M&A Announcement

Dec 14, 2015

Good afternoon. My name is Shannon. I will be your conference facilitator today. At this time, I would like to welcome everyone to Micronic Technologies Conference Call. All lines have been placed on mute to prevent any background noise. Thank you. It is now my pleasure to turn the floor over to your host, Fichron, Investor Relations Director, Ivan Donaldson. Sir, you may begin your conference. Thank you, Shannon. Good afternoon and thank you for joining our conference call regarding the announced acquisition of Inoterra, as well as our license arrangement with Nania. I'm joined today by Mark Durkin, Micron's CEO Mark Adams, our President and Artie Maddock, our CFO. This conference call, including audio and slides, is also available at micron.com. There will be an audio replay of the call, accessed by dialing 855 8592056 with a confirmation code of 4498 274. A webcast replay will be available on the company's website. Let me turn you now to the Safe Harbor slide on slide number 2. During the course of this conference call, we may make projections or other forward looking statements regarding future events or the future financial performance of the company. These forward looking statements include, but are not limited to, statements related to the benefits of the proposed transaction between Micron and Oterra and Nania, and its future financial performance of Micron. These forward looking statements are based on information available to Micron, Inotera, and Nania as of the date of this release, and current expectations, forecast and assumptions involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by these forward looking statements. These forward looking statements should not be relied upon as representing Microns In Otterra's or Nana's views as of any subsequent date. The companies assume no obligation to update forward looking statements to reflect actual results changed assumptions or other factors. With that, I'll turn the call over to Mark Durkin who will provide an overview of these transactions. Mark? Thank you, Ivan, and thank you to everyone who's joining us today. I'm pleased to share that last night we signed agreements for Micron to acquire the remaining outstanding equity of Innoterra. We believe this is a compelling combination for both companies, for our shareholders and for our customers and employees. The acquisition solidifies a highly successful 7 year partnership within Oterra. Separately, we signed a memorandum of understanding to enter into agreements granting Mania an to license 2 future DRAM technology nodes, continuing our strategic relationship. Let me turn everyone now to Slide 3 and snapshot of Innoterra. As background, Micron currently owns 33% of Innoterra and purchased a purchases 100 percent of their manufacturing supply under a market price discount structure, which transitions to a margin share structure starting in January of 2016. Innotero represents approximately 35% of our DRAM production today. And as previously discussed, is expected to have approximately 80% of its wafer starts converted to Micron's leading edge 20 nanometer technology by the end of calendar year 2015. With a full conversion by the middle of 2016. Slide 4 outlines the financial and strategic rationale for the transactions. The announced transactions are financially compelling and strategically important to Micron. The acquisition enables Micron to simplify our operations and business model, capacity and does not change our end market exposure. With the exception of one time transaction related items, We expect this acquisition to be immediately accretive to our gross margins, EBITDA, earnings per share and free cash flow. Going forward, Micron will benefit from the full consolidation of Innovatera's financials, including their free cash flow generation While a future may differ from the past, since 2013, Innovator has generated over $2,000,000,000 of free cash flow. The incremental to the cash flow that Micron, this is incremental to the cash flow that Micron generated from the Innoterra output, while participating in the joint venture. Regarding the license with Manya, it allows them to license 2 future DRAM technology nodes. We believe these life to provide additional value to our shareholders and help extend our strategic relationship with Manya and its parent formosa. I would now like to turn the call over to Ernie Maddox, who will share some additional transaction details. Ernie? Thank you, Mark, I'll start with Slide 5, which provides an overview of the Innoterra transaction. As part of the transaction, each shareholder of Innoterra will receive consideration or $30 new Taiwan per share. Net of Minotera's cash and debt, this represents a net transaction value of a approximately $3,200,000,000 for Micron to acquire the remaining 67 percent of Innovara Equity not owned by Micron today. Inoterra had net cash of approximately $9,900,000,000 as of its latest fiscal quarter ending September 30, two 2015. Micron plans to fund this transaction with approximately on stock sold to Nanya and approximately $500,000,000 of cash from our balance sheet. My friend also has the option to finance the the equity component of this transaction unless we obtain at least $2,500,000,000 of debt financing on satisfactory terms. Parties to the transaction expect to execute definitive agreements within approximately 60 days. The Board of Directors of both companies have approved the transaction and we expect to close the transaction in approval by 2 thirds of Innovara's shareholders, regulatory approvals, and other customary closing conditions. Excluding Micron's 33% ownership, shareholders representing approximately 31% ownership of Innoterra are expected to enter into now to slide 6. Over the last 12 months, Anatera has generated approximately $1,400,000,000 of EBITDA that was not reflected in Micron's financials. This transaction enables us to capture all of the on a is approximately $3,200,000,000 or 2.2 times the last 12 months of EBITDA. Based on the cash flows that we expect to generate from Inanterra going forward, we believe this will be a great transaction for our shareholders. Moving on to Slide 7, you'll note that the acquisition provides significant financial opportunities. In addition to streamlining our manufacturing operation, on a pro form a basis, the combined company generated cumulative EBITDA of approximately $7,000,000,000 over the last 12 months. As we already purchased 100 percent of the production from Minatera, there will be no impact to our combined pro form a revenues. We do, however, expect the transaction to be accretive to closes. As part of purchase accounting, we anticipate some one time transaction related items. In addition, as we align our depreciation methodologies, we anticipate approximately $300,000,000 of adjustments to depreciation and amortization per year. This is subject to final adjustments as a result of purchase accounting. Despite new debt there is expected to be minimal impact to our leverage ratios due to the inclusion of Inotera's EBITDA. We also anticipate minimal impact to our previously announced fiscal year 20 capital expenditures because the bulk of Inotera's 2016 capital expenditures will have been spent prior to the closing of the acquisition. Our consolidated capital expenditures beyond fiscal 2016 will include future process technology investments in Innoterra This average should the call back over to Mark Durfin. Mark? Thanks Ernie. Let's turn to page 8, the technology transfer and license with Nania. In addition to our acquisition of Innoterra, we entered into an MOU to grant Nania the option to license our 1 X and 1Y DRAM Technologies. These new licenses enable Micron to monetize our DRAM intellectual property with Nanya and extend our longstanding relationship. The terms of the new agreements have no impact on our existing 20 nanometer license, which will remain in place. Under the license agreements contemplated by the MOU, In each case, when Nania exercises this option to license our 1x or 1y technology, Micron receives royalties based on revenues from the products implementing that technology. In addition, we will receive an equity stake in Nanya for each technology node licensed based on the achievement of certain milestones. The license is not transferable. Production under the license is limited to a specific facility footprint and is also subject to an overall quarterly cap. Finally, license terminates upon a change of control of Nanya. From a financial standpoint, these new licenses will add incremental revenue margin and cash flow for Micron, although any financial benefit will start at the earliest in calendar year 2017. Let's turn to Slide 9. In summary, this is an exciting acquisition for Micron, which solidifies a successful partnership with Inotera and the Foremostat group. Micron has a strong history of successfully acquiring and integrating memory assets during periods of volatility. While the DRAM market over $2,000,000,000 of free cash flow since 2013 and is expected to be fully converted to our clean nanometer technology by the close of the acquisition. Innoterra represents approximately 35 percent of our DRAM manufacturing and this transaction enables us to capture full financial benefit of Innoterra's operations. The transaction has no incremental capacity to the industry as we currently purchase 100% of Innoterra's production. Finally, as Ernie highlighted, this transaction is expected to be accretive to our gross margin EBITDA, earnings per share and free cash flow. We believe this is a great transaction for Micron and Innova's employees, customers and shareholders. We're very excited to welcome Innova's employees to the Micron team, A strong track record of technology execution will be a valuable addition to the combined company. We'd now like to open this up and take any questions you may have. Operator? Thank Our first question comes from Monica Garg with Pacific Crest Securities. You may begin. Hi, thanks for taking my question. You had a slide showing kind of the how the gross margin benefit. But maybe could you provide more quantitative numbers? Like last time, for the new agreement, you had given us that there will be 8 to ten points higher benefit from that 35 percent capacity. Now when you merge the 2, could you give more qualitative numbers on that? The previously discussed markers still apply. However, there will be incremental impact as a result of this as we align