Q2 2023 Amkor Technology Inc Earnings Call

Speaker 1: Good day ladies and gentlemen and welcome to the Amcor Technology 2nd Quarter 2020 3 earnings conference call. My name is Diego and I will be your conference facilitator today.

Speaker 1: 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.

Speaker 1: I would now like to turn the call over to Jennifer Jue, Head of Investor Relations.

Speaker 2: Ms. Chu, please go ahead. Thank you, operator. Good afternoon, everyone, and thank you for joining us for Amcor's second quarter 2023 earnings conference call. Joining me today are Hiel Rutten, our chief executive officer, and Megan Faust, our chief financial officer.

Speaker 2: Our earnings press release was filed with the SEC this afternoon and is available on the investor relations page of our website, along with the presentation slides that accompany today's call.

Speaker 2: During this presentation, we will use non-GAAP financial measures, and you can find the reconciliation to the US GAAP equivalent on our website.

Speaker 2: We will make forward-looking statements about our expectations for Amcor's future performance based on the environment as we currently see it. Of course, actual results could differ.

Speaker 2: 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.

Speaker 2: Please note that the financial results discussed today are preliminary, and final data will be included in our Form 10Q. Now I would like to turn the call over to Heale.

Speaker 3: Thank you, Jennifer. Good afternoon, everyone, and thank you for joining the call today.

Speaker 3: MCORP delivered second quarter performance in line with our expectations with revenue of $1.46 billion and EPS of 26 cents.

Speaker 3: Demand for advanced packaging increased in the second quarter, notably demand for consumer wearable products and for high-performance computing devices.

Speaker 3: For the first half of 2023, revenue of $2.9 billion was down 6% versus the first half of 2022.

Speaker 3: better than the semiconductor industry's estimated decline of over 20% in that same period.

Speaker 3: Overall, business continues to be dampened by challenging macroeconomic conditions, high inventory and weak end market demand.

Speaker 3: With our technology leadership and broad geographic footprint, Emcore is outperforming the industry and is well positioned to capitalize on industry megatrends that we expect to propel growth beyond the current cycle.

Speaker 3: Now let me review the dynamics in each of our end markets.

Speaker 3: Revenue from our communications end-market decreased 11% sequentially and increased 7% year-on-year.

Speaker 3: Inventory consumption is taking longer than anticipated due to weaker end market demand, especially in the Android supply chain.

Speaker 3: Smartphone units declined around 10% in 2022 and are expected to decline a further 5% this year.

Speaker 3: We have a leadership position in advanced packaging throughout premium-tier smartphones, and we expect semiconductor content to continue to increase to support new features and functionality.

Speaker 3: This, combined with our continued investment in technology, in close cooperation with key customers, positions us well to outperform the market and to accelerate when the industry exits the current cycle.

Speaker 3: In the first half of 2023, revenue from the automotive and industrial end market increased 5% compared to the first half of 2022, with advanced packaging revenue up 30%.

Speaker 3: In the second quarter revenue from conventional automotive and industrial applications softened due to inventory control by certain customers.

Speaker 3: In the quarter, ADAS and electrification applications remained resilient at record quarterly revenue levels.

Speaker 3: Despite near-term variability, semiconductor content per car is expected to continue to increase, driven by the proliferation of ADAS, electrification, infotainment and telematics.

Speaker 3: M-Core is the leading automotive offset and has multiple decades of experience meeting the stringent requirements of the automotive industry.

Speaker 3: Our qualified manufacturing lines in multiple geographies such as Korea, Japan and Portugal and our broad technology portfolio ranging from advanced packaging, wirebond and power are important differentiators to our customers.

Speaker 3: Revenue from the computing end market represents 20% of total revenue and increased 15% sequentially and 5% year-on-year.

Speaker 3: Increasing demand for leading-edge advanced packaging supporting high-performance computing devices for AI applications led to the sequential growth.

Speaker 3: As a technology leader, EMCODE is enabling the OSET supply chain with the deployment of 2.5D heterogeneous integration technology.

Speaker 3: integrating high bandwidth memory and ACK on interposer, combined with module attached on substrate.

Speaker 3: In the computing market, we support leading customers in all areas of data centers and networks.

Speaker 3: ranging from CPUs, GPUs, memory and AI accelerators to routers and switches.

Speaker 3: We continue to invest in the high-performance computing market, both in capacity and technology, to support customers with innovative solutions for next-generation devices.

Speaker 3: Revenue from the consumer end market increased 33% sequentially but decreased 27% year on year.

Speaker 3: Advanced SIP for wearable devices increased from a trough in the first quarter as we observed first signs of inventory reductions.

Speaker 3: Consumer IoT devices require miniaturization at high levels of integration into small form factors.

Speaker 3: These IoT devices are increasingly incorporating wireless connectivity, sensors and devices for data protection, combined with ultra-low power requirements.

Speaker 3: Achieving the form factor and power profile requires a found system and package solutions.

