Greg Johnson - Senior Director, Finance and IR Steve Kelley - President and Chief Executive Officer Joanne Solomon - Chief Financial Officer.

Randy Abrams - Credit Suisse Jairam Nathan - Sidoti Sidney Ho - Deutsche Bank David Duley - Steelhead.

Good day, ladies and gentlemen and welcome to the Amkor Technology Second Quarter 2015 Earnings Conference Call. My name is Vince and I will be your conference facilitator today. At this time, all participants are in a listen-only mode. After the speaker’s 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 Finance and Investor Relations. Mr. Johnson, please go ahead..

Thank you, Vince, 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 website.

During this conference call, we will use non-GAAP financial measures and you can find the reconciliation to the U.S. GAAP equivalent at our website. 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.

And now, I would like to turn the call over to Steve..

Good afternoon, and thanks for joining the call. Today, I will discuss our second quarter results, our third quarter outlook and the progress of our key growth initiatives. Our second quarter revenues were roughly flat to Q1. In addition to soft demand from our largest customer, we experienced general weakness in the mobile device market.

Demand for Android smartphones across all tiers fell short of expectations. PC and tablet demand was also lackluster. In other markets, second quarter demand generally met our expectations. Looking forward, we expect mobile device market conditions to remain sluggish in Q3, as excess inventories continue to be depleted.

New flagship smartphones launching in the fall should stimulate revenue growth in the fourth quarter. We expect revenue from other markets to be flat to slightly down in the third quarter. Macroeconomic uncertainties and a cautious business climate are constraining the seasonal growth we normally experience.

These slowdowns occur periodically in the chip business and we are reacting as we have in the past with intensified focus on manufacturing efficiency, OpEx control and capital spending reductions.

We have cut $50 million out of the 2015 CapEx plan and are now projecting to spend roughly $550 million this year, including $150 million for a new K5 facility. We expect operational expenses to be down 5% year-on-year. The competitive environment intensifies during the slowdown.

So, we are redoubling our efforts to speed up decision-making within the company so that we can react quickly and positively to customers’ changing requirements. Looking beyond the current market conditions, I have confidence that we are on the right path to long-term growth.

Our value proposition, superior technology combined with world-class execution, and a competitive price is the right answer for our customers. We can help our customers to differentiate with innovative cost-effective packages. Our manufacturing scale and broad portfolio also help customers react quickly to sudden changes in market demand.

We offer our customers geographic flexibility with leading-edge factories in Korea, China and Taiwan. Our advanced product capabilities in all three of these countries are continually being updated and enhanced. In the first half of 2016, we will begin running qualification lots in K5, our new R&D and manufacturing facility in Korea.

In China, we recently broke ground on a new building, which will increase the manufacturing space of our Shanghai facility by nearly 50% to a total of roughly 600,000 square feet.

Strong demand for China build products from both local and international customers drove our decision to move forward with this project, which will be completed in the second quarter of 2016. Our Shanghai facility offers the most advanced OSAT technologies in China, including wafer level and 3D packaging as well as a wide variety of test platforms.

We now have sales offices in Shanghai, Beijing and Shenzhen and continue to hire new salespeople and design engineers to assist our customers in China. These new offices and people reflect our increased focus on Chinese customers, who will be a major catalyst for Amkor’s growth in the coming years.

Our Greater China growth initiative continues to gain momentum. In the first half of 2015, our Greater China revenues were up 75% year-on-year. We have a larger strategy to broaden Amkor’s base of customers, not just in Greater China, but also in Europe and in the U.S.

The number of customers generating at least $30 million in annual revenue has increased by 30% over the past 2 years, and over time, this broadening of our customer base will enhance the overall health of our business. The integration of J-Devices, our joint venture in Japan, is going well.

We continue to broaden and deepen our cooperation on many fronts, including sales, operations and R&D. J-Devices delivered solid performance this quarter with revenue up 3% sequentially. We expect to consolidate their results starting in the first quarter of 2016 after we increase our ownership stake to 80%.

Upon consolidation, J-Devices will materially improve our revenue, free cash flow and EBITDA performance. The consolidation will also cement Amkor’s position as the second largest OSAT in the world, well ahead of the next two players. Amkor and J-Devices together are the largest OSAT supplier to the automotive IC industry.

