Conference Transcript - AMKR 2026-03-03

Joe Moore, Analyst — Morgan Stanley, Semiconductor Research

Okay, welcome back. I'm Joe Moore, Morgan Stanley, Semi-Inductor Research, and very happy to have with us today the management team of Amcor, Kevin Engel, newly CEO of the company, and Megan Foss, CFO. Thank you guys for being here.

Kevin Engel, CEO

Good morning.

Joe Moore, Analyst — Morgan Stanley, Semiconductor Research

So, maybe starting with that leadership transition, you're coming in as CEO, but I know you've had a long time with the company. I think we overlapped at National Semi-Inductor one time 30 years ago or something. Yeah, a long time ago. but so you've been in this job a short period of time. Can you just talk about big picture, how you think about the opportunity at Amcor, any big changes from what you guys have been doing over the last few years?

Kevin Engel, CEO

Yeah, so, you know, I think about our, again, our strategic pillars. You know, I think that's the fundamental of our business. And I'll try to tie these three pillars into what we're doing today and how that's really relevant for some of the key growth markets for us in the coming years. So if you think about our first pillar, you know, elevating our technology, and leadership, and that is really fundamental. And you think about advanced packaging, and that's really what's accelerating the growth for the AI market. There's also a good bit of advanced packaging and communications. So a lot of areas there that we're really focused on partnering with customers to make sure we look at their roadmap trajectory, make sure we're able to provide the technologies that they need to move their devices forward. Then we have expanding our global footprint, which for us is also a key pillar. Especially if you think about advanced packaging, outside of Taiwan and China, Amcor is the only OSAP that offers advanced packaging outside of that region. So for customers looking for supply chain diversity, resiliency, we offer that technology in Korea and then obviously in the future in the U.S., so that's a fundamental pillar for us. And then the third would be enhancing our strategic partnerships. with our customers. And again, they kind of all tie together in some ways because those partnerships tie around where the customers want packaging done, and they also tie around that technology alignment. So those partnerships are very important for us to set the path forward. So I think those are the pillars that are going to continue to drive us forward as we think about the next two to three years.

Joe Moore, Analyst — Morgan Stanley, Semiconductor Research

Yeah, okay, thank you. The investment in the U.S. stands out, and I know you just reported and had a pretty big CapEx kind of guidance for the year. It speaks to, I guess, your conviction around the growth opportunities that are there. But can you talk about that? Can you talk about the decision to invest in Arizona generally and to sort of maybe step up the investment as we're seeing with these CapEx numbers?

Kevin Engel, CEO

Yeah, so obviously we've been working very closely with our customers on that. I think if you look back, this is a facility where we're not really focused on building, and they will come. It's really looking at the customer dynamics, working with the customers to make sure we build the scale that's needed to support that demand, ultimately, the customers see. So when we look at that step up in investment, that was, again, around really that push from the customers to build scale, obviously support some level of manufacturing in the U.S. I don't think anybody envisions that the vast majority of the manufacturing will back, but a portion where you want a full turnkey flow from the silicon all the way to the packaging. And that's what we're focused on. I think if you look across those customers, You know, it's really that partnership, you know, kind of goes back to that third pillar, which is really critical. And also the technology pillar in that the U.S. will be our more advanced packaging technologies. So if you think about construction, we broke ground in October last year, and we've been, we've basically finished the grading of the site. We've been pouring concrete, you know, kind of an interesting fact. Some of our larger pours, it's 300 to 400 concrete trucks that come in, you know, over the night. to do these things, and the concrete slabs are between four and six feet thick. So a lot of activity there, that's exciting. And then over the course of, you know, the next couple months, we'll start going vertical. So that'll be, you know, for me, a very exciting time where we start seeing, you know, the steel going in. So, you know, exciting. That'll give, you know, construction will be completed around mid-2027, and then we'll start moving the equipment in and, you know, start to build out, you know, production in 2028, early 2028. And when we look at this phase one, you know, again, if we're taking a two-phase approach, phase one is the first building under construction today. That'll, you know, once it's fully scaled, it'll be around 25,000 wafer per month capacity. And then phase two would basically be roughly the same size and scale.

Joe Moore, Analyst — Morgan Stanley, Semiconductor Research

The value proposition of sort of being the only person packaging outside of China slash Taiwan, it seems clear. How much of it is going to have to be geographically matched to the region where there's manufacturing? Obviously, there's significant buy-in to wanting this done in the United States from your customers versus just why isn't being in Korea enough to kind of mitigate the risks of some kind of geopolitical issue in Taiwan?

Kevin Engel, CEO

Yeah, so I think there's a couple of dynamics there. I mean, I guess the way we view it is Korea for us is a little bit of a short midterm bridge to the U.S. You know, Korea, if we look at the opportunities we have there, it's really been accelerating as, again, customers want diversity. So if we look at our investments this year on the equipment side, it's predominantly going into Korea as well as into Taiwan to continue to scale in Taiwan as well. And then, you know, so we see a path to where Korea will support, you know, kind of the Asia ecosystem. We have a facility in Portugal which will support this European ecosystem, and then ultimately longer term in the U.S., you know, have that support structure. I think if you look back and kind of think about, you know, how countries are viewing it, you know, obviously countries are really viewing AI as a national security item. So even, you know, countries and sovereign nations are also looking at how they have some level of that supply chain within their regions.

Joe Moore, Analyst — Morgan Stanley, Semiconductor Research

And you talk about having a commitment from customers to do this. You're not just building it in anticipation. They know they want to be here. How much of that is tied to TSMC's expansion in Arizona? Obviously, Apple is a major user. And are those customers willing to pay more for something to be packaged in that region because of the geographical preference?

Kevin Engel, CEO

Yeah, so let's approach that in a couple of different ways. So those two customers have made some public announcements around our partnerships. There's another one that's made some public statements. But ultimately, there's a long list of customers behind that, mostly in the computing segment, that want some optionality in the U.S. So I think that's exciting. When we kind of think about how that will continue to evolve over time, you know, it will – the technology suite, the advancements are going to continue. And from a customer commitment perspective, I think the way we view that is there's lots of different levels and different structures of commitments. They can be, you know, take-or-pay type agreements. They can be, you know, upfront investments related to either capital or they can be prepay agreements. So each customer has a slightly different dynamic there in how we're structuring those agreements. But ultimately, when we think about TSMC as a leading foundry partner with manufacturing in the U.S., they'll be a pivotal customer, and then we would expect that other wafer sources could also participate in that facility.

Joe Moore, Analyst — Morgan Stanley, Semiconductor Research

Okay. Great. Thank you. And then with regards to it, just because the capital spending number is pretty topical, can you talk about the balance sheet as you sort of spend that money and how you think about your allocations of capital going forward?

Megan Faust, CFO

Sure. Sure. No problem. So we've been preparing for this investment for quite some time. So we spent a lot of time in 2025 strengthening the balance sheet. So we ended the year with $2 billion in cash and short-term investments. We also have a $1 billion unused line of credit. So we had $3 billion in liquidity exiting 2025. So that was really in preparation for funding this capital. But we really have a lot of flexibility in how this is going to play out. As you know, we do have significant grants and investment tax credits that will help support the U.S. expansion. With the $7 billion that we've outlined for this campus, that would then equate to potentially $2.8 billion in government support. So that's one thing to keep in mind. As Kevin mentioned, customer commitments would come into play. And then from an Amcor financing or how we would manage the balance sheet, whether that's cash on hand or cash from operations, our leverage is really low right now. Our debt to EBITDA leverage is 1.2 times. So we have plenty of debt capacity. So we're really going to evaluate the right tool, the right timing based on the visibility and what's really going to maximize value to the shareholders. From a capital allocation perspective, really investing in the business, and we're signaling that with our accelerated investments in 26, we think this is a critical time to invest to capture that growth that's necessary. From a strategic investment, we really categorize in the second pillar that regional expansion. So that's demonstrated by both Vietnam and then our Arizona facility. And then we're going to optimize, you know, the debt structure, the towers, the cost of debt. And last, we're going to continue to return capital to shareholders. And we expect that we'll modestly grow that dividend even through this investment period.

Joe Moore, Analyst — Morgan Stanley, Semiconductor Research

Okay, great. Let me just talk about the business environment. Are there areas that feel incrementally better, incrementally worse than a few quarters ago? Obviously, advanced computes on everyone's mind. But just how are you thinking about 2026?

