Jul 30, 2009
Operator
Good afternoon, ladies and gentlemen. Thank you for standing by.
Welcome to the Amkor Technology Inc. Second 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.
This conference call is being recorded today, Wednesday, July 29th of 2009 and we'll run up for up to one hour. Before we begin this call, Amkor will 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 second 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. Now, I'd like to turn the conference over to Mr.
James Kim, CEO and Chairman. Please go ahead.
James J. 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. Before turning to our financial results, I want to make a few comments about the Management Succession Plan that was announced at the end of the second quarter.
Under the plan, I would become Executive Chairman of the Board of Directors and Ken Joyce will become Chief Executive Officer and the President effective October 1st 2009. Ken would also join the Board at that time.
I have a great confidence in Ken as our new Chief Executive Officer. I have worked closely with Ken since he joined Amkor in 1997 and you all know him well from his role as a Chief Financial Officer for more than 8 years and as President and Chief Operating Officer over the last 19 months.
After more than 40 years as CEO of Amkor and his predecessor, I believe this is the right time to make this transition. Since the end of 2005, we have substantially realigned our cost structure, due to our gross margins from the low teens to rates in the mid 20's.
We achieved the 13 quarters of positive free cash flow totaling more than $850 million and have reduced our debt by nearly $600 million. We expect to be free cash flow positive for the third quarter and the full year.
And if we are successful in being free cash flow positive for 2009, that will be our fourth consecutive year of generating free cash flow cash under very challenging circumstance. In April 2009, we completed $250 million convertible notes operating and renewed our $100 million revolving credit facility and our balance sheet and liquidity are strong.
I believe we are now well positioned with a healthy balance sheet and cash flow base as we look ahead to our future operating needs and our debt maturities in 2011 and 2013. As the Executive Chairman, I will continue to play an active leadership role at Amkor, collaborating with Ken and our senior management team as we build upon our core strategies of continued focus on cash flow generation, closely managing cost in line with the customer demand, controlling capital spending and managing our debt, partnering with our key customers and the related prudent investment in new technologies and sustained discreet approach to pricing with sharing select cost savings with our customers.
I am optimistic about Amkor's prospects for the future. Our business is tied to worldwide GDP and the consumer spending and I believe that technology advances will stimulate consumer demand and help drive the recovery in the semiconductor industry when the world economy emerges from current recession.
Amkor's position as a technology leader is an important competitive strength. We continue to work closely with several of our key customers to develop and the improvements increasingly advanced interconnect technologies needed to meet their requirements for smaller semiconductor geometries with higher levels of speed and performance.
I believe that our market position and the long-term value will be enhanced by these efforts. When the economy recovers as the customers increasingly rely on and recognize the value we bring with these new technologies.
Turning to the second quarter, I am very pleased with our performance in a difficult economic environment. We had $507 million in net sales, much better than expected increase of 38% from the first quarter.
We also exceeded expectations with our gross margin of 20% which is up substantially from 12% in the first quarter of 2009, despite a $7 million charge to exit our manufacturing operations in Singapore. Our goal is to achieve strong margins even during periods of historically lower levels of activity.
The results for the second quarter demonstrate that our strategy of focusing on the margin and managing our cost in line with our customer demand is wanted. There is still room to improve performance, particularly as our business recovers.
We are seeing improvement in our customer demand for the second half of 2009. Based on current customer focus third quarter 2009 debt sales are expected to increase 17% to 21% sequentially reflecting higher than typical seasonal growth.
Gross margin for the third quarter is estimated to be in the range of 23% to 25%. With that, I will turn the call over to Ken to comment on the business before Joanne concludes with the further discussion of our recent financial results.
Kenneth T. Joyce
Thank you, Jim. I am honored by the confidence and trust that has been placed in me by Jim and our Board.
Under Jim's leadership, we have established a successful business model and have put in place a talented team of experienced managers and a highly trained and dedicated global workforce. As we move forward, we will continue to drive and build upon the core strategies outlined by Jim, which has served us well.
With regard to the second quarter, unit shipments of 1.7 billion were up 43% compared to the first quarter of 2009. Our growth was driven was by customers, adjusting inventories from historically low levels in the first quarter, strength in our 3D packaging, principally in support of wireless applications and improved demand for our leadframe packaging services.
In response to a period of unprecedented economic turbulence, our customers reduced inventory levels during the fourth quarter of 2008 and Q1 2009. During the same period, wafer foundries worldwide experienced historically low levels of utilization.
Our sales dropped more than 46% in Q1 2009 versus Q3 2008. In Q2, we began to see signs of recovery as unit demand increased.
Our revenues for the second quarter were 27% less than the second quarter of 2008. In comparison, signaling further recovery we expect that the gap in revenues for the third quarter between 2008 compared with 2009 will now grow further.
