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

Hi, everyone. I'm Dylan James. I'm a Vice President with NASDAQ's office in San Francisco. Very pleased to keep the program moving along this morning with Amkor. And so you're going to be hearing from Amkor's CEO, Giel Rutten. He will present a couple of slides then I'll come back for a quick fireside chat. So very enjoyable with one of our great listed companies in Arizona. So, Giel Rutten.

Good morning. Thank you, Dylan. So I will start off indeed with a few slides on Amkor to introduce the company to all of you. And do I get a clicker or I just ask you to move the slide forward? Next. So on Amkor. Amkor is a manufacturing service company in the semiconductor supply chain. We were established in 1968. We're one of the pioneers in the semiconductor manufacturing supply chain. Now we have a large manufacturing base in Asia, employ about 30,000 people on a global basis. We spent on an annual basis, about $900 million in CapEx, and that's going into capacity expansion, bode as well as factory floor space, quality investments. I think all of that is being done across our manufacturing footprint. About 11 million square foot of manufacturing space. Located -- our factories are located in 7 countries across Asia, and we are present in about 11 countries across the world. Strong manufacturing footprints in these 7 countries, and we are adding a new facility currently in Vietnam. Now we're supporting key customers, actually lead customers in all critical end markets from the mobile smartphone market, automotive, where we hold a leadership position, consumers and industrial as well as in the compute market. So we have a couple of strong positions. We're the leader in advanced packaging. We hold the #1 position in automotive. And on a global basis, we hold the #2 position in the outsourced manufacturing space. Now where are we in the semiconductor supply chain? This gives you, let's say, a high level representation. Starting on the left side, you see the classic semiconductor companies. They come in 2 shapes and forms. One is fabless companies. Fabless companies, they don't do manufacturing themselves. They do the design of the semiconductor companies. They hold the IP positions, and then they outsource the manufacturing of their semiconductor components. And then there's a second category of companies that have their own in-house manufacturing base, we call them IDMs, integrated device manufacturers. And this category of companies coexists. I think typical examples of fabless companies are companies like Qualcomm, Nvidia, et cetera. Typical, let's say, IDMs are companies like ST, NXP, et cetera, here in Europe. Now, the IDMs, generally, they tend to start outsourcing more and more of their manufacturing both on the wafer manufacturing side as well as on the assembly and test side. So then we have wafer manufacturing. It's either in-house or through wafer foundries. I think the most well-known foundries on wafer side is TSMC, but also GLOBALFOUNDRIES, et cetera, have a strong position in that market. And then we get packaging and test, that's Amkor. Other names, our #1 competitor is ASE in Taiwan. And then, of course, after that supply chain, it goes into the OEM equipment manufacturers. So this could be a mobile phone or a car or a computing device. So that's the supply chain, and we form a critical part of that supply chain. Now with respect to the growth catalyst of the industry, this will not be new to you. But for us, it's important that we play in all of these critical markets. So both the mobile market, specifically the smartphone market, where the transition to the 5G standard is driving growth, a higher semiconductor content per device. The IoT market is an important element to this, specifically moving into wearable devices. Then the third is automotive, more semiconductor content per car, specifically in applications like driver assistance features, sensors, digital displays that increases the semiconductor content in automotive. Specifically in Europe, here in Europe, an important market, also an important market for us. We have a manufacturing site in Portugal, and we see huge interest there from the automotive community. And last and not least the computing market, it starts with the terminal devices like PCs, but a large investment in semiconductors is in the networking and data center parts where the increased data rates across the network, moving from an analog economy to a digital economy for the next couple of years, will increase that data traffic and that will drive investments in that infrastructure continuously. So in all these markets, we see that these growth trends and the singular growth drivers are enabled by advanced packaging. The more mainstream packaging, the wirebond packaging is supporting the baseline, but advanced packaging is all -- is driving this, whether you do 5G RF, an RF integration, whether you do computing, automotive, everything is enabled by advanced packaging. And with our leadership position, we believe that we are very well positioned in these singular growth drivers. Now strategic focus areas of the company is, first of all, the markets, I already mentioned that. We're clearly focused on these singular growth drivers and more specifically engaging with the lead customers in these markets that drive innovation. Because to build a position in each of these markets, you need to engage with the leaders in these industries, make sure that you co-develop, that you introduce new technologies in sync with their supply chain requirements. Technology side, we have a model of developing and introducing new technologies, not by in-house pure technology development, but it's a co-development with customers. That's our innovation model. And there, we exclusively work with the leaders in the industry. And that enables us basically to introduce technology platforms and then proliferate them further into the industry. A few examples there, and I'll come back to that later, are in the RF domain, but also in the compute and automotive domain where we are able to work with the leaders in this industry. Another important differentiator for us, and that's definitely more important over the last couple of years is our geographical footprint. So besides technologies, of course, we also are a manufacturing partner. We need to support a resilient supply chain for our customers, and that relates to scale, to quality, but also to location. I think we definitely have a strong diversified footprint with a strong manufacturing base in the critical parts of the geographies that are currently becoming more important because of the geopolitical dynamics currently playing. We have a strong manufacturing base in Korea but also in Japan, also in the rest of Asia, but also in Europe, for example, and we're currently evaluating how best to engage in the U.S., because we see strong demand for our customers to regionalize our supply chain presence and de-risking that, not only from geopolitical efforts also, but we also see that an overriding element of IP protection is becoming more important, specifically, for example, in the automotive industry, where customers don't want -- they see, for example, the China market being a highly competitive market when we transition into electrical vehicles. So we see there a regionalization of IP development and IP protection and that also holds for manufacturing IP. The last important pillar of our strategy is financial health. I think over the last couple of years, we've built significantly the strengthening of our balance sheet to assure that we can weather fluctuations or cyclicality in the market that we're serving. I think we're very well equipped to do that. To invest in the business, we also put a dividend policy in place for shareholder return over the last couple of years starting in 2020 and actually this year, increasing another 50% on dividend to establish a strong shareholder return. And that ends my short introduction to -- of the company and we go to -- I think later on, we can do some Q&A, but now we go to the fireside chat. I'll leave this…

