Amkor Technology - Earnings Call - Q1 2020

Transcript

Speaker 0

Good day, ladies and gentlemen, and welcome to the EMCORE Technology First Quarter twenty twenty Earnings Conference Call. My name is Chris, and I'll be your conference facilitator today. Mode. After the speakers' remarks, we will conduct a question and answer session. As a reminder, this conference is being recorded.

I would

Speaker 1

now like to turn

Speaker 0

the call over to Vincent Keenan, Vice President, Investor Relations. Mr. Keenan, please go ahead.

Speaker 2

Thank you, Chris. Good afternoon, everyone, and thank you for joining us for Amcor's first quarter twenty twenty earnings conference call. Joining me today are Steve Kelley, our Chief Executive Officer and Megan Faust, our Chief Financial Officer. Our earnings press release was filed with the SEC 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 Amcor's future performance based on the environment as we currently see it. Of course, actual results could be different. 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 Steve.

Speaker 1

Good afternoon. Thanks for joining the call. Today, I'll review our first quarter performance and our second quarter outlook. During today's call, I'll also discuss how we dealt with the coronavirus in the first quarter and how we expect it to affect our business in the second quarter. Fundamentally, we believe that the virus, while impacting near term demand, will not have a significant negative impact on the medium or long term growth of the semiconductor industry.

We expect the market's secular growth drivers, including high performance computing, five gs and digital automotive to remain intact. And we are well positioned for growth. We believe that our long term strategy to achieve balanced revenue growth by delivering an unmatched combination of technology, quality, execution and service will continue to deliver value to our customers and to our shareholders. Now on to the first quarter results. We just completed the best first quarter in Amcor's history, largely due to strong demand for advanced packaging in the consumer and communications markets.

Revenue grew nearly 30% year on year to a first quarter record of $1,150,000,000 In response to the virus, we implemented new hygiene, health monitoring, and people density protocols throughout our factory network. These protocols have kept our employees safe and allowed us to maintain a high operating tempo. In a challenging environment, our manufacturing team's execution has been and continues to be exceptional. Our most significant virus related supply issues began late in the first quarter after governments in The Philippines and Malaysia imposed restrictions on the movement of people, including our employees. These restrictions constrained factory output during the last two weeks of March and the April.

The good news is that the output from our factories in The Philippines and Malaysia has largely recovered. Our teams in both countries have done an excellent job bringing our 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 SiP revenue in the quarter more than doubled year on year. Amkor's Advanced SiP technology, quality and yield performance match up nicely with the needs of our customers. From a business standpoint, we believe that advanced SiP manufacturing is a solid long term growth engine for the company with good cash flow and moderate capital investment requirements. Amkor has long been a leading supplier of advanced SiP modules for smartphones, including RF front end modules for four gs and five gs phones. We built on that expertise to establish a leadership position in antenna and package modules, which ramped to volume in the first quarter.

Amkor's advanced SiP technology is also being used by automotive and consumer customers who benefit from our longtime experience building high yield, high quality modules. And all of our customers have access to Amcor's advanced SiP toolkit, which includes double sided assembly, advanced RDL 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.

In our advanced packaging factories, which account for more than 60% of our revenue, overall demand has stayed reasonably strong. Supply constraints have been minimal. In our 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 that near term demand is expected to weaken as a result of the coronavirus. Our estimate of the impact of these virus related demand reductions is included in our second quarter forecast.

At the midpoint, we believe second quarter revenue will be up about 17% year on year and down about nine percent sequentially. As I said before, we see the coronavirus as a near term challenge for the semiconductor industry and for Amkor. Our medium term and 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 in each of the past five years in both up years and down years.

As a result, we now have the strongest balance sheet in Amkor's history with roughly $1,000,000,000 in cash and around $500,000,000 in net debt. Megan will now provide more detailed financial information.

Speaker 3

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 $1,150,000,000 Revenue was only 2% lower than Q4 twenty nineteen, primarily due to continued strength in the consumer market and in mobile communication. Q1 gross margin of 16.4% was nearly 300 basis points higher than the prior year quarter. Gross margin reflects a change in product mix to higher bill of materials packages like advanced SiP and flip chip.

