Q1 2023 Amkor Technology Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the Amcor Technology first quarter 2023 earnings Conference call. My name is Diego and I will be your conference facilitator today.
At this time all participants are in a listen only mode. After the speaker's 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 <unk> head of Investor Relations Ms. Zhu. Please go ahead. Thank you operator, good afternoon, everyone and thank you for joining us for Amcor. Its first quarter 2023 earnings conference call.
Joining me today are healed root and 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.
Please refer to our press release and 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.
Thank you Jennifer.
Good afternoon, everyone and thank you for joining the call today.
Amcor delivered first quarter revenue of $1.47 billion and EPS of <unk> 18 cents, both above the midpoint of our guidance.
Our automotive and industrial end market posted another quarterly revenue record driven.
Driven by resilient demand and building on M course leadership position in this market.
Our strong footprint in premium tier smartphones also generated positive results.
With low single digit year on year growth in our communications business.
Challenging macroeconomic conditions and weakening demand in consumer and computing contributed to a total year on year seven a decline of 8% for the first quarter.
The semiconductor industry is facing near term had twitch.
Mainly caused by high inventory and weak end market demands.
Most recent market forecast projecting a further decline for this year.
Our advanced packaging portfolio accounted for 73% or four school of first quarter revenue and that's a strong project pipeline.
We expect to perform better than the market based on this leading position in advanced packaging, our broad and diverse global footprint and our focus on industry makeup threats.
Yeah.
Now, let me review the dynamics in each of our end markets.
Revenue from the communications market was up 2% year on year, driven by strength in all about advancing its IP portfolio supporting multiple functions throughout the phone.
We observed customers continuing to work through excess inventory, especially but in the Android supply chain cut.
Current estimates project smartphone units to be down low single digits. This year.
However, semiconductor content and premium tier phones continues to increase.
And innovations had improving performance and adding functionality.
Amcor holds a leadership position in advanced packaging throughout premium tier smartphones and has a strong track record as a trusted partner for innovative solutions and for delivering operational excellence.
Revenue from the automotive and industrial market increased 14% year on year they're.
They're driven by growth in Adas and electrification and industrial applications.
Advanced driver assistance systems generate growth and multiple applications from camera and high performance processor through sensors like radar and Lidar.
If he adoption is leading innovations in electrification, especially the introduction of wide bandgap materials like silicon carbide and gallium nitride.
These materials enabled improvements in power efficiency and charging infrastructure.
The trend has accelerated by government initiatives to support our clean energy transition.
Adas electrification infotainment and telematics they'll drive continued expansion of semiconductor content per car.
Market reports project automotive electronics to grow at a mid teens kind of good for the next several years.
One of the highest growth areas in the semiconductor market.
As the leading automotive oshatz with qualified manufacturing lines in multiple geographies and a broad technology offering we expect ongoing strength in this market.
Revenue from the consumer end market decreased 43% versus the first quarter last year.
We observed multiple near term headwinds impacting the consumer market.
Including product lifecycle changeovers in the Iot wearable market.
Reduced consumer demand and excess inventory.
We continue to work on building the pipeline for Iot devices, utilizing advanced as IP solutions, and diversifying our product and customer portfolio.
You recently began ramping new products for the emerging a fiat experience and expect the proliferation of Iot devices to drive revenue growth, but he beyond carbon semi cycle.
Revenue from the computing end market decreased 17% year on year.
Driven by weakness in personal computing and storage.
And data centers, we support all areas from CPU, GPU memory, and AI accelerators to routers and switches.
High performance computing devices supporting artificial intelligence required the use of the latest silicon notes and at enabled by advanced packaging solutions, such as to when novelty and high density fan out.
In addition, and I'll put this terminal materials, we apply in our packaging solutions help our customers resolve technical challenges.
But over a broad advanced packaging portfolio and established relationship with lead customers at foundries amcor is well positioned to capitalize on opportunities in the computing market.
With lower capacity utilization the team is focused on managing costs, while maintaining our high performance standards.