Thank you, Giel. So let's talk more about your focus markets. And if you can walk us through current dynamics, how Amkor is positioned and then the growth opportunities that you see in each end market?

Okay. Thanks, Dylan. Let me try to do that. I mean Amkor -- and I touched upon that earlier already. I mean a very important market for us is about 40% of our revenue is in the communication market. Very much centered around the smartphone market, a big semiconductor market in general, but also a big market for us. We are engaged with leaders in that industry, in the key ecosystems, both on the iOS as well as on the Android side. What we're currently seeing is that in that market there are pockets of that market that are weakening, there are some inventory buildup on the low and mid segment of the smartphone market, mainly in China. And that is, I would call, a headwind to that industry. For Amkor, however, our position in that market is very much to the premium tier 5G smartphones, where we hold a couple of leadership positions, specifically in the RF domain and display and camera domain, which stay pretty resilient. So although the overall segment is weakening a bit because of inventory, our position is still strong. And going forward, we still see more resilient in that higher-end premium tier part of the market. Now another important market for us is the automotive market where we hold a #1 position. Now there are 2 elements to it. One is our manufacturing excellence because automotive -- serving the automotive market requires a high-quality manufacturing base, and we have most of our factories qualified for automotive manufacturing. Technology is also important because we see applications in the automotive domain moving from more traditional applications on the semiconductor side to more advanced packaging. Things like ADAS, digital displays, in-car networking and telematics are all enabled by advanced packaging. And there, we're pretty happy with that market. Now the automotive market going forward, we believe the inventory levels, as reported, are still relatively low. And the car manufacturing volumes are expected to be strong next year. So we believe that going forward that, that's a strong market for us also. And that's an important pillar. Now going to the compute markets, a little bit mixed picture there, the PC market. And I think that's well known, is a bit weak, but the infrastructure and data center market is still fairly resilient. So with limited exposure to the PC market and more better exposure to the other parts of that compute supply chain, we feel pretty satisfied with that performance. And then last but not least, the consumer, specifically IoT market, a bit more exposed to consumer behavior and demand related fluctuation there. But overall, our pipeline is strong. So in general, we're happy with our footprint in the individual market segments. And although there is a macroeconomic headwind, we still believe that our position is fairly resilient.

