Q3 2021 Amkor Technology Inc Earnings Call
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Good day, ladies and gentlemen, and welcome to the Amcor technology third quarter 2021 earnings conference call. My name is Hillary and I will be your conference facilitator today at this time all participants are in a listen only mode.
After the Speakers' remarks, we will conduct a question and answer session.
As a reminder, this conference is being recorded I would now like to turn the call over to Jennifer do you head of Investor Relations Ms. Zhu. Please go ahead.
Thank you operator, good afternoon, everyone and thank you for joining us for Amcor is third quarter 2021 earnings conference call.
Joining me today are field Rhoten, our chief Executive Officer, and Megan Faust, our Chief Financial Officer.
Our earnings press release was filed with the FCC. This afternoon and is available on the Investor Relations page of our website along with the presentation slides that accompany today's call.
During this presentation, we will use non-GAAP financial measures and you can find the reconciliation to the U S GAAP equivalent on our website.
We will make forward looking statements about our expectations for amcor future performance based on the environment as we currently see it.
Of course actual results could differ.
Please refer to our press release and other SEC 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 discussed today are preliminary and final data will be included in our Form 10-Q.
And now I would like to turn the call over to heal.
Thanks, Jennifer and good afternoon, everyone and thank you for joining the call today.
We delivered outstanding financial results for the third quarter with record revenue of $1 $6 billion to $8 billion and record profitability.
Strong execution high factory utilization and control spending resulted in record quarterly EPS of <unk> 74 cents.
When combined with a strong first half results, we generated $1.74 of EPS in the <unk>.
First he coauthors doubling last year's performance and shape here, yes.
Revenue was up 24% year on year.
3% sequential growth comes on top of an excellent second quarter.
Continuous momentum drove record performance in all end markets, most notably in communications and consumer where we saw sequential revenue increases of 28% and 22% respectively.
Our communications business grew 24% year on year.
Presenting 42% of total cost of your revenue.
The main driver for growth is the strength in the smartphone market, particularly in five G. With current industry forecast often it can be 500 million <unk> enabled smartphones to be built this year.
We expect <unk> to remain an important growth driver and we continue to invest in technology and manufacturing scale to support our customers in this growing market.
In the automotive and industrial markets, we achieved another quarterly revenue record with sequential growth of 9% and year on year growth of 42%.
The growth on the lines of a strong recovery in this market, although supply chain constraints, especially in wafer substrate supply that's been further growth.
The strong recovery of our automotive business is mainly due to significant ramps of new products in this domain, but particularly supporting the rapid proliferation of Adas functionality and the accelerated electrification of car models.
And of course, well positioned to support these innovations with a solid technology portfolio and then established automotive qualified manufacturing base.
In Adas, we are ramping the assembly of the latest generation process us using all of the advanced flip chip technology and the portfolio are afraid that in optical sensors using wafer level fan out technology.
For electrical vehicles, we are enabling the assembly or Pike published silicon carbide devices in our Japan factories utilizing unique via both ALLETE clean technology.
Although we foresee some short term and mid term constrains in automotive supply chain. We believe the long term growth drivers in this market to remain in place, resulting in the continued expansion of semiconductor content per car.
Market forecast show growth rates in the automotive market that exceeds the average semiconductor industry growth.
Strength in the consumer markets resulted in a better than expected sequential increase of 22%.
We continue to diversify our product and customer portfolio and Iot Wearables have you ramped several new products in the third quarter.
We expect this market to be an important driver of growth and know where overall product and customer pipeline for advanced <unk>.
<unk> solutions in this sector remains strong.
Revenue in the computing market set another quarterly record.
<unk> growth of 9% and year on year growth of 28%.
Further upsides was tempered by constraints and material supply, especially high end substrate materials.
During the quarter, we experienced solid performance in all computing applications and the further strengthening of our project pipeline.
We continue to invest in technology and manufacturing scale to capitalize on opportunities in emerging segments like AI and high performance computing.
Finally, our test business grew 19% year on year in the third quarter to a record $225 million as we broaden the scope of our test services for five chief Communications and system level testing.
Our manufacturing organization did an excellent job managing the steep production ramp in the third quarter, most notably for advanced packaging and our factories in Korea.
During the quarter, we added capacity around several new products, while working through obstacles in the supply chain caused by COVID-19 restrictions and supply constraints for material and equipment.
We've worked closely with our suppliers and customers and managed to keep the impact limited, although we experienced some revenue impact for our <unk> business due to short supply of critical Ics.
We expect the constraints of material and equipment supply to continue into next year to mitigate risk we have expanded agreements with several of our suppliers as well as most of our top customers towards the best office supply assurance in future periods.