Geopolitical dynamics continue to impact the semiconductor supply chain with all of our diversified geographic footprints amcor is uniquely positioned to support our customers with reliable and cost effective manufacturing.
We are actively securing new programs with our customers in support of diversifying and derisking their supply chains.
Investments in our new Vietnam factory continuous plants with the goal to stop high volume manufacturing later this year.
In the U S. We continue to be actively engaged in discussions with customers partners and economic development agencies to establish a semiconductor supply chain.
Now, let me turn to our second quarter outlook.
We expect second quarter to be similar to first quarter with revenue of $1.475 billion at the midpoint of guidance.
For the second half of this year, we remain optimistic that the Mount as well as supply chain inventory will improve.
Bush to accelerate with our leading technology portfolio and diversified manufacturing and end market footprints.
We believe that the secular growth drivers for the semiconductor industry remain in place and.
And we are well positioned to outgrow the market.
Thank you heal and good afternoon, everyone.
First quarter revenue of $1.47 billion exceeded our guidance midpoint.
We believe that amcor diversified end market exposure is mitigating cyclical variability and will provide stability and resilience as we work through the cycle.
The automotive and industrial end market, representing 26% of our Q1 revenue continued to run at record revenue levels.
Our technology leadership in advanced packaging enabled us to win new programs and premium tier smartphone growing our revenue and market share year on year in the communications end market despite challenging market conditions.
The resilience in these markets, partially offset the softening of the consumer and computing end markets, which are being impacted by macroeconomic factors and inventory buildup in the supply chain.
Our enhanced focus on cost discipline during a downturn is essential to maintaining profitability and generating free cash flow throughout the cycle.
As a reminder, our financial model allows for significant incremental flow through to gross margin of around 40% as revenue increases.
This same model applies when revenue declined profit drops faster than revenue.
Gross margin for the first quarter was 13, 2% and gross profit was $194 million.
During the quarter, our factory teams were able to lower manufacturing costs by around $30 million.
To help offset the impact of Underutilization and foreign currency losses.
Head count control overtime reduction and reduced work weeks, all contributed to lower labor costs.
Lower supplies and maintenance and less electricity usage contributed to a decrease in O Cogs.
These temporary cost containment measures are flexible tools, allowing us to reduce cost while maintaining the ability to support the anticipated increase in demand for the second half of 2020 three.
Operating expenses for the first quarter were $126 million.
Research and development expense increased over Q4, primarily due to incremental new product introduction activity, including development of test solution supporting new products targeted to launch in the second half of 2023.
Operating income was $69 million and operating income margin for the quarter was four 7%.
Net income for the quarter was $45 million, resulting in EPS of 18 cents.
Okay.
First quarter, EBITDA was $229 million and EBITDA margin was 15, 6%.
Our balance sheet is strong we ended the quarter with $1 $3 billion of cash and short term investments and our total liquidity was $1 $9 billion.
Our total debt as of the ended the first quarter is $1 $2 billion and our debt to EBITDA ratio is <unk> nine times.
Our financial strength provides flexibility to continue to invest in our future through this short term semiconductor cycle.
Moving onto our second quarter outlook, we expect Q2 performance to be similar to Q1.
While there continues to be uncertainty with respect to the duration of the cycle. We anticipate an improved second half of the year driven by the introduction of new phone model resilience in automotive and industrial and more balanced inventory levels.
For Q2, we expect revenue of $1.475 billion at the midpoint.
For comparability, a reminder, that our Q2 'twenty two results were adversely affected by the Covid Lockdown of our Shanghai factory.
We expect gross margin to be between 12 and 14%.
We expect Q2 operating expenses of around $125 million.
We expect our full year effective tax rate to be around 17%.
Second quarter net income is expected to be between 30 and $70 million, resulting in EPS of 12 to 28.
We are holding our capex forecast for 2023 and $800 million.
We are being prudent with our spend and our Capex forecast is 12% lower than 2022.
Our investment plan is focused on strengthening specific advanced packaging technology and growth areas, such as advanced S E T and flip chip.
As well as investments in our diversified geographic footprint.
