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spk03: Good day, ladies and gentlemen, and welcome to the Amcor Technology Third Quarter 2021 Earnings Conference Call. My name is Hillary, 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 Ju, Head of Investor Relations. Ms. Ju, please go ahead.
spk01: Thank you, Operator. Good afternoon, everyone, and thank you for joining us for AMCOR's third quarter 2021 earnings conference call. Joining me today are Phil 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 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 US GAAP equivalent on our website. 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. 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 Gil.
spk06: Thanks, Jennifer. Good afternoon, everyone, and thank you for joining the call today. We delivered outstanding financial results in the third quarter with record revenue of $1.68 billion and record profitability. Strong execution, high factory utilization, and controlled spending resulted in record quarterly EPS of 74 cents. When combined with the strong first half results, we generated $1.74 of EPS in the first three quarters. doubling last year performance in the same period. Revenue was up 24 percent year-on-year, and 20 percent sequential growth comes on top of an excellent second quarter. Continued momentum drove record performance in all end markets, most notably in communications and consumer, where we saw sequential revenue increases of 28 percent and 22 percent, respectively. Our communication business grew 24 percent year-on-year, representing 43 percent of total quarterly revenue. The main driver for growth here is the strength in the smartphone market, particularly in 5G, with current industry forecasts of nearly 500 million 5G-enabled smartphones to be built this year. We expect 5G to remain an important growth driver, and we continue to invest in technology and manufacturing scale to support our customers in these growing markets. In the automotive and industrial market, we achieved another quarterly revenue record, with sequential growth of 9% and year-on-year growth of 42%. The growth underlines a strong recovery in this market, although supply chain constraints, especially in wavefront substrate supply, dampen further growth. The strong recovery of our automotive business is mainly due to significant ramps of new products in this domain. particularly supporting the rapid proliferation of ADAS functionality and the accelerated electrification of car models. EMCO is well positioned to support these innovations with a solid technology portfolio and an established automotive qualified manufacturing base. In ADAS, we are ramping the assembly of the latest generation processors using our advanced flip chip technology and the portfolio of radar and optical sensors using wafer-level fan-out technology. For electrical vehicles, we are enabling the assembly of high-power silicon carbide devices in our Japan factories, utilizing unique wire-bound and lead-frame technology. Although we foresee some short-term and mid-term constraints in the automotive supply chain, we believe the long-term growth drivers in this market remain in place. resulting in the continued expansion of semiconductor content of cars. Market forecasts show growth rates in the automotive market that exceed the average semiconductor industry growth. Strength in the consumer market resulted in a better-than-expected sequential increase of 22 percent. We continue to diversify our product and customer portfolio in IoT wearables. and we ramped several new products in the third quarter. We expect this market to be an important driver of growth, and our overall product and customer pipeline for advanced SIP solutions in this sector remains strong. Revenue in the computing market set another quarterly record, with sequential growth of 9% and year-on-year growth of 28%. Further upside was tempered by constraints in material supply, especially high-end substrate materials. During the quarter, we experienced solid performance in all computing applications and a further strengthening of our project pipeline. We continue to invest in technology and manufacturing scale to capitalize on opportunities in emerging segments, like AI and high-performance computing. Finally, our test business grew 19% year-on-year in the third quarter, to a record $225 million as we broaden the scope of our test services for 5G communications and system level testing. Our manufacturing organization did an excellent job managing the steep production ramp in the third quarter, most notably for advanced packaging in our factories in Korea. During the quarter, we added capacity and ran several new products while working through obstacles in the supply chain caused by COVID restrictions and supply constraints for material and equipment. We worked closely with our suppliers and customers and managed to keep the impact limited, although we experienced some revenue impact for our SIP business due to short supply of critical ICs. We expect the constraints in material and equipment supply to continue into next year. To mitigate risk, we have expanded agreements with several of our suppliers as well as most of our top customers to warrant a better supply assurance in future periods. In the U.S., we continue to monitor investment policies to incentivize domestic semiconductor manufacturing, and we are exploring a possible factory location to align with the U.S. investments of other major semiconductor companies. Our capex target for the year remains at $775 million, with major investments for wafer-level and flip-chip technology, SIP, and test capacity, as well as facility expansions. Now let me turn to our fourth quarter outlook. We are expecting the fourth quarter to be another solid quarter with revenue of $1.64 billion at the midpoint of our guidance. This represents a year-on-year increase of 20% for both the quarter and the full year. For 2021, we expect double-digit percentage growth in all end markets, and we remain confident in our strong market position and the overall demand environment. Megan will now provide more detailed financial information.
