庫力索法 (KLIC) 2006 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Kulicke & Soffa second-quarter fiscal year earnings results conference call. At this time all parties are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded.

At this time, I would like to introduce Mike Sheaffer, Director of Investor Relations.

Thanks, Megan. Good morning everyone and welcome to Kulicke & Soffa's second fiscal quarter results conference call. 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 Kulicke & Soffa website at www.k&s.com. The content of this conference call is owned by Kulicke & Soffa Industries and is protected by U.S. 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, display or perform the content of this conference call in whole or in part without the written permission of K&S.

Today's remarks are governed by the Safe Harbor provisions of the 1995 Private Securities Litigation Reform Act. 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 the risks associated with the operations of Kulicke & Soffa, please refer to our SEC filings especially the 10-K for the year ended September 30th, 2005, and our most recent 8-K.

And now it's my pleasure to introduce the host for today's call, Scott Kulicke, CEO and Chairman of the Board. Scott?

Thanks, Mike. Good morning. The purpose of this call is to discuss K&S's financial results for our second fiscal quarter ended April 1st, which we announced earlier today. For those of you who may have missed that press release, those results are available on our website, www.k&s.com, in the Investor Relations section.

Our March quarter results are more complicated than usual, given that during the quarter we sold the businesses that made up our test segment, and we reduced our debt by $75 million through an exchange of cash and shares. We trust that as you sort out all these nonrecurring entries, both positive and negative, associated with the transactions, you will be able to appreciate the solid financial performance of our core businesses. To help you with all that, here's Maurice Carson, our CFO, to take you through the quarter's financial results.

Thank you, Scott. All the numbers I'm going to talk about are quarter two for the March quarter compared to quarter one, the December quarter. So I'm doing quarter-on-quarter. Test is treated as discontinued operations and is not included in these comparisons. The revenue number was where we expected although the $160 million does include significant increase in gold pass-through. This distorts some of the margin numbers I will discuss later. IDMs and subcons were about equal in bonders.

Gross margin was down significantly in the quarter, 400 basis points due to the large increase in the gold pass-through. The average price of gold this quarter was 14% -- 14.6% higher than Q1. Margins in the equipment segment were flat. Operating expenses were up $900,000. This included the remaining expenses for moving the blade business to China and some additional overhead reductions. As is often the case there were significant offsetting increases and decreases in the net number. But we're pleased with the trend there.

Tax expense was $1.7 million mostly due to foreign taxes and PA state taxes. We had a benefit in the discontinued operations of the sales test resulted in the loss on the tax books. CapEx was $3.8 million of which $2.4 was for the new headquarters building which we move into this quarter. We've talked about that in the past. So the remaining $1.4 million is consistent with prior quarters and guidance. We had $17.8 million in the discontinued operations line associated with the divestiture of the Test Division. To give you a high level breakout of this expense 4.9 was -- $4.9 million was loss from operations; $7 million was for facilities expenses, accrual for facilities expenses; $6 million for severance; fuel costs $2 million; and in gain including the tax benefit on the transaction of $2 million.

On the balance sheet our cash and cash equivalents went from 102 to $122 million. This included the offsetting $27 million we received from the sale of Test and the $27 million that we paid for the bond equity swaps.

DSOs jumped to 80 days. Two day of this increase was due to the -- we kept some of the AR as we previously disclosed from Test on our books with no offsetting revenue. Most of the rest of the increase is due to the fact that the test business generally had lower DSO than the segments that remain with the Company. In spite of the DSO increase, the receivables were down by a total of $37 million although this included $12 million that was sold with Test.

Inventory days were flat and inventory dollars were $17 million down including $10 million worth of inventory sold with Test. As we discussed at the mid-quarter call, we swapped some cash and equity for bonds during the quarter. This resulted in a $75 million decrease in debt and a $43 million increase in shareholders equity. Scott?

Thanks, Maurice. Looking forward you'll note that in the press release we offered revenue guidance for the current or June quarter of about $155 million plus or minus 5%. Keep in mind that this revenue level is predicated on current gold prices and that significant movement and those prices either way will change our revenue but will have only negligible impact on our bottom line. That bottom line and the associated cash flow is what we're focused on. We've shed our unprofitable businesses, leaving core product lines that is bonders and bonding tools and bonding wire, which are profitable and cash flow positive and with good marketshare positions.

VLSI recently released their 2005 marketshare numbers and estimated our bonder marketshare at 45% or greater than the next two suppliers Shinkawa and ASM Pacific combined. We are pleased with that but feel that we can continue to expand that position by focusing on applications niches, geographic niches and smaller customers who are traditionally underserved. Last quarter was a good example of this ongoing effort with increased penetration in the Japanese market and in China.

