Good afternoon. My name is Shannon, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Micron Technology's conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, please press star then one on your telephone keypad. If you would like to withdraw your question, please press the pound key. Thank you. It is now my pleasure to turn the floor over to your host, Micron 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 Inotera, as well as our license arrangement with Nanya. I am joined today by Mark Durcan, Micron's CEO, Mark Adams, our President, and Ernie 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 855-859-2056 with a confirmation code of 4498274. A webcast replay will be available on the company's website. Let me turn you now to the Safe Harbor slide on slide number two. 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, Inotera, and Nanya, and the future financial performance of Micron. These forward-looking statements are based on information available to Micron, Inotera, and Nanya as of the date of this release, and current expectations, forecasts, 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 Micron's, Inotera's, or Nanya'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 Durcan, 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 Inotera. 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 seven-year partnership with Inotera. Separately, we signed a memorandum of understanding to enter into agreements granting Nanya an option to license two future DRAM technology nodes, continuing our strategic relationship. Let me turn everyone now to slide three, a snapshot of Inotera. As background, Micron currently owns 33% of Inotera and purchases 100% of their manufacturing supply under a market price discount structure, which transitions to a margin share structure starting in January of 2016.
Inotera 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 four 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 while securing a long-term path for Inotera and its employees. Note that this transaction will have no impact to industry 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 Inotera's financials, including their free cash flow generation. While the future may differ from the past, since 2013, Inotera has generated over $2 billion of free cash flow. This is incremental to the cash flow that Micron generated from the Inotera output while participating in the joint venture. Regarding the license with Nanya, it allows them to license two future DRAM technology nodes. We believe these licenses provide additional value to our shareholders and help extend our strategic relationship with Nanya and its parent, Formosa. I would now like to turn the call over to Ernie Maddock, who will share some additional transaction details. Ernie?
Thank you, Mark. I'll start with slide five, which provides an overview of the Inotera transaction. As part of the transaction, each shareholder of Inotera will receive consideration worth TWD 30 per share. Net of Inotera's cash and debt, this represents a net transaction value of approximately $3.2 billion for Micron to acquire the remaining 67% of Inotera equity not owned by Micron today. Inotera had net cash of approximately $0.9 billion as of its latest fiscal quarter ending September 30th, 2015. Micron plans to fund this transaction with approximately $2.5 billion of debt, up to $1 billion of Micron stock sold to Nanya, and approximately $500 million of cash from our balance sheet. Micron also has the option to finance the equity component of this transaction with cash.
Micron is not required to close the transaction unless we obtain at least $2.5 billion of debt financing on satisfactory terms. The 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 the middle of 2016 after the completion of certain additional agreements, approval by two-thirds of Inotera shareholders, regulatory approvals, and other customary closing conditions. Excluding Micron's 33% ownership, shareholders representing approximately 31% ownership of Inotera are expected to enter into voting agreements in support of this transaction. Turning now to slide six. Over the last 12 months, Inotera has generated approximately $1.4 billion of EBITDA that was not reflected in Micron's financials. This transaction enables us to capture all of the EBITDA and free cash flow from Inotera on a going-forward basis.
The incremental transaction value for the portion of Inotera we don't currently own is approximately $3.2 billion or 2.2 times the last 12 months of EBITDA. Based on the cash flows that we expect to generate from Inotera going forward, we believe this will be a great transaction for our shareholders. Moving on to slide seven, you'll note that the acquisition provides significant financial opportunities. In addition to streamlining our manufacturing operation on a pro forma basis, the combined company generated cumulative EBITDA of approximately $7 billion over the last 12 months. As we already purchased 100% of the production from Inotera, there will be no impact to our combined pro forma revenues. We do, however, expect the transaction to be accretive to our gross margin, EBITDA, earnings per share, and free cash flows immediately after the transaction 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 million 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 2016 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 Inotera. This average should be approximately $800 million annually, and we expect this will be funded by incremental cash flow. I'll now turn the call back over to Mark Durcan. Mark?
Thanks, Ernie. Let's turn to page eight, the technology transfer and license with Nanya. In addition to our acquisition of Inotera, we entered into an MOU to grant Nanya the option to license our 1x and 1Y DRAM technologies. These new licenses enable Micron to monetize our DRAM intellectual property with Nanya and extend our long-standing 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 Nanya exercises its 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, the 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 nine. In summary, this is an exciting acquisition for Micron, which solidifies a successful partnership with Inotera and the Formosa Group. Micron has a strong history of successfully acquiring and integrating memory assets during periods of volatility. While the DRAM market has some recent headwinds, Inotera has generated over $2 billion of free cash flow since 2013 and is expected to be fully converted to our 20 nanometer technology by the close of the acquisition.