spk02: Thank you, Giel, and good afternoon, everyone. Amcor delivered strong financial results in Q3, setting new records for revenue, gross profit, operating income, EPS, and EBITDA. Third quarter revenue of $1.68 billion was up $274 million, or 20% from the second quarter, and, as Hill noted, all of our end markets set new revenue records. During the quarter, we successfully navigated through several disruptions in the supply chain, specifically material constraints for wafers, substrates, and components. These disruptions primarily impacted the communications and markets, where our growth was hindered, but still in line with historical seasonality. This was partially offset by upsides in our consumer advanced SIP portfolio for IoT wearable products. Revenue for advanced products grew 26% sequentially and represents around 70% of our business. This significant growth is driven by new product introductions, primarily in advanced SIP, supporting the communications and consumer end markets. Our revenue for mainstream products grew 4% sequentially and 27% year on year, principally due to recovery in the automotive market. With high levels of utilization, gross margin expanded 150 basis points year on year, to 19.3%, and our gross profit of $325 million is an all-time record. Operating expenses for the quarter came in as expected at $113 million. Our focus on controlling OpEx during a period of significant growth contributed to record operating income of $211 million. Operating income margin expanded 160 basis points sequentially to 12.6%. Net income for the quarter was $181 million, resulting in an all-time record EPS of 74 cents. We generated record EBITDA of $358 million in Q3, and EBITDA margin was 21.3%. Shifting to the balance sheet, We ended the quarter with $790 million of cash and short-term investments, and total liquidity of $1.2 billion. At September 30th, total debt was approximately $1 billion, and our debt to EBITDA ratio is 0.8 times, well below our target of 1.5 times. With respect to our capital allocation policy, we will reinvest in the business, supporting technology and capability advancements in R&D, as well as capacity expansion for organic growth. This may be equipment as well as facilities expansion when needed. Target capital intensity in the low teens and efficient utilization enables profitable growth. We will continue to optimize our debt structure with respect to amount, cost, and duration, We have reduced our interest expense by over 20% or $11 million for the nine months ended September 30th compared to the same period in the prior year. We also have access to reserve liquidity for unforeseen events or opportunities. As it relates to strategic investments, we target technology enhancements adjacent to our core competencies. and geographic diversification supporting our customers' supply chain needs. For example, in the US or other locations that are developing a semiconductor supply chain. Returning capital to shareholders remains a priority and we expect to grow the dividend over time. Our solid financial position provides flexibility to achieve these priorities. Moving on to our fourth quarter outlook. we expect continued strength in the market, with revenue to be between $1.59 billion and $1.69 billion. Considering the midpoint of our Q4 guidance, 2021 revenue growth is estimated to be around 20% over prior year. Gross margin is expected to be similar to Q3, between 18 and 20.5%. We expect to maintain operating expenses at around $115 million. We expect our full-year effective tax rate to be around 15 percent due to discrete tax benefits and favorable foreign currency movements. Q4 net income is expected to be between $140 million and $190 million, resulting in EPS of 55 cents to 75 cents. Our forecast for capital expenditures for the full year remains at $775 million for our capital intensity in the low teens. With that, we will now open the call up for your questions. Operator?
spk03: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. a confirmation tone will indicate your line is in the question queue. You may press star 2 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 poll for questions. Our first question is from Randy Abrams of Credit Suisse. Please state your question.
spk04: Okay, yes. Thank you. Good evening. Good job on the results, especially factoring the supply constraints. I wanted to ask on the fourth quarter guidance, where at the midpoint it's a small revenue decline. Could you elaborate? Some years I think it's flat, plus or minus. For fourth quarter, how much of that is a supply constraint impacting sales versus – I'm curious if you're also seeing any areas of push out due to customers also facing some mismatch shipping product. So if you could elaborate a bit on the sequential decline granted off a high base in third quarter.
spk06: Hi, Randy. This is Sergio. Let me try to give you a first flavor of Q4 guidance. The fourth quarter for MCOR generally is a little bit up or down. It can be up a few percent or down a few percent. The guidance is currently 2% down. Mostly we see a correction in the communication market where we see still some constraints in components, specifically also critical ICs. I don't see a correction, as you mentioned, in the end market where, let's say, end customers are correcting their build plans based on imbalance in the supply chain. So, to me, it's still a continuation of the third quarter with limited supply of specific ICs.
