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spk05: Good day, ladies and gentlemen, and welcome to the Amcor Technology First Quarter 2023 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 Zhu, Head of Investor Relations. Ms. Zhu, please go ahead.
spk01: Thank you, Operator. Good afternoon, everyone, and thank you for joining us for AMCOR's first quarter 2023 earnings conference call. Joining me today, Arheel Rutin, 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 Gil.
spk03: Thank you, Jennifer. Good afternoon, everyone, and thank you for joining the call today. MCOR delivered first quarter revenue of $1.47 billion and EPS of 18 cents, both above the midpoint of our guidance. These results demonstrate MCOR's strength in navigating through this industry cycle. Our automotive and industrial end market posted another quarterly revenue record, driven by resilient demand and building on MCOR's leadership position in this market. Our strong footprint in premium tier smartphones also generated positive results. with low single-digit year-on-year growth in our communication business. Challenging macroeconomic conditions and weakening demand in consumer and computing contributed to a total year-on-year revenue decline of 8% for the first quarter. The semiconductor industry is facing near-term headwinds, mainly caused by high inventory and weak end-market demand. most recent market forecasts projecting a further decline for this year. Our advanced packaging portfolio accounted for 73% of first quarter revenue and has a strong project pipeline. We expect to perform better than the market based on this leading position in advanced packaging, our broad and diverse global footprint, and our focus on industry megatrends. Now let me review the dynamics in each of our end markets. Revenue from the communications market was up 2% year-on-year, driven by strength in our advanced SAP portfolio, supporting multiple functions throughout the phone. We observe customers continuing to work through excess inventory, especially within the Android supply chain. Current estimates project smartphone units to be down low single digits this year. However, semiconductor content in premium-tier phones continues to increase, and innovations are improving performance and adding functionality. Emcor holds a leadership position in advanced packaging throughout premium-tier smartphones and has a strong track record as a trusted partner for innovative solutions and for delivering operational excellence. Revenue from the automotive and industrial market increased 14% year-on-year, driven by growth in ADAS, electrification, and industrial applications. Advanced driver assistance systems generate growth in multiple applications, from cameras and high-performance processors through sensors like radar and LiDAR. EV adoption is leading innovations in electrification, especially the introduction of wide bandgap materials like silicon carbide and gallium nitride. These materials enable improvements in power efficiency and charging infrastructure. The trend is accelerated by government initiatives to support a clean energy transition. ADAS, electrification, infotainment, and telematics will drive continued expansion of semiconductor content per car. Market reports project automotive electronics to grow at the mid-teens CAGR for the next several years. one of the highest growth areas in the semiconductor markets. As the leading automotive OSET with qualified manufacturing lines in multiple geographies and a broad technology offering, we expect ongoing strength in this market. Revenue from the consumer end market decreased 43% versus the first quarter last year. We observed multiple near-term headwinds impacting the consumer markets. including product lifecycle changeovers in the IoT wearable markets, reduced consumer demand, and excess inventory. We continue to work on building the pipeline for IoT devices utilizing our advanced SAP solutions and are diversifying our product and customer portfolio. We recently began ramping new products for the emerging AR VR experience and expect the proliferation of IoT devices to drive revenue growth beyond the current semi-cycle. Revenue from the computing end market decreased 17% year-on-year, driven by weakness in personal computing and storage. In data center, we support all areas, from CPU, GPU, memory, and AI accelerators to routers and switches. High-performance computing devices supporting artificial intelligence require the use of the latest silicon nodes and are enabled by advanced packaging solutions such as 2.5D and high-density fan-out. In addition, innovative thermal materials we apply in our packaging solutions help our customers resolve technical challenges. With our broad advanced packaging portfolio and established relationship with lead customers and foundries, Emcor is well positioned to capitalize on opportunities in the computing market. Our global manufacturing organization continues to demonstrate operational excellence and supply reliability across our factories. With lower capacity utilization, the team is focused on managing costs while maintaining our high performance standards. Geopolitical dynamics continue to impact the semiconductor supply chain. With our diversified geographic footprint, Emcor is uniquely positioned to support our customers with reliable and cost-effective manufacturing. We are actively securing new programs with our customers in support of diversifying and de-risking their supply chains. Investments in our new Vietnam factory continue as planned, with the goal to start high-volume manufacturing late this year. Additionally, we are expanding our silicon carbide and power technology capabilities to both our Portugal and Japan factories. In the U.S., we continue to be actively engaged in discussions with customers, partners, and economic development agencies to establish a semiconductor supply chain. Now let me turn to our second quarter outlook. We expect second quarter to be similar to first quarter. with revenue of $1.475 billion at the midpoint of guidance. For the second half of this year, we remain optimistic that demand as well as supply chain inventory will improve. We are poised to accelerate with our leading technology portfolio and diversified manufacturing and end market footprints. We believe that the secular growth drivers for the semiconductor industry remain in place, and we are well positioned to outgrow the markets. With that, I will now turn the call over to Megan to provide more detailed financial information.
