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spk03: Good day, ladies and gentlemen, and welcome to the Amcor Technology third 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 the 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 third quarter 2022 earnings conference call. Joining me today, Arheel Rutan, 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 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.
spk06: Thanks, Jennifer. Good afternoon, everyone, and thank you for joining the call today. EMCO delivered excellent results in the third quarter. reaching a record quarterly revenue of $2.1 billion and EPS of $1.24. All end markets achieved new records, driving revenue up 24% year-on-year. Sequentially, revenue was up 38%, which reflects growth and a successful recovery of our Shanghai factory. While the industry is facing near-term macroeconomic headwinds and market forecasts have weakened in some areas, demand for our advanced packaging technology remained strong and momentum strengthened during the third quarter. Growth in advanced packaging came in at 33% year-on-year, close to 80% of our business in the third quarter. mCorp continues executing on its strategy to leverage a leadership position in advanced packaging and its broad geographical footprint to capitalize on the industry megatrends of 5G, IOT, automotive, and high-performance computing. Now let me review the dynamics in each end market. Our communication business experienced significant growth in the third quarter, driven by high-volume RAMs supporting the launch of premium-tier 5G smartphones. Communications revenue for the quarter increased 76% sequentially and 35% year-on-year. Although overall smartphone units are projected to be down this year, 5G units continue to proliferate. Premium-tier 5G phones are rich in silicon content, and ongoing innovations continue to add functionality. mCore supports a wide range of applications in multiple package formats throughout the phone, including devices for audio and power management, MEM sensors, NAND memory, and apps processors and modems in package-in-package technology. In addition, advanced system and package technology is deployed for RF devices, display controllers, and camera applications. With our advanced SAP platform for heterogeneous integration, we enable continuous integration in form factor, functionality, and performance by applying industry-leading technologies and design rules. mCore's high-volume manufacturing capability together with its broad technology portfolio are key enablers for growing our footprint in premium tier smartphones. Revenue within the consumer end market increased 31% sequentially and 14% year-on-year, supported by new IoT wearable product ramps. We observe a trend of further miniaturization and integration of new functionality like sensors and connectivity in wearable IoT devices. Together with lead customers, we further innovate our advanced SAP assembly and test platform to incorporate these new requirements. We believe the IoT wearable segments will continue to diversify and grow. To support future customer demands, we are expanding our footprint to Vietnam, which is expected to start high volume manufacturing in late 2023. Revenue within the automotive and industrial markets grew 6% sequentially and 13% year-on-year. We observe continued improvements in material lead times and anticipate a more balanced supply chain by the end of this year. Market reports project automotive electronics to grow at mid-teens CAGR over the next few years. EMCOR's 40 plus years of automotive experience together with our advanced packaging leadership global manufacturing footprint, and trusted partnership with leading automotive customers positions as well to capture growth from the acceleration of semiconductor content in cars. Emcor works closely with lead customers, both to develop innovative technologies and to support changes in geographical manufacturing footprints. We are expanding our capacity and technology portfolio for automotive solutions, notably in our factories in Europe and Japan. in support of regional supply chains for critical automotive semiconductors. Revenue from the computing end market increased 12% sequentially and 22% year-on-year. Although the PC market is soft, we observe opportunities for growth driven by continued de-verticalization and a growing adoption of an outsourced manufacturing supply chain. New fabulous entrants and OEMs with in-house silicon design together with the introduction of an ARM-based architecture for PCs, laptops, and tablets are expected to drive future growth. Furthermore, the introduction of AI and anticipated upgrades of data centers and networks require advanced packaging and enhanced semiconductor content. Our test business grew 32% sequentially and 80% year-on-year to a record $266 million. We have invested in broadening the scale and capability of our test services through our global factory footprint. Multistage testing has become more important with the increasing complexity and cost of assembled products. Customers