Amkor Technology, Inc. (AMKR) Earnings Call Transcript & Summary

Good morning, and welcome to the Bank of America Leveraged Finance Conference and to our session with Amkor Technology. I'm Ana Goshko, Bank of America's credit analyst covering technology and telecom, and I'll be moderating the discussion today. And we are very pleased to have with us Megan Faust, Amkor's CFO; and Vince Keenan, Amkor's Vice President of Investor Relations. So a quick note to the audience, you have a tool through which you could submit questions. So feel free to do that throughout the presentation, and we'll be checking that. And with that, let's get started. So Megan and Vince, again, thanks for being with us. And maybe you could begin by recapping a brief overview of Amkor for us.

Sure. No problem. Good morning, Ana. Good morning, audience. So Amkor outsourced assembly and tests. So we're nestled in that supply chain where we do packaging and test for semiconductors. Two primary technologies are the advanced technologies, which you'll hear us talk a lot about today and the mainstream technologies, which is mainly wire bond. I can go into the key markets on it because I think we're going to talk about those two. But we're -- our biggest market is communications. That's about 40%, followed by consumer, around 20%, 25%; auto, 20%; and then as well as high-performance computing.

Okay. Great. And then for someone who is more of a generalist and might not have in-depth understanding yet of the technology, could you describe the difference between what you call advanced packaging and mainstream packaging?

Sure. Vince, do you want to take that one?

Sure. The mainstream is really, as Megan said, primarily wire bond and leadframe. It's for simpler ICs, where the IO, the input is not as complex. It's still used in a lot of simple applications because it's a very economical package, it's been around for a long time. But the real growth is on the advanced side. The advanced packaging is really designed for more complex chips, where you have more IO, there's more challenges with power consumption, heat, and we also have advanced packages where you put multiple chips in a single module. So in advanced packaging, you've got flip chip, which takes advantage of the entire die, so to speak. There is wafer-level where you can expand the die, especially with high-density fan-out, some of the most advanced. And then, of course, advanced system-in-package, or advanced SIP, is a unique package in that you not only have ICs, but it can be up to 200 other components. So basically, you got a lot of circuitry in a single package that gets mounted on the board. And these are all very desirable in the most advanced technologies like high-performance computing and smartphones.

Okay. Great. That's helpful base to start with. And then could you also just talk about how you work with your customers and the different customer types that you have? And then to the degree which you have any customer concentration?

Sure. So as far as our customer range, we have over 200 customers, predominantly the major semiconductors. But we also work with directly with the OEMs and at times even foundries. Some of those relationships are from the design stage where we're partnering with our customers to design the product all the way up to high-volume manufacturing. So that's one area that we see distinguishes Amkor is we're not just the manufacturer, but we can also partner to solve those packaging solutions for our customers. As far as concentration, we disclosed that our top 10 customers represent 60 -- on average, 60% of our revenue. That being said, it is a fairly discrete market, so we don't see that concentration as a negative. And with the consolidation happening, that will continue to have high concentration.

Okay. Okay. So then the pandemic, let's talk about how you've kind of fared there. So if you look back to your pre-pandemic 2020 outlook for the business, so let's talk February time frame versus where end market demand and the company's sales performance stands today or has ended up year-to-date, what's different versus the original 2020 expectation and what's not?

Vince, do you want to take that one?

Sure. The COVID has definitely been more of a benefit than a negative. If you look at the work from home, that definitely helped our high-performance -- our computing area, especially since we have a lot of data center and storage and memory. I would highlight only NAND memory, no DRAM. And then if you look at the communications business, we did much better with the launch of premium smartphones in the spring that helped our first half of the year. And even though we had a stronger-than-expected first half, we're seeing normal seasonality in the second half. So altogether, the launch of premium smartphones as well as there's more content in the 5G phone. So as 5G continues to grow, we have a content lift. The only offset to those 2 positives was the automotive market, where the shutdowns in the spring at the OEMs had a negative impact, and we're still seeing -- we're seeing the beginning of a recovery, we kind of bottomed in the second half but auto has definitely been lower than expected this year.

Okay. And then what about from your own production standpoint, have there been any kind of supply chain issues, kind of freight cost related to anything that any materials you require or any kind of implications for how you're running your facilities?

Yes. So I would say, fortunately, from a production standpoint, we'll just start with the manufacturing entities. We have been successful in being able to keep our operations, for the most part, open. We had some minor disruptions as countries were shutting down and requiring different people regulations, but we were able to quickly respond to that and catch up on production. So we did not have any significant impact there and luckily that's continued. As far as supply chain issues, that has been a definite focus. We have not had any disruption to our supply and what we've been able to provide our customers. We've worked very closely, our procurement team has worked very closely with our suppliers as well as the customers to ensure we can get what we need and also ensure the second sourcing is available. And with Amkor being so large, we do have some purchasing power to ensure that we get those supplies and materials that we need.