Speaker 3: Although we observe multiple near-term headwinds impacting the consumer market, including product lifecycle changeovers, reduced consumer demand and excess inventory, we expect that beyond the current industry cycle.

Speaker 3: Our system and package expertise positions as well for growth.

Speaker 3: In the first half of 2023, our manufacturing organization continued to demonstrate operational excellence across our factories.

Speaker 3: focusing on quality and supply reliabilities, while diligently managing costs at lower capacity utilisation.

Speaker 3: Geopolitical dynamics continue to impact the semiconductor supply chain.

Speaker 3: EMCOR is uniquely positioned to support our customers with reliable and cost-effective manufacturing across the geographically diversified manufacturing footprints.

Speaker 3: Investments in our new Vietnam Factory continue as planned, with the goal to be production ready late this year.

Speaker 3: We have established silicon carbide capabilities in Japan and are expanding these capabilities to multiple other factories, including Portugal.

Speaker 3: We are also expanding our way for processing advanced flip-chip and test technology in Portugal in close cooperation with foundry partners to support a seamless European semiconductor supply chain.

Speaker 3: In Korea, we are expanding capacity for 2.5D technology in support of customers ramping devices for AI applications.

Speaker 3: In the US, we continue to be actively engaged in discussions with customers, partners and economic development agencies to establish a US manufacturing facility.

Speaker 3: Now let me turn to our third quarter outlook.

Speaker 3: We expect performance to improve from the first half, with revenue of $1.775 billion at the midpoint of guidance.

Speaker 3: This represents sequential growth of 22% driven by advanced packaging in support of the full launch of premium tier smartphones.

Speaker 3: With that, I will now turn the call over to Megan to provide more detailed financial information.

Speaker 4: Thank you, Heale, and good afternoon, everyone.

Speaker 4: Second quarter revenue of $1.46 billion was flat compared to the first quarter, with increases in consumer and computing, offset by declines in communications and auto and industrial.

Speaker 4: Amcourse Technology Leadership and Strong Market Position are mitigating cyclical variability and providing the resilience needed to exceed industry growth.

Speaker 4: First half 2023 revenue was down 6% compared to the first half of 2022.

Speaker 4: This reflects strong outperformance compared to the semiconductor industry, which is estimated to have declined over 20% during the same period.

Speaker 4: Gross margin for the second quarter was 12.8 percent, and gross profit was $187 million.

Speaker 4: We have continued to focus on cost discipline during the cycle, which is essential to preserve profitability.

Speaker 4: Sequentially, we reduced manufacturing costs by another $10 million.

Speaker 4: The manufacturing teams are carefully balancing current and future needs.

Speaker 4: and we have maintained the structure required to support the anticipated increase in demand in the second half of 2023.

Speaker 4: Operating expenses for the second quarter were lower than expected at $111 million.

Speaker 4: Due to lower incentive compensation, as well as other cost control initiatives.

Speaker 4: Operating income was $76 million, and operating income margin for the quarter was 5.2%.

Speaker 4: Net income for the quarter was $64 million, resulting in EPS of 26 cents.

Speaker 4: This represents a more than 40% improvement in bottom line profitability compared to Q1.

Speaker 4: Approximately half of the increase is an operating income. While the other half is due to favorable foreign currency balance sheet remeasurment, lower net interest expense, and lower taxes.

Speaker 4: Second quarter EBITDA was $245 million and EBITDA margin was 16.9%.

Speaker 4: We ended the quarter with $1.2 billion of cash and short-term investments.

Speaker 4: and our total liquidity was $1.9 billion.

Speaker 4: Our total debt as of the end of the second quarter is $1.1 billion and our debt to Yvada Racheo is 0.8 times.

Speaker 4: Amcor's cost and CapEx discipline during this cycle has resulted in continued financial strength as demonstrated by our strong balance sheet.

Speaker 4: This allows us to continue to invest through this cycle to enable future growth with lead customers. Moving on to our third quarter outlook, we expect Q3 revenue to be $1.775 billion at the midpoint of guidance.

Speaker 4: Representing the sequential growth of 22%.

Speaker 4: The strong ramp into Q3 is primarily due to the introduction of new premium tier smartphones.

We expect gross margin to be between 13.5 and 15.5%.

We expect Q3 operating expenses of around $115 million.

We expect our full year effective tax rate to be around 17%.

Third-quarter net income is expected to be between $90 and $130 million, resulting in EPS of 36 to 53 cents.

We are fine tuning our full year CupX target, reducing it by $50 million to $750 million.

This is 17% lower than 2022.

We are continuing to invest in strengthening our global manufacturing footprint and our advanced packaging technology.

AMCOR has 55 years of experience in the semiconductor industry and has successfully navigated through many industry cycles.

Over the past several years, we have transformed our operational performance and balance sheet to a position of financial strength.

Our strong financial position enables our technology leadership and diverse geographic footprint, allowing us to perform significantly better than previous cycles, and to capitalize on the industry mega trends, which we expect to drive accelerated growth.

as we exit the cycle. With that, we will now open the call up for your questions.