Automotive products are a key element of our long-term growth plan. We think that this could be a billion dollar business for us by later this decade, up from the $750 million we generated last year. Our investments in NAND flash are also paying off, with first half revenues up 20% year-on-year.

MEMS is a key growth business for Amkor showing 28% year-on-year growth in the first half of 2015. This growth is being fueled by IoT application, such as altimeters, microphones and environmental sensors. We are helping our customers design fusion sensor products, which combine multiple sensors into a single package.

MEMS allows us to leverage our expertise in wafer thinning, die stacking, wire bonding and flip chip interconnect to deliver sophisticated products with a very small footprint. Technology leadership is the key differentiator for Amkor. We are engaged with leading customers at all advanced nodes from 16 nanometers to 10 nanometers.

We are also expanding our System in Package business quite significantly, with a particular focus on RF and front-end modules for smartphones. As we look to the future, more integration will occur at the package and module level, as the economics of advanced silicon nodes become more and more challenging.

We have developed high-yielding integrated fan-out solutions called SWIFT and SLIM, which enable our customers to build very thin, very small products combining application processors, memory, baseband and other peripheral ICs. These solutions leverage our expertise in fine pitch, micro-bumps and 3D packaging as well as other technologies.

Joanne will now provide more detailed financial information..

Thank you, Steve, and good afternoon everyone. Second quarter revenues of $737 million were flat sequentially. Our gross margin of 16% was constrained due to lower-than-expected revenues, annual labor rate adjustments in our factories and a weaker product mix.

A substantial portion of the cost at our factories is fixed, so there tends to be a direct relationship between our revenue levels and gross margin. For example, we delivered non-GAAP gross margin of 23% on sales of $853 million in the fourth quarter of 2014.

Generally, we would expect margins to reach the 20% area at around $800 million of quarterly revenue and around 25% at $900 million. Operating expenses in the quarter were $76 million, down from $81 million in the first quarter. The reduction was due to lower incentive compensation reflecting the pullback in the business.

For the second half of the year, we expect our operating expenses to remain below $80 million per quarter. For the full year, we expect operating expenses to be down 5%. We expect the effective tax rate to be around 30% for the full year. The increase in effective tax rate is driven by minimum taxes in certain jurisdictions.

We generated EBITDA of $805 million over the past 12 months, adjusted to exclude the litigation charge. J-Devices produced $120 million of EBITDA over the same period. On a combined basis, Amkor and J-Devices generated $900 million of EBITDA.

As a reminder, we currently own 66% of J-Devices and we expect to begin consolidating the results in January 2016 after we increase our ownership to 80%. The consolidation of J-Devices is expected to materially increase our revenues, free cash flow and EBITDA performance and lower our capital intensity.

And our EPS will increase by the 14% incremental ownership change. During the second quarter, we completed the redemption of our 7.375% senior notes due 2018 using cash on hand and borrowings under our credit facilities, which bear interests at floating rates tied to LIBOR.

Based on current interest rates, we expect to save approximately $17 million in annual interest expense from the redemption. Second quarter results included a $9 million charge or $0.04 per share for this early extinguishment of debt. At June 30, we had total debt of $1.5 billion and J-Devices debt was only $50 million.

On a standalone basis, Amkor’s debt to EBITDA was two times, and a combined basis, debt to EBITDA was 1.7 times. And finally, our liquidity is solid, with about $450 million in cash and $250 million in available undrawn loans. With that, we will now open the call up for your questions.

Operator?.

Thank you. [Operator Instructions] Our first question comes from Randy Abrams of Credit Suisse. Your line is open..

Okay, yes. Thank you. I wanted to ask first question just about the outlook, where third quarter, it sounds like it’s more mobile, but wanted to see on the broad based business just how much of a slowdown are you seeing in that area.

And if you could given an early perspective looking ahead to fourth quarter, what your expectation on the inventory adjustments, have you started to see a pickup, maybe you are kind of at this stage early stage, mobile and then kind of non-mobile, how you see a first cut at fourth quarter?.

Okay. So with regards to Q3 Randy, we do see continued sluggish conditions from mobile in Q3. I think they are still working through inventory issues particularly in the android segment. And from what I can ascertain, they have inventory issues at all tiers.

