Greg Johnson - Senior Director, IR Steve Kelley - President and CEO Joanne Solomon - EVP and CFO.

Randy Abrams - Credit Suisse Suji De Silva - Topeka Chad Dillard - Deutsche Bank Jairam Nathan - Sidoti David Duley - Steelhead.

Good day, ladies and gentlemen and welcome to the Amkor Technology Second Quarter 2014 Earnings Conference Call. My name is Jamie, and I will be your conference facilitator today. At this time, all participants are in a listen-only mode. After the speakers' remarks, we will conduct a question-and-answer session.

As a reminder, this conference is being recorded. I would now like to turn the call over to Greg Johnson, Senior Director of Investor Relations and Corporate Communications. Mr. Johnson, please go ahead..

Thank you, Jamie, and good afternoon, everyone. Joining me today are Steve Kelley, our President and Chief Executive Officer; and Joanne Solomon, our Chief Financial Officer. Our earnings press release was filed with the SEC this afternoon and is available on our Web site.

During this conference call, we will use non-GAAP financial measures and you can find the reconciliations to the U.S. GAAP equivalent at our Web site. We will also make forward-looking statements about our expectations for Amkor's future performance based on the environment as we currently see it.

Of course actual results could be different, please refer to our press release and other SEC filings for information on risk factors, uncertainties and exceptions that could cause actual results to differ materially from these expectations.

Please note, that the financial results discussed today are preliminary and final data will be included in our Form 10-Q. With that, let me hand it over to Steve..

Good afternoon, and thanks for joining the call today. We had a strong first half and are looking forward to a very strong second half of 2014. We expect record third quarter revenues to drive improved gross margin and improved earnings per share.

Our leading edge technologies will fuel second half growth as mobile devices with high Amkor content along the market. We now expect to grow Amkor revenues faster than the overall semiconductor market in 2014, as we did in 2013. Our Q2 revenues were up 10% sequentially and 3% year-on-year.

Strength in the second quarter was broad based with communications product leading the way. Our execution in the advanced product area has been very good and contributed to some important wins in the second quarter. These wins served to firm up our expectations for the second half of 2014 and offer an encouraging outlook for the first half of 2015.

In the third quarter we expect revenues to grow by approximately 10%. Our midpoint Q3 revenue guidance is $840 million, well above our previous peak. Have we not transferred our Japan operations to J-Devices, our midpoint Q3 guidance would have been roughly $860 million a 12% sequential increase.

We continue to focus on expanding our participation in the smartphone and tablet market. In addition to our applications processor and baseband work, we are a major player in NAND flash and power management ICs and are rapidly growing the RF Module business. Our fingerprint sensor and managed businesses are experiencing strong growth.

In addition we are investing in our fusion [ph] sensor products, which combine multiple sensors and a microcontroller into a single package. All three of our advanced product manufacturing hubs Korea, China and Taiwan are quite busy right now.

Our three country footprint allows customers to choose manufacturing locations which best fit their supply chain needs. Mainstream product sales are also expected to grow in the second half of 2014. Our efforts to broaden Amkor’s customer base and engage more deeply with current customers are beginning to show results.

Sales into all of the major market areas automotive, industrial, consumer, networking and computing are expected to rise in 2014. Amkor’s 2014 sales into the automotive market should be up 25% year-over-year.

Combined Amkor and J-Devices automotive revenues are expected to exceed $750 million this year and reach a $1 billion yearly run rate within three years. The automotive business is relatively stable, but leverages Amkor strengths and is a key part of Amkor’s revenue foundation.

We continue to broaden and deepen our cooperation to J-Devices on many fronts including sales, operations in R&D. Amkor owns a 60% stake in J-Devices the world's second largest OSAT and the largest OSAT in Japan. From a financial standpoint Amkor currently accounts for J-Devices as an investment.

We expect to consolidate J-Devices results by 2016 adding roughly $1 billion to Amkor’s revenues. Now I would like to spend a few moments talking about our R&D priorities.

The R&D team’s number one priority is developing low cost packaging solutions for the next generation of mobile devices, solutions which minimize the material and process cost for maximizing yields and reliability performance.

This development effort is particularly important for customers seeking cost effective alternatives to further select the level integration. Our R&D team is currently engaged in projects at the sub 20-nanometer level in addition to their effort with the 20 and 28-nanometer nodes.