Our materials business, that is bonding wires and bonding tools, are also well-positioned in their respective markets especially bonding tools with about a 50% worldwide share. Our wire business has gained share over the last few quarters and this fact plus customer quality awards from companies like Infineon and AIT indicate we are running this business well. We believe materials demand was about flat compared to the December quarter which is reassuring given where we are in the calendar year.

These measures of marketplace success only matter if we can translate them into financial performance. In past calls we've repeatedly discussed our ongoing efforts to turn K&S into a company capable of consistently generating good financial results. The March quarter demonstrates our progress against that goal. ROIC as we calculated for the quarter was about 24% and we increased our cash position by $20 million. We're pleased and proud of these results but at the same time we note that there is opportunity for further improvement both at the top and bottom lines.

Megan, we are happy to take a few questions now.

(OPERATOR INSTRUCTIONS) John Pitzer of Credit Suisse.

First on the revenue guidance for June, it seems to be a little bit more optimistic than the comments you made around the mid quarter. I'm kind of curious what has changed relative to that on the revenue guidance for June?

Well one thing gold is up. And that has a little bit of effect. I guess the other point I'd make is that I think the market tended to overreact to our last set of comments in the last call. We certainly did not mean for the market to do its Chicken Little routine that the sky was falling after the last call. And we're still confused about why people read that call the way they did. We said that we expected revenue to be off a little. We are still saying we expect it to be off a little but it's not the end of the world.

And then, Scott, can you characterize activity between IDM and subcons for the March quarter and then what your expectation would be for the June quarter?

As Maurice said in his comments they were about evenly balanced in terms of bond or demand. And we don't -- in the March quarter. And we don't expect any significant change in that in the March quarter or in the June quarter.

And then last question --

We're seeing strong pull through from both segments in our customer base.

Can you give us a little sensitivity for every 5% move in gold price what kind of impact would that have on the top line?

Maurice, you can help me out with that.

I don't have that in front of me.

We don't have that at the top of our heads.

Okay, thanks, guys.

Tom Diffely of Merrill Lynch.

A couple things real quick here, first, can you give us an update on the utilization rates in the field of your tools?

Okay. Utilization has fallen off a little bit since the peak in December, perhaps 5 percentage points or so. It bounces around week to week. But it's about what you would expect this time of the year.

Okay. Up the mid 70s?

No, puts it at the high 70s, low 80s for the last few weeks.

All right. And then on the operating expense side, do you expect expenses to come down a little bit more in the June quarter or follow through from the divestiture?

Yes, we expect them to come down but it's not going to be that quick. The remaining overhead is going to take some time to clear out. So we expect incremental improvements quarter by quarter by quarter but it won't be major in the June quarter.

Okay. And then finally on the business trends, have you seen a change in terms of the behavior of the OSAT customers? Are they getting any less lumpy over time or is it still feast or famine?

I'd say that for probably the last several quarters they have been buying bonders in smaller lumps. And that is kind of where we expect it to be. I mean the reality is that they tend to negotiate kind of a master price and then they need some bonders and then they need some bonders and then they need some bonders. And it is not -- let's negotiate 1000 bonder blanket order the way it used to be. Although -- and it's only that there is not that piece of paper called the blanket order. There is still a master price that is agreed to between the two companies, and the releases still are coming in increasingly often and in smaller amounts.

Okay, thank you.

Next question, Megan.

Edward White of Lehman Brothers.

Hi Scott. Scott, I was hearing from out of subcons that they're buying a pretty decent level of wire bonders right now but their plans seem to call for a lot more in the second half of the year from selected subcons. And I know it is just talk right now but are you hearing that kind of thing and what are your thoughts on that?

Our subcons -- in general the conversation with the subcons is around how good it's going to be. In part because that is what gives them leverage on a day-to-day basis. It's always the promise of the next order. I don't know that I've seen a huge change in subcon sentiment. Maybe it's a little bit more positive. First, it was never as negative as you guys seem to have thought it was. Secondly, this is a pretty good level of business. I mean if you look out historically, the kind of quarter we just ended and the kind of quarter we are guiding to in the current quarter is in the top half of the distribution of bonders per quarter.

We're real happy at these kind of business levels and we'd be tickled if we could have a run of quarters at this kind of level.

Okay. You know when you talked about before about strong pull-through from both sides from the subcons and the IDMs, what do you mean specifically in terms of pull-through? Is it -- is it just sort of forward customer activity that you are seeing or --?

