Magnachip Semiconductor Corporation (MX) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the MagnaChip Semiconductor conference call. [Operator Instructions] Please be advised that today's conference call is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Bruce Entin, Head of Investor Relations. Please go ahead, sir.

Thank you. And good morning, and thank you for joining us today. As you know, MagnaChip issued a press release last night and filed an 8-K this morning to announce it has signed a definitive agreement to sell its Foundry business and Fab 4 to a special purpose company in South Korea. The press release and other press releases as well as the 8-K can be found on the company's Investor Relations website. A telephone replay of today's call will be available shortly after the completion of the call and will be archived on our website for 1 year. Access information is provided in the press release. During the course of this conference call, we may make forward-looking statements. Our forward-looking statements and all other statements that are not historical facts reflect our beliefs and predictions as of today and, therefore, are subject to risks and uncertainties as described in the safe harbor discussion found in our SEC filings. I should also note that all statements we make relating to the definitive agreement and the transaction contemplated thereby are qualified in their entirety by what we disclosed in the 8-K. Thus, you are encouraged to refer to the 8-K for additional details. Joining me today are YJ Kim, MagnaChip's Chief Executive Officer; Shin Young Park, the company's Chief Accounting Officer; and Theodore Kim, our Chief Compliance Officer and General Counsel. Since the 8-K contains the details of the transaction, YJ will provide only brief comments and answer analyst questions related to the transactions. However, please note, we will have no further comments regarding the update of our financial guidance that we provided on March 10, and we will reserve comments about the current business environment for when we report Q1 results. Now I'll turn the call over to YJ. YJ?

Thank you, Bruce. Several hours ago, I participated in a formal ceremony in Seoul to sign a definitive agreement to sell our Foundry Services Group and Fab 4 factory in Cheongju to a special purpose company in South Korea. This is a business transfer as we are not selling the whole company, but carving out and selling one division of MagnaChip. The business transfer transaction value is approximately $435 million, consisting of 2 components: first, $344.7 million in cash, which will be paid in South Korean won based on the exchange rate on the third business day prior to the closing; and second, the buyer's assumption of statutory severance liabilities currently estimated to be around $90 million. We currently expect this transaction will take 4 to 6 months to close. When we launched the strategic evaluation process, we said we would explore a range of possible options, including, but not limited to, joint ventures, strategic partnerships and M&A possibilities. We also said we were committed to improving MagnaChip's profitability and unlocking shareholder value and that we would be mindful of the best interests of shareholders, customers and employees. I am pleased to say that we achieved an outcome that satisfies all these objectives. From all stakeholders' perspective, this is a win-win transaction. MagnaChip expects to meaningfully delever and strengthen its balance sheet by using the cash proceeds to significantly reduce debt and largely be freed of our current interest expenses. We also expect that the accrued severance liabilities on our balance sheet will decline substantially when the transaction is completed. Moreover, MagnaChip will then be a more streamlined company and ideally positioned for continued future success. We will be a pure-play analog standard products company with a great opportunity to focus exclusively on attractive growth prospects in our Display Solutions and Power Solutions business lines. As I mentioned in recent conferences calls, we are excited about the analog power business and see the Electric Vehicle segment of the auto industry as a market that aligns well with our Power products and technologies. In the display space, we look forward to build upon our leadership position in the OLED display driver business, where we've doubled our product portfolio in just the last year. We are also excited about the recent design win we achieved in the emerging MicroLED space. The news of the definitive agreement also is good news for our Foundry customers. As mentioned in our press release, SK hynix is a limited partner of the special purpose fund that is acquiring the Foundry business and Fab 4. Foundry employees soon will be indirectly affiliated with a world-class semiconductor company that has a broad technology portfolio and a global track record of success. Upon the closing of the transaction, approximately 1,500 MagnaChip employees are expected to be transferred to the buyer. As a reminder, Fab 4 was the larger of our 2 analog and mixed signal fabs and has accounted for approximately 73% of our total wafer output. We expect to report these results of the Foundry business as discontinued operations in our quarterly results beginning in Q1 2020, and we will show assets and liabilities relating to Fab 4 and the Foundry business separately on our balance sheet until the transaction closes. Going forward, we will continue, as usual, to operate Fab 3, which primarily serves the needs of our Power business. It is our intention to host an Investor Day event in the coming months to provide a detailed overview of our new business profile once the transaction closes. In closing, I'd like to thank entire Board of Directors for working tirelessly with the management team to drive this sales process to a conclusion. Many thanks also to our financial adviser, JPMorgan, and legal adviser Paul, Weiss. With that, I'll turn the call back to Bruce. Bruce?

Okay. Thanks, YJ. So Catherine, this concludes our prepared remarks. We'd now like to open the call for analyst questions.

[Operator Instructions] Our first question comes from Suji Desilva with ROTH Capital.

Congratulations to all of you and the Board on the transaction. Very good outcome for you guys.

Thank you.

So yes. So first question, can you estimate the portion of the operating expenses that would go along with this transaction, so we can understand what the pro forma company starts to look like?

