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

Welcome, everyone. I'm Ana Goshko from Bank of America. And again, welcome to our 2021 still Virtual Leveraged Finance Conference that we're looking forward to being in person next year. But nonetheless, we're thrilled to have Amkor Technology here with us. We've got the company's CFO, Megan Faust; as well as Jennifer Jue, who is the Senior Director of Investor Relations and Finance. So Megan and Jennifer, thank you so much for joining us again this year. And I think jumping right in, the audience -- I believe this investor audience probably has a pretty good familiarity with Amkor, but it's also helpful to start out just by providing a recap and a brief overview of Amkor and what you do.

Thanks, Ana. So Amkor is an OSAT, which stands for Outsourced Semiconductor Assembly and Test company. We pioneered the OSAT model and have over 50 years of history, proving our leadership, expertise and our reliability. We're known as the advanced packaging leader, and we partner with semiconductor and foundry companies to manufacture and test all different kinds of semiconductor chips that ultimately end up in products like cell phones, cars, consumer products or even high-performance computers or data centers. We're proud to be the #1 OSAT for automotive and have the largest advanced technology portfolio and offer the most geographically diverse options for our customers to choose from to leverage their supply chains.

Okay. Great. So jumping in, I think the -- probably the most topical area of questioning in this conference this year, not surprising, is supply chain. So despite severe supply chain constraints that have negatively impacted, I think, most of your end markets, Amkor has delivered record revenue levels. So one, how did you do that? Two, how much of a damper did supply chain constraints impose? And does this mean that there really is really strong pent-up demand in growth for Amkor due to the backlog that a lot of your end market customers are experiencing?

Yes. I think let's just take a step back because there certainly have been a lot of disruptions in the supply chain over the past several quarters. From the pandemic-induced disruption and logistics, the disruption in the auto industry, all the natural disasters and calamities caused by the freeze at Texas, fires and earthquakes in Japan and Taiwan and the low inventory for 2019 being a correction year, there have been numerous challenges. And the overall supply chain, though, the OSAT part has not really been the bottleneck. The bottlenecks have been elsewhere. And so we're really able to keep up and work across the supply chain to provide as much relief as we can. So we work really closely and actively collaborate with our suppliers and customers to mitigate risks. And our procurement team has many strategies to handle such as our significant purchasing power, which has helped us create productive working relationships with these suppliers, brought up alternative sources. We've increased -- seen increased transparency with longer forecast visibility. So the industry has really pulled together and is working in a very collaborative way to try to mitigate all of the risks and constraints that we're seeing. I would say, to bring it back home a little bit with where we're seeing impacts, it's changed throughout the year. Earlier in the year, we saw some wafer constraints in automotive and communications, which we have really seen those largely improved now. Currently, we're seeing some constraints in critical IC components for our communications products as well as some of our consumer products, and we've seen some of that impacting our Q3 and Q4 business. Material availability also had an impact in our other end markets, but to a much more modest degree. And of course, the substrate supply continues to be an area of constraint that we're seeing impact all of our markets, and we expect that to continue on into 2022, hopefully, with some easing happening towards the second half of next year.

Okay. COVID's not over, unfortunately. So with these variants, unfortunately, that are continuing, are you facing any shutdowns or labor issues that are negatively impacting any of your factory capacity? And this might be a good point for you to just give us a refresher on where your key production facilities are.

Yes, sure. No problem. So I would say, generally speaking, nothing significant to report. When the pandemic first started, we had implemented really stringent protocols across all of our factory base. And knock on wood, we've been able to not have material impacts at any of our facilities locations. We did have some minor impacts in Malaysia as well as in the Philippines and some downstream impacts as well in areas such as in Vietnam. But we've been very fortunate that we haven't been significantly or materially impacted by COVID at any of our factory locations. In scope of scale, as far as where our largest revenue and factory locations are, that's going to be in Korea, which handles a lot of our advanced SiP and other advanced packages, followed by China, which is another advanced packaging facility. But then we also do have more mainstream-type factory locations in Malaysia as well as in Philippines, and then we have a factory location in Portugal as well. And we also do have locations in Taiwan too.

