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Amkor Technology, Inc. (NASDAQ:AMKR)

Citi Technology Conference

September 06, 2012, 14:00 p.m. ET

Executives

Joanne Solomon - EVP and CFO

Bob Lanzone - SVP, Advanced Product Development

Greg Johnson - Head, Corporate Communications

Unidentified Analyst

It's a pleasure to have Amkor with us today. (Inaudible) semi cap equipment and also specialty semiconductor analyst and again welcome Amkor. Joanne Solomon, CFO will be presenting 20 minutes presentation we will also then have some Q&A and then turn it over for audience question. So, with that let's get started. Joanne.

Joanne Solomon

Thank you, Caris, and thank you everyone for joining us today. With me today I have Bob Lanzone, he is our Senior Vice President in Advanced Product Development and Greg Johnson, Head of Corporate Communications. So, as you are attending a question feel free to ask any technology based questions, Bob will do a great job.

To get started I have two slides that I will walk you through and three slides will be counted disclaimer slides to the extent that we have any forward-looking information I'd just caution you that there is with respect to forward-looking information we refer to our SEC filings and I'll follow to it with respect to guidance is our last time giving guidance is as of July 26 their comments relating to the guidance as of that date.

To give some highlights of the business for people who may not be out familiar with the story. Amkor is one of the leading outsource semiconductor packaging and cap providers. So, we are a contract manufacturer, our manufacturing facilities are in Asia base about 75% of our revenues come out of (inaudible). And we have manufacturing locations in Taiwan as well as China and Japan. The industry is dominated by poor principle outsource of semi and test providers, ASC, OSAT. ASC has largely been up, we are larger than they are with respect to flip chip, assembly and test and then going without chip pack, which is core to Amkor and where we sustained our competitive advantage over the last 40 years. Our focus is largely on the advanced package development. So, we tend to bring new packages to their and then benefit from the higher market share initially and that’s where we are seeing today and flip chip as more and more packages migrate out of wire bound into flip chip. And we are well positioned to capitalize on that trend and we have the leading market share in support of flip chip.

As a contract manufacturer, here we are tend to be driven a lot by who our customers are. So, we are well positioned with many of today's leading semiconductor company. Customers like Qualcomm, Texas Instrument, Toshiba, Altera, Xilinx all customers of ours and keep the ideas attraction and exceeding the R&D pipeline.

With respect to favorable OSAT trend, more and more companies are starting to outsource more and more what’s driving that is the as the OSAT fires are building scale we can do things that cheaper and more effectively and all from a technology perspective sometimes to become difficult for a semiconductor company to maintain the level of manufacturing capability for both to outsource instead.

To give you some highlights from a financial perspective, Amkor is on a trailing 12 month basis as of Q2, our revenues were 2.8 billion. Our EBITDA, high level of EBITDA $500 million on an unadjusted basis if you back off our litigation accrual to half and back in Q2 it would be at 533 and net income is 85 million adjusted and then 97 million on adjusted.

We as a company and from a financial policy standpoint we talk about a continuous focus on profitable growth and strong cash flow generation. So, that keeps a very balanced view with respect to how we deploy cash and being both cyclical and a seasonal industry it's important to keep our cost in line with the demand that we are seeing in that remains the priority of ours.

As a company we do have debt on our balance sheet it's about $1.4 billion. From a credit profile our debt-to-EBITDA is 2.7, there was some level of deterioration because our EBITDA was again impacted by the accrual for the litigation matter. Our return on invested capital remains above our weighted average cost of capital, it has gone back a bit, there was some level of compression with respect to our profitability. We were adversely impacted in 2010 and 2011 as a result of (inaudible) and we had some areas where we had some utilization challenges largely on the legacy side.

We remained well positioned for growth, we are investing in the right areas. We continue to invest in support of, well chip is well on the legacy side mean that some cost savings initiative. And [Bob here] simply takes the fair share of capital investment we had in the last year or so in support of Through Silicon Vias.

