idea of the direction or how much up or down – I’m assuming down, but how much down?

September quarter over the…

Michael O’Brien: Over June for bookings?

Yes. Shipments will be down a little, so I expect bookings will be down a little bit. Beyond that I don’t know that there will be any appreciable trend line. Even though it’s a capital equipment item we keep the deliveries short enough so that it starts to act almost like a [turns] business.

Michael O’Brien: Okay, so similar to the way shipments are going?

Yes, and that’s always the best proxy.

Michael O’Brien: Thanks.

Our next question is coming from Shekhar Pramanick of [indiscernible] Technologies

Good morning. A couple of questions. Are you seeing on subcon side this incremental behavior change in the last four to six weeks, given that we’ve definitely seen some trouble from the chip labs; any kind of behavior change? And lastly I had a question about third quarter gross margin, if you take a mid point of the revenue guidance, how the numbers should look? And I have one more.

The subcons are -- rather than talk specifically about subcons I will answer your question a little bit differently. There are all kinds of stories in the business right now. Everybody heard about Intel’s got an inventory bulge, but there’s the story behind it which is their fab yields were better than projected so it’s really not a problem. And you can do it account by account and everybody has a data point and a story behind it. And the data points are all a little worrisome, but the stories all mitigate the worry. It’s simply the number of them that is worrisome not each individual data point. I don’t know if I said that clearly or that makes sense. And that’s kind of what we’re seeing in the subcons. One subcon is in the middle of a merger and that clearly -- they've taken equipment but it makes everything go a little fuzzy in that account. Another subcon has his own local problems and this guy is waiting for [permanence] in his factory in China, and that guy has got something else going. And you hear story after story. Everyone makes sense; everyone says, don’t take this and try and build a trend line round it.

The good news is they all with one exception seem to be in the market. They’re all taking equipment. Again the rate of growth isn’t quite as strong as it was earlier in this year but these guys all believe, and believe with their check book that their businesses are growing. And we have to go with that, we still think there’s a lot of growth left in this cycle. So that was the answer to your one question, I forget your questions. Shekhar.

The gross margins have been pretty decently, so what’s the sense the third quarter would look like if we take a mid point of revenue guidance, say 185?

I think you’re going to see, and Maurice correct me if I’m wrong, first you have to add on that there’s always customer mix issues. Even is revenue was flat you could see margins are up or down a little bit based on customer mix. You’ve got a few less Bonders, you’re going to have some overhead absorption issues in the Bonders side. You’ve got a few less probe cards’ you’re going to see some absorption in the probe card side. On the other hand, on materials the revenue goes up so you get a little bit of pickup there, and how it all blends out. Probably a little bit of margin pressure but based on absorption. And by the way it’s similar to the changes that you saw in this quarter.

Similar vein; on SG&A you had a kind of nice down-tick on SG&A number, almost $4m in the second – third quarter. Should that…

But that’s because your base line included period charges in June.

Remember last quarter we had the write off of the intangibles for the Board business and the shut down of [May Rill]. Those were extraordinary items that came in last quarter that didn’t repeat.

We’d like to take credit but we really can’t, it’s that June was disproportiately higher because of non-recurring charges.

The baseline SG&A spending was down, but only slightly.

Okay. Thank you.

Our next question is coming from Tim Sholts-Mallender (ph) of Morgan Stanley.

Morning, Scott.

Hey, Tim.

Just a quick question – actually a couple. The first is; you’ve talked about the bottoms up and the tops down forecast. Can you just share with us what are the key inputs to your top down forecast?

Top down it’s more a model than a forecast, and it’s kind of a qualitative not quantitative view of how the industry works. It starts with [Moors Law] it goes from the idea that you get a reduced feature size in the fabs, which reduce the cost of silicon and/or increase the functionality bit, raw performance of the chips that are available. You get new chips or old chips at lower cost that go and stimulate new products that pull through incremental unit demand. It says that that’s a cycle that works pretty well except that we inside the industry periodically screw it up because we overbuild capacity or we overbuild inventory. And its cycles are normally terminated by the puncturing of one of those two bubbles. So we’re in the meaty part of the really -- the money part of the 130 nanometer cycle, we’re in the very early days of the 90 nanometer cycle. Capacity is tight.