value our turnkey service to ensure quality, reliability, and reduce cycle time. In the third quarter, our manufacturing organization demonstrated great flexibility to ramp our Shanghai factory back to full capacity after the COVID lockdown in Q2, and to manage a record ramp in output from our Korea factory, supporting new products for premium tier smartphones and IoT wearable devices. Geopolitical dynamics and COVID-related disruptions continue to impact the semiconductor supply chain. Globally, our customers are evaluating their supply chain strategies to reduce risk and secure sustainable and cost-effective manufacturing bases. We are working closely with our customers to adapt to these changing requirements. In Asia, our factory project in Vietnam is progressing as planned, and we are expanding in R&D and manufacturing capability in Japan to offer a secure supply chain for automotive semiconductors and sensors. In Europe, we are investing in technology and capacity and are partnering with lead customers in our Portugal factory in support of a European automotive supply chain. In the US, we see more interest from customers following the passage of the Chips and Science Act. We believe ENCODE's broad geographical footprint is a key differentiator and positions us uniquely to support our customers and benefit from these shifting global supply chain trends. While the U.S. export controls announced in early October are not focused on OSEP operations, we expect regionalization trends may accelerate in response to these new U.S. export controls. Now let me turn to our fourth quarter revenue outlook. After our record third quarter, we expect Q4 revenue of $1.85 billion at the midpoint of guidance. This would represent a year-on-year increase of 7%. The higher than seasonal Q4 sequential decline of 11% is primarily due to three factors. First, customers accelerating bills in the third quarter, taking advantage of better material availability in selected areas. Second, an impact of recently issued US export controls estimated in the low single digits percent of revenue. And finally, softening in some areas of the market, reflecting inventory corrections by certain customers. Second half revenue is expected to increase 16% of a prior year's second half, with all end markets contributing to the growth. We expect that our strong position in advanced packaging and deep relationship with leading customers will moderate volatility throughout these near-term macroeconomic headwinds. Megan will now provide more detailed financial information.
spk01: Thank you, Gil, and good afternoon, everyone. Amcor achieved record performance in the third quarter, reaching two new milestones. One, revenue crossed the $2 billion mark at $2.1 billion. And two, EPS is over $1 at $1.24. AMCOR's outstanding top-line and bottom-line results are due to our leadership position in advanced packaging technology and quality execution on high-volume ramps of new products. Demand was better than expected, primarily due to strength in the communications markets, supporting new launches of premium-tier smartphones utilizing our advanced SIP technology, and material availability allowing for upsides supporting customer demand. With expanding content and market share gains, the communications market grew more than 30% over prior year Q3. Gross margin for the third quarter was over 20%, the highest Q3 performance in over a decade, supported by high utilization across our factory footprint. We also set a new quarterly record for gross profit in Q3 at $421 million. Operating expenses came in lower than expected at $102 million, primarily due to timing of new product introductions, lower labor costs, and favorable foreign currency rates. Operational excellence contributed to robust profitability and record quarterly operating income of $319 million for the third quarter. Operating income margin for the quarter was 15.3%. Q3 income tax expense came in lower than expected due to foreign currency exchange rate movements and a discrete income tax benefit related to changes in the valuation of certain deferred tax assets. Net income for the quarter was $306 million, resulting in EPS of $1.24, both of which are new all-time quarterly records. Q3 EBITDA was $481 million, and EBITDA margin was 23.1%. Overall, we are very pleased with our Q3 performance. including quarterly revenue records in all of our end markets. Our balance sheet remains solid and allows us to invest in advanced packaging technology to capitalize on the long-term growth catalysts of 5G, IoT, automotive, and high-performance computing. We ended the quarter with $932 million of cash and short-term investments, and total liquidity of $1.6 billion. Our total debt as of the end of the third quarter is $1.1 billion, and our debt to EBITDA ratio is 0.7 times. AMCOR is not immune to the near-term macroeconomic uncertainty, but even in the case of a market slowdown, we have the financial strength to continue to expand our global footprint in response to customer demand. Construction on our new facility in Vietnam is progressing