Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Amkor Technology, Inc. (NASDAQ:AMKR)

Q2 2011 Earnings Call

July 27, 2011 5:00 pm ET

Executives

Kenneth Joyce – President, Chief Executive Officer

Joanne Solomon – Executive Vice President, Chief Financial Officer

Analysts

Sirhan – Credit Suisse

Wayne Ying - Citigroup

Jake Kemeny – Morgan Stanley

Raj David - Citigroup

Operator

Good afternoon ladies and gentlemen and welcome to Second Quarter 2011 Amkor Technology Incorporated Earnings Conference Call. My name is Alicia and I will be your conference operator for today’s call. (Operator Instructions) This conference call is being recorded today, Wednesday, July 27, 2011 and we’ll run for up to one hour.

Before we begin this conference call, Amkor would like to remind you that there will be forward-looking statements made during this conference. These statements represent the current view of Amkor management. Actual results could vary materially from such statements. Prior to this conference call Amkor’s first quarter 2011 earnings release was filed with the SEC on Form 8K. The earnings release together with Amkor’s other SEC filings contain information on risk factors uncertainties and exceptions that could cause actual results to differ materially from Amkor’s current expectation. I would now like to turn the conference over Mr. Ken Joyce, Amkor’s President and Chief Executive Officer, please go ahead sir.

Ken Joyce

Thank you, Alicia, and good afternoon everyone. With me today is Joanne Solomon, our Chief Financial Officer. To begin, Q2 sales of $688 million and gross margin of 19% were at the higher end of our expectations. We achieved strong results in the face of extraordinary supply chain challenges due to the tragic earthquake in Japan. Our global workforce did an outstanding job of working closely with our customers and supply chain partners to resolve these supply issues. We did, however, experience some material shortages. In addition, the wafer shortages initially experienced by our Iwate, Japan factory have been resolved, and this factory is fully operational. Overall, the negative impact on our Q2 sales due to uncertainties in the electronics industry supply chain was less than half of the $50 million estimate given when we gave our Q2 financial guidance back in April.

In addition, Q2 sales growth was constrained by greater than expected weakness in demand for wireless [base band] chips by a single OEM. Looking beyond these two items, demand for communications and consumer electronics applications was solid. We also saw some improvement in networking, where we have been experiencing some softness in demand the past few quarters. Although gross margin of 19% for Q2 was at the higher end of our guidance, we experienced significant margin pressure from unfavorable foreign exchange rate movement, higher gold prices, and lower utilization of certain assets support consumer applications, networking, and the isolated weakness in communications I just mentioned.

We continue to exercise discipline in our pricing policy in this challenging environment, where rising raw material costs and manufacturing costs and temporary pockets of excess capacity are pressuring gross margins and profitability. We also remain focused on increasing efficiency and cost effectiveness as an organization. However, it’s important to maintain a rational pricing environment in order to promote a healthy supply chain. Looking ahead to Q3, we expect sales growth to be consistent with our typical seasonal patterns. Strong demand for communications and a seasonal increase in gaming is expected to drive sequential revenue growth of 5% to 12%. In support of this growth, and to meet the capacity requirements of our leading customers, we are currently planning capital additions of approximately $225 million for the second half of 2011, and $425 million for the full year.

Much of our capacity spending this year is in support of our newest and most advanced interconnect technology for wireless communications, including flip-chip CSP packages, flip-chip stacked CSP, and fine pitch copper pillar flip-chip. Our sales of these packages have more than doubled in the first half of 2011, compared to the same period in 2010. To continue driving technology leadership and innovation, our capital spending in the second half of the year includes approximately $25 million for research and development initiatives to support next generation inter-connect technology such as wafer level thin out, and true silicone [via].

We’re also investing in wire bond access to support the migration of gold wire bonding into copper. Q3 gross margin is expected to be in the range of 17% to 20%. We anticipate that unfavorable foreign currency rates and rising gold prices will continue to put pressure on our gross margins in Q3. We also see some areas of excess capacity if global consumer spending remains muted in the face of an uncertain macro-economic environment. In closing, we are seeing solid demand for our packaged inter-connect technologies, and strength across many of our end markets as we move into the second half.

The migration to flip-chip and copper wire bonded packages is accelerating. As the price of gold continues to rise, we are actively engaged with our customers to try to transition to these technology platforms. Over the past few quarters, we have been investing in capacity to support this business. As a result, Amkor’s well positioned to meet the needs of our customers in 2011 and beyond, and with that; I’ll now turn the call over to Joanne.