In the U S. We continued to moan disorder investment policies to incentivize domestic semiconductor manufacturing and we are exploring a possible factory location to align with the U S investments of other major semiconductor companies.
Our capex targets for the year remains at $775 million with major investments for wafer level and flip chip technology.
And test capacity as well as facility expansions.
Now, let me turn to our fourth quarter outlook.
We are expecting the fourth quarter to be another solid quarter with revenue of $1 $64 billion at the midpoint of our guidance.
This represents a year on year increase of 20% for both the quarter and the full year.
But 2021, we expect double digit percentage growth in all end markets have you remain confident in our strong market position and the overall demand environment.
Megan will now provide more detailed financial information.
Thank you heal and good afternoon, everyone.
Amcor delivered strong financial results in Q3, setting New records for revenue gross profit operating income EPS and EBITDA.
Third quarter revenue of $1.68 billion was up $274 million or 20% from the second quarter.
And appeal noted all of our end market set new revenue records.
During the quarter, we successfully navigated through several disruptions in the supply chain.
Specifically material constraints for wafers substrates and component.
These disruptions primarily impacted the communications end market, where our growth was hindered but still in line with historical seasonality.
This was partially upset by upsides in our consumer advanced S IP portfolio for Iot wearable products.
Revenue for advanced products grew 26% sequentially and represents around 70% of our business.
This significant growth is driven by new product introductions, primarily in advance that's IP supporting the communications and consumer end markets.
Our revenue for mainstream products grew 4% sequentially and 27% year on year, principally due to recovery in the automotive market.
With high levels of utilization gross margin expanded 150 basis points year on year to $19 33 per cent.
And our gross profit of $325 million is an all time record.
Operating expenses for the quarter came in as expected at $113 million.
Our focus on controlling opex during a period of significant growth contributed to record operating income of $211 million.
Operating income margin expanded 160 basis points sequentially to 12, 6%.
Net income for the quarter was $181 million.
Melting and an all time record EPS of <unk> 74 cents.
We generated record EBITDA of $358 million in Q3, and EBITDA margin was 21, 3%.
Shifting to the balance sheet, we ended the quarter with $790 million of cash and short term investments and total liquidity of $1 $2 billion.
At September 30th total debt was approximately $1 billion and our debt to EBITDA ratio is <unk> eight times well below our target of one five times.
With respect to our capital allocation policy.
We will reinvest in the business supporting technology and capability advancement in R&D.
As well as capacity expansion for organic growth.
This may be equipment as well as facilities expansion when needed.
Target capital intensity in the low teens and efficient utilization enables profitable growth.
We will continue to optimize our debt structure with respect to amount cost and duration, we have reduced our interest expense by over 20% or $11 million for the nine months ended September 30th compared to the same period in the prior year.
We also have access to reserve liquidity for unforeseen events or opportunities.
As it relates to strategic investments, we target technology enhancements adjacent to our core competencies and geographic diversification supporting our customers' supply chain needs. For example in the U S or other locations that are developing a semiconductor supply chain.
Returning capital to shareholders remains a priority and we expect to grow the dividend over time.
Our solid financial position provides flexibility to achieve these priorities.
Moving on to our fourth quarter outlook.
We expect continued strength in the market with revenue to be between $1, five 9 billion and $1 six $9 billion.
Considering the midpoint of our Q4 guidance 2021 revenue growth is estimated to be around 20% over prior year.
Gross margin is expected to be similar to Q3 between 18 and 25%.
We expect to maintain operating expenses at around $115 million.
We expect our full year effective tax rate to be around 15% due to discrete tax benefits and favorable foreign currency movement.
Q4, net income is expected to be between $140 million and $190 million.
Melting in E. P. S. A 55 cents to 75 cents.
Our forecast for capital expenditures for the full year remains at $775 million for our capital intensity in the low teens.
With that we will now open the call up for your questions operator.
Thank you.
We will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star.
Keith.
One moment, please while we poll for questions.
Our first question is from Randy Abrams of credit Suisse.
Please state your okay, yes. Thank you good evening.
Good job on the results, especially factoring the supply constraints.
I wanted to ask on the fourth quarter guidance.
At the midpoint, it's a small revenue decline.
Could you elaborate some years I think it's flat plus or minus.
For fourth quarter, how much of that is a supply constraint.
Packaging sales.
Versus.
I'm curious if you're also seeing any areas of pushout.
Due to customers also facing some mismatch shipping product.
So if you could elaborate a bit on the sequential decline greater off a high base in third quarter.
Hi, Randy This is Phil let me try to give you will first flavor of Q4 guidance.
