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Amkor Technology Inc. (NASDAQ:AMKR)

Q1 2009 Earnings Call

April 29, 2009; 5:00 pm ET

Executives

James Kim - Chief Executive Officer & Chairman

Kenneth Joyce - President & Chief Operating Officer

Joanne Solomon - Chief Financial Officer

Analysts

Vis Vellore - Credit Suisse

Junaid Ahmed - Citigroup

Peter Kim - Deutsche Bank Securities

Olga Levinson - Barclays

Eric Ruebell - MTR Securities

Scott Rusham [ph] - Liberty Mutual Group

Josh Lipchin - Eaton Vance

Presentation

Operator

Good afternoon ladies and gentlemen, thank you for standing by. Welcome to the Amkor Technology Incorporated first quarter 2009 earnings conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation, the conference call will be opened for questions.

Before we begin this call, Amkor like to remind you that there will be forward-looking statements made during the course of this conference call. These statements represent the current view of Amkor management and actual results could vary materially from such statements.

Prior to this conference call, Amkor’s first quarter earnings release was filed with the SEC on Form 8-K. The earnings release together with Amkor’s other SEC filings contain information on risk factors, uncertainties and assumptions that could cause actual results to differ materially from Amkor's current expectations.

I’d now turn the conference over to Mr. James Kim, CEO and Chairman. Please go ahead, sir.

James Kim

Thank you and good afternoon. This is James Kim. With me today are Ken Joyce, our President and Chief Operating Officer; and Joanne Solomon, our Chief Financial Officer.

We ended the first quarter with $389 million in net sales, a 29% decline compared to the fourth quarter of 2008. As we noted in our press release, our sales were adversely impacted by the sharp global economic downturn and weakness in consumer demand like other companies in the electronics and semiconductor industry.

Based upon the latest available information from our customers, we currently expect that our second quarter sales will be 18% to 22% higher than the first quarter of 2009 as the customers adjust their inventories from the historical low levels in the first quarter. However we have not seen any significant change in the overall general weakness in consumer demand and it continues to be very difficult to predict future results in this very challenging and dynamic economic environment. We believe our strategy is for managing through the current downturn are working and it is our goal to emerge as much stronger company when the inevitable recovery occurs.

Our key strategies and actions taken in response to the current economic environment include, continued focus on cash flow generation, reduce in cost and controlling capital spending, close collaboration with our key customers and related prudent investment in new technologies.

We are seeing disciplined approach comprising of the sharing select cost savings with our customers and completion of the recent offering of the $250 million of the 6% convertible notes and the expansion of our $100 million revolving credit facility, which has significantly strengthened our balance sheet and enhanced our liquidity.

In the current environment, we are focused on gross margins and cash flow and have responded effectively and decisively to the challenging market conditions. We began our cost cutting efforts early in 2008 and have implemented wide ranging, carefully selected cost reduction measures to align our cost structure with reduced levels of the demand.

Our first quarter operating results when compared with the first quarter of 2008, benefited by approximately $55 million from these cost reduction program. Approximately 60% of these savings are from labor related initiatives, including significant reductions in head count, lower executive and other employee compensations, as well as shortened shift. The other 40% was largely driven by lower expenditures for other cost of sales and SG&A.

You will clearly find that our strategies that are working are reflected by the positive gross margin we achieved for the first quarter, modest levels of ASP erosion at 1% to 2% and the current global cash balance of approximately $500 million.

While we were free cash flow negative for the first quarter by $106 million, $104 million is explained by payments in connection with patent license dispute and employee benefit and separation payments. We expect to be free cash flow positive in the second quarter and it is our goal to be free cash flow positive for the full year 2009, even with the typical payments made in the first quarter.

We are prepared to make further cost reductions to align our cost structure as necessary, but we are also being careful to avoid cutting so deep that we limit our ability to respond when the semiconductor market returns to more normal levels of the demand. Given the depth of our global manufacturing operations and our standing as a technology leader, we believe we are well positioned to respond to customer upside when opportunities arise.

