庫力索法 (KLIC) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Kulicke & Soffa year-end financial results conference call. At this time, all participants 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 Michael Sheaffer, Director of Investor Relations. Please go ahead.

Good morning, everyone, and welcome to Kulicke & Soffa's fourth fiscal quarter and fiscal year 2006 results conference call. An audio recording will be made of the entire conference call, including any questions or comments that the 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.kns.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 and 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 30, 2005, and our other recent SEC filings.

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

Thanks, Mike. Good morning, and welcome to this conference call, the purpose of which is to discuss K&S's financial results for the fourth fiscal quarter and for the fiscal year 2006, which were released earlier today. For those of you who may not have seen that press release, it is available at the Company's website, www.kns.com, in the investor relations section.

I'm going to try and focus today's discussions on K&S, rather than the semiconductor cycle. As a management team, our goal is to increase the value of K&S over the long run. The tactical side of that effort has to do with the day-to-day conduct of the business, creating leading-edge products and manufacturing them at costs and with delivery cycles that match our customers' needs. Our number-one position in wire bonders and in bonding tools, and our strong number-three position in bonding wire is testament to how well we execute those day-to-day aspects of our business.

We're proud of that performance and happy to answer your questions about those facets of K&S. But that conversation won't particularly lead to better understanding of the broader semiconductor industry. As I have emphasized over the last several quarters, our strong factory performance results in leadtimes so short that all of our businesses, including our capital equipment businesses, are [turns] businesses, with manufacturing cycles and delivery times of just a few weeks.

Our customers have adopted their wire bonder purchase patterns accordingly, so that they are adding bonder capacity more or less in real-time, all the while keeping their capacity utilizations at high levels at both the top and the bottom in the semiconductor cycle.

All this makes the metrics that you traditionally quiz us on -- for example, leadtimes or capacity utilization -- less interesting as a predictor of either our future business levels or where we are in the semiconductor cycle.

As to the strategic side of increasing the long-term value of K&S, those of you who follow K&S know that over the last few years we have shed poorer-performing and noncore businesses. We have refined our cost structure. We have strengthened our balance sheet and generated a lot of cash. In the process, we have transformed K&S into a Company more focused on financial performance.

As a result of these efforts, on a continuing operations basis, we have been profitable or at least breakeven over each of the last 12 quarters, notwithstanding a wide range of semiconductor business conditions. Along the way, we have evolved K&S's culture so that cost management and balance sheet performance are ingrained.

One example of this is that our incentive compensation and the vesting of performance shares are tied to return on capital. No one gets paid out of those programs unless we perform well. And that performance is measured against an absolute financial standard, not just relative to some forecast.

As I mentioned before, we are proud of our improved financial performance; but we realized sometime ago there were limits to the amount of shareholder value we can create simply by increasing operational effectiveness. K&S has, in parallel to its ongoing focus on financial performance, a growth agenda. Some of that growth can come from continued market share gains, especially in our bonder business where we have been steadily capturing a new customer or two each quarter for the last few quarters, we can continue to grow through market share expansion.

However, we recognize that at sometime in the future, we will start to saturate our existing TAM. With this in mind, we have been evaluating alternatives for significant expansion of our TAM, which relate to the recently-announced Alphasem acquisition. This acquisition is a vehicle for K&S to enter the die attach business.

The die attach business is very similar to wire bonding. It serves the same customer base, often down to the same purchasing agent and engineering manager. The machine elements are similar. In fact, every one of our major wire bonder competitors also makes die bonders. Moving into die attach is a natural expansion for K&S, one that increases our equipment TAM from 600 million to over 1 billion.

Alphasem's availability was particularly fortuitous. While [not] the market share we are, Alphasem has an excellent reputation for customer satisfaction and strong, long-standing customer relationships. Equally important is an exceptionally talented team, happy to have a new corporate home that is committed to this industry as they are. With a purchase price of $27.1 million, subject to further customary balance sheet adjustments, the price was reasonable and affordable in the context of K&S's balance sheet.