Okay. What about cost inflation? How is Amkor being impacted? And to the degree you are being impacted, are you able to pass those higher costs through to your end users? How fluid is that process, I would say? And obviously, labor and kind of wage inflations as well, is that a concern?

Yes. I would say that one of the silver linings that's happened throughout the pandemic is there's a lot more increased transparency. So we have seen increases on materials and on COGS such as labor and electricity. And we're able to work with our customers to push that cost increase into a price correction. And it's a fairly easy and straightforward conversation because everybody is seeing those same things. So we really do pricing as strategic versus opportunistic, and we really value the long-term relationship with our customers. So keeping those open lines of communication and that transparency, I think, absolutely helps in those areas.

Okay. And I know in the past, an issue of concern that investors sometimes have cited is the lack of real kind of long-term contracts that you have with customers. But is that actually a benefit here because you're able to have those conversations and you don't have things in backlog that you feel like you can't really reprice?

Megan, do you want to take that one?

Yes. I would say definitely, we're seeing some benefit in this environment with respect to arrangements. And we would say the majority of our top customers have entered into some form of an expanded engagement with us, whether that's from their perspective to secure supply. And then obviously, from our perspective, it helps to mitigate risk with respect to utilization in the future. So we see this collaboration with our customers and expanded long-term arrangements as definitely a benefit.

Okay. And then I think you have a very unique vantage point into the semiconductor kind of industry environment. Are you seeing any easing of the constraints and bottlenecks?

Yes. I mean I would say that it certainly has evolved over time, right? The recovery from all of those different calamities that have happened, I think as stuff gets back -- brought online, we're certainly seeing improvements in those areas. I would remind again that the OSATs are typically the bottleneck here in these situations. So as soon as those materials are available, we're able to process and push those packaging and tests through. And really, I would say the area that we're continuing to monitor is more so on the substrate supply side.

And just to add to that, there's a lot of push in the supply chain to improve the substrate supply. And so we would anticipate that expanding capacity to come online in the late '22. So we would expect to see some tightness continuing into the early part of '22 and not really seeing a lot of easing on that substrate issue until the second half when that new capacity comes online.

Okay. Okay. So I think this is a good segue into the topic of kind of onshoring, which is a big -- good time because I think the policymakers and companies themselves want to get their arms around their supply chains more. So a couple of different questions for you. So one, you did just very recently announce plans to build a new advanced system packaging or SiP assembly and test, I think "smart factory" in Vietnam and to invest $200 million to $250 million just in the first phase. So first of all, if you could just kind of fill us in on what drove this decision and why Vietnam and then when that construction's starting, when do we expect manufacturing to come online.

Okay. Sure. I'll -- I can talk about Vietnam and then we can expand that to some other location. So with respect to the decision, I mean, our advanced packaging factories are running very full. Q3 was a peak record for us. We were able to serve the demand well, but we do see continued growth coming with respect to multiple growth catalysts. And so the decision was really, do we expand in our existing sites and locations, which is what we've done over the past several years or should we look at a new geography. And serving customers and really doing our diligence, Vietnam really rose to the top as a good location for us to expand. And that was really centered around quite a few decision points. There's already a fairly well-established semiconductor ecosystem in Vietnam. And so that's proven that the talent is there. There's cost advantages of being in Vietnam. There was strong interest from our customers where it's actually complementary to their current supply chain. And so by moving there, that's able to support all of those aspects. There's also government support in Vietnam, too, so with incentives, et cetera, those were all taken into consideration. So we expect to break ground in '22 with construction completing mid-to-late '23, and we would have high-volume manufacturing in late '23. And as you mentioned, the first technology that we plan for Vietnam is the advanced SiP. We have historically housed that in Korea. And so by offering a new location for our customers that actually helps them, I'm going to say, diversify their footprint as far as where their products are being manufactured. From a financing perspective, we did say that this would cost between 200 and $250 million for the first phase. This will be 20,000 square meters of clean room space but there's the potential to expand that over time. The building that we're planning to build could take up to 180,000 square meters of clean room space. But we want to do this in a very measured and phased approach in order to manage cash outflows and production at the same time.