Kevin Engel, CEO

Well, I think there's a few things there. I mean, compute, we've talked about. I mean, I think that's obviously a significant growth driver for us. We've signaled, you know, we would anticipate about a 20% growth year-on-year in compute. And, again, our compute market includes PCs as well as, you know, data center. So PCs we would expect to be more modest and then, obviously, acceleration in the AI and data center area. So that's exciting. We think about automotive, you know, a couple dynamics there. You know, we think of that in market in two kind of pillars as well. There's mainstream, more wire bond-type applications where there's a lot of IDM internal capacity. And then you have the more advanced technologies, more flip chip and other type of technologies going into in-car computing, you know, infotainment and ADAS applications. That advanced segment is growing very quickly. So that's a very exciting area for us. And if you think about what's driving that growth, even if unit car sales are relatively flat, the addition of additional compute power and the additional ADAS functionality in the cars is continuing to accelerate. Then obviously you have, albeit maybe slower, the migration to hybrid and EVs, which typically has more semiconductor content as well. So that advanced area is growing quickly. If you think about the mainstream side, that for the past several years has been a story of inventory control at the IDMs and OEMs. I think that's finally starting to normalize, and we've seen three-quarters, quarter-on-quarter growth in that area. So, again, kind of slowly crawling out of that trough there. That's helping us with our Philippines factory where we're seeing relatively high loading. So that we would expect to continue. So for us, automotive is still an exciting, you know, area for this year. You know, communications, you know, we'll see how that market develops. I think there's a lot going on there, which kind of maybe leads into some of the challenges we've seen over the past, you know, quarter or so. And that comes around, you know, memory. Obviously, all customers are, you know, concerned about memory. Amcor typically doesn't procure the memory. It's consigned to us. But, again, if the memory is not coming in, then obviously we can't build the parts. So customers are definitely trying to balance there. And in some cases, what we're seeing is for customers where maybe they don't have all the memory they want, then they have to prioritize which products they want to support with that limited memory. And typically in the communications area, at least, that will go into more premium tier applications. And typically we have a higher penetration rate or footprint in the premium tier. So balancing act there. Silicon supply on the advanced nodes, So that's also an area that seems to be a bit constrained. For us, typically, how that manifests is lumpy loading. You know, foundries typically will ship a little bit more in bulk when they get in that type of dynamic. So we tend to see, you know, maybe more supply one week than we need and less supply than we need the next week. So that's all about agility and trying to manage our capacity along with this lumpy loading. Then the third kind of constraint that we see now is on the substrates, so advanced substrates. And that's from the growth in AI, put some constraints on some of the materials, and we're seeing that trickle down in the communications and some other areas. But at least that one, I'd say most of our customers saw that constraint coming, so they've been working on dual sourcing and other supply chain options. and then we have strong relationships with our supplier. So today we feel that's manageable. And then obviously over the weekend with the war breaking out, what's that going to do for oil prices? And then oil prices will typically trickle down to plastics and things like that from a cost perspective. So there could be some inflationary pressures there. But again, obviously that's very early to tell.

Joe Moore, Analyst — Morgan Stanley, Semiconductor Research

Yeah, I've never really seen this many different supply constraints emerging. when the sort of broad markets were just okay, but it's like one thing is driving shortages of everything. So very interesting. Maybe you talk about advanced packaging as a driver. You've got 2.5D, high-density fan out. I know for many years it's been a priority for you to increase your exposure to those technologies. Can you talk about how that's going?

Kevin Engel, CEO

Yeah, sure. So if we go back a couple years ago, we had a rapid growth in the 2.5D supporting some of the GPU business. And we had always kind of said that, you know, 2.5D would be the first technology, then it would transition into this HDFO technologies. And we're definitely seeing now across this year a rapid growth of the 2.5D. We've talked about, you know, roughly tripling that revenue this year compared to last year. So good dynamic there. And we've talked about how, you know, for us we view really that bucket, 2.5D and HDO, is one set of capacity because we can very quickly move assets between one or another. So even as, you know, potentially one technology, you know, shifts or there's a challenge on supply or a geopolitical issue, we can shift that capacity to the other quickly. So I think that's, you know, that's exciting for us to see that growth. And we talked about, you know, for that HDFO platform, two CPUs that we were ramping, going to ramp this year. So we've been investing heavily there. You know, as we talk about capital investment, obviously the U.S. manufacturing site is a big piece of that investment. But amongst just the equipment piece and the equipment, which is, you know, roughly a 40% increase year-on-year on equipment spending, that's predominantly going to Korea to support these HDFO-type platforms.

