Q1 2020 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please could TD standby. Thank you for your patience.
[music].
Good day, ladies and gentlemen, welcome to the M. core technology first quarter 2020 earnings conference call.
My name is Krish and I'll be your conference facilitator today.
At this time all participants are in the listen only mode. After the speaker's remarks, we will conduct a question answer session. I was reminded this conference is being recorded.
I would now like to turn the call over to Vincent Kenyan.
Vice President Investor Relations Mr. King. Please go ahead.
Thank you Chris.
Good afternoon, everyone and thank you for joining us for Emcores first quarter 2020 earnings conference call.
Joining me today or Steve Kelly, our Chief Executive Officer, and Megan Faust or Chief Financial Officer.
Our earnings press release was filed with the FCC. 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 on our website.
We will also make forward looking statements about our expectations for Emcores future performance based on the environment as we currently see it.
Of course actual results could be different.
Please refer to our press release, another FCC 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 discuss today are preliminary and final final data will be included in our form 10-Q.
And now I would like to turn the call over to Steve.
Good afternoon, thanks for joining the call.
Today, I'll review, our first quarter performance and or second quarter outlook.
During today's call.
I'm also discuss how we dealt with the Corona virus in the first quarter.
And how we expected to affect her business in the second quarter.
Fundamentally.
We believe that the virus well impact in near term demand.
Well not have a significant negative impact on the medium or long term growth the semiconductor industry.
We expect the markets secular growth drivers.
Including high performance computing.
Gee.
And digital automotive to remain intact.
And we're well positioned for growth.
We believed that our long term strategy.
To achieve balanced revenue growth by delivering an unmatched combination of technology.
Quality.
Execution and service.
Well continue to deliver value to our customers.
Into our shareholders.
Now onto the first quarter results.
We just completed the best first quarter in airports history.
Largely due to strong demand for advanced packaging and the consumer and communications markets.
Revenue grew nearly 30% year on year, two or first quarter record of $1.15 billion.
In response to the virus.
We implemented new hygiene health monitoring and people density protocols throughout our factory network.
These protocols.
That's kept our employees safe.
And allowed us to maintain a high operating tempo.
In a challenging environment or manufacturing teams execution has been and continues to be exceptional.
Our most significant virus related supply issues began late in the first quarter.
For governments in the Philippines, and Malaysia imposed restrictions on the movement of people.
Including or employees.
These restrictions constrain factory output during the first during the last two weeks of March in the first few weeks of April.
The good news is that the output from our factories in the Philippines in Malaysia has largely recovered.
Our teams in both countries have done an excellent job, bringing her factories back to a near normal operating tempo.
While maintaining a safe environment.
In the first quarter.
Sales into the mobile communications market were strong.
Driven by spring phone launches.
Sales into the computing and consumer markets were solid.
Automotive and industrial sales were down.
Our advanced S&P revenue in the quarter more than doubled year on year.
Emcores advanced guess IP technology.
Quality and yield performance match up nicely with the needs of our customers.
From a business standpoint, we believed that advanced as I P manufacturing.
As a solid long term growth engine for the company.
Good cash flow.
In Madrid capital investment requirements.
Amcor has long been a leading supplier of advanced S&P modules for smartphones, including RF front end modules for Fourg and Fiveg phones.
We built on that expertise to establish a leadership position in antenna and package modules.
Which ramped the volume in the first quarter.
Yeah of course advance its IP technology is also being used by automotive and consumer customers.
Who benefit from our long time experience building high yield.
High quality modules.
And all of our customers have access to inquiries advanced S&P toolkit.
Which includes double sided assembly.
Advanced audio molding.
And RF shielding technologies.
Moving to our outlook for the second quarter.
Given the level of near term demand uncertainty this is not a typical quarter.
Here's what's happened so far in April.
And our advanced packaging factories, which account for more than 60% of our revenue.
Overall demand has stayed reasonably strong.
Supply constraints had been minimal.
You know wirebond factories overall demand has remained sluggish.
Similar to the first quarter.
