This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk08: Good day, ladies and gentlemen, and welcome to the AMCOR first quarter 2022 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 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.
spk02: Thank you, operator. Good afternoon, everyone, and thank you for joining us for AMCOR's first quarter 2022 earnings conference call. Joining me today are Hjul 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 U.S. 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, 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. MCOR delivered solid results in the first quarter, with both revenue and profitability at the high end of guidance. Revenue of $1.6 billion and EPS of 69 cents are first quarter records, reflecting year-on-year increases of 20% and 40% respectively. Continued strong demand for our advanced packaging solutions, particularly in the communication end market, drove better-than-expected results. Now let me review the current dynamics in our end markets. Our communications business grew 22% year-on-year, driven by demand for advanced SAP and flagship technology for the latest 5G processors and peripheral devices in new smartphone models. Some weakness in the China market was offset by strength in the high-end smartphones, as well as the spring launch of new models. With EMCOR's leadership position across multiple semiconductor devices and 5G phones, we expect the ongoing proliferation of 5G to remain an important growth driver. Solar performance in the automotive and industrial markets drove 15% growth compared to first quarter 2021. In the automotive supply chain, we observe an increased attention to risk management. Both semiconductor suppliers as well as tier one companies are exploring multiple sourcing arrangements as well as options to establish regional supply chains. With MCOS Manufacturing Alliance in the main automotive geographies, we are well positioned to support our customers in implementing these changes. In Korea, we have a strong automotive manufacturing hub for advanced packaging. In Japan, we offer a well-established manufacturing base supporting a broad range of automotive solutions, including emerging silicon carbide power products for EV. And in Europe, we are expanding our technology portfolio in our Portugal factory, where we have started production of automotive sensors using wafer-level fan-out and MEMS technology. In all locations, we are working with lead automotive customers on their next-generation products, and we have multiple new product introductions ramping this year. With our global manufacturing footprint and broad technology offering, we expect ongoing strength in this market. ADAS, electrification, and infotainment and telematics will drive continued expansion of semiconductor content per car. As the leading automotive OSET, Emcor has a strong track record of partnering with customers who demand automotive-grade quality and supplier reliability. Automotive-qualified manufacturing lines are a critical differentiator, and we are proud to have received recognition from top automotive companies for our commitment to quality and supplier reliability. Our consumer business increased 11% year-on-year, supported by strength in traditional consumer product and a broad portfolio of IoT wearables. Our advanced SAP assembly and test platform offers a turnkey solution for the IoT wearable market, and our high-volume, cost-effective flip chip technology offers excellent value to customers for traditional consumer applications. We expect the consumer market to further expand, and our overall product and customer pipeline remains strong. IoT wearables continues to be an important driver for growth, although we expect that this emerging product category is more prone to quarterly variability due to supply chain constraints and varying product life cycles. Continued strong momentum in the computing market drove year-on-year growth of 36%. the 10th consecutive quarter of sequential growth. We achieved robust growth in all compute applications. In data centers, introduction of AI, as well as the trend of increased data traffic, is driving investments in high-performance computing, utilizing the latest silicon nodes with advanced packaging technology. We see similar technology requirements in the wired and wireless infrastructure market, notably in support of 5G infrastructure. Although the PC market is softening, we observe a trend to ARM-based PC architectures. In this emerging PC segment, mCore is able to support our customers with a proven multi-chip modular solution. With our broad advanced packaging portfolio and established partnerships with lead customers and foundries, we believe we are well positioned to capitalize on opportunities in these growing computing applications. and we continue investing in advanced technology and manufacturing scale for this market. Finally, our test business grew 14% compared to first quarter 2021. We have established a broad test expertise by supporting both industry leaders as well as emerging companies in new application areas. Through early engagement in customers' product life cycles, we are able to define test strategies and intelligent equipment selection to provide differentiated test solutions. We are broadening the scope of our test services in areas like 5G communications, computing, and system-level testing to enhance this turnkey support to our customers. Our manufacturing organization continues to demonstrate mCore's commitment to quality and supply reliability to our customers. The ongoing semiconductor supply challenges require diligence and flexibility from our global organization to meet customer requirements while maintaining industry-leading quality standards and high factory utilization. In late March, the Chinese government mandated a COVID-19 lockdown of our Shanghai factory. Demonstrating the utmost in flexibility, our manufacturing team is closely cooperating with local authorities and customers to minimize the impact and resume regular operations. We anticipate that our Shanghai factory will return to normal production during the second half of the quarter. Our guidance reflects this, and as we work through this dynamic situation, we are doing what we can to support our people and keep them safe. We are leveraging our global factory network to support our customers and we work with authorities to enable a controlled restart of production. In addition to managing these supply chain challenges, the Emcor team continues to expand our global manufacturing footprint to ensure we can capture future growth opportunities and meet expanding customer requirements. Besides supporting a changing automotive supply chain, we are also expanding our footprint to offer customers a broader geographical diversification. In November 2021, we announced our plans to expand our global factory footprint by building a state-of-the-art factory in Bac Ninh, Vietnam. The project is on schedule to start pilot production in the second half of 2023. When completed, our Bac Ninh manufacturing campus will offer our customers an attractive, large-scale, cost-effective manufacturing location with a diversified technology portfolio. Now let me turn to our second quarter revenue outlook. We have included an estimated revenue impact for the Shanghai lockdown of around $120 million in our guidance, assuming that the situation continues to improve. Including this impact, we are expecting second quarter revenue of $1.52 billion at the midpoint of our guidance. This would represent a year-on-year increase of 8%. Megan will now provide more detailed financial information.