If anything, leading edge-way per capacity is holding down the industry not creating a bubble. So that part of the cycle works well, there is more fab capacity being shipped, more fab capacity being installed. It’s witnessed by improving financials out of the wafer fab guys and doesn’t apply to [Novelus’ KLA 10-cores]. And that that just ought to mean incremental units that will be available and will demand incremental wire bond purchasers, more capillaries, more wire new designs, more probe cards and so on and so forth.

The one thing that is a little worrisome is you’re starting to hear about inventory bubbles. Not big numbers; again there’s a story for almost every one, it says don’t really worry about it, it’s just that I’ve brought in my lead times. Or, it’s just that I have better fab yield or this or that or the other thing. But still it is something that should have investors scratching their head a little bit, but I don’t think it’s something that would cause people to run for the hills yet.

Okay, maybe just one housekeeping one. I don’t know if I heard it clearly; did you say you were going to use up $44m or $54m to buy back remaining bonds outstanding?

$44m from cash reserves and including we also have $11m left over from the bonds we just did. So it’s a total of $54m of spending, $44m from cash reserves.

Great, and maybe just a final one. You’re obviously going through a lot of restructuring in the business as you implement this plan you talked about, you know, particularly changes in the Test Sockets etc. As you go through this should we expect to see not only cash being used in the refinancing activity but maybe also in working capital as you just try and reduce some of the inherent business risk as you go through this? If you have a sort of number that would be helpful.

No, we expect to generate cash from operations. We don’t expect big increments of working capital. There will periodically be some period charges associated with cost reduction that shouldn’t surprise people. They won’t be blockbusters as we see them. There will be some Capex but in general we’re constraining Capex. There will be dribs and drabs of that stuff but nothing that ought to undermine the underlying positive cash flow from operations.

Great. Thank you.

Our next question is coming from Timothy Orcury (ph) of Smith Barney.

Scott, hi.

Hey, Tim.

This is probably a difficult question to answer, but kind of like this top down forecast you use, I guess is there any way to equate what that top down forecast -- if you look at 2004 and you look at what the entire unit number will be for the year, is there any way to equate that to a number of Bonders? And if there is, is the run rate in September above or below what that kind of normalized run rate is?

Tim, I want to go back to the things I said a minute ago. It is not so much a forecast as a qualitative model about how the industry works. It’s value is not to say the industry is going to take 7,000 or 6,000 or 8,000 Bonders, it’s more for [calling] inflection points, which ultimately is I think the harder and more important job. So no it doesn’t lend itself to the kind of question you’re asking at all. It’s simply it is most useful in saying, are the good times over and are we going to go through the floor or not next quarter. That’s the purpose of it, so please don’t think of it as a forecast, think of it as a model. It’s qualitative not quantitative; think of it as finding inflection points not slopes and curves.

Understood, okay. Well let me try to ask it maybe a different way then…

You won’t give up, it seems like 20 questions.

That’s right.

Go ahead.

Do you think then I guess if not quantitatively at least qualitatively, do you think the run rate of Bonder shipments, is it above what kind of normal demand is, or is it below? So in other words what I am asking is, we saw this big rush of Bonder orders really in the year, have we basically caught up with demand and now we’re kind of operating more kind of in lockstep with what unit demand is?

Look, I mean you’re asking me to separate out long-term unit growth or long-term Bonder shipment trend lines and short term. And the problem is that the long term includes peaks as high as 1,900 Bonders a quarter and troughs as low as 300 Bonders a quarter. And if I average those and say, oh well the long-term average is – and I am just making this number up, I have not averaged them – if I say the average is 872 Bonders a quarter, is that a meaningful number. Because the spread above and below that line is so high it really isn’t a meaningful number. I think I know what you’re trying to get at, and we get at that through a different vehicle. We get at that through the capacity through the utilization numbers. Now capacity utilization has basically oscillated in the 75% to 80% range for – and I’m looking at the chart, which for investors is on the website – oh I don’t know, back to October, with the small excursion rate around the holidays. But putting aside three weeks in the holidays it stayed in the 75% to 80% range. K&S in that period they shipped – oh I don’t know, 4,000 Bonders – I don’t know, a lot of Bonders. The industry is probably adding way over 10% in that nine-month period. I don’t know, way over, I’d have to go back and figure that out.