the depreciable lives and go through all of the asset accounting. So, while I wouldn't tell you it's going to be dramatically different, we still have to sort of let the purchase accounting take its course here. And when we have some very clear specific numbers, we'll be happy to provide them. Thanks. Then just as a follow-up, could you update us how much capacity in Oterra right now has on 20 nanometer? How much is on 25 or other nodes, sorry, 30 nanometer, I mean? So, by the end of this year, over 80% of Innoterra starts will be at the 20 nanometer node. So they are aggressively ramping toward there right now. And then as we move into next year, you're just going to see that progress continues such that by the middle of next year, you're going to see virtually 100% of that output at that 20 nanometer node. And Monica, the Monica, the remainder, the remainder that's not 20 nanometer today is 30 nanometer. There's no 25 nanometer at Innovator. Yes, thanks. I misspoke. Thanks. Thank you. Our next question is from John Pitzer with Credit Suisse. You may begin. Yeah. Mark and Martin? You got a bit of an echo there, John. Let me see if this is any better. Hey, John, maybe try to get back in the queue. We'll try to get you in there, okay? Okay. Thanks. Operator, can we go to the next one? Our next question is from Kevin Cassidy with Stifel. Thank you for taking my question. I was just wondering, the timing of this announcement, why now why not wait for the agreement to play out a little more? The new agreement? I'll take this 1, Ernie. The relationship with, between Micron, in Oterra, Nania, other related foremosta parties and the public shareholders is kind of a it's a complicated multilateral agreement. We think bringing in Oterra into Micron is advantageous, but an agreement like this is not always executable based on the varying interest of all the different parties. We happen to have a period right now where we think we can get this done in a way that is, also attractive to Nania Formosa and the public shareholder while bringing all the benefits we previously mentioned to Micron. By the way, I will say that additionally to what we've outlined. I think, one of the side benefits here is that as we consolidate, we will have go forward basis, a simpler operating model as well as simpler financials to convey to you guys. So As we look at why does this make sense to Micron? From Micron's perspective right now, Innoterra is in a great position. Kind of good job over the last couple of years, strengthening the balance sheet. The debt is down to de minimis numbers and will be de minimis at close. There's a significant cash on the balance sheet. The 20 nanometer ramp is proceeding well, and we're confident in their execution moving forward. Most of the capital associated with that ramp has already been spent. So the timing from Micron's perspective right now is pretty good and the stars kind of align where it made sense to some of the other parties. So we wanted to go ahead and do it. Okay. And maybe if I can do a quick follow-up on how was the price derived? It seems to be a higher price than Micron typically pays? Yes. Well, it was, it was heavily negotiated. And we believe it provides strong value to Micron. Our next question is from John Pitzer with Credit Suisse. You may begin. Yes, Mark, is that any better? Much better. Oh, perfect guys. I apologize for the first time. Mark, just as a follow on to that, one of the advantages of the initial way you structured the Unotera deal was to kind of minimize some of the financial impact when the industry was going through sort of some poor times. And if you look at the memory trends over the last kind of 6 months, especially in DRAM, you've had worse than expected pricing and how much longer that's going to continue. So I'm kind of curious as to why, given what the market's doing today, you're making this decision to kind of increase your fixed cost And at this point in the cycle, is this a positive indication of how you see profits turning around around the 20 nanometer ramp, or can you give us a better understanding of that? Well, it's certainly an indication of where we see, in Oterra execution and cash flow associated data with Innoterra output. I'm not here on the call today to to predict the cycle or predict what the memory market is going to look like on a go forward basis. We've said over and over again that we think that we do believe that the memory market on a go forward basis is going to be much less volatile and we continue to believe that. And in that environment, we see, much less need for the complexity of the interterostructure. So without trying to predict exactly where gross margins are going to be or where pricing is going to be on a go forward basis. We think that we still believe in the DRAM business we think there's going to be margin in the DRAM business and we think that, our view is, this is a compelling investment for us. That's helpful, Mark. And then it's probably a little bit premature, but I'm kind of curious if you could talk into it in sort of broad strokes, what the CapEx burden might look like now that Innoterra will be folded into the P and say, we commented that we think on an average, you'd be looking at somewhere in the