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Amkor Technology, Inc. (NASDAQ:AMKR)

Deutsche Bank dbAccess Technology Conference

September 13, 2012 02:40 pm ET

Executives

Greg Johnson - Sr. Director, Corporate Communications

Analysts

Vishal Shah - Deutsche Bank

Vishal Shah - Deutsche Bank

Good morning, everyone. Thanks for joining. We have our next presenter for the day, Amkor. One of the leading subcons based out of the U.S. With us today is Greg Johnson, who is going to make a quick presentation and then we'll open up for Q&A. Greg, go ahead.

Greg Johnson

Thank you, Vishal. I would like to thank Deutsche Bank for inviting us to the conference. I'd like to talk to you today about Amkor Technology, and our position in what's called the outsourced semiconductor packaging and testing space. First, before I do that, I'd just point you to the disclaimer on forward-looking statements and our guidance policies. This is also in our SEC filings.

From Amkor, so the packaging and test base is estimated to be about a $50 billion market. About half of that is internal with the IDMs, and about half of that is outsourced in the OSAT space and we have about a 12% market share of that $25 billion today.

We are the number two player in this space. We are one of the largest players. There is a Tier-1 of the top-four, which have about 45%, and then there is the host of smaller companies that compete in more niche markets.

Amkor has been an industry pioneer. We actually pioneered a lot of the technology over the years and we have been driving innovation in the space for over four years. We did go public in 1998, and have been listed NYSE since then.

One of our key strengths is that we believe we are in the right markets with the right customers, so we are looking at not just individual customers, but spaces where there is growth and where there is the potential to operate profitably.

We have a strong competitive position within the OSAT space, being the number two player, and there's a number of favorable trends from the perspective of the OSATs, where both, the growth of fabless design houses where they don't have any other manufacturing, so kind of by definition their business gets outsourced to the OSAT, as well the IDMs more fab-lite strategy tends to favor us as they outsource more and more of their demand.

From the key financial highlights, the information here is, this is the last trailing 12 months through June 30th. Amkor, although we are in asset-intensive business, so a lot of our growth does need to come from CapEx. We take a very balanced perspective with respect to our profitability. We want to focus on growth, but profitable growth not just every top line dollar, but we do want to balance that with strong cash flow generation. We look to take the right opportunities, but not necessarily every opportunity.

We do, obviously, work in a very cyclical industry. Our goal is to manage our profitability through those cycles and be able to take advantage of both, growth cycles as well as be defensive when things are correcting.

The balance sheet has gotten much stronger, we paid down about $900 million of net debt in the last six years and debt-to-EBITDA right now is about 2.7, so a very healthy balance sheet and better than it had been in the past.

Our ROIC has been under some pressure in the last couple of quarters, but it's still above our whack. It's about 9%, which is one of the higher ones in the space as well, and we do view that we are well positioned for future growth.

Net sales were about $2.8 billion. EBITDA was about $500 million, adjusted for legal settlement that we had in last quarter that goes up to $533 million, and net income also goes up to right about $100 million, when we adjust for that legal settlement.

Let's talk about the growth drivers that we see, so there is a couple of different areas that we are looking at. One is the end market, and specifically for us where we've seen a lot of growth is smartphones and tablets in the communication space. It's about 45% of the business now and it's been gaining share relative to some of the other end markets and we see that as continuing to grow.

We are deeply penetrated in the key devices in all the spaces that we look at and we do have really strong ties with both, our customers and with their customers, the OEMs where we work very closely with them on developing their roadmaps.

There is also drivers with respect to technology, and for us the big driver technology-wise in the space, has been the migration out of build wire bond. There are two avenues for that. One is, migrating into flip chip, which is really our strength. We focus on advanced packaging more so than our other competitors. Right now about 45% of our business has migrated into flip chip and that's been very successful for us and very positive for our gross margins, and we've also developed some leading edge technology called fine pitch copper pillar, which enables much finer pitch and also cost reductions in the space. Three packaging is coming up in the next couple of years, and then there is copper wire bonding, which is the other migration out of gold wire bonding, and we are ramping that very rapidly this year.

As I mentioned, there is also some dynamics in the packaging and test business. Well, of course, just general unit growth benefits us, but the fab-lite model on the IDM side and the growth of fabless is also good for us gaining a share of what the market is out there. If we roll the clock back in the OSAT space, it used to be just significantly overflow, but because of our expertise on the advanced side and the desire for the IDMs to focus more on the front-end, we've become much more of a collaborative business, where we are peak-to-trough over the cycles has been the amplitude of that peak-to-trough has been moderated because of some of these trends, so we are in the market and a couple of the devices that we focus on are smartphones and tablets and everybody knows that the growth of those are projected to over the next five years to be very significant, perhaps as much as $6.5 billion units of just those two devices will be sold.