I'm sorry, just demands from both sides. Neither side of the equation has a band in the bonder market. They are all in there taking some bonders.

Okay. Finally, can you give us an update on new product trends, where you think you are going, status of that?

We're still in the first half of the product lifecycle of the Maxum Ultra. The product is doing well. But as is always our style, there is a continual flow of enhancements and improvements and continuous improvement activities associated with that bonder. It is no secret that there is another bonder behind that that is due out next year. We're pleased with how those prototypes are running. I think the design teams are going to meet all their goals, both performance and cost goals, from that product. And it will be a great bonder when it comes to market.

There's a steady flow of new products or enhancements to products in the materials sector. The capillary guys and the wire guys that stuff -- their stuff. And I think we're doing all the things we've traditionally done that allow us to have the commanding marketshare positions we have.

And the Elite is well-positioned product-wise?

The Elite is well-positioned, and we're continuing to see how we can stretch variance or applications, packages, on either the Elite or the Ultra frame to go out and target niches that we've not historically served.

Okay, sounds great. Thanks.

David Duley of Merriman & Co.

Good morning. I was wondering if you could just update us very quickly, a housekeeping question, what are your leadtimes right now?

Leadtimes are, if anything, maybe stretched out a hair, but they're competitive.

Would that be in the four to six-week range or longer than that?

A little longer than that. We're pretty well sold out through the end of May.

I seem to recollect last year the subcons seemed to get much more active, like in the middle of the June -- the month of June, sometime in June. Given where utilization rates are this year and inventory situations, when would you guess that they might start to get active for the Christmas build?

Okay, the traditional model for the industry which is not determinative or predictive and is entirely backward looking is around about the end of spring, the beginning of the summer, people start to build up for the holiday season. Now, that is not a prediction. Sure, go ahead. Maurice wants that.

I was going to say that as Scott mentioned earlier, the subcontent remained active last quarter and this quarter. There hasn't been a big drop-off for (indiscernible). So we've had good activity from them all the way along.

Yes. I mean, one of the things that we pay attention to, not that we have any specific knowledge about it, but we're reading the same reports you are is, of course, inventory positions in the supply chains from our customers down to the board assemblers and what that means, because that tends to mitigate one way or the other, or modify (indiscernible). But ultimately, they only buy bonders because there's going to be more silicon available, or more silicon that needs to be assembled. So ultimately, it seems to me the driver you ought to be looking at is not bonders but the output of people like TSMC and UMC.

Now, does the ASEs of the world, the Amcors and [SPILS] and STATS ChipPACs only buy bonders because they think there's going to be chips to build with them?

Now, with the -- some of the subcons are suggesting yesterday since they all reported that the activity throughout the quarter would grow stronger. That seems like that's a good sign for future wire bond demand. And I think to follow up on Ed White's comments, they all talk about spending kind of lower levels in Q1 and Q2, indicating they buy 40 or 50 wire bonders in the second kind of course, but their CapEx budgets are much, much larger than that. So I was wondering if you might be able to give us a little commentary there.

First, the big subcons by and large bought more than 40 or 50 bonders in the first half each. We don't see a forecast for huge discontinuities in their order streams. They have been very good customers. They look like they will continue to be very good customers. I know that for some of them, their CapEx were distorted or are being distorted by investments in bump fabs, which are big lumps. They're being distorted by investments in testers which are big lumps. And the point I'm trying to make is that you guys try and equate CapEx budget to bonder budget, and there's other things in that number that you can't make a one-to-one correlation to. And I'll go back to what I said a minute ago; these guys have been good, steady customers in the last couple of quarters. We expect them to continue to be good, steady customers.

Okay, one final thing from me, actually two-parter. When you just -- I was wondering if you could just give us an outlook kind of on if we do have some improving revenues what the gross margin trend might look like and that will make take it for me.

Maurice, why don't you handle that one?

Well, gross margins were, as I mentioned in the equipment side were relatively flat, at a good member. They're coming off of a bigger revenue number. We're pleased with that and we would anticipate that around the normal curve they will continue in the equipment side. The package material side will be heavily dependent upon the price of gold on the gross margin percentages as it has been in the past. And if the gold stays the same price then the margin percentages will stay around the same.

We're actually very pleased with the gross margin out of equipment and revenue from the December and March quarter was down significantly but we held our margins flat and we think that's again excellent performance out of our factories and our supply chain.

What exactly allowed you to on a down revenue hold your margins flat?

We've talked about this in the past. We don't have a high absorption factory. The absorption of fixed cost in our factories isn't as great as it is in some other industries. Plus there is a whole lot of mix shift that goes on here between customers and between segments of customers that always affects that number.