We are excited about Alphasem. Besides its existing product lines, Alphasem has a next-generation die bonder platform currently in prototype form which targets the heart of the die bonder market. We are expanding Alphasem's engineering team to accelerate the launch of this new product, with high expectations for it in 2008 and beyond.

Maurice, why don't you take our audience through some of the details of the quarter and of the Alphasem acquisition?

Thank you, Scott. First, I'm going to provide some comments about the note in our Q4 earnings release regarding the potential understatement of earnings in prior periods. During the year-end close, we found that certain AP accrual accounts were not automatically cleared or reduced in the system each quarter. This caused us to over-accrue accounts payable and, therefore, understate the earnings for periods when the payments were made. We are in the process of verifying these payments and periods; but this issue most likely affected most periods from 1999 through 2004. The total amount of this non-cash item is approximately $4 million pretax.

For the remainder of my remarks, I'm going to be discussing Q4 versus Q3, our June quarter, as a full-year comparison. I would like to start with the gold metal pass-through component of our financials. As we discussed last quarter, package material revenue (indiscernible) in the cost of sales include a large amount of gold metal value. Although this does not affect gross margin dollars, it has a large impact on all domestic when we view it as a percent of sales. Last quarter, the amount of the gold metal pass-through was $75.3 million; this quarter it is $80.4 million. This increase in (indiscernible) higher volumes and higher gold prices.

Gross margin was down 150 basis points driven by this gold metal increase. Our margins in the equipment segment were flat. We had a decrease in operating expenses of $1.7 million due to three factors -- less restructuring; lower R&D, primarily prototype material; and lower incentive pay. Capital expenditures decreased from $1.9 million in Q3 to $1.4 million in Q4. There was a 9 million -- $900,000 in Q3 for the new headquarters building which is not a reoccurring capital expense.

On the balance sheet, cash and cash equivalents improved approximately $48 million from $109 million to $157 million. In addition to strong earnings, this was driven by a very good collections effort. DSO dropped from 81 days to 67 days, and the accounts receivable balance went down by $32 million. Inventory dollars and days were both improved.

Let me take you through some of the key points about the Alphasem acquisition. The original purchase price was $30 million. There was a working capital adjustment at close that brought the price to $27.1 million. This transaction is subject to further adjustments based on final working capital and any net cash on the balance sheet at the time of close. Much of the working capital is guaranteed and will be settled at a later date.

We expect to close the purchase of the China assets by the beginning of the year. The transaction was all cash, financed by internally generated funds. Alphasem was profitable in calendar year 2005 and on track for a small loss in 2006. We are adding additional engineering resources as Scott mentioned; and we anticipate that the acquisition will be slightly dilutive in 2007 but accretive after that.

Alphasem will be an integrated into our equipment segment and reported as part of this segment going forward. The China manufacturing operations will move into our China facility by the end of December and the operations in Berg, Switzerland, will remain as is. Scott?

Thanks, Maurice. Given current conditions in the industry, the September quarter was another good one for K&S. Net profit from continuing operations is $9.3 million, with $48 million of cash generated. Along with the Alphasem acquisition, we are creating incremental long-term growth opportunities for K&S. We are happy to take a few questions.

(OPERATOR INSTRUCTIONS) Edward White of Lehman Brothers.

Hi, it's Ed White. I was wondering if you could talk a little bit more about some of the market share opportunities you mentioned in wire bonders. You talked in the press release about some opportunities in Taiwan that were relatively new. Can you talk about those and what else is out there; and perhaps do the same for die bonders, what kind of market share opportunities at Alphasem?

In the wire bond space, we have historically focused on a handful of big subcontractors and a handful of big IDMs. And traditionally, underserved smaller subcontractors and IDMs in -- I'm struggling for a word here, because I don't want to say anything that will sound like I'm demeaning customers -- but customers away from the mainstream of the applications space.