Another important R&D focus area is the development of wafer-level packages for larger ICs. These wafer level chip scale packages are impatiently the packages of choice for many ICs used in mobile devices. They provide a very low-profile product at a competitive cost.

Wafer-level CSPs are also a preferred solution for wearable and Internet of Things applications. To take advantage of attractive sales growth opportunity in the first half of 2015, we are increasing our 2014 capital investment plan to approximately $675 million, an increase of $100 million from the guidance provided in April.

Most of this incremental capital investment will be in wafer-level packaging, advance flip chip and advance test capacity. Our early investments in these areas have already paid off. Amkor is today a clear technology and leader in the advance packaging and test area.

Advance packages are now the preferred choice in both the high end and the mid-range segment of the Smartphone market, which together account for roughly 90% of mobile phone IC value.

The demand for advance packages is also being driven by a second wave of mobile device customers, who are transitioning out of wire bond into wafer-levels and flip chip packages. This technology transition is opening the door for Amkor at many accounts where we have presence today.

As I said many times since joining the import [ph] our principal objective is growing revenue to drive sustainable earnings growth. 2012 marked the end of the several year period with relatively flat sales and profits. In 2013 we saw sales grow 7%, gross margin grew by 160 basis points and earnings per share improved from $0.24 to $0.50.

2014 is looking even better with strong year-over-year growth, improved gross margin and improved earnings per share. Our investments in advance packaging capacity and leading edge testers are paying dividends for us and providing the needed foundation for growth into 2015. Joanne will now provide more detail of our financial information..

Thank you, Steve. And good afternoon everyone. Overall Q2 was a strong quarter and consistent with our expectation. Our gross margin improved 110 basis points over the second quarter of 2013. The increase was primarily due to sales growth, favorable product mix and lower material costs. Operating expenses in the quarter were $90 million.

This was up from $83 million in the first quarter, principally from project specific professional and consulting fees and our R&D activities in connection with the ramp of 20-nanometer production and other technology initiatives. For the rest of 2014 we expect our operating expenses to be around $85 million a quarter.

Our effective tax rate in the second quarter was 29%. This is driven by discrete tax items and changes in our earnings mix among foreign jurisdiction. For the full year 2014, we now expect an effective tax rate of around 25%. The other income section on our income statement includes two items related to foreign currency.

We recognized a $9 million being on the sales of our Japanese subsidiary to J-Devices. The gain was mainly driven by the release of accumulated foreign currency translation adjustments. We also recognized an offsetting loss of $4 million from the impact of unfavorable foreign exchange rate movement in the quarter.

Our equity pick up from our 60% ownership in J-Devices in the second quarter was $20 million. J-Devices recognized a gain on their purchase of our Japanese subsidiary as they were able to book a deferred tax asset for net operating loss carry forward, for which we had a valuation allowance. Our 60% share of that gain was $9 million.

J-Devices also received the first annual settlement of a two year take or pay contract this quarter. Our share of this settlement was $8 million. We had originally forecast the settlement for the next quarter. The remaining $3 million was generated from J-Devices operations.

And that’s what results considering that this is their seasonally slowest quarter. And finally at June 30, we had total debt of $1.5 billion. Our debt to EBITDA was 2.1 times. Our liquidity is solid with 525 million in cash and $435 million in available revolving credit lines and undrawn secured term loans.

With that we’ll now open the call up for your questions. Operator..

(Operator Instructions). Our first question comes from the Randy Abrams from Credit Suisse..

The first question, I wanted to see if you can talk about the increase in CapEx, just what I guess is prompting the upward revision? And I guess coupled with some of your competitors or peers in the group also raising CapEx, just how you’re viewing overall supply side? Just in terms of new investment coming in.

And any potential risk where we could get into oversupply situation..

Randy let me address that question two ways. First, little more color on why we increased the spending forecast. A few things happened in Q2 that were positive for Amkor, we had a major customer who awarded us more share at the end of this year and into next year. We also had another major customer who won a significant program.

That drove some acceleration of spending we were planning to make in 2015. We pulled it into 2014. The third major item was really the fact that this moved to wafer level chip scale packaging has accelerated. And so we’re basically using all of our available capacity this quarter in that particular part of our business.

So it’s incumbent on us to build some more capacity there. I think the second part of your question was more general.

Are we building too much assembly test capacity in the OSAT industry, is that correct?.