realm of $800,000,000 a year. However, that won't come each and every year that will be a little bit more lumpy than that, but that's a good proxy to use as you think about things over the long term. Perfect. Thanks guys. Thank you. Our next question comes from Harlan Sur with JPMorgan. You may begin. Hi, good afternoon. Thanks for taking my question. Given the full control over Inotero, are there any dynamics of full ownership that would allow the Micron team to now drive faster or better execution on future node migration is faster cost curves, etcetera? Well, it's a it's clearly a simple structure and we'll have a streamlined management process, by virtue of not having a separate Board of Directors to contend with. But overall, We believe that Innovatera has been operating well over the last 18 months. And we expect that to continue on a go forward basis. Okay, great. And then I think in your prepared remarks, you said that debt on Innovero's balance sheet kind of pre close will be de minimis, but I think in Ontario's last earnings call, they seem to indicate funding their near term CapEx with debt. I think the next tranche being somewhere in the neighborhood of about $475,000,000 U. S. Are you guys going to be paying that down or carrying that debt over and taking on the incremental interest sense? We expect that that debt will be retired prior to the close of the transaction. So there may be $100,000,000 or so plus or minus of debt on the sheet at the time of the transaction, but that will essentially be taken care of at that time. Great. Thanks for the color. Thank you. Our next question is from Steven Chen with UBS. You may begin. Hi, thanks for taking my questions. Ernie, first one on synergies. I know you sort of alluded to a little bit just wanted to dig in a little bit more. In terms of COGS, any purchasing or consumable material synergies that can be realized from combined unit share operations, first of all? There may be over time, but it certainly wasn't a really important thought process as we went through this transaction. So we've essentially modeled them at or close to 0, but I do think there may be some opportunities that present themselves over time. Okay. And as a follow-up for the new or the extended non UTech like agreement for sub-twenty nanometer DRAM. Can you talk a little bit more about what's the incremental difference between the new license agreement versus the existing 1, specifically in terms of economic benefits to Micron? And kind of looking a little longer term, any sort of estimates for how big of a future royalty issue that could represent? I think it's still way too soon to sort of think about the totality economic benefit, I will comment that the terms are materially better than the existing license that we have for 'twenty. I would also comment, that, you should note some of March comments about the equity components of those transactions as well. Great. Thanks. Thank you. Our next question is from David Wong with Wells Fargo. You may begin. Thank you very much. Are you already in discussions with some entity with regard to obtaining the debt? Can you give us some ideas to when you expect to know if going to be able to get the debt on satisfactory terms and also what satisfactory terms are in your view? Certainly, we would expect to know, within the 60 day timeframe, between now and the completion of the definitive agreements and things, I expect we'll know sooner than that, we have high confidence that we will be able to obtain the financing we seek. We are thinking about that in terms of local market financing in Taiwan. And that would carry an interest rate appropriate to a company like ours, which would be nominally 3% plus or minus, we believe more minus than plus. Great. Thanks very much. Thank you. Our next question comes from Shrini Sundar with Summit Research. You may begin. Hi guys. Thanks for taking my call. My question is, for this agreement, I would say that China, China is the elephant in the room does this agreement make it easier for China to invest into Micron? I don't think this agreement really impacts any other deals that we might contemplate either positively or negatively other than the fact that we think it strengthens Micron. And That's our primary motivation for doing the deal. And so that could make us a stronger company. Okay. Next question is, your headquarters will still be in Boise and in addition to that, what will be the tax rate that you will be having as a sort of this transaction? So that headquarters don't plan to be remaining in Boise for sure. And as we don't foresee this as as necessarily impacting our tax rates in the short term. Thank you. Our next question comes from Rohit Shah with Nomura. You may begin. Yeah. Hey guys, as far as this transaction goes, the head scratcher for me is that you're going to be issuing up to $1,000,000,000 of equity with the shares at near a multiyear low. Can you just can you talk about the rationale there, Mark, please? Thank you. I'm going to let Ernie talk about financing. Sure. I think carefully note our words $1,000,000,000 worth of equity. And also bear in mind that closing is forecast to be several months away. So, we have the ability and the flexibility to Okay. And then just second