Morgan Stanley Technology, Media & Telecom Conference

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.

Good morning.

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?

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, 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. And then we have expanding our global footprint, which for us is also a key pillar. If you look at, especially if you think about advanced packaging, you know, 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.

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?

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 vast majority of the manufacturing will back, but a portion where you want a full turnkey flow from, you know, 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 three to four hundred concrete concrete trucks that come in you know over the night to 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 this first building under construction today that'll you know once it 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.

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, you know, why isn't being in Korea enough to kind of mitigate the risks of some kind of geopolitical issue in Taiwan?

Yeah, so I think there's a couple 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 you 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.

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?

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, you know, TSMC as a leading foundry partner, you know, with manufacturing in the U.S., still be a pivotal customer, and then we would expect that, you know, other wafer sources could also, you know, participate in that facility. 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? 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 25. 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 seven billion dollars that we've outlined for this campus that would then equate to potentially 2.8 billion dollars 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 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.

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 compute is on everyone's mind, but just how are you thinking about 2026?

Well, I think there's a few things there. I mean, compute, we've talked about. I mean, I think that's obviously the 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 or 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 types 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, you know, even if unit car sales are relatively flat, you know, 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 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 quarter or so. And that comes around, you know, memory. Obviously, all customers are 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 part. 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'll go into more premium tier applications and typically we have a higher you know penetration rate or footprint in the premium tier so balancing act there you know 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 and when they get in that type of dynamic 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, you know, kind of constraint that we see now is on the substrates. So advanced substrates. And that's, you know, 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 suppliers, 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.

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?

Yeah, sure. So, you know, 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 roughly tripling that revenue this year compared to last year. So good dynamic there. And we've talked about how, for us, we view really that bucket 2.5D and HDO as one set of capacity because we can very quickly move assets between one or another. So even as potentially one technology shifts or there's a challenge on supply or 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, And that's predominantly going to Korea to support these HDFO-type platforms.

And when you talk about the 2.5D and the migration there, 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?

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, you know, where these are things like, you know, 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. You know, 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, we're the fastest follower to some of the foundries when they develop these new technologies.

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?

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 their direct customer, then you're not in an overflow model. So it's very different there.

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?

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, you know, tails off, something else can ramp up to replace it. So for us, that's, you know, I'd say that's kind of standard business.

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

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 and 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.

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. So 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?

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 was 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, you know, 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.

Yeah, and then 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 you hope they'll be okay. 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 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 we feel pretty comfortable yeah and then we'll see like you said how the supply chain dynamics work out if there's you know major head ones there or not. But at least so far, we're not seeing that. And you had a wearables ramp last

year. You have other growth opportunities within communications that are important, you know?

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

you talked about some of the dynamics there that are driving, you know, multiple trends within there, you know, but your conviction in that as a long-term growth driver? Oh, I think it's

significant. Yeah. 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. My current model car, you walk up to it, similar to a Tesla, you walk up to it, it 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.

And then finally on compute, you know, the AI compute, I think, 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?

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, 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 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, we've talked about that a little bit in the earnings call that we've been focused on a few things in Korea related to space. 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, you know, going to be a significant growth driver for us.

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. Yeah.

Yeah. 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.

So last question for me, and then I'll open 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?

Yeah, so the first thing I would say, 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, I'd say there was the heavy push going back when the CHIPS Act first started. 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 our investments today. I'd say it's more around the customer dynamics, the customer pull. If we think about our speed for Arizona, it's really more constrained by us and our ability to 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, like we talked about, mainstream, it's a matter of 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. And so long-term, we feel the future is bright, and there's a lot of opportunity there.

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

I would say at this time, yes.

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