Beginning this year, we started a concentrated effort to broaden our focus and to go after smaller subcontractors, to go after smaller IDMs, and to go after applications that we didn't traditionally serve; lower pin-count applications, LEDs, things like that.

Our guys are doing a great job. We've been capturing one or two of these new customers every quarter, and they are really incremental growth for the bonder business. It's not at the expense of somebody else. We've maintained our focus on the big guys as well, but we're bringing these smaller companies, smaller customers into the fold.

The customers are happy; they're getting the high-quality service that has been the K&S hallmark of doing business. They're getting the best equipment in the market for a change, and we're getting the incremental revenue and market share.

So we're really happy with that process. Obviously, it can't go on forever, but we can certainly continue to grow our market share at the current levels. And that's a very specific objective now for the wire bonder team.

On the die bonder side, Alphasem's existing product lines are focused on a handful of, again, generally not core applications, not mainstream BGA, QFN applications, but (indiscernible) the size of the marketplace a little bit. But in those areas, they've done very well.

Their next-generation die bonder, however, I guess (indiscernible) our next-generation die bonder is designed to bring them right back into the center of gravity of the market -- high performance, high accuracy, high process capability and competitive costs.

We like the prototype. We've spent a lot of time looking at it in the due diligence process. We're spending a lot of time with them now because we believe we can couple their strong understanding of the die bonder market with the strength of our wire bonder manufacturing system and supply chain, and really bring a blockbuster product to market at the end of 2007 or early 2008. There should be tons of market share availability -- market share opportunity available to us.

Great, thank you.

Tom Diffely, Merrill Lynch.

Could you give us a little feel for what the margin or impact from Alphasem will be in the first quarter?

Maurice, can you help us? Margin impact from Alphasem on -- well, first quarter which is only two months, and then on an ongoing basis.

During 2008, I anticipate it will probably -- I mean 2007, it will probably take -- we anticipate right now it will take 200 basis points. It will be 200 basis points lower, but on a much smaller base it will have less than 100 basis points impact on equipment margins on an ongoing quarter-by-quarter basis.

Okay. Then on (indiscernible) kind of increasing real-time nature of your business, are you becoming more seasonal? Are seasonality patterns starting to affect you more?

Yes, we keep talking about that and expecting to see that, and we haven't so far. There's no interesting data. There's nothing that jumps out of the charts either on seasonality or capacity utilization or any of that stuff. And we find it just not very useful at this point.

Okay. Finally, on the consumables side, the dip you're expecting in this quarter, is that driven by sort of production or changing gold prices or just [lucky] business?

Mostly holidays. And that's one area where you clearly see a hole around Christmas and another hole next quarter around Chinese New Year.

And you expect the next two quarters to be down a little bit because of the holidays?

I expect there to be a hole around Chinese New Year. It's too early for us to make any useful forecast for the quarter as a whole.

Okay, thank you.

Peter Kim, Deutsche Bank.

Good morning. Could you give us an idea about the incremental cost addition, how it will come online with Alphasem?

Operating expenses?

Yes. I assume it will all go onto the equipment, right?

Yes, it will be reported in the equipment segment.

At this point, I think it will be -- the total expense will be around 8, $9 million a quarter. (indiscernible) probably be less than that until we get some of these engineers out of total operating expense and listed in equipment.

And remember for the December quarter, it will be only be two-thirds of that.

Recently, I guess there's been some activity in the DDR3 area, and I was wondering if you could give us a quick update on how your bump bonders are doing in that market.

We're pretty pleased with the bump bonders in the AT Premier -- thank you, Michael. We've got very broad penetration of the Premier into a whole lot of accounts, none of which are doing huge volume. So we like our position in the market as the absolute leader, I think, in bumping technology, bumping productivity. Now we're waiting for the market to catch up with the machine capability.

Do you anticipate any significant contribution from this [vocation] in 2007?

If it happens, it will be back-end loaded.