But the industry as a whole has added a lot capacity but utilization has stayed more or less flat in that period. I think what that tells you is that our customers add capacity in real time as they need it. They don’t bank capacity, they don’t buy capacity in advance. It goes back to my earlier comments about Bonders is essentially a turns business, and you shouldn’t take it in the typical capital equipment model, you know. ASE buys as many Bonders this month as they think they will need next month; they are not buying with long-term capacity expansions in mind. So people are keeping track with the unit output, they are not building ahead, they are not falling behind. That’s what the utilization data tells us and I think that’s probably the way to get at your issue.

Okay, Scott, maybe one last quick thing. Historically what’s the longest – you know going back as far as you can remember – what’s the longest that bookings have gone down in terms of sequential quarters? Because this will be your second straight bookings decline, and as I recall usually bookings decline for three quarters. So one could argue that maybe we’re kind of halfway through a sort of mini little downturn here so to speak.

Unfortunately I can remember bookings decline that lasted for a long time. I can also remember periods where bookings declines were down 85%. So what we’re seeing here is just noise compared to a real traditional bottom is dropping out kind of downturn. And I’ve said very clearly, I don’t think we’re in that kind of model. I think we’re in a different kind of a cycle. The last 18 months, 24 months doesn’t fit the historical charts, and you guys keep trying to force the real life experience back into some theoretical model, and we’re in a different kind of a cycle. The upturn was different the downturn if and when it comes will be different.

I agree, Scott. Thanks a lot.

Okay. Next question, Megan.

Our next question is coming from Peter Wright of CIBC World Markets.

Good afternoon. I have a couple of questions for you. The first one focused on the Test business looking at both the revenue and the gross margin appreciation for the past couple of quarters. I was wondering if you could comment on the mix shift there, [Cobra] versus [cantilever] product, and if there are any new customers attributing to that favorable mix?

Well first for the customers. We serve so many customers that I don’t even know – I mean no new big customers. But there are a lot of little customers and they come in and out, and I’d be disappointed if we didn’t have some new ones, but certainly no new big customers. We call on every big customer out there and do business with them on an ongoing basis at different rates.

In terms of mix, Package Test had a great quarter last quarter. Again that was a kind of a -- part of that not all of it, part of that was a non-recurring blip with one particular customer who had a kind of a hurry up route to the product line. Vertical Test – Cobra had a good quarter as well. I guess all three product lines were up. I think the two that actually got our attention were Package and Cobra, or Vertical. Cobra showed more or less business as usual this quarter. Package Test will settle back again, not because of loss of share but just because it’s one customer’s going back there to restore trend line. And Cantilever continues on its trend line.

And moving to the Wire Bond business, I was hoping you could comment if revenue is to come back in the December quarter to these levels, we’ve seen ASP erode a little bit over the past four to six quarters. I was hoping you could comment on if you think we’re heading kind of for a level of a blended ASP or if there’s any more pressure…?

I repeat my earlier comments. Actually ASP per Bonder, per customers has gone up over the last four to six quarters with a successful introduction of the Maxum Plus where got, depending on the customers, I guess 4% to 8% price increases, in that range, depending on the customer, particular configuration of Maxum Plus and particular circumstances. So ASPs as measured that way are going up. What you see quarter-to-quarter is essentially product mix and customer mix differences.

Let me try and explain customer mix for a little bit. You’ve got big subcontractors who buy in very large volume. They clearly get better pricing than say a small IDM who buys in dribs and drabs. And you will see changes in that kind of customer mix quarter-to-quarter, and big enough changes that it shows through in the company statements. On product mix you’ve got the different between Maxum, Maxum Plus. We do have some customers still taking Maxum’s – Maxum, Maxum Plus’s and Nu-Tek’s, which is a version of that same platform focused at lower [pin count] applications. The machine has less bells and whistles, has a lower [COGS] and has a lower ASP.