Okay. And then have you incurred any specific costs or actually have benefited from potentially savings less travel or kind of other overhead costs that may have gone down this year that will -- in a kind of post-pandemic environment, hopefully, in 2021 will impact your SG&A or your kind of cost of goods sold at all?

Yes. It's really interesting how it's almost a wash as far as the savings that you mentioned, lower T&E has really then offset any incremental freight cost or transportation costs or labor costs as far as needing to manage through some of this. So we have not had what I would say material impact to our income statement this year. And as that unwinds, I see that also washing. So I don't expect significant upsides or downsides as this winds down.

Okay. And then final question on this topic. So in a post -- hopefully, a post-vaccine environment, from end market demand, had you expect anything sort of out of the typical kind of seasonality or kind of demand outlook that might result from hopefully what may end up being a post-vaccine fuel?

I think the hope after the post vaccine is the automotive will get back to normal. I think there's been such disruption with those factories having to shut down and the impact on the inventory and the supply chain, and that's working its way through now. But until things are more stable, that to me is the market that has the most opportunity for stability.

Okay. Okay, great. So on that topic, so looking out on the growth outlook by end markets, so you did obviously highlight that communications is the biggest end market currently and then sort of kind of clustered together, you've got consumer products, automotive, industrial, computing is kind of the smallest end market for you. But how do you expect that to trend over the next 1 to 3 years? And where do you have the most kind of stability versus potentially volatility and the growth?

Yes. So we're in a really fortunate position where there's multiple secular trends out there now that are actually impacting all of our end markets. So as we think about the next 1 to 3 years, we like to talk about them by end markets. But in communications, the 5G proliferation over the next, honestly, 3 to 5 years, it takes the new generation to work its way through. That's going to be a very significant growth trend for our communications market as that comes in and the 4G moves out. And the benefit there is the increase in content and Vince mentioned that, that there's a lot more content, and so there's a lot more opportunity for Amkor to participate in that trend. As we work through the end markets with automotive coming back, there's a very significant growth in the advanced systems that are supporting automotive, ADAS, infotainment, electric vehicles, that is all requiring incremental content. It's not replacing old content, those are all new features, new systems. And as they work their way from the premium cars down into the mid-tier cars, that also increases units, et cetera. IoT in our consumer business is really expanding the desire for people to have connected home, IoT devices, multiple devices, there's just a lot of the units with respect to consumer that's expanding. And last, while it's the smallest market for Amkor, it's the largest in the semi space is high-performance computing. And really, with the data center needs, et cetera, there's a lot of activity there. So I would say, from a 1 to 3 year, we're in a really great position in all of our end markets. Now as you talk about stability and volatility, communications tends to be the most volatile, given those cycle times tend to be a lot shorter. And the success of those cycle times are all independent of each other. So it's really -- if you think about the growth trends, it's really dependent on the success of each launch versus more stable markets like automotive, where those cycles can be upwards of 10 years. And so that's a much more sticky long-term base and you get less volatility in the automotive market.

Okay. That's helpful. So if we focus on communications, I believe you touched on this, but smartphone units are forecasted to decline this year. But how does that impact Amkor because obviously, you've been having a lot of growth in that segment. So with units down, how are you growing revenue?

Sure. So yes, we've been able to grow our communications market significantly this year. And despite that units being down, it's really a content story. And there's -- with 5G coming on, and that's just a small portion of the units, the 5G, we believe for Amkor could be 10% to 15% incremental content. So each cycle has new wins, new programs, and we always -- you'll win some, lose some, but we always want that net win, and that's how we grow our communications market.

Okay. And then we did touch upon customer concentration for the entire company. But for the communications, kind of end market, in particular, what's your customer concentration there? And then what's your exposure to the Chinese end market?

Sure. So from a communications, we do serve both the iOS and the Android market. And then the Android market, it is inclusive of Samsung and the China phone makers. So it is very broad. Historically, we had done more Android business than iOS, but as we look at how 2020 is playing out, it is weighting more towards the iOS, but I wouldn't want there to be an impression that there's a significant concentration on one or the other, we're very diversified with both ecosystems.

Okay. And then on the Chinese side?

Yes. Vince, on the China side?

Yes. It's definitely more exposure. We did not have high silicon, which is, of course, the semiconductor subsidiary of Huawei. So our exposure to Huawei is primarily through other customers, and we put it . Overall, some of the trade engines involving Huawei do not really impact us, and there actually could be some upside if some of the other Chinese handset makers gain market share, that would be a benefit for us.

