ASE Technology Holding Co., Ltd.

Hello, I am Ken Sheng, the Head of Investor Relations for ASD Technology Holdings. Welcome to our fourth quarter. Man. Welcome to our fourth quarter. Oh my God, it ran out. Earnings release. Thank you for attending our conference call today. We apologize for not having our earnings release in our typical physical format. As with most people in Taiwan, we are acting with an overabundance of caution in regards to minimizing the chance of exposure to the coronavirus. Please refer to our safe harbor notice on page two. Our lawyers have worked very hard on this disclosure, so please give it your utmost attention. All participants consent to having their voices and questions broadcast via participation in this event. please refer to our safe harbor notice. I would like to remind everyone on this call that the presentation that follows may contain forward-looking statements. These forward-looking statements are subject to a high degree of risk and our actual results may differ materially. For the purposes of this presentation, our dollar figures are stated generally in new Taiwan dollars, unless otherwise indicated. As a Taiwan-based company, our financials are presented in accordance with Taiwan IFRS. Results presented using Taiwan IFRS may differ materially from other accounting standards. For today, I will be going over our business update and financial results. Afterwards, we will have a Q&A session with Joseph Tung, our CFO. As a reminder, because ASE Holdings was jointly formed on April 30th, 2018, as a legal entity, our SPIL subsidiary's results are consolidated only as of that date going forward. For the sake of comparability, our full year 2019 results will be compared against a pro forma set of results for full year 2018, as if SPIL was a subsidiary and consolidated during the entire year of 2018. This set of results is labeled or will be labeled pro forma. Please refer to page three. Let's go through an update of our 2019 goals. For our spill combination, as you know, we have been limited in our ability to tap the full potential of our combination with spill during the restricted period imposed by the Chinese Anti-Monopoly Bureau. It is our understanding that the assigned third-party regulatory auditor has completed and submitted its report pertaining to our compliance during the restricted period ended November 24, 2019. We continue to expect to receive an official acknowledgment accepting that a satisfactory audit has been conducted and reconfirmation that the restriction period has been completed without incident. We also continue to expect to receive such an indication during this quarter. As of today, we have not received any additional information regarding the status of this process. However, given the current situation in China, the timing of this notification may understandably be subject to some delay. During 2019, our EMS unit achieved record revenues on the strength of SIP products. We continue to believe that our EMS entity provides a crucial component of SIP, a system-level understanding. During December of 2019, we announced our intention to acquire Esteele Flash, the second-largest EMS company in Europe. We are in the process of clearing all relevant regulatory hurdles, and we expect to complete the combination during the third quarter of 2020. Unfortunately, we will not be able to give an outlook in terms of how much such an acquisition will contribute to our results during 2020, but we can state that a steel flash had revenues of around $1 billion U.S. In addition, our organic EMS business should also continue to grow during 2020, driven by our portfolio of SIP products and across our computing, industrial, and automotive segments. Along with the acquisition, we also expect to have an expanded geographical footprint, which could make a difference for current and new customers. There's much to look forward to from our EMS business. Exiting the year, our test business outgrew the rest of our ATM business. Given the context that the semiconductor industry shrank during 2019, we're pleased that we were able to grow our test business by 7%. and hold our assembly business relatively flat. Looking out into 2020, we continue to see strong momentum for our test business. We're looking for our test business to pick up speed and grow greater than twice the logic semiconductor growth rate. Group SIP grew at 13% during 2019, with 230 million of new SIP products scattered across multiple customers. For 2020, total SIP growth should continue to expand with SIP adoption accelerating. At this time, we see accelerating momentum for SIP business in 2020, driven in part by 5G-related products. Finally, in 2019, fan-out revenue was ahead of our target of $50 million for the year. As we see increasing input output density for shrinking dye, we see fan-out becoming a necessity and a path to become the mainstream packaging method on the next Foundry node. Such packaging adoption should accelerate gradually during 2020 and pick up more aggressively during 2021. We currently estimate fan-out revenue to grow more than $50 million during 2020. During this year, we will continue to invest in this capacity along with panel-level fan-outs. During 2019, we were selected to be included in the Dow Jones Sustainability World Index for the fifth consecutive year. And more impressively, within this index, we have been the worldwide leader within all semiconductor and semiconductor equipment companies for four consecutive years, which is considered a record. The Dow Jones Sustainability Index is widely considered the global standard for measuring and advancing corporate ESG practices. During 2019, we also were selected for inclusion in the CDPA list for climate change for the third time. CDP recognized ASE as a pioneer for action on climate change. CDP scored over 6,800 companies with a rating of A to D minus. Only the top 2% made the A list. We were also the first Taiwanese company to be included in both the Dow Jones Sustainability World Index, and the CDPA list. We're extremely proud of the company's ESG accomplishments. Next, a little bit on the coronavirus. As with all entities in Asia, we're in the midst of trying to run our business under the impact of the 2019 novel coronavirus. As of today, the impact to us from this virus generally