Operating expenses were around $5,000,000 lower than expected. 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 disciplined discretionary spending resulted in operating income of $85,000,000 Operating margin increased 600 basis points from the prior year quarter to 7.3%. Net income for the quarter was $64,000,000 and earnings per diluted share was $0.26 a significant improvement over the loss in the year ago quarter. This represents the best profitability for our first quarter in the last ten years.

EBITDA increased over 35% from the year ago quarter to $210,000,000 and EBITDA margin was 18.2%. Moving to our second quarter outlook, we expect revenue to be between $1,000,000,000 and $1,100,000,000 Gross margin is expected to be between 9.513.5%, reflecting changes in product mix. We widened our guidance range this quarter as the current macroeconomic environment has made it more difficult to predict end market demand. Our guidance also includes estimates for incremental costs for labor and other supplies we expect to incur for virus containment action. We expect Q2 operating expenses of around $105,000,000 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 $32,000,000 or zero one three dollars per share to net income of $19,000,000 or $08 per share. Our 2020 forecast for capital expenditures remains at $550,000,000 Our investment plan focuses on strategic growth areas, primarily capability and capacity in advanced SiP, flip chip and fan out technologies. Our capital spend in the first quarter was relatively light, which gives us flexibility to push some CapEx into 2021 should macroeconomic conditions worsen. Moving on to 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 $200,000,000 from available credit facilities and revolvers. While we have no immediate need for these funds, we felt it prudent to access these credit lines to ensure we have available liquidity and flexibility in the event macroeconomic conditions worsen. As a result, we ended the quarter with $1,000,000,000 of cash and short term investments. In addition, our net debt of $513,000,000 is the lowest it has been in over twenty years.

This strong financial position is 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 the top priority. You can see the impact of that focus in our 2019 performance. Even as our revenue declined 6% in 2019 due to the industry inventory correction, we generated over $100,000,000 of 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 are also able to strategically invest for medium and long term growth. With that, we will now open the call up for your questions. Operator?

Speaker 0

Thank And our first question comes from the line of Randy Abrams with Credit Suisse. Your line is now open.

Speaker 4

Okay. Yes, thank you and, yes, good evening. Wanted to ask the first question, if you could comment on the second quarter, guidance, just a bit more details on it. I'm curious across the different segments, how the demand is faring. And if you could also discuss, it seems like the foundries are still guiding a bit of resilience.

And maybe if you could talk a bit the trends, some of it might be timing when they're reported, but there's some difference in your seasonal profile relative to some of the foundry outlook, which seems resilient to date, but advising there might be adjustments later.

Speaker 1

Sure. Let me just give you a little background into our Q2 forecast and I'll address your specific questions Randy. First part of our forecast thinking was to look at April 1 because that's in the books. And what I can say about April is that our actual shipments are on par with our Q1 run rate. So we start with that.

But we also know that there are a lot of things happening in the end markets that will lead to contraction. So we polled our customers about their views on demand in May and June. So many of those customers indicated that there were changes that were imminent. So we basically rolled up those imminent changes and came up with our forecast for Q2. Most of the impact, to answer your first question, is in three segments.

First is automotive. The second is communications. And the third would be industrial. So 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 because there's a fair amount of uncertainty in Q2, you know, more than the average quarter. That's how we ended up with a $50,000,000 swing on either side of the midpoint. To answer your final question about the foundries and OSATs. The I think the biggest difference with the foundries is their lead time. Typically a lead time at an OSAT like Amcor is let's say two weeks, maybe three weeks depending on the complexity of the product.

Whereas the foundries it could be anywhere from two months to four or five months. So I think it takes a while for demand perturbations to filter up the chain.

Speaker 4

Okay. No, that's helpful. And if you could talk, Megan, I think you mentioned mix changes in the gross margins. If you could discuss what some of the shifts are going on, to impact the gross margin, guidance?

Speaker 3

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 bit of pressure on the gross margin percentage. That would really relate to the pro rata amount of our higher bill material cost products like advanced SiP. To just come back to the general material percent issue which is what drives that, you know, SiP has grown significantly. And as Steve mentioned it's more than doubled from a year ago quarter.

