Earnings Call: Q2 2021

Jul 26, 2021

Day, ladies and gentlemen, and welcome to the Amkor Technology Second Quarter 2021 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 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 Ju, Head of Investor Relations. Thank you, Ms. Ju. Please go ahead. Thank you, operator. Good afternoon, everyone, and thank you for joining us for Amkor's Q2 2021 earnings conference call. Joining me today are Hill Rootin, 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 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 Amkor's 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, our preliminary and final data will be included in our Form 10 Q. And now, I would like to turn the call over to Hill. Thanks, Jennifer. Good afternoon, everyone, and thank you for joining the call today. Today, I will review our Q2 performance and will provide the outlook for the Q3. I will also make a few comments on dynamics in the markets and technologies that Amkor is well positioned for future growth. We delivered solid financial results in the Q2 with an all time quarterly revenue record of $1,410,000,000 above the high end of guidance and an increase of 20% year on year and 6% sequentially. Following a strong Q1, continued momentum resulted in better than expected performance in all end markets, most notably Communications and Consumer, where we saw a sequential increase of 6% and 9%, respectively. High factory utilization for our advanced technology portfolio And continued improvement in our mainstream business resulted in a record second quarter EPS of €0.51 The 6% sequential growth in Communications exceeded our expectations after a strong Q1 in this segment. Year on year, our communications business grew 28%, representing 40% of total quarterly revenue. For the full year of 2021, we expect continued growth in this business driven by the strength in the smartphone market, particularly in 5 gs. With current industry forecast of over 500,000,000 5 gs enabled smartphones to be built this year. EMCOR has a leading position in the 5 gs RF domain. And over recent years, we have established a proven technology portfolio to address the advanced requirements needed to enable 5 gs. With our DSMBGA advanced SiP platform, We have established a preferred advanced packaging solution for this demanding application. EMCOR's industry leading design rules, Dual sided molding technology, conformal shielding, together with in line RF testing, delivered best in class integration levels in a high volume, High Yield Manufacturing Process. We continue to develop technology and manufacturing scale to support our customers in this growing market segment. In the automotive and industrial markets, we achieved another quarterly revenue record. Year on year growth of 33% underlines the recovery in these end markets. Some supply chain constraints, especially in the wafer and substrate supply, dampened even further growth. We continue to see strength in the mainstream part of our automotive portfolio and have received several customer endorsements, especially for the quality and delivery performance in our Philippines factories. In the advanced product part of our portfolio, We ramped several new products in the automotive sensor domain. For radar sensors, we utilized wafer level fan out technology in our cortical factory. Customers are rapidly adopting this technology due to the strict requirements of radar sensors. In addition to the growing sensor market, we also ramped several new products targeting the automotive high power domain, Accelerated by the growth of the EV markets. For the second half of the year, we anticipate the automotive supply chain will gradually improve, resulting in further growth. Beyond the second half, we believe the growth drivers in this market remain in place, And we expect that semiconductor content per car will further increase due to accelerated proliferation of driver assistance electronics and the electrification of more car models. Strength in the consumer markets resulted in a better than expected sequential increase of 9%. We continue to diversify our product and customer portfolio in IoT wearables and ramped several new products in the quarter. We expect this market will be important drivers of growth, and our overall product and customer pipeline for advanced SAP solutions in this domain remains strong. In addition to the wearable market, we also experienced strength in traditional consumer products by gaming, display and video devices, and we expect continued growth going forward. Revenue in the computing market set another quarterly record with sequential growth of 6% and a year on year growth of 21%. We experienced solid performance in all computing applications and the further strengthening of our project pipeline. We are investing in technology and manufacturing scale to capitalize on opportunities across the computing domain, From personal computing to infrastructure and data centers. We see more opportunities in this market in emerging segments like AI and high performance computing and in the changes brought by the ongoing divertericalization in this market. Finally, our test business grew 12% year on year in the Q2 as we broaden the scope of our test services for 5 gs communications and system level testing and expand our test attach rates. To prepare for the volume ramp In the second half of twenty twenty one, our manufacturing organization has expanded cleanroom space and capacity, most notably for advanced packaging in our factories in Korea. Also, we are encouraged by progress in the U. S. On investment policies to