thing, you guys talked about one of the merits of this deal, just streamlining the operations. And I wonder what does that say about how the 20 nanometer transitions progressing for you? Absolutely nothing. The 20 nanometer progression is executing according to schedule. We have markers out there that, for Innovara specifically, 80% of their output by year end, and we still feel very good about that. And then we've also said that by May of 2016, that more than 50% up to 60% of the company's output will be there. And we serve feel good about that as well. Okay. Thank you. Thank you. Our next question is from Steven Fox with Cross Research. You may begin. Yes, thanks very much. Just to be clear in terms of post the deal closing, it doesn't sound like you're anticipating much in terms of a major operating or flexibility synergies with all the plants combined. Can you just talk about what you would get and maybe whether that's still under consideration? Obviously, we're going to be trying to get synergies that are possible and achievable under the transaction. My close relationship between the companies that we don't see these as being material and something that we believe is part of the financial model to just 5 a deal. Of course, we're going to be clearly looking for opportunities. And as we get those, we'll be, sure to talk to you about them. Great. That's helpful. And then just Ernie, could you just clarify, you mentioned that most likely with purchase accounting goals. I believe you said that there would be a D and A write down about $300,000,000. So that was is that the expected reduction in EBITDA combined if we're looking at this on a pro basis? That's to the extent that we can fully model that right now. That's our view, but there are a lot of things in play with respect to that. And clearly that number has a series of assumptions in it that are going to be tested and validated, but that's a good number to use for now. And again, as we see that number changing in any way significantly. We'll come back and talk with you. Understand. Thank you very much. Thank you. Our next question is from CJ Muse with Evercore ISI. You may begin. Hi, this is Ada calling in for CJ. Thanks for taking my question. Can talk a little bit about what the tie up does in terms of the 1x ramp? It should have no impact on the 1 X ramp. And what about OpEx? There's no Go ahead, Martin. Sorry, Martin. We wouldn't expect there to be any material impact OpEx either. So, it's pretty, pretty de minimis relative to the cost impact of the license agreement to Micron. Great. Thank you so much. Thank you. Our next question comes from Joe Moore with Morgan Stanley. You may begin. Great. Thank you. In terms of your long term CapEx as a company, I think you've talked about a range in the past of 20% to 25% of does that change with this dynamic? You mentioned the incremental CapEx from Minotera. Do we need to think of that whole range being higher from here? It's probably a good thing to think about as I noted, if you look at 20% to 25%, that was under the model where that CapEx was being funded by a third party. So if you bring that into that model, I would consider that as your modeling future CapEx. So we'll be saying a little bit more about that as we come up on our Analyst Day here in February, but the $800,000,000 is a good proxy for time being. Great. Thank you. And then within you mentioned up to $1,000,000,000 of stock goes to non you. What determines the amount? Certainly, market conditions will determine, we'll determine that, the price of the company's equity the ability and interest rate on any incremental debt, and other circumstances that may occur between now and then. Thank you very much. And Shannon, I think we have time for one more question, please. Our last question is from Timothy Arcuri with Cowen and Company. You may begin. Good afternoon. This is Carl Ackerman on for Timar Currie. Some of your competitors sound very worried about 3 X Point. And other non volatile memories and their impact on future DRAM demand. I know this is a good trade for you because you have more point share than DRAM share, but optically a lot of investors today that we spoke to wonder why you have made this acquisition at such an uncertain time in terms of demand trajectory. So how should we address these concerns? I think one of the things about this deal is it does put Micron in control of the cash flow that in Ontario is generating. So as we we think about where we might want to invest cash on a go forward basis, it might be in DRAM Manufacturing. It might be in in 3 d PROS point could be in NAND, could be in other new memories and products we're working on, having control of the cash flow, from the inventory and the ability to reinvest optimally is one of the nice benefits of this deal and allows us to optimize where we make capital investments across the whole network. Inoterra has been a is a nice, efficient, on a part of our manufacturing network. Doesn't necessarily always have to be DRAM, but being able to move the cash where we want the cash is certainly a nice advantage of this deal. Great. Thank you. You everyone for all your questions today. And, operator, we can close the call now. Thank you. This concludes my contact