Yes that’s correct..

And my feeling is probably not and let me just -- I’ll spend a few minutes discussing why I think that. The first factor is IDM spending is way down on assembly and test equipment. With a few exceptions most IDMs today depend on Amkor and other OSATs for their incremental assembly and test equipment needs.

The second area is that our OSF PAM [ph] is shifting rapidly. So many of our competitors right now are playing catch up when it comes to advanced product investment. The third factor is really the tablets customers continue to grow at a faster rate than the overall chip industry and we’re keeping pace with them.

And lastly and maybe most importantly, the cost per incremental unit of capacity in advance packaging is simply higher. If you take a look at these advanced packaging facilities that we put together, it looks like a wafer fab. Lot of big machines, [indiscernible] people. So a lot of capital expense but your margin is better on those types of products.

Hope that answers your question..

And the second question is probably two separate ones I’ll try to fit into it. The wafer level of packaging that you’re mentioning, could you talk how much of it is the fan-in which is using mostly like more like connectivity, Wi-Fi versus you’re starting to need to invest to see to fan-out wafer packaging for baseband or time baseband AP memory.

And probably a little bit separately, you highlighted the sensors and MEMS as a growth area. And if you could talk about maybe how big that -- how fast that area is growing and how big that’s getting. That's two slightly separate questions. .

Your first question was on wafer level packaging, some idea about fan-in versus fan-out. I think the fan-out part is still fairly new. So we see some of that but not a whole lot at this point. We have efforts -- development efforts going on with a number of customers in that area. But we wanted to see how that plays.

Fan-out is one approach to the high level of integration that our customers are demanding from next generation. And we’ve got other approaches, and I think what will happen there is that the best cost solution will win. And whatever solution wins, we'll go with that one.

But right now, I think we have more effort focused on some of the non-fan out approaches to the mobile device equation. The second part of your question is centers and MEMS.

We’re seeing tremendous growth right now in access of $100 in sales this year and we’re seeing it not only in the mobile phone area, but also in automotive areas and the Internet of Things applications as well. And we get good companies of steel here.

We have a cavity (ph) MEMS line in our Philippines facility where we manufacture a wide variety of MEMS on a single line, which allows us to pass on better cost for our customers..

The next question comes from Suji De Silva from Topeka..

Steve, your talked about the, some of the Tier 2 handset baseband guys moving over advance packaging? How far are we in that transition? It's still early innings and how much share do you expect to get as that transition happens?.

I think the transition is happening fairly quickly, I expect let say 60% to 70% of transition happened in the next 12 months in the second tier. And I think it will be largely complete by the end of 2015.

The goal I've articulated this year to at least double ourselves into the China and Taiwan tablets region this year and I expect a similar goal for next year. So we’re expecting to move our share up, I won’t be happy until we have about 30% of the share of that China and Taiwan tablets market, but that’s going to take some time..

Great. And then also a question on the gross margin, you’ve achieved I think your low 20s target at 800 million, what can we expect next there and it is really driven more by mixed advance packaging or I think utilization is pretty full but just want to get a sense of that breakout..

I think it’s probably mix, but really I think we have a more to gain on the utilization side. So we’re working closely with the factories in the coming quarters to try to improve their efficiencies. So I think there’s some gains to be made there that are still out there..

Would you articulate a next target or we should think about low 20s kind of being the level for now?.

Right now low 20s is the level. That’s what I would model. But we’re obviously aiming for better than that overtime..

The next question comes from Chad Dillard from Deutsche Bank..

Just had one on wafer level packaging market.

Could you just talk about how you expect that market to grow this year?.

Yes. The wafer lever packaging market is growing faster than industry can put capacity in place. It’s probably the best way I could put it.

What we’re seeing right now is that any integrated circuit which goes into a Smartphone or a Tablet or to any high sensitive application, they’re trending quickly towards that solution and what’s happening there is that wafer-level CSPs are really now the package of choice, for even the mid-range products in the Smartphone area.

So you’ll see adoption of this package throughout the industry in the coming six to 12 months..

And then on the consumer segment could you just provide us some detail on I guess you share expectations? Do you see any benefit from some of the PC market starting to come back to life and overall any other opportunities for share gains?.