spk01: Thank you, Gil, and good afternoon, everyone. AMCOR delivered strong financial results in Q1, setting first quarter records for revenue, gross profit, operating income, EPS, and EBITDA. First quarter revenue of $1.6 billion was up 20% year-on-year and down 7% sequentially. The communications end market led the strong performance versus guidance, with strength in both the iOS and Android ecosystems. All of our end markets grew double digits year on year, and computing achieved another quarter of record revenue. While we were able to exceed our Q1 expectations, this did not come without challenges. We continued to successfully manage the ongoing supply chain constraints. on wafers, substrates, lead frames, and components to support robust customer demand. Revenue for advanced products grew 26% year-on-year in the first quarter and represents approximately 70% of our business. Demand for our advanced SIP and flip chip solutions within the computing, automotive and industrial, and communications end markets is strong. and is driving this significant growth. Our mainstream products make up around 30% of our business and demonstrate continued strength with a year-on-year increase of 9% in the first quarter. Gross margin of 20.4% exceeded the high end of our guidance, driven by disciplined cost control. Gross profit of $325 million is a first quarter record. Operating expenses for the quarter were in line with expectations at $115 million, resulting in operating income margin for the quarter of 13.2%. Net income for the quarter was $171 million, resulting in record Q1 EPS of 69 cents. Q1 EBITDA increased 30% year-on-year, to $363 million, and EBITDA margin was 23%. Our balance sheet is solid. We ended the quarter with $1.2 billion of cash and short-term investment. During the first quarter, we executed a new $600 million revolving credit facility, replacing a $250 million revolving credit facility. Total liquidity increased to $1.9 billion, providing us with financial flexibility. Our total debt as of the end of the first quarter is $1.2 billion, and our debt to EBITDA ratio is 0.9 times. Moving on to our second quarter outlook. As Gil mentioned, a government-mandated COVID-19 lockdown impacted our Shanghai facility beginning in late March. Our factory team has been working closely with local authorities to resume regular operations, and we anticipate our Shanghai factory will return to normal production during the second half of Q2. Market demand continues to remain strong across our portfolio and geographic footprint, and we don't expect this short-term disruption to have a material effect on our mid- and long-term results. With the reduced Shanghai factory output included and assuming that the lockdown ends as currently anticipated, we expect revenue to be between $1.47 billion and $1.57 billion. Gross margin is expected to be between 16.5% and 18.5%. The Shanghai lockdown is estimated to have an approximately 300 basis point impact on gross margin, reflecting underutilization and incremental COVID lockdown costs. We expect Q2 operating expenses of around $115 million. We expect our full-year effective tax rate to be around 15%. Q2 net income is expected to be between $90 million and $140 million, resulting in EPS of 37 to 57 cents. Our forecast for capital expenditures for the year remains at $950 million to support strong demand expected in 2022 and beyond. With that, we will now open the call up for your questions. Operator?
spk08: Thank you. And ladies and gentlemen, at this time we will conduct our 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 that your line is in the question queue. You may press the star key followed by the number 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. Once again, to ask a question, press star 1 on your telephone keypad. One moment, please, while we pull for questions. Thank you. Our first question comes from Randy Abrams with Credit Suisse. Please state your question.