We are engaged with a lot of the leading customers in the space, so Qualcomm, TI, and Senion on the logic side. Samsung, Micron and Toshiba on the memory side. Consumer electronics is our next biggest end market, and for us that's gaming consoles, that's TVs, that's set-top boxes, that's digital cameras, a lot of other consumer space, and again engaged with both, IDMs and fabless guys in there.

In the networking, so servers, routers, switches. Networking as an end market it's been little bit of a malaise the last year or so, but we are starting to see some early signs of sequential recovery in that space as the growth of specially smartphones are tables is requiring some infrastructure build out.

Let's take a look at how we define our end markets, and we have really five markets and you can see the split of our revenues between those. Communications is 45%, and most of this is really smartphones and tablets. That 45% has grown a little bit over time and this has been one of the main drivers of our profitability.

Consumer has lost a little bit of ground with both, the macro being weak and with gaming being on a little bit of perhaps a secular decline relative to the peak that it reached in 2010, both as the game boxes haven't refreshed very recently as well as some competition from gaming on mobile or handheld devices.

Computing for us has been pretty stable about 12% of the business, and for us it's more focused on peripheral, so it's HDD as well as printers and flash memory and memory sticks, and things like that.

Networking, like I said is servers, routers and switches, and then automotive is actually and some industrial businesses is the 10%. Automotive has been a good core business for us, so let's look at in those significant devices, where some of the chips that we actually package and test, so we are in the smartphone. It's the big guys, if you will. Apps processors, baseband , the memory, audio processor, connectivity, power management, the controller, so there is a few functions that we're not participating in, but the majority of them we do have share with a lot of the manufacturers in that.

Thinking with the gaming console, digital home and networking servers, so the big chips that drive a lot of the high value silicon content, we also package and test, so when we are looking at these devices, we are well penetrated in them.

We consider our customer relationships very solid, very strong. You can see here that these are some very well known names in the semi space. They are a good mix of fabless and IDM. Our top-10 folks are about little over 60% of the business, and top-25 are 83%. That said, we do have about 250 customers, and for us it's both, very important to take care of the big guys and keep them happy and keep them satisfied and meet their capacity needs, but it's also really important for our profitability to take care of some of the littler guys, because servicing that whole portfolio is important to keeping our utilization as good as they can be.

Let's talk a little bit about flip chip. Like I said, Amkor is the number two OSAT in the space, ASC is the largest, but in flip chip we are the largest, so we've done almost $1.1 billion last 12 months, and that you know our next largest competitor is about 40% lower than that. The flip chip has really been driven by the wireless and by the move to handheld and mobile devices as well as the networking infrastructure that's being created to support that.

The advantage of the flip chip is that, it does drive higher device performance. You get a much higher pin count versus wire bond. It's more power efficient. It allows smaller form factors as well as higher pin count within the smaller form factors. For us, it's a gross margin business than the wire bond.

One of the developments that we pioneered and we did this back in 2010 with Texas Instruments as the development program was developing fine pitch copper pillar flip chip, which is typically with flip chip you have a solder ball that might be at a pitch of about 120 millimeters to 140 millimeters, and this goes down to about 50. It provides significant benefits over solder bump. Again, it's very focused on the hand-held business, and today we've sold approximately 145 million units and while we started developing this with TI, we are qualifying a number of customers coming up and will be ramping this diversifying that footprint into more of the customers.

The other interesting thing about fine pitch copper pillar is that it's an enabling technology for 3D chips stacking both in the 2.5 silicon interposer and then 2, 3D stacking, which we'll talk about in a second.

Just briefly looking at one of our R&D efforts, where we've been focused the last couple of years is 2.5 in 3D, and that is both, the dumb silicon interposer which sits on the substrate and then the active die sits on that as well as multiple die stacking in true 3D fashion.

We are investing on both CapEx and R&D resources and developing this. A lot of our customers are interested in this as next generation technology. There is still technical roadmap considerations to be worked out as well as some engineering challenges.

When we look at our research and development efforts, we had spent almost $93 million, almost $100 million in last 12-month both, on the expense side and the CapEx side, and we do focus a lot on 3D fine pitch copper pillar as well as wafer level process. You've seen a lot of wafer level CSP as well as the beginnings of wafer level fan-out start to take a bigger share of the market and then we've played a leading role in developing that technology.