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

Kenneth Joyce

Thank you, Jim. During the first quarter, our net sales decreased to $160 million or 29% sequentially, with unit shipments of 1.2 billion, down 33% compared to the 1.7 billion units shipped in the fourth quarter of 2008. We saw unit and revenue declines across all of our packages and end markets. Overall, our flip chip packages held up somewhat better than our wire-bond packages.

During the last two quarters, our customers have been reducing inventory levels in response to the current downturn. While global consumer demand has not appreciated significantly, we expect some increase in unit demand as customers rebalance their inventory from the significantly reduced levels of the prior quarter.

We are concentrating on enhancing our strong relationships with the diverse group of customers, both fabless and IDM, across the broad range of applications. We continue to build stronger ties with our customers through packaging innovation, high quality service and selective investments and key technologies they need for their advanced semiconductors. Leveraging these relationships provides a cornerstone for our other strategic initiatives in managing through this downturn and emerging as a stronger company in the years ahead.

Consistent with the third and fourth quarters of 2008, our price erosion for the first quarter remained at 1% to 2%. We continue to believe that it is not prudent to reduce price in a weakening economy, just to gain market share or fill the factories; rather, we will continue to work closely with our customers and suppliers to eliminate costs from the supply chain and share select cost savings with our customers.

Over the past decade, we have diversified our customer base. Fabless semiconductor companies account for about 60% of our total sales in the first quarter and we provide services for a broad range of applications in the wireless, consumer and computing areas. Our customer base is well diversified and our top 10 customers contributed 51% of our net sales in the first quarter.

Before turning the call over to Joanne, I would like to comment briefly about our plans with regards to capital additions. As Jim stated, discipline with regard to capital spending is critical. We are operating under a zero-based budgeting approach that is focused on specific customer requirements, technology advancements and cost reduction programs.

In the first quarter of 2009, capital additions totaled $24 million as we continue to cancel or defer non-critical equipment purchases in response to market conditions. We expect second quarter capital additions to remain at these low levels and estimate that our capital additions for the quarter will be approximately $25 million. We also reaffirm our current plans for capital additions of approximately $100 million for the full year.

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

Joanne Solomon

Thank you, Ken. Our financial position and liquidity remains sound. After the quarter, we completed an offering of $250 million, principal amount of 6% convertible senior subordinated notes through 2014 and renewed our $100 million senior secured revolving credit facility, extending the maturity to April 2013.

The liquidity provided by the new convertible notes and revolving credit facility, significantly improves our balance sheet. The proceeds from the note offering and availability from our extended revolver, together with cash flow will be used to address our debt maturity and operating requirements in future period. We have in aggregate $113 million of debt coming due through the end of 2010, and in 2011 the remaining $254 million of 7.125% senior notes and 2.5% senior subordinated convertible notes mature.

During the first quarter of 2009, we repurchased $33 million principal amount of debt due in 2011 and recorded a related $9 million gain in the first quarter. In April 2009, we used $29 million of the proceeds from the convertible notes offering, to repurchase $35 million principal amount of debt due in 2011 and expect to record a related $5 million gain in the second quarter.

We are continuing to evaluate our plans for when and how best to use the remaining proceeds from the convertible note offering, taking into account market conditions, restrictions under our debt covenants and other factors. Gross margin for the first quarter of 2009 was 12%, down sequentially from 18% in the fourth quarter of 2008, reflecting the impact of lower sales volumes and a $6 million charge for workforce reduction. These declines are mitigated partially by the benefits of the cost reduction initiative and the strength of the U.S. dollar against certain foreign currencies.

Income tax expense for the first quarter was $3 million, reflecting taxes attributable to profits in our taxable jurisdiction. For 2009 we anticipate income tax expense of about $2 million per quarter. Here is a recap of our second quarter 2009 guidance contained in our earnings release. Sales are expected to grow 18% to 22% from the first quarter, gross margin between 17% and 19%, and net loss per share of $0.04 to around breakeven.