With those introductory remarks, I'd love to take any questions that you all may have.

Question-and-Answer Session

Unidentified Analyst

I'll start off and then we can go to the audience for questions as well. I think that you had mentioned part of the results of the 28 nanometer capacity as part of the result of that. You had guided a little bit softer for the third quarter, can you give us an update on what you are seeing in terms of trends since then and your expectations for how that might contribute to the growth profile in fourth quarter?

Joanne Solomon

Yes absolutely. One of the key trends for us is reported to wireless phase and that’s larger on the smartphone and tablet side. There are a lot of exciting products that are going to get announced within the next week or so, and we are well positioned to capitalize on the growth coming out of those packages, part of these packages are driven into new technologies like 20 nanometer. As a reminder our treasured communications is about 45% of our revenue, this comes from communication. And there is also a seasonal trend with respect to communication, Q1 '10 (inaudible) they pick up in Q2 and then it picked out Q3 and Q4. What happened this year were two very different from that seasonal pattern is that we didn't see as much of a tick up in Q2 on the communications side and we didn't see as much of a pick up as you expect in Q3 also. And now it's driven by some of the issues around supply of 28 nanometer. It became clear is that the demand for the wafers without shipping the capacity, the technology is ramping well. We are seeing wafer show up to our door and we are pushing them out as fast as we can. And assuming that there is strong sell-through of these devices, we do expect that we will strength in Q3 and Q4 in support of this and a more normal seasonal cycle and communication for 2013.

Unidentified Analyst

And how does that translate to utilization, I think utilization was close to 80% in the second quarter what’s your expectations as we head in the year-end?

Joanne Solomon

From a utilization perspective because this is largely new capacity in support of new technologies. A lot of it is driven more by the timing of our CapEx. In connection with this migration the 28 nanometer there is also a migration in tester platform. So, we are bringing the testers as the demand shapes up, so that part of what has moderated our CapEx for those second half of the year. We were at 550, we [rolled] it back to 500. So, a lot of that has to do with when we need the testers and when we bring on the capacity. So, I'll say that the 28 nanometer issue aren't impacting as much from a utilization standpoint. There is some impact just because that there is so many differentiated factor into a device, if there is a delay in building the device there is some (inaudible) with respect to the other chip. But with respect to utilization as you said capacity utilization on a similar side as of Q2 was high 79%. We do expect to be back in 80 range.

Unidentified Analyst

And then you mentioned the reduction in CapEx for the second half, is your expectation still 500 million and also as we look into next year what are your initial thoughts about CapEx requirement?

Joanne Solomon

Our expectation is that CapEx will maintain at 500 million on the machinery equipment side. We are also in the final negotiations to acquire a piece of land in Korea from a long-term perspective. So, that’s an incremental 100 million above that 500. So, it does feel like it's the right level of CapEx for us for 2012. We have very much from our strategy standpoint, is we do the best we can to keep the CapEx in line with the demand. So, as we see the final demand we try to achieved up for the balance of this year we will fine tune CapEx along the way. With respect to 2013, we haven't really given too much guidance, we haven't given any guidance with respect to where CapEx will be for 2013, but to give you some color with respect to what to expect, our depreciation expense as a percentage of revenues is right around 13%.

So, capital intensity moving forward if we invest right around 13%, you can expect to see that much in the way of depending on how you feel about demand pattern in the next year. So, that could drive capital intensity higher than that metric. Some of the things that can help us moving forward is the, we talked a little bit about the tester migration in support of 28 nanometer for our customers. As that technology matures you will have test time reductions and the more test time reductions you have the more throughput we will be able to get out of the tester. So, that will help moderate some of the level investment, we will able to benefit from the investment we made in 2012. Also we invested heavily to ramps and bring scale to our fine pitch flip chip copper pillar technology which is really a platform technology. It's where we started with in support of Texas Instrument and we are qualifying customers beyond that now. That will more of a 2013 story, we do have capacity in place to service a level of demand and there maybe some incremental investment depending on how well it's adopted to the extent we view that’s a very positive story that we will be able to ramp up other customers.

