ASE Technology Holding Co., Ltd.

Hello, I am Ken Shon, the head of investor relations for ASC Technology Holdings. Welcome to our first quarter 2020 earnings release. Thank you for attending our conference call today. We are again unable to have our earnings release in our typical live format. We, like the rest of the world, continue to remain cautious in regards to minimizing the spread of COVID-19. Please refer to our safe harbor notice on page two. 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 generally stated 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 results using 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 Tong, our CFO. In late March, China's Anti-Monopoly Bureau notified us that we have successfully demonstrated our compliance with our two-year restricted collaboration period with SPIL. We can now finally have unrestricted communication and collaboration between SPIL and ASE. This is the culmination of a series of efforts which began in 2015. Discussions on the various aspects of coordination have started, but there is plenty of work ahead of us. We believe that this combination will lay the groundwork for improved operating efficiency, lower overall costs, and top-line synergies. Needless to say, this quarter has been very dynamic. In the three months since our last earnings release, the world has become a vastly different place. Three months ago, the focus of the world was on the impact of the spread of COVID-19 within China and the continuity of goods coming out of China. We hypothesized that the rest of the world would realize the dangers of such a virus and would take swift action to contain any potential spread. As such, we focused primarily on the supply side and logistical impacts to our China factories. To that end, I'm happy to report that our China factories have all returned to full staffing. However, our hypothesis of contained spread has failed to come true. As a result, we must now adjust to more pessimistic scenarios in which COVID-19 has a more substantial impact. We have been following the many top-down industry reports that have generally grown more and more pessimistic over the last two months. It seems that when the overall environment is generally upbeat, industry reports race to be the most optimistic, and now the inverse is true, with reports racing to be the most pessimistic. The global supply chain is mature and resilient, and often built with significant redundancies. Aside from our China factories, which experienced labor shortages during the early part of the quarter, our factories have been running relatively smoothly. Some of our factories are working under government-imposed work rules, but by and large, such disruptions are being managed and their overall impact remains relatively limited. We also continue to see spotty supply chain issues on a variety of components and supplies. However, we believe the majority of these issues are resolvable. We currently do not see any immediate major disruptions to our business. For the first quarter, our ATM business outperformed our initial expectations. We believe that because Taiwan was able to control COVID-19 relatively early, we were able to take on customer upsides. Our EMS business underperformed our initial expectations as it experienced downstream supply chain issues. This disruption was resolved during the quarter. We believe as a result of this, some of our EMS revenue has been deferred from our first quarter to our second quarter. Please turn to page three where you will find our first quarter consolidated results at the holding company level. Generally speaking, given this is our seasonally down quarter, sequential comparisons may not adequately reflect the performance of the company. 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 the consolidation. For the first quarter, we recorded fully diluted EPS of 89 cents and basic EPS of 92 cents. consolidated net revenue was $97.4 billion. This represents a 16% decline quarter over quarter and a 10% improvement year over year. We had gross profit of $16.2 billion with a gross margin of 16.6%. Our gross margin declined by 0.5 percentage points quarter over quarter while improving 3.8 percentage points year over year. The sequential decline is primarily the result of seasonal loading. The year over year increase in gross margin is primarily the result of stronger ATM loading and higher ATM revenue mix. Our operating expenses decreased by $1.1 billion during the first quarter to $10.1 billion. This was primarily the result of lower operating expenses in both our ATM and EMS business units. Some of our operating expenses are not variably driven by revenues. And as such, despite the absolute dollar decline, our first quarter operating expense percentage increased 0.8 percentage points sequentially and 0.2 percentage points year over year to 10.4%. Sequentially, operating margin declined by 1.3 percentage points to 6.2%, while being up 3.6% year-over-year. Our sequential operating margin decline is principally the result of lower revenue from seasonality. Our year-over-year improvement in operating margin is primarily related to higher loading. During the quarter, we had a net non-operating loss of $0.8 billion. This amount includes net interest expense of $0.9 billion. This amount was offset in part by net foreign exchange and financial gains and losses. Tax expense for the quarter was $1.2 billion. The effective tax rate for the first quarter was 22.4%. We expect a 23% effective tax rate for the first half of the year. For the entire year, we expect an effective tax rate of between 20% to 24%. This would be inclusive of our undistributed earnings tax. Net income for the quarter was $3.9 billion, representing a decline of $2.5 billion sequentially from and an improvement of $1.9 billion year over year. 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 $17.2 billion with a 17.7% gross margin. Operating profit would be $7.4 billion with an operating margin of 7.6%. Net profit would be $5.2 billion with net margin of 5.4%. Basic EPS, excluding PPA expenses, would be $1.23. On page four is our ATM P&L. It is 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 first quarter of 2020, revenues for our ATM business were $66.2 billion, down $3.1 billion from the previous quarter, and up $11.8 billion from the same period last year. This represents a 4% decrease sequentially and a 22% increase year over year. Our ATM revenues came in ahead of our expectations due to stronger than expected demand driven primarily from forecast upsides. Gross profit within ATM were down $2.4 billion quarter over quarter, and up $4.9 billion year-over-year to $13.3 billion. The sequential gross profit decline is due to lower loading in a semi-fixed cost environment. The year-over-year gross profit improvement is primarily driven by higher loading. Gross profit margin for our ATM business was 20.1% down 2.6 percentage points sequentially, while up 4.6 percentage points year over year. Margin decline sequentially is the result of lower seasonal loading and NT dollar appreciation. We estimate that NT dollar appreciation had a 0.9 percentage point negative impact to gross margins. Margin improvement year over year is primarily attributable to higher relative loading and a higher mix of test revenues. During the first quarter, operating expenses were $7.8 billion, down $0.6 billion sequentially, and up $0.9 billion year over year. The sequential decline is driven by lower overall operating expenses led by lower R&D expenses. The year over year increase is primarily related to increased R&D and administrative expenses. Our operating expense percentage was 11.7%, down 0.3 percentage points sequentially, and down 1 percentage point year over year. During the first quarter, operating profit was $5.6 billion, representing a decline of $1.8 billion quarter over quarter, and an improvement of $4 billion year over year. operating margin was 8.4%, declining 2.2 percentage points sequentially and increasing 5.5 percentage points year over year. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 21.7%, and operating profit margin would be 10.4%. On page five, you'll find a graphical presentation of our ATM P&L. On page six is our ATM revenue by market segment. Overall, not much has changed in the mix of our revenue. There is a slight move towards automotive, consumer products, and others, with computing slightly down from its seasonal peak in Q4. On page seven, you will find our ATM revenue by service type. During the first quarter, our revenue mix continues to transition towards bumping, flip chip, and SIP. We continue to expect our test business to outgrow our assembly business as we continue to expand our turnkey business model. On page 8, you can see the results from our EMS business and its associated revenue by applications. During the first quarter, we had revenues of $32.7 billion, representing a decline of $16 billion, or 33% sequentially, and a decline of $2.2 billion, or 6% year over year. EMS revenues declined quarter over quarter primarily because of business seasonality. EMS revenues declined year over year primarily as a result of downstream supply chain issues related to COVID-19. Our EMS gross profit was $3 billion, declining $1.3 billion sequentially, but improving slightly year over year. The sequential gross profit decline was driven primarily by business seasonality, while the year over year improvement is the result of beneficial product mix. Gross profit margin for the EMS business unit came in at 9.3%, an improvement of 0.4 percentage points sequentially and 0.9 percentage points year-over-year. These improvements are primarily driven by product mix. Our EMS business unit's operating expenses closed the quarter at $2.3 billion, declining $0.5 billion sequentially, and increasing $0.1 billion year over year. Operating expenses declined sequentially due to lower labor costs and administrative costs. Operating profit for the quarter was $0.8 billion, representing a $0.8 billion decline sequentially and a $0.1 billion improvement year over year. The sequential operating profit decline is primarily due to seasonality, while the year-over-year improvement is due to lower operating costs. Our operating margin came in at 2.4%, which is a 0.8 percentage point decline sequentially and a 0.3 percentage point improvement year-over-year. The sequential decline is primarily the result of seasonally down revenue, while the year-over-year improvement is the result of product mix. On the chart on the bottom half of the page, you will find a graphical representation of our EMS revenue by application. Our communication segment dropped off on a percentage of total basis from its peak season in Q4. Aside from communication, most movements were relatively small on a dollar basis. On page 9, you will find key line items from our balance sheet. At the end of the quarter, we had cash equivalents in current financial assets of $79.4 billion. Our interest-bearing debt increased $14 billion to $229 billion. Total unused credit lines amounted to $241.6 billion. Our EBITDA for the quarter was $19.1 billion. Over the next 24 months, we are looking to reduce our net debt-to-equity ratio down to around 60% to 65%. To do this, we'll be primarily focused on monetizing components of our balance sheet and lowering capital equipment investment. On page 10, you will find our equipment capital expenditures. Machinery and equipment capital expenditures for the first quarter in U.S. dollars totaled $410 million. of which 237 million were used in packaging operations, 156 million in testing operations, 15 million in EMS operations, and 2 million in interconnect material operations and others. Given that business for the back half of the year appears a bit more uncertain than usual, we are cautiously monitoring our capital expenditures, especially expenditures related to expanding existing capacities. However, capital expenditures for our business are not just meant to address the oscillations related to current year demand. For us, much of our capital expenditures are meant to address our technological roadmap and positioning for the new demand over the next two to three years. Strategic capacities related to advanced packaging, such as fine pitch bumps, Fan out and SIP need to continue. At this time, we believe the amount of capex for this year still to be similar with last year, but we are ready to make adjustments as needed. I think we showed that we delivered a decent first quarter. But in light of the macro calls for Tasha, the following statement may be somewhat unexpected. Most of our customer forecasts have not had significant downward revisions as a result of COVID-19. And it follows that pretty much all of our customers believe they will have significant product ramps during this year. This is because electronics comes out with a new and an improved product every year. And in order to do that, new and improved semiconductor chips have to be made each and every year. to enable those new features. This is at the very core of electronics. Every season, you come out with something new, virus or not. Our customers will build new products and, for the most part, cannot make a determination of sell-through until their products or their customers' products start selling. So in this challenging environment, our customers must secure capacity with lowest product risk. Seemingly small or insignificant components of a manufacturing supply chain can become a bottleneck and make the difference between having parts to sell or losing share to your competitor. In this environment, customers reach out to the largest and most capable player, ASE. And of course, we understand that demand can be there one moment and not the next. We are exercising extra care in regards to capital expenditures, especially as it relates to capacity expansion as versus technological innovation. We're also closely monitoring the timing of various key product launches and how they coincide with our available capacity. We're also holding back expenses and tightening our belts across all of our factories as we speak. We do understand the unusual nature of COVID-19 in that this is the first time that world economies have all paused within a few months of each other. What will ultimately happen in the next few months as these economies restart? How much demand is pent up as versus delayed? or outright canceled? And if that's not enough, how will geopolitical situations fare? We do not believe we are in a position to know. These are exogenous variables outside of our immediate control. Our focus is on our ability to serve the longer-term industry trends, we need to invest in the capacities which will serve the trends and underlying technologies that will rise after this whole thing settles down. For example, we are confident that the need for additional bandwidth has only increased as learn and work from home become more prevalent. The need for processing power continues to grow. Ultimately, technological advancements like 5G will propagate. For us, semiconductors are becoming more and more advanced as I.O. and transistor densities drive new generations of semiconductor packaging and testing forward. System-level requirements of SIP are also increasing as customers move more system-level functions into the package. Technological progress also drives additional outsourcing for us. From how we see it, these concepts are much more about when and not really about if. Most importantly, all of these factors are good for ASE. With that said, we do want to mention our synergy expectations as it relates to spills. we still believe that we can put in motion the actions that will generate synergies by combining our efforts. These synergies are intricately tied between revenue and expenses and the strategic positioning of each of our sites. These actions are being taken. However, given the overall economic uncertainties during the back half of the year, the overall timeline for these financial impacts to take shape may end up stretching out past the current year. From our current first half view, we currently see spill synergies as a significant portion of why we will achieve significant margin growth during the first half of 2020. To that extent, we continue to expect to increase beyond the two percentage points of operating margin promised during the first half of the year. However, back half visibility of our business is limited, and as such, we also have limited capability to quantify our synergistic impacts during this timeframe. Due to the impact of COVID-19 outbreaks, our outlook continues to be subject to a higher degree of risk. The information provided is done so as a reference of our current view as of the date of this presentation. Our business, financial condition, and results of operations are of greater adverse risk, and as a result, there may be a higher likelihood of material variances between our expected and actual results. So for our ATM business, in NT dollar terms, ATM second quarter 2020 business should be similar with third quarter 2019 levels. ATM second quarter 2020 gross margin should be close to third quarter 2019 levels. For our EMS business, in NT dollar terms, EMS second quarter 2020 business should be above first quarter 2019 levels. EMS second quarter 2020 operating margin should be slightly above first quarter 2019 levels. And now for our question and answer session.

Please press 011 on your telephone keypad if you would like to ask questions. Thank you. The first to ask question, Bill Lu from UPS.

Yeah, hi, good afternoon. Thanks for taking my question. I would like to start with the ATM business. It was up really nicely in one Q. If I'm doing the math correctly, I think Q2 is up maybe another 15% or so year on year. I'm wondering if you could talk about, first of all, if you look at the OSAP business What is the industry year-on-year growth this year? I think TSMC has said that the foundries will be up high single digits. I'm wondering what is that outlook for the back end. And then secondly, if you look at this really strong growth for ASE year-on-year, how much of it is share gains and how much of that is sustainable into the second half of the year? Thanks.

Well, as we set out in the beginning of the year, we're expecting a fairly strong year for 2020, but of course there's a lot of uncertainties in front of us, including the pandemic and also a lot of the geographical tension that could arise in the future. So as far as first and second quarter, we're still seeing the seasonal pattern continuing. But for the second half of the year, I think there are too many uncertainties in front of us, so we're refraining ourselves from making any comments on the second half. But as a whole, I think the whole industry momentum remains the same. I think the 5G deployment and also a lot of the new applications coming on stream will continue to be the growth drivers for the future. So at this point, we are still investing for the longer term, but not just focusing on the short-term impacts for whatever that's happening at this point.

If I can ask maybe a little bit more specifically, if you look at Q1 of 20%, year on year, how much of that do you think is share gains?

I think that's very, very difficult to answer, but I think given our scale and also the broader exposure to our different segments of the industry, in particularly we are fairly strong in position in the 5G arena. I think the I wouldn't be surprised if there is share gain. Actually, in the first quarter, there is some order transfer from other regions to us. I think when the time gets tough, a customer will go for the strongest player to secure their supply.

Okay, thank you. My second question is on CapEx. Ken talked about maybe bringing down the debt-to-equity ratio and having some flexibility on the CapEx side. I know you're saying and you're maintaining CapEx at a similar level to 2019, but can you just talk a little bit more about, if you look at the overall CapEx, how much of it is the capacity bias versus the technology bias? Thanks. I think it's...

I think it's about 40-60 split. I mean, a lot of the, only 40% of the CapEx is really technology-driven and also some project-driven, particularly in the SIP area. For the rest, it's basically maintenance as well as investing for added capacity to meet the demand. And I think on this, in the past two years plus this year, we're seeing pretty aggressive CapEx spending. We're seeing the industry movement and the necessary CapEx needs to be put in for capacity as well as for technology advancement. I think this investment will start to pay off. And going forward, as we can better communicate or align with Bill, I think the greater scale, the added manufacturing flexibility, capacity sharing, better CapEx alignment will allow us to better manage our CapEx going forward. And we're expecting... By more efficient CapEx investments, we will be able to generate more cash flow to bring down our overall leverage, and therefore we are setting a 24-month target to bring down our overall leverage.

Great. Thank you very much.

Next to ask questions, Randy Abrams from Credit Suisse. Go ahead, please.

Okay, yes, thank you. Good afternoon. I wanted to follow up a bit on Bill's questions on the CapEx and what you're planning with the balance sheet. Could you elaborate a bit more when you mentioned monetize the balance sheet assets, what the potential is there, what you're thinking on that side? And from the CapEx perspective, is there a way to think about kind of a range, whether it's a percent of the CapEx or a dollar amount that you're looking at for a year out from now? Because one scenario for coming out of the virus and then just picking up, like if you really have a way to pull down CapEx, say, one to two years further out. But I'm curious on both of those, if you have numbers on what could be possible.

I think we mentioned that, you know, The CapEx for technology advancement and also for some of the projects that are ongoing and some of the new projects that are coming on stream, we will keep those CapEx intact and we'll continue to make the necessary investment for these longer-term prospects. But purely for capacity or for maintenance, I think we will keep it flexible and dynamic depending on the market situation. At this point, it's very difficult to put a dollar amount on it because of the extremely limited visibility, particularly in the second half. I think the pandemic situation will definitely have a short-term impact on the overall, in terms of demand, in terms of the overall logistics situation. issues that may arise, and also it could have some impact on creating some of the delays on the product launches. So all things put together, I think making second half a very, very difficult period to predict how things will shape up, and we will just go back step by step to see how the situation changes and make our adjustment on our capex.

Okay, and if I could follow up on that. The spill synergy, I think you mentioned, but I wanted to clarify, the first half, I think you mentioned something like two-point operating or maybe it's an off-ex synergy. Could you talk about the base or just clarify what the base is on that two-point, if it's an off-ex or an operating margin improvement? And I guess the other part was the balance sheet asset, what you meant by monetizing assets. It just kind of brings down working capital, or there's other assets you might want to monetize?

I think in terms of the margin improvement, I think it's an overall target that we set up for ourselves. That includes the margin expansion coming from loading increase and also from some of the synergies that we can – create from alignment with Bill. We actually exceeded our target. We're expecting to exceed our target for the first half of the year. If all things being equal, if things continue to go without too much disturbances, I think for this whole year, The target is we should be able to reach the target for this year. That includes some of the synergy that we are creating from SPIL. I think on this front, we have already started some of the collaboration programs, including procurement, including campus alignment, capacity sharing. and some of the joint R&D roadmap alignment. I think a lot of the areas that we can create some value for us, and I think the aim is not just solely for integration of the two companies. It's really through a lot of collaborations to create additional value or to increase our efficiency and therefore to reduce costs. I think all these benefits will be shared with our customers and therefore making the combined entity a much more competitive entity going forward. I think the second part of your question is the component of our assets.

Yeah, I think you mentioned two things. It was over 24 months CapEx could come down, and you also focus on monetizing balance sheet assets to generate cash.

Well, I think by and large we're still expecting, we're still hoping that we can generate internal cash flow so as to fund the deleveraging. But if we, if there's any, but, you know, on top of that, I think, you know, monetizing some of our investments may be another alternative for us to generate the needed funding for deleveraging as well. So right now we're not there's nothing specific that we like to report but we'll just see how things will shape up and we will decide what is the best asset for us to monetize and at what point in time. Okay, thank you.

I'll get back in the queue. All right. Next we're having Roland Hsu from Citigroup.

Hi, good afternoon. This is Roland Hsu from Citi. I think first question is I think I probably had missed what you said about this synergy target. You continue to mention about this synergy target. So can you remind me again what are these synergy targets are you meant for?

Synergy target?

Yes.

Are we talking numbers?

Yes. Is this numbers or is this other targets? I just did not get it. Yeah, so. Please remind me again. Thank you.

Okay. As I said, we are initiating some of the programs that we have, including procurement, including FX alignment, capacity sharing if customer requests. We are also aligning our R&D efforts to better utilize our resources in the R&D area. All these programs should create some of the synergies for us to benefit. But there is no dollar amount. I'm just saying that with the overalls, both on the top line as well as on the cost side, we are setting a target of a margin improvement of 2% going forward. And as I said, in the first half, we are expecting to achieve that. Second half, you know, there's a lot of uncertainty there is. But in the longer term, I think all these efforts that we are putting in should help us to reach that target, or if not, to exceed that.

Okay, thank you. And you have this 2% synergy target in operating margin. How about for operating margin point of view? Do you have any target for this synergy?

I think I'm mainly talking about ATM operating margin stations.

So you said 2% is ATM operating margin improvement? Yeah.

Okay, thank you. But that's the overall, including Synergy can be created. That's not the Synergy margin.

Understood, yeah. Okay, then for your overall second quarter guidance, in first quarter, at that time you expect, you know, you will have a slightly dip in first quarter and will be followed by a strong quarter-over-quarter growth through end of this year. So if you look at your second quarter revenue guidance compared to what you thought in January, do you think the growth in second quarter you guided now is as strong as you expected back to January? Yes.

We, I think, first and second, first quarter, we're actually stronger than expected because there were some uptick in the final demand from our customers. Also, there is some motor transfer because of the difficulty created happening in other regions. And I think a lot, also, I think the wind, As I mentioned, when a situation becomes a bit more difficult, our customers tend to go for the strongest player to better secure whatever they need. So all things put together, we actually have not only a better than seasonal first quarter, but also better than expected first quarter for us as well. And I think the same pattern goes into second quarter. We did not bring down our expectation for second quarter from beginning of the year, and things are moving on track at this point. But having said that, we are also saying that going into second half, things become much more muddier. and we have extremely limited visibility because of the pandemic situation. And whether that will have an impact on the overall demand or having some logistic issues being created, you know, all things, you know, there are a lot of uncertainties in front of us. So we are not making any comments on second half at this point.

Okay, so this strong quarter over quarter goes to end of this year. This probably is not valid anymore?

I wouldn't say that. I'm just saying we're not commenting on it.

Okay, yeah. Okay, thank you. My next question is for EMS. Ken just said there was some EMS revenue just preferred from first quarter to second quarter, and now you guided your second quarter EMS revenue is similar as the first quarter last year level. So I would like to ask how much of this EMS revenue is preferred from first quarter to second quarter? Okay.

I don't have a dollar amount for it, but we can say that in the first quarter, we experienced more disruptions than we were expecting, not just on the staffing in our channel operation alone. There are also other logistics difficulties that we faced. So we assume... We think that some of the orders were being pushed out to the second quarter. So if you look at our past EMS business pattern, second quarter is either down or from first quarter, either down from the first quarter or stay relatively flat. But this time around you're seeing our second quarter showing you know, stronger than normal quarterly growth. So we are assuming that some of the orders that were originally were given to first quarter is being pushed out to second quarter.

Okay. Okay, understood. And also for your first quarter EMS growth margin increased because of the product mix change. And look at your product mix. You have... lower communication business and with a higher computer and storage part. So can we assume for your communication business, EMS business actually is carrying a lower growth margin?

Okay. You're saying the second quarter or?

No, I'm talking about the first quarter.

Roland, there's a lot of things that go into what the profitability of any particular factory. Some of that has to do with loading and such, right? So maybe in this particular situation, in this particular first quarter, if I panned out, kind of how, you know, how it looks, right? But I wouldn't say this is always the case. So I don't think you can make that particular assumption at this time.

Okay. But you said, you know, previously for your prepared remark, you said, you know, the higher growth margin from EMS was mainly due to this product mischange. So that actually made me to think that this way, yeah. So you think they also have some factor for this different loading?

In the products that we're doing, I wouldn't say that you can compare that across different quarters and such, but in our opinion, it is the product mix shift that did give us some impact to the overall margin movement. And the margin movement actually was not that materially significant.

Okay. Understood. Yeah. And lastly, for your EMS revenue, for the whole year, are you expecting the whole year EMS revenue to increase or to flat or decrease this year? Thank you.

Again, we are not giving out full year. We're not commenting on full year.

Okay, yeah. Okay, understood. Thank you. I will go back to the queue. Thank you.

Next question, Bruce Liu from Goldman Sachs.

Thank you for taking my question. The things I want to ask about the HIP, you know, management is guiding for additional 100 to 200 million U.S. dollars more revenue for HIP starting from this year. Can we have more granularity about what kind of HIP project is maybe already and what kind of profitability we can expect for this new HIP project?

I think the target of $100 million increase in terms of SIP revenue remains the same. And by the way it's going, I think this year we will, again, exceed that target. In terms of our portfolio right now, From both EMS as well as ATM, we're currently having roughly 15 projects old and new. We still have these multiple projects that are on hand, and we'll continue to work on these projects. I think the overall profitability of these projects are in line with the corporate average at this point, and I think everything is going as planned. Although going into the second half, I think these projects will continue, but then the timing of it may have some changes, but that remains to be seen.

So, you know, the target of additional 120 million, assuming no change in terms of the product launch, or you already factored that in?

Well, we're talking about new revenue, project from new... Yes, yes. These are still in line.

I see. I understand. So you're mentioning, again, I want to double-check. My understanding is correct. Your profitability for the new SID project is in line with the existing profitability for both EMS and ATM data.

Yeah.

Okay. Okay. Again, I want to double-check that. Do you still... reiterate the operating margin to be more than 4%, the target for operating margin for 4% for EMS business for 2020? Does that remain?

The 4% remains to be the target, but I think given the situation that we're in, I think it's going to be very, very tough for this year for us to reach that target. I think There's a lot of variables in front of us, and at this point, it's very, very difficult to predict.

I see. I understand. Okay, lastly, I want to ask about the panel-level packaging stuff. Your competitor is talking about that their production year is reached to the wafer-level packaging level, and they are expecting to ramp up the batch production. So what's your current status for the panel-level packaging?

It's still under development, and I think whatever we have at this point, in terms of the progress of this panel, I think we're still moving ahead, moving along, and we're not expecting, I think this is more of a 2021 scenario. at this point.

Oh. So you're suggesting that your competitor will have already a much better production schedule than you?

I can't speak for our competitors.

Okay. I understand. Okay, I'll go back to the queue. Thank you.

And right now we're having Sebastian Ho from CLSA. Go ahead, please.

Hey, yes. Thanks for taking my question. So a few follow-up. The first one is on the CapEx. So it seems like the government is guiding CapEx flat for this year. So I wonder, have you, this such decision, have you factored in the potential capacity alignment with spill? Thank you. To some degree, yes. Okay, so great. Okay, so can we, and how about the, in terms of the split, or roughly split between testing and packaging? So can we assume that testing still at a, I'm sorry, not a split, I mean say compared to last year, I mean in terms of the increase or decrease. So testing will probably be growing, packaging probably declining. Is that a way to look at it?

You mean this year compared to last or what? Yeah, yeah, this year compared to last year. Yes, I think this year the percentage for assembly will be higher than last year.

Yeah, and test would be lower than last year. So last year we did spend significantly on test.

Oh, okay, I mean percentage-wise. So with me, the testing this year, the cap rates will go down. young year?

Yes, because I think both of the investments were made last year. Okay.

Got it. Got it. Thank you. My second question is on the OPEX ratio target. I think last time, or last few quarters, the company were competent to lower that OPEX ratio to 2018 level, which is from like 0.4%, something like that. And what's your Does that kind of target still hold or achievable now?

All things being equal, I think we're still hopeful that we can... reach that target but I think it's at this point it's just very very difficult for us to for us to to predict actually I think the second half is really just too much variables involved and so I think first half we're certainly on track but second half Second half really depends on the situation. Right.

Okay, okay. But if we go back, I mean, a quarter or two quarters ago, when you set up that target, given that you haven't had a final green buy from Moffcom on spills mergers, so I would assume that you didn't factor in the potential R&D or OPEC synergy when you set up that target. Right? But now you can't. Or you have already. What do you mean? I mean, when you set out the lowering of the OPEX ratio this year, in January, February, and before you get a final approval from Spiel's mergers, did you factor in the potential synergy in that target

That's being considered, but I wouldn't say that we had a clear idea of how much savings, so to speak, is coming from the lift up the restriction.

Okay, I understand. Third question is on the, I think the CFO mentioned that you have to plan to bring down leverage in 24 months. So do you have any target debt ratio, debt to equity ratio in mind? I think the last year we're sitting at 100%. What's the target? in two years from now. Thank you.

I think Ken mentioned that our target is in the next 24 months we want to bring our net debt to equity ratio to 60 to 65%. Okay.

Okay. That's helpful. Is it more linear decline or it will be more centered in the later part? of the 24 months? I mean, is it more of a linear decline, I mean, throughout the next 24 months, or we would like to see more of a step function, maybe a slow decline this year in the first 12 months, and a larger decline in the 13 to 24 months?

Well, we're going to play by ears, but that's the target.

All right, all right. Okay, my next first question is about what's your sense about your customers or supply chain worrying about the supply chain disruption? So it looks like everybody has been stockpiling inventory, their material inventory or their product's inventory. And what's your sense on that? Are you getting requests from your customers asking you to do so? And are you also preparing some of the higher materials inventory, just in case?

Well, I think we are producing, based on the forecasts that were given to us, I don't think we're in the position to comment on a customer's inventory levels. And, you know, they have their plans, they have their schedules. We're here to serve them and to meet their needs. I think that's the position we're taking now.

How about ourselves? For example, if we do packaging into a sourced substrate, I think this is also probably some of the components of concern a couple of months ago. How are we looking at that? Because we heard that some of the OSAC companies have been building up those more than safe level of the inventory, for example, like old substrates. Do we have to do so, or are we not so worried about that?

No, I think there was some spotted disruptions, but overall we are still at the normal level at this point.

Okay, okay. All right, that's all from me, thank you.

All right.

And right now, we're having Rick Shee from Daiwa Securities.

Yeah, hi, good afternoon, Joseph and Ken. The first question, as usual, is housekeeping about your utilization rate across the water-bombing, fridge-bombing, and also testing Q1, and what do you expect for the second quarter?

I think the first quarter, we're running at around 75% to 80%, as expected. And going into second, I think we'll be around 80% across the board.

Okay, around 80% plus for second quarter, right?

Right. Okay.

All right, thank you. So second question, if I look at your competitor, mCore, which also released their guidance for second quarter, their revenue roughly will be declining by around 10% quarter-on-quarter. So should I interpret this market share gain from you guys continuing second quarter, or mCore try to lowball their second quarter guidance because of COVID-19? How should I interpret this discrepancy?

Well, I think we have different exposures. We have different customer mix. We have different focus areas. I think the overall situation is very different between the two companies. But I think, as I said before, When there's more uncertainties in front of us, I think the customer will pick the strongest player to better secure whatever they're demanding.

Okay. All right, fair enough. So, all right. The last question from me is... I guess from the supply chain angle, right, you guys and some of the founders are sitting in the same supply chain. But listen to the founding majors at TSMC and UMC. I guess their first half business outlook looks as resilient as yours. But they're also saying something about the customer's inventory pre-bill. ahead of the second half. So UMC said that they don't rule out any possibility of order cancellation in second half. So I guess both UMC and TSMC tried to tone down their second half outlook because customer inventory prevailed. Do you have any comment on that?

Like I said, I think... I think the front-end wafer FAFSA may have a better visibility on the overall inventory situation. But, you know, we're just producing per our customers' forecast, and we're not in such a position to comment on the overall inventory. Of course, you know, like we said, the second half is very, very... How do I put it? It's very uncertain. There could be a lot of factors playing in second half. So, you know, we certainly could not rule out that some forecast reductions or push out and things like that will happen. I think that's why everybody, including ourselves, is much more conservative in trying to make any comment on second half.

Yeah, I know it's quite difficult to get a number right, but just one quick follow-up, if I may. So when I look at the foundries market outlook for this year from TSMC, UMC, I guess they're still looking at probably around a single digit, right? They say low single digit growth. year on year. So do you expect the global offset market revenue this year to follow the same pattern?

Yeah, I think whatever waiver that's being produced needs to be packaged. I think as long as they continue to crank out waivers, we're here to take on the back-end part of it.

All right. Thank you. Thank you so much. That's all from me. Thank you.

Now we're having Gokul Hariharan from JP Morgan.

Thanks for taking my questions. A couple of things. First of all, I know that you're not offering guidance in second half, but could you talk a little bit about which areas you are feeling more comfortable about from a vertical perspective and which areas are where you think the risk is likely to be bigger as we think about second half? The other question I have is a bit more longer term. I think if you think about the last four or five years, open industry growth has actually been quite slow, and they're probably behind Foundry and behind the semiconductor X memory kind of growth rate. How should we think about this going forward now that you are creating a more consolidated industry as well? Potentially some price discipline also comes in. Should we expect that OSAD should grow in line with CEMI or still be going to see a discount to overall industry growth when it comes to the OSAD industry itself? Thanks.

Well, I think, you know, I think like everybody else is saying, I think right now in terms of communication, at least for the time being, infrastructure seems to be more resilient than others in the We are also seeing that data center, high performance computing, because of the homeschooling or home working, that seems to be having better momentum. I think given the situation at this point, I think that's how the industry will move particularly into the second half. I think that we're sharing the same view as everybody else. In terms of CapEx, I think you're correct that the overall OSAC CapEx investment were behind the front end for the past few years, but in the I think starting from 2018, going into 19 as well as in 20, I think we're sort of in the catching up mode. And also, because of the changes or investment in terms of technology or new applications, these CapEx are required to be made so as to meet the changing demand

Okay. Could you talk a little bit also about what you expect? Are there still pockets of IDM that could actually get outsourced? And what is your appetite to go after some of these IDM businesses, even when we have seen that some of your Chinese peers have been a lot more aggressive in buying some of these captive assembly and test operations and making money? making bigger capital investments in this as we go through a downturn situation in the second half of the year?

Well, I think the outsourcing will continue. I think the overall complexity of backend assembly and tests is getting far more complex than before, and therefore the investment of which becomes more difficult for the IDMs to continue. And I think that the added complexity or the technology advancement is really the driver for continuous outsourcing more. So I think that's the general trend. I don't think it will reverse anytime soon.

And does ASP feel like it is the right decision to potentially go and buy some captive assembly and test business to expand the revenue base, or you think it's better to be more organic?

It really depends on the situation. I think we don't buy capacity just for the sake of capacity. I think it has to complement with either the business portfolio or technology portfolio. that we have on hand in any particular area, if that makes economical sense as well as strategic sense for us, you know, either our peers or IDM captive can all be considered, as well as it makes sense.

Okay. Last question for me. On the EMS side, can you talk a little bit about how your footprint China versus non-China will be evolving, especially as we have some of the steel-fash acquisition coming in as well as some of the investments that USI itself has done outside of China. Could we talk maybe what it looked like last year and maybe what you want it to look like in maybe a couple of years' time?

I think up to last year, in terms of USI, up to Three-quarters of their capacity is in mainland China, and I think that ratio is coming down a bit because of a lot of different reasons. I think we're expending Taiwan operations. We're expending Poland, Mexico, and, of course, after we close the deal with ActioFlash, I think that percentage will drop. We'll come down further. I think the most of STL Flash, one of the primary reasons why we're interested in STL Flash is because of their geographical coverage, which complements USI's current operation. And also on the product side or device side, it also complements with USI. where they have a far larger exposure in non-3C segments, where USI is basically more focused on 3C. In terms of business model, it's also complementary because the SDO Flash primarily are focusing on early stage, small volume, more variety type of business, where USI is focused more on the mass production of high-volume products. And I think the combination is complementary in many different aspects of the overall business, which I think brings a lot of value to us.

Okay. Thank you.

Thank you.

Next on the line, Zihong Ng, China Renaissance.

Hi, good afternoon, gentlemen. My question is regarding the company's priority on capital allocation, say, between CapEx, debt repayment, and dividends. Yeah, can Joseph elaborate a little bit on that?

What if I say I put dividends last?

Or maybe I try a different way. The dividend policy, should we expect for this year's dividend to be at least flat from last year's level?

Let us say we do have a – we are putting some priority over the deleveraging and the hopefully that can be done through better profitability going forward. But, you know, we will need to balance off to look at different interests and try to have a balanced approach to not necessarily satisfy everybody, but then to keep everybody comfortable.

Mm-hmm. Okay. Or maybe on the net gearing side, the 60%, 65% is not the optimal level, right? You still have more room to go if you guys have more time to bring down this gearing.

Well, I think optimal is a very subjective term, and I'm not sure whether 60% or 65% is the optimal or not. But I think that's just the first stage target that we're aiming at. I think when there's uncertainty in front of us, I think it's prudent that we kind of strengthen our overall financial standing and And if we can do more, we will try to achieve whatever we set out to go.

Okay. All right. Okay. Got you. And maybe the last one on advanced packaging, maybe on the fan-out type stuff. When should we expect to have more meaningful revenue to contribution? Let's say around maybe a $200 million of U.S. dollars of revenue contribution a year?

Well, our target is to add another, we'll have incremental final revenue of $50 million a year. And we have been successful in reaching our target. And this year, I think we are fairly confident that we will not only hit the target but also exceed our target for this year. Okay. Thank you very much.

Thank you.

Now the line is open to Randy Abrams.

Yes, thank you for calling again. I wanted to follow up on the ASTL flash. Could you give the update on timing to close and then abuse sales and margin with the incremental change to the EMS or USI division after you consolidate?

Because of the gun jumping rule, I don't think we can give you the numbers at this point. But in terms of the schedule, I think we're still aiming to close this deal by end of second quarter or early third quarter.

Okay. And then if I could ask on the deleveraging process. Originally when you acquired Spill, I think your intention was you could achieve low-cost debt. I'm curious now if you think about equity financing to help deleverage or that's still largely off the table.

Like I said, we want to proceed with this deleveraging through our own internal cash flow by more taking a closer look at our overall CapEx spending. And if it's, If it's preferred, we will also looking at monetizing some of our invested assets. So that will be the source, the main sources for the leveraging effort. At this point, we do not have a plan to to do a capital injection through public offerings.

Okay, great, that's helpful. And the last question, just to clarify, in terms of the order pattern, and it does get to OSAT, the other piece of Amcor, I think they are still counting on this third quarter rebound, like you get the normal product ramps. I'm curious, two parts of that, have you seen last few weeks, where it feels like orders held firm and you mentioned some upside. But have you noted any change last few weeks as we progress through this that customers have actually turned more conservative? And then on the part about the pickup, I know you're not giving kind of full year, but in terms of the launches, are you still seeing that normal pattern? So you may get inventory corrections in some place, but do you still see that pattern or lift there? in terms of those product launches, or do you see some delayed activity this year?

No, I think that there's, in terms of customer forecast, there's ups and downs in different customers. I don't think, at least for second quarter, we're not seeing anything abnormal. Again, you know, going to second half, then, you know, it's... We really don't have that much of a visibility at this point.

Okay. Fair enough.

And, you know... Oh, go ahead.

And right now we're having Bruce Liu from Goldman Sachs. Go ahead, please.

Hi. Thank you, Jeff, for taking my question again. I want to go back to the profitability of SIP. I think we do have the conversation regarding to the ADM growth margin going back to prior acquisition level, which is like mid to high 20s. I think I thought that SIP is one of the important factors to bring out the profitability. So I'm actually very surprised to see that the SIP profitability is only like, you know, a corporate aperture level. But, you know, that stated, can we place on the assumption that that is a structural profitability, which means that your production skill and yield is at the comfort level? Do we still expect that?

Please. I think, you know... We need to make a distinction between SIP business on the ATM side or on the EMS side. I think the business patterns is different. On the ATM, I think whatever the projects that we're taking off, at this point, tend to have very similar, although it's, you know, when I say it's close to corporate average, it's close to corporate average, because we do have some legacy projects that may be a bit lower, but whatever new business that we're getting, our target is to get the similar margin that we're getting from our other part of the business. So that's the overall strategy we're taking. In terms of EMS, I think at the growth level, because of the different devices, their bond cost is very different. Some with higher material cost, some with lower cost. So on the gross margin, it's kind of difficult to compare. But, you know, what we're saying is we want to have these businesses generating similar operating margins for us, and that's what we're aiming at at this point.

I see. I understand. Another thing is that ASE used to have some investment in subjects, as a material that we emphasized for the last couple of years. But we definitely see the new trend, the importance of the substrate as a future SIP is getting a lot higher. Does AOC have any plan to increase your investment in substrate?

Yes. We have been a bit conservative on the substrate. What we're now focusing on is to pick and choose some of the SIP projects that we're taking on and trying to find the suitable product for us to make ourselves. But by and large, I think the variety of these substrates used in different SIPP type of projects are very large. There's a wide range of different products that I don't think a single company can address everything. We just have to, with our resources on hand, we need to be... selective in choosing the one that's most suitable for us.

I understand. Okay, one last question from me is that given the current political situation, does AAC plan to increase your capacity in the United States?

We're not ruling out anything. We will continue to evaluate things. But right now, we don't have an established plan to have anything, you know, U.S. or Europe and some other areas. It really depends on how things are moving going forward. And for us to make a meaningful investment, we need to have – We have to look at the overall situation and choose the right location for us to expand. I don't think it's prudent for us to make any investment based on political reasons.

So what is the lead time for you if you want to make an investment or expand your capacity in the U.S.? I believe you have some capacity there already, right?

You mean in the U.S.?

Yes.

We do have some test operation in the U.S. and serving mostly to handle some of the engineering tests that our customers have. But in terms of lead time, I think it really depends on you know, if you're setting up a garage shop, it only takes days, but, you know, for real meaningful operation, I don't have a clear idea. It depends on the regulations and the rules and all the licenses and, you know, there are so many different piece involved. It's very hard to to understand.

Thank you.

Thank you. I think we don't have any more questions online.

Thank you for calling into our conference call. See you next quarter.