You had talked in your slides about some of the supply chain. And so I wonder if we could unpack supply chain risk mitigation a little bit more given the disruptions that you've seen, as you mentioned due to pandemic or the geopolitical dynamics or even the natural disaster. Can you talk in more detail about the geographic diversification, being a key differentiator versus competitors? And you even have manufacturing that's here in Europe, right? So you talked about the regional focus. Maybe talk about the OSAT and how it's set up and what you're hearing from customers on changing supply chains and opportunities that are developing there.

Okay. Yes, that's a good question. Dylan, thanks for that. To give you a few elements there and step back a bit on that supply chain dynamics. I mean, over the last 3 years, mostly by 2 key events, one is the COVID event. And the second thing is the geopolitical tension between the 2 main geographies, China versus U.S. We clearly see that the industry -- the semiconductor industry created a larger awareness of the vulnerability of its supply chain. I mean, concentration in Taiwan, dependent on some of the manufacturing in China, and that made companies both OEMs, so end customers as well as semiconductor companies, realize that they had to revisit their supply chain strategy going forward, and that's currently happening. I think there are a couple of important elements to that. One element is de-risking too big of an exposure to the China's manufacturing supply chain, that's a clear element. And let's call it -- the second element is very much reshoring of manufacturing. Reshoring in the U.S. And as you see in the CHIPS Act being approved in the U.S. to reshore semiconductor manufacturing back into the U.S. and that's driven by an awareness that has a vulnerability of national security. So it's not per se cost related or supply continuity, but it becomes a matter of national security in U.S. Reshoring also back to Europe. And I think there is another driver in Europe. It's not per se national security. It's driven by a big presence of the automotive industry in Europe. And potential vulnerability there in the switch to electrical vehicles, where there's an awareness that China is becoming and already is a big competitor in that transition. And there, I think reshoring manufacturing in automotive back to Europe for critical components is becoming an important element and we are part of that. I think we have a factory in Portugal, and we're currently expanding that factory significantly when it comes to capacity as well as introducing specific technology together with our customer base. So that's another driver. And then if you go back from the U.S. to Europe to Asia, I mean, a similar thing in Asia. There are different -- in different jurisdictions, there are different dynamics. In Japan, there is a stimulus of the Japan government to bring some of the semiconductor manufacturing back to Japan. It is for advanced sensors, it's for automotive. And we have 5 factories in Japan, and we see there also increased attention there. So in multiple geographies, there are multiple dynamics. But for Amkor, we are investing in that. We are investing in that diversification and expanding in geographies to align our manufacturing presence to the supply chain needs of our customers. And we're supported in doing that actually by governments. In Europe, there are programs, in the U.S. there are programs, and we are very positive that this is a key differentiator for us as a company.

That's great. Could we shift focus to your CapEx plans? And you're targeting $900 million this year, which includes some spend for the Vietnam expansion. Can you talk through where you're focusing investments and how you're thinking about spend going into next year?

Yes. Capital investments for the company this year, we spend about $900 million in capital investments. That means a capital intensity of about 13% of our revenue. And that intensity, we foresee that to continue at that level going forward. Now there are 3 key areas where we invest our CapEx currently. One is centered around investment in capacity and capabilities on advanced packaging, because we believe that advanced packaging will grow above average in the industry. A lot of the key drivers in the semiconductor industry are enabled by advanced packaging. So that's the core of our investments. And we do that in our manufacturing base across the world in Korea, but also ramping up our new factory in Vietnam and also in Europe and in the foreseeable future in the U.S. That's one big part. It's about 60% of our investment is going into capacity and capability expansion. Second part is building new factory floor space. We grew over the last couple of years, on average close to 20% per year. So we need more factory floor space. We don't want to diversify too much in greenfield projects, but we're expanding there quite significantly. That's another part of our investment. And the third part is an investment that goes into quality enhancement, automation in combination with R&D capability where we invest in. Factory automation for us is a high priority, and that relates very much to announcement of our quality and quality control. And we do a lot of investments in, for example, automatic pattern recognition on defects, handling automation, engineering data management across factories, standardization across factories. So these are the 3 key elements. And I would say going forward, these priorities may shift a little bit, but in relative terms, they will stay as is.