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 the star key followed by the number 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. One moment, please, while we pull for questions. Our first question comes from Randy Abrams with Credit Suisse, please state your question. Hey, I'm just thank you. I want to ask my first question.

from the seasonal smartphone. I think first just within that, do you see a normal profile or any change to timing for this year for that smartphone ramp? And then for other applications, if you could go through a few of the other areas, how you're seeing auto industrial compute consumer.

Okay, hi, Randy. Let me try to answer that here. Let's first focus on the communication market.

And your question, whether we go back to a normal seasonal pattern in the second half of the year.

Now if we take the two ecosystems, the iOS ecosystem, we see their normal pattern. It's clear the volumes that are going to be shipped are in line with previous years. And we see a ramp in multiple devices supporting that phone ramp.

On the other end for the Android ecosystem, we still see weakness in the second half of the year, specifically because it takes a longer time to replenish or to build the down the existing inventory boats with respect to end products.

as with respect to inventory in the supply chain. So for the full market, not a full return to normal seasonality.

With respect to the latter part of the year we see some first signs that the seasonal pattern on a quarterly basis gets back to a normal seasonal pattern.

Then with respect to the other markets, we saw a bit of inventory corrections in our second quarter.

for automotive and we expect the automotive market in general to stay resilient for the latter part of the year. We have multiple new products in the pipeline, specifically when it comes to applications like ADAS, electrification, I think these markets will continue to be strong. I will be expecting.

So for the other markets, specifically on the computing markets.

a little bit given take in the third quarter because there we see some customers phasing some products out and phasing in new products but overall we believe that for the remaining part of the year we see a good, let's say, basis for a strong business in the second half of the year.

Does it answer your question, Randy?

Yeah, actually maybe this is about the fourth quarter. I think you mentioned on COM. So I guess just overall because it's a good sequential ramp off of second quarter. But fourth quarter I think can swing either way depending the year. But how you see the profile coming off because there's a correction early this year. If you have to do that, you need to improve.

Well, I mean, the Android side is still a little bit uncertain, a rendish, certainly in the latter part of the year. On the other end, we see first signs in the later part of the year and the fourth quarter to go back to normal seasonality. And as you mentioned before,

It can be up a little bit, it can be down a little bit. I think that's what we currently view that we currently have. That's what we are expecting.

Okay, no, that's helpful. In the profitability leverage for the margins, are there inflationary costs that you're dealing with or a mixed shift to system and package with higher material content? Just curious on the margins where some years you're gonna pick up, I think a bit more.

However, the primary reason for that is a product mix shift to the higher material content products. So as we mentioned, the driver for the Q3 increase is communications and advanced SIP is one of the biggest technologies supporting that for the premium tier smartphone launches. And so with that higher proportion of advanced SIP and other advanced products, that's what's relating to, I would say, a higher material content.

We can also use a proof point that advanced SIP for Q2 was even up 12% year over year. So that's the primary reason. There is some seasonal increase in electricity and pricing in Q3. In addition to the higher volume, we do have the summer rates, which together we usually

I just wanted to also focus on, you know, the full picture because gross margin is compressed, as you know, by that material content increase. However, you will see significant increase in the gross profit dollars growing much faster than revenue as well as operating income.

and the bottom line APS for Q3 is growing over 70% sequentially. Great, thanks for the additional color. And for the COA's opportunity or maybe broadly on AI, if you could discuss a bit more of the...

the processing or capability you can provide. And how do you see the revenue opportunity? And it's your lead time where if you get orders it may come in a bit later or do you have capability to ramp up. So if you could just suck a little more on what you're seeing and what capability you can provide to that market.

Yeah, that's a good point. Randy, let me try to comment to that. I mean, Amcarez engaged in two and a half these technologies for multiple devices, multiple customers, already for several years. Currently, we see driven by these adoption of AI.

increase in 2.5D volumes. So we have a certain capacity install base going into next year. We're going to ramp that up. Actually, our current plan is to triple our current volume for 2.5D going into next year.

We do end-to-end processing, so we have a full turnkey process flow. So both the high bandwidth memories and as you see on Interposers and then the on-sopstrait parts combined.

We have a pipeline with multiple customers and we expect that with the adoption of AI in data centers that this technology will become a more broadly adopted assembly technology going forward.

Thanks, Tom.

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Gilles for closing remarks. Okay, thank you. Let me recap the key messages. AMCOR delivered second quarter results in line with our expectations with revenue of $1.46 billion and EPS of 26 cents. We are expecting third quarter performance to improve significantly with revenue of $1.775 billion at the midpoint of guidance, a 22% sequential increase. We are confident that the secular growth drivers in the industry remain in place and will drive growth beyond the current cycle. With our leadership in advanced packaging, a broad geographic footprint, and exposure to industry mega trend.

We are poised to outperform the semiconductor market and accelerate out of this cycle. Thank you for joining the call today. Thank you. And ladies and gentlemen, this concludes today's conference call. You may disconnect.