The other trends from an investment standpoint will continue to support the migration to copper wire and the cost production on the legacy side. And we are seeing greater levels of adoption in (inaudible) this is small form factor package, low pin count, it doesn't have a substrate and we are seeing more companies migrate out of the wire bound package into a wafer level CSP package. So, depending on how that demand pattern performs in 2013 that will take lot of investment. So, that’s a really long way of not giving a specific answer for guidance for 2013 but some of the puts and takes that we are going to be looking at as we (inaudible) 2013.

Unidentified Analyst

So, it sounds like maybe I think this year you are coming in close to 18 or maybe 19% CapEx to sales. It sounds we probably get some alleviation of that next year as 28 matures a little bit and then maybe a bottom range will be 13% depreciation level; is that a good way to think about?

Joanne Solomon

I think absent a new technology story coming up. The more aggressive (inaudible). There is our historical patterns with respect to capital investment is to see the periods of higher level of investment are followed by periods of where you are reaping the benefit and you can go with that. So, at some point it should turn here and ultimately 2013 could be the trending year, if there isn't another like of trend that will drive.

Unidentified Analyst

And then Joanne if we can maybe go through the different parts of revenue composition we talked about communications a little bit, you alluded to 28 nanometer seeing sort of a near-term shaper of how that demand is going through to your income statement. What about other parts of the communications business, what are you seeing in terms of demand as we head into the year-end and into the beginning of next year?

Joanne Solomon

Broadly it's a tremendous category, it is (inaudible) position to some of the leading platforms, it's a very positive story for us. So, broadly with respect to tablets as well as smartphones. We see continuing positive demand trends that will continue to benefit from that. And it goes with the on the logic side as well as we have from memory business as well. So, we are positioned broadly in the device. So, that’s a positive story and we do expect that continue through Q3 and Q4 and depending on consumer demand for these devices in the second half that will set us up really well for the next year also. The other side of the story is the more data driven devices that are out there the more demand will be on the networking side as well. So, there is some pull through demand on that side also.

Unidentified Analyst

Outside of communications if we maybe talk about consumer net?

Joanne Solomon

Yes, consumers is obviously the full operation in semiconductor chip across the consumer spectrum is very broad. We did have and we still maintain an exposure to being in the game boxes. And our share with respect to gaming had been historically been very dominant which with positive gaming was very seasonal with Q2, Q3 side and very trough like revenues since Q1 and sometimes even Q4. There has something really significant development of new boxes in gaming and some of that demand is wining one of our IBM customer who started to internalize some of that demand. So, while we have a seasonal pickup here driven largely by gaming sequentially, when you look at (inaudible) that lower level. With respect to our (inaudible) it's on the flip chip BGA side, so these are the large body size chip. It's the same access that support networking also. So, as our share of the gaming business is going down and more gaming is going at the handset level or at the tablet level, we were redeploying flip chip BGA assets in support of other areas. So, it may deteriorate some of the top line growth but our profitability will be maintained as we redeploy those assets to let's say flip chip CSP in support of communication, that will help mitigate some of the CapEx need and will also redeploy those gaming assets maybe to second tier opportunity that maybe not at the same level of premium that you get on a gaming chip.

Unidentified Analyst

So, what does that due to seasonality than how much of the magnitude effect may we have as we go forward into next year?

Joanne Solomon

The positive side is that we would expect to see our seasonality less even it had been in going back to 2008, 2009, 2010. We were having periods of over outperformer competitors and underperforming our competitors and was largely because of the seasonality in gaming. So, I think the amplitude of the seasonality will start declining now a little bit for us. So, as gaming becomes less dominant of a story in our portfolio.

Unidentified Analyst

Maybe if we can talk a little bit about that activity that we are seeing over the next quarter, if you can mention sort of the terms of the debt and sort of how you view the balance sheet at this point going forward.