So this is our fastest growing technology at Amcor and it's actually been very beneficial as you've seen in our Q4 record revenue and $0.40 EPS as well as the record Q1 revenue at $0.26 So Q4 and Q1 show that although higher bill of material cost products like Advanced SiP exist and while they're 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.

Speaker 4

Okay. If I could follow-up on the advanced SiP maybe if you could talk pipeline, if you expect the consumer product, to, I guess, continue its ramp up and how you see the pipeline for additional projects. And then if you could talk about AIP where you're in volume, if you expect, a kinda normal ramp up or or additional ramp up of volume, towards second half with some of the flagship phone launches.

Speaker 1

Sure. Let me just take them one at a time, Randy. So on the consumer products, we see that holding steady, getting stronger throughout 2020. So we like what we have today and we like what we see in the pipeline on consumer. You know in general for SiP we like our backlog of projects.

And to that end you know, we're actually adding on to our factory called K4 in Korea, which is our primary center of excellence for SiP manufacturing. So we're expanding floor space and expanding our capabilities there. We're also fitting out an additional module in our new K5 factory in Incheon, Korea, specifically for advanced SiP. So we're bullish on SiP moving forward. With regards to AIP, the antenna and package module, you know, we ramped well.

We did a nice ramp in Q1. I would say we'll have to wait and see how the market develops, particularly in the millimeter wave segment. But we're ready to dissatisfy whatever the customer needs are moving forward.

Speaker 4

Great. If I can do 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. If you could discuss a bit implications on second half where you normally get the seasonal ramp. I know it's early, but if if you believe this correction might be kinda multi quarter where you get the seasonal ramp, there's some talk also about potentially some of the flagship launches 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 I noticed you're holding the CapEx. So does it also tie to some of the views on on some of these projects moving ahead?

Speaker 1

Yeah. We are holding the CapEx because we are optimistic about the demand in the second half of this year and also, about the fact that our content's going up, particularly in smartphone and automotive and high performance computing. So going back to your first question which is the second half and really 2020. Obviously we started strong in Q1. We're going through some near term demand issues in Q2 connected with the coronavirus.

What I think we're going to see is in the second half probably a few things that will catalyze a recovery. The first is the launch of flagship phones. The second is the release of some pent up consumer demand. And third is I think we'll see a recovery in the automotive market. And I think we're going to exit 2020 at a very high operating tempo.

So we think 2021 is going to be a banner year for Amcor. The other thing I think it's important to keep in mind for 2020 is we just spent the better part of eighteen months going through an inventory correction. You know, we started this correction back in 2018 as an industry. And it was a long process, you know, better part of six quarters. So going into this coronavirus demand perturbation, there's not a lot of excess inventory out there.

And so what that generally means is when you recover, at least in the chip industry, we should recover fairly quickly.

Speaker 4

Okay. Great. No. I appreciate that. And if you could discuss if there's any timing delay or or schedule shift or or at least from the semiconductor perspective, it's a pretty normal timetable at this stage.

Speaker 1

Are you referring to the flagship phones?

Speaker 4

Yeah. For the flagship phones.

Speaker 1

You know, it's really difficult for us to pin that down, but we think it's definitely happening in the second half. I don't know exactly when. So we just respond to the inputs we get from our customers and we follow their lead.

Speaker 4

Okay, great. Thanks a lot Steve and Megan.

Speaker 0

Thank you. And our next question comes from the line of Tianjin Golener Your line is now open.

Speaker 5

Hi, yes. Thank you, Steve and Megan, and congrats on the strong quarter. I just have a first clarification then maybe a follow-up. The clarification is, I think, Steve, you mentioned you know all the facilities are running at a full capacity now right? Is that correct?

Speaker 1

No. No we're definitely not running at full capacity. I think we're running very good rates in some of our more advanced factories. So what we saw in Q1 is lot of demand for advanced packages, in particular system and package products. So on those lines we're 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 segment, we have a lot of room for growth within our installed capacity.