relates to China's lack of available labor. Much of China's workforce are migrant workers. These workers often travel thousands of miles between their hometown to their job. A large portion of these workers go home during the Lunar New Year holidays. During the 2020 Lunar New Year holidays, China has taken aggressive actions trying to curb the spread of the coronavirus. including extending the duration of the Lunar New Year holiday and restricting the movements in and out of a number of affected regions. Today, transportation in China is significantly more complicated than before the coronavirus measures were put in place. Many workers have difficulties rejoining the workforce due to transportation routing limitations or an inability to leave their hometowns. Even when these workers complete the logistical challenge of getting back to a factory, they must go through a health screening and a quarantine process. The competition for available basic workers is quite strong right now. Even with our factories running overtime to make up for these labor deficits, our China-based factories are all running at varying levels of suboptimal reduced staffing. The current situation is very dynamic and much depends on upon the ability of the world to control the spread of this virus. Overreaction is probably the most prudent course of action. With the information given to us now in terms of availability of labor, we can provide you the following information. Within ATM, roughly 15% of our revenues are from China-based factories. Within EMS, more than half our revenues are from China-based factories. From a seasonality perspective, the first quarter is typically our trough quarter, which provides some cushion to the overall impact to these factories. Nevertheless, during the Lunar New Year, our China factories still run at 60 to 70% staffing. We expect to return to 80 to 85% staffing by the end of February, and we still currently expect to be able to get near full staffing by the end of the first quarter. Page four. On this page, we will find our fourth quarter consolidated results at the holding company level. We will generally defer business explanations of these results to our ATM and EMS P&L discussions. Intercompany transactions between our ATM and EMS businesses have been eliminated during consolidation. For the fourth quarter, we recorded fully diluted EPS of $1.47 and basic EPS of $1.50. Consolidated net revenues was $116 billion. This represents a 1% decline quarter-over-quarter and a 2% improvement year-over-year. ATM revenues of $66.8 billion were flat quarter-over-quarter and up 6% year-over-year. EMS revenues of $48.7 billion declined 4%, both quarter-over-quarter and year-over-year. We had gross profit of $19.8 billion with a gross margin of 17.1%. Our gross margin improved by 0.8 percentage points quarter over quarter while improving 0.7 percentage points year over year. The sequential increase in gross margin is primarily the result of stronger ATM loading and higher ATM product mix. Our operating expenses increased by $0.4 billion during the fourth quarter to $11.1 billion, primarily the result of increased operating expenses from our EMS business unit. Our operating expense percentage of 9.6% represents an increase of 0.4 percentage points. This increase was primarily the result of higher operating expenses within our EMS entity. Operating profit was $8.7 billion versus $8.4 billion in the third quarter. Sequentially, operating margin improved 0.4 percentage points to 7.5%, all being flat year over year. During the quarter, we had a net non-operating loss of $0.1 billion. This amount includes net interest expense of $0.9 billion, offset in part by our foreign exchange, and financial instrument activities. Tax expense for the quarter was $1.8 billion. The effective tax rate for the fourth quarter was 20.7%. Net income for the quarter was $6.4 billion, representing an improvement of $0.6 billion from the previous quarter and $0.9 billion from the same period in 2018. On the bottom of the page, we have again provided here key P&L line items without the inclusion of PPA-related expenses. Consolidated gross profit excluding PPA expenses would be $21 billion with a 18.1% gross margin. Operating profit would be $10.2 billion with an operating margin of 8.7%. Net profit would be $7.8 billion with a net margin of 6.8%. Basic EPS, excluding PPA expenses, would be $1.84. Page 5, here is the 2019 consolidated full-year result with pro forma legal entity comparisons. Again, we will defer to the business unit P&L to make business commentaries. For 2019, consolidated net revenues grew by 4% as compared with 2018. EMS revenues grew 9% annually, and ATM revenues stayed flat. Gross profit for the year increased by $0.3 billion year over year, primarily as a result of higher EMS revenues. Gross profit margin for the consolidated entity declined 0.5 percentage points, primarily attributable to higher EMS product mix. Operating profit for the year declined by $3.2 billion, primarily because of higher operating expenses. Operating margin declined by one percentage point. Non-operating expense was $0.2 billion for the year, including $0.9 billion of interest expense. Non-operating expenses declined as a result of higher income from financial instruments and currency hedging activities. Net income increased by $1 billion from $15.9 billion to $16.9 billion. Fully diluted EPS for the year was $3.86, while basic EPS was $3.96. Removing the effect of PPA depreciation and other transaction-related costs, our gross margin would be 16.7%, operating margin would be 7.1%, and our EPS would be $5.35. On page six is our ATM P&L. It's worth noting here that the ATM revenue reported here contains revenue eliminated at the holding company level related to intercompany transactions between our ATM and EMS businesses. For the fourth quarter, revenues for our ATM business were $69.3 billion, up $1.4 billion from the previous quarter, and up $5.2 billion from the same period last year. This represents a 2% increase sequentially and an 8% increase year over year. Our ATM revenues came in slightly ahead of our expectations due to stronger than expected seasonal demand. For our industry, we believe the sequential increase during the fourth quarter to be somewhat unusual as we typically see a slight