We do a lot of work with both, like I said our semi customers as well as the OEM device manufacturers to help them understand when they have a need and when they have a design requirement, what kind of packaging and test can we offer to make that device work.

I mentioned some of the growth drivers in the industry. When we look at 2011, right now, the OSATs are about 50% of that $50 billion industry or about $24 billion total. Back in 2006, only about 43% of the total business was outsourced. About $19 billion and Gartner is forecasting that the outsource is going to grow to 54% and represent a market of about $35 billion by 2016, so both the fab the IDMs are outsourcing and they do this in several ways.

One is actually shutting assets where they can offload some of their back end as of June to an OSAT. The other way to do it is just to stop investing in leading edge technology, so they will keep what they have, but when there is something new they will work within OSAT partner to actually develop that and to handle the capital for themselves.

The fabless has obviously been a success story, so $65 billion of revenue and they are up to about 25% share of the market and I think everybody looking at the winners in the fabless space, that share is likely to continue to grow.

Let's look at our footprint for just a bit. We've got about 6 million square feet add. It's in five different Asian countries, Philippines, Korea, Taiwan, China and Japan. Our two major centers of operation are Korea and the Philippines, so Korea is where we do a lot of our high tech packaging, higher ASPs, more complicated products, so you see it's responsible for over 50% of our revenue in the Philippines and other 20%

On the unit side, the big driver is the Philippines, where we do a large majority of our leadframe business, so a very high volume, low pin count are wire bond and we also have bumping in other high tech work being done in Taiwan. Memory and other things in China, and we have some operations in Japan focused on that ecosystem.

One of the things we announced a couple of quarters ago is that we are building what call it K5 facility in Korea. Right now we have three sites in Korea. We have two small buildings in the Seoul metropolitan area a couple of acres each. Then we have a big campus down in the South in Gwangju, and we've signed a MOU to acquire some land in an economic development zone near Incheon Airport of about 46 acres, where we would like to build an R&D research center as well as do advanced packaging and test there. That's where we are anticipating designing and building this over the next couple of years and maybe having it online by late 2015 or 2016. In addition to Korea being a really great location for talent in packaging and test and great engineering resources, we've got some nice tax incentives available for the investment.

Looking at the competitive position, so what we've got here is both, our ROIC and our capital-insensitivity of the top-fours. That's over the last couple of years. Since our ROIC has been under pressure, we actually achieved 24% back in 2010, where our capacity was extremely highly utilized and the industry growing very rapidly and we saw some declines in 2011 as the macro moderated and some of the end markets started to become a little choppy. Right now we are about 9%, but then still above our 8% whack.

From a capital-intensity perspective, we tend on the lower in the competitive space. In the last 12 months, we're on par with the other folks, but historically we've been a little bit lower. We've been more focused on free cash flow, and managing our CapEx relative to the OSATs are, competitors.

Briefly looking at where we came out in Q2. We've got two counts to Q2. One is as reported, one is adjusting for the $34 million legal settlement, so from a net sales perspective, we grew about 5% sequentially or about flat with the prior year.

Gross margin was a little bit of adjusted gross margins, a little bit improvement from Q2, so a little bit of pressure relative to year-over-year. We did see a lot of issues with gold prices and FX, and while those have moderated sequentially when we look in history, there are still some impacts from those.

The other thing I'd like to point out is that we do expect to be free cash negative for this year, and that is something we are very cognizant of. We've been free cash flow positive for six years in a row. We think this year will likely be negative, and for the number investment reasons well as the legal settlement, but we are very cognizant of that and focused on returning that to positive territory.

Profitability trends, revenue and gross profits, so we peaked in 2010 about almost $3 billion. It's come down a little bit in the last year and a half. Gross margin has been under pressure both, with some underutilized capacity as well as golden FX. We do think, we are making some progress on utilization and getting specially some of the wire bond assets little more fully utilized.

From SG&A and research perspective, the level between, say, 10% and 12% has been pretty steady and we try to really focus on being mindful of our OpEx, mindful of what kind of top line and what kind of gross margins that we are generating in managing those levels to help maintain profitability both in the up cycle and on the down cycle.

Free cash flow and EBITDA, so free cash flow had been a little bit for the LTE, and probably it's going to be in the negative category for the full year. EBITDA is very strong at like $500 million, again, that would be a little higher absent the legal settlement.

