Amkor Technology, Inc.

Thank you. Good afternoon, everyone, and thank you for joining us for AMCOR's second quarter 2020 earnings conference call. Joining me today are Hiel Rutten, 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 US 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 Hiel.

Thanks, Vince. Good afternoon, everyone. I'm pleased to be with you on my first call as President and CEO of MCOR. On today's call, I plan to share some of my background with you and we'll discuss the important markets and products where I believe MCOR is well positioned for growth. I will also cover our second quarter results and expectations for the third quarter. I joined Emcor in 2014 and was the leader of our advanced product business for more than five years. During that time, the advanced product business grew by close to 50% on the strength of wafer level, flip chip, and advanced SIP technology for communications, computing, and consumer end markets. I worked closely with the lead customers to introduce and ramp these technologies and manufacturing solutions. Prior to joining mCore, I served in a variety of senior management positions with companies in the semiconductor and electronics industry throughout Europe, Asia, and the U.S., including NXP and Philips. Over the past month, I spent a lot of time with customers and suppliers, as well as with our factories, sales, and business teams. Their feedback only reinforces my view that Emcor has the combination of key technologies, a highly skilled manufacturing base, and deep customer relations necessary to expand and strengthen our leadership position as a trusted partner in the semiconductor supply chain. Going forward, I see significant growth opportunities for mCore in emerging growth segments like 5G communication, high-performance computing, IoT wearables, and automotive electronics. These markets will continue to drive innovation in technology and manufacturing expertise in the OSEP domain. The breadth and diversity of mCore's technology portfolio Manufacturing Scale and Footprint, together with its broad customer base and support structure, positions the company very well to serve our customers in these high growth areas. Before we move to our recent results, I would like to update you on our progress responding to the coronavirus. Across our factory network, We continued to keep measures in place to contain the impact of COVID-19. We were able to avoid significant disruptions in our factories, and our purchasing team has been able to mitigate supply chain impact on component and materials supply. Our robust IT infrastructure has allowed employees to transition to a work-from-home environment while maintaining high levels of Customer Service. Now let's turn to the second quarter results. Continued strong demand in the communications and consumer end markets resulted in another quarterly revenue record. Revenue increased 31% year over year. Broad-based demand drove both revenue and profitability above the high end of expectations. When combined with the strong first quarter results, We generated nearly 50 cents of EPS in the first half of 2020 while strengthening our balance sheet. Communications experienced better than expected revenue across all ecosystems and major customers. Although we expect overall smartphone units to decline in 2020, in the first half, we experienced growth in our 4G products as well as a steady ramp of 5G products, including RF frontends, modems, sensors, and AIPs. Computing, which grew 13% both sequentially and year over year, also exceeded expectation in all applications, including data center, infrastructure, storage, and PC laptops. Our memory business has shown steady growth with over 15% sequentially and over 35% year-over-year in the second quarter. NAND flash memory business remains a growing portion of our portfolio, and we are well-positioned to capture growth in both the communication and the computing markets. Consumer wearables continue the four-quarter trend of both sequential and year-over-year growth. Customers increasingly choose MCOR's advanced SIP technology. Combined with our strong engineering support and high-volume manufacturing, it delivers industry-leading quality and yields. Finally, our test business grew 5% sequentially and 25% year-over-year as we continue a multi-quarter trend of increasing test attach rates. The strong first half revenue performance was driven by our advanced product portfolio. This resulted in a higher level of utilization of our flip chip and wafer level production lines as compared to the first half of 2019 during the inventory correction. Advanced SIP, where we have been adding capacity for the past four quarters, had some of the highest utilization rates in the company, driven by new RF AIP, and Wearable Products. The one area where our utilization rates declined this quarter is in our lead frame and wire bond lines. The recent weakness in automotive has reduced utilization in these factories. Over 40% of our lead frame and wire bond business is tied to the automotive and industrial end markets. Our factory team did an excellent job to secure supply to our customers under current difficult conditions. Also, the quality performance across factories in the second quarter of 2020 was at its best level for the last three years, resulting in several positive endorsements from our customers. While the semiconductor supply chain has responded very well to the coronavirus challenges, we are still dealing with an environment of dynamic forecast changes as customers try to balance limited visibility with inventory levels in their supply chain. With a robust product pipeline, we expect to maintain our capex budget at 550 million this year with investments focused on capacity and capability and quality improvements. Major investments include advanced SAP and test capacity and capability, as well as quality enhancement through automation. Turning to our third quarter outlook. While there is macroeconomics uncertainty related to the pandemic, we are expecting Q3 revenue to grow 6.5% sequentially and 15% year over year at the midpoint of the guidance. The launch of flagship smartphones, including more 5G models, and many more. We have a strong footprint is expected to drive this growth along with consumer wearables. Automotive business is expected to show continued weakness with further revenue declines in the automotive supply chain, particularly in Japan. Automotive customers tell us that Q3 will be likely the trough quarter with slow recovery in Q4 and the first half of 2021. In closing, We have a strong position in the key growth areas for semiconductor packaging and test services. And I'm confident in MCOR's future and our long-term prospects for revenue growth and sustained profitability and positive cash flows. Megan will now provide more detailed financial information.