incentivize domestic semiconductor manufacturing. The EMCOR team is exploring a possible factory location to align with the investments in the U. S. Supply chain of other major semiconductor companies. During the quarter, we increased our CapEx target for the year to around $775,000,000 partially in anticipation of some initial investments in a new factory location. Other major investments in 2021 are planned for wafer level and flip chip technology, SIP and test capacities as well as facility expansions and specific investments to support our Industry 4.0 program. Now let me turn to our Q3 outlook. We expect significant growth with revenue of $1,700,000,000 at the midpoint of guidance. This would represent a sequential increase of 21% and a year on year increase of 26%. The ongoing short term constraints in the supply chain of materials and equipment are expected to continue into the second half of twenty twenty one, and we are working closely with our suppliers and customers to help mitigate these risks. For full year 2021, We expect growth in all end markets, particularly communications, and we are well positioned to support the continued recovery in automotive. We remain confident in our strong market position and the overall demand environment and expect to outgrow the semiconductor market in 2021. Megan will now provide more detailed financial information. Thank you, Hill, and good afternoon, everyone. Today, I will review our 2nd quarter results and then provide some comments about our 3rd quarter outlook. 2nd quarter sales were better than expected, up 6% from the Q1 to an all time quarterly record of $1,410,000,000 All of our end markets experienced growth this quarter. And as Hill noted, Revenue in both Automotive and Industrial as well as Computing were new quarterly records. Advanced Products revenue grew 17% in the first half of twenty twenty one over the same period last year and represent approximately 70% of our business. Our mainstream products revenue also improved, driven by the recovery in automotive and increased 20% in the first half of twenty twenty one over the same period last year. Advanced SiP products grew double digits sequentially in Q2, primarily in support of the communications and consumer end markets. With strong growth in both Advanced and Mainstream Products, gross margin grew 300 basis points over prior year Q2 to 19.4 percent and gross profit dollars of $273,000,000 is a 2nd quarter record. Material content increased 150 basis points sequentially and costs in support of second half growth Moderately constrained gross margin. Operating expenses for the quarter came in slightly lower than expected at $118,000,000 and operating income margin growth outpaced gross margin expansion, increasing 365 basis points year on year to 11%. Net income for the quarter was $126,000,000 resulting in record Q2 EPS of $0.51 Q2 EBITDA increased over 40% year on year to $295,000,000 and EBITDA margin was 21%. We ended the quarter with $885,000,000 of cash and short term investments and total liquidity of $1,300,000,000 Our solid financial position provides flexibility to continue to invest in growth opportunities. Moving on to our 3rd quarter outlook. We expect revenue to be between 1.6 $5,000,000,000 $1,750,000,000 Gross margin is expected to be between 18.5% 20.5%. Consistent with historical seasonality, Q3 expectations include a significant increase in communications, driven by advanced SiP products. We expect Q3 operating expenses of around $115,000,000 Our plans for controlling OpEx in a significant growth environment are expected to contribute to operating income margin expansion of around 150 basis points. We expect full year effective tax rate to be reduced to around 15% due to discrete tax benefits recognized in the first half of twenty twenty one and favorable foreign currency movements. Q3 net income is expected to be between $150,000,000 $200,000,000 resulting in EPS of $0.60 to $0.80 This would represent over 80% growth in EPS at the midpoint compared to the prior year quarter. We are increasing our planned capital expenditures to $775,000,000 for the year to meet strong second half demand and for initial investments in a new factory location. Our target capital intensity remains in the Hello, teams, and we expect free cash flow for 2021 to exceed prior year free cash flow. 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 our question and answer session. And our first question comes from Hasse Liu with Credit Suisse, please state your question. Hi. This is Angela on behalf of Randy and Congratulations on a great quarter. So if you could give a little more color on What has drove the strength of your 3rd quarter what will be driving the strength of your 3rd quarter sales and about like relative strength and weakness application And your initial view for 4Q? Hi, Angela. Let's just clarify the question. There was a little bit of audio on our side. So I think your question is to add some color With respect to any supply constraints that we might be experiencing heading into the Q3, To perhaps expand by application on those supply constraints and then whether or not we have any comments as it relates To impact in the 4th quarter. Did I capture your question appropriately? Actually, my question is More so around larger drivers of your performance. Okay. So end market drivers. Okay, Angela. Gil, would you like to address the end market drivers? Yes, Angela. Let's try to summarize that. I'm No, the main catalyst for growth is certainly in the Q3 is 5 gs communication, Then IoT, specifically IoT Wearables, generally automotive. And