So I will go back and refute your basic statement that says there is ongoing ASP pressure in the Bonder business. In the last four to six quarters the ASPs have gone the right way not the wrong way.

Okay. Thank you for that. Looking at it your way then it looks like the subcons who spent more in the first half are arguably specifically the ones that you’re [tied] to than maybe what could happen in the second half additionally with utilization rates…?

Absolutely, that’s true. I mean there was a gigantic spurt in the first half. We had our all time record new shipment quarter for instance in Bonders in the March quarter, and it was mostly subcon driven. And typically the way the cycles work is the subcons power the leading edge of it and our customer mix goes disproportionately subcons. It’s not that more of them are buying it, but they’re buying more units. And then it sort of evens out as you get in the second half of the cycle.

And additionally with utilization of [fine pitch] wire bond being virtually 100% versus more the trailing edge in that 75% to 80% range you said. It seems like the favorable mix is there for the blended ASP to appreciate through the rest of the year. Am I reading you right on that?

I don’t know. As we see the current quarter for instance it will be a little bit subcon rich, which goes back to Maurice’s earlier comment about a little bit of downward pressure on gross margin. The change you saw March to June will probably be replicated June to September, but that’s customer mix driven. I don’t know; we saw an interesting thing in the June quarter, we sold machines to more different customer name and more different site names than we ever had before. It goes back to an earlier comment about share growth. And a lot of those were Nu-Tek’s which are the lower priced machine. So I’m not sure that you can make the extrapolation you want to make because it’s complicated by this share growth, penetration into lower price niches that we didn’t historically serve.

Great. And lastly, looking at the breakeven level and where you’re going to be taking that. If you could maybe give us what your target is of where to take that by the end of the calendar year; where we can be looking for that to be?

Well we’re actually looking beyond the end of the calendar year because some of this stuff that’s already in the pipeline, especially in Test, doesn’t mature until well into next fiscal year. But what we’ve said, and it’s more qualitative than quantitative, but we want to be able to be profitable at the trough of the cycle. Given current product mixes troughs of the cycle are down around $100m revenue give or take $10m. But we want to be able to make money in those kinds of conditions, and that won’t happen by the end of the calendar year, that’s going to take more work and more time. but we’re continuing making incremental progress towards that goal.

And is more of the leverage going forward going to be coming from the gross margin line, or the operating expense line?

At different points of time you get different points of leverage, and we’re working on both. We’re still working to reduce the COGS and Bonders, we’re still working a lot to reduce COGS in Test, so there’s that side. Then there are things like Maurice’s shared service center which is operating expense. I’m not sure what the relative balance is, it’s just it’s a lot of work in both areas.

Great. Thank you.

Our next question is coming from Andy Shopeck (ph) of Nutmeg Securities.

Thank you, and good morning.

Hey, Andy, what’s up?

Well I have a request before I ask my question. The request would be that in subsequent earnings releases you include cash flow statement. I think that this is a very important component of what’s happening at the company. You’ve acknowledged and highlighted it in your opening remarks and I’m certainly watching it closely. So I think it would be helpful for us on future calls to actually be able to see those cash flow statements, which might just lead to some further discussion if you can do that in the future?

We will take it under advice.

Okay. Maurice, I have a couple of questions for you. I want to drill down on a couple of things here. First of all in the calculation of fully diluted shares outstanding, do you use the treasury method?

We add back all of the shares -- I’m sorry I’m not going to give you a yes or no answer to that but we add back all of the shares related for option programs and for the bonds, and then the interest that would have been not there if we didn’t have the bonds.

Okay, well that is I believe a treasury, or modified treasury method as I understand it. What are the total number of outstanding on unexercised option shares at June 30?

We have equity page here --

Maurice is going through his book find that [indiscernible], you’ll have to bear with us.

I may not have that. That’s one of the reasons why we don’t publish some of this, I may not have brought that into the --?