There is also the mix shift between the Ultra and the predecessor model which helped a little bit.

Not much this quarter, but yes.

But if we go back to couple of quarters ago.

Thank you.

(OPERATOR INSTRUCTIONS) Edward White of Lehman Brothers.

Hi. I was wondering, Scott, if you could talk a little bit about the factors behind your marketshare success and your market share increases here. As you look around and look at what's going on out there is it product or something else you guys have done, or what is the key driver behind that?

There's not so much one key driver but the core of the bonder organization is focused on customer satisfaction and reducing the cost of ownership or the cost of a bonded package. And that is 100 little issues on UPH, on uptime, on yield. I wish I could serve you up some nice simple -- oh, we have the magic framice that makes our bonders better. But it is a lot of work by a lot of people down at the fractions of a percent improvement on each little effort that adds up to K&S being the best-in-class supplier; the K&S bonders, whether it is the Ultra or the Elite, being the best-in-class bonders.

And I want to go back and reemphasize that it's the best in class supplier as well as the best in class product. That supplier issue includes our ability to synthesize between the capillary business and the wire business and the bonder business. And for our applications engineers to bring all of those pieces together at the customer site to improve the customer's experience and increase the customer's profitability on a bonded wire.

Great. Thank you.

Thank you, Ed. Next question, Megan.

Peter Kim of Deutsche Bank.

Good morning. I had a question about -- last quarter you had changed your the way you segmented cost out getting rid of the corporate expense and building that into the business segments. And then now with the testing gone I guess there's some residual overhead that remains and that is again being distributed into the two remaining business segments. I was wondering if you could kind of go through the transitions and give us kind of a flavor for what percentage of the cost has gone into what -- each of the business segments?

Maurice?

It's primarily based on revenue for the most part not exclusively so you can kind of track it on revenue although internally we use revenue out of gold. It is close to that. I think that the number -- and I don't have it exactly right in front of me -- but I think it is 2-to-1 or something like that, bonders over materials. But it's a number approximately like that.

2-to-1?

Yes. And the Test number as I talked about at the mid quarter, the residual Test number is something south of $2 million of expenses and overhead that is now absorbed by the those two businesses.

Right. Do you anticipate some of this residual to maybe get reduced over time?

Absolutely.

I think that is the question that I answered earlier that every quarter it's not going to be a big step function but yet we have a lot of work going on with that right now to reduce that and it will be a focus until the number is right. But it is going to be quarter by quarter by quarter kind of effort.

You don't have a target?

Well, we don't have a -- we have internal targets now that we are still working through on what we'll drive that number down to. But we're still pounding out the details to support that so I don't think we can really talk about it yet.

Great, thank you very much.

David Duley of Merriman & Co.

Just two quick follow-ons. Scott, you mentioned -- you read stuff about inventory out there and I'm sure you talk to your customers. Could you give us your read on what your customers and their customers are saying about the inventory situation?

And then just one other question from me, there is a huge installed base of bonders in Taiwan; I think I just remember looking through the reports yesterday like 8 to 10,000 at the two big boys. I'm just wondering if there is some sort of replacement cycle attached with some of those bonders that have been there for awhile. Thanks.

About the inventory, we have no specific or unique knowledge. Yes, I mean, nobody seems to be overly concerned about inventory right now given where we are in the calendar year.

The second question about the replacement cycle, whether it is Taiwan or anywhere older bonders run out of steam for newer applications. And at some point older bonders even if they are running older applications become not cost-effective. So we see people replace bonders typically bonders that are -- I'm going to give you a big range, but five to eight to 10 years old depending on the application that the customer is running. Most of the 8020s have been pulled out of production. Some of the early 8028s are being pulled out of production. Although I say pulled out of production, they also often get recycled, often into smaller less demanding niche markets.

Thanks.

Megan?

Gentleman, that was our final question.

All right. Well thank you very much. Megan and Mike, do have some wrap-up announcements?

Yes, I do. Thanks, Scott. I would like to remind everyone that a reconciliation of the ROIC calculation that Scott mentioned is posted on our website. That is scheduled to be on there in about one hour. In addition we will be attending the Merrill Lynch conference on May 3rd in New York. Our next mid-quarter conference call is scheduled for June 8th. And finally, we will be also attending the Bear Stearns conference on June 13th in New York City.

This concludes today's Kulicke & Soffa conference call. As we announced at the start at the call, an audio recording has been made of the entire conference call including any questions or comments that participants may have contributed. The audio recording will be available on the Internet for a limited time and may be accessed on the K&S web site at www.k&s.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.