Joe Moore, Analyst — Morgan Stanley, Semiconductor Research

And when you talk about the 2.5D and the migration there, where it does put you sort of into an area where you're competing with foundries a little bit. But talking to TSMC and others, it seems like they're very happy to have you here. Can you just talk about how that business is going to get split going forward?

Kevin Engel, CEO

So, I mean, first, I think it's important to realize foundries are our customers. So there's a strong customer dynamic across pretty much all foundries. Then, obviously, like you said, with TSMC, obviously we have a partnership around the U.S. I think when you think about technologies, and then again, this technology leadership position that we try to make sure we're enhancing and moving forward and elevating, there's technology leadership related to, I would say, less leading node, where these are things like, think power modules, SIP, where you're continuing to expand and provide advantages within the package. but it's not necessarily driven by advanced node. So I'd say the foundries in that case typically don't participate in those types of innovations or accelerations of packaging. But when it comes to packaging that is fundamental to chip sales, especially advanced node chip sales, to me I think a lot about market adoption. So in the early days of a new package, typically there's a very high investment time or investment period And typically, the customer mix and the product mix is very small. So the foundries will participate in that area to develop that advanced technology, make sure they're able to sell their silicon. And then as that technology matures and starts to grow and scale between maybe different markets, additional customers, that's when typically the OSATs will come into play. because ultimately customers and customers, large ones at least, want dual supply chain optionality, and the foundries recognize that. So for us, these technologies that emerge over time, we want to be the leading OSAT, you know, we're the fastest follower to some of the foundries when they develop these new technologies.

Joe Moore, Analyst — Morgan Stanley, Semiconductor Research

And the growth opportunity is clear, but I guess is there a risk that you don't want to be an overflow capacity for them? So are you sure you have committed business for the investment?

Kevin Engel, CEO

Yeah, so, again, I think there's multiple models there. There's models where the foundry may be the customer, and then there's a lot of other models where the end customer is a direct customer. So, obviously, when the end customer is a direct customer, then you're not in an overflow model. So it's very different there.

Joe Moore, Analyst — Morgan Stanley, Semiconductor Research

Okay. And then can you talk about the – are there geographic dynamics that enter into that? Do you end up serving one geography of AI chips with those markets and just does any of the geopolitics affect you guys?

Kevin Engel, CEO

Yeah, so I think it comes more down to device level. You know, I think there are some device levels that can be true either in computing and communications to where a specific device is targeted for a specific region. And I think that comes down, again, to agility, being able to move capacity and make sure that you have a broader customer base so as maybe one device tails off, something else can ramp up to replace it. So for us, I'd say that's kind of standard business.

Joe Moore, Analyst — Morgan Stanley, Semiconductor Research

And then can you talk about the margin impact of advanced packaging? I assume it's helpful over time.

Megan Faust, CFO

Sure, sure. So the targeted margin for high-density fan-out 2.5D is well above our corporate margins. Really, the technical complexity, high investment creates barrier to entry, and there's very limited OSATs that are capable of doing full flow and then tight capacity. So the margin profile is high. In those early, I would call, you know, ramp-up investment qualification, you are going to have some dynamics where you're not going to have those margins right away. You need to build scale. You need to get the yields. You need to have the increased utilization. So that's what we called out as part of the Q1 impact on our margins. But with the, I would say, two products that we see ramping in the second half in the scale that we're expecting, we'll be able to have the margins that we're expecting at scale by the end of this year. And without giving guidance on our margin expectations from a full Amcor perspective, this movement to a more favorable mix of what we would characterize as high-value advanced packaging, we believe we can achieve in that mid-to-high teens gross margins in the second half based on our line of sight today.

