Good afternoon ladies and gentlemen and welcome to the Q4 2019 Amkor Technology, Inc. earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time. As a reminder, this conference is being recorded. I would now turn the call over to Mr. Vincent Keenan, Vice President of Investor Relations. Sire, please go ahead.

Thank you Leigh. Good afternoon everyone and thank you for joining us for Amkor's fourth quarter and full year 2019 earnings conference call. Joining me today are Steve Kelley, our Chief Executive Officer and Megan Faust, 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 a reconciliation to the U.S. GAAP equivalent on 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-K. 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 fourth quarter and full year performance, our 2020 priorities and our first quarter outlook. Our fourth quarter revenue was up 9% sequentially and up 9% year-on-year. Robust demand for advanced packaging in the communications and consumer markets drove revenue above our guidance range. Fourth quarter operating margin was 10% and EPS was $0.41. Looking back on 2019, I am pleased with how we handled a challenging market environment in the first half of the year. We cut discretionary spending but continued to invest strategically in advanced packaging capacity and quality improvement initiatives. The investments contributed to our strong second half performance. In 2019, many of our advanced technologies migrated into new high-volume markets. One example is Amkor's advanced SiP technology, which now has a firm foothold in the consumer and automotive markets, complementing our leadership position in the smartphone market. Another example is our best-in-class wafer level fan-out technology, which is now deployed in automotive radar as well as smartphone applications. Customers in a wider variety of markets are now leveraging Amkor's technology to miniaturize, improve performance, increase reliability and lower system cost. Increased demand for advanced packages, in particular advanced SiP packages, drove most of our revenue growth in the second half of 2019. And on a full-year basis, our advanced system and package business grew 9% to $1.1 billion. Now I would like to review our 2019 performance in some key target markets. In communications, we experienced strong double digit growth in the second half of the year, fuelled by our participation in successful flagship phone launches. In automotive and industrial, advanced package revenue grew 14% year-on-year. Driver assistance and infotainment applications accounted for much of that growth. Finally, in consumer our new advanced SiP…

Thank you Steve and good afternoon everyone. Today, I will review our fourth quarter and full year results and then provide some comments about our first quarter outlook. Fourth quarter sales increased 9%, both sequentially and year-over-year, to a record $1.18 billion. Gross margin of 18.9% is up 200 basis points from the year ago quarter. And operating income margin increased 300 basis points year-over-year to 10%. Our improved profitability this quarter was a direct result of the leverage in our model. We earned $0.41 per share in the fourth quarter, which includes approximately $0.05 of tax benefits we had not anticipated. We also generated $244 million of EBITDA and EBITDA margin was nearly 21%. As Steve mentioned earlier, 2019 was a year of two contrasting halves. While first half revenue was impacted by the inventory correction, the second half of 2019 was much stronger growing 26% over the first half. As a reminder, we have relatively high fixed costs, so we typically expect 40% to 50% of any revenue dollar change to drop through to gross profit. Cost control measures in 2019 mitigated the impact of lower sales on profitability in the first half and positioned us for strong leverage when growth returned in the second half. Less than 25% of the 2019 revenue decline flow through to gross profit. As a result, we generated $233 million of operating income for the year and our operating income margin of 5.8% declined only 23 basis points from 2018. Interest expense declined $7 million in 2019 or 9%. This was primarily due to the full year impact of the 2018 redemption of $200 million of 6.625% senior notes with proceeds from a term loan with a fixed interest rate of only 1.3%. Net income for the year was $121 million or…

[Operator Instructions]. Your first question is from Sidney Ho from Deutsche Bank. Your line is now open.

Great. Thank you and congratulations on good quarter and guide. My first question is on the China Coronavirus impact. You talked about some minor supply issues related to that. Can you help us quantify that impact in terms of how that impacted your revenue, cost of goods sold and operating expenses?

Yes. Sidney, we are not going to get too granular on the exact number, but let me just walk you through our analysis. The manufacturing team were on top of the issues pretty early and we identified alternative sources of supply for most of the components and piece parts that we have sourced out of Chinese factories. And there were basically a few items where we didn't see a way to mitigate the shortfalls within the quarter. So we incorporated those shortfalls into our manufacturing plant and thereby into our Q1 financial forecast.

Okay. Maybe I will move on to next one. I think your 1Q revenue is generally down, high single digit, low teens, on a sequential basis. And clearly, you are guiding down about 5%. Steve, you talked about continued strength in communications and consumer but outside of consumer, how should we think about the growth rate of the other segments when compared to seasonality? And I can extend that question a little bit more, how should we think about the revenue growth with your overall revenue growth relative to normal seasonality beyond first quarter?

Sure. Sidney, so in Q1, again we are forecasting 25% up from Q1 of 2019 and 55 down sequentially. In addition to consumer SiP product, which should be running at high volume similar to same volume that we saw in the fourth quarter, we also see continued strength in communications. We saw the iOS ecosystem demand continue into January. We expect that to be relatively strong for most of the quarter. There are also a couple of flagship phones that will be launched towards the end of Q1, which are helping us in the communication space. I think when you look beyond communications and beyond the consumer SiP project and you look to the general market, that looks pretty seasonal. It's down mid to high single digits. So it's about what we would expect in the normal year.

Great. That's helpful. My last question, if I may. So your gross margin guidance for Q1 is down sequentially, which is understandable given lower revenue. But the decline is a little more than I expect. If you can help us bridge the gross margin from Q4 to Q1, specifically how much is related to fringe benefit increase, maybe product mix and market mix, depreciation, et cetera., that will be great. And as you go through the remainder of the year, what are some of the factors we should think about other than the incremental revenue you are going to get?

Okay. Sidney, so I will start with your question on Q1. So as you know, our guideline for modeling flow through is generally 40% to 50%. And as you mentioned, the flow through from Q4 to Q1 is shy of that. Things can impact our flow through, various headwinds or tailwinds. Those can include product mix, utilization, foreign currency, et cetera. So in Q1, as compared to Q4, we are forecasting a product mix shift to higher material content, advanced packages such as SiP and flip chip. So this is what's constraining the flow through. Fixed manufacturing costs are actually declining, as you would expect in the normal model. So there is nothing unusual happening there. With respect to your question on the full year, as a reminder, we don't give full year guidance. But as it relates to the material percentage, we do expect to have continued growth in advanced SiP. So as you are looking for the full year, you could probably use the Q4 exit amount as a guideline. Just to remind you though, we are still experiencing underutilization in the general market. And so once that general market does recover, that will benefit the gross margin expected later in the year.

Very helpful. Thanks.

Your next question is from Randy Abrams from Credit Suisse. Your line is now open.

Hi. Yes. Thank you and good job on the results. I wanted to ask, maybe first follow-up on first Coronavirus situation. If you could maybe talk a little bit more the bottlenecks, I guess directly what you are seeing in terms of where are some of the material constraints? And then maybe just step further just with some of the factories having a bit of a delay coming back? I am curious, maybe the unknown factor is kind of a tricky point I am having on the call now. Just whether you are getting the full feedback on both the production impact further downstream and then also it's kind of a moving part, but the demand impact from what's happening in China? So I am just curious how much you are getting the feedback now or factoring it into guidance?

Okay. Yes, on the bottlenecks, basically they are very small parts, things like lids and capacitors and so forth that we run into issues. So for most of those parts, there are alternatives available. But for a few of them, we couldn't find alternative this quarter. That's what is causing us to back up a little bit on our guidance for Q1. As far as the demand signals, like I said earlier, we have not seen anything change in the demand picture except we have seen some increases in demand in our wirebond factories outside China. And so we have booked some additional revenue there or some additional orders that we attribute to customer concerns about China shortages. And naturally, one advantage we have as Amkor is that we have 20 factories, 19 of which are outside China. So that helps us quite a bit in helping our customers come up with alternative supply chains. Now the second part of your question was regarding any other demand signals we see out there. I think your concerns are valid. Obviously our customers are gathering data as well on other parts that maybe in short supply. We are monitoring that situation on a daily basis. It's fluid. And then of course, if there are changes in end customer demand, particularly out of China, that's going to take some time to filter through into our order book. But are going to monitor that on a daily basis.

Okay. Great. And maybe if I can follow-up, if you could give us kind as a reference how much of your production is out of the China factory and if you had to deal with any slowdown from just labor coming back where there's measures to take? And then from a demand side, if you kind of have a view how much of your demand, I think this one is for direct customer, like how much of your direct customer? And then maybe it's probably difficult to know where all the parts go, but like the end demand from China market just to see how much demand is impacted or could be impacted in the China market?

Yes. So let me, I think you are asking two different questions, one is about our China factory, the other is about the China market. So let me just take those in order. So our China factory is operating well. We move quickly. Our basic approach was to put employees relatively closest for the employees. So it's actually safer to work at Amkor than it is to go into the outside world. And so we enhanced a number of aspects within the factory. We improved our meals and so forth. We enhanced our screening. So it includes the usual things like body temperature checks, hand washing, masks and so forth. And we eliminated visits to the factories by our customers and non-central personal. And finally, we shut down travel. So I think we have created a pretty safe environment within the factory in China. We also adjusted the shift schedules so that it allows us to keep the factory running more or less at full speed. So I am very happy with the measures that we have taken in China and the output continues unabated at this point. With regards to the China market demand, again that's some thing we will just have to wait and see and see what impact that has been on our order book. But today, we haven't seen any meaningful shifts except for the additional orders we have received in our wirebond factories outside China.

Okay. Great. And if you could talk on the advanced SiP on the consumer, I think maybe it's a clarification from Megan. The fourth quarter, I think when you are saying the run rate in Q4, is that kind of like telling if we take that times four, that's kind of your rough run rate you are expecting for 2020? And I am curios because those are lumpy depending on projects. Maybe your visibility for the new wafer projects later in 2020, how you are feeling this in terms of growing with the new wave and maybe how you see it broadening out or any risk on that side for SiPs in the consumer side?

Yes. Randy, so as far as comments made with respect to and I think you are getting at the elevated material content, my suggestion to least look at Q4 is not an actual, it's all of our products mixed together in Q4. And that's a good marker because there was strong SiP in Q4. So as we look out to 2020, as you have said, material content can be pretty lumpy with new projects coming on, seasonality, et cetera. So I think that's a decent guide to look forward and then the known is the return of the general market, which would help to moderate that.

Okay. I guess my question also on the revenue side, how you are thinking about the revenue side for 2020 and then how you are thinking about the product or design and traction for the next wave of projects, like maybe for next peak season? Like any upside or risk, at least at this stage that could change?

Yes. Randy, I would have to say that we are very optimistic about 2020 based on our position in the markets that we target. I think on the communication side, we are there in most of the new 5G phones. And I think in the general market, we expect that to recover at some point this year. It's hard to break exactly when, but it will recover. I think in automotive, we are clear leader and we are very well positioned as the demand for advanced packaging will continue to increase for these data intensive systems. Consumer, obviously we have got a very great position and we will be fighting for more consumer business as we head into 2021. So I am pretty optimistic. I think 2020 is going to be a good year for Amkor.

Okay. That's great. And last question on the general market. It actually looks like advanced packaging effectively drove a lot of the growth. And general market kind of was, you could say, sluggish through the year. And I think you have been looking for signals of pickup. You could say, at this stage now into 2020, how's your view for general market, like maybe relative to industry, like you start to track growth again? Or it looks like it's still going to be sluggish for a bit longer?

I think in Q4 we saw some positive signals, particularly in automotive. So that was good after many quarters of declining revenue in wirebond. I think if think about the general market in total, I think the common theme from our customers is, they believe the inventory correction is over. So that's good. Then the real question is, how fast do you recover? And that's the tough one to answer. But if I look back in our history, we see changes in market psychology. When you are contracting, the psychology is to not build inventory and to restrict orders. But then when lead times start to firm up and perhaps stretch, the psychology changes and more customers decide to place orders and we are back into more normal run rate. So at some point, that's going to happen. I don't know exactly when. But I think it's some time this year.

Okay. Great. Thanks a lot. I appreciate the color.

Thanks Randy.

Your next question is from Krish Sankar from Cowen & Co. Your line is now open.

Yes. Hi. Thanks for taking my question and congrats, Steve and Megan, on the great results. I had a couple of questions. Number one is on CapEx. It looks like your CapEx is back to 2017, 2018 levels. Can you help us understand, you did say that a lot of it is going to advanced packaging. Is there a way to kind of like quantify it what it is today or this year relative to 2017, 2018? And then I had a follow-up.

Yes. I think you are right. It's very close to 2017, 2018 levels, more normal level of CapEx. We had restricted it last year in response to the downturn. But if I break it down, of the $550 million that we intend to spend on CapEx in 2020, more than 60% of that will be spent on expanding advanced package capacity. So this is for advanced system and package for wafer level, for flip chip products. And that's per demand we see in the near term. A bit more than 30% will be spent on facilities, quality improvement and R&D. And that includes our continuing work on panel level fan-out as a potential successor technology for wafer-level fan-out. And then the remainder of our $550 million will be spent on wirebond package capacity expansion.

Got it. Very helpful, Steve. And then another follow-up, thanks for giving the color. I understand you don't want to quantify the impact of Q1 revenues because of the virus. I am just kind of curious like hopefully sooner than later when the virus issues subsides, as demand snaps back, do you actually think there is going to be a lag effect because the supply chain cannot keep up with the demand impact? And if so, is there a way to like to figure out what the lag effect would be?

Yes. Really, that's a tough one to answer. But I think certainly when we run into issues like this, I think people start to err on the side of building more and not building less because you want to ship as much as possible into your end market. So we think things will come back later this year.

Got it. If I can just squeeze one more, Steve. Last year, Chinese New Year was in February. This time it was earlier. And typically in the back-end business, demand snaps back after Chinese New Year. Arguably December was like delayed because of the virus. Do you think the dynamics this time would be different than a year ago quarter?

Well, the thing is, we haven't seen any change in the demand picture yet, except for some of the additional demand we received in our wirebond factories outside China. So we are going full speed ahead until we see signals that tell us that there is going to be impact on our demand.

Got it. Thanks a lot, Steve. Thanks, Steve and congrats, Steve and Megan.

Thank you for calling in.

[Operator Instructions]. I am showing no further question at this time. I would like to turn the conference back to Mr. Vincent Keenan for any closing remark.

Thank you Leigh. This ends the question-and-answer portion of our call. I will now like to turn the call back to Steve for his closing remarks.

Yes. I would like to recap our key messages. First, we closed out 2019 with a very strong fourth quarter as both revenue and profitability exceeded the high-end of expectations. Second, the momentum which drove our fourth quarter performance is continuing into the first quarter of 2020. And finally, we are optimistic about the coming year, given our excellent position in many of the industry's highest growth markets. Thank you for joining the call today.

Ladies and gentlemen, this concludes today's conference. Thanks for your participation and have a wonderful day. You may all disconnect.