in automotive, we see strength In the driver assistance features and also in the automotive power domain and then, of course, high performance computing in general. But if you look specifically into Q3, we see that the communication market is strong. We expect growth both In the volume of smartphones to be sold in the Q3 as well as an increase in the number of 5 gs Handsets to be sold. Comparing to last year, it is expected that this year, 500,000,000 Smartphone 5 gs enabled handsets will be deployed into the market, which is doubling compared to last year. And that drives A significant semiconductor content, whereas Amcor has a good position In the RF domain, but also in multiple other components in the 5 gs smartphones. So Angela, just to add to Gil's comments to give you some color, our 21% Increase for Q3 at the midpoint. The last 5 years, we've had about 15% Increase. So that significant increase in Q3 we're expecting, as Hill mentioned, is led by communications. Typically, if you look back at our Q3 performance, you'd see around a 30% increase for Communications, and we're Expecting something around 40% for the communications market. Any follow-up questions, Angela? Yes, sure. About your 3rd Q growth margin guidance, You've recently mentioned about some Cost factoring in, can you elaborate upon that? Mid 20 percent margin. Yes. Angela, are you speaking specifically to the Q3 Guide for gross margin or specific to the Q2 actuals? I just wanted to make sure I addressed the right question. Yes, the 3Q guide. Okay. Yes, so our midpoint for the gross margin guide Is flat sequentially, acknowledging revenue is expected to increase 21%. So as you know, gross margin can fluctuate based on utilization or product mix. So advanced SiP revenue is increasing Significantly in Q3, as I mentioned, that is supporting the communications market. And Advanced SiP does have a higher material Content and so that's what impacts product mix. However, our gross profit dollars are projected band around 150 basis points sequentially. EPS is also expected to be up around $0.20 or 40% to a record $0.70 So overall, while the product mix can have an impact on gross margin percentage, Advanced SIP is profitable, generating good results and cash flow. And follow-up Around your SIP pipeline, can you give an update of your SIP pipeline, the revenue expectation For the full year, and do you see it growing, capturing multi sourcing And some of the consumer audio products. Thanks, Angela. Let me try to answer that Good question. I think with respect to our SiP pipeline, as we already mentioned earlier, we have a strong pipeline, Both in the Communications segment as well as in the Consumer segment. For Communications, we see healthy growth in the 3rd quarter. And of course, we don't guide for the full year, but we expect that to extend in the 4th quarter also. 4th, the consumer managed markets, we are ramping up several new products in the 2nd quarter as well as in the Q3. And we see continued strength there, proliferating in multiple products as well as in multiple customers there. So going forward, we expect SiP to be an important product part of our product portfolio in EMCOR Where it goes from starting with communication, it extends into the consumer market as well as in the automotive and to computing markets. Any further questions to ask? Yes. Thank you. On lead times, are your lead time running normal for Assembly and Test and how are your lead times now for getting additional equipment? Okay, Angela. In the supply chain, we are experiencing several challenges. One is in the lead time Of equipment, new equipment, we saw over the last 6 to 8 months, lead times actually doubling. But overall, we were able to install the capacity that we required for our ramp in the Q3. So although that lead times are extending, we don't see that as a bottleneck for the second half of this year. We share already in anticipation of these lead times. We in selective areas ordering equipment for the following year. Now if we look to the lead time for our manufacturing process, these lead times are not changed. We don't see an extension there. We start our manufacturing process when we have all the materials available, and then the our manufacturing lead time is unchanged. And that's Extreme lead time is unchanged, and that holds both for assembly as well as tests. Of course, besides equipment, We see more challenges in the supply chain for materials specifically, Where we see significant challenges for substrates and lead frames in different parts of the market. For the 2nd and third quarter, we're able to work with our suppliers and customers to deliver on our forecast. However, we see a challenge to support further upsides. Great. And next, regarding the industry Full billing data. So the billings are at a record high and You worry some investors. So how do you see the industry respond? And do you have any concern on Reversal to oversupply and do you negotiate with your customers on Okay. Thanks, Angela. Let me start with the second part of your question is the agreements that we have with our customers. In the current market conditions, we see several agreements with our customers that go beyond our regular Agreements that we have, and they range from prepayments to minimum loading agreements in critical areas where we see Significant increases, and customers are willing to support these changing commercial terms and work with us. Then go back to your first part of the question that was very much related to billings in the equipment industries. And this is indeed a very strong year for the equipment