Inotera represents approximately 35% of our DRAM manufacturing, this transaction enables us to capture the full financial benefit of Inotera's operations. The transaction adds no incremental capacity to the industry, as we currently purchase 100% of Inotera'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 Inotera's employees, customers, and shareholders. We're very excited to welcome Inotera's employees to the Micron team. Their 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 you. Ladies and gentlemen, if you would like to ask questions at this time, please press star then 1 on your telephone keypad. If you would like to withdraw your question, please press the pound key. Our first question comes from Monika Garg with Pacific Crest Securities. She may begin.
Hi, thanks for taking my question. You had a slide showing how the gross margin benefit, maybe could you provide more quantitative numbers? Like last time, for the new agreement you had given us that there will be 8 to 10 points higher benefit from that 35% capacity. When you merge the two, could you give more quantitative 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. While I wouldn't tell you it's going to be dramatically different, we still have to let the purchase accounting take its course here. When we have some very clear specific numbers, we'll be happy to provide them.
Thanks. Just as a follow-up, could you update us how much capacity Inotera right now has on 20 nanometer? How much is on 25 or other nodes? Sorry, 30 nanometer, I mean.
By the end of this year, over 80% of Inotera starts will be at the 20 nanometer node. They are aggressively ramping toward there right now. As we move into next year, you're just going to see that progress continue, such that by the middle of next year, you're going to see virtually 100% of that output at that 20 nanometer node.
Monika, the remainder that's not 20 nanometers today is 30 nanometer. There's no 25 nanometer at Inotera.
Yes. Thanks. I misspoke. Thanks.
Thank you. Our next question is from John Pitzer with Credit Suisse. You may begin.
Yeah, Mark.
You've 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. Thank you.
Operator, can we go to the next one?
Our next question is from Kevin Cassidy with Stifel. You may begin.
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?
Yeah. I'll take this one, Ernie. The relationship between Micron, Inotera, Nanya, other related Formosa parties, and the public shareholders, it's a complicated multilateral agreement. We think bringing Inotera into Micron is advantageous, an agreement like this is not always executable based on the varying interests of all the different parties. We happen to have a period right now where we think we can get this deal done in a way that is also attractive to Nanya, Formosa, and the public shareholders, 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, on a go-forward basis, a simpler operating model as well as simpler financials to convey to you guys.
As we look at why does this make sense to Micron, from Micron's perspective right now, Inotera is in a great position. They've done a good job over the last couple of years strengthening their balance sheet. The debt is down to de minimis numbers and will be de minimis at close. There's 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. The timing from Micron's perspective right now is pretty good, and the stars kind of aligned where it made sense to some of the other parties, we wanted to go ahead and do it.
Okay, 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.
Yeah. Well, it was heavily negotiated. We believe it provides strong value to Micron.
Okay. Thank you.
Thank you. Our next question is from John Pitzer with Credit Suisse. You may begin.
Yeah, Mark, is that any better?
Much.
Much better.
Oh, perfect. Guys, I apologize for the first time. I guess, Mark, just as a follow-on to that, one of the advantages of the initial way you structured the Inotera deal was to kind of minimize some of the financial impact when the industry was going through sort of some poor times. If you look at the memory trends over the last kind of six months, especially in DRAM, we've had worse than expected pricing, and don't know how much longer that's going to continue. 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 at this point in the cycle. Is this a positive indication of how you see profits turning 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 Inotera execution and cash flow associated with Inotera output. I'm not here on the call today 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 do believe that the memory market on a go-forward basis is going to be much less volatile, and we continue to believe that. In that environment, we see much less need for the complexity of the Inotera structure. 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 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. 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 Inotera will be folded into the P&L.
So-
Yeah. Go ahead, Ernie.
I was going to say, we commented that we think on an average, you'd be looking at somewhere in the realm of $800 million a year. That won't come each and every year. That will be a little bit more lumpy than 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 JP Morgan. You may begin.
Hi. Good afternoon. Thanks for taking my question. Given the full control over Inotera, are there any dynamics of full ownership that would allow the Micron team to now drive faster or better execution on future node migrations, drive faster cost curves, et cetera?
Well, it's clearly a simpler structure, and we'll have a streamlined management process, by virtue of not having a separate board of directors to contend with. Overall, we believe that Inotera's been operating well over the last 18 months, and we expect that to continue on a go-forward basis.
Okay, great. I think in your prepared remarks, you said that debt on Inotera's balance sheet pre-close will be de minimis, but I think in Inotera's last earnings call, they seemed to indicate funding their near-term CapEx with debt. I think the next tranche being somewhere in the neighborhood of about $475 million. Are you guys going to be paying that down or carrying that debt over and taking on the incremental interest expense?
