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Original Source: FD (FAIR DISCLOSURE) WIRE
OPERATOR: Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Amkor Technology fourth quarter earnings conference call. [OPERATOR INSTRUCTIONS]
I would like to turn the conference over to Jim Kim, Chairman and Chief Executive Officer. Please go ahead, sir.
PETER KIM, ANALYST, DEUTSCHE BANK: Thank you. Good afternoon. This is James Kim, Chairman and Chief Executive Officer of Amkor Technology. With me today is Ken Joyce, Chief Financial Officer. Before we begin this call, I would like to remind you that any forward-looking statement made during the course of this conference call represents the current view of management. Prior to this conference call, our fourth quarter earnings release was filed with the SEC on Form 8-K. The earnings release, together with our other SEC filings, contain information on risk factors that could cause actual results to differ materially from our current expectations.
2006 was an outstanding year for Amkor. We achieved record sales, gross profit, and net income. Following the industry correction of 2004, we enjoyed a strong business recovery that continued through most of 2006. During the six quarters of this up cycle, our quarterly sales grew by 70%, representing the greatest 18-month sales increase in Amkor's history as a public company. Last year we assembled a nearly nine billion ICs, an increase of 18% over 2005, and the fifth consecutive year of record unit shipments following the 2001 downturn. This growth was driven by strong performance in both traditional and advanced product areas, with noteworthy gains in 3D packaging, microlead frame, Flip Chip, and system and package margins.
During 2006, we made strategic investment in Singapore to provide a wafer pump and wafer probe services in collaboration with our technology partners and customers who operate in the region. Our Flip Chip related revenue nearly doubled in 2006 and we now have Flip Chip process capabilities in China, Korea, Taiwan, Singapore, and the Philippines. Companies are also recognizing the value of our lead-free bumping technology and are starting to license this technology for their use. These achievements resulted from an unwavering management focus and commitment to enhance our operational effectiveness, improve productivity, work closely with our customers, suppliers, and technology partners, and enrich our product mix. Our fourth quarter performance reflected the expected slowing of business momentum following six quarters of strong growth. We anticipate the periods of modestly weaker business conditions, as the excess inventories are absorbed and supply chain moves toward equilibrium. It is always difficult to predict the scope of industry corrections. However, I believe that companies across the semiconductor supply chain have been disciplined in expanding capacity and that unless global demand were to weaken considerably, the current inventory correction should be relatively brief.
We have entered the 2007 -- 2007 with an objection of continuing to execute under strategies that we have put in place over the past 18 months. We intend to maintain our technology and product leadership in key market segments with the tier 1 customers and technology partners. We intend to maintain a focused business strategy that recognizes our existing operational strength and technology leadership that positions Amkor to profitably support growth applications. We remain committed to exercising financial discipline in the way we manage our business mix and capital investments. Our goal so to consistently achieve consolidated gross margin at around 24% to 25%. We will continue to drive operational effectiveness so that we can optimize asset productivity and achieve higher returns on our assets.
Ken Joyce will review our fourth quarter operating performance. Ken?
KEN JOYCE, CFO, AMKOR TECHNOLOGY, INC.: Thank you, Jim. 2006 was a year of solid financial performance for Amkor. As Jim mentioned, we achieved record sales of $2.7 billion and record net income of $170 million. During the year, we generated $524 million of cash flow from operations, reflecting business growth coupled with careful management of operating expenses and a disciplined approach to capital spending. We used $316 million to pay for capital expenditures and generated $208 million of free cash flow. We retired $132 million of 5.75% convertible notes at maturity this past June and $3 million of other debt. Additionally, we plan to use available cash resources to retire $142 million of 5% convertible notes at maturity in March of 2007.
Q4 2006 marks our fifth consecutive quarter of gross margins at or above 24%, operating margins at or above 13%, positive net income, and positive free cash flow. We have maintained our commitment to disciplined capital spending. In 2004 Amkor's ratio of capital additions to sales was 21%. This ratio improved to 14% in 2005 and 11% in 2006. We expect this ratio will remain in the 10% to 12% range for 2007. We see similar trends to more rational capital investments across the larger companies in our industry, and we believe that such continued restraint has positive implications for our industry. At the same time, we have undertaken an ambitious effort to improve our operational effectiveness and increase the return on our capital investments. One advantage of having a large asset base is the opportunity to redeploy equipment from underperforming lines to other product lines or locations that offer better economics while minimizing the incremental CapEx expenditures.
Over the past year, we have taken a hard look at our product portfolio, our business mix, and our production capacity, with a view towards increasing productivity and unit throughput without sacrificing quality. The success of these efforts is evident in our improved gross margin. Taking a look at the fourth quarter, given the 4% decline in sales, our gross margin of 25.3% was higher than we had planned. During the quarter, we saw an unexpected shift towards more use of consigned substraights in our Flip Chip business. As we've noted before, substraight costs are a high percentage of Flip Chip …