as planned, and we expect to be ready in late 2023 to support high-volume manufacturing for lead customers. Vietnam is a strategic long-term investment for Amcor, as it will offer our customers an opportunity to diversify their global supply chain. Moving on to our fourth quarter outlook. We are expecting Q4 revenue between $1.8 billion and $1.9 billion, representing year-on-year growth of 7% and contributing to full-year growth of around 15%, well above the semi-industry growth estimates for 2022 of mid-single digits. Growth margin is expected to be between 16% and 18%. we expect operating expenses of around $110 million. Assuming continued strength in the U.S. dollar, we expect our full-year effective tax rate to be around 10% before discrete tax items. Fourth quarter net income is expected to be between $150 million and $195 million, resulting in EPS of 60 to 80 cents. Considering our fourth quarter guide, our second half 2022 estimated performance results in revenue growth of 16% and EPS expansion of around 20% compared to the prior year's second half. Our forecast for capital expenditures for the year is projected at $900 million, about 5% lower than the previous target. The update is due to timing of payment terms and delays in equipment delivery. Our plan to support long-term growth is unchanged given the secular trends in the market. To strengthen our advanced packaging leadership position, our investments are focused on increasing capacity and capability within technologies such as advanced SIP, flip chip, wafer level, and test. as well as associated investments in quality and factory automation. We are also selectively expanding our facilities in response to customer demand. Our global footprint is a key differentiator for us and provides support for the development of regional supply chains. We see strong interest in Japan and Europe, which are attractive to many customers for introduction and ramp-up of new technologies, notably for the automotive market. Looking ahead to 2023, we are monitoring macroeconomic uncertainty and working closely with our customers to manage changes in the demand environment. We are confident in our long-term outlook as we do not see a change in the growth catalysts for advanced packaging. in which AMCOR maintains a leadership position. With that, we will now open the call up for your questions. Operator?
spk03: Thank you. And at this time, we will be conducting 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 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. Once again, to ask a question, press star 1 on your telephone keypad. We'll pause for a moment to poll for questions. Our first question comes from Randy Abrams with Credit Suisse. Please state your question.
spk05: Thank you, and a good set of results. I want to test just the first question on the third quarter. You mentioned, I think, the better materials which helped you ship more. Could you go through a couple other factors? One, just the impact of the China recovery or benefit from China recovery and how much of a headwind is that high base from third quarter to fourth quarter that you shipped some additional product in a catch-up? And also, how much a factor are you seeing early early builds this year for some of the key premium smartphones. So it's a bit of a shift in seasonality earlier.
spk06: Hi, Randy. This is Gil. Let me start answering this question just to make sure that I understand well. So you're asking about the impact of the China recovery on the bills in the third quarter. Correct, Randy?
spk05: Yeah, that's right. And then also the impact if you saw any earlier shift of seasonality with the component availability where the premium you may have billed a bit earlier. And so that might be affecting the fourth quarter compared.
spk06: Yeah, let me start with the last part of your question. The earlier bills or the accelerated bills in the third quarter because of material availability. You saw that most notably in the communication segment, both on the iOS as well as on the Android side, Randy. And the availability was brought, it was both components as well as some other materials, but that's made customers decide to pre-build, also giving some other supply chain uncertainties later in the year. With respect to the China recovery and the impact of the third quarter, I mean, when we look to the quarter-on-quarter improvement of revenue, then we see about 25% of that being attributed to the recovery of our ATC factories, and the rest is growth. So 75% is growth. 25% is due to recoveries.
spk05: Okay, good. There's still a good number on the core business. For the forward look on fourth quarter, if you could give a view just on the different applications, how you're seeing the trends by application, and then an initial view for 2023 at this stage, like how you see your own business and how do you see the industry and the context with that just as we go into early part of the year. There's some calling for a kind of cyclical correction downturn. If there's an initial view how you see first quarter versus seasonal.