We expect that that debt will be retired prior to the close of the transaction. There may be $100 million or so, plus or minus, of debt on the balance sheet at the time of the transaction. That will essentially be taken care of at that time.
Great. Thanks for the color.
Thank you. Our next question is from Steven Chin 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, but just wanted to dig in a little bit more. In terms of COGS, any purchasing or consumable material synergies that can be realized from combining the internal 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. We've essentially modeled them at or close to zero. I do think there may be some opportunities that present themselves over time.
Okay. A follow-up, for the new or the extended Nanya Tech license agreement for sub 20-nanometer DRAM, can you talk a little bit more about what's the incremental difference between the new license agreement versus the existing 20-nanometer one, specifically in terms of economic benefits to Micron? Kind of looking a little longer term, any sort of estimates for how big of a future royalty stream that could represent?
I think it's still way too soon to think about the totality economic benefit. I will comment that the terms are materially better than the existing license that we have for 20. I would also comment that you should note some of Mark's comments about the equity component 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 idea as to when you expect to know if you're going to be able to get the debt on satisfactory terms? 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 would 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%. We believe more minus than plus.
Great. Thanks very much.
Thank you. Our next question comes from Srini 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 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. That could make us a stronger company.
Okay. My next question is, your headquarters will still be in Boise, and in addition to that, what will be the tax rate that you'll be having as a result of this transaction?
The headquarters, still plan to be remaining in Boise for sure.
Foresee this as necessarily impacting our tax rates in the short term.
Thank you.
Thank you. Our next question comes from Romit 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 billion of equity with the shares at near a multi-year low. Can you talk about the rationale there, Mark, please? Thank you.
I'm going to let Ernie talk about financing.
Sure. I think I'd carefully note our words up to $1 billion worth of equity, also bear in mind that closing is forecast to be several months away. We have the ability and the flexibility to be responsive to market conditions as they develop.
Okay. Just second thing, you guys talked about one of the merits of this deal, just streamlining the operations. I wonder, what does that say about how the 20 nanometer transition's progressing for you?
Absolutely nothing. The 20 nanometer progression is executing according to schedule. We have markers out there that, for Inotera specifically, 80% of their output by year-end, and we still feel very good about that. We've also said that by May of 2016, more than 50% up to 60% of the company's output will be there, and we certainly feel good about that as well.
Okay. Thank you.
Thank you. Our next question is from Steven Fox with Cross Research. You may begin.
Yeah, 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 major operating or flexibility synergies with all the plans 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 earlier note was just to say that, as we thought through things, and don't forget, there's already a very close relationship between the companies, that we don't see these as being material and something that we'd believe is part of the financial model to justify the 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. Ernie, could you just clarify, you mentioned that most likely with purchase accounting goals, I believe you said that there would be a D&A writedown of about $300 million. Is that the expected reduction in EBITDA combined if we were looking at this on a pro forma basis?
To the extent that we can fully model that right now, that's our view, there are a lot of things in play with respect to that, clearly that number has a series of assumptions in it that are going to be tested and validated. That's a good number to use for now, 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 C.J. Muse with Evercore ISI. You may begin.
Hi, this is Ada calling in for C.J. Thanks for taking my question. Can you talk a little bit about what the tie-up does in terms of the 1X ramp?
It should have no impact on the 1X ramp.
What about OpEx?
There's no-
Well.
Go ahead, Mark.
Sorry, Mark. We wouldn't expect there to be any material impact to OpEx either. It's 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 Joseph 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%-25% of revenues. Does that change with this dynamic? You mentioned the incremental CapEx from Inotera. 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%-25%, that was under the model where that CapEx was being funded by a third party. If you bring that into that model, I would consider that as you're modeling future CapEx. We'll be saying a little bit more about that as we come up on our Analyst Day here in February, but the $800 million is a good proxy for the time being.
Great. Thank you. Then, you mentioned up to $1 billion of stock goes to Nanya. What determines the amount?
Certainly, market conditions will 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.
Great. Thank you very much.
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 Karl Ackerman on for Tim Arcuri. Some of your competitors sound very worried about 3D XPoint 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 XPoint 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. 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 Inotera is generating. As 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 3D XPoint, could be in NAND, could be in other new memories and products we're working on. Having control of the cash flow from Inotera and the ability to reinvest that optimally is one of the nice benefits of this deal and allows us to optimize where we make capital investments across the whole network. Inotera is a nice, efficient part of our manufacturing network. It 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.
Thank you.
Thank you, everyone, for all your questions today, and operator, we can close the call now.
Thank you. This concludes Micron's