seasonal decline as the holiday season build winds down. We believe this to be a positive sign and the result of a general business recovery. Gross profits within ATM were up $1 billion quarter over quarter and $1.7 billion year over year to $15.7 billion. Both of these gross profit improvements are the result of incrementally higher loading. Gross margin for our ATM business was 22.7%, up one percentage point sequentially, and up 0.9 percentage points year-over-year. Margin improvements sequentially and year-over-year are primarily the result of higher overall loading and a higher mix of test revenue offset by negative foreign exchange impact. We believe that our margin recovery is just starting and believe a small year-over-year increase of 0.2 percentage points through a downturn to be a significant achievement. During the fourth quarter, operating expenses were $8.3 billion, flat with the third quarter, but up $0.6 billion from the same period last year. The year-over-year increase is primarily related to increased R&D expenses related to higher MPI costs. Our operating expense was 12% down, sorry, down 0.2 percentage points sequentially, and up 0.1 percentage points year over year. We would like to make some comments in regards to what is becoming a more significant portion of our operating expenses, new product introduction, or MPI costs. Our R&D MPI expenses sometimes significantly precede their associated revenues. As we've previously mentioned, Leading-edge packaging methods such as fine-pitch bumping, copper pillar, and fan-out require longer and more significant MPI efforts. These MPI expenditures often precede their associated revenues by more than three to six months. As such, our operating expenses will reflect higher and somewhat imbalanced R&D-related expenses when there are significant amounts of advanced packaging products in the pipeline. In short, more MPI costs now lead to more products to run down the road. We believe our focus related to these expenses should be towards better monetizing them once the associated business comes into mass production. During the fourth quarter, operating profit was $7.4 billion, representing improvements of $1 billion quarter over quarter and $1.1 billion year over year. Operating margin was 10.6%, increasing 1.2 percentage points from the third quarter and increasing 0.8 percentage points year over year. This improvement was primarily attributable to better gross profit performance from higher loading during the quarter. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 24.4%, and operating profit margin would be 12.7%. On page seven, we have our ATM full year P&L with a pro forma and legal entity comparison. For our ATM business, we, along with most of the industry, had a soft first half of 2019. The back half was marked by a significant recovery, and even though our performance was one of the most resilient within the semiconductor industry, The sluggish first half was a significant drag on our full-year results. On a full-year pro forma basis, our ATM business in total increased by 1%, composed of our packaging business being flattish, materials business being down 1%, and our test business being up 7%. During this downturn year, we were able to increase our gross profit by 1% while holding gross margins to a 0.1 percentage point decline. This was primarily driven by softer loading in our assembly business, partially offset by higher test product mix. Operating income declined 10% primarily due to higher operating expenses. The higher operating expenses primarily consisted of higher R&D costs and employee compensation. The R&D costs are primarily associated with higher MPI and advanced project costs. The employee compensation costs relate to employee stock options issued after completing our combination with SPIL. Operating margin declined by 0.9 percentage points. Please turn to page 8. Here you'll find a graphical presentation of our pro forma ATM P&L. We're not going to talk much about that. On page 9 is our pro forma ATM revenue by market segment. We do see the communications segment continuing its recovery here. On page 10, you can see our pro forma ATM revenue by service type. During the fourth quarter, our revenue mix continues to transition towards bumping, flip chip, and SIP. As stated earlier, we continue to expect our test business to outgrow our assembly business as we continue to expand our turnkey business model. On page 11, you can see the results of our EMS business and its associated revenue by application. During the fourth quarter, we had revenues of $48.8 billion, representing a decline of $1.8 billion, or down 4% sequentially, and a decline of $1.9 billion, or 4% year over year. EMS revenues came in slightly ahead of our expectations as a result of higher demand as the seasonal build was slowing down. As mentioned during our previous earnings release, the seasonality of our EMS business accelerated forward a month or so. This seasonality adjustment had some business pulled in from the fourth quarter into the third quarter. As such, we had a relatively stronger third quarter, which led to a relatively softer fourth quarter. The year-over-year decline was also driven by this seasonality adjustment. Our EMS gross profit was $4.3 billion, declining $0.2 billion sequentially and $0.3 billion year-over-year. The gross profit decline was driven primarily by softer loading. Gross profit margin for the EMS business unit came in at 8.9%, flat with the previous quarter, in declining 0.2 percentage points year-over-year. The year-over-year decline in gross profit margin was driven by softer loading and product mix. Our EMS business units operating expenses closed the quarter at $2.8 billion, increasing $0.4 billion sequentially year-over-year. Operating expenses increased primarily as a result of planned expansions of business resulting in higher employee-related expenses, transaction-related expenses, and MPI costs for future products. Operating profit for the quarter was $1.6 billion, which is a $0.5 billion decline sequentially, and a $0.6 billion decline year-over-year. Our operating margin came in at 3.2%, which is a 0.9 percentage point decline sequentially, and a 1.1 percentage point decline year over year. For the full year, our EMS business continued to grow, driven by strength within