spk04: Yes, good morning. Yeah, and a good result for first quarter. I wanted to just go into the Shanghai issue factory impact, and just ask a few follow-ups to that. I think first, it seems like it's been different by supplier. Some suppliers have kept going or operating partial utilization. So was there a factor that mandated a total shutdown? And in terms of what you're seeing on the timing, like the date you expect to get the production back up, or if you're still waiting that clearance? And given the loss impact, I think you mentioned 120 million. How much do you see as a makeup that in third quarter it would supplement? We're normally at a seasonal ramp, but how much do you anticipate incremental revenue versus some of that production may have shifted to other non-China sites at competitors that might be lost revenue?
spk06: Good morning, Randy. This is Gil. Let me try to answer your questions here. First of all, on the lockdown in Shanghai and why this is different across multiple companies. What we experienced in Shanghai was very much that the location where the factory is situated depends on the local measures that are taken. I mean, currently we see that, for example, we are in Pudong, that there are very strict measures in the Pudong area. And it's actually within Pudong, it's region by region. And that forced actually the local authorities to go to a lockdown of most of the manufacturing locations in Pudong. They kept it very strict also in the high-tech park where we are situated. Other areas in the Shanghai area, may experience slightly different measures, although we see that similar things are proliferating there. With respect to the impact, we do a couple of things. Of course, we work with customers very closely because with many of the customers, we have long-term supply agreements where we utilize our global manufacturing footprint to shift volume to other factories. in areas outside of Shanghai. It is also a relative low season for the business. So we have a bit of excess capacity and our customers have a bit more flexibility there. So we expect that on an annual basis, the impact will be able to compensate for a large extent, Randy. Maybe not to the full extent, but to the large extent.
spk04: And just to recall for the status, do you have a date for resuming production or it's still set to how the conditions go in the coming weeks?
spk06: Yeah, there are a couple of strict conditions that you need to apply. Currently, we're working with customers and we feel that we have a way forward where we meet all of the conditions. So it will be a matter of days before we can start again.
spk04: And if we think in a worst case, the $120 million for it's about first half of the quarter, in a worst case if it extended, is that the way to think about it, like half a quarter that much revenue impact if, say, another, the outbreak gets worse again? Or as we move on over time, you have more time to shift orders, so you'll try to manage it to a lesser impact if it were to extend on further?
spk06: Yes, I think the longer it would take, the more, let's say, options that open up to utilize other factories. But we are fairly confident that there is a way forward where we are back to normal operations definitely before the second half of this month.
spk04: I want to ask on the demand side then. If you could talk, since we last had the results with the Russia-Ukraine, there's been a demand side in China from these lockdowns, and inflation's been persistent. Have you witnessed in certain applications demand change that affects your viewer, how customers, if they're slowing down their order rates?
spk06: Well, that's a good question, Randy. I mean, currently we're very alert on demand changes, but we have not seen demand changes. Actually, we still see upsides that we cannot fulfill because of hiccups in the supply chain, material supply, or certain component supply. So we still believe that the end markets are strong, even in the communication market where there is some weakness in the China communication market. But on the other hand, we see upside on the premium tier Android smartphones where we hold a strong position. So all in all, we believe that the demand side is still very strong. But we're watching it clearly. We're also watching the inventory in the chain when it comes to distributors. or inventory at our customers. And so far, we don't see any indications of concern.
spk04: To follow up on the inventory, it seems like the IDMs are still relatively okay or a bit low. Fabless has built up some in the past couple quarters, like from some mismatch, but the absolute level is a bit higher. Are you witnessing its... more on a wafer bank level, like waiting for a substrate, or is it your view it's already finished package and test ships that they're carrying a bit elevated inventory?
spk06: Well, on the wafer bank in the foundry side, we have limited exposure what the inventory level is there, Randy. On the finished products, so the packages and tested products, We have a bit more insight. I mean, on the distributor side, we see a slight increase, but still below their target level on the IDM side. We believe that the inventory levels at both our Fabulous customers as well as the IDM customers is still below their targets. That is at least our observation at this point in time.
spk04: And this final question I want to ask, and it's just a little bit of a preview into second half, given the comments on demand side. Is it rough expectation to be your catch-up and could see above seasonal quarter, or is it difficult to make it up given relative tightness? And then the way to think about the margin where you hit a bit over 20%, if we start to pass that, if you see the leverage, we could start – pushing back into low 20s again.