Operator, we will now open this call for questions.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from Satya Kumar – Credit Suisse.

Vis Vellore – Credit Suisse

The first question is regarding OpEx. If revenues are coming back, first thing how do we model OpEx going into the second quarter and if revenues are back to the $500 million level, what level of OpEx should we expect?

Joanne Solomon

With respect to modeling OpEx going forward, we always described that materials was the only variable cost in that direct forecast. With the magnitude of the cost reduction efforts that we’ve gone through, we’ve shown that both labor and other cost of goods sold are also variable in this downturn.

We continue to monitor the environment and continue to scale our cost structure in line with demand. Specifically answering your question, I would expect to see that from backwards upon the balance sheet, that R&D and SG&A maybe down a couple million dollars from the Q1 level, and then we could see some increasing with respect to other cost of goods sold, starting at that model, that’s how we do it.

Vis Vellore – Credit Suisse

Okay, and also you mentioned in the first quarter the ASP decline was in the 1% to 2% range. What is your outlook on this? Do you expect it to be 1% to 2% or now that with revenues kind of coming back, do you see if your peers getting more aggressive on pricing?

Kenneth Joyce

Over the past three quarters, it’s remained relatively stable and that’s our position. As we said during the call, we’re not going to just drop prices to fill the factory. We don’t think that’s a sound strategy, so we’re going to continue to work with our customers, part of our business model on a regular basis is to reduce cost and pass the savings on to our customers and we do that, but we think the 1% to 2% is the appropriate range from what we can see at this time.

Operator

Your next question comes from Timothy Arcuri – Citi.

Junaid Ahmed - Citigroup

Hi, this is Junaid Ahmed calling for Tim, Citi. My question is regarding end demand and production levels, given that the restocking is helping the utilization rates right now, once that restocking is complete and if we assume end demand to migrate from there at moderate levels, how do your production levels line up relative to the end demand; would you think it’s below or above and would it be correct to assume that the revenues could roll back once that restocking is complete?

James Kim

No, I think I stated in both the press release as well as my conference call earlier statement that I think it is very hard to predict the future. As we stated, it appears to be inventory adjustment or who knows, second half may be surprise, stock market is saying it just hit the bottom, but I don’t really know. So, I have to depend on what customer’s interests are. So at this time for me, any kind of speculation will be a foolish thing to do.

Junaid Ahmed - Citigroup

And in terms of like production levels, right now you think relative to what you assume end demand to be at moderate levels you would be below or above in your opinion?

James Kim

We have conditioned ourselves to be able to meet any surge coming in the market or any downturn. We have very, very well positioned ourselves to manage that. That’s what we have done last six months and I’m very, very comfortable with what we have done, and as Joanne explained earlier, our cost will be well contained. Therefore, even if there is a very significant increase in demand, we are able to handle any increase. At the same time if the economy is bad and it goes down again, we already have attained a low point I believe.

Operator

Your next question comes from Peter Kim - Deutsche Bank Securities

Peter Kim – Deutsche Bank Securities

So I just want to follow-up on this question about the average selling price. I understand that your position of trying to maintain the 1% to 2% decline, but I was wondering, are you seeing pricing pressure on a competitive level, and do you think that it’s having any kind of a market share implications?

James Kim

We always see pricing pressure and I think we respond on a customer by customer basis as I think our competitors do too. I don’t believe we are losing market share; in fact I believe we may be gaining market share in some of the high-end products. That being said, there is some low margin business in which we’ve chosen not to participate. There have been some cell phone developments in China that were announced over the last couple of quarters and we’ve chosen not to participate in that low margin business.

Peter Kim – Deutsche Bank Securities

Okay, and then for my follow-up, I wanted to ask about the Toshiba, signing of an agreement, potential joint venture going forward. I was wondering, will this expose you to NAND flash packaging and test business?