spk04: Okay. If you could elaborate on constraints. You talked about a couple in the remarks, but auto, the constraints you're seeing, and if you could give a look at how you see the constraints evolving. So I think auto was one area. High-end substrate was an area. And if you could elaborate more on the constraints in ICs. Are these mostly small IC, like power management, or is it across different ICs? If you could elaborate a bit on constraint and how you see it continuing, looking forward as we go into next year.
spk06: The way that we see and experience constraints is slightly different in each market segment. If you take, for example, the automotive market, we observed the constraints in the beginning of the year was mostly wafer constraints. Later on in this year, Q3, Q4, and also into next year, we see constraints continuing, but then shifting more on the substrate side, specifically the higher end substrates in automotive applications like ADAS, which is generally designed in advanced silicon nodes. We observe constraints there, and the basis is the same for the computing market. Now, on the communication market, however, we see multiple different dynamics. There we see for our SIP business a continued shortage of specific components or ICs. And as you already mentioned, these are ICs which are, let's say, smaller ICs, generally designed in the more mature nodes. and that we see continue in the fourth quarter.
spk04: Okay. If you could give an initial view. I mean, you mentioned it's mostly supply side, not demand side. Is there an initial view? Well, I'm sure we'll get more detail in a few months, but for first quarter, how it's looking, if it looks like – factoring the supply-demand you could see above seasonal first quarter, and then how you're viewing next year in terms of the overall environment. If you're expecting good year, still supply-constrained year, and I'm curious on the risk side if you see any areas where inventory is building up, like components that are more available, but needing to slow that down.
spk06: Well, we don't guide for, let's say, the first quarter next year or even beyond that, Randy. But on the inventory and supply situation, there is some short-term inventory buildup because of some of the components' constraints, and that would result in some buildup of inventory of other components. although our view is that that's still a small effect in the overall supply chain. We also see end customers being less conservative on holding more inventory, so we expect that, based on their risk management, overall inventory during the year will continue to increase. On the supply side, on the wafer supply side, I believe that there the constraints will ease. in the first half of the year. On the substrate supply side, it may take a little bit longer. I mean, significant investments are made for substrate supply, let's say capacity increases, but that will, in my view, only come on stream towards the fourth quarter of next year. So, in short, I mean, I don't see significant inventory buildup, and some of these constraints will ease a little bit in the second quarter. And some of them will continue till the fourth quarter next year.
spk04: Okay. Thank you. And one last question I'll ask for the, I'm curious, the SIP business driver, if it's, I think traditionally that consumer SIP was audio, if that's still a big driver, or if you could give a profile of the SIP, like how much now it looks like it's growing this year. And the profile, if you could talk a bit more about this pipeline and how it looks for continuing to grow the SIP opportunities.
spk06: Yeah, our SIP opportunities, you know, in the third quarter, we saw significant strength in SIP. You know, on the communication side, it was slightly moderated because of the supply constraints that I mentioned before. On the consumer side, it was strong, although also there we see some constraint, but we had significant strength on the consumer side. We believe that to continue. We see also a diversification on the product side, both on the communication as well as on the consumer side. And SIP, more broadly, is also entering applications like automotive, where we have strength specifically on the digital, let's say, dashboard side. So, you know, multiple applications, strong product pipeline, and in our view, it's a growth engine going forward.
spk04: Okay. Actually, and I'll say maybe one more just on the margin implication. If it looks like from a capacity perspective, you're running near full, would the gross margin now, kind of when you're operating at this level fairly high, 19%, 20%, is that viewed as kind of that high point, or you could say like upcycle margin, if this remains healthy, or is there room, like if we have a good year, for some further margin leverage? Yeah, I can take that, Randy.
spk02: So with respect to gross margins being at, you know, 19%, 20%, while we're operating at high utilization, we do have still some capacity, specifically in our Japan location. So there is some upside there. And then the only other comment I would make is one of the other variables besides utilization that does impact gross margin percentage is product mix. So with respect to that mix of products, that can have an impact on gross margin percentage where we could have some upside as well.
spk04: Okay. All right. Great. Thanks, Megan and Neil. Thank you.
spk03: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our next question is from Art Winston of Pilot Advisors. Please proceed with your question.
spk07: Thank you for the really great results and the great outlook. I have two questions. The first one is, given the very sharp increase in your material costs, what about the possibility of raising selling prices to offset these sharp increases in the materials?