spk06: Thank you, Gil, and good afternoon, everyone. First quarter revenue of $1.47 billion exceeded our guidance midpoint. Year on year, revenue was down 8%, a decline that reflects the current semiconductor cycle. We believe that AMCOR's diversified end market exposure is mitigating cyclical variability and will provide stability and resilience as we work through this cycle. The automotive and industrial end market, representing 26% of our Q1 revenue, continued to run at record revenue levels. Our technology leadership and advanced packaging enabled us to win new programs in premium tier smartphones. growing our revenue and market share year-on-year in the communications end market, despite challenging market conditions. The resilience in these markets partially offset the softening of the consumer and computing end markets, which are being impacted by macroeconomic factors and inventory buildup in the supply chain. Our enhanced focus on cost discipline during a downturn is essential to maintaining profitability and generating free cash flow throughout the cycle. As a reminder, our financial model allows for significant incremental flow-through to gross margin of around 40% as revenue increases. This same model applies when revenue declines. Profit drops faster than revenue. Gross margin for the first quarter was 13.2%. and gross profit was $194 million. During the quarter, our factory teams were able to lower manufacturing costs by around $30 million to help offset the impact of underutilization and foreign currency losses. Headcount control, overtime reduction, and reduced work weeks all contributed to lower labor costs. Lower supplies and maintenance and less electricity usage contributed to a decrease in OCOGs. These temporary cost containment measures are flexible tools, allowing us to reduce cost while maintaining the ability to support the anticipated increase in demand for the second half of 2023. Operating expenses for the first quarter were $126 million. Research and development expense increased over Q4, primarily due to incremental new product introduction activity, including development of test solutions, supporting new products targeted to launch in the second half of 2023. Operating income was $69 million. An operating income margin for the quarter was 4.7%. Net income for the quarter was $45 million, resulting in EPS of 18 cents. First quarter EBITDA was $229 million, and EBITDA margin was 15.6%. Our balance sheet is strong. We ended the quarter with $1.3 billion of cash and short-term investments, and our total liquidity was $1.9 billion. 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. Our financial strength provides flexibility to continue to invest in our future through this short-term semiconductor cycle. Moving on to our second quarter outlook, we expect Q2 performance to be similar to Q1. While there continues to be uncertainty with respect to the duration of the cycle, we anticipate an improved second half of the year, driven by the introduction of new phone models, resilience in automotive and industrial, and more balanced inventory levels. For Q2, we expect revenue of $1.475 billion at the midpoint, representing a year-on-year decrease of 2%. For comparability, a reminder that our Q2 22 results were adversely affected by the COVID lockdown of our Shanghai factory. We expect gross margin to be between 12 and 14%. We expect Q2 operating expenses of around $125 million. We expect our full year effective tax rate to be around 17%. Second quarter net income is expected to be between $30 and $70 million, resulting in EPS of 12 to 28 cents. We are holding our CapEx forecast for 2023 at $800 million. We are being prudent with our spend, and our CapEx forecast is 12% lower than 2022. Our investment plan is focused on strengthening specific advanced packaging technology in growth areas such as advanced SIP and flip chips, as well as investments in our diversified geographic footprint. With decades of semiconductor industry experience and successfully operating through prior cycles, we are confident in our long-term outlook supported by the industry's secular growth trends. Our technology leadership, broad geographic footprint, and strong financial position enable us to continue to outperform the semiconductor market. With that, we will now open the call up for your questions. Operator?