The fourth quarter for Amcor generally is a little bit or down it can be up a few percent or down a few percent.
The guidance is currently 2% down.
Mostly we see a correction in the communication market.
She still some constraints in components, specifically also critical Ics.
I don't see a correction.
As you mentioned in the EMS markets there.
Let's say end customers.
Well the next thing that build plans based on that.
The imbalance in the supply chain. So to me, it's still a continuation of the task quarters with limited supply of specific basis.
Okay.
If you could elaborate on constraints you talked about a couple in the remarks, but auto.
The constraints you're seeing in weather.
If you could give us a look at how you see the constraints evolving so I think auto with one area.
High end substrate with area and.
If you could elaborate more on the constraints and Ics are these.
Mostly small IC like power management.
Or is it across different Ics.
If you could elaborate a bit unconstrained and how you see it.
Continuing looking forward as we go into next year.
Okay.
No debate as we see.
She inexperienced constrains is slightly different in each market segment. If you take for example, the automotive market, we observe the constraints in the beginning of the year was mostly.
For constraints later on in this year's Q3 Q4 and also into next year, we see constraints, continuing but then shifting more on the substrate sites spin.
Specifically, the higher end substrates in automotive applications like Adas, which is generally designs in advanced Silicon notes, we sure hope so constrained staff.
And the basis is the same for the computing market.
On the communication markets. However.
We see multiple.
Different dynamics there.
Dad, we seek for our IP business continued shortage of specific.
Components or Ic's and as you already mentioned these out Ice's rich.
Let's say smaller ic's generally designs and the share more mature nodes.
And that we see to see should continue in the fourth quarter.
Okay.
If you could give an initial view.
It's mostly supply side not demand side is there an initial view.
Sure, we'll get more detail in a few months, but for first.
First quarter, how its looking if it looks like.
Factoring that the supply demand you could see above seasonal first quarter and then how youre viewing next year in terms of.
The overall environment, if youre expecting good year still supply constrained your or and I'm curious on the risk side, if you see any areas where.
Inventory.
Building up quite components that are more available, but needing to slow that down.
While we don't guide for for let's say the first.
Quarter next year.
On that Randy but on these on the inventory and supply situation.
There is some.
Short term inventory builds up because of some of the components constraints and that will be sold and some buildup of inventory of other components. Although our view is that that's still a small effect in the overall supply chain.
We also see and customers being less conservative on holding more inventory. So we expect that based on their risk management overall inventories during the year will continue to increase.
On the supply side.
On the wafer supply side I believe that there are constraints.
<unk> in the first half of the year on the substrate supply sites. It may take a little bit longer I mean significant investments are made for substrate supply.
That's a capacity increases.
But that will in my view only come on stream towards the fourth quarter of next year.
So in short I mean, I don't see significant inventory buildup and some of these constraints will ease a little bit in the second quarter and some of them Bill will continue until the fourth quarter next year.
Okay.
Thank you.
Then one last question and I'll ask for.
I'm curious if this is a driver if it's.
I think traditionally our consumer sick with audio if that's still a big driver or.
If you could give a profile like how much now it looks like it's growing this year and the profile. If you could talk a bit more about this pipeline.
And how it looks for continuing to grow the Sip opportunities.
Yes, our sip opportunities in the third quarter, we saw significant strength in peace.
On the communications side it was slightly moderated.
Because of the supply side.
Constraints that I mentioned before on the consumer side it was strong.
Although also there we see some constraints, but we had significant strength on the consumer side, we believe that to continue.
We see also a diversification on on the product side, both on the communications as well as on the consumer side.
More broadly is also entering applications like like automotive.
Strength to specifically on the digital let's say shared dashboard site.
So multiple applications strong product pipeline and in our view of <unk> growth engine going forward.
Okay.
Maybe.
One more just on the margin implication.
If it looks like from a capacity perspective.
You are running near full with the gross margin now.
What you're operating at this level fairly high 19%, 20% is that theaters kind of that.
The high point or you could say like upcycle margin business remains healthy.
Or is there room, Mike if we have a good year for some further margin leverage.
Hi.
Oh, yes.
Yeah, I can take that Randy.
So with respect to gross margins being at 19, 20%.
While we are operating at high utilization, we do have still some capacity.
Specifically in our Japan location.
So there is some upside there and then the only other comment I would make is one of the other variables. Besides utilization that does impact gross margin percentage is product mix.
So with respect to that mix of products that can have an impact on gross margin percentage, where we would have could have some upside as well.
Okay, alright, great. Thanks, Thanks Megan.
Thank you.
Yeah.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Our next question is from Art Winston of pilot Advisors. Please proceed with your question.