I think the way we view the non-mobile right now, which includes consumer and computing and networking industrial so forth, we see it as pretty steady. From a supply standpoint, I think you’ve seen the semi-conductor industry adapt to a low growth environment. So there's not a lot of capacity being added there, particularly at the IBM level.

So I think it looks less okay from a supply standpoint. From a demand standpoint we really see that the PC market, other markets have stabilized. We don’t expect great things, but we expect let say steady growth and worst case flat in those markets..

The next question comes from Jairam Nathan from Sidoti..

We are seeing a lot of competition between foundries to get the next business and getting into the one x notes and so, one of them has an integrated model, the other has uses [indiscernible].

So as this share keeps shifting or the risk of shifting from one to the other, how should we -- how does that kind of gain that risk when you’re doing say your CapEx lands?.

Yes. That’s a very good question. Let me make a few comments about their (indiscernible) supply chain. First, if you take a look at the market today, our customers, the vast majority of both the tablets and the IBM chip companies prefer to maintain separate foundry and OSAT supply bases.

Our wafer is in the foundries and the package of testers is from the OSAT. Why? Because this model offers much more supply chain flexibility and also keeps the cost base very competitive. But I would say -- the other key point is that we were closer, but all the way for foundries today. TSMC, SMIC Global, all view Amkor as a preferred partner.

Intel awarded us the Preferred Quality Supplier Award last year. And we are working with most of those foundries at the sub 20-nanometer level. We've got good relationships with these foundries.

What I think is going to happen is that, if we executed the 20 nanometer note and we will, if we perform well, deliver the right products, keep a sufficient volume, then it will be very well positioned for the next note.

So it really comes down execution and I think the end customers will ultimately determine the supply chain of the 40 and 60 nanometer nodes..

And my second question was on the higher CapEx now.

Would some of that -- does that go to K5s, all the equipment or is that a separate discussion here?.

That’s a separate discussion. So K5 is a separate discussion that is not included in the latest raise. So that’s a topic we'll come back to in the next earnings call. But I did comment on K5 the last earnings call. We’re spending some money this year, as we began construction.

We spend the bulk of the money on K5 next year and then complete and our construction in probably 2016..

(Operator Instructions) The next question comes from David Duley from Steelhead..

You mentioned that you had a second tier handset customers, I guess migrating from wire bonded solutions to advance packaging solutions.

Could you help me understand how that’s going to impact utilization rate of your older equipment? And do you have other customers to kind of back fill that migration?.

Yes. That’s -- it’s been the key store point for Amkor for number of years and we put a major press in Asia and another customers at the U.S. in particular to try to show that we keep our leading edge assets full. So leading edge [indiscernible] book assembly [ph] in the test assets.

And what we’re seeing is that the most of the second wave customers are adopting the same test platforms and the same package drives as the first wave technology of leaders. So it works very well for us. And so what it requires from us to capture second wave of customers is not necessarily capital investment but investment in people.

And so that’s what we’ve been doing this year, is we’ve been building up our service infrastructure, identical support infrastructure in Asia so that we can secure the business from these second wave customers..

Okay. And could you help me understand two things. What will be the impact on the gross margins, I guess on a quarterly basis maybe this year and next year with the higher CapEx and could you just give us what the overall utilization rates of the separate areas of your equipment was? Thank you..

On capital intensity plan the increase capital and how it effects our depreciation rates, for Q2 depreciation expense was running about 13%. So we do see that notching up with some of the higher increased capital intensity at the wafer level processes. So it could go to 14ish, 15% overtime..

So maybe you think 15% next year and 14% this year, since you won’t be able to get the stuff in place immediately?.

I think that’s fair..

Okay.

And just also a follow-on, how should we think about how you spend this money? Will it all be in the third quarter incrementally or would you spend a lot in the fourth quarter as well?.

It will be over the Q3 and Q4. We have fairly long payment terms with our capital equipment guys. So the payment will actually be over Q3 and Q4..

Okay. Thanks Dave. This ends our Q&A. I will now turn the call back to Steve for his closing remarks..

I would like to recap our key messages. We delivered a solid second quarter with 10% of sales growth and improvements in gross margin and profitability. We expect a very strong third quarter and second half 2014. We are poised to outgrow the semiconductor industry and improve our profitability for the second year in a row.

And finally, we are making good progress in receiving our primary cooperate objectives, growing revenue and driving sustainable earnings growth. Thank you for joining us today on the call..

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect..