Good day, ladies and gentlemen. And welcome to the Amkor Technology Fourth Quarter and Full Year 2016 Earnings Conference Call. My name is Tanya, 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 conference over to Greg Johnson, Vice President of Finance and Investor Relations. Mr. Johnson, please go ahead.

Thank you, Tanya, and good afternoon, everyone. Joining me today are Steve Kelley, our President and 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 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-K. And now, I would like to turn the call over to Steve.

Good afternoon, and thanks for joining the call. Today, I'll discuss our fourth quarter and full year performance, our 2017 priorities, our pending acquisition of NANIUM and our first quarter forecast. In the fourth quarter, we generated year-on-year revenue growth of $350 million, consistent with our guidance. Demand was stable in most end markets and our factories executed well. Our strong revenue performance drove healthy profits, as well as nearly $120 million of free cash flow. Full year 2016 revenues were $3.9 billion, a $1 billion increase over 2015. The consolidation of J-Devices together with solid execution of our automotive, Greater China and advanced SiP initiatives drove both revenue growth and better profitability. Mobile communications sales grew 8% year-on-year, contributing 44% of total revenue. We believe that we gain share in the major smartphone ecosystems in 2016. Combined Amkor and J-Devices automotive sales grew 20% year-on-year to just under $1 billion, accounting for 25% of overall revenue. In Greater China, sales grew 17% year-on-year. Our investments in Greater China advanced packaging and test capacity together with a more capable customer support organization are paying dividends. Advanced SiP sales of $775 million grew 7% year-on-year, contributing 20% of total revenue. Space constraint, performance, sensitive mobile applications are driving the development and growth of advanced SiP products. These products are also migrating into other applications such as automotive, data processing and storage. J-Devices performed well in 2016, showing healthy growth in revenue and profitability. The J-Devices team is executing a consolidate and fill strategy, which will lower fixed costs. We expect to reap the full benefit of these structural cost reductions in 2018. Now I would like to move on to our 2017 priorities. Balanced revenue growth remains the overriding objective for Amkor. We believe that engaging broadly with customers across multiple…

Thank you, Steve, and good afternoon, everyone. First I will review our fourth quarter results, followed by a recap of our 2016 performance and a few comments about our 2017 activity. We delivered revenues of just over $1 billion in Q4, up $350 million year-over-year. The consolidation of J-Devices contributed about $230 million of that growth, with the remaining $129 coming from the healthier demand environment and the benefits of our strategic initiatives. Fourth quarter profitability was strong with gross margin of 22% and EPS of $0.42. As expected, we received approximately $26 million or $0.08 per share of insurance proceeds related to the second quarter 2016 Japan earthquakes. These proceeds contributed about 250 basis points to gross margin. In both Q3 and Q4 we were able to achieve gross margin of around 20% with revenues of over $1 billion. Our fourth quarter EPS included $0.12 resulting from foreign currency gain and tax benefits related to the re-measurement of liabilities on our balance sheet. EPS was $0.69 for the full year 2016, an increase of $0.37 over non-GAAP EPS for 2015. This is due largely to revenue growth and our cost control initiatives. Note that with the receipt of the insurance payment in Q4, the impact of the Japan earthquakes on our full year 2016 results was minimal. With the improvement in our profitability we generated $850 million of EBITDA in 2016, a $190 increase over 2015. At December 31st we had total debt of $1.5 billion and debt-to-EDITDA of 7.1 times, a significant improvement from our ratio of 2.4 times one year ago. Our liquidity is solid with $550 million in cash and $450 in available undrawn loans. We generated $140 million in free cash flow for the full year. We also paid down around $100 million of debt in the fourth quarter. Looking out to 2017, the depreciation and other costs related to our new K5 facility in Korea will begin in the first quarter, a portion of these incremental costs will be offset by the savings from the closure of our K1 factory. Operating expenses in the fourth quarter were $100 million. For the first quarter of 2017 we expect operating expenses to be around $110 million. This increase is primarily due to K5 costs, which will be classified as R&D expense until we commenced high-volume manufacturing. Once high-volume manufacturing begins later this year some of these future expenses will be recognize in cost of goods sold. We expect our 2017 full year effective tax rate to be about 25%. In 2017 we expect to make capital investments of approximately $500 million. And finally, our pending acquisition of NANIUM is expected to close at the end of Q1. We plan to provide further financial details on NANIUM during our April earnings call. However, the impact is expected to be modest given the current size relative to Amkor. With that, we will now open the call up for your questions. Operator?

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

Yes. Hi. Thank you. I wanted to ask the first question about the first quarter guidance. If you could talk a bit more about the factors, it looks a little bit below seasonal, if it’s related to timing of some of these flagship launches or if there's -- if you are seeing an inventory overhang at customers? And I'm curious at an early look into second quarter, where some of the foundries are pointing to another slow quarter, just if you get the sense it’s more an issue at the wafer bank level that you see a pickup or normal pickup going into second quarter?

Yeah. Sure, Randy. So basically let me just answer in two parts. First, I will talk about the general market then I will go into the smartphone ecosystems. In the general marketplace we see good demand right now. And so it’s most easily measured when we look at our capacity utilization at Philippines and other mainstream plants which is very healthy. So it’s a good automotive industrial consumer PC networking applications. So that part market is good. We are seeing this quarter the three main ecosystems in smartphones namely Apple, Samsung and the Chinese companies, they are going through a bit of a trough quarter, some of its, a period between the old phones and the new flagship phones are coming out, some it’s inventory correction. So that puts really happy in Q1, where we are just seeing a depth which is probably, yeah, a little bit more than seasonal for Q1. So I think you correctly identified that. As we look into Q2, I think, again, we don’t see any reasons to pessimistic about the general marker, we think that will hold up, because we think inventories are under control, I checked through the distribution channel have shown that recently. So, again, it comes down to the smartphone ecosystems and I think you'll see a flagship phone came similar to what we have seen in past years where Samsung should launch their flagship in Q2 and Apple in Q3. I think the Chinese will probably recover somewhat in Q2. I think they are going through a bit of an inventory correction this quarter, so I expect to see the demand from Chinese OEMs to start to recover in Q2. I see Samsung recovering in Q2 at some point and then I see the second half of the year being quite strong as all three of those ecosystems are engaged in Q3 and into Q4.

Okay. Great. Again, it looks like a CapEx was maintained versus the tone you had given before on 2017. Could you talk about – you were mentioning last call potentially you could pull in SLIM and SWIFT. Do you have any figure for that and maybe how much CapEx would be a swing factor? And the second part of that is the new NANIUM investment, if you could talk about how their technology fits in with the internally developed SLIM and SWIFT?

Yeah. I will be happy too. Let me just take those in order. First of all, on the CapEx, we have been guiding to roughly $500 million in CapEx expense for 2017 for the last three calls actually. And we still feel that $500 million is the right number for 2017 CapEx and that we will all be focused on capacity expansion and maintenance. Right now I don't see a pulling of the SLIM and SWIFT capacity. Right now really our plan is to install about 2,500 wafers per month capacity of SWIFT in K5. Because we see this year is primarily a qualification in low rate initial production year for SWIFT. So we see that capacity being installed primarily in ’18 and ’19. So let’s talk about NANIUM. So, I think, maybe just a few words about NANIUM and then where we are going into the future. First of all, for us NANIUM is a technology play. It fills a gap in our portfolio. If you look at wafer-level fan-out versus SWIFT, the best way to think about it is wafer-level fan-out is actually a low density fan-out technology, which is geared toward single die application and we are basically stretching the die using epoxy boarder which allows more IOs and more [ph] bond pads (17:38). In the economics of this, obviously wafer-level fan-out is more expensive than wafer-level CSP. But it makes sense for the customer when the die shrink cost savings outweighs the incremental fan-out cost. So that's really what we’re getting with NANIUM those single die solutions where the customers trumped die that needs to stretch it so they can accommodate all the IOs. The SWIFT technology is different. The best way I think about SWIFT, it’s an ultra-thin substrate for high density applications, small geometry, 2 micron line space type geometries. It’s geared towards more complex die with more IOs and what it really does is facilitate SiP for very thin foam factors. So I think that’s where SWIFT will gain most traction from a combining multiple die onto a very thin substrate. So it’s very similar to conventional eminent substrate at much thinner.

Okay. Great. And then final question, I want to touch the gross margin down to mid-teen. Is that what you would consider normal leverage with the revenue decline or if there is any mix a more advanced packaging related for pricing impact? And I guess, as we look at 2017, last you had a bit of gross margin improvement, but the way you are – I guess, the way you are thinking about gross margin year-over-year moving toward peak season?

Yeah. Randy, the result we are seeing is very consistent with our model. There is a high degree of leverage up and down between $900 million and a $1 billion in sales. So our model shows that at $1 billion we can deliver roughly 20% gross margin. We have proved that in Q3 and Q4. But unfortunately it deteriorates when we get to $900 million. So that’s what you are seeing here. I don’t think mix plays a major issue, a major role in the production and gross margin expectations for Q1. The important thing to remember those Q1 is trough quarter, so I think, we are going to improve over the course of this year.

Okay. Great. Thanks a lot, Steve.

Yeah.

Thank you. [Operator Instructions] And our next question comes from Sidney Ho of Deutsche Bank. Your line is now open.

Hi. Thanks for taking my question. Just follow-up on Randy’s question earlier, if you look at the NANIUM – first of all thanks for the explanation on the NANIUM technology versus SWIFT. But understanding that the NANIUM generated about $40 million of revenue last year, can you talk about how soon do you think this deal will accretive to earnings and what kind of revenue costs you expect going forward?

Yeah. Sidney, let me give you a little background on NANIUM. Maybe circle back to what you are looking for. So again NANIUM is technology play. It fills a gap in our portfolio. But it also brings a few other things. It brings the revenue, relatively new equipment set that they have installed in Portugal, experienced engineers in a very good factory. So we looked at that together with the culture was also great fit for Amkor. We also consulted with our customers and we got very positive feedback from our customers on the capabilities of NANIUM, particularly on their process maturity, process yields and the quality of their people. There is also I think very good feedback from customers on the Amkor/NANIUM combination because it fill some of the gaps NANIUM have primarily in expansion capital in a worldwide service organization. So that’s the basic rational for NANIUM. Looking forward, the immediate plan Sidney is to build more capacity in Portugal to take advantage of NANIUM’s, I think, number one position in the marketplace from a quality and execution standpoint to generate more demand. Through one of the things that NANIUM couldn’t do was address the needs of Asia customers because they don’t have a sales people in Asia, we have lot of sales people in Asia, so we are bring that technology to them even before the deal closes. And then, of course, we are pursuing a seamless integration so that the NANIUM employees feel welcome and part of the Amkor team and then also try to maximize our cross learning once the deal closes, so that the Amkor and NANIUM engineers learns as much as possible from each other. So that’s the basic value proportion of NANIUM. We haven’t looked at all the financials yet for 2017, but what I can tell is you are right their revenue was just under $40 million last year and they are making a profit. So I believe that they can be a positive for Amkor financially.

Okay. Thanks. Thanks for the explanation. My follow-up question is on the gross margin side. If you back out the insurance proceeds Q4 is roughly 20% of gross margin was slightly over $1 billion, which is exactly your target. Is it fair to assume this will be your baseline going forward when the next time you hit for $1 billion, I assume sometime this year or are there other factors like high depreciation or any one-time charges that that may be deter that 20%?

Hi, Sidney. I think you are right that that’s the right level. Keep in mind that that's based on a leverage of the $1 billion revenue mark. So as long as we consistently had the demand for the $1 billion we should be able to hit the 20% margin.

Okay. Great. My last question if I may is on the automotive side. Clearly, Australian market right now. Can you talk about your ability to grow above and beyond the industry unit growth rate? I am especially interested in the outsourcing trend for packaging and testing in auto. My understanding is that this market particularly in Japan does not tend to outsource the backend as much as some other markets and if the entire industry is like 50% outsourced, what is the auto -- what is the percentage in auto today and what do you think will go in two year to three year timeframe?

Yeah. I don’t have a lot of specifics, but let me just comment generally on automotive. I think the first data point I will point to you is that we grew about 20% year-on-year in automotive, so I believe that’s probably faster than the overall growth rate in the industry, so I think we are gaining some share there. I think in Japan in particular, with J-Devices we are very well-positioned, because those factories used to be part of Toshiba, Renaissance and Fujitsu. So what happened to J-Devices revenue is automotive but those used to be internal factory, so it was pretty easy to convert to an outsourced model in Japan. On the Amkor side, we have customers at Amkor producing automotive ICs for decades. At a variety of facilities but its concentrated in Philippines and so the automotive customers and their customers are very familiar with our factories. They have been thoroughly embedded and they are very comfortable going back year after year with new programs. That’s what gives us a bit of an advantage in the market. I think, speaking globally about the trends towards outsourcing. I think certainly for many customers, they probably have a preference for building that internally when they can, because of the strong quality requirements of their end automotive customers. We understand that and so we are basically in a position where we need to be as good if not better than their internally factories be successful in the market and that's the focus of all of our manufacturing team.

Okay. Thank you very much.

Thank you. And our next question comes from Atif Malik from Citigroup. Your line is now open.

Hi. Thanks for taking my question. Steve, you commented on below seasonal mobile demand in the March quarter. I was wondering if you can give a bit more color. Are you exposed to one particular customer more, I mean, I think, your guidance is kind of reflective of what [ph] Volvo (26:40) mentioned on their call, but Volvo had little bit different trend. So you can help us out on, if you are overexposed to one or two particular guys that are driving the guidance below seasonal and then I have a follow-up?

Yeah, Atif. I think we are not giving too specific. There is one particular customer where we have very good share that’s going through a bit of an inventory questions quarter this quarter. So, yeah, we may have felt it little more than some others. That’s correct.

And then, if you look into the full year, last year you had very strong design wins and content gains in advanced SiP. So how confident you feel for the full year that you kind of grow on that advanced SiP content win this year?

Yeah. I am very confident about advanced SiP. I think, we proven our ability to be successful. Right now the most challenging SiPs are the RF and frontend SiPs. And we are the number one or very close to it today coming from a standing over from a starting position three years ago. So our ability to execute on high precision assembly is quite good, particularly in our flagship factory in Korea called K4 and so we built on our success, broaden the customer base and we are investing for lot of growth this year in advanced SiP. In addition to that, we build advanced SiP memory modules in China and also in Korea, and we have other products that are built in various factories around the company. So I think we are pretty very well-positioned there.

And lastly, if you can comment on the timing of the NANIUM acquisition, why now and is the adoption of integrated fan-out packaging process is becoming much more broader than outside the application processors?

So the timing of NANIUM, I think, there are number of factors that went into the timing. But the biggest one is the market is growing to a size where it’s of interest to us and rather than investing a lot of internally we thought it was advantages to go by NANIUM because we like their technology and we like their people, so it was a good fit. What was your second question, I am sorry, I missed, I didn’t write down?

Then my second question was, are you seeing a much broader adoption of fan-out packaging processes outside application processors?

Oh! Yeah. Yeah. For sure. so this particularly technology is typically for these smaller ICs not this, again wafer-level fan-out is not for the app processors but typically things like PMICs power management type products and peripheral communications chips and networking chips. And so where we see this is part of a larger chipset and we are – our customers have been able to shrink the die down save money on their wafer costs, but now the die is too small to fit all the IOs on, so that’s why – that’s what driving wafer fan-out. They need to stretch that die and we can do that for this wafer-level fan-out process.

Got it. Thank you.

Sure.

Thank you. And our next question comes from Ana Goshko of Bank of America. Your line is now open.

Hi. Thanks very much. I wanted to ask about potential sources and uses of cash and cash flow this year. So, I understand that you got NANIUM coming up as it used. I believe you also have some proceeds coming in from excess real estate sales in Korea. Had the company has also said that with the lower CapEx after the completion of K5 that you believe you would be in a position to generate enhanced free cash flow this year. So, altogether, I wanted to understand, how much excess free cash flow might be available this year and what would be the uses of that?

Sure, Ana. Although, we don’t normally guide free cash flow, we do expect to be free cash flow positive for 2017. And as you mentioned those specific usage and for an acquisition and then we are expecting midyear about $130 million in proceeds on a sale of our K1 factory and then with the CapEx disciplined of $500 million and how that compares to the 2016 CapEx numbers. So 2016 showed a healthy year of cash flow generation and EBIT DA and we continued with that continued strength of our business and leveraging those fixed costs we expect to see 2017 also to have free cash flow positive figures.

Okay. And then a few follow-up to that if I could, and had you been updated leverage target you cited 1.7 times debt-to-EBITDA that’s now belong a below 2 times, are you at your leverage target or would you like to further reduce leverage?

Sure. We don't have an absolute target and as we continue to grow EBITDA and as we start to delever and that will have a positive effect on that ratio but we were very pleased with the improvement that we gained here at the end of Q4.

Okay. And then, thank you, and then, finally, are there two bonds still in the company’s capital structure both are callable and both have interest rates over 6%, which I think is expensive relative to the country level financing that you’ve got in Korea and Taiwan, for example. So wondering what your plan is with regard to potentially trying to refinances those bonds and reducing the cost of funding?

Sure. So, just as a remainder, our first priority is to reinvest in the business and fund our capital expenditures. And then, secondly, we would look at paying down some of bad debt and you are right, right now we have a mix of both foreign debt and the capital, the senior notes that you mentioned. So as we have cash proceeds come in we'll start to take a look at what the most opportunistic play is to further reduce our debt.

Okay. Well, thank you.

Thank you. And our next question comes from David Duley of Steelhead. Your line is now open.

Yes. Thanks for taking my question. I apologize I got cutoff for just a minute or so. Could you talk a bit about your growth in your SiP business going forward and what the key drivers of the growth will be? And also how do you view the profitability of that segment of your business at this point?

Yeah, David. I think on SiP the growth rate was quite good, we referenced it earlier, I think, it’s – it grew 7% last year and I believe that we will grow faster this year, if I look at the opportunities that are in front of us, they are quite impressive for SiP. So I wouldn’t be surprised to see us grow 10% or more in 2017 for advanced SiP. So that’s my expectation.

And on the profitability side?

Well, profitability side, advanced SiP is definitely averaging up the company. They are quite good. We add more value in advanced SiP than we do in just a standard packaging test.

Okay. And then, as far as your CapEx plans go for this year, how much do you think it’s going to be focus on SiP and fan-out in some of these advanced initiatives?

David, I don’t have that level of detail here. But I could tell you in general of the expansion capital we definitely have a bias towards advanced product capacity in both SiP and wafer-level products in that category. In the past we typically spend roughly 60%, maybe 65% on advanced and the rest of it on mainstream technologies.

Okay. And just one finally, let me flip one final question, is on the NANIUM, I am assuming it’s kind of a lower cost fan-out process, is that, is it panel based lithography or how does NANIUM compete in the marketplace kind of in the lower cost area?

Yeah. It depends on what you are comparing to. So wafer-level fan-out is practiced by NANIUM and certainly less expensive than SWIFT. The SWIFT is for higher density, its finer line in space geometry, but wafer-level fan-out certainly more expensive than wafer-level CSP. We don’t need to expand the die. So again the decision to use fan-out is really driven by this cost trade between the benefit of shrinking the die versus the penalty we are paying more for the packaging. And so it’s going on – the economics will vary from customer-to-customer and application-to-application. But there is definitely a network growing that because the opportunity to shrink this die is out there and in general you can make the economics work for PMICs, as well as for lot of the other peripheral chips that are going to phone.

Okay. Thank you.

Thanks very much, Dave. There are no more questions so that ends the Q&A portion of the call. I’d like to turn the call back over to Steve for his closing remarks.

I would like to recap our key messages. First, healthy demand and good factory execution fueled strong fourth quarter results. Second, we think 2017 will be the good year for Amkor. Many of our initiatives have gained traction and industry trends are working in our favor. And finally, we are excited about our pending acquisition of NANIUM, a best-in-class manufacturer of high yielding wafer-level fan-out packages. And thank you for joining the call today.

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