And so I think there have to be some price concessions from the phone makers to clear that inventory out in Q3, which would set up for a reasonable Q4. I think the other catalyst for mobile devices in Q4 are the launch of some premium smartphones from Apple. And I think if they gain traction in the market, it could be good thing for Amkor.

On the broad based slowdown, I think of the rest of the market roughly as automotive and then everything else, I think automotive continues to steam along. It’s a steady market. We don’t see much in the way of big ups or downs for automotive.

I think in the broader market, much of it is – dependent on the particular customer we are talking about, but in general, I think you are seeing a caution in the market today, where I think that we will see people not replenishing inventory as fast as they may have in the past because the outlook is uncertain.

I think the other key factor is going to be the state of the distributor inventories. They haven’t reported yet, but if those inventories went up in Q2 it takes some time to move the inventories back to normal in Q3..

Okay, thanks for that color. I mean, I have a quick follow-up and then my second question. So, if you go to the price concessions that are taking place, just how broad based and how much that impacts kind of your medium-term target where gross margins are if there is a way to offset that.

And the second question just on the CapEx, on the $50 million revision, just the areas you are revising or we are pulling back on some of the investment?.

Okay, sure. So on the price pressure let me first look back at Q2. We took a close look at Q2 and we didn’t see anything extraordinary pricing, just normal cost reductions and price concessions. We do expect – we expect more in the way of price concessions in Q3 and Q4 because of the market conditions.

Our general position is that we intend to hold our ground. So our intention is to meet the market in most cases, but not be a price leader. I think we can maintain margins based on some of the cost reduction plans we have in place, but we will see how it turns out.

I think right now what we see is that quite a bit of the attention is focused on the foundries and I think that they are working to try to keep their fabs full and I think that our customers may see some price reductions from the foundry side. On CapEx, what we did there is we took $50 million out of our CapEx capacity expansion budget.

So we have taken the CapEx down by roughly 40% year-on-year. If you look what we spent for capacity expansion in 2014, it was roughly $650 million. And now, we are at $400 million in Q – in this fiscal year 2015.

And I think it’s a variety of lines, mostly advanced product lines in reaction to the slowdown in mobile devices, where we have also taken a little bit out of the mainstream budget as well..

And Randy, this is Greg – I am sorry, Randy, this is Greg. Just to clarify one of Steve’s comments when he was talking about pricing concessions in the Android market to clear inventory, that was the phone makers lowering the prices of the handsets to the consumers, not necessarily our pricing to our customers..

Okay, yes.

So it’s end product, but I guess you are saying there is still a little bit more taking place when you look if in meeting the market that there – it sounds like some of your competitors are being – are giving a little more price concessions?.

Yes. And I think you are definitely going to see that. That’s what happens when the markets close down and we intend to defend our market share..

Okay, great. I appreciate the color. Thank you..

Thank you. Our next question comes from Jairam Nathan of Sidoti. Your line is open..

Hi, thanks for taking my question. With regard to just on CapEx now, given the slowdown what are your thoughts on – it looks like you are maintaining your K5 plans here, but what are your thoughts there.

And if – what’s the plan if there is a chance it could get kind of get cut if this was a slowdown here?.

Yes. The way our K5 construction schedule is set up, we don’t have the option to slow it down. So $150 million we have in our budget for 2015 is hard and fast, so I can’t do too much about that. I think there is some chance to further reduce capacity expansion CapEx.

We will see in the coming weeks how things develop with customer demand, but I think there is a bias towards the downside on capacity expansion CapEx..

Okay.

And as far as gross margins of – Joanne, you kind of give us an idea of what could be the $800 million and $900 million, can you kind of – is there – is there further risks to gross margins here as in this – at the current rate in that $700 million, $750 million kind of or is this a pretty good level?.

I think the guidance reflects where we are at now. If there is further volume degradation, then it would have an impact on our gross margin because of the level of fixed costs we have, it will be – it would be very difficult to make them variable in the short run..

Okay.

And last question on – so at these levels, would J-Devices’ gross margins are they pretty similar to what you have right now?.

They are similar. They are – just as a reminder, they are very focused on the mainstream side. So, there would be maybe a little bit compression at these levels. Once there is a return of the advanced product business, then there would be some lowering of the gross margin..