spk05: Thank you. And ladies and gentlemen, at this time, we will 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 that 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 star keys. Our first question comes from Randy Abrams with Credit Suisse. Please state your question.
spk02: Randy Abrams Okay, yes, thank you. I wanted to ask the first question just about the the view on your applications. I think just from one side, the auto industrial has been quite strong, and I believe you mentioned resilient. So the outlook from here, I'm just curious if you see that strength sustaining it. We've had the foundry feedback get a bit softer from the high base. And flip side on some of the applications going through correction, if you could give a view the consumer SIP where we saw a sharp decline, if you expect that headwind or new projects could rebound momentum. And then if you could give a comment on the other areas like PC and compute. So, yeah, just curious more on the applications, how you're seeing the relative resilience and also the weakness on the consumer side.
spk03: Okay. Hello, Randy. Hope you're doing well. Let me start trying to shed some light on the automotive and industrial part first. You know, we experienced indeed a resilient demand in the first quarter and expect that to continue the second quarter. And actually, we have strong indications that that will remain strong in the remaining part of the year, so in the second half of the year. Just as a reminder from the foundry side, you know, within the automotive sector, market, there is a significant volume of silicon being produced by IDMs in their internal factories. So it's not only driven by advanced silicon from the frown leaf side. So we continue to expect resilience. We don't see any indications of increasing inventory in that automotive market. Go back to the second part of your question. on the consumer system in package. Yeah, we saw some headwinds in the first quarter, as we already mentioned in the earlier part of our earnings call. We see new programs coming up in the second half of the year. There was definitely also a headwind with respect to market demand. So going forward, we expect a recovery. That will start towards the end of the second quarter a little bit in the ongoing part of the second quarter. And we feel comfortable that towards the later part of the year, there will be continued strength in this market. I mean, having said that, long term, we believe that the wearable market, specifically on the consumer side, the IoT wearable market is a product category that will further grow. It's a little bit choppy. Short term, it's very much exposed to the swings in market demand, but overall we're confident that longer term this is a good market for us. With respect to these other parts of our SIP portfolio, a large part of that is related at a very high level to the swings in the communication market, whether it's on the Android side or on the iOS side, and it ebbs and flows with that market. So although we saw strength, and that strength is very much underpinned by market share increases in the phone, specifically premium-tier phones, but we expect definitely there will be an upswing in the second half of the year attributed to the launch of new premium-tier phones. Does that answer your question, Randy?
spk02: Yeah, that does. I mean, if I can follow up on the implication for second half, How do you see the inventory? Do you see some spillover where it could have a bit of a dampening factor? Or are you seeing, I guess, one on the inventory situation in the slower markets? Do we get through that and get back to using a third quarter or even just factoring low base, even pick up from there? So I'm just curious at this initial stage, second half view, and To follow on the full year view now, your outlook versus industry outlook.
spk03: It's difficult to predict what will happen exactly in the second half. I mean, in our view, the reduction of inventory, which is ongoing currently in the critical markets like PCs and also the smartphone market, specifically on the Android side, mid-range and low-end Android phones, So we expect that to further improve in the second quarter, although it is going slower than expected. And going into the second half of the year, the recovery for the communication market specifically is, you know, partly, of course, attributed to the, let's say, the burn off of our inventory. and the industry inventory, but is also very much attributed to end market demand. And that's difficult to predict. There are macroeconomic elements with respect to consumer demand for new mobile phone models. But overall, we're optimistic that there is a much more balanced inventory situation going into the second half of the year and further improvement during the second quarter.