spk06: Yeah, from the revenue perspective and also from the margin perspective, we are very positive that we can make up the loss in the second quarter and the remaining part of the year. Maybe not in the exact portfolio elements, but we believe that the market is strong. We see upsides for the third and the fourth quarter. So we are definitely confident that we can make up for the Q2 correction due to the lockdown.
spk04: Actually, I want to ask one final question. This is on the advanced versus mature. Is the bottleneck more advanced side, but just your capacity for... flip to test and substrate, or do you see also some bottlenecks on mainstream where you're running full capacity or at the lead frame constraint?
spk06: Yeah, I think you already mentioned it, Randy. I think on the mainstream side, we still see constraints on the lead frame side. A little bit on the substrate side, but that's the lower end of substrate, so less than in the advanced side. So mainly it's lead frame on the mainstream side, which is still a significant impact if you look to the revenue and the forecast that we cannot deliver upon. On the advanced product side, it is a couple of things. If you look to SIP, it's still the more mature silicon nodes and the related components that are a bottleneck in the industry and that force end customers to make decisions on their portfolio. Then when it comes to substrate, specifically in the high-end substrate side, we see constraints in the compute segment. certainly on the infrastructure side, as well as on certain parts of the automotive market where there are still constraints on high-end substrates.
spk04: And one word I may have missed. In mainstream, did you say significant or insignificant impact?
spk05: Significant. Significant. Okay.
spk04: Okay, great. Thanks, John and Megan.
spk05: Okay. Thanks, Randy.
spk08: Thank you. Our next question comes from Krish Sankar with Cowan & Company. Please state your question.
spk03: Hi, thanks for taking my question. I had a few of them. First one, a clarification. You mentioned the Shanghai lockdown impact is $120 million and you expect it to come back online in the second half of the quarter. Just simplistically speaking, if Shanghai was shut down for the whole quarter, would it be a $240 million impact or lesser or lower impact?
spk06: Well, I mean, we don't quote the revenue per factory, Krish, but the mathematics add up to about that level, yes. I think the Shanghai factory on the revenue basis is about 15% of mCore revenue.
spk03: Got it. Very helpful. And then you mentioned about the China smartphone being offset by high-end smartphones. Having more high-end in the mix, is that a positive, negative, or a neutral impact of those modules?
spk06: Let me try to repeat the question, Krish. So your question is related to the premium-tier smartphones and our position there and strength in that segment, whether that would be... a positive impact to our gross margin, our average gross margin. Is that a correct reflection of your... Exactly. Yeah, exactly.
spk03: I think we... Is that positive, negative, or neutral?
spk06: Yeah, I think we hold a strong position in the premium tier smartphones, and we already have that for multiple years in a row, so I would consider that a positive, because we deliver their full-term key solutions That includes both the bump, the probe, the assembly, and the final test. And if we add that business up, that would be a positive contribution to our average gross margin.
spk03: Got it. Got it. And then you mentioned about auto and the diversifying supply chain there. I'm kind of curious. On the auto side, the exposure, if I'm right, is more on the wire-bonded side. Is that correct, and how do you see auto through the second half of this year?
spk06: Let me first try to answer that first question with respect to the diversification of the supply chain and auto. Actually, we see that more pronounced on the advanced package side. I mean, the driver behind the diversification of the supply chain and automotive is driven by security of supplies, IP protection, and more control on the factory base by tier ones, semiconductor companies, but also end customers. So if you look to where that's most prominently available, then that will be in the advanced product sites. And then specifically, that is very broad. So that also includes automotive sensors, which is a very broad product category. And there we see that customers want to have more control of that supply chain. Then with respect to automotive in the second half of the year, we're very confident that the automotive market will go through a strong year. The volumes in the produced cars And I understand there are some hiccups because of the Ukraine disruption. But overall, the industry expects that there are 6% more cars being built this year versus last year. Also, the EV penetration and the hybrid car penetration is faster than expected. So with that, we expected that this will be a solid year with a good second half of the year. And that's what we factored into our numbers. Krish.
spk03: Very helpful. And then a final question for Megan. The 950 million capex was kind of maintained for this year. I remember last time you said 100 million goes into Vietnam. So the rest goes into advanced SIP, packaging, wire bonders. Is there any color you can give on the remaining 850? How to think about What goes into SIP, advanced packaging, wire bondage, et cetera?
