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?