CapEx and capital intensity, so right now our guidance is for $500 million of CapEx. Majority of that we expect to send on flip chip packaging as well as test capacity with some infrastructure and R&D investments as well.

The K5, what we have committed to is that we expect to spend about $350 million for the land and the building, so $100 million for land. $250 million for the building and that will occur over the next couple of years and so it comes into production in 2016.

Looking at the credit profile, what you can see is that right now debt-to-EBITDA was 2.7 and net debt-to-EBITDA, 2.0. we have paid down about $900 million of net debt since 2005, which is where we peaked about $2.2 billion of debt, so we view, we were proud of the progress we made on the balance sheet. We don't think we are there yet, we want to continue that trend of de-leveraging, and we will always balance the ability to invest in the company, to invest for our customers and for their demand, but we also want to be mindful of free cash flow and the ability to continue to de-lever.

Then finally, debt maturity. We did a number of transactions over the last couple of years that significantly changed this maturity profile. So, starting from the right, our two senior notes don't mature until 2018 and 2021, and that's now about $750 million of the debt.

On 2014, the green bar. That's actually a convert that's in the money and we treat that mainly as equity. We think that's likely to convert, so we won't need to either refinance it or pay it off at maturity. The purple bars. Those tend to be foreign term loans, and very attractive interest rates, and we can either pay them off at maturity or sometimes roll in when they do come due.

With that, I am done, and so would like to either it over it over to chat or the audience for any questions.

Question-and-Answer Session

Vishal Shah - Deutsche Bank

I guess, I'll start, kick it off with two questions and we can over to the audience. First off, foundries have announced that yields are improving of 28-nanometer, and I'd just like to get a sense if there is any impact in terms of the end of the year and how you see that going forward.

Greg Johnson

Yes, so the availability of 28-nanometer has been kind of a bit of an issue throughout the year. I think from what we are seeing the yields look like, they are in pretty good shape and look like they are for the stage in the ramp of a new technology node are consistent or maybe slightly better than where they have been in the past, so for us that's a positive development.

We are also seeing that it looks like the capacity is finally catching up with the demand. What we had seen earlier in the year was the demand was outstripping that capacity, and so the revenue potential that we could have had say in Q3 would diminish, because the wafers just weren't available, but we are hopeful that those issues are working themselves out.

Vishal Shah - Deutsche Bank

Got it. Then in terms of the wire bond to flip chip transition, I would just like to get a sense of how big of an opportunity there is. Where we are in overall game and if there is any potential for acceleration moving further?

Greg Johnson

Yes. I think in terms of the transition, there is different packages in different end markets that are taking different strategies, so there something that is, say, very high volume maybe very mature technology, very price-sensitive, that tends to migrate probably to copper wire.

The things that are more high end, more complex that require a greater counts of pins or interconnects and that also have, say, more stringent or increasing thermal and electrical performance requirements. Those are migrating to flip chip, because flip chip actually enables a lot of enhanced performance over the physical limitations of wire bond, so we view the migration of flip chip as a very positive us.

That's something that has been one of our leading focuses for a number of years. We do have the largest share of that market, and we see that growth potential continuing.

Vishal Shah - Deutsche Bank

Then moving onto networking, I know you mentioned that had been little bit slower in the earlier part of the year, but I would just like to get a sense of how you see it trending going forward and if there is any potential impact for like e [ao211 AC] transition valid demand?

Greg Johnson

So, broadly what we've call was probably in the second half maybe fourth quarter of 2010 networking started to soften out and then throughout 2011, was really just it was re-bouncing along the bottom if you will. It wasn't growing, it wasn't shrinking any more, but was just below where it had been when it had been much more stronger in 2010.

We did see some sequential growth in Q2 for our networking business. Our guidance for Q3 also has some sequential growth in that networking space, so we haven't got it kind of beyond that, but we are hopeful that that is not just a bullet, but that is the sequential trend that's going to continue.

One of the things that's been a little bit of interesting or puzzling for us is that the really strong on the wireless and handheld side hasn't resulted in more growth on the infrastructure side, because at some point the massive growth and demand for IP and demand for wireless capacity. The infrastructure to support that has to catch up, so this might be some early signs that we are seeing that process happen.

Vishal Shah - Deutsche Bank

Then the overall industry has engaged in a pretty significant CapEx ramp over the past year or so, and what I would like to know is how do you see pricing pressure being affected going forward?