With decades of semiconductor industry experience and successfully operating through prior cycles. We are confident in our long term outlook supported by the industry secular growth trends.
Our technology leadership.
<unk> geographic footprint and strong financial position enable us to continue to outperform the semiconductor market.
Operator.
Thank you.
And ladies and gentlemen at this time, we will 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 that your line is in the question queue. You May Press Star two if you 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 keys.
Our first question comes from Randy Abrams with Credit Suisse. Please state your question.
Okay.
Thank you.
So first question just about the applegate.
Apple the view on your applications I think just from one side the auto industrial is quite strong.
I believe you mentioned Brazilian.
The outlook from here I'm, just curious if you see that strength sustaining it.
The salary feedback and a bit softer.
The high base.
On the flip side on some of the applications going through correctly, if you could give a view.
The consumer Sip, where we saw a sharp decline if you expect that headwind or won new projects.
Rebound momentum and then if you could give a comment on all the other areas like pizza and compute.
So yes, just curious more on the applications have you seen.
The relative resilience of I'll say the weakness on the consumer side.
Hey, Hello, Randy Hope you're doing well.
And let me start trying to shed some light on the automotive and industrial part first.
You know we experienced indeed, the resilient demand in the first quarter.
That's to continue in the second quarter and actually.
We have strong indications that that will remain strong and the remaining part of the show and in the second half of the year.
Just as a reminder from the foundry sites.
Within the automotive market that is a significant volume of silicon being produced by idms in that internal factory. So it's not only driven by advanced silicon from the from the site. So we continue to expect to resilience, we don't see any indications of inquiry.
Leasing inventory in the automotive market.
Go back to the second part of your question.
On the consumer system and package them.
Yeah, we saw some some headwinds in the first quarter as we already mentioned.
In the earliest part of kind of all of our earnings call.
That will start towards the end of the second quarter.
Little bit and in the end and the ongoing part of the second quarter and we feel comfortable that towards the later part of the year.
It will be continued strength in this market I mean, given having said that you know long term you believe that's debatable market specifically on the consumer side.
Iot wearable market is a product category that will further grow it's a little bit choppy short term its very much exposed to swings in market demand, but overall, we're confident that longer term. This is a good market for us.
With respect to the share or the powerful forward as IP portfolio.
A large part of that is related.
Very high level to the swings in the communication markets.
Whether it's on the Android side or on the IR web site and it ebbs and flows with the debt markets. So although we saw strength and that strength is very much underpins my market share increases in the share and the phone specifically the premium tier phones, but it should be expect definitely there will be an upswing.
In the second half once a year attribute it to the launch of new premium tier phones.
It was an internal combustion or Randy.
Yeah that does that mean, if I can follow up on the implications for second half.
Do you see some spillover, where it could have a bit of a dampening factor.
Or are you seeing I guess I guess, one on the inventory situation in the southern markets till we get through that.
And get back to you.
You saw third quarter or even just shocking low base.
You can pick up from there. So just curious at this initial stage.
Second half view.
Following that on the full year, if you're above your now your outlook versus versus industry outlook.
It's difficult to predict what will happen exactly in the second half I mean in and out of U D. <expletive> in reduction of inventory, which is ongoing currently in the critical markets like P. C.
And also the smartphone market specifically on the Android side mid range and low end Android phones.
So we expect that to further improve from the second quarter, although it is going slower than expected and go into the second half of the year.
The recoveries are for.
For the communications market, specifically is you know partly of course attribute it to the.
Let's say the burn off of our inventory and the industry inventory, but it's also very much attribute to end market demand and then that's difficult to predict a macroeconomic elements.
Respect to consumer demand for new mobile phone models, but overall, we are optimistic that that is a much more balanced inventory situation going into the second half of the year.
And further improvement during the second quarter.
Actually just one other question I had on T. H P C related if.
If you could talk to them I think in your prepared remarks, you mentioned high density fan out until the hefty.
H P C.
As we've talked about the AI, where a lot you see things like the whole loss do you supply and see gaining content on those areas as far as the fan out.
High volume opportunity.