And over the past two weeks.
We have received indications from a number of customers the near term demand is expected to weaken.
As a result of the current a virus.
Our estimate of impacted these virus related demand reductions is included in our second quarter forecast.
At the midpoint, we believe second quarter revenue.
We'll be up about 17% year on year.
Down about 9% sequentially.
As I said before.
We see the krona virus as a near term challenge for the semiconductor industry and for EMCOR.
Our medium term in long term outlooks remain quite strong.
We will continue to execute our strategy and invest for growth in a disciplined way.
We have produced strong positive free cash flow and each of the past five years.
Both up years and down years.
As a result, we now have the strongest balance sheet, yeah of course history with roughly $1 billion in cash.
In around $500 million in net debt.
Megan will now provide more detailed financial information.
Thank you, Steve and good afternoon, everyone.
Today, I will review, our first quarter results.
Our second quarter outlook and also provide some comments on the strength of our balance sheet.
We delivered record first quarter revenue of $1.15 billion.
Revenue was only 2% lower than Q4 2019, primarily due to continued strength in the consumer market and in mobile communication.
Q1, gross margin at 16.4% with nearly 300 basis points higher and the prior year quarter.
Gross margin reflects a change in product mix.
Higher bill of materials package, it like advance S&P and flip chip.
Operating expenses were around $5 million lower than expected <unk>.
This is primarily due to lower travel and other discretionary spending as well as lower than expected restructuring charges in Japan.
The record Q1 revenue and discipline discretionary spending resulted in operating income of $85 million.
Operating margin increased 600 basis points from the prior year quarter to 7.3%.
Net income for the quarter with $64 million an earnings per diluted share with 26 cents, a significant improvement over the life and the year ago corridor.
This represents the best profitability for first quarter in the last 10 years.
EBITDA increased over 35% from the here go quarter to $210 million.
An EBITDA margin was 18.2%.
Moving to our second quarter outlook, we expect revenue to be between 1 billion and $1.1 billion.
Gross margin is expected to be between 9.5, and 13.5% reflecting changes in pricing.
We widened our guidance range this quarter as the current macro economic environment has made it more difficult to predict end market demand.
Our guidance also includes estimates for incremental cost for labor and other surprised we expect to incur for virus containment actions.
Yes.
We expect Q2 operating expenses of around $105 million, which includes an estimate for restructuring costs in Japan.
Generally we expect our annual effective tax rate to be around 20% subject to a minimum level of taxes not dependent on our income.
We expect Q2 bottom line to be in the range of a net loss of $32 million or 13 cents per share to net income at $19 million or eight cents per share.
Our 2020 forecast for capital expenditures remains at $550 million.
Our investment plan focuses on strategic growth areas, primarily capability and capacity and advanced S&P flip chip and fan out technology.
Our capital spend in the first quarter was relatively light, which gives us flexibility to push them capex into 2021 should macro economic conditions worsen.
Moving onto our balance sheet.
We entered Q1 with a strong balance sheet.
Out of an abundance of caution we took steps to shore up our cash position, drawing approximately $200 million from available credit facilities and revolvers.
Well, we have no immediate need for these fun, we felt it prudent to access Ses credit lines to ensure we have available liquidity and flexibility in the event macro economic conditions worsen.
As a result, we ended the quarter with $1 billion that cash and short term investment.
In addition, our net debt a $513 million is the lowest it has been in over 20 years.
The strong financial position as a direct result of our focus on free cash flow generation and our resilient business model.
As a high fixed cost business operating in a cyclical industry generating free cash flow is a top priority.
You can see the impact of that focus and our 2019 performing.
Even as our revenue declined 6% in 2019 due to the industry inventory correction, we generated over $100 million that free cash flow.
This was our fifth consecutive year of free cash flow and with our Q1 results. We have made significant progress towards meeting our goal of a sixth consecutive year.
Given our financial flexibility, we are well positioned to withstand potential near term challenges.
We're also able to strategically invest for medium and long term growth.
With that we will now open the call up for your question.