Joanne Solomon

Yes, absolutely. There right now our debt level is about $1.4 billion in debt, we do have 2 senior note instrument that mature in 2018 and 2021 and 2014 we have 250 million convert that has conversion price of $3.02. The balance of the debt is foreign debt, some of it we do revolve to support our CapEx needs in the foreign jurisdiction. And we had (inaudible) a we had two recent debt transactions, the first one was, we have a revolver in the U.S. it was initially a $100 million we want to have an upside that’s 150 million to provide for a little more liquidity as we were dealing with some of the contingencies around the litigation as well as the increased cash flow negative for 2012. The second transaction was we enter into a new bank loan in Korea, $150 million. We used 50 million to refinance an existing debt instrument with another institution and the remaining $100 million will be used to support the CapEx needs in Korea. The terms of the foreign debt are very attractive, they tend to be right around the 4-ish, 5-ish percentage, there are variable. And it's been very helpful (inaudible) keep our cost of borrowing down to half rating with the foreign debt. The foreign debt operates, we don't have financial covenants that we are dealing with, so it remains a very stable capital structure without having to introduce any volatility into it.

Unidentified Analyst

Coming back to the point regarding the wireless business and the sort of delay of demand in terms of the third quarter being pushing the fourth quarter, at this time point does that give you confidence that fourth quarter will be up sequentially despite normally being a down seasonal quarter.

Joanne Solomon

Fourth quarter is always a transitional quarter. If you look at the absolute averages, it's up 2%, because it's an absolute average some year's its down some year's its up. And that really is driven off of where we are on the demand trend. How strong is consumer demand, what considerations with respect to inventory levels. So, our expectation is that the communication trend will continue on into Q4 and then ultimately when we give guidance with respect to Q4 it will be the view as to how the business doing and holding up. The other 55% of the business. But right now it's we do expect Q3 and Q4 to be better than Q1 and Q2 if we see those second half growth.

Unidentified Analyst

Can you clarify about you said 100 million additional money is to be paid for land in Korea?

Joanne Solomon

Yes, we are working with the government authorities procure about 50 acres of land in Korea. It will cost us about $100 million of which based on the current negotiations we will pay about 30 million this year and will pay 70 million next year. 2013 we will work on the design of the factory and the R&D center. The product land [in Chan] right outside of Seoul and 2014 and 2015 will incur the construction cost and then we will open the doors late 2015, 2016.

Unidentified Analyst

Is that money scheduled for that’s $30 million this year and some in the later years that will be included in the rest of the CapEx that’s not disclosed?

Joanne Solomon

So, we did disclosed it in two pieces trying to give granularity of the closure. So, the 500 million CapEx does not include anything with respect to the land. So, it's 500 million a very typical CapEx across the 100 million piece of land. With respect to the way we disclosed our CapEx be given on the accrual basis, that’s the level of we are going to increase our fixed assets whereas the (inaudible) is little bit different.

Unidentified Analyst

So, the location itself was selected, it is adjacent to or is it near, $2 million an acre sounds like relatively expensive land for some of the manufacturing facility. Can you talk about that, I'm little surprised for the number for that.

Joanne Solomon

So, it's not adjacent to the existing factories, we have three other factory locations in Korea. The thinking is that we will have a major factor in the Northern side of southern Korea, and then one in the southern portion of the region. So, those two travel to Korea, it's right near the (inaudible) airport which is about an hour outside of Seoul. Our other two locations which are much smaller in size, one four acres in size. One is in Seoul and the other is in the perimeter of Seoul.

Unidentified Analyst

What is cost of wire bonding packaging as a percentage of your total sales and when do you expect to turn free cash flow positive, is it first half next year or second half?

Joanne Solomon

Can you give me the second half of that question again?

Unidentified Analyst

What percentage of sales are copper wire bonding packaging for you and when do you expect to turn free cash flow positive, is it first half next year or second half?