Okay. And is that $200 million to $250 million -- is that spread within the first year or how do you see that?

It will be spread -- yes. It will spread between '22 and '23 based on our projections. And so we're expecting that this is going to be managed within low-teens capital intensity. We don't see this as a significant step function in our CapEx spend.

Okay. And that's largely capital expenditures?

The $200 million to $250 million is the facility. And so once the facility is in place, then we will also have equipment capital needs, but that would be within our current growth budget, whether we were going to put new equipment in Korea or now we're going to put in Vietnam, that would have been part of our capital spend for '22.

Okay. And then as you're starting a new major facility like that, does it create some margin pressure at the offset as you're sort of not quite to scale yet?

There won't be significant margin pressure. Those costs are capitalized as part of the building and the construction. There'll be some very modest SG&A-type infrastructure, but nothing material that we would see or anticipate from a margin pressure.

Okay. Great. Okay. So then shifting to the U.S. question. So I think you have mentioned the potential to establish factories in the U.S. And as I mentioned, there's -- it's a big policy topic. Obviously, there's the CHIPS Act bill, which is being promoted by the Biden administration, potential incentives for companies to build chip facilities within the U.S. We've seen announcements from Intel, also Samsung recently. So how does that -- how does Amkor fit into that narrative? And where are you in your kind of decision-making process on potentially reshoring more to the U.S.?

Yes. The U.S. investment in the supply chain is something that we're still committed and very much interested in. We continue to see customer interest and manufacturing continuing to increase. As you mentioned, we're also encouraged by the Senate's passing of the CHIPS Act. Our current activities are -- we're actively exploring and evaluating potential sites for the factory location. And we really think that Amkor is uniquely positioned as the U.S.-based OSAT scale with our broad advanced technology portfolio. A lot of what you had just mentioned with TSMC expanding is happening really here in our backyard because we're here headquartered in Tempe, and we're really close to all the planned foundry sites. So we're continuing to be poised for it. We'll align our timeline with other U.S. supply chain activities as they start developing.

Okay. Great. So then maybe shifting more into just the overall need of your end market conditions and outlook. So we think about Amkor's current revenue by end market exposure. And let me just kind of tee that up for the audience. We've got communications, which is 40%-plus typically; consumer products, maybe 20%-plus; auto industry, about 20%; computing, 15%. What are the relative growth rates? And if we looked out 1 to 3 years, how would we expect maybe those segments to shift?

Yes, sure. So I would say we're pretty excited about how each of those markets has a catalyst for growth. What we're seeing in each of them are multiyear, what we would term megatrends. So in the communications market, we have the 5G and how that's proliferating through and we can talk a little bit more about growth there. In the consumer market, the IoT wearables space is exploding, and that's really unit-based. High-performance computing, there's a lot happening in there with respect to, I would call it, deverticalization, where traditionally it had been housed by IDMs and now it's expanding and that becomes an opportunity for Amkor. And then what's really well known is automotive and the growth expected there. And so each of those end markets is having increase in silicon content to support that and a need for advanced packaging technology. And that's where Amkor excels, and we're very well-positioned in each of those markets. So just to try to give some color on the growth expectations, per Yole, advanced packaging is expected to grow twice what the traditional or mainstream packaging has been. So they've characterized a CAGR of 8%, let's say, from 2020 to 2026, versus 4% for more of the traditional or mainstream and Amkor is very much focused on this advanced packaging space. So that's where we can see each of these markets really expanding. Specifically, we've seen automotive growth very strong in the double-digits. But what may be even more pronounced is the expectation of the high-performance computing market with what's happening there, and that absolutely is looking to be double-digit CAGRs. Amkor has a great pipeline of products in each of those end markets. We're partnering with our customers to develop new technology. Recently, we mentioned our DSMBGA , double-sided, molded BGA that's going into SiPs, and that's really contributing to both the consumer and the communications, but it's also proliferating into automotive as well. And then just as a reminder, in addition to these growth catalysts, we're also noting today that our inventory levels are very lean. Jennifer mentioned that earlier. And so we would anticipate not only will that demand be there, but there is a desire to replenish that inventory, and that's going to be a tailwind in the more coming years.