James Kim

At this time on that particular subject that we had a joint press, I think Toshiba is a very important customer and we are supporting them in their efforts to address their back end operations with system LSI business, not to do with the NAND flash. The details of the range on occurrence are being negotiated, so we cannot disclose anything further.

Operator

Your next question comes from Olga Levinson [ph] - Barclays.

Olga Levinson - Barclays

I guess basically through the end of April ’09 given your guidance for up 18% to 22%, can you talk about the linearity there on a month-by-month basis; whether you see a really strong April followed by flattish or down May and June or gradual month-over-month improvement?

Joanne Solomon

Olga it’s a little bit hard to hear your question, but we’ll certainly try our best to answer, so if we don’t capture it all just please follow that. With respect to the second quarter, the linearity is very much back end, so it has a lot to do with how strong the engine are.

Olga Levinson - Barclays

Okay. And just from an end-market perspective, can you talk about what’s driving the growth or which areas do you expect under or over-performance?

James Kim

Again as I’d say, I think this class anyway based on the orders coming from customer, it appears to be inventory adjustment, not from a final demand point of view. Again, we will know more about it as time goes by, but we are not convinced that this increase is coming from final demand.

Olga Levinson - Barclays

Okay. And then just a quick question on does your gross margin assumes any restructuring charges?

Joanne Solomon

There are restructuring charges in Q1 for $6 million; the gross margin guidance for Q2 does not include any significant restructuring charges.

Olga Levinson - Barclays

Okay, and there aren’t any included in the EPS guide either?

Joanne Solomon

Yes, that is correct.

Operator

Your next question comes from Eric Ruebell – MTR Securities.

Eric Ruebell – MTR Securities

Thanks for taking my questions. Joanne, could you drill a little bit into the gross margin during the quarter, the out performance relative to other fixed cost and labor versus the drawow a s by. down in inventory in Q1. If you could sort of benchmark the relative out performance on the material side or the fixed cost labor side and how should we be thinking about that in the guidance for Q2?

Joanne Solomon

Yes, I’ll take a crack at it. I mean one of the things with respect to guiding margins in a volatile environment that we have to consider is currency and one of the things that we are having a hard time forecasting is when and how quickly will the cream one appreciate. So when we gave guidance, we had certain assumptions about that that it would recover quicker than what it is recovering. That does create some of the over performance.

James Kim

Let me add some color to this. This is Jim Kim. First of all, as you look at the cost, remember materially really a variable expense, mostly. Therefore I think facility is 37%, 38%, 40% depends on the product mix happening in that particular quarter.

Another thing is the depreciation; remember is almost a amount you cannot change, so it’s between past investments. So if you take those two out remaining is actually labor and other cost of goods sold, but if you notice the Q1 and you compare to Q4 or last year’s Q1, you’ll see significant change occurred in the labor expense area and other cost of good sold and I think that’s the model you can project for the future. I hope I answered your question.

Eric Ruebell – MTR Securities

That’s helpful. You’ve talked a lot about how the current revenue, the book for the quarter seems to be driven by inventory or replenishment, can you talk a little bit about which, if any end markets are kind of seeing the best re-stocking right now?

Kenneth Joyce

Eric, this is Ken. It’s been pretty broad based. I think the reaction was, there was an initial pull back across all sectors and I think we’re seeing a rebound and really a very broad based we’re re-bounced across all the end markets. For us the consumer market is generally a little weaker than some of the others, but it’s a pretty broad based rebound.

Eric Ruebell – MTR Securities

And then just my one last question is on the pricing side. In the past we’ve sort of seen a lot more aggressiveness on price coming out of a downturn, but in the quarter ASP’s we’re really well managed, is this sort of a sustainable industry trend that we can expect here or how do you sort of account for the better behaved prices?