Speaker 5

Okay. That's clear. Thank you. And the next one would be on the CapEx because you said, of we would be holding some packs for the second half, maybe even for 2021. And I remember in the last quarter, Megan also mentioned about over 60% would be invested in advanced packaging.

I'm wondering if we hold off some CapEx, which part of it be kind of mostly impacted?

Speaker 1

Yes. So CapEx, again, we're keeping our guide at $550,000,000 spend for 2020. And you're right, last earnings call we guided roughly 60% for Advanced Packaging, 30% for other things like facilities, R and D, quality improvement, IT and then 10% for wire bond essentially. That's the split. And that remains the split.

I think your question is more do we have any flexibility to push that to 2021, some of it? And the answer is yes. But at this point, we don't think we need to do that because we're expecting a reasonably robust recovery in the second half. If that expectation changes, we do have the flexibility to push part of that $550,000,000 in CapEx spending into next year.

Speaker 5

Okay. Thank you. That's all from me.

Speaker 0

Thank you. And our next question comes from the line of Sidney Ho with Deutsche Bank. Your line is now open.

Speaker 6

Thanks for taking my questions. I have a few. First of all, the Q2 guidance down 9% for revenue, how much revenue impact are you assuming in your guidance related specifically to supply constraints? And kind of related to that in terms of gross margin you talk about incremental cost in supply and incremental costs related to virus containing. Can you quantify that headwind that may reverse in the following quarter?

Speaker 1

Yes. Let me take the supply constraints question and I'll let Meaghan answer the incremental cost question. But to answer your question on Q2 supply constraints will probably cost us around $20,000,000 in revenue. And most of that is because of the constraints we had in Malaysia and The Philippines in the April. But today we're pretty much recovered from that.

You know there are shortages of things but they're the normal things like substrates and capacitors and things. And I would not classify them as major constraints for us in Q2.

Speaker 3

And then Sydney your question regarding the incremental costs. 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're recurring in Q2.

Speaker 0

Thank you. And our next question comes from the line of Krish Sankar with Cowen and Company. Your line is now open.

Speaker 7

Yes, hi. Thanks for taking my question. Steve and Megan, had a couple of them. Number one, Steve, you said that you expect auto to recover in the second half. Is that what your customers are saying?

Is it more a function of given the fact that auto has been so weak, we expect kind of a cyclical rebound? Kind of curious on that. And then I had a couple of more follow ups.

Speaker 1

Yes. So in automotive, obviously there's been a lot of commentary about the automotive market. What gives me reason for optimism? Basically what I see first is our position in the automotive market. So we're very strong in the digital parts of the automotive that require advanced packaging, whether it's SiP or flip chip or some variant thereof.

And so what we're seeing is that technology migrating quickly into the midrange vehicles. So not just the high end but also the midrange. And so we have a very good market share there. And we expect to benefit disproportionately as the car making resumes. The other points that give me reason to be optimistic about automotive is in the past if you take a look at what happened during the last chalk, 2009, you know there were considered government efforts to sell and to incentivize people to buy cars.

I think that will likely happen again. I think the car makers know how to sell cars. They've been able to cut deals to incentivize people to buy cars. And finally I believe that personal cars assuming social distancing remains a thing, you know personal cars are a great way to control your environment. So I think you'll see a resurgence in enthusiasm for personal cars.

Speaker 7

Got got it. That's very helpful, Steve. And then just a quick question on the smartphone communication segment for you. How do you envision that in the second half? You did say that some of the flagship phones might still be on target, so it should improve.

So is it fair to assume that you're kind of going through a slow patch now and it should improve into the second half? Or how should we think of that segment exposure?

Speaker 1

I think you're roughly right. You know, I think these phones are always seasonal, right? And it won't be different this year. What's different for us is our content continues to go up in these flagship phones. And with the advent of five gs, you know, the content comes up even faster.

So we're pretty happy with our market share in the advanced phones. And we're also happy with seeing a lot of the features migrate into the mid range. Similar phenomena to what we see happening in automotive. So we know that the next wave of phones will come out in the second half of this year. And we're looking forward to supporting those production ramps.