Okay. With regard to the concentration that you've had in communications, obviously, a blessing and a curse because there is sensitivity often to a particular concentration, particularly customer concentration. Again, if we look out one to 3 years, do you think that some of the other growth drivers will -- that the communications kind of share will kind of abate? Or kind of tidal wave of kind of demand is so strong in communications that you think its relative position will probably remain?

Yes. So with communications being our largest market, of course, right, 40% is what you had characterized, even within that, the concentration, as you said, I mean Amkor's well-positioned among all ecosystems in the communication. So we have a healthy business that's diversified across all ecosystems. And I think with respect to 5G rollout, that's really where we've excelled in our capability to support that rollout amongst all of the ecosystems. And so just to put some numbers out there, I mean, when 5G began rolling out in 2019, it was slow, only about 9 million units. But in 2021, that's going to grow to -- for 2020 it's about 200 million units, and in 2021, that's going to almost double to 500 million units. And that's not even half of the total volume of units. So there's still quite a ways to go for 5G to proliferate through the end user. So with respect to concentration, from Amkor's perspective, will that 40% moderate? It could. We do see significant growth behind automotive and high-performance computing. So I wouldn't expect the 40% increase. It could abate as you had mentioned.

Okay. Great. So shifting to topics of sort of margin and kind of free cash flow. So the company's gross margin goal has been in the area of 20% with high utilization. Is there any upside from here? And what would it take to achieve it? And then let me just throw this in there at the same time because it is capital intensity, which is also obviously a percentage of revenue, the guidance right now is for low-teens percentage. Should we consider that a base case level?

Okay. Let me take the margin comment first. So yes, 19% to 20% gross margin for a full year is -- that's -- we're on track to achieve that's going to be the highest gross margin percentage in over a decade. And that really was, as you mentioned, due to the high utilization, the strong demand and then with the OSAT able to serve that. And as Jennifer mentioned, not being the bottleneck. So utilization is the biggest lever to gross margin performance. That being said, we do have some pockets that are still not fully utilized. So is there an ability to expand that? There is. Specifically, I can comment on Japan. We're not fully utilized yet in Japan. There's been a significant recovery in the automotive market, but we're still operating in the mid-70% utilization on average there. Typically, we would see a 40% to 50% incremental flow-through on changes in revenue. And so as we build scale, there's opportunity to expand our gross margin as well. But there's variability from quarter-to-quarter as it relates to product mix, currency, employee increases that are tied more to cycles and merits versus volume. But we do see upside, and we're going to continue to optimize our cost structure.

Okay. And then on capital intensity?

So on capital intensity, we have commented that a low-teens capital intensity is a good, I'm going to say, baseline base case level for us. That's allowed us to grow. This year, nearly 20% would be our target with our Q4 guidance. And even last year, we had 11% intensity, and we were able to grow 25%. So that capital spend encompasses a portion of some facilities expansion as well as equipment expansion.

Okay. And then on free cash flow outlook. So in the past, the company has not always generated annual free cash flow. But with the margins that you've cited and the capital intensity that you're citing, it sounds like maybe you've evolved beyond that. So especially with the dividend you have in place, can the company generate sustained positive free cash flow?