Operator.
Thank you.
I was reminded to ask a question would need to press star one or your telephone.
Joe Your question. Please press the pound key.
Please stand by we've compiled the culinary roster.
And our first question comes from the line of Randy Abrams with Credit Suisse. Your line is now open.
Okay, Yes, thank you and yeah. Good evening and wanted to ask the first question. If you could comment on this second quarter on guidance, just a bit more details on it I'm curious across.
The different segments on how the demand is fairing and if you could also discuss it seems like the foundries are still guiding a bit a bit of Brazilians a habit and maybe if you could talk a bit that trends some of it might be timing when they reported but.
Yes, if there's something different in your sees no profile relative to some of the foundry outlook, which which seems resilient today.
But it by saying there might be adjustments later.
Sure.
Yeah, I'm, just give me a little background in Turkey to forecast and I'll address your specific questions Randy.
First part number forecast thinking was to look at April 1st because that's on the books and what I can say about April is that are actual shipments are on par with our Q1 run rate.
So we start with that.
But we also know there a lot of things happening in the end markets that.
That will lead to contraction so we pulled her customers.
How about your views on demand in May and June.
So many of those customers a indicated that there were changes that were imminent.
So we we basically have rolled up those.
Those are imminent changes and came up with our forecast for Q2.
Most of the impact to answer your first question.
Is a in three segments.
First is automotive.
The second is communications in therapy industrial.
[noise], because that's where we're seeing most of the adjustments made.
The computing and consumer markets are holding up pretty well.
Through Q2.
We decided to widen the guidance range a bit.
There's a fair amount of uncertainty in Q2 or more than the average quarter. That's that's how we ended up with a 50 million dollar swing on either side of the midpoint.
To answer your final question about the the foundries and the.
Oh, sorry, I think the biggest different would the foundries is their lead time.
Typically oh lead time, and I know sound like EMCORE is a.
Let's say two weeks, maybe three weeks, depending on the complexity the product Where's the foundries it could be anywhere from a two months to to four or five months. So I think it takes a while for demand for innovations.
To to filter Oh, the chain <unk>.
Okay. No. That's helpful. If you could talk on make it I think you mentioned mix changes in the gross margin.
If you can discuss with that with some of the shifts are going on impact that gross margin guidance.
Guidance.
Sure Randy So specifically for Q2, as we've guided and Steve outlined our revenue we are experiencing some further product mix shifts in Q2, which is putting a better pressure.
On the gross margin percentage and that would really relate to the pro rata amount of our higher bill of material cost products like advanced S&P to just come back to the general material percent issue, which is what drives that you know advanced S&P.
He has grown significantly and then as Steve mentioned, it's more than doubled from a year ago corridor.
So this is our fastest growing technology at EMCOR and it's actually been very beneficial as you've seen in our Q4 record revenue and 40 cents EPS, yes, as well as being record Q1 revenue at 26 cents.
So Q4 in Q1 show that although higher bill of material cost products like advanced as type key.
Exist and while there are dilutive to that gross margin percentage.
They are accretive to earnings.
The other issue in Q2, we are experiencing is the manufacturing costs are staying fairly flat and that's a function of some merit increases and labor costs in Q2 as a result of the tendency to give those in the second quarter and those are then offsetting the volume reduction.
Okay, if I could follow ups I mean, the advanced S&P, maybe if you could talk pipeline. If you expect the consumer products too I guess continue its its ramp up and and how you see the pipeline for additional projects on and then if you could talk about.
P., where you're in volume if you expect John 80 kind of normal ramp up or four additional ramp up a volume on towards second half with some of the flagship phone launches.
Sure, Let me just taking wintertime Randy I'm.
So when a consumer products.
You know, we see that holding steady getting stronger throughout 2020, so we like what we have today and we like what we see a in the pipeline on on consumer.
You know in general for S&P, we'd like or backlog of projects.
And to that end.
We're actually adding onto our factory a called K for in Korea, which is our primary center of excellence for us I'd be manufacturing through expanding for space and.