spk02: Hi, and actually just one other question I had on the HPC related. If you could talk, I think in prepared remarks you mentioned high-density fan-out and 2.5D. So on HPC, and especially as we talk about the AI where a lot use the things like co-ops, do you supply and see gaining content on those areas as far as 2.5D fan-out or is that high-volume opportunities? like working on the high-end flip chip and test. So I'm just curious your exposure and how you see the opportunity, especially for more AI-type accelerators.
spk03: Yes. You know, with respect to the, let's say, AI devices, the most advanced AI devices using 2.5D accelerators, We have them in production, and we started producing them last year using 2.5D technologies, and we're ramping them further going into this year. And we believe that that will continue for, let's say, the remaining part of this year, contributing to, let's say, growth and overcompute segment in general. So it is 2.5Ds. And I think it's a common 2.5D technology that's being applied for these devices, Randy.
spk02: And I'll just ask one other technology follow-up. The mobile market, do you see much – I mean, there's been talk about disaggregating dyes, but it's kind of stayed as a flip-chip process. Do you see much shift in how those mobile communication – and for that, high-density fan-out – Is there growing adoption, whether in computer or mobile?
spk03: Yeah, it's our belief that the adoption of high-density fan-outs and also desegregation of SOCs will first happen in the compute market, and specifically the most demanding compute segment, like AI, where we go to the next generation technologies fairly quickly. Now, the next adoption would be in the mobile market, but that may take a few more years. We think that in the current solution for the mobile processors, be it the most common apps processors, that would happen, let's say, in the timeframe after 2025 to 2027, where they adopt 3 nanometer and below processor technology.
spk02: And if I can follow up on, if we move toward hybrid bonding for some of these applications, whether processor and memory, high bandwidth memory, do you see much of a role or would that be found reprocessed? Just curious if you have plans to get involved in that supply chain.
spk03: Yeah, we believe that when it comes to chip-led technology desegregation of monolithic SOCs, utilizing, let's say, hybrid bonding technologies, that first generation, second generation probably will be covered in a foundry environment. The technology is very much an extension of the wafer manufacturing and it requires also technologies that will call for a very high investment level. Next generations, when there is a broader proliferation of these technologies, that will definitely go into the OSET domain, and that would only happen when we get a course done on the technology side and further standardization for these technology domains. So, yes, longer term it will move into OSET domain, but the initial generations would be in the foundry domain.
spk02: Thanks, Flavio, and good job navigating the environment.
spk03: Thank you.
spk05: Thank you. Just a reminder to ask a question. Press star 1 on your telephone keypad to remove yourself from the queue. Press star 2. Our next question comes from Tom Disley with DA Davidson. Please state your question.
spk04: Yes, good afternoon. Maybe just a couple quick questions on the market itself. You talked about 8% decline year over year. What was your view of what the market did in that period as well?
spk03: Hi, Tom. This is Gilles. Good to have you on the phone. First quarter market, we see that market forecast, Tom, for the year is actually deteriorating quarter on quarter. If you look to the latest numbers which come out from market firms like Gartner, it comes to, let's say, a correction downward for the full year of 2023 of high single digits to low double digits. decline for the total semiconductor market. So for the first quarter, it's difficult really to judge, but we believe it was down close to the same level, high single-digit, low double-digit decline on a year-on-year basis.
spk04: Okay. So I guess when you talk about outgrowing the market, Is it just where you're located in the marketplace, or is there share shifting going on, or is it just the fact that your leverage to the high end and your leverage to automotive creates a better scenario for you specifically?
spk03: Yeah. I think that it's indeed the last part that you mentioned, Tom. We believe that our market footprint very much into the automotive market, which is the highest growth segment of the semiconductor market, in the premium tier of the smartphone market, where we feel that we gain market share, specifically with new technologies being introduced. And then on the computing segment, with trends in the computing segment going from a vertical industry to a de-verticalized industry, that that offers... opportunities for MCOR as a leading O-set to grow faster than the market.
spk04: Okay. It sounds like there's reason to be a little optimistic about each of the markets improving in the second half. But when you look at the total performance of the company, which of these end markets do you think will be the biggest contributor to half-over-half growth in the second half?