Based on the midpoint of our revenue guidance, revenues are expected to be 16% less than the peak revenue levels for the third quarter of 2008. Fabless semiconductor companies accounted for approximately 56% of our total sales in the second quarter and we expect that the percentage of fabless customers for the third quarter will drop as IDM demand continues to strengthen.
Our customer base is well diversified. And our top 10 customers contributed 54% of our net sales in the second quarter.
Consistent with the past four quarters, our price erosion for the second quarter was about 2%. We do not believe that it is prudent for us to reduce price or chase low margin business in a weakening economy just to gain market share or fill the factories.
As demand improves, we believe, we are well positioned to achieve profitability while keeping our capital investment need in balance with our customers' demand. Our capital investments are focused on specific customer requirements, technology advancement and cost reduction programs.
In the second quarter of 2009, capital addition totaled $27 million as we continued to cancel or defer all non-critical equipment purchases in response to market conditions. We expect third quarter capital additions to be approximately 70 million, which is still at low levels when considered in light of our current depreciation expense and expected demand for the second half of the year.
We increased our expectations for the full year capital additions to approximately $150 million. The increase is largely attributed to increasing the capacity of our wafer bumping operations in support of advanced interconnect technologies.
I will now turn the call over to Joanne to discuss our financial results. Joanne?
Joanne Solomon
Thank you, Ken. As Jim and Ken noted, the near term outlook for the semiconductor industry has improved and our financial position and liquidity remained sound.
We generated $69 million in free cash flow in the first quarter and are on track to keep free cash flow positive for the full year 2009. We ended the quarter with a cash balance of $455 million and total debt of just under $1.6 billion.
During the second quarter of 2009, we repurchased a $144 million principal amount of debt due in 2011 and recorded a related $8 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 condition, restriction under our debt covenant and other factors.
First, margin for the second quarter of 2009 was 20%, up sequentially from 12% in the first quarter of 2009, reflecting the impact of improved sales volumes, sustained cost reduction and a 7 million charge for plan to exit Singapore manufacturing operations. And I just want to correct one thing I said in my prepared remarks earlier, we generated $69 million in free cash flow for the second quarter, I apologize for that.
Continuing on with prospect of gross margin, gross profit was also reduced by about 1 million as a result of foreign currency movement. In addition, we reported a $6 million foreign currency loss for the quarter principally as a result of the appreciation of the Korean won against the U.S.
dollar. Here is a recap of our third quarter 2009 guidance contained in our earnings release.
We are also expected to grow between 17% to 21% from the second quarter. Gross margin is expected to be between 23% and 25% and net income is expected to be in a range of 40 to $55 million or $0.17 to $0.22 per diluted share.
Operator, we will now open this call for questions.
Operator
Thank you. Ladies and gentlemen, we will now begin the question and answer session.
(Operator Instructions). And our first question comes from the line of Peter Kim of Deutsche Bank.
Please go ahead.
Peter Kim
Hi. Thanks for taking my question.
First, I want to ask about the Qualcomm issue that occurred in the quarter. I was wondering if you would be willing to side the business and talk about how long you think you'd carry that business?
Kenneth Joyce
Could you give some clarification on that Peter with respect to the Qualcomm answer you're trying to?
Peter Kim
I think that Qualcomm during the quarter said that they was to get regards to the issue that they had, that they've moved some of their capacity to Amkor. I was wondering if you could find that business and talk about how long you expect to hold that business?
Joanne Solomon
So, we see Qualcomm as a total customer and we will not comment on how much business was shifted to us, it's really hard for us to tell what was shifted first what was intended to be with us. This is being part of a long-term strategy of Qualcomm so this wasn't a short-term decision based on for the ITC ruling.
So there's no way for us to bifurcate it. Qualcomm is a very important customer of ours and they'll continue to be, we expect that they'll continue to be a very important customer of ours even after as the years progressed.
Peter Kim
Okay. And then, could you talk about your, the mix of revenue from the flip chip capacity.
Considering that over the last year or two, I think that you've noted that most of your capital spending was going towards adding capacity in the flip chip area. And yet, your revenue as a percentage from flip chip has remained relatively steady as a percentage of total.
I was wondering if you could talk about, what kind of returns you expect from these continued investments in this phase?
Joanne Solomon
That's a great question. Flip chip is a very interesting business line and when you look at the data that we've provided in the press release, it doesn't entirely tell the whole story.
We've talked in the past that, part of our, some of our customers consign substrates... some of the assets to procure substrates.
We had a significant demand increase as one of our customers that actually consigned substrate to us. So, the average selling price actually goes down but, our utilization with respect to flip chip is very high and it's one of our advanced technologies, we see exceptionally strong demand and we'll continue to invest as well and support that strong demand.