spk06: Well, Art, let me answer that. We mentioned it also earlier on in previous calls. The general arrangements that we have with our customers is that cost increases on the material side are factored in the prices towards customers. So if our material cost is increasing, specifically for substrates, what we're seeing now, and also other materials, then we factor that into adjustments to pricing to our customers.
spk07: It's factored in? Okay.
spk06: No, no. It will be factored in. If it continues to go up, prices to customers will also go up.
spk07: Okay, good. Megan touched on the last one. Other than in Japan, is the utilization rate pretty much high across every place else except perhaps in Japan?
spk06: Yeah, we're running out of time.
spk02: Go ahead, Io.
spk06: Yeah, I mean, third quarter, fourth quarter are, for MCOR, our peak quarters. You know, there were some areas that are still some underutilization. Meg already mentioned that in Japan. But overall, we have a very strong utilization across our factories.
spk07: Good. And my last question is, in terms of the automotive industry, If the supply congestion were to ease, should we assume that your automotive shipments would be sharply higher, correlating with the increased amount of car bills across the world? Would that happen?
spk06: Well, you know, in the quarter in Q3, we saw... No, I'm talking about going forward, not in... Oh, going forward.
spk07: Yes, yes.
spk06: Yeah, I think in my view, we're still not at the peak of our automotive business. If we take, for example, applications like ADAS or digital dashboards or in-car networking, it's still in the early beginning. So it's not only the car volumes, but it's also the attach rate of these advanced functions into the car. And what we believe is that there is an acceleration in the car market that For two elements, first is ADAS, but also electrification of the cars is increasing, much steeper curves than what was expected two years ago. So it will continue to increase. And as mentioned, we believe that the semiconductor content per car and the overall semiconductor market in automotive is growing faster than the average semiconductor growth rate.
spk07: We can assume that the product mix would be more profitable for the more advanced and complex electrification products that you're making going forward. It would be more profitable?
spk06: Well, we have pockets that are more profitable than others, but that would be a correct assumption.
spk07: Okay. Again, thank you for everything.
spk03: Our next question is from Vijay Rakesh of Mizuho. Please proceed with your question. Vijay, are you there?
spk05: Yes, sorry, I was on mute. Gil and Megan, I was wondering on the auto industrial side, what's your split within that of auto industrial and When you look at autos, you mentioned ADAS and electrification. Just wondering what percent of your automotive was geared to ADAS and EV?
spk02: So, Vijay, we don't break out auto and industrial separate. However, the majority of that market is automotives. And then with respect to your second question, it was specifically asking about the concentration of ADAS in our automotive.
spk05: Yeah, ADAS and EV.
spk02: Yeah, so we don't break out ADAS, EV. We also have a significant amount of infotainment in automotive. And then as a reminder, all of that traditional, you know, mainstream business is in automotive. We are seeing significant increase in the advanced portion of automotive, but we don't break out those segments separately. This quarter, we did see an increase in ADAS from the prior quarter, as well as in electrification.
spk05: Got it. And as you look at Q4, your December quarter, in terms of the mildly softer 2% down, I guess, how would you look at auto industrials and the comm side into Q4? I know you mentioned comm had some, I guess, constraints, but how would you look at auto industrial and the comm side trending into Q4? Thanks.
spk06: Megan, do you want to comment on this?
spk02: Sure. Yeah, so automotive we're seeing more flattish in Q4, so continued strength despite the supply chain constraints. And communications is where we are seeing a decline in Q4. And as Heald mentioned previously, we are seeing continued shortages in specific IC components. And it is fairly historically seasonal to see a downtick in communications in Q4, given the timing of the different phone launch cycles.
spk05: Got it. Thanks so much. Thanks, Richie.
spk03: At this time, I'm showing no further questions. I would like to turn the call back over to Gil for closing remarks.
spk06: Okay, thank you. Well, before closing the call, I would like to recap our key messages. For the third quarter of 2021, we delivered all-time record revenue of $1.68 billion and reckoned EPS of 74 cents. For the fourth quarter, we expect robust year-on-year growth of 20% with revenue of $1.64 billion. Supply chain constraints of substrates and components are expected to continue into Q4 and into the next year. We expect a gradual recovery in the second half of next year when new capacity comes online. We are working closely with our customers and suppliers to help mitigate risks from these ongoing constraints. The main catalyst for future growth are 5G, IoT, automotive, and high-performance computing, and MCOR is well-positioned in these key markets. Last but not least, I would like to thank the global MCOR team for delivering this record quarter. Thank you for joining the call today.
spk03: Ladies and gentlemen, this concludes today's conference call. You may now disconnect and have a wonderful day.
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