Greg Johnson

Yes. Good question, so I'll talk about pricing in two ways. The way we look at it for like-for-like devices, where say we did the same device last quarter or last year and we look at the pricing that we are getting for it this year. That ASP decline tends to average for us like between 1% and 2% a quarter. And recently, say, the last four, five quarters it's actually been at low end of that range. It's been 1% or less, so where you do see a lot of competitive pricing pressure is when you are quoting or trying for new business.

Obviously, in an industry where there has been pockets of underutilized capacity throughout the space, not just at any one particular OSAT, things will become very competitive. I mean, they are always very competitive. It is a very dynamic space and a very price conscious space in addition to quality and technological capabilities. I would say quoting new businesses is, in an industry where you've got some of those pockets of underutilization, you do see some pressure.

Vishal Shah - Deutsche Bank

Then just keeping with the theme of overall spending, what's the spend being high in 2012, what are your thoughts for 2013 CapEx?

Greg Johnson

We haven't guided anything for 2013, but I can say, maybe give you some sense of the puts and takes that might result either in higher CapEx or lower relative to 2012, so ultimately our CapEx is really driven by demand. The CapEx that we are spending in 2012 than we spent in 2011 was for strong in flip chip supporting smartphones and tablets. The growth this years is test for wafer level CSP and for the 28-nanometer chips that are also supporting smartphones and tables, so depending on where demand is in 2013, that will ultimately drive our CapEx. A couple of things that may enable us to reduce it are that a lot of the spending that we are doing this year has happened more back end loaded, especially like the availability of 28-nanometer continues to get pushed further and further to the end of the year, so we will enter 2013 with some capacity there that will drive revenues in 2013 with the CapEx spending already having incurred in 2012, so that might give us some room to perhaps to moderate it.

Vishal Shah - Deutsche Bank

Okay. Then now looking a little bit forward this 3D NAND and like the potential opportunity for you, how big of a market size would that be and when do you see that coming?

Greg Johnson

I'll answer the second question first that it's probably significant revenues are in general in the space are probably not expected until the 2014-2015 timeframe. While there is 2.5D, there has been some devices put into product at that low volumes. 3D is still more of in R&D stage, so there is going to be another year or so for some of the R&D that will incur and some other technological challenges to be worked out.

In terms of the size of the market, the things that have driven that continue to drive innovation and drive flip chip versus wire bond are a lot of the same kinds of things that we see driving 3D as well, so it's the desire for smaller silicon nodes, smaller form factors increased pin count, thinner die, thinner packages, improved performance, better thermal performance, better electrical performance, so we think that 3D will be an enabling technology that will allow those developments to continue.

Vishal Shah - Deutsche Bank

Got it. Okay. Then I just have a question also on automotive. It's been doing quite well over the past year or so, and I would just like to get a sense of I guess like how do you see in terms of like the sustainability of the performance.

Greg Johnson

Yes. Automotive is a good business for us. Obviously the technical requirements are very high, because of the stringent quality parameters that the space has. We did see a bit of a dip after the earthquake in 2011, when some of the actual auto production facilities were damaged and supply was interrupted. That has come back in the last couple of quarters, so it's been good for us. We are very with that.

Vishal Shah - Deutsche Bank

Then moving back to CapEx, a significant portion has been increased spending on the test side, so I would just like to sense of your roadmap for that business.

Greg Johnson

Okay. Sure. Typically in year past, we've spent about 60% of our CapEx on packaging, about 20% test and about 20% on infrastructure and R&D. This year, we'll probably spend about 40% on test, 40% packaging and 20% R&D, and that's sort of our general expectation for the full year.

What's driven that is that there's two things. One is, on 28-nanometer, there was a migration to a new test platform, so there were some growth, some rebuilding the installed base to handle all the growth in 28-nanometer. The other thing was wafer level CSP has been a strong driver for us, and where wafer level CSP is more of a test-focused kind of business, because there is no substrate, so there is more investment on the front-end side on probers. The growth in that business has shifted some of the CapEx out of the packaging category into the test category.

Vishal Shah - Deutsche Bank

Got it. Then from its transition from 28-nanometer to 20-nanometer, would that be the same issue?

Greg Johnson

I think it's probably too early to determine that. The identification of the testers and deciding which test platform to use is a very collaborative process with us and the customers, so I think that is still kind of TBD.

Vishal Shah - Deutsche Bank

Got it. Okay. Well, I think this is basically about it, so why don't we just wrap it up. Thank you very much, Greg, for joining us and thank you.

Greg Johnson

Okay. Thank you.

Vishal Shah - Deutsche Bank

Appreciate it.

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