Okay. Because you have exposure there, okay.

Yes.

Okay. So maybe shifting to consumer now. So like what products and applications are you most exposed to?

Yes. Go ahead, Vince, on these.

Sure. The -- there's a lot of, I guess, connected home, things like that, set-top boxes, TV, but the really growth that we're seeing is starting to be in wearables. When you look at fitness devices, hearables, there's so many areas where they need that -- what we deliver with advanced packaging, primarily advanced SIP, which is miniaturization, power consumption and performance. So we've actually seen a strong ramp this year in our consumer division with advanced SIP. And we see a decent pipeline for future products. And I would also say advanced SIP is also used in the smartphone. So overall, that's a nice growth engine for us.

Okay. And then same question for automotive and industrial. So sort of outside of automotive, what exposure do you have? And then obviously, the company has had its J-Devices subsidiary, so how much of the automotive and industrial is in Japan? And what's the potential for expanding outside of Japan.

Yes. Go ahead, Vince, you've got that.

Sure. The Japan exposure, we don't really give revenue by country, but as you mentioned, the J-Devices acquisition has been very successful. We have picked up a customer base, but I would also mention a lot of their newer designs that are done in advanced technology are primarily done outside of Japan. Those factors are mainly serving mainstream products. But overall, the automotive business has been growing nicely, especially in advanced technology, which is up to 30% of our total revenue. And as Megan mentioned, those are the areas of ADAS, infotainment, electric vehicles, this is the area that we see growing content. And what's great about this is it's not tied to units. The mainstream business has been more of the up and down with units, but advanced systems start in premium cars and then go down into the mid-level and eventually the economy car. So there is content growth even if units are not that strong.

Okay. Great. And then just to wrap up on the end market. So computing, what's the current kind of organic growth? And what's the outlook for growth in that's -- the computing end market?

Vince?

Sure. The computing market is primarily -- we've got 2 big areas: data center and infrastructure. And then as I mentioned before, memory or storage. So the high-performance computing has definitely got important growth areas, especially around the data center. We're seeing new entrants around AI chips, GPUs. So all of these are sweet spot for advanced technology. In fact, the one area where we have reasonable scale in 2.5D, one of the most advanced technologies is in the data center space. So that area really has -- even though it's kind of our smallest end market, it has a lot of long-term growth drivers as the data center becomes more important, not only traditional players, but the hyperscalers are also starting to design their own chips.

Okay. That's helpful. So I just wanted to touch upon the China exposure and the outlook. So you did touch upon the kind of Huawei issue and some of your exposures and the potential in the communications segment. I mean is most of the exposure limited to the communications end market? Or is there kind of a broader presence or strategy for China?

Well, China, just to clarify, we serve local China customers and that is probably mid-single digits of our revenue. But we also, at our China factory, which is our largest -- second largest factory, we serve both local China and international customers there. So it's important to understand that dynamic. As far as what we serve to the local China market, we do have some business, I would say, it is communications, fingerprint sensors, et cetera, where they see Amkor, a medium core because of our advanced packaging capability. To the extent that a local China OSAT can do the production, the regionalization, they are going to go local for local. And so we typically don't participate or try to compete on that lower end mainstream business in China, we leave that to the China OSATs. So as far as the strategy, we'll continue to provide the advanced packaging capability that those customers need. But as we're all observing this regionalization and China really wanting to stay within China to support, that most likely will evolve, but Amkor's exposure there is fairly small.

Okay. Wanted to touch upon what the competitive environment is like currently. So the -- if you look back a few years, there was a round of some industry consolidation. So interested to know how you believe the environment has changed as a result of that? And then secondly, are you facing any new competition, and we continue the questions on the role of foundries?

Sure, sure. Yes. So obviously, the largest consolidation was with ASE and SPIL most recently. And we see that as a good thing. With that consolidation, there was some rebalancing that needed to happen because that combination became so large. So that was something that came out of it. We also see more rational pricing so we actually see a very stable competitive environment. And with ASE and Amkor, we see that we would consider ourselves the Tier 1 OSATs that were the most capable with the broadest advanced packaging capability. Beyond that, there are some others that have niche competitive advantages, but not to the scale, let's say, Amkor or ASE has. As far as new competition in the foundry, so yes, there has been specifically with foundries having advanced packaging capability. When you look at the scale of advanced packaging, the areas that those foundries are addressing are almost near foundry like packaging versus what the traditional Amkor, ASE scale would be. And then if you kind of move down into what would then drop into EMS. So we're not seeing what the foundries are looking at doing as intruding on our space. And in fact, many of the foundries we partner with today and they're customers of us today, and we help them solve some of those packaging issues. So whether we can be a second source, if there is an increase in market demand for some of those technologies or perhaps partner with them on some of their bumping supply chain services, we can do that.