Thank you, Gil, and good afternoon, everyone. Today I will review our second quarter results and then provide some comments on our third quarter outlook. We delivered a third consecutive quarterly revenue record as revenue rose 2% sequentially and 31% year-over-year to $1.17 billion. Through the first six months of 2020, revenue is up 30% from 2019 and operating income margin increased 530 basis points. Q2 gross margin of 16.4% was flat with the first quarter and expanded 260 basis points from the prior year quarter. Gross margin was dampened by the ongoing shift in product mix to higher bill of materials packages like advanced SIP and low utilization of certain mainstream production lines as a result of weakness in the automotive market. Operating expenses were flat sequentially and also flat year over year after adjusting for the $3 million gain in Q2 2019 for the sale of real estate. Our strong revenue performance and disciplined spending Thank you. Our focus on free cash flow has resulted in more consistent cash generation, We delivered free cash flow for five consecutive years through 2019. With our strong performance in the first half of 2020 and expected growth in Q3, we are well positioned to deliver a sixth year of positive free cash flow. This financial flexibility has allowed us to de-lever over the last five years. We ended the quarter with $1.4 billion of total liquidity, which consisted of $1.1 billion of cash and short-term investments and $300 million of availability under our debt facilities. Since 2015, we have reduced net debt by $610 million and net debt now stands at $450 million, the lowest in the company's history. Moving to the outlook. As a reminder, we widened our guidance range for the second quarter, given the level of uncertainty related to the overall macroeconomic environment, and we are maintaining the wider range for the third quarter outlook. We expect revenue to be between $1.2 billion and $1.3 billion. Gross margin is expected to be between 15% and 18%. This reflects the expected shift in product mix. to hire bill of materials packages for advanced SIP products supporting communications and consumer markets. We expect Q3 operating expenses of around $110 million, which includes approximately $10 million for restructuring costs in Japan. Our Japan restructuring initiative includes a streamlining of operations and the closure of one factory. We expect to substantially complete these activities by the end of this year. This restructuring will have a quick payback and is expected to reduce fixed costs by approximately $25 million, half of which we expect to benefit from in 2020. We expect our annual effective tax rate to be around 20%. We expect net income to be in the range of $42 million to $85 million. and earnings per share to be in the range of 17 to 35 cents. Our 2020 forecast for capital expenditures remains at $550 million. As Hill stated earlier, we believe that the mid- and long-term growth drivers for the semiconductor industry remain intact. The combination of a broad technology portfolio, a global manufacturing footprint, and a trusted customer base, together with a strong balance sheet, form a solid foundation for profitable growth in 2020 and beyond. With that, we will now open the call-up for your questions. Operator?