spk03: Yeah, the biggest contributor for the second half versus first half growth for mCore is the biggest market that we're also observing, and that's the communication market. Communications is still above 40% of the total company revenue, and the growth in the second half will be driven by the introduction of new premium tier smartphones across the industry. Definitely on the iOS side, where we see a growing market share for ourselves, but also on the Android side. So recovery of the smartphone market, together with the introduction of new phone types, will drive growth in the second half.
spk04: Okay, great. And then, yes, looking at the model, Megan, how much variability is there in operating expenses on a quarterly basis?
spk06: Yeah, hi, Tom. So with respect to, you know, varying throughout the year, and we've given a general guideline that we would anticipate around $120 million per quarter. You can see that with our Q1 actuals and Q2 guide, that's running a little ahead. That really has to do with the timing of our NPI activity that's going to contribute to some of those second half launches. So I would say there's some variability, but albeit modest. So I would continue to look at a general run rate for the year of 120 per quarter.
spk04: Okay. And at what point would you expect depreciation to go up for the new facility in Vietnam?
spk06: So with respect to our Vietnam facility, we're anticipating that that would go online at the end of this year. So that, again, being depreciated over a fairly long period of time is going to have a pretty modest impact on depreciation as it rolls into 24. And then we'll be bringing on the equipment in that facility basically, you know, in concert with the programs. And I would view that as a general growth perspective. You know, we manage that with our overall CapEx forecasts. That would just be part of our regular M&E increases.
spk04: Just curious, for the first couple lines, how much of the equipment is going to be new equipment versus relocated equipment from other facilities?
spk06: For the beginning, those lines will end up being new equipment to get those lines through MPI, QUAL, and then into production. As we expand there, we will continue to look at our full capacity and ensure that we're balancing that appropriately. As you may know, our Center of Excellence for SIP is in Korea, and as we expand that product line in Vietnam, we will consider whether it would be optimal to transfer some of that equipment once we get things up and running.
spk04: Okay. And then final model question, when you look at the potential for growth in the second half, What would you estimate your incremental gross margin would be on that growth?
spk06: Yeah, great question. So we have given a general guideline from our incremental margin drop through the gross margin of around 40%. I would say with the anticipated increase in advanced SIP coming in into the second half supporting communications, you would probably see an incremental gross margin of slightly below that 40% in order to accommodate that product mix change.
spk04: Okay. Which of your groups would have the highest incremental gross margin?
spk06: It's not necessarily driven by end market, Tom, because we have, you know, I would say SIP supports not only communications and consumer. It's really, you know, while product mix has some impact, it's really a function of how well those lines are utilized moving into that step up in revenue.
spk04: Okay, great. And then, Hill, final question for you. When you look at the want to diversify manufacturing geographies with all your customers, are you starting to see companies wanting to shift capacity from one region to another, or is it still kind of in the early stages of just planning out how to do that in the future?
spk03: Well, what we're actually seeing currently, Tom, is indeed a very, let's say, active shift of capacity from one location to another. Another important trend is that customers look for a second source of existing capacity, and that all related to supply chain disruptions in, let's say, in the last couple of years. and it also relies to the, let's say, geopolitical tension in some areas. So we see that this is ongoing on, let's say, on a very active basis where we shift, let's say, where we offer customers a second source, for example, in our Vietnam factory, or where we work with customers to de-risk their supply chain by moving volume from one territory of one region to another region. So it's ongoing.
spk04: Okay. Well, thank you both for your time today.
spk03: Thanks, Tom.
spk05: At this time, I'm showing no further questions. I would like to turn the call back over to Nikhil for closing remarks.
spk03: Let me recap our key messages. mCore delivered revenue of $1.47 billion and EPS of 18 cents in the first quarter, above midpoints of guidance. We are expected second quarter to be similar to first quarter with revenue of $1.475 billion. We are confident that the secular growth drivers for the industry remain in place and will drive growth beyond the current cycle. With our leading technology portfolio, and diversified manufacturing and end market portfolio, MCOR is well positioned to outperform the semiconductor market in 2023. Thank you for joining the call today.
spk05: Thank you. This concludes today's conference. All parties may disconnect. Have a great evening.
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