Joanne Solomon

With respect to copper wire, we continue to gain momentum in the space and transitioning our customers to copper wire. Right now for Q3 I'd estimate that copper wire would be about $15 million of revenue for the quarter, so it's about 16% of our assembly has been converted to copper. We do expect that trend to continue on. The tradeoff between cost savings and mitigating the [gold] exposure are significant and it will be a way to improve our profitability (inaudible). So, we do expect that to continue at a very aggressive growth rate in 2013 and beyond. We also do see packages converting, continue to convert out of wire bond into flip chip whether it's conventional flip chip or wafer level CSP, we are seeing more and more packages that are going migrating out of the wire bond package entirely and we do see that as a trend that’s continuing as well.

Unidentified Analyst

You started with my question, just with respect to that migration to wire bond to wafer level CSP, is that create a revenue opportunity and margin opportunity and do you have any unique capabilities relative to other (inaudible).

Bob Lanzone

So, import that innovator in a wafer level packaging, its part of in around 2002, and so our focus has been on building scale in 200, 300 millimeter wafer level packaging. The future focus from a development perspective is to reduce the cost of capital to produce the same device and also increase the reliability of the device such that you have a larger dye size that’s suitable for that technology format. The larger the die size, the more packages or ICs that can use wafer level packaging, so it's growing in from two perspectives but reliability increased to allow larger die therefore create a larger addressable market for wafer level packaging.

Joanne Solomon

And the second part of our question about this represent in revenue opportunity for us, I believe that one of the same set, if you look at our performance over the last couple of years, our competitors did a better job supporting the conversion to copper wire. They got earl lead on that fund in supporting the Taiwan supply chain in copper wire and they continue to leverage that they built beyond just Taiwan also. I think it will be really nice for us to regain some of that low pin count share back by migrating it on to the flip chip side and on to wafer level chip base.

Bob Lanzone

So, if you look at a smartphone or a cell phone, you go back historically you might see three or half a dozen wafer level packages, now you are probably averaging in dozen going to a dozen and a half packages that use that format. So, a very significant growth in the number of devices in a cell phone or even a tablet that use wafer level packages, their lower cost is thinner and they are high performance. So, all of those drivers really push long year adoption.

Unidentified Analyst

Can you comment about near-term CapEx trend, you mentioned that you are bringing our CapEx down, I think some of your competitors have brought up their CapEx, are they just catching up from under-investing or do they have a different view on their marketing share. I think maybe gaining share, have more rosy view of short-term demand?

Joanne Solomon

I think our competitors are in line with us, I think we started with a lower CapEx number then raised it and that we each got it back a little bit. So, I think that’s consistent within the industry and piece of news that I missed about them than raising up their CapEx. It's little bit hard for me to comment. But we do support very common customers and in the communication stage so there is an initial expectation of a higher level of demand in the second half and given the delay in the 28 nanometer. I think we are all trying to just maintain what it is we need to support their needs and (inaudible) with respect to reducing the test time to write it which is keeping down some of the capital intensity on the test side.

Unidentified Analyst

What are you seeing in terms of the competitive dynamics in the space, I know there still has been pretty vocal or trying to invest some of the market share they lost overtime. So haven't seen deterioration in ASPs or anything else about this to believe that there is more competition from or larger competitors.

Joanne Solomon

The OSAT space is very competitive, I know (inaudible) sound like a lot of fires in the space but it can be very competitive and we offer it with the level of tier two players that enter and exit and capture a piece along the way. ASC and still very much went head to head on the sire bond side and the copper wire bond side.

Unidentified Analyst

But are they pressuring you in particular or are you not seeing any meaningful impact from that competition?