That’s okay, I can ask after the call then.

Okay, if you want to call me this afternoon we can sit down and we can go through that.

What I really am trying to get at is the total potential dilution; to what extent this 69+m fully diluted shares does reflect all of the issuance of the new bonds and the option shares, or whether or not should your share price for example jump to $15 or $20 a share sometime later on how that might affect the calculation of fully diluted shares?

That I can answer. All of the bonds are included in our fully diluted numbers in the quarter, and all of the placements -- [fully] stock options are not 100% in there, but there’s not enough that you would go that some are [still under water]. But it’s so small relative to that number it wouldn’t change much. So a change in stock price would have very little effect.

So net net basically the outstanding dilutes shares have increased by 2 million from the bond swaps that are basically about a 3% kind of dilution from having issued and retired?

That’s correct, that will be after we call the 5.25%.

Exactly, on the 19th.

Yes.

Okay. With respect to cash flows, can you give me a sense of what the free cash flow was in the current quarter? I think you said $27.6m from operations?

Yes, and then we had Capex of around $2m, so that was the $25m.

Okay. So your cash flow actually increased despite a drop in revenue here in the quarter from the prior quarter, I believe it was around $21, from operations to prior quarter?

Mostly because of AR. Coming off that peak quarter we collected a lot of the cash from the peak quarter.

Okay.

Reduction in revenue should get some working capital turned into cash.

Fine. And there have been no more provisions for resizing during the current fiscal year?

No, we took a charge for the [France] we took it straight through operations and did not put it as a provision for resizing, we just took it through the expense line.

That’s in what, the second quarter?

Yes.

In June.

In the June quarter. Sorry, March quarter.

March quarter.

In general we’re handling those kinds of expenses as period expenses as opposed to resizings, going forward. We didn’t always do it that way, but that’s --

Yes, well I am glad that you mentioned that because it’s a little more clear now what’s happening. Maurice, can you specify or quantify what the fixed cost reductions have been in all of fiscal 2003 and so far year-to-date in ’04? Do you have a sense of what those actual reduction and fixed cost expenses have been?

I probably could sit down and calculate it, but we don’t really look it -- as Scott mentioned in our last call we calculate our breakeven in a very simplistic way, we don’t break out all the fixed costs reductions. Of course other than the interest which we already quantify, and a couple of the charges related to specific exiting businesses, we’ve never added up that number and looked at it that way.

Andy, the philosophy behind that is one that we learned the hard way. When push comes to shove all costs can be turned into variable costs, all costs become variable. So the idea of what’s a fixed cost can be very subjective. And rather than start to have subjective arguments with the financial community we’ve opted for a modified breakeven methodology which I think we’ve been frank about what we use, that is at least objective in its nature, even if it’s not technically the way you were taught in business school.

Yes, I know, it’s clearly a little different from what we’re used to seeing. Scott, all I can say is just keep doing what you’re doing, I’m sure Wall Street will recognize and wake up to what’s happening at this company somewhere down the road. Thank you.

I also, Andy, and thank you for that encouragement. We think we’re building a great financial engine here and we’re a little frustrated with Wall Street’s inability to get the story.

Sometimes it just takes a little longer. But I really would like to see a cash flow statement going forward in future press releases. If you could do it, it would be great.

Well take that one under advice.

Thank you very much.

Alright, Megan I think we’ve used up our hour. We want to thank all these ladies and gentlemen for their attention. Mike, do you have a few closing comments?

Yes, I do. I would like to announce some upcoming events. We will be participating at the [Schwabs Soundview] conference on August 11, 12 at the Pan Pacific Hotel in San Francisco, and we will be holding our next semiconductor business update call at 9 am ET on September 9. This concludes today’s Kulicke & Soffa conference call. As we announced at the start of the call an audio recording has been made of the entire conference call including any question or comments that participants may have contributed. The audio recording will be available on the internet for a limited time and can be accessed on the K&S website at www.kns.com. Thanks everyone and have a great day.

Thank you ladies and gentlemen for your participation in today’s teleconference. You may disconnect your lines at this time and have a wonderful day.