And expand our capabilities. There were also fitting out an additional module and our new K fine factory in Incheon Korea.
Specifically for advanced S&P.
So we're we're we're bullish on S&P moving forward.
With regards to an IP the intended and package a module.
You know we ramped a wealth we did it you know a nice ramp in Q1 I.
I would say, we'll have to wait and see how the market develops a particularly in the millimeter wave segment.
But we're ready to you know to satisfy whatever the customer needs are moving forward.
Okay, great if I can do on one more question.
As you look because it's a much different profile, where first quarter much better than seasonal and now you're factoring some impact on it if you could discuss a bit implications.
The second half free normally get the seasonal ramp I know, it's early but if you believe this correction might be kind of multi quarter, where you get the seasonal ramp on theres. Some talk also.
About potentially some of the flagship launch it could be a little bit later, so if you're also seeing.
Some different timing this year as we go towards second half and I noticed your holding the Capex I'm. So does also tied to some of the views on on some of these projects moving ahead.
Yeah, we are holding the capex, because we are I'm optimistic about.
Demand in the second half of this year and also a about the fact that our content is going up tick in.
Smartphone in automotive and high performance computing.
So going back to your first question, which is the second half and really 2020.
Obviously, we started strong and Q1.
We're going through some a near term demand issues in Q2.
Connected with the current criminal virus.
When I think we're gonna see is a in the second half.
Probably a few things that will will catalyze recovery.
The first system onto flagship phones.
Oh, the second is releasing some pent up consumer demand.
And third is a I think we'll see a recovery in the automotive market.
Yeah, I think we're going to exit 2020.
In a very high operating tempo. So within 2021 is gonna be a banner year for for EMCOR.
The other thing I think it's important to keep in mind for 2020.
Is we just spent the better part of 18 months going through an inventory correction.
We started we started this correction back in Q3 of 18 as an industry and it was a long process no better part of six quarters.
So going into this corona virus demand.
Perturbation.
There's not a lot of excess inventory out there.
So what Theyre generally means is when you recover at least in the chip industry, we should recover fairly quickly.
Okay, Great I appreciate that in a few could discuss if theres any timing delay area or schedule shift towards or at least from semiconductor perspective, it's a pretty normal timetable at this stage.
Are you referring to the flagship phones.
For the flagship funds.
It's really difficult for us to to pin that down.
But we think it's definitely happy in the second half I don't know exactly when so we just respond to the inputs, we get from our customers and we we follow their lead.
Okay, great. Thanks, what's even negative.
Thank you and our next question comes from the line of T. onion goal in there with Sidoti. Your line is now open.
Hey, Thanks, Thank you Stephen the Megan Congrats on a strong quarter a I just have a first a clarification that maybe a follow up the clarification is I think Steve you mentioned about you know Oh almost the order for cities are running at full capacity now right is that correct.
Oh no no we're definitely not ran at full capacity I think.
We are.
We're running a very.
Good raids.
And some are more advanced factories. So what we saw in Q1 is a loan demand for advanced packages particular system in package.
Products. So in those lines were running close to full.
In some of the wafer level lines, we're getting close to full as well, but for the rest of the company, particularly in our wire bond segments. Oh, we have a lot of a room for growth within our or install capacity.
Okay. That's clear. Thank you under the next to why would that be on the Capex. Because you said, though of course to be holding some packs for the you know sector have maybe even if we're 2021 and I remember in the last quarter I'm, making also mentioning about over 60% or would it be invested in advanced packaging I'm wondering if we hold.
If someone capex smoke, which part of would be kind of most impacted.
Yeah. So so capex again, we were keeping our guide at $550 million spend for a 2020.
And you're right.
Last.
Today's call, we guided roughly 60% for advanced packaging, 30%.
For other things like facilities R&D quality improvement I T.
And then a 10% for Wirebond essentially that's that's the split and that's that remains the split.
Yeah I think your question is more do we have any flexibility to push that to 2021 some of it the answer is yes.