industry. We see significant installation Of new capacity in the course of this year, the way that we look at this is very much that in 2020, We saw a significant moderation in the installed capacity due to the COVID situation. So I see 2021 A bit of a catch up per year where there is higher investments. That will continue. Of course, the industry is expected to grow, What I see this year very much as a catch up year versus a moderate 2020 investment year. When it comes to the lead times for Critical Equipment, we're working with our suppliers there To assure that we have a forecast for 2022 in such a way that our suppliers Can preempt the volumes that they need to build for us next year. And we are confident that We are able to also support our customers in the coming year. Does that answer your question, Angela? Yes. Thank you so much. Thank you. And our next question comes from Art Winston with Pilot Advisors. Please state your question. Thank you and congratulations on such a Great quarter for shareholders. My first question, Real, is, would you anticipate if you forget seasonality That the 5 gs business will continue to grow from this level or would you anticipate it should flatten out going forward? Yes, that's a good question. I mean, we see the transition from 4 gs to 5 gs continue for the next 2 to 3 years. This year is expected 500,000,000 handsets being built with 5 gs capability, Which is about 40% of the total handset market. We expect that to grow in 2022 to something like 65% to 70%. And then the years after, it will gradually move to a higher percentage. The overall smartphone market, if you take the overall volume, it grows It's mid single digits percentages this year, and we expect, let's say, a moderate growth going forward. We saw some of the critical markets like, for example, the India market holding back a bit in the Q2, but we expect that to recover So that's what we see over the next 2 years, continued growth in 5 gs. We have a strong footprint there, And that is a strong growth driver for EMCOR going forward. Good. In terms of Capacity utilization, are we bumping up against utilization any place like Korea or some place where it fully utilized? Well, we installed significant incremental capacity actually In the Q2, to prepare for the Q3 ramp, currently, our lines are highly utilized. We see still some utilization improvement possibilities in our Japan factory, for example. But generally, in the 3rd Q4, we are close to fully utilized. And we also expect this year To be close to fully utilized in the 3rd Q4. Wow, okay. Have you picked out a location in the United States? And if so, what do you think the whole project will cost when you're finished up with it? Well, we're watching closely the activities in the U. S. With establishing a semiconductor manufacturing supply chain, of course, we are encouraged To see the passage of the chips for American Funding, Amcor is uniquely positioned to be an OSAT in the U. S. We are a U. S.-based The company should be headquartered in Tempe, Arizona. Of course, with respect to the U. S. Cost structure as compared To the Asian cost structure, we are very currently working with federal, state and local jurisdictions To really understand the incentives that could become available to build a competitive Supply chain in the U. S. I mean, currently, we are actively exploring and evaluating potential sites for U. S. Facilities and to bring that up in line with other investments in the supply chain To be able to support our customers in the U. S. But nothing has been signed so far? You have a question? Yes. No, but we're zooming in to a few possible locations, And we expect to finalize this in the next phase. Okay. My last question is on A couple of older conference calls you alluded to going into sort of more high technology testing and And emphasizing testing going forward, but you're really not talking about very much so. Is that is testing growth in the cards for the future? Well, Tes, let me step back here to create a perspective. I think turnkey Services for EMCOR is important, and turnkey basically includes bumping, probing, assembly and final test. So testing is an integral part of our offering, and we're investing significantly to expand Our test capability and capacity, very specifically in the 5 gs domain, Where 5 gs testing is a new technology area where we started to invest in about 2 years ago, And we now have significant volume capability in place in our Korea facility. Okay. Well, thanks and thanks for the results as well. Okay. Appreciate that. Thank you. And at this time, I'm showing no further questions. I would like to turn the call back over to Hill for closing remarks. Thank you. Okay. Thank you. Before closing the call, I would like to recap our key messages. For the Q2 of 2021, we delivered all record revenue of $1,410,000,000 and a record second quarter EPS of $0.51 For the Q3, we expect robust year on year growth of 26% with revenue of $1,700,000,000 Supply chain constraints are expected to continue in the second half of this year, with gradual recovery occurring through the 1st part of next year. We are working closely with our customers and suppliers to help mitigate risks from these ongoing constraints. The main catalysts for growth are 5 gs, IoT, automotive and high performance computing. And with EMCOR's position in these key markets, we expect to outgrow the semiconductor market in 2021. And last but not least, I would like to thank The global EMCOR team for delivering another great quarter. Thank you for joining the call today. Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.