Joe Moore, Analyst — Morgan Stanley, Semiconductor Research

Okay. Maybe we could go a little deeper on gross margin. You know, you were higher than that, you know, a couple of years ago. Is that possible for you guys to at some point return to those levels? And kind of what are the puts and takes around that?

Megan Faust, CFO

Sure, sure. Absolutely. So we anticipate that we can achieve margins, what I would call pre-semi-cycle, which has been a long time. And that semi-cycle is so prolonged, it really drove our mainstream utilization down for a very extended period. And that's what we're still experiencing today is very low margins in, you know, that part of our business. Utilization is really our key lever to profitability. We're a very high fixed cost, you know, business model. And so we need that utilization and leverage to return. So that's one aspect of what we're expecting to happen. In this low-utilized environment, we are taking the opportunity to streamline, specifically in Japan, our mainstream locations. We have identified one factory that we are closing down, so we're in the process of moving that business to our other sites and working with our customers. In addition to that, we have a couple of other dynamics that are now shifting, and they're really centered around our strategic priorities we've talked about. Our Vietnam facility is now, I would say, hit a great milestone in Q4 where we're at break-even. That had a 90 basis point impact to our 2025 gross margins, but we're in an inflection point where we're going to see that start to really benefit moving into 26. We're expecting to double our revenue, and that scaling in Vietnam specifically is going quite well. We have a great pipeline, lots of customer interest. That's a great region to ensure supply security. And then we've talked a lot about high-density fan-out and the expectations of that product mix shift and the benefit of that margin on our bottom line. So overall, we see all the ingredients to be able to return to those prior gross margin levels.

Joe Moore, Analyst — Morgan Stanley, Semiconductor Research

Yeah, and you're moving into higher and higher margin segments. You're spending a lot more on capital. You're providing geographic flexibility to your customers that they've asked you for. So it seems like you should get paid for that. at some point. Maybe going back, double-clicking on some of the end-market commentary, on phones, I appreciate some level of caution, because there's a lot of issues out there with memory, but your biggest customer seems fine so far. The second biggest smartphone customer makes memory, so that you hope they'd be okay.

Kevin Engel, CEO

So, you know, I guess we've heard about disruption in the China Android market, which isn't really a big market for you guys so just you know how worried should we be about this memory stuff and is it really as simple as if it affects apple it'll affect you you know or is it more broad than that yeah well i think you know we've said we would expect in communications to be you know single digit growth so i don't think we're we're projecting you know significant softness or anything i think if we look at q1 as an example where we got it there we see significant growth year on year in communications i think there's two pieces there There's, you know, the exit of a strong launch last year, you know, that's kind of continuing in the Q1. And then there's also, you know, regaining of the socket that we talked about, you know, historically. So those are boosting our Q1 numbers, you know, pretty healthy. And if we look at our position within that market in the different sockets, you know, we feel pretty good about where we are today. You know, every year, every cycle, there's different nuances on, you know, which customers win, which sockets, you know, and some customers, you know, we may participate, other customers, we may have a smaller footprint. So the share moves around, you know, you have to stay hungry with these customers for sure and be aggressive. But in general, you know, we feel pretty comfortable. And then we'll see, like you said, how the supply chain dynamics work out, if there's, you know, major headwinds there or not. But at least so far, we're not seeing that.

Joe Moore, Analyst — Morgan Stanley, Semiconductor Research

And you had a wearables ramp last year. You have other growth opportunities within communications that are important.

Kevin Engel, CEO

Yeah, I mean, so that we would call it our consumer market, wearable applications. And, yeah, so they're a positive year last year there. And, again, for that market, we would expect kind of low-digit, mid-digit, single growth. So, again, that is very heavily tied to just consumer spending. Do the consumer buy these wearable products? So, again, we'll see how that progresses throughout the year.

Joe Moore, Analyst — Morgan Stanley, Semiconductor Research

And then in automotive, you talked about some of the dynamics there that are driving multiple trends within there. But your conviction in that as a long-term growth driver?

Kevin Engel, CEO

Oh, I think it's significant. I mean, again, especially for this advanced, if you just – I mean, I think we can all think about over the past five years how much the car has changed related to when you sit in the car, the electronics that are in there. You know, my current model car, you walk up to it, you know, similar to a Tesla, you walk up to it and unlocks a car, it automatically recognizes your profile. It's harder when you do valet parking, by the way, so you've got to have a key for your valet. But those types of trends we would expect to continue. The computing in the car is going to increase. I mean, this is even without starting to talk about autonomous driving and those types of things that, to me, are even further down the road.

Joe Moore, Analyst — Morgan Stanley, Semiconductor Research

And then finally on compute, you know, the AI compute, I think is, I think everybody knows is very strong near term. I think that strength is pretty durable beyond this year. What limits your participation in it? You know, how big can you get in the specifically call loss types of markets?

Kevin Engel, CEO

Yeah, so I think what's limiting us today is more footprint related and maybe a little bit resources related to R&D. You know, these are all, all these MPIs are pretty intensive when it comes to the call cycle, you know, building out a very robust, you know, product that meets the quality, the yields that a customer wants. So that takes time, and it takes a pretty strong lift from your R&D team. So we've been focused on some of the, you know, significant growth drivers for us related to that. There's other opportunities that we could have supported. We wanted to make sure we were successful on some of the larger opportunities. Then space, you know, we've talked about that a little bit in the earnings call that, you know, we've been focused on a few things in Korea related to space. You know, one, last year we increased our footprint within the existing building. Then we broke ground on an additional building last year, so that will be completed towards the end of this year. So that gives us an additional space to continue to ramp going into 2027. And then we've also started to – or accelerated, I would say, migration of some of our SIP-type products from that Korea facility over into Vietnam, which, again, frees up additional space for these advanced products. So it's about managing all that timing and how fast we ramp. And, again, that's what allows us to increase that capital spending that's going predominantly into Korea for advanced packaging. Then longer term, obviously, the U.S. is going to be a significant growth driver for us.

Joe Moore, Analyst — Morgan Stanley, Semiconductor Research

And this utilization equation seems kind of challenging because you do have all these different types of capacity. So I assume there's local levels of utilization that are significantly different depending on what we're talking about. Is that fair? Yeah.

Megan Faust, CFO

So, I mean, even when you think about advanced packaging, we're well utilized in that space. So that can be, you know, in the higher 70s, low 80s, you know, exiting 25. But even in our mainstream locations, We still have some that are in the 50s to the low 60s. So in the aggregate, you know, we were for the full year 25 in the mid-60s utilization. So there's still a lot of leverage out there for us to benefit from.

Joe Moore, Analyst — Morgan Stanley, Semiconductor Research

Okay, helpful. So last question for me, and then I'll open it to the audience. Can you just talk about, you know, thinking about this business over the next three to five years, the strategic importance of the back end, the government focus on it, I think originally the subsidization commentary was entirely around front-end wafer manufacturing, but obviously there's a lot of focus on you guys now. Can you just talk about how you see those priorities improving over the next few years?

Kevin Engel, CEO

Yeah, so the first thing I would say, well, we're playing an investor day in May, so we'll definitely look at longer-term targets and give a lot more visibility into what the business looks like. I think in general what we see is, at least related to government dynamics, You know, I'd say there was the heavy push going back, you know, when the Chips Act first started. You know, like you said, the first focus area was the front end silicon, then kind of trickled down the supply chain. So, obviously, we were engaged there. I'd say today that's more of just a monitor and make sure the support is still there. But that's not what's really driving, you know, our investments today. I'd say it's more around the customer dynamics, you know, the customer pull. You know, if we think about our speed for Arizona, it's really more constrained by us and our ability to, you know, how many products and technologies can you ramp at one time. Customers want us to go faster in the U.S., so I think that pull from the customer perspective is definitely there. And then, obviously, you know, like we talked about, you know, mainstream, it's a matter of, you know, balancing some of those factory capacities, making sure we're consolidating and supporting the right businesses. That's heavily automotive-focused. And then all the other areas, I think we feel pretty good about kind of mid-growth to significant growth depending on the market in different regions. So long-term, we feel the future is bright, and there's a lot of opportunity there.

Joe Moore, Analyst — Morgan Stanley, Semiconductor Research

But you're saying this is kind of more of a mandate from your customers rather than anybody at the government?

Kevin Engel, CEO

I would say at this time, yes. Okay.

Operator

Any questions from the audience? We'll wrap it up there. Kevin, thank you so much.