But at this point, we don't think we need to do that because we're expecting you know a reasonably robust recovery in the second half its expectation changes, we do have the flexibility to to push part of that $550 million in capex spending into next year.
Okay. Thank you that's Oh for me.
Thank you.
And our next question comes from the line of Sidney Ho with Deutsche Bank. Your line is now open.
Hi, Thanks for taking my question Ive, a few <unk> first of all the Q2 guidance down 9% for revenue how much.
Revenue impact are you assuming in your guidance drilling related specifically to supply constrains and I can relate to that in terms of gross margin you talk about incremental cost and supply and Oh and kept incremental cost related to virus containing can you quantify that headwind that may reverse in the following quarter.
Yeah, Let me take the supply constraints question, I know OLED, making answer there.
Incremental cost question.
But to answer your question on Q2, a supply constraints.
Well probably.
Process around $20 million in revenue and most of that is because of the constraints. We had in Malaysia in the Philippines in the first few weeks of April.
But today, we're pretty much recovered from that.
You know their or their shortages of Oh things, but there's a normal things like substrates, and ER and capacitors and things and I would not classify them as major constraints rise in Q2.
And then Sydney your question regarding the incremental cost, we're not giving that level of detail as far as quantifying the level of cost I can tell you that they were modest and they were included in Q1 and then they are recurring in Q2.
Thank you and our next question comes in the line of Krish Shankar with Cowen and company. Your line is now open.
Yes, hi, Thanks, taking my question Stephen Megan had a couple of them number one Steve you said that you expect auto did a covenant the second half.
Is that what your customers. This thing is it more a function of given the fact that how does it mean, so we expect kind of a cyclical rebound kind of curious on that and then add a couple of more follow ups.
Yeah. So in automotive obviously, there's been a lot of commentary about the automotive market.
What gives me a reason for optimism.
Basically what I see first is our position in the automotive market.
There were very strong in the digital parts of the automotive that require advanced packaging, whether its S&P or flip chip for some variant thereof and.
So what we're seeing is that technology migrating quickly into the mid range vehicle. So not just the high end, but also the mid range.
So we have a very good market sure there than we expected benefit disproportionately.
As a carmaking resumes.
The other [noise] excuse me the other points that give me a reason to be optimistic about automotive.
Is in the past if you take a look at what happened or.
During the last chalk.
2009.
You know there were a concerted <unk> government efforts to to sell into a incentivize people to buy cars I think they'll likely happen again.
I think the car makers know how to sell cars, we need to cut deals to incentivize people the bikers.
And finally, my belief that you know personal cars.
Assuming so you know social distancing remains a a thing you know personal cars are great way too to control your environment. So I think you'll see a resurgence and enthusiasm for personal cars.
Got it that's really helpful. Steve and then I'm just a quick question on the smartphone Communications segment for you how do you envision the thinking that you didn't say that some of the flagships phones might still be on target such an infill. So is it fair to assume that you kind of going to a slow patch knowing that you didnt boon to the second.
Uh huh.
Or how should we think of the that segment exposure as well.
I think you're roughly right you know I think.
These phones or are always seasonal right and it won't be different this year.
What's different for US is our content continues to go up the flagship phones.
And with the I've been in five G. You know the content comes up even faster. So we're we're pretty happy with our or market share.
In the advanced phones, and we're also happy we've seen a lot of the features migrate into the mid range similar to phenomena to what we see had been automotive.
So you know we know that the next wave of phones will come out the second half of this year and we're looking forward to supporting those production ramp.
Got it got it and then a final question for Megan Oh, you spoke about Capex and thanks for the color on that if if do you do have to push out capex into 2021 because of eco macro in the second half wouldn't be the wire bonder capex would it be advanced packaging or would it be across the book.
Yeah, it's really going to be dependent upon what the demand environment looks like but it couldn't be you know abroad across the board.
Got it tends that I think is do you think it Megan.
Thank you.
We do have one follow up question from a lot of Sidney Ho with Deutsche Bank. Your line is now.