Great, thank you.

David Duley of Merriman and Curhan.

A couple questions. Could you remind us or let us know, what do you think Alphasem's market share is? And it seems like there's a lot of commonality in the customer base. Will there be any leverage on the operating expenses over time because you're basically selling to the same customers?

First, the market share right now is in the 10 to 12% range. Certainly, there's no commonality on the existing products in terms of pieces or subsystems.

We see opportunities over time. Already we've got engineers and supply chain guys working that turf regarding our next-generation wire bonder and our next-generation die bonder. And there will also be a lot of overlap in things like supply chain where we can use volume of one product to lever better pricing for another product.

But that's something that will unwind over time. It's not an immediate impact. Maurice, do you want to --?

I think you also asked about overlapping customers. Happily for us there is little overlap really in the served customer base right now. We see this as an ability to expand both ways. But there is less overlap in direct customers served than you might think right now.

So that presents an opportunity to kind of cross-sell the products into both customer bases?

Yes.

I guess I heard your prepared remarks; I know you don't want us to focus on things. But there's certain metrics we still all like to hear. I would be curious, if you don't want to talk about utilization rates and leadtimes, which I would just like you to comment in general about, what metrics would you really have us focus on, to try to look at the future of your business?

First, I'm going to indulge you, David. Utilizations bounce around in the high 80s, and that is absolutely meaningless at this point. It is quite meaningful if you take a general industry view and you look at how our customers, especially our subcontract customers, are successfully changing their business models. But in terms of a leading-edge indicator, that is no longer an interesting piece of data.

Die bonder deliveries are measured in single digit weeks, as they have been for the last year. There is no real change. Wire bonder deliveries, I'm sorry; thank you, Maurice. Wire bonder deliveries are measured in single digit weeks as they have been for the last year. There is no change there. There is no information there.

As to your last question about what is useful for looking at K&S, I think what is useful for looking at K&S are the financial metrics. Ultimately we are here to make money, build shareholder value. You know the metrics for that. They are earnings and cash flow, and cash flow, and cash flow.

Now, you have got some market share data that might be useful; but that only comes out sporadically and is always backward looking. But we think we are doing a good job there. So that is kind of the answer.

One thing about the utilization rates that you kind of brushed upon is historically, when we go into a couple quarters' downturn, like the third quarter of wire bonder shipments being down, utilization rates usually go to like 60 or 70%. They're not doing that this time, so I think that is a positive development.

I think that is a very positive development for the industry; and the credit goes to our customers who are running their businesses that much better. I think we have enabled that a little bit by having very short leadtimes. But credit to them.

I think you really are seeing the beginning of a change in the -- especially the subcontract business model, where those guys, like K&S, have come to the realization that more than anything cash flow, consistent cash flow, is what matters.

They're generating cash, we're generating cash, and we are all sitting around waiting for the marketplace to reward us for it. I don't think you guys have gotten the story yet.

Usually, you know, I think you will be rewarded as you show us that you can make money in this downturn; and that is what you're doing. So ultimately your multiple will go up over time.

But we look forward to seeing your buy recommendation come out.

Two final things for me. Could you help us understand what the gold pass-through revenue will be in the upcoming quarter. Could you take a stab at helping us understand in your guidance statements what the implied gross margins are?

Okay, I'm going to let Maurice do that. It sounded like you are asking to predict the price of gold, and I hope he doesn't go quite that far.

I'm going to tell you that in our model we currently are planning it to be flat, but we generally do that. We don't try and forecast the price of gold. And therefore, just let you know after the fact where it went.

So right now, our planning assumptions have flat margins given the flat gold assumption should be -- a gold price assumption will also be relatively flat.

Then based on the guidance, what kind of cash flow do you think you would generate?

I don't think we have ever forecast -- guided cash flow. Scott?

Yes.

Well, how about this? We can figure out what the net income number is going to be. Could you help us with depreciation and amortization?