And you mentioned your dividend, but you've also recently announced there an increase in the quarterly dividend and the new framework outlining the goal of 40% to 50% of cumulative free cash flow back to shareholders, elaborate. Everybody loves a dividend. So would you mind elaborating a little bit more on this?

Yes. I mean, starting a dividend program was part of strengthening our financial basis a couple of years ago. And I think it was a journey that lasted at least 5 years for us to basically build a strong balance sheet to assure a consistent cash flow for the company and we introduced the dividend program 3 years ago. We started modest on a return that was probably below market. We increased in 2021 with 25%. This year, we increased with 50%. And on top of that, we introduced the framework where our intent is to have a shareholder return of 40% to 50% of our free cash flow over time. And that can come with extraordinary dividend payment or even we have the option of share buyback programs. So I would see this as an element of strengthening our financial position and also the confidence that we have in the business going forward. I think that's what I would like to say on the dividend program.

And then just generally, and then we'll open it up for some questions. How do you see 2023 setting up for the semiconductor industry and Amkor in the stage at -- and what would be some of the key areas that could allow for the business to outperform industry growth?

Yes. 2023, of course, we report per quarter, and we guided in the fourth quarter, but let me open up a little bit on our expectation for the next year. I mean there are macroeconomic headwinds. I think that's undoubtedly there. It's inflation, it's consumer confidence that's coming down and inflation going up, capital is getting more expensive and that would drive investment levels to moderate. Overall, there are also positive signs. Whether we reach the trough, it's unclear, it's hard to predict. But there are already corrections, certainly on the inventory side that are being implemented over the last quarter already. So we see inventories going down, and that would stabilize the business. End market demand in some pockets is still strong, and now we refer to automotive, refer to certain segments of the higher-end mobile markets. So I'm personally still optimistic for the industry next year. Although a growth year like this year, where we see double-digit growth is probably not there. It will be moderation. But we definitely believe in the longer-term growth drivers of the semiconductor industry. I mean, there is a strong underpinning of this industry in multiple market segments, and that means that instead of firing on 1 cylinder, we're currently firing on 4 cylinders. And even if some of the markets are slowing down, definitely, as an industry, we have a very strong basis to work from. So I'm optimistic, and we will continue to invest in the individual growth drivers of this market.

That's great. Well, thank you for your thoughts and words. And we'd love to open it up for a few questions for Giel.

Just 2 questions. Are you doing anything on hybrid bonding? And the second question is, what's your maintenance CapEx intensity?

Our maintenance CapEx, but let's start the, let's say, the first part of the question. Do we anything -- do we do anything on hybrid bonding? I mean hybrid bonding is a specific technology that is applied in multiple, let's say, product segments. Of course, it's becoming more prominent on the agenda because of, I would say, end of Moore's law is driving chiplets reintegration into an SoC, and that requires hybrid bonding. We have a hybrid bonding already for multiple other applications in-house, so the technology is available. Although I believe that first generations of chiplet integration will be restricted to a foundry base. It requires very high levels of investment. And I clearly see that as an extension of the current wafer manufacturing. There was another part of the question, our maintenance CapEx. I mean, maintenance CapEx, we don't characterize our CapEx as such. We don't have the maintenance CapEx. I think we have a maintenance budget, which is part of our overall other cost of goods sold and I cannot put a percentage to that, but it's part of our cost of running our business.

Other questions? Great. Giel, thank you very much for the wonderful education.

Thank you. Thank you, Dylan.

Thank you.