Oh, Thanks for letting me ask the question again I I was on me, it's when they ask a follow up sell a here here they are [laughter].
Sure on dog, So <unk> the first of all based on the automotive side I know, Chris just ask about this but given production facilities for most of the automakers worldwide I still mostly shut down at this point what are your thoughts on that business issue I think in the past you talked about that business growing 10%, a year or kind of run rate and maybe remain.
This was the geographical mix for that business.
Yeah, you know I think it's a mixed picture depending on what region World you're talking about this first the status of the factories, where there is China or you're pretty U.S. and there's even a lot of variation within regions.
I don't really have a geographical breakout for you Sydney.
What I can say is that I think.
We're taking her lumps in the first half and the automotive market.
You know we saw a downdraft in Q1, we're seeing it further downdraft in Q2.
So I think that's why I'm up im optimistic about a recovery in the second half in automotive because of our position in the market and the fact that you know these factors will come back to me, it's really a question of demand ultimately.
And so can we find ways to stimulate demand for personal vehicles.
And I think we will be able to do that.
Okay. That's fair My last question is.
It is a C and say this a little bit an earlier and that takes into culinary, but TSMC talk about the semiconductor market X memory being flat to down slightly this year, if I compare that to you guys. If we strip out Justine maybe the large consumer base I P project. The G. That you guys are working on is that right. We should think about your business for the full year.
Maybe you can give us some reference to think about the second half what will be great.
Yes city, we really haven't a revised are taking a look at the second half you had the you know we're dealing with so much near term or uncertainty, we're taking a one quarter over time.
Okay. That's it that's all have thanks.
Thanks HM.
Thank you.
And we.
Thanks, Chris <unk>, Okay. Thank you Oh I'm sorry. This is there one more question, yes, yes, yes, we do have one more question from a lot of Ana Goshko Goshko with Bank of America. Your line is nope.
Hi, great. Thank you very much and so maybe can you all mentioned that you'd you're on some credit facilities to enhance the cash balance and you do a lot of cash at 1 billion. So wondering if you can just provide more kind of thought about your rationale for maintaining that amount of cash I'm sorry.
Secondly on as it seems like you're potentially making sure you're covered it in a downside scenario. In addition to scaling back capex, what would be or other levers if you needed to preserve free cash flow or minimize any kind of free cash flow burn in a downside scenario and then finally could.
You remind us do you have any covenants in any of the facilities that you have.
On that a credit facility side.
Sure and I'll take your I'll take and probably the last one first we do not have any significant covenants in our debt facilities. So that's an easy one.
With respect to the cash balance we did you know out of an abundance of caution I'm really you know not that any especially with Steve's remarks, we don't see an eminent needs, but we thought with the potential for worsening environment to take those action.
And we'll continue to evaluate those cash level with respect to our view on future demand and then we'll pay down when we're comfortable we are investing those.
As well in the near term and then we felt that this just with this level of conservative it's conservative is done with prudent.
So with respect to your other question about what levers we can pull in addition to capex and how will ensure that we maintain <unk>.
Positive free cash flow.
Oh no to you in 2019, we were under pressure in that environment, and we were able to successfully reduced cost to ensure that we preserved cash flow and even generated over 100 million.
In cash flow and that was through you know reducing incentive comp and reducing discretionary spend.
And just being disciplined about how we exercised stuff.
So with respect to cash burn et cetera, we'll keep our eye on that and as any demand weekends will take actions as needed.
Okay. Okay, great. Thank you that's helpful.
Thank you.
Thank you Chris This ends the question and answer portion of our call I will now turn the call back to Steve for his closing remarks.
To recap are key messages.
First we just completed the strongest first quarter and then of course history.
With revenue operating margin any P.S. all at the high end of expectations.
We dealt effectively with the current of harvest in the first quarter.
Keeping employee safe.
While maintaining solid production up but.
In the near term, we will navigate through the impact of the virus on demand.
And then the medium and long term, we're very well positioned to grow revenues and profits and all of our target markets.
Thank you for joining the call today.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
[noise].