Joanne Solomon

Thank you Ken, and good afternoon everyone. Our Q1 sales of $688 million were up 3% sequentially, and were at the higher end of our expectations. Our chip-scale packages were down 9% due to weakness in wireless base band chips as Ken discussed. Ball grid array and lead frame packages and test services all grew more than 10% each. Our sales to integrated device manufacturers, or IDM customers, grew 45% in Q2, essentially flat with Q1. We anticipate that the revenue split between our IDM and our fabless customers will remain around 50/50 for Q3 2011. The pricing environment remains stable, with very little price erosion this quarter.

The gross margin for Q2 was 19%, at the high end of our anticipated range, and consistent with Q1. Compared to our gross margin of 24% in Q2 2010, foreign currency and gold drove about half the decline. As Ken mentioned, the pockets of excess capacity added further pressure. Our OPEX of $74 million were slightly lower than Q1 and our expectations. For Q3 2011, we expect OPEX to remain generally consistent with Q2. During the quarter, we successfully completed a series of debt transactions. We issued $400 million of new senior notes, which are due in 2021, and bear interest at 6 5/8%.

We used the net proceeds from the issuance of these notes to redeem in full the $264 million of our 9 ¼% senior notes due 2016, and to refinance the $43 million of our 2 ½% convertible senior notes due May 2011. We also used proceeds to pay the related fees, expenses, and accrued interest and the balance of the proceeds will be used for general corporate purposes. We recognized charges of approximately $16 million with no net tax effect, or $0.05 per diluted share, due primarily to the premiums paid to retire the existing debt. With these charges, earnings per diluted share would have been at the higher end of our anticipated range. These transactions are the latest example of our continued success in capitalizing our market opportunities to enhance our liquidity, strengthen our balance sheet, reduce our interest expense, and mitigate future refinancing ropes on very favorable terms.

Income taxes were slightly higher than our expectations; we now anticipate that effective tax rates for Q3 and full year 2011 will be around 13%. The higher effective tax rate is caused by higher losses in tax jurisdictions like the US, where we maintain a full valuation allowance. The losses in the US were largely driven by the refinancing costs. We ended the quarter with a cash balance of $475 million, total debt of $1.3 billion, and a net debt of $848 million. Additionally, we were free cash flow positive again in Q2. With that, we will now open up the call for your questions. Operator?

Question-and-Answer Session

Operator

Thank you. We’ll now begin the question and answer session. (Operator Instructions) Our first question comes from the line of Satya Kumar of Credit Suisse. Please go ahead.

Satya Kumar – Credit Suisse

Hi, this is Sirhan calling in for Satya, thank you for taking my question. I had a question regarding Q2 gross margins; your revenues are up and gross margin is only 17 to 20%, how do you see the split between labor, material, and others in Q3?

Joanne Solomon

The split between labor materials would be generally consistent with what we saw for Q2, and let me just get that to you, so you have that handy. So Q2 is about 42% materials, 12% labor and the rest depreciation and other costs, which was 21%.

Sirhan – Credit Suisse

Thank you, that was very helpful. So in Q3 you would expect it to be similar?

Joanne Solomon

Similar; you know product mix has the tendency to shift things around a little bit, which is why we give a range with respect to gross margins, depending on where the actual mix shakes out, you may have some movement within that gross margin range.

Sirhan – Credit Suisse

Okay, but in terms of your guidance, it’s going to be pretty much similar to what you had in Q2?

Joanne Solomon

Similar; I would expect a bit of an uptick in materials because of the added pressure from gold as the gold prices continue to increase, and the average gold price increases for the quarter, we expect there to be some pressure on material because of that number.

Sirhan – Credit Suisse

Got it, thank you. And where do you see the utilization rates for Q3? For packaging?

Joanne Solomon

The utilization rate for Q3 would be in the low 80s.

Sirhan – Credit Suisse

For what? For both, packaging and test?

Joanne Solomon

Yes. Pretty close.

Sirhan – Credit Suisse

Okay, thanks.

Joanne Solomon

And let me just correct the breakout of the materials percentage; it’s about 43% for materials in Q2, 15% for labor, and then 23% for depreciation and other. I apologize, I was looking at the wrong year.