James Kim
By the way Peter, flip chip is a broad application by the way. There is a bond that we had in effect to the bumping areas.
So, I don't think you can really just looking at the gross data, you will not be able to allocate that way. Because like bumping which is related to flip chip also, you have to understand.
Peter Kim
Okay, thank you.
Operator
Thank you. Our next question comes from the line of Olga Levinson with Barclays Capital.
Please go ahead.
Olga Levinson
Hi, thanks for taking my question. First question, I guess, one of your competitors this morning talked about 3Q revenues being up each month, every single month and then pass likely down in the fourth quarter.
I just wanted to get your thoughts on how you see your fourth quarter, I guess, in general terms and given some of the share gains there's been on in the last few months, where... how is Amkor positioned relative to the industry?
James Kim
You know we normally don't give beyond this quarter as you know. So I don't think we can violate that rule but I did state in my script that I expect the second half to be strong.
That obviously is the number starting from a lower level. And I think this continuation of second quarter's growth will continue we said though the quarter is going to grow by 17 to I believe to 21%.
And it's a very I think first of all I need to project what the fourth quarter is going to be. They are some economists are saying, we could have double dip or something like that.
Who knows? Nobody really know.
So I don't think I can give you that specific to reach month how it's going to look like. There are some speculations by some analyst that fourth quarter will be down by 10% in its own.
I don't think we're in a position to say anything of that nature other than, let me emphasize, I think last six months have taught us Amkor's Management Team, how to manage any kind of a situation that rise to us. If we drop 10% we'll manage it and still be profitable company, if it goes up then so be it, then we'll benefit from a low cost structure that we have.
I think that's the best answer I can give it to you because I think we cannot predict beyond this quarter.
Olga Levinson
Okay. And then on the raised CapEx guidance.
Can you talk about the drivers for that decision and whether that was fueled by new and just some advanced technologies where you had you didn't have the equipment or just greater confidence in the outlook for 2010. Just how to think about that?
James Kim
Let me answer before Ken does. Our CapEx is very much in this environment.
Remember, it depends on because we have access capacity. So, although I don't think either, I said it many times, we don't need to really invest these amounts, but accept new technologies, in time like these always a new technology is getting introduced.
And that earlier, we need to continue to invest in new technologies. And most of the investment that we are making, as I say, we have been very low investment at the first quarter...
first half. Those quarter we gave $70 million guidance and as a whole year 150 million because of...
there has been new demand coming from new technology area.
Kenneth Joyce
In addition to that Jim and in conjunction with what you're saying that's very much in line. The investments that we're making in Q3 as we indicated in our press release, a lot of that will be in support of wafer bumping technology which is quite expensive and does support and enable our smaller geometries and innerconnects on the flip chip side.
So, it's an expensive type of an investment, its advanced technology, and as Jim said that's where we're investing our money.
James Kim
Also in the area of flip chip as you know because the flip chip is such a broad area some there is require new technologies which require more balancing of hedges and so on.
Joanne Solomon
So as from a finance perspective, Jim, I think I would add is that depreciation expense for our full year is about 300 million. So CapEx of 150 is much than just the run-rate of our depreciation burden.
Operator
Thank you. Our next question comes from line of Satya Kumar with Credit Suisse.
Please go ahead.
Unidentified Analyst
Yeah, hi, this Ves Valeri (ph) for Satya. Congratulations on your strong results and guidance.
Actually Joanne can you please give the breakup of your costs for gross margin, do you typically break it for materials and labor?
Joanne Solomon
Sure, for Q2, Satya?
Unidentified Analyst
Yeah, that's right.
Joanne Solomon
For Q2, materials was about 205 million, direct labor was about 66 million and depreciation and other costs was a 132 million and if I did my math right that should total for.
Unidentified Analyst
Okay, and then you also mentioned to the pricing as kind of holding up your pricing in the second quarter was down 2%, how do you see that? Do you still see a that to be the case or do you see any increase pricing in the second half as compared to the first half?
Kenneth Joyce
Satya, this is Ken. I believe that the pricing is remaining rather stable as we go forward.
I think, there has been rationality in the industry overall and we expect that to continue.
Unidentified Analyst
Okay and at higher level, like, what you think the longer term capital into second tier businesses, especially that you are adding your Flip Chip line, which maybe more reserve, do you see it around the 10% is what you had mentioned earlier or do you see that...
Kenneth Joyce
I think it could be a little less this year but as we move forward I think in a 10 to 12% range is probably the perfect capital intensity range.
Operator
Thank you. (Operator Instructions).
And our next question comes from the line of Eric Reubel with MTR Securities. Please go ahead.