Okay, thank you. That’s all I have..

Thank you. Our next question comes from Sidney Ho of Deutsche Bank. Your line is open..

Thanks for taking my questions. It sounds like you are expecting up quarter closer to high-end of the historical range for Q4.

And assuming of revenue increases, how should we think about your gross margin in Q4? Because you said Q2 was impacted by weaker product mix, yet if you look at the revenue by end market and revenue by advanced versus mainstream, they are not that different from Q1.

And if I recall correctly, the last time you see a gross margin below kind of 15% range, it’s when – it’s a few years ago when revenue was below $700 million a quarter.

Is there any specific things that happened in Q2 and Q3 that we think will go away as it becomes a tailwind in Q4?.

Yes, just let me make a couple of comments there, Sidney. I think in Q2, you are right, when you look at the revenue it’s hard to see the mix impact. But within advanced products, we had a change in our mix. And so the advanced product margins came in a little bit lighter than we normally have. So, that’s what happened in Q2.

But what we see in Q4 is if the revenue comes back, it will be coming back primarily in the advanced product side of the business and so we get a double benefit. We fill our factories to a greater extent and we come in with products that have higher margins..

Okay, that makes sense.

My follow-up question is with regards to your China fab, first, can you remind us what percentage of your revenue comes from China? And second, once the new facility is built, how much revenue can it support? And lastly, will this be supporting primarily advanced technology on mainstream? And what end-market do you expect the revenue to come from? And if you can touch up on the competitive dynamics in China, that will be great? Thanks..

So, I can start off. So, China is our second largest factory. It represents about 20% of our revenue. It has some of our most advanced packages there. It does have some mainstream packages, but there is a focus to the advanced side and largely supporting communications..

Yes. Let me add a few comments there. Most of the large customers in China that we deal with are really looking beyond China for growth. They are looking to international markets. So, they are looking for a reliable supplier, a high-yielding supplier and someone who has some experience. So, Amkor is a logical choice.

Right now, our factory in Shanghai is the most advanced OSAT facility in the country and we already are dealing with major customers there on high volume. So, in addition to that, we will be bringing some additional technologies into that plant in the next 6 months, including 12-inch pumping.

And that’s an area where some of our major competitors cannot do that today. So really, the dynamics are we have local customers who want a local supply chain. We have international customers who want the China supply chain. And our Shanghai facility is a pretty good fit for both of those customers..

Okay, great. Thanks, Steve. Thanks, Joanne..

Thank you. [Operator Instructions] Our next question comes from David Duley of Steelhead. Your line is open..

Yes, thanks for taking my question. Just a couple of follow-ups I guess. Regarding J-Devices, I think in the past, you have mentioned – or maybe you could help us understand what you think the operating metrics of that business is when you do absorb it. You’ve talked about how the metrics are going to look better.

Could you help us with perhaps what the free cash flow was of the business in 2014 and perhaps what the operating profits was or whatever other metrics you can provide? That will be great..

Okay. So, we did file J-Devices’ financial statements with our 10-K. A couple of metrics I can share it now is their revenues was $923 million in 2014, their gross margins were about 13% and their net income margin was 5%. So, they don’t invest as much in R&D as we do.

They certainly don’t have the interest expense we have, so more of it falls straight to the bottom. From a cash flow standpoint, their EBITDA generation over an LTM period was $120 million. Their CapEx is in the range of about $50 million to $75 million. So, you can see that they are very much free cash flow positive.

And then from a debt metric standpoint combined with our, say, they improve our debt-to-EBITDA from the 2 times to below 2 at the 1.7..

Okay, excellent.

And when you look at your K5 facility, when that’s completed, how much capacity will be added roughly with the current outlook that you have? I realized you can probably bring it up in pieces once the factory is built, but how should we look at the additions to total capacity here?.

Yes, it will have roughly the same floor space as our expanded China facilities, so in the order of 650,000 square feet. That will be a combined R&D and manufacturing center. And that will be almost all advanced products, very high capital intensity, but very low labor intensity..

Okay.

And what does your Chinese factory do that’s big now or roughly is there some metric in dollars of capacity that you can give us?.

So, it’s about 20% of our revenues that helps with the scale of the factory..