You guys have pretty good models, and particularly have been able to forecast what you just asked me about, which have been very steady numbers over a long period of time. So I think that you have enough information in your model to get to those numbers.

Thank you.

Andrew Schopick of Nutmeg Securities.

Okay, let's follow-up the cash flow question. Maurice, cash flow from continuing operations only, in fiscal year '06, in the absence of a cash flow statement here, can you give me that number?

No, I don't think I can give you that number right now.

Going to have to wait for the K to be filed?

Yes.

Okay. Can you give me the gold sales for fiscal year 2006 versus 2005? Do you have those full-year numbers?

Gold pass-through?

Yes, gold metal sales.

No, we only have fourth quarter here.

I think I can go back and find it in the prior Qs.

It is in the Q.

There's nine months in the Q.

There's nine months in the Q. I don't have it in front of me. I (indiscernible) anticipating that question. The first one I was anticipating; the second one I wasn't.

All right. Gentlemen, are there any further debt reduction or balance sheet objectives that you have in the year ahead? Given the financial orientation now that you have toward the business.

We have an ongoing dialogue about further debt reduction. I can't give you any more specifics than that, but it is clearly very high up on our list of things to worry about.

Okay. Last, comment or question concerns the return on invested capital. I believe that was around 23, 24% in the three months ended July. What was it actually for this period as you calculate it?

Hold on for a second. I don't have that, we have to post that on the website. It is a non-GAAP number. But we can do that. Like we can post it in the same format we did last quarter. We will put that on the website today or tomorrow for everybody, okay? And the reconciliation to a GAAP number, we will get that out there.

Is there an objective that you're shooting for in terms of how you're running the business?

Always higher is better. We use our cost of capital as a threshold for incentive purposes, though. For instance -- well, threshold is maybe not the right word. But it is a major marker. We don't start to get generous in a lot of our incentive programs until we start to earn at least our cost of capital, which is in the 17, 18% range.

Okay, can I --?

One other thing I would like to add there, Scott, is that we also look at companies that we consider best in class in the industry and in similar industries, as our ultimate target. We benchmark against those companies that are really good at return on invested capital.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Jeff Bernstein of Manhasset Capital. We will move on to our next question, which is a follow-up coming from Edward White of Lehman Brothers.

I was wondering if you could talk a little bit about the timing of any cost restructuring at Alphasem.

There is no particular cost restructuring plan for Alphasem. The Alphasem justification was not based on synergies or laying people off or any of that stuff. You know, there is clearly work to be done to improve some of their performance, but it is not in a restructuring context.

We see major opportunities in the supply chain area, where we have a lot of expertise that we can help out with. Then of course, the other focus is the next-generation die bonder and getting it to market as quickly as possible.

So within the context, I think you talked before about an 8 to $9 million operating cost associated with Alphasem. So that is consistent with the idea of getting to -- of having it be mildly dilutive for fiscal '07?

That's correct, yes.

So you wouldn't have to reduce that to get do a mild dilution for this year?

No, that actually includes the increased engineering expense that we will add during the year.

Okay, great. Thanks.

Andrew Schopick of Nutmeg Securities.

I just meant to ask one additional question about stock buybacks. Can we assume that that is really still a low priority or off the table kind of consideration?

Well, you know, we go through this menu of things we can do to continue to improve the balance sheet, and it is on the menu. But it is always down at the bottom of the menu.

Okay, thanks again.

Our principal focus is debt.

Gentlemen, I show no further questions in the queue at this time.

All right. Michael?

Thank you, Scott. I would like to remind everyone that we will be participating at the Credit Suisse annual technology conference in Phoenix. Our presentation will be on November 28 at 1.30 Mountain Time and will be webcast. We will also participate at the Lehman Brothers Global Tech conference in San Francisco. Our presentation there will be on December 7 at 11 AM Pacific Time; and that will also be webcast.

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 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 website at www.kns.com. Thanks, everyone and have a great day.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.