James Kim

Well, we sure hope so. We think probably there’s been some learning by all the members of the set that you just can’t drop prices into off the factories as we call, we just don’t see that as a strong strategy. That being said I think we try to offer competitive prices to our customers and work with them to reduce cost that’s part of our model, but it’s a day-to-day struggle to be honestly Eric. I mean we work every day to reduce cost and share those cost saving with our customers the best we can and make them reasonable profits for our shareholders.

Operator

(Operator Instructions) Your next question comes from Scott Rusham [ph] - Liberty Mutual Group.

Scott Rusham [ph] - Liberty Mutual Group

A clarifying question and if I look at the stigmatic cash flows, there’s $43 million under purchases of property plan and equipment and you say that CapEx was $24 million I believe; what’s the difference between the two?

Joanne Solomon

We deferred both cash paid CapEx, which is what you’re seeing on the cash flow statement versus what we added to our fixed asset based in the first quarter. So the way to look at it is the $24 million number represents what was delivered to our factories when we plugged in; $42 million represents what we actually paid for in the quarter, so almost all of that equipment was actually delivered in Q4.

Scott Rusham [ph] - Liberty Mutual Group

Okay, and then the second question I had was, the $113 million in maturities through 2010, what does that consist of?

Joanne Solomon

The maturities that we have in 2009, 2010 are foreign debt. We have loans in Korea, Taiwan as well as the working capital facility in China.

Scott Rusham [ph] - Liberty Mutual Group

Okay. Is that all on the balance sheet or is there some that’s not in the balance sheet?

Joanne Solomon

It’s all in the balance sheet.

Operator

Your next question comes from Josh Lipchin - Eaton Vance.

Josh Lipchin - Eaton Vance

As we look to this restocking in the order book you have, how long does it take to restock and do you have any directional visibility into the third quarter?

Joanne Solomon

Have a little trouble with your question here, could you rephrase that question a little bit?

Josh Lipchin - Eaton Vance

Sure, no problem. As you look into the third quarter, from what you’re seeing from customers, does the restocking trend continue? Could you see growth potentially in 3Q versus 2Q?

Joanne Solomon

First of all, we don’t give guidance on Q3, that’s on Q2. We are having difficulty even giving you a proper Q2 number, and also remember we don’t restock anything. We are just doing it from manufacturing utilities to providers to our customers. They give us about six months forecast and we do have some general ideas, but I don’t think we are ready to release that at this time, because we don’t really know how they change week-to-week. I hope I answered your question, because it’s not a traditional inventory stocking.

Josh Lipchin - Eaton Vance

I understand. With respect to the utilization, do you have a forecast for utilization in the second quarter?

Joanne Solomon

Yes, it’s obviously a hard number to forecast and we left the quarter at 45% utilization for Q1, I think we left the quarter and that’s what it was for Q1. We’re forecasting as best we can that utilization will be 55%.

Operator

Your next question comes from Olga Levinson [ph] – Barclays.

Olga Levinson - Barclays

What are you assuming for interest expense in 2Q and through the rest of the year?

Joanne Solomon

With the offering that we just completed that should bring up our interest levels. Implicit in our guidance for Q2, we have about $31 million in interest expense and we would expect that to trail down Q3 and Q4 assuming that we did not use the proceeds for further debt repurchases, to the extent that we do use the proceeds debt and that interest expense number would come down.

Operator

Your next question comes from Satya Kumar – Credit Suisse.

Satya Kumar – Credit Suisse

One quick follow-up; what percentage of your COGS was material and labor?

Joanne Solomon

The percentage of COGS as material was about 39% to 40%, and labor which includes risk charge was about 16.5%. The risk charge was $6 million as a remainder.

Operator

Thank you and I’m showing no further questions. I will now turn it back to management for any closing remarks.

Joanne Solomon

Thank you everyone for joining the call. We appreciate your time and look forward to the next quarter. Thank you.

James Kim

Thank you.

Operator

Ladies and gentlemen, this concludes the Amkor Technology Incorporated, first quarter earnings conference call. You may now disconnect. Thank you for using ACT Teleconferencing.

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