Speaker 7

Got it, got it. And then a final question for Megan. You spoke about CapEx and thanks for the color on that. If you do have to push out CapEx into 2021 because of a weaker macro in the second half, would it be the WildBonder CapEx? Would it be advanced packaging?

Or would it be across the board?

Speaker 3

Yes, it's really going to be dependent upon what the demand environment looks like but it could be broad across the board.

Speaker 7

Got it. Thanks a lot. Thank you Steve. Thank you Megan.

Speaker 1

Thank you.

Speaker 0

And we do have one follow-up question from the line of Sidney Ho with Deutsche Bank. Your line is now open.

Speaker 6

Thanks for letting me ask the question again. I was on mute when I asked the follow-up. So here they are. So the first follow-up is on the automotive side. I know Chris just asked about this.

But given production facilities for most of the automakers worldwide are still mostly shut down at this point, what are your thoughts on that business this year? I think in the past you talked about that business growing 10% a year kind of run rate. And maybe remind us what the geographical mix for that business is?

Speaker 1

Yes. I think it's a mixed picture depending on what region of the world you're talking about as far as status of the factories whether it's China or Europe or The 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 our lumps in the first half in the automotive market. We saw a downdraft in Q1. We're seeing a further downdraft in Q2. So I think that's why I'm 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'll be able to do that.

Speaker 6

Okay. That's fair. My last question is you answered this a little bit earlier in the Q and A. But TSMC talked about the semiconductor market ex memory being flat to down slightly this year. If I compare that to you guys, if we strip out just maybe the large consumer SiP project that you guys are working on, is that a right range to think about your business for the full year?

Maybe you can give us some reference to think about the second half will be great.

Speaker 1

Yes, Cindy, we really haven't revised or taken a look at the second half yet. We're dealing with so much near term uncertainty. We're taking it one quarter at a time.

Speaker 6

Okay. That's all I have. Thanks.

Speaker 1

Thanks, Cindy. Thank you. We do have Thanks,

Speaker 0

Chris. Thank you.

Speaker 1

Oh, I'm sorry. Is there one more question?

Speaker 2

Yes. We do

Speaker 0

have one more question from the line of Anna Goskow with Bank of America. Your line is now open.

Speaker 3

Hi, great. Thank you very much.

Speaker 8

So Megan, you mentioned that you drew on some credit facilities to enhance the cash balance and you do have a lot of cash at $1,000,000,000 So wondering if you could just provide more kind of thought about your rationale for maintaining that amount of cash? Secondly, as it seems like you're potentially making sure you're covered in a downside scenario, in addition to scaling back CapEx, what would be your 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 the credit facility side?

Speaker 3

Sure Anna. I'll take I'll take probably the last one first. We do not have any significant covenants in our debt facilities so that an easy one. With respect to the cash balance we did, you know, out of an abundance of caution really, you know, not that especially with Steve's remarks we don't see an imminent need but we thought would the potential for a worsening environment to take those actions. We'll continue to evaluate those cash levels 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 we felt that this just was this level of conservatism was prudent. So with respect to your other question about what levers we could pull in addition to CapEx and how we'll ensure that we maintain positive free cash flow. I'll note to you in 2019 we were under pressure in that environment and we were able to successfully reduce costs to ensure that we preserved cash flow and even generated over $100,000,000 in cash flow. And that was through, you know, reducing incentive comp, reducing discretionary spend and just being disciplined about how exercise those.

So with respect to cash burn etcetera we'll keep our eye on that. And as any demand weakens we'll take actions as needed.

Speaker 8

Okay. Okay great. Thank you. That's helpful.

Speaker 0

Thank you.

Speaker 2

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. I would like

Speaker 1

to recap our key messages. First, we just completed the strongest first quarter in Amcor's history with revenue, operating margin and EPS all at the high end of expectations. We dealt effectively with the coronavirus in the first quarter, keeping employees safe while maintaining solid production output. In the near term, we will navigate through the impact of the virus on demand. And in the medium and long term, we are very well positioned to grow revenues and profits in all of our target markets.

Thank you for joining the call today.

Speaker 0

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.