our SIP business and communications customers. For 2019, we had EMS revenue of $165.9 billion, representing a 9% annual increase from 2018. This was primarily driven by growth within our SIP-related products. Gross profit increased $0.3 billion or 2% primarily as a result of higher revenues. Gross profit margin declined 0.6 percentage points primarily as a result of product mix changes and initial ramp-up of costs of sites outside China. Operating profit increased to $4.9 billion with operating margin declining 0.8 percentage points to 2.9%. The operating margin decline was driven by higher operating expenses related to higher expansion costs for sites outside of China, higher MPI costs related to future projects, and higher transaction related expenses. On page 12, you will find a graphical representation of our EMS revenue by application. You will see that our communication segment picked up while our consumer applications declined. These moves are seasonally driven. On page 13, you'll find key line items for our balance sheet. At the end of the quarter, we had cash and cash equivalents and current financial assets of $65 billion. Our interest-bearing debt decreased $6.9 billion to $220.7 billion. Total unused credit lines amounted to $225.4 billion. Our EBITDA for the quarter was $22.5 billion. On page 14, you will find our pro forma equipment capital expenditures. Machine and equipment capital expenditures for the fourth quarter totaled 457 million US dollars, of which 227 million were used in packaging operations, 205 million US dollars in testing operations, 18 million US dollars in EMS operations, and 7 million US dollars in interconnect material operations and others. For the full year of 2019, we spent 1.5 $1,575,000,000 for capital expenditures, $798,000,000 in packaging operations, $689,000,000 in testing operations, $69,000,000 in EMS operations, and $19,000,000 in interconnect material operations and others. For our ATM business, we had a strong fourth quarter, one that outpaced the third quarter in every aspect. Everything picked up. All major product lines are running well. A quarter ago, we said that the recovery was well on its way and that the business looked healthy. We saw that demand even seemed to be persisting into the first quarter. This, we believe, would lead to a stronger than seasonal first quarter. For the whole year, 2020, we saw 5G being the biggest story of 2020, driving all our business units towards banner years. This view has not changed. It remains backed up by our customer forecasts. A shallower trough than a typical first quarter, followed by strong quarter-over-quarter growth. For our EMS business, during the first quarter, we usually see a significant cliff as the holiday seasonal build concludes. This also continues to be the case. Customer forecasts have remained relatively consistent. So, if you look out into the rest of the first quarter, I do know what we'll be selling extremely well, surgical face masks. All kidding aside, This is the business environment in which we're left trying to understand. Relatively few people have any control of the macro factors that will impact our business. The situation is pretty much in the hands of sovereign government officials. When will the coronavirus be controlled and what measures will be necessary for that control to happen? It's the effectiveness of those measures that will ultimately determine the availability of labor for ASE's China-based factories, the health of the overall supply chain, and eventually the health of consumer demand. And even for me, I fundamentally believe the science that indicates the current coronavirus is similar to the flu. And I believe the transmission method of this virus is via droplet format and not airborne. Rationally, We should just avoid crowded areas, wash our hands, and avoid touching our faces. Rationally, I shouldn't be using an N95 mask and hoarding hand sanitizers. But when the stakes are ultimately high and include your very own life, probability becomes meaningless. Fear trumps rational thinking. This virus is a negative lottery, and everyone is doing whatever they can not to win. So the fear that is gripping the world, the overabundances of caution at the personal, company, and sovereign government levels are completely understandable. But the impacts to our business are totally unpredictable. Supply chain risk is also troublesome and extremely difficult for us to evaluate. It doesn't matter if we can manufacture our components If the company ahead of us cannot provide the raw materials or the company below us cannot assemble the end product, this environment will test supply chains. But remember, in times of uncertainty and fear, product manufacturing risks are amplified. Customers, in turn, choose to stick with the leaders because the leaders have the best capability and flexibility to get the job done. Unnecessary product risk could be the difference between a product that gets made and one that does not. So for our first quarter, we have adjusted our expectations given our operational constraints, and we've even adjusted for higher labor costs. But please remember that our expectations are made in an environment which the macro factors, which are completely out of our visibility, easily outweigh the micro factors which are immediately visible to us. We actually had a significant internal debate over whether we should provide an outlook at all. But we felt that not guiding would contribute to the atmosphere of fear. We decided that highlighting the strength of our business should not be outweighed by uncertainties exogenous to our entire industry. But with that said, please regard our outlook with a higher potential for variance than normal, and we would appreciate it if you would all assign a broader range of potential performance. So for ATM and NT dollar terms, ATM first quarter 2020 business should be between second and third quarter 2019 levels. ATM first quarter 2020 gross margin should be slightly above second quarter 2019 levels. For EMS, in NT dollar terms, EMS first quarter 2020 business should be similar to first quarter 2019 levels. EMS first quarter 2020 operating margin should be slightly lower than first quarter 2019 levels. These are the end of the prepared remarks. We can go to the Q&A session at this point.

Yes, thank you. Ladies and gentlemen, it's Q&A session now. Please press 01 on your keypad if you would like to ask questions. Thank you. The first to ask questions, Randy Abrams, Credit Suisse. Go ahead, please.

Yes, hi, thank you, and good afternoon, and appreciate you still giving out the guidance I wanted to ask the first question just on, as you're factoring in the first quarter guidance, it sounds like you're implying more of the production side impact. I'm curious from the demand side if you've seen any customer revisions at this stage from the demand side. And within that guidance you gave, is that more how orders look now, or have you taken a discount to factor in any demand side weakness?

I think what we are, whatever we're providing now is really based on the situation at our factory level. So it's more on the supply side kind of constraint that we have. And we've made those kind of the best guess adjustments into our first quarter outlook. But in terms of demand, I don't think we are in a position to comment on the overall demand situation because There's still a lot of uncertainties in front of us. But indirectly, I think this demand situation should be reflected into the forecast that we're getting from our customers. So whatever we're providing at this point is really looking at our own situation and looking at the forecast that we're still getting from our customers and make the overall estimation of what kind of impact it will have on the first quarter and remaining of the year.

Okay, and if I could ask on the investment side, you're running at a high level through second half, I think, ahead of some of the good drivers you were expecting for this year. How are you thinking about maybe the CapEx relative to what you were doing the last few quarters holding, or if you have a full-year CapEx, knowing it could change based on what's happening?

At this point, we're still up. optimistic about the 2020, and we will continue our cap-backs as required. But at the same time, there is some of the cap-backs being made earlier than 2020, what we call the upfront investments that we are already making. So, for 2020, we're expecting our cap-backs not to exceed whatever we had spent in 2019.

David Chang Okay. It won't exceed 2019. Okay. And if I could then ask on the, and maybe if I missed it, the SIP business, you had the 13% growth last year. Do you have a potential, what you're kind of seeing at this stage in terms of SIP, how much or what the outlook could be for this year? And then maybe on the broader business, factoring in like the virus gets contained, do you have kind of a view on maybe full year for the overall company versus industry? Maybe a rough view what type of growth could come through. I'm sorry, the later part of the question? Okay. Yeah, the first was more micro, just more looking at the SIP, what you expect for this year. And then the second was if you have kind of a broader baseline view, maybe going into the year, if the virus contains within a quarter or so, how your business and also how the industry looks on a full year growth?

I think in terms of SIF, we had a pretty good run-up in 2019, and I think that momentum will continue. I think more worth mentioning is that the new project revenue exceeded our target of $100 million incremental revenue in 2019, and we're expecting to... that momentum to further strengthen in 2020 as well. So there will be a fairly healthy growth in our synthesis in 2020 as well. As for the whole year, taking the virus situation aside, I think we still remain very optimistic about the whole year situation, and we're expecting healthy growth. a very healthy growth in terms of overall revenue, particularly on the ATM side of it. And first quarter, we are still expecting an above-seasonal quarter. And for the remaining of the year, we're still expecting sequential growth on a quarterly basis overall.

Okay. Last question, if I can ask the margins. In ICATM, maybe the factors you mentioned just the start of the margin improvement, and it looks like tests may be one factor, but if you could go through the areas, giving confidence that margins and maybe how much you might be seeing in that front, and if you could give an update then on the EMS, where first quarter looks like a lot of impact on the production side, but maybe the how second half could look for margin versus second half last year, at least if we're through the virus impact?

From a consolidated point of view, we do expect a healthy margin improvement in the year because of the, first of all, higher loading, and also a lot of the investment that we're making in 2019 will start to pay off in 2020. We are expecting a better control over our OPEX ratio. We are expecting, although I cannot quantify at this point, but we do see room for more efficiency improvement after the restriction period is lifted. So, overall, I think the margin situation in 2020 will some healthy, quite a bit of healthy improvement. That's both on the ATM side and also on the EMS part of the business as well. Okay, great. Thanks a lot, Joseph. Thank you.

Next, we'll have Bill Liu from UBS. Please go ahead.

Yeah, hi, Joseph. Hi, Ken. Thanks for taking the question and A lot of information given, so I'm just hoping for some clarifications first. I think Ken said that tests would grow faster than 2X logic. I think, did I hear that right? And if so, what is the, what's your expectation with the logic growth this year?

People are expecting somewhere around 7% to 8%.

Okay. So... Can you just talk a little bit about the key drivers for TESS this year? And also, I don't know if I heard it, besides that, was there also a guidance given for total ATM growth this year over last year?

No, we didn't give a total ATM for 2020.

Okay. Can you try to help me a little bit around that?

As I mentioned, we are expecting a healthy growth, particularly in the ATM part of it, because a lot of the new initiatives that we're taking will start to pay off in 2020. We're seeing strong momentum in our SIP business. We're seeing strong momentum in our test business as well. So overall, I think we're going to have a pretty, you know, if taking all the uncertainties aside, particularly in this virus situation, whatever we're getting at this point, whatever information we're gathering at this point leads to quite a healthy year for us in 2020. Okay.

Maybe I'll ask that slightly differently because you have said that if you look at the growth this year, 5G is one of the bigger drivers. If I look at 5G, a lot of it is China. I guess my question is, is there a way to quantify that? you know, how exposed you are to China and to 5G within that optimistic outlook for ATM, ICATM.

What percentage of our revenue will be 5G related? Is that the question?

Yeah, that would be very helpful if you could answer that.

Well, that's one question I cannot answer. I think we, of course, 5G will be a major driver for growth for us, including 2020 and beyond. But in terms of what percentage of 5G, what percentage of revenue will be 5G related, I think that's a very difficult number to come by because everything is interpoint. Some can be 5G, direct 5G, or some can be 5G related. Some can be rising out of 5G implementation. I think the key for us is really to maintain our first mover advantage in terms of the 5G development or deployment. And this is driven by our overall, our deepest coverage of all the 5G players. So whatever players deliver that comes up with 5G more applications or more products, you know, I think we want to maintain our first mover advantage and I think we'll stay as a dominant player in the 5G field.

Great. Sorry, can I speak in one more? So you talked about production out of your China-based factories and how that's going to be back to normal by end of the quarter. But assuming issues do not get resolved, what's your ability to shift manufacturing away from the Chinese factories?

I think right now the overall capacity in our China factory in terms of ADM is about 15%. And I think most of the products can be taken over by our Taiwanese side or other areas as well. So I think this is the point Ken tried to make earlier You know, when there is a crisis, I think the leader with the highest scale and flexibility tend to be the safer bet for our customers. So I think that's, you know, the silver lining is there is a crisis in front of us. There is some additional challenges in terms of overall strategic positioning for AAC. It's to look at it as a plus for us.

Okay, great. Thank you.

The next to ask questions, Goku Hariharan, JPMorgan. Please ask your questions.

Hi, thanks for taking my question. First of all, could you talk a little bit about CapEx looking at 2020 It felt like 2019, eventually CapEx ended up being higher than the expected range. What do we expect for 2019? And secondly, I think you talked about some of the NPI investments which drove OpEx higher in Q4. What is the timeframe roughly in terms of when we see these investments come through in terms of revenues? And how should we think about OpEx In 2020, are we expecting OPEX as a percentage of sales to start coming down, given that we are expecting meaningful revenue growth? And I had a follow-up question on the guidance as well.

Well, as mentioned, we are expecting – this is not a budgeted number, but by the forecast we're getting from our customers, we're expecting a – relatively steady capex compared to 2019. But the combination of that capex would be somewhat different, because in 2019, up to 44% of the capex was spent on tests. But going into 2020, that ratio will will come down to below 30%. So more resources will be put in assembly events packaging. And also a larger impact will be spent on EMS, some of the new SIP project that we put the MPI in already in the second half or fourth quarter of 2019.

Okay. Could you talk a little bit about the OPEX as well and the NPI?

In terms of OPEX, I think this year the overall OPEX ratio grew from 9.4% in 2018 to 9.9%. And this is because we have additional ESOP-related expense. We spend more on R&D. And also we are expanding some of our sites, some of our non-China sites, given the trade war situation. So we are looking at 2019 as a year of investment. And I think a lot of this permanent investment will start to pay off in 2020. That gives us a better margin outlook for 2020 as well. In terms of the overall control of the OPEX, our target for this year is really to come back to 2018 level of 9.4% or 9.5% level.

Okay. Just a quick question on the guidance. Could you talk a little bit about how you handicap the guidance for any demand shortfall? I know that it's very early for customers to feedback to you in terms of any potential demand risk on 5G products, et cetera, in China. So could you talk a little bit more in detail about are you already handicapping some of those potential risks near-term demand disappointments in your Q1 guidance, or the caution in Q1 guidance is primarily related to supply disruption and not really counting on any potential demand related to China 5G?

Well, as I mentioned, whatever outlook numbers that our guidance will provide is based on the forecast that we're getting from our customers. So without directly commenting on the overall demand situation, We would like to say that, you know, that is somewhat reflected in the forecast that we're getting from our customers. And with that forecast, we look at our own capacity situation and make the necessary adjustment, particularly in the first quarter outlook. So that's how we come up with the overall outlook. that we provided. Okay.

Thank you very much.

Right now, we're having Charlie Chang, Morgan Stanley. Go ahead, please.

Hi. Thanks for taking my question. So, first of all, can I ask how you're going to split the mini-media with AIP between ASC and subsidiary USI? both the revenue and profits. Thanks. What? The mini meter with AIP. How are you going to split the revenue and the profits between you and the USI?

We're not commenting on the specific product at this point.

Okay. And then Joseph, you mentioned about this year you're setting higher margin, better control of all cash ratio. Does that discount the merger synergy already, or there's a kind of separate factor?

Right now, I don't think we... We are not putting a lot of weight on the synergies that can be created, particularly on the operation after the merger because at this point we're not in a position to comment on that because the restriction hasn't been lifted yet. So no, we're not budgeting this into the overall.

Okay, okay. And then on that front, any timeline or any reason that restriction is still there, when that is going to be removed?

Well, I think we have already filed the... I think the appointed reviewer has already filed their last report to the Antitrust Bureau in China, and we are waiting for them to... reviewed such reports and give us a clear note of health. But because of the virus situation, I think it's kind of put, I think if there's some delay, that is well understandable. But at this point, we're still hoping that by the end of the quarter, we should be able to get full clearance.

Okay, and lastly, maybe also related to your ATM business growth in 2020. So if you can compare your ATM business versus the industry growth in 2019 and 2020, do you think you are outgrowing or undergrowing the industry? And I think that's associated to another question, whether you think local Chinese big end foundries are getting share? And do you think Chinese semi-customers, they have any preference between using ASE or those local vendors?

Well, I think we will be able to outgrow the industry overall if you're talking about the logic part of it. I think we're pretty confident that we'll be outgrowing not just the industry, but also all of our competitors. And I think, what's the latter part of the question?

Yeah, because China is pushing this semi-localization, right? So I'm not sure if that does change customers' preference. I mean, for those local, local China semi-customers, do you see the shift from your China FAB to those local vendors? And I'm not sure that... If there's such kind of a preference, does those local vendors still need to discount your price versus yours?

Well, I think preference is one thing, but the capability is the other. So they can prefer their local vendor, but if their local vendor cannot provide the service or the quality or the product as a whole, I would think our customers really have a choice. So, yes, we will review the overall situation or competition very seriously, and we will try our best to accommodate whatever our customer demand is or requirement is, and that includes ramping up our China factory as well if local manufacturing is preferred by our customers.

Okay, okay. I see. Thanks for the answers.

Right now, we're having Richie from Daiwa Securities. Go ahead, please.

Hi, thank you so much for taking my question. The first question, as usual, is housekeeping for model and purpose. So can I know your utilization rate in Q4 across the packaging testing and bumping? And also, what's your view on first quarter loading?

Fourth quarter, we are at a range of 80% to 85% utilization, and going to across board. And first quarter, we're looking at 75% to 85%.

75 to 80. Okay, thank you. Then second question, now this is a little bit hypothetical. Assuming there's some impact from the virus in your first half, then would you be able to make up the show for in second half?

What's the impact to the virus?

Okay, yeah, because I'm just thinking, I'm just trying to resemble the situation to the source back in the... Well, I think, first of all, I think, you know, within reason, of course, we can make it up and we do have the scale or the flexibility to handle that. Unless there is a, you know, total collapse of the whole situation, then I think right now what we're seeing is things are still within a manageable level.

Okay, thanks. That's fair enough. The final question is about 5G. I think a couple days ago, Xilinx, when they put out their business outlook, they actually say something about a slowdown in the 5G bill this year. So would you worry about that the demand given by your customers for the 5G bill this year a bit too bullish? Do you see any risk on that?

Oh, I think there is always risk on whatever forecast or whatever market assessment there is. But, you know, we... The forecast that we're getting still suggests that we are having a good year, and we'll try to analyze the situation better and make proper adjustments on whatever we're seeing, i.e. if there is any overbooking or any over-optimistic kind of forecast that we're getting, and we'll try to make some some more read into, because we do have a very diversified customer base. So there's some level of check and balances we can get among our different customers. So I think, you know, we have been managing our business for over 30 years, so we should have the experience or knowledge how to view the overall situation.

Okay, fair enough. Yeah, I have no more questions. Thank you so much. Thank you.

The next one to ask questions, Bruce, Goldman Sachs. Please go ahead.

Hi, thank you for taking my questions. So my question is regarding for your U.S. production. You just mentioned that you have 85% production in Taiwan for ACM. How about your production in China? Are you able to move those SIP production back to Taiwan?

That will be a larger scale of work to do, yes. But I don't know how to answer this question actually.

Okay. So basically your assumption is based on that your labor and everything is going back to your factory around like 80% or 90% by the end of the first quarter. Is that your assumption for the USF business as well?

Yes.

I see.

Okay. I'd like to answer your question, your first question. If we can do it, then I don't think anybody else can do it either. So, that would be a real problem for us. Okay.

Well, I don't... Well, because you, that's why we need to ask you, right? Okay, let's try to ask a different question. So, regarding to your profitability for the ATM, so if you look at your profitability for ATM, for 2020, you are looking at much better years with higher iteration rate, a better product mix. And the profitability for ATM in both quarters is still lower than the historical level or before the AACSP acquisition. So what kind of profitability or what kind of the new norm of profitability we can expect in 2020 or 2021 onwards? This one should be a lot easier.

Yeah, it's a lot easier, but I don't want to give you the answer, though.

You didn't give me the first one. You had to give me this one.

No, I don't want to get into trouble with the SEC here. If I give you any numbers, then I need to put out a full-blown, what do they call it? And we're not allowed to do that.

The way TSMC uses that, they call it a structural probability. What? They call it structural probability.

Structural probability, what do you mean?

Yes. Well, that's what TSMC was using. instead of getting into trouble.

I don't understand.

No, I mean, so for me, it's that, you know, we are expecting some profitability improvement. So historically, AHS bills are able to generate somewhere around like 25 or 28, even 30% gross margin at the peak quarter. So are we... Are we expecting those kinds of numbers in the foreseeable future?

Let me do this. Let me do this. I am, as a CFO, I am asking for at least 2% improvement.

I see. In 2020? Yeah. I see. I believe everyone listened to you, right? Huh? I believe all the staff listen to you and will follow the instructions.

You believe what?

I believe all your staff will follow your instructions and deliver the results.

Well, remember they are not all my staff. Okay, thank you. It could be my wishful thinking, right? True, true.

So, back to the queue. Thank you.

Right now, we're having Sebastian Ho from CLSA. Please go ahead.

Yes, thank you. My first question, just to want to clarify some of the numbers that I didn't hear very clearly. So I think you mentioned that the digitalization rate in your EMS factory in China was like 6% in Chinese New Year and expect that to go up to What percentage point by end of February and then by end of this quarter? For the numbers, could you repeat that again?

Yeah. All right.

We are looking at around 60% to 70% staffing during the Lunar New Year. And then we expect to return to 80% to 85% by the end of February, and then hopefully to get close to full by the end of the quarter. That's the more optimistic outlook at this point.

So these are the okay scenarios?

Yes, that is the okay scenario.

Okay. Okay. But what's the usually staffing rate increase a month after or two, three weeks after a CMY holiday, let's say the past two years?

Normal year? Yeah. Normal year, it's back to full.

Okay. So basically you're saying that it's 85% by end of February, but the normal year is by end of February should have already gone back to 100%, right? That's correct. Almost 20% below.

That's correct. But during this time frame, we're also going through basically the trough seasonal quarter, right? So that gives us a little bit more cushion to work with. We can also work with a little bit more overtime, planning worker schedules and such. In a positive scenario, this is what we're seeing.

Got it. I have a question, a follow-up on this, because typically your EMS business is a, as your definition, a trough quarter with a low season in one view. So even if you can't get back to the, like, very decent staffing rate, would that still be a bottleneck to your manufacturing stability or fulfilling your customer demand after all this low season in Q1?

It still has some impact. It still has some impact.

Or this year is somewhat different, like you see a better than typical she wants is an elegy, so that's why this will matter.

Even during, so we're basically trying to get to an optimal percentage, right? So we're trying to get to 100%, but that 100% is 100% of the seasonal quarter.

Okay, got it. And my second question is about your EMS business. I look at your 2018 to 2019 change. You have 9% revenue growth, but the operating profit dropped 14%. OP margin contracted by 0.8%. Can you explain again what drives that OP margin operating income decline and also what's your outlook for 2020?

So our EMS entity is in the process geographic expansion. There's also trying to expand a current site. And then they're also buying a steel flash, right, and doing a number of other transactions that have been talked about. These things, these expansion plans are actually generating additional costs within OPEX this year. These are not – we don't see these necessarily as structural in nature for OPEX at this time.

Okay, sure. But have most of the expands expanded? We would like to – or do you expect these will mobilize this year?

Okay.

To a much lesser degree, yes. There will continue to be some ramp-up, particularly in Poland, in Mexico, in Taiwan, in terms of EMS. In terms of MDI, it really depends on what new projects we'll be getting. But I think most of the... The cost for expanding non-China sites from EMS perspective is starting in 2019, and things are starting to get much more streamlined. So there will be additional expenses put in, but in terms of overall percentage of revenue, I think it's back to a normal level.

Okay. So to the conclusion for the EMS DIPs outlook this year is that the top line will grow and margin, OP margin will stabilize here or potentially improve?

Yes.

Okay. Got it. Thank you.

The next question is from China Renaissance. Go ahead, please.

Oh, hi. Good afternoon, gentlemen. I just want to touch base on the EMF acquisition at Steel Flash. When would that start contributing to the company's top line?

We don't have a – we're not giving out this year's number for Steel Flash because we don't – The transaction is not closed yet. But as a reference, last year they had a revenue of $1.1 billion. And if you look at their first and second half split, it's about 45%, 55%. And they had a net income of around $53 million for last year. Mm-hmm. So you'll probably take that as a reference and we'll expect. The schedule is to close the transaction by early third quarter.

Okay, all right. So is it fair to assume that that business, the net margin at least, right, is better than our existing EMS business? Yes. Any reason for that? Is it one-off or because of the mixed issue?

I think it's the different nature of business. I think what they're focusing on is smaller volumes, but larger variety, and a lot of it is not the traditional 3C type of business. I think the biggest benefits to businesses Out of this transaction is three-fold. One is it does expand our overall geographical coverage throughout Europe. And the second is the business model is different. They are serving a lot of the new application, smaller volume, and once those businesses turn into mass production, then it's very natural for SEO Flash to move these to Europe. to USI. Oh, okay. I think there is really the customer portfolio is very, very complementary. I think there's very little overlap between the customers.

Okay, sounds great. And my last question regarding this dividend part, is it fair to assume at least for this year's dividend will be flat from last year's level? The what? I cashed it again. It will be at least flat.

Well, actually, we've been paying off 60% to 65%. I think we're not changing it at this point.

I mean from the dollar perspective, dollar amount perspective.

Well, we almost made the same. We made similar... You know, the EPS we made this year, it's going to last. So, dollar-wise, I think. Okay, good.

Anything else you have?

Do we have any more callers? Okay, thank you for attending ASD's fourth quarter earnings release.

Well, I think I did not give any guidance on margin.

All right, thank you very much. See you next quarter.