Like working on the buy and flip chip and test. So I'm just curious your exposure and how you see them.
Yeah, Hi Tech accelerators.
Yes, you know with respect to the.
And let's say AI devices, the most advanced AI devices, using two and a half and teach them. We have them in production I'd be staff, that's producing them last years, using two and a half dish technology.
And we are ramping them food that's going into this year.
And we believe that that will continue for the let's say the remaining part of this year's.
Contributing to our let's say growth in over a computer segment in general.
So it is it is two one off dish.
And I think that you know it should come in at two one off the technology, that's being applied for these devices or Randy.
And I'll just ask one other technology pull up the mobile market do you see much I mean, theres been talk about disaggregated diet Fad.
But it's kind of stayed at a flip chip process.
Seen much.
Shift in how those mobile communications and for that high density fan out is there a growing adoption whether in computer mobile.
Yeah, it's all a belief that a dish the adoption of high density fan out and also desegregation of Src's will first happened in the computer market and specifically the most demanding or compute segment like AI.
That'd be cool Oh, two the next generation technology fairly quickly now.
The next adoption would be in the in the mobile market, but that may take a few more years and we think that's in the current solution for the mobile processors, but what would be its there and you know the most common apps processors.
That's what's happening, let's say in the time frame after 25 25 to 27.
They adopt mm three nanometer and below our process technology.
And if I can follow up on that if we moved toward hybrid bonding for some of these applications.
We're the processor and memory high bandwidth memory.
Do you see much of a role or would that be foundry process. It just curious if you will.
When you get involved in that supply chain.
Yes, we believe that when it comes to chipset technology disaggregation of monolithic Asics Ashish are utilizing them, let's say hybrid bonding technologies. That's a first generation second generation probably will be covered in.
Foundry environment. The technology is very much an extend the extension of the wafer manufacturing and it requires also technologies that will call for a very high investment level next generation spend whether that's seven there is a broader proliferation of these technologies.
That will definitely go into the Osha to domain and that would only happen when we get our costs down on the technology side and photos that standardization.
For the Sip technology do match, so yes longer term it will move into Osha domain, but the initial generations would be in the foundry domain.
Okay. Thanks, a lot here on good job navigating the environment.
Thank you.
Yeah.
Thank you just a reminder to ask a question press star one on your telephone keypad to remove yourself from the queue Press star two.
Our next question comes from.
Tom Diffley with D. A Davidson please state your question.
Yes. Good afternoon, maybe just a couple of quick questions on the market itself, you talked about 8% decline year over year, what what was your view of what the market did in that period as well.
Yeah.
Hi, Tom does this sit as skill.
Good to have you on the phone.
First call Tomorrow codes.
You see that market forecast that Tom for the years is actually deteriorate in quarter on quarter. If you look to the latest.
Our numbers, which come out from the market firms like Gartner It comes into a let's say a correction downward for the full year of 2023, well high single digits to low double digit decline for the total semiconductor market.
So for the first quarter, it's it's difficult really to judge, but we believe it was down close to you know the same the same level high single digits low double digit decline.
On a year on year basis, Okay. So I guess when you when you talk about outgrowing the market.
Is it just where you're located in the marketplace or is there a share shifting going on or is it just the fact that you are leveraged to the high end and your leverage to automotive creates a better scenario for you specifically.
Yeah, I think that's it's indeed, you know the last part that you mentioned, Tom we believe that our market footprint pretty much into.
Into the automotive market, which is the.
The highest growth segment of the semiconductor market.
In the premium tier of the smartphone market, where we feel that we gained market share specifically, it's new technologies being it being introduced and then on the computing segment. The trends in the computing segment are going from a vertical industry to a deepwater collage to English.
III that that offers.
Opportunities for Amcor is leading all set to grow faster than the market.
Okay.
It sounds like Theres reason to be yeah, a little optimistic about each of the markets improving in the second half, but when you look at the total performance of the company, which of these end markets do you think it will be the biggest contributor to half over half growth in the second half.