I mean as YJ mentioned during his prepared remarks that we plan to have an Investor Day event in coming months, but we have not set the date yet. So more details were going to come. We'll keep you posted, like, once we set the date.

Okay. Fair enough. And then on the proceeds you're getting, the use of that. Would you target the convertible debt first or the straight debt? Just wanted to get some thoughts there. I know it's early in that process, but some color there would be helpful.

It is. I mean -- thanks. So as you mentioned, that's all in the process. And YJ mentioned also that we'll intend to meaningfully delever and strengthen our balance sheet to significantly reduce our debt, but we haven't set any priority, anything. So more details were going to come as we get closer to closing. So that detail also be -- will be shared with you.

Okay. Great. And maybe a last question for Thomas (sic) [ Ted ]. Thomas, with the transaction being entirely into South Korea geography, do you know what regulatory approvals might be needed? Is it limited to South Korea? Or do you need global ones as well?

So it's -- I don't want to speak -- this is Ted, by the way.

Sorry, Ted. I'm sorry about that.

No problem. So I don't want to speak about all the potential global regulatory approvals that might be needed. But I think what I should point out, and you can refer to the 8-K and the business transfer agreement that's been filed with the 8-K, you look at -- you'll see that there is no closing condition tied to any regulatory approval. So we don't believe that there is any regulatory hurdles that will hinder the closing of this transaction.

Okay. And maybe a last question for YJ as well. YJ, can you update us on the CFO search process?

It's in the progress.

Our next question comes from Raji Gill with Needham & Company.

Congrats as well. I know you can't provide a lot of details because you're waiting for the Analyst Day in a couple of months, so I appreciate that. But just in terms of the 1,500 employees that are going to be transferred to the buyer, can you maybe characterize those employees? Are those mostly in manufacturing or OpEx? I would assume it's mostly manufacturing, but any color there in terms of the actual employees that are being transferred over.

Yes. I mean in a high level, I think a majority of the manufacturing and then a couple of hundred engineers that goes with R&D of the Foundry is included.

Okay.

Raj?

Yes. I'm sorry, I had it on mute. Sorry about that. So just in terms of your high-level strategic vision, once you're a stand-alone company and you're focusing on OLED and Power, how do we think about the investment -- strategic investment you'll be making in those 2 businesses going forward? How do we kind of think about some of the longer-term growth trends or markets that you want to maybe penetrate further that you perhaps couldn't because you were burdened by Foundry? Any kind of high-level kind of comments in terms of what do you think the new strategic vision of the company will be post the Foundry sale.

Yes. It's a very good question, Raj. So I guess we can give more detailed vision later on the Investor, but let me be brief with you. Look, we want to be leaner and meaner and more efficient, and with focus on profit growth with exciting products. So we will look at the Display and Power and look at our capability, what are the adjacent market we can address. And for example, MicroLED was a good example where we use our OLED power capability in one chip. So I think that's the prelude on the new focus of the MagnaChip.

And just last question. In terms of your external fab and your Fab 3, so you're confident that you have the external support for OLED to help you grow on OLED. So just any kind of thoughts there in terms of that external fab providing capacity and support as you grow OLED. And just on the Fab 3, the Power fab, any thoughts there in terms of that fab having enough wafer capacity also to support the power growth in that business.

Yes. So again, a very good, fair question. So as you know, the -- our OLED right now is 100% manufactured by external 12-inch foundry. So I would say the OLED business is a pure fab-less play. On the Power, the power discrete, where we think is a value-add, is going to be made in Fab 3. As you know, we are also qualifying the long 10,000-hour cycle on the automotive. Those kind of things will be very valuable to produce in Fab 3. And we will be, again, be prudent and meaning -- meaner and more efficient and grow the capacity or the -- convert the capacity to value-added discrete products.

And our next question comes from Atif Malik with Citibank.

YJ and team, great job in carving this out. Question on your Foundry customers. I don't think so you have a 10% type Foundry customer, but just curious if you received any feedback from those customers? Or were they involved in this process?

I cannot go into the process, but I think the Foundry customers, which I've spoken today, are very happy. As I said, this is a win-win situation for both Foundry business and customer as well as employees as well as remainco. I think this really fits the business model much better for both sides.

And just to be clear, YJ, will MagnaChip be using Fab 4 for any kind of foundry business in the future?

We do have some products today in Fab 4. So what we do, if you look into our 8-K, there will be service agreement both sides that some foundry product in Fab 3 going to the newco as well as some product that we still make in Fab 4 we have the transfer agreement in place. So if they are competitive, then we can also use the foundry in Fab 4 products such as like PMIC, things like that. So that's the -- how we're going to grow the revenue, and we're going to use multiple 8-inch as well as 12-inch to grow the Power business as well.

And now I'd like to turn the call back to Mr. Bruce Entin for any closing remarks.

Okay. Thank you, Catherine. So this concludes the conference call. Please look for details of our future events on MagnaChip's Investor Relations website, and thank you for joining us today.

Thank you.

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