Thank you for the really great results and the great out look I have two questions. The first one is given the very sharp increase in your material cost what about the possibility of raising selling prices offset these sharp increases.
In the materials.
Yeah.
Well, let me, let me answer that.
Mentioned it also earlier on in previous calls.
The general arrangements that we have with our customers is that cost increases on the material side are affected and the prices to our customers. So if if our material cost is increasing specifically for substrates, what we're seeing now and also other materials.
And we factored that in to adjustments to pricing to our customers.
But it's factored in okay no no it will be factored in if it's if it continues to box prices to customers will also go up.
Okay. Good.
Megan touched on the last one.
Other than in Japan is the utilization rate.
Pretty much high of course every place else, except perhaps in Japan.
Yes.
Go ahead Hugh.
Yes, I mean third quarter fourth quarter.
For EMCORE, our peak quarters.
There were some areas status still some.
On the utilization Mega already mentioned that in Japan.
But overall, we have a very strong utilization across our factories.
Good.
And my last question is in terms of the automotive.
If if the supply congestion where to ease should we assume that your automotive shipments would be sharply higher correlating with the increased amount of carb bill for quest or world would that would that happen.
Well in the quarter in Q3, we saw I'm talking I'm talking about going forward.
Going forward, yes, yes.
Yes, I think in my view, they're still not at the peak of our automotive business. If you take for example applications like Adas or digital dashboards or income networking is still in the early beginning so it's not the only car volumes, but it's also the attach rate.
<unk>.
These advanced functions into the car and what we believe you said that is an acceleration in the kind of markets.
Two elements for us is Adas, but also electrification of the car is increasing much steeper curves and what's what was expected said two years ago. So it will continue to increase.
And as mentioned, we believe that the share the semiconductor content per car.
And the overall semiconductor market in automotive.
Growing faster than the average semiconductor growth rate.
We can assume that the product mix it would be more profitable for the more advanced.
Alex electrification.
Products that you're making going forward it would be more profitable.
Well, we have pockets that are more profitable than others.
But that will be a correct assumption.
Okay again, thank you for everything.
Our next question is from Vijay Rakesh of Mizuho. Please proceed with your question.
P. J are you there.
Yes, sorry, I was on mute.
Hey, Gielan, Megan and I was wondering on the auto industrial side, you know, what's your split within that auto industrial and and you look at auto side.
You mentioned Adas and electrification just wondering how what percent of your automotive was scared to death.
That's an EV.
So Vijay we don't break out auto and industrial separate however, the majority of that market is automotive.
And then with respect to your second question. It was specifically asking about the concentration of Ada.
And our automotive.
Yes, it definitely dv, yeah. So we don't we don't breakout Adas or EV. We also have a significant amount of infotainment and automotive and then as a reminder, all of that traditional.
Main stream business is in automotive.
We are seeing significant increase in the advanced portion of automotive, but we don't break out those segments separately.
This quarter, we did see an increase in Adas from the prior quarter as well as in electrification.
Got it and as you look at Q4.
<unk> quarter.
In terms of the.
Mildly softer 2% down I guess.
How would you look at auto industrial.
And the Com site into Q4, I know you mentioned had some some.
Some I guess constraints, but how would you look at auto and industrial and the condensate trending into Q4.
Megan do you want to momentum there sure yeah. So automotive we're seeing more flattish in Q4, so continued strength despite the supply chain constraints.
And communications is where we are seeing a decline in Q4 and as Hilde mentioned previously we are seeing continued shortages in specific IC components and it is fairly us.
The historically seasonal to see a downtick in communications in Q4, given the timing of the different phone launch cycles.
Got it thanks, thanks, so much.
Thanks Richard.
At this time I'm showing no further questions I would like to turn the call back over to hill for closing remarks.
Okay. Thank you.
Before closing the call I would like to recap our key messages.
For the third quarter of 2021, we delivered all time record revenue of $1 six 8 billion.
And record EPS of <unk> 74.
For the fourth quarter, we expect robust year on year growth of 20% with revenue of $1 $64 billion.
Supply chain constraints of substrates and components are expected to continue into Q4 and into the next year.
We expect a gradual recovery in the second half of next year when new capacity comes online.
We are working closely with our customers and suppliers to help mitigate risks from these ongoing constraints.
The main catalyst for future growth.
Five chief Iot automotive and high performance.
Performance computing and encode is well positioned in these key markets.
Last but not least I would like to thank the global amcor team for delivering this record quarter.
Thank you for joining the call today.
Ladies and gentlemen. This concludes today's conference call you may now disconnect and have a wonderful day.
Okay.
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Sure.
Yes.
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