Yeah. The biggest contributor for the second half versus first half growth for Amcor is the biggest market that they are also serving that's the communication markets communications is still above 40% of the total company revenue.
And the growth in the second half will be driven by the introduction of new premium tier smart smartphones.
Across the industry.
On the Io best sites that'd be she shed a growing market share for ourself, but also on the on the Android side so recoveries.
Of the smartphone market and together with the introduction of a new.
Phone types and it will drive growth in the second half.
Okay great.
And then just looking at the model and Megan.
How much variability is there in operating expenses on a quarterly basis.
Yeah, Hi, Tom Hi.
So with respect to you know bearing throughout the year and we've given a general guideline that we would anticipate around $120 million per quarter.
Can see that with our Q1 actuals and Q2 guide that's running a little ahead that really has to do with the timing of our NPI activity, that's going to contribute to some of the second half launches. So I would say, there's some variability, but albeit modest and so I would continue to look at.
General run rate for the year of 120 per quarter.
Okay and at what point would you expect a depreciation would go up for the new facility.
In Vietnam.
So with respect to our Vietnam facility, we're anticipating that that would you know go online at the end of this year, so that again being depreciated over a fairly long period of time, it's going to have a pretty modest impact on depreciation as it rolls into 'twenty four.
And then we will be bringing on the equipment in that facility basically.
In concert with the programs and I would view that as a general growth perspective, you know, we manage that with our overall capex forecast. So that would just be part of our regular Anthony increases.
Okay, and just curious for the first couple of lines how much of the equipment is gonna be new equipment versus relocated equipment from other facilities.
To get those lines, you know through N P. I qual and then into production as we expand there we will continue to look at our full capacity and ensure that we're balancing that appropriately as you may know our center of excellence for S. E. T is in Korea, and as we expand that.
Decline in Vietnam, we will consider whether it would be you know optimal to transfer some of that equipment once we get things up and running.
Okay, and then final model question when you look at the potential for growth in the second half what would you estimate your incremental gross margin would be on that growth.
Yeah, Great question. So we have given a general guideline from our incremental margin.
Drop through the gross margin of around 40% I would say with the anticipated increase in advanced S type he coming in in the second half.
Supporting Communications, you would probably see an incremental gross margin is slightly below that 40% in order to accommodate that product mix change.
Okay, which of your groups would have the highest incremental gross margin.
It's not necessarily driven by end market, Tom because we have you know I would say sap's supports not only communications and consumer.
And it's really you know what product mix has some impact it's really a function of how well those lines aren't utilized moving into that step up in revenue.
Great and then he'll final question for you when you look at the with the want to.
Diversify manufacturing geographies with all your customers are you starting to see companies.
Companies wanting to shift capacity from one region to another well or is it still kind of in the early stages of just playing it out how to do that in the future.
Well, what we actually see in currency Thomas and teach a very.
Let's say active shift of capacity from one location to another.
Another important trend is that customers look for a second source of existing.
<unk> capacity.
And that's all related to supply chain disruptions in let's say in the last couple of years and it also.
He lives should to the share that's a geopolitical tension in some areas. So we see share that said this is it.
Ongoing on the let's say I would say on a very active basis.
Every shift, let's say bad we offer customers a second source for example, in our Vietnam factory or where we should work with customers to derisk their supply chain by moving volume from one territory or one region to another region. So it's ongoing.
Okay well. Thank you both for your time today.
Thanks, Tom.
At this time I'm showing no further questions I would like to turn the call back over for.
For closing remarks.
Let me recap our key messages.
Amcor delivered revenue of 1.47 billion and EPS of <unk> 18 cents in the first quarter.
Above midpoint of guidance.
We would expect the second quarter to be similar to first quarter with revenue of 1.47 and $5 billion.
We are confident that the secular growth drivers for the industry remain in place and.
And we'll drive growth beyond the current cycle.
With our leading technology portfolio and diversified manufacturing and end market portfolio Amcor is well positioned to outperform the semiconductor market in 'twenty two 'twenty three.
Thank you for joining the call today.
Thank you.
This concludes today's conference all parties may disconnect have a great evening.