spk06: Well let me start with the first part. I think that's the quarter on quarter revenue change and then per application. I mean we don't guide per application but I can give you some high level I mean, the two segments where we see the most prominent changes are in communication and consumers. Auto and computing are less impacted than the quarter-on-quarter, and that's generally what we see. Now going into, and this is from Q3 into Q4, going into Q1, I mean, we don't guide Q1. I mean, there are multiple uncertainties still, and we're working closely with customers to understand their forecast and forecast changes. You know, we watch also closely what the market is doing. So, you know, we don't share guidance yet for Q1. Megan, do you have anything to add with respect to the quarter-on-quarter specifics?
spk01: Hi, Randy. It's Megan. So I think Gil covered the color on the end markets well. And with respect to your question about 23 Q1, you know, as Gil mentioned, we're monitoring. We would say, though, for the full year 23, we would expect to continue to outgrow the semi-market. I think you see that well for 22. And the reason for that is our position in support of advanced packaging where those needs are more diversified and we are less exposed in some of the areas of weakness.
spk05: That's helpful. One follow-up question just on the gross margin. The sales delivered quite a bit of upside. It was still a good gross margin on historical perspective, but the Just to leverage, given the sales strength, I'm curious on the gross margin, because also in fourth quarter, with sales coming down, there's a few point lower gross margin. Like traditionally at that revenue level, you could be a few points higher. So if there's mixed impact or other factors affecting the gross margin, or just did fall a little bit short on the leverage.
spk01: Sure. So with respect to Q3, we did have an increase in material content between Q2 and Q3. That product mix change is what's causing, I would say, a more mild gross margin percentage. However, we did have very robust profitability with records throughout gross profit dollars, operating income dollars, and EPS for Q3. As it relates to the change for Q4, that sequential change between Q3 and Q4 having a decline in gross margin percentage is truly around the reduction in utilization. That incremental margin is around 45%, which is what we typically guide with our financial model. So there is no change in our structural costs. And I would also point to the full second half performance given the significant outperformance in Q3 followed by more than seasonal decline in Q4 with some of those accelerated builds mix shifting, the profit levels are expanding on a second half view compared to the prior year second half. So even with gross margin percentage decline, gross profit dollars, operating income dollars, and even bottom line EPS is expanding around 20%. And again, that's even with significant increase in the product mix shift to advanced SIP.
spk05: That's helpful. Actually, maybe one two-part follow-up. Just one clarification, the SIP, if you can give a framework how this year looks like it will track relative to last year, because I think that's some of your mixed impact. And then the other question I wanted to ask was on the CapEx. It sounds like a tool delay, just the nature of it, because supply chain is improving a bit. just where the delay is. And then if there's an initial view on the capital intensity for next year, if we should think with the push out, it would be that capital intensity plus the $50 million, or you'll take into account business environment. So it might be actually a little bit of a lower capital intensity into next year.
spk06: Okay, let me start, Randy, with the SIP part, and then Megan can pick up on the capital intensity for next year. I mean, SIP certainly in the third quarter had significant growth, also coming from last quarter. Now we see year-on-year changes, let's say. close to 50% when it comes to year-on-year changes in our full advanced SIP portfolio. So significant change of which the change in both communication as well as consumer were driving the larger part of this growth. With respect to the capital intensity, is that answering your question, Randy?
spk05: Yeah, sorry. Yeah, that is helpful, just the close to 50% growth. So that explains a bit on also the mix for the margin. And then the capital intensity, I guess Megan can take that one.
spk01: Yeah, sure. So, Randy, the update to our guide of reducing $900 million is really around as we're fine-tuning timing of payments and equipment delivery. As it relates to looking forward, you know, we would still use a rule of thumb of, you know, 13% or so capital intensity. We will have our spend for Vietnam included in that. And, of course, we'll take into account any sort of changes in the environment. But at this time, you know, I would say the rule of thumb of 13% is a good mark.
spk05: Great. Thank you, Hill and Megan.
spk03: Thank you, and just a reminder to ask a question, press star one on your telephone keypad. Our next question comes from Hans Chung with DA Davidson. Please state your question.
spk04: Hi, thank you for taking my question. So first, I want to touch base on the 4Q. I know you comment the China, some impact from China, the export restricts. I remember that's low to mid-single-digit percent. Should we think about that, just the average level going to 23? We will continue to see that kind of impact next year.