Yes, great question. So our business is generating strong cash flow and EBITDA as we've been demonstrating with our performance. And so with continued strength in the business, our CapEx discipline, last year, we generated over $220 million of free cash flow. And this year, we anticipate we'll exceed that even with a 40% increase in CapEx. So we've demonstrated that we've been able to have positive free cash flow even in down years. So if you look back over the last 6 years, there were 2 cycles, 2 contractions and we were able to, with our CapEx spend, be able to ensure that we can be free cash flow positive. So that really has given us the confidence with respect to the dividend, as you mentioned, that we will be able to sustain free cash flow to support that dividend and even grow that dividend in the future.

Okay. Great. So then you've actually already touched on the next question was -- so you've said that you plan to increase the dividend over time, and you actually just did. So you raised it by 25% from $0.04 to $0.05 per share, which by my math is about an annualized dividend now about $48 million, let's call it, $50 million. And that equates to about 25% of your LTM free cash flow of about $200 million. So is that how you're determining the size of the dividend? Is it a free cash flow payout ratio that's determining it? And then how do you think about that going forward with regard to future increases?

Sure. So I would say there's a lot of factors that go into what's the right amount of dividend and then how should we increase that so that it is sustainable over time. So I wouldn't say there's a specific target free cash flow payout ratio because, as you know, free cash flow, while it will remain positive and have been positive, the amount of cash flow may fluctuate and our need for capital spend may fluctuate. So while that is a factor, I wouldn't say that that's what the determining factor was. So what we did evaluate was the strength in our operating results, our current balance sheet, providing financial flexibility in order to serve future opportunities. The other factor is we've had quite an increase in our stock over the last year. So that's had an impact on the yield. So all those factors were considered in coming up with the 25% increase that we set just this last quarter.

Okay. Great. But I think we're -- have a few more minutes left, so we have to touch on debt given this is a credit conference. So any plans on the debt side -- really to do anything is the question. But to refinance to raise capital potentially for some of the investments that you mentioned?

So we're always evaluating our capital structure and looking for ways to optimize any need for capital. We did mention for Vietnam that, that is not contingent on raising debt, that we would be able to fund that with our current balance sheet. But that being said, in this rate environment, we are always going to be looking for the best way to optimize our balance sheet. As far as leverage, we had set a target of reaching 1.5 gross leverage. We have exceeded that. We're at about 1.0x. So we do have some runway, but there's no immediate need to increase leverage at this time.

Okay. Okay. I mean, some might argue that you're underlevered. I actually have companies that -- like their leverage targets are to increase their leverage. Okay. Great. Well, I think we've taken up our time. It's been super interesting. I really appreciate it. Any final comments that you wanted to make to wrap up, Megan or Jennifer?

Yes. I'll just make a statement in general. But fundamentals in the semi industry have changed and innovation and growth are now really driven off of the multiyear megatrends of 5G, HPC, IoT and automotive. And these megatrends require advanced packaging expertise to deliver smaller geometries, faster performance and better power and thermal management. And this is really where Amkor excels. As I said at the beginning, we pioneered the OSAT model, and we have over 50 years of history, proving leadership, expertise and reliability. We're known as the advanced packaging leader, and we're going to continue to partner and collaborate with our customers to develop innovative solutions to the increasingly complex requirements created by the demands of the megatrends and the slowing of Moore's Law. Across our broad and expanding global footprint, we have the technology, we have the manufacturing capability, the operational excellence and the service organization and structure in place to pilot these customer solutions into the future. And really, financially, Amkor is in the most flexible position in our history. We're confident in our long-term outlook and our ability to support growth by investing in the business as well as returning capital to shareholders. This year, we will have set new records in revenue and profitability. And because of our advanced technology leadership, our deep customer relationships, our manufacturing excellence and financial flexibility, we believe that we are well-positioned to capture future growth in the industry, and we're really excited about Amkor's future.

Okay. Great. Okay. Well, Jennifer and Megan, thank you so much for being with us. All the best and hope to see you in person soon.

Thank you, Ana.

Thanks, Ana.

Okay. Bye-bye.

Bye.