Okay. That's helpful. So let's move on to some numbers. So the company gross margin overall, so I think you've spoken about a 20% area of target. And you're getting kind of close to that. So you're currently kind of in the high teens, 20%. So is the 20% area sort of the target? Or is there potential from any kind of actions and/or product mix that you might anticipate that could take you above that?

Sure. Yes. So gross margin can be impacted, as you said, by product mix, it's impacted by utilization and seasonality. And currently, even at our high-teen gross margins, we are experiencing impacts from product mix as well as utilization. So right now, we have a significant impact related to our advanced SIP business and that, that has grown and become quite a more concentrated weight of our revenue. And typically, that has a higher material content. And when you have that higher material content, it does, I would say, have an impact or constrain your gross margin percentage. That being said, over the last 4 quarters, we've had really strong cash flow operating margin down to bottom line EPS, despite what you might characterize as some constraining on our gross margin percentage. The other factor is utilization. And I would say that's the biggest lever to our gross margin. And currently, we have -- we are experiencing lower utilization in our mainstream factories and specifically automotive, and that was a result of the pandemic. So that also is having an impact. And as automotive returns, that will have a positive effect. The last area I would say that's impacting gross margin specifically is we've noted that Japan has had a decline in the business, and we have taken action to rightsize that and are in the process of restructuring. That -- those restructuring activities will reduce our fixed costs by around $25 million. And so that will then also have some benefit to the gross margin percentage going forward.

Okay. Okay, great. So I'm getting a question from the audience on free cash flow. So let's kind of move into that realm. So as a leading-edge OSAT provider, capital intensity can be high as it drives the revenue growth. So Amkor guided to $550 million of capital expenditures for this year, but the potential to stretch to $575 million. What would put you at the high end of that range? And what specific end market or technology is it dependent on?

Sure. So our $550 million guide, I would say the largest area that we invested in this year was advanced SIP. And we've heard Vince talk a lot about that advanced SIP market predominantly in the communications as well as the consumer space. So that's the biggest area of investment. The current spend of $550 million is in the low teens capital intensity. And we've seen that come down over the years. And there's been a lot of discipline put on our CapEx spend to ensure that we can provide free cash flow. That's our goal. As far as the potential for that additional $25 million, being that we're 2/3 through the quarter, we're not seeing the need to increase spend. The projects that we had, we were contemplating whether we would have to pull in that spend and predominantly advanced SIP, we're going to be able to meet all of those time schedules without having to pull in extra spend for 2020.

Okay. That's good to know. So on free cash flow, generally, so the company has not always generated annual free cash flow through cycles. But I think -- and the recent kind of couple of years, you've done a lot better job on that. So has something changed in the way that you're operating your business to allow kind of more consistent free cash flow generation?

Yes. I would say so probably 5 to 7 years ago, we did shift our style to have flexible manufacturing lines. Previously, we had dedicated manufacturing lines for our customers. And to the extent that their demand changed, we were left idle. And so by moving to a flexible manufacturing line and convincing our customers that we can still meet their demands, that allows us to optimize the efficiency and use of that capital and have higher utilization. And higher utilization is really, as I mentioned before, the key to profitability and then end result is free cash flow.

Okay. So we have about 2 minutes left. So I want to get at least one specific debt question in here. So Amkor recently initiated a quarterly dividend that equates to about $39 million year-over-year. Can we take this to be a sign that you're confident that you'll be able to meet that with annual free cash flow?

Yes. So we're very confident in how the long-term outlook looks for Amkor as far as our business model and our ability to generate free cash flow. And we've demonstrated that over the last 5 years, which had 2 down years that with our ability to manage CapEx that we were able to produce free cash flow to meet and have that meet the dividend requirements.

Okay. And then final question then is, so how comfortable are you with your current leverage? And are there any sort of things you would like to do to kind of further optimize your debt structure, whether it be secured or unsecured mix USD versus non-USD?

Yes. So we feel that the current level, we're comfortable within our long-term when we exceeded that here in September. As far as our capital structure, we continue to evaluate, but we believe the mix of U.S. and foreign debt helps with the cost of debt and our ability to repay. And so as we manage the levels of cash and free cash generation, we'll continue to evaluate what the right level of debt is.

Okay. Great. Okay, well, I think we're out of time. This has been a very helpful discussion, learned a lot. And just thank you very much for joining us at our conference, Megan and Vince.

Yes. Thank you, Ana.

Okay. Take care. Bye-bye.

Bye-bye.