Joanne Solomon

The pricing environment on the advanced side tends to be not quite as competitive because customers are more focused on investment an expanding capacity. With respect to legacy packages and the wire bond it's very much the competitive dynamic and what’s critical is market pricing is going on a downward trajectory and you have to make sure you are investing to get the efficiencies and cost out of the package to make a profit, because it's one thing facility asset. It's another story about showing the assets profitably to support reinvestment and that’s quite some time secure two players really don't have the longevity that the top for had. The price environment is well competitive, it's not rationale right now. It still the price competitiveness is being led largely by investments in technology and taking out cost which over is a positive from the industry and that what keeps us the top four relevant.

Unidentified Analyst

And maybe as a quick follow-up to one of the previous questions. So, when you think about switching from gold to copper, at least partly switching from gold to copper, so make sure I understand so it is there to say that your revenue are probably take ahead but your margins may improve and do you think about that now that’s the case. I was looking at your gross margins versus ASC and still and it seems like yours is a little bit lower is that partially the reason why or is there is something else that’s going on?

Joanne Solomon

You are right, migration to copper there is, because you are taking out cost of the package that you won't see a drop in revenue but also see a drop in your cost. So, you may lose some top line, but your profitability will improve both from the gross margin percentage, it will improve from a gross profit dollar perspective, it's neutral to a slight positive, when to hit scale, because already at scale. I'd say the neutral side positive, because we are in ramp mode right now with respect to copper wire, the real benefit to us for copper is probably more of a 2013 story as we hit a higher level of scale on copper wire and higher level of utilization of copper asset. So, you have a drop in revenue, improvement in gross margin and neutral to slight positive on gross profit dollars.

Unidentified Analyst

Then one last question comes of free cash flow, I think someone asked previously. So, you will be burning cash this year. What is the expectation for next year assuming a CapEx may come down as you seem to adjust?

Joanne Solomon

Once you have a better feel for revenues and CapEx we will have a better feel for free cash flow. In trying to give you some color without answering the question directly, as a company it is one of our goals to become to be free cash flow positive. We had six consecutive years of free cash flow positive result. This year was the year we went negative for what we believe are all the right reasons to all the right customers and we do see as a company that is important to maintain positive free cash flow result. So, whether it's specifically 2013 that we turn the corner and get back there. We will have to see how the investment need shape up. One of the things that we just talked about earlier from a free cash flow perspective that 70 million on the land will hit us next year. So, that will impact our free cash flow results next year as appose to (inaudible) impact this year.

Unidentified Analyst

Even though I guess the portion of that will be covered by the term loan that you mentioned or is that not the right way to think about it.

Joanne Solomon

We don't include borrowings in our free cash flow.

Unidentified Analyst

This has been a very tricky environment for lot of companies so we heard this week at the conference. Can you talk about and maybe characterize how the demand has been kind of the demand (inaudible), what it looks like if any other prior cycle. And then just quickly any M&A opportunities either OEMs or consolidating smaller players.

Joanne Solomon

With respect to the demand environment, we certainly live in very interesting time, the [time] of 2009 to the 2010, 2011 and 2012 were very characteristic, it's not all bad but it's not all good. So, one of the things that, it's hard for me to draw parallel to other cycles because of some kind of duplications that we are offering. I will say we certainly expected a stronger second half than where we expected initially. And we certainly didn't expect such a mute at Q2. So, that was some of the [habit and pattern] involved for us this year. The second part of your question with respect to consolidation, continuing on the theme of we live in a really interesting time, there is a lot of change that’s happening in Japan, changes happen easily in Japan, but the Tsunami clearly brought has bring a lot of change, they need to be competitive it's bringing a lot of change though. We do see a lot of activity with respect to Japan. A lot of the consolidation is actually happening not by acquisition but by the big getting bigger, our self and ASC. So, it's more share consolidation than it is having some quality assets, but from a longer term prospective we do see our IBM customers continuing to adopt more fab like strategies either more aggressively like the Toshiba where they are shedding assets and sometimes just letting technology let them go out of the backend.

Unidentified Analyst

With that we will conclude, thanks Joanne, thanks Bob, thank you Greg. Thank you.

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