spk06: Hans, this is Hugh. Let me try to answer that. We were still evaluating how that further develops. This is a judgment of our, the impact of the fourth quarter and the measures, the new measures of the restrictions are just being announced. You know, we don't know whether we can recover this, but definitely in the fourth quarter, it's a low single digit impact. And there is an expectation that either it will continue at that level or we are able to recover that when it shifts, that same business it shifts to other customers.
spk04: I see. And then regarding the inventory correction, how would you characterize the inventory level in the supply chain or at your customers? When do you think that correction could end? When do you think we can see the patterns that Q2, Q1, or even later second half?
spk06: Yeah, that's a good question, Hans. You know, we see the inventory and the industry being different in different parts of the market. If you take, for example, the automotive market, then the larger part of that market we see inventory still being slightly below the target level of some of the customers. So I would characterize that at low, while in, for example, the communication market, we see specifically inventory pockets in the low and mid range of Android smartphones. And that will take, in our expectations, still one quarter, maybe one to two quarters to build that inventory down. Now, if we take the computing market, Then in the PC market, we see similar trends that there is an inventory at the mid-range to lower end PCs. We also expect that that will, let's say, normalize towards the second quarter of 2023. Other parts of the compute market that cater for the data center and networking part of that market, you see inventories at the normal level. Now the consumer part of the market, we also see some inventory in some pockets, but on the, for example, on the IoT wearable market, where we saw significant increase quarter on quarter from the second to the third quarter, we don't believe that there is a huge inventory built up, so we see there a normal inventory. So in summary, I think inventory is different in different segments of the market. But the pockets in the market with high inventory, we expect that to normalize towards the second quarter of 2023.
spk04: That's helpful. So what are the utilization right now, and then how is that trending? I suppose they're trending down in fourth quarter, and then just kind of curious, like, what's the current utilization rate? And then when do you think that could fatten out?
spk06: Yeah, let me make some comments on the utilization rates. I mean, we don't report that specifically, but some indications in the third quarter, we were running at maximum utilization. There were limited pockets with slides. under utilization, and that was specifically in our Japan factories, but the remaining factories were running at full utilization. Going into the fourth quarter, we still see a high utilization rate, some fallback in our Korea factories with respect to a correction in the communication markets and in the consumer market, but the remaining factories will stay at very high utilization.
spk04: Great. And then, and I think last one. So as we are in the downturn of the industry cycle, so I was wondering like how variable are the cost structure in both Cox and OPEX?
spk06: Can I leave that to Megan? Megan, the question is about the cost structure going forward when there's a slight correction in the industry.
spk01: Yeah, sure, Hans. So from our financial model, what you would expect on the behavior related to down cycles is, you know, typically we've shared a 40 to 50% incremental margin, and that's how you can measure the behavior of our fixed cost structure with changes in revenue. That's what's playing out here in Q4. With respect to OPEX, OPEX has been fairly well controlled, even in the face of very significant revenue increases. So I would anticipate there would only be mild changes in OPEX associated with potentially lower employee compensation as it relates to, you know, a downturn cycle.
spk04: Got it. Great. That's all I have. Thank you.
spk03: Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Hiel for closing remarks.
spk06: Thank you. Let me recap the key messages. MCOR delivered record third quarter results with revenue of 24% year-on-year growth and EPS of $1.24. Advanced packaging revenue increased 33% year-in-year to around 80% of total quarterly revenue. We expect fourth quarter revenue of $1.85 billion, resulting in a second half growth of 16% compared to second half 2021. MCOS continues to execute on its three strategic pillars of leveraging our advanced packaging technology leadership, focusing on industry mega trends, and strengthening our broad geographical footprint. Although we observe macroeconomic headwinds and weakened market forecasts in some areas, we believe the long-term growth drivers for the semiconductor industry remain in place, and we are confident our strategic focus and leadership position in key semiconductor markets will continue to drive future growth. Thank you for joining the call today.
spk03: Thank you. Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.
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