Eric Reubel
Hi, congratulations on a good quarter. Joanne could you break out the bond repurchases in the quarter between the 2011 issues?
Joanne Solomon
Sure, absolutely. So in Q2, we repurchased...
let me just make sure I got the right base amount, amount 68 million base of second half, 2.5 for convertible to 2011. And we bought in the second quarter 76 million of the 7 and 8 note due 2011.
Eric Reubel
Great, thanks for that. Another question for you Joanne.
If I look at through the incremental drop through in the quarter definitely moved up in to the 50% range, if I look... and I would imagine that happens with a nice improvement in the utilization.
If I look in to Q3 it looks like the incremental gross margins kind of coming down to the new point of guidance back into the 30% range, is there not a lot more capacity utilization to the capture or is that whether incremental gross margin is coming down?
Joanne Solomon
When we look at all the cost savings that we did over the past year or two years, I would suggest that our fixed cost came down looking at Q3 '08 versus Q2 '09 by about $80 million cost savings in comparison. 15 million of that were savings from risks and so the balance of that is 65 million.
Hopefully, we can convert more on that to permanent some of that temporary. Q3 '09, we're seeing about fixed cost coming up about 25 million and I would say that's more attributed to fixed cost that tend to be more variable whether it's overtime repairs or maintenance and supply.
So that's probably explaining what's going on with incremental margin is, is that there are some cost coming back in the third quarter.
Operator
Thank you. Your next question comes from the line of James Crowe with Regimens (ph).
Please go ahead.
James Crowe
Good afternoon. You talked about keeping free cash flow in the third quarter and in for the second half, is there any elements of cash flow that will not show earnings like change in working capital or something like that and we need to be aware of it?
Joanne Solomon
Nothing, I would describe it as unusual, there is clearly movements in cash conversion. But there is a...
I wouldn't say that there is something atypical that's driving.
James Crowe
And then, as the cash builds, does the use of cash start to change, clearly seems like what is increased capital spending, but other priorities that are now coming into focus?
Joanne Solomon
We were very fortunate that our liquidity is as strong as it is. There is always a question with respect to how to use cash and what's your minimum cash balances.
We clearly look to that debt maturities we have coming out in 2011 and 2013 and on to the extent that there is opportunities to repurchase it or somehow otherwise get in back, take a look at our profitable use of cash. CapEx, we clearly look at capital investments but that has a lot to do with our liquidity to somehow more liquidity we will automatically spend more on CapEx, that we have to be based our first the strategic positioning of the business.
So, we're very fortunate and the fact that we're in turbulent times, the idea of having a bit more of a tag is certainly more comfortable for us.
Operator
Thank you. (Operator Instructions).
And our next question comes from the line Chris Smith with SCM Advisors. Please go ahead.
Christopher Smith
Hi, just a few question. Maybe I missed this but did you mention what capacity utilization was this quarter?
Joanne Solomon
I didn't mention it yet, it is in our selected table on our press release. We round up by the second quarter at 66% for the third quarter more forecasting and today about 77%, high 70s.
Christopher Smith
Okay. And switching gears back to demand, make fairly, sequentially demand that has improved pretty meaningfully, I am just curious how you would characterize demand, I mean some of the competitors said it's more inventory destocking, some have said that they actually see real end demand, I'm curious to hear you comments?
James Kim
I don't think anybody goanna really know, other than I think its definitely a mix of them. Absolute to that as inventory de-stocking occurring especially in the third quarter, you have to know, though the inventory increases in our third quarter?
And so second quarter was definitely just try to feel the inventory but I think that is still continuing. But at the same time we all have a facts when emerging economy's especially in our Asia, the demand, final demand is increasing.
So I think it's a combination of that.
Operator
Thank you. Next question comes from the line of Ross Feller (ph) with RBC Wealth Management.
Please go ahead.
Unidentified Analyst
Mr. Ken, I have followed your company for many years and I just wanted to say congratulations.
I know you had probably hit some pretty rough times back in 2004 and 2005, and the turnaround that you have done is great. And also congratulations on naming Ken Joyce as the new CEO.
Kenneth Joyce
Thank you.
Unidentified Analyst
I was telling there were some tough times along the way and you guys have had a great turnaround so once again hats off to you and congratulations.
Kenneth Joyce
Thank you, Ross.
Unidentified Analyst
Thank you.
James Kim
Thank you very much.
Operator
Thank you and Management, there are no further questions. So I'll turn the conference back over to you for any closing comments you may have.
James Kim
Thank you for participating in our conference call. I want to extend the special thanks to our investors and analysts that have been following Amkor since we went public in 1998.
Good bye, thank you.
Operator
Thank you. Ladies and gentlemen that will conclude this teleconference.
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