Sirhan – Credit Suisse

Okay, thank you. Last question I had was in terms of your Q2 inventory, can you talk about what is planned, the increase that you saw?

Joanne Solomon

The increase in inventory, with respect to Japan there were some swings and movement and inventory as people were trying to make sure we were making an impact in Japan. You obviously see higher inventory levels for us as we’re heading into Q3 to prepare, so I would say it’s more or less as we would expect, heading into Q3. When I look at our inventory gauge, it’s fairly consistent. I don’t see an unusual buildup with our inventory. Our inventory levels are appropriate.

Sirhan – Credit Suisse

Okay, that’s all I had. Thank you.

Operator

Thank you, our next question is from the line of Wayne Ying with Citigroup. Please go ahead.

Wayne Ying – Citigroup

Hi, thank you for taking my questions. In terms of the guidance for Q3, could you comment on what’s driving the upside and downside for that range of 5 to 12%?

Ken Joyce

We’re seeing some seasonal uptick in the gaming; the communications market remains very solid for us. As we said, we were impacted in Q2 by one OEM. We expect that we’re going to see some recovery here as we’re in Q3, and the consumer – we still see it as solid although there is some uncertainty out there, with respect to overall demand in terms of the macro-economic economy. But overall we feel good. We did see networking remains a little bit soft, but we saw some improvement in Q2 and we expect that to go forward in Q3. So we see some seasonal trends actually, and based on our discussions with our customers, we feel confident that we have good solid demand moving into Q3.

Wayne Ying – Citigroup

Okay, a lot of discussion about the chip inventory moving higher for the (inaudible); how does that affect the (inaudible) pattern in the last couple of weeks?

Ken Joyce

All we can say is what we see, I can’t speak for the entire industry, but what we see is that there has been a buildup in the dye banks in our factories, and what does that tell us, and who are the customers that are building in there? Well, they’re actually one step, once the front end makes the decision to put those into production, they take them and they give them to us and that’s good news. I think what we’re seeing there is that our customers and their customers downstream are managing their inventories really very closely, and it probably is somewhat of a reflection of what I talked about a few minutes ago, this cloud of uncertainty that’s started to rise with respect to the demand picture. I don’t think it’s so much of an inventory issue, I think inventories may be in the right areas; it’s about where this demand ultimately comes out.

Wayne Ying – Citigroup

That’s helpful. Turning to the CAPEX side, you’re taking a slightly different route than some of the competitors and the talent competitors are spending more money on copper wire mounting while you are investing more heavily on advance packaging technologies. Can you give us some outlook on how this is going to play out in the next couple of quarters, in terms of end market demand?

Ken Joyce

I feel very good where we’re at. There has been a migration obviously, from gold to copper wire bond, but there’s also a migration going on to flip-chip, at the high end. We’ve invested a lot of money there in the flip-chip, so I really feel very good with the money we put there. Now that being said, we’re investing more in copper and we’re converting our customers over also, on copper wire bond, but you’re absolutely right; we’ve been focusing more on the leading edge packages and flip-chip. Flip-chip this quarter is 36% of our total revenue, the highest it’s ever been. So I think we’re making the right investment and we’re going to benefit from that.

Joanne Solomon

I think the only thing that I would add is that with respect to our focus on flip-chip and most specifically the flip-chip in the CHL packaging, that’s what positions us really well to support the smart phones and the tablets. It shows our technology investment in the flip-chip is relative to our share of positioning in smart phones and tablets.

Wayne Ying – Citigroup

Okay, so with relatively high CAPEX investing in 2010, 2011, how do you see the CAPEX trend moving forward 2012 and beyond?

Ken Joyce

Well, you know, it depends on where the demand goes. CAPEX decisions are not short terms decisions, these assets are good, we have to make investments in support of our customers demand forecast; we’re going to do that. But that being said, we remain committed to CAPEX that drives profitable growth.

Joanne Solomon

You’re right on the historical trend there, our capital intensity has been trending to this 14% and last year we were higher than 14%, as we had the heavy investments in R&D as well as facilities. So I can see it staying at relatively high capital intensity, as the industry continues to go through technology transitions. A lot of the wireless carriers migrated from the wire bond packages this year, to the flip-chip packages this year, which is great. It’s great for us, we’re well positioned to support that, that drove higher capital intensity, and as we talked about as well, in support of lead frames and some of the wire bond laminate packages, we have to invest to support migration to copper and Ken mentioned that in his prepared remarks, is that trend is accelerating now that gold is around $1600 an ounce. With respect to the compression on gross margins, we are incentivized to migrate more and more of our customers out of gold wire bond. With that said, there’s some packages that will always stay in gold wire bonding, and we’ll continue to support that.