Okay, yes. Thank you. I guess you already gave me that, I am sorry. And final question for me is when you look at your CapEx for advanced packaging, we hear all sorts of buzzwords about fan-out and CSP and couple pillar and all these things.

And I am just kind of trying to figure out what you look at what the customers are doing, where are you putting – which areas that you are investing the most money in?.

Well, we can spend a long time answering that question, but I won’t..

Maybe the answer is by market or just the two big areas in an advanced packaging area that you see a lot of growth that you are investing in?.

Yes, let me just – I will say a few words. Probably, the most significant transition over the past 2 years has been to wafer level CSP packaging. So, what we see today is everything from very large chips and smartphones to very small chips are going to this form factor, which is good, right, because it takes advantage of our existing capacity.

We built a large capacity for wafer level CSP in all three of our advanced product sites. As you move forward, I think what you will see is more advanced packaging that combines application processors with baseband chips. It combines it with memory and with other peripheral devices.

Today, we are one of the leaders in 3D packaging, where we stack chips on top of each other, sometimes in packaged form, sometimes in die form. And I think as you move forward, you will see us extend that horizontally as well. So, some of these packages that you build up and some you build across and some you do both.

And so our expertise is in very fine geometries, very thin packages, very reliable packages. So, we are engaged with the leading smartphone makers to bring those packages to market. Really what’s driving it is a move from silicon level integration to package level integration. And I think that’s pretty good news for Amkor and the OSAT community..

And maybe to that, let me ask just a follow-up there.

Do you think that the fan-out package or however you might characterize that internally, is that an area of big investment for Amkor?.

Yes, it is. It’s a big investment area for us. We think that will go to high volume in 2017, but we should be ready for that in the second half of next year..

Okay, thank you so much for taking my questions..

You’re welcome..

Thank you..

Thank you. Our next question comes from Umesh Bhandary [ph] of Jefferies. Your line is open..

Thank you for taking my questions. Maybe the first question in terms of your CapEx outlook and obviously you reduced the CapEx for the full year here.

And just how much flexibility there is if let’s say the business were not to come back in fourth quarter, how much flexibility is there in terms of reducing that CapEx further or how much of the CapEx is really fixed?.

Yes. I’d say my feeling is that right now our forecast is $400 million for capacity expansion and $150 million for K5 construction. The K5 is fixed. The CapEx for capacity expansion, we still have flexibility, but I would characterize it probably maybe $40 million more, we could take out a bit if demand doesn’t develop as we expect..

Got it. And then just in terms of the outlook, obviously, there is still 45% of your business comes from IDM, I mean I guess on that number, what trends are you seeing there.

I mean just given those weaknesses in the end markets, are we seeing more in-sourcing now from your IDMs than what you have sort of set in the past couple of quarters and what does that do for pricing?.

We have seen isolated cases of in-sourcing, but the stronger trend is that most of these IDMs decided sometime ago to picture advanced packaging for most apps, including Amkor. And so by and large, most of the IDMs do not have internal capacity for advanced packaging, so it’s not really impacting us, the decision to in-source.

The only time that we run into this in-sourcing problem would be with memory manufacturers, in particular..

Got it. Thank you.

Maybe one final question for Joanne here, Joanne given the change in the capital structure now, maybe you can give some pointers in terms of what your cash interests are going to be for the next couple of quarters here?.

Yes. So, we do expect a significant drop in our interest expense. I would say interest expense is going to be right around $18 million to $19 million a quarter moving forward..

So that will be your cash interests or interest expense?.

That will be interest expense. The cash interest, we tend to pay interest expense on the high yield every six months, but cash interests would be similar for the year if you just annualize it..

Got it. Okay, thank you very much..

Thanks very much, Umesh. So that concludes our Q&A today. I would like to hand the call back to Steve for his closing remarks..

Thanks, Greg. I would like to recap our key messages. First, the weak mobile device market and soft demand from our largest customer are having an impact on our short-term financial performance. We will navigate successfully through this slowdown and emerge as stronger company.

We do expect revenues to increase in Q4, driven by the launch of new flagship smartphones with high end core content. Third, our growth initiatives are producing results. And finally, the consolidation of J-Devices’ financials is on track to begin in January 2016. Thank you for joining us today..

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