spk01: Sure, I can do that, Krish. So out of our $950 million, there's about 30% of that is for infrastructure, and that does include the incremental $100 million for Vietnam that you mentioned. So then there's about 3% to 5% for quality and R&D, leaving about 65% for capacity and capability that you just mentioned. And the majority of that, I would say 90% of that equipment CapEx is geared towards advanced, SIP, flip chip, wafer services, and about 10% is allocated for wire bond mainstream business.
spk03: Got it. Thank you very much, Megan. Thanks a lot to you. Thanks, Chris.
spk08: Thank you. And just a reminder, to ask a question, press star 1 on your phone. Our next question comes from Tom Disley with DA Davidson. Please state your question.
spk07: Yes, good afternoon. Maybe just a quick clarification on the Shanghai facility. Did that completely close? The doors were closed essentially to zero production when it closed? Or is there such a thing as essential business that would allow you to run some capacity through there?
spk06: Hi, Tom. Let me try to answer that. Completely closed, no. I think we still maintain about 1,000 people on site. Facilities keep on running. We make sure that equipment is maintained. All of that continues, but there is no effective production going through, so no shipments leaving the facility, but a significant number of people on site. And currently we go through a process where we bring more people in to ramp up while we're ramping production that more people get on board.
spk07: Okay. Okay. That's helpful. Thank you. And you mentioned that there's a little bit of slowing in the PC market. I'm curious, is that more of a seasonal trend? Is it a weakness in end market demand or supply chain? How would you characterize the softness?
spk06: Tom, I missed the first part of your question. Which market are you referring to?
spk07: Oh, the PC market.
spk06: Oh, the PC market. Yeah, you know, on the PC market, we see a broader weakness more than the traditional PC market. The point we're making is that within the PC market, where there's a little bit slowness in this part of the year, I think that's public knowledge. We see a trend from the traditional PC architecture to an ARM-based architecture. In the traditional PC market, it is very much, for a large part, a vertically integrated supply chain. If the market moves to an ARM-based architecture, then the companies that are playing there are actually utilizing an outsourced supply chain, which is good for mCore.
spk07: Okay. Thank you. And then last question. When you look at the supply chain, is there any way to quantify the impact either on the results or output in either a revenue or margin point of view?
spk06: Megan, can you comment to that?
spk01: Yeah, Tom. So when we look at the constraints that we've had in the quarter, it's very difficult to quantify one on the top line because both AMCOR and our customers are working to refine their forecasts, both with our material supply and theirs downstream, so it's very difficult to quantify that. So without having that, it's also difficult to quantify the margin impact. That being said, I would say that the impact from a margin perspective is not significant, given that we've still been able to deliver you know, especially in Q1 upside results, we were able to more than offset that constraint with other demand.
spk07: Okay, that's very helpful. Maybe I'll stick in this one more. Has there been any COVID outbreaks or impacts in any other region besides your Shanghai facility?
spk06: Tom, no. Of course, the COVID, let's say pandemic, is already ongoing for well over two years. And in these two years, we put very strict procedures in place in all our global factories, where there were flare-ups in areas like Malaysia, like the Philippines and other jurisdictions. We were able to manage that very well in our manufacturing organization with strict procedures. You know, the Shanghai situation in our case is an exception, but currently we don't see any other locations that see COVID impacts.
spk07: Okay, that's nice to hear, and thank you for your time today.
spk08: Thank you. And at this time, I'm showing no further questions. I would like to turn the call back over to Gil for closing remarks.
spk06: Thank you. Before closing the call, I would like to recap our key messages. mCore delivered strong first quarter results, with revenue of $1.6 billion and EPS of 69 cents, both first quarter records and up 20% and 40% year-on-year, respectively. Including the anticipated effect of the Shanghai factory lockdown, the expect revenue of $1.52 billion, reflecting year-on-year growth of 8%. Demand for our technology and services remains strong, and mCore is well positioned within key growth markets of 5G, IoT, automotive, and high-performance computing. And finally, I would like to thank our global mCore team for delivering an excellent first quarter. Special thanks to the factory management team and employees in our Shanghai factory for their diligence in managing the mandated factory lockdown and the continued focus on bringing the factory back to regular operations. Thank you for joining the call today.
spk08: Ladies and gentlemen, this concludes today's conference call. You may now disconnect.
Disclaimer