Wayne Ying – Citigroup

Okay, last question, regarding interest expense. With all the refinancing activity, what do you think the interest expense could come down in 2012, versus if you don’t do anything?

Joanne Solomon

We did increase our debt; we’re relatively neutral on debt this year versus last year. So I would expect our quarterly interest rate to be around $80 million. We do have some amortizing debt that in a foreign jurisdiction, so that moves the needle, but that’s relatively low interest rate, so it’s $20 million a quarter, $80 million a year on interest expense.

Wayne Ying – Citigroup

Okay, thanks.

Operator

Thank you ladies and gentlemen. (Operator instructions) The next question is from the line of Jake Kemeny with Morgan Stanley. Please go ahead.

Jake Kemeny – Morgan Stanley

Hi Joanne. I just had a question for you. Do you guys expect to continue to generate free cash flow in the back half of the year?

Joanne Solomon

Yeah, our expectation is that will be free cash flow positive for the year and that does include being free cash flow positive in Q3 and Q4. Depending on the timing of CAPEX payments, it’ll shift around, but ultimately break out between Q3 and Q4.

Jake Kemeny – Morgan Stanley

Okay. And then with that, what is the proceed? Is there any other debt that you can look to reduce in the cap structure?

Joanne Solomon

As far as reducing debt in the cap structure, we have some really attractive long term debt that we put up this year and last year, that put the $345 million at 2018 and $400 million at 2021. As a reminder, in 2014 we have a convertible note that’s $250 million that has an exercise price of $3.03, and then between that, between 2011 and 2014 we have some of that amortizing foreign debt. So there is some payments that we make throughout those years.

Jake Kemeny – Morgan Stanley

Okay. And I think on previous calls you commented that you’d like another company with a net debt position of $500 million. Is that still accurate?

Joanne Solomon

That has been our long term goal, is to manage down to a net debt of $500 million. That said, we’re a much bigger company now. Our debt to EBITDA ratio is just above two, our interest coverage ratio is strong. So we’re growing as a company. Our EBITDA remains strong; our ability to carry our debt remains solid.

Jake Kemeny – Morgan Stanley

Okay, great, that’s all I had, thank you.

Joanne Solomon

Great, thanks.

Operator

Thank you, the next question is from the line of Raj David with Citigroup. Please go ahead.

Raj David – Citigroup

Thanks for taking my call. I have two questions. The first one is on the smart phone side; it’s probably a broader level question. How are you guys, on the one hand, it sounds like there’s a benign picture you are painting from a demand standpoint, consumer demand; on the other hand, apple android phone sales are just record penetration levels every day, and so I’m trying to reconcile the two. I understand that communication is only one part of your business. How are you guys positioned to capture this pretty powerful wave? And then the second question is on the Japan supply chain disruptions. How do you see that? Is that stabilized? What do you see there?

Ken Joyce

Well, on the smart phone side, I believe we’re really well positioned. That’s where we’ve been making our investments, in support of the advanced technologies that are driving this growth, and as you say, that market continues to be robust and we participate not only directly into the OEMs but through many of our customers into the OEMs as you mentioned. So I think from the smart phone position, we are extremely well positioned in terms of what we’ve invested, actually available, and taking advantage of that market. And with respect to the situation in Japan, once again, as the CEO I’m absolutely pleased with our workforce worldwide. They worked around the clock early in the period with customers and suppliers to make sure that we got the supplies; the supply chain was moving smoothly. We’ve largely worked through that. I think there could be a small spillover of some of the materials issue into Q3, but I think it’s largely cleaned up and shouldn’t have a significant impact on us in Q3. But what impact there is is already built into our guidance.

Raj David – Citigroup

Thank you.

Operator

Thank you. (Operator instructions). There are no further questions at this time. I will turn it back over to management for any closing remarks.

Ken Joyce

Well, since there are no further questions, we’ll end the call, and I thank everyone for their participation here today. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Amkor Technology's CEO Discusses Q2 2011 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts