ASE Technology Holding Co., Ltd.

Hello, I am Ken Chung, the Head of Investor Relations for ASE Technology Holdings. Welcome to our third quarter 2020 earnings release. Thank you for attending our conference call today. please refer to our safe harbor notice on page two. All participants consent to having their voices and questions broadcast via participation of this event. 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. I am joined today by Dr. Tian Wu. ASC Holdings COO, and Joseph Tong, ASC Holdings CFO. For today's call, I will be going over our financial results, Tien will be providing a market overview, and Joseph will provide a recap and our guidance. We will have a Q&A session following the prepared remarks. As with the rest of 2020, the third quarter has proven that there is never a dull moment, especially in the electronics industry. The third quarter was remarkably eventful for us. Typical seasonality ran through August with run rates reaching historical highs. However, in September, the U.S. Bureau of Industry and Security's Export Administration Regulation, EAR for short, went into effect. As a result, for our ATM business, we commenced to replace capacities left open by exiting business. This process occurred much more quickly than anticipated, as our overall loading levels snapped back to full utilization. During the quarter, we took two charges related to the EAR. one in cost of goods related to unused inventory and one in non-operation for interface boards used specifically for EAR-impacted customers. We also experienced near-term highs in the value of the NT dollar relative to the U.S. dollar. Meanwhile, our EMS business ramped up a bit later in the year, in line with a deferred seasonal pattern. We don't believe the EMS business has yet peaked for this manufacturing season. In total, we ended the quarter strong, with strength across our core SIP, advanced packaging, and wire bond products. please turn to page three, where you will find our third quarter consolidated results at the holding company level. In this section, we will generally defer business explanations to our ATM and EMS P&L discussions. Intercompany transactions between our ATM and EMS businesses have been eliminated during consolidation. For the third quarter, we recorded fully diluted EPS of $1.54 and basic EPS of $1.57. This means that on a year-to-date perspective, we have fully diluted EPS of $4.01 and basic EPS of $4.12, exceeding full-year 2019 EPS already. Consolidated net revenue was $123.2 billion, representing a 15% increase quarter-over-quarter and a 5% increase year-over-year. We had a gross profit of $19.7 billion with a gross margin of 16%. Our gross margin declined by 1.5 percentage points quarter-over-quarter and 0.3 percentage points year-over-year. The sequential margin decline is primarily the result of EAR impact, a stronger NT dollar environment, and a higher EMS business mix. The year-over-year decline is primarily the result of EAR impact and the strong NT dollar. Our operating expenses increased by $0.2 billion during the third quarter to $10.6 billion as a result of higher operating expenses in our EMS business unit, offset in part by lower operating expenses in our ATM business unit. Despite the increase, our operating expense percentage declined 1.1 percentage points sequentially and 0.5 percentage points year-over-year to 8.6%. This amount is currently trending below our 2018 operating expense percentage. Operating profit was $9.1 billion, up $0.7 billion sequentially and year-over-year. Sequentially, operating margin declined 0.4 percentage points to 7.4%, while increasing 0.3 percentage points year over year. During the quarter, we had a net non-operating loss of $0.1 billion. This amount primarily consists of net interest expense of $0.7 billion and an EAR-related tooling impairment of $0.7 billion. This amount was offset in part by net foreign exchange investment and sale of equipment gains. Tax expense for the quarter was $1.8 billion. The effective tax rate for the third quarter was 20%. Net income for the quarter was $6.7 billion, representing a decline of $0.2 billion sequentially and an improvement of $1 billion year over year. we believe it important to note the operating margin impact of the strengthening NT dollar and the EAR-related write-down. Removing the inventory charge while using the second quarter exchange rate, we estimate an operating margin of 8.6%. And similarly, using the third quarter 2019 exchange rate, we estimate an operating margin of 9.7%. Without inclusion of the EAR-related inventory and equipment write-down totaling $1.6 billion, we would have basic EPS of $1.84 during the quarter. On the bottom of the page, we have again provided key P&L line items without the inclusion of PPA-related expenses. Consolidated gross profit excluding PPA expenses would be $20.6 billion, with a 16.7% gross margin. Operating profit would be $10.3 billion, with an operating margin of 8.3%. Net profit would be $7.9 billion, with net margin of 6.4%. Basic EPS excluding PPA expenses would be $1.84. 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. The third quarter for our ATM business was incredibly busy. Usually, that's good. We do a lot of work and we get a lot of revenue for it. We had a different kind of busy this quarter in which we were busy stopping EAR devices, retooling factory lines, and restarting replacement devices. This happened at a frenzied pace. As a result, despite the EAR disruption, we still saw measured growth. That's actually a significant achievement given the size of the business lost. More about that later from Dr. Wu. After the third quarter finished, our ATM business outperformed our initial expectations rather significantly. In retrospect, we are somewhat surprised at the efficiency of the supply chain and the pace at which our capacity refill has happened. The refill was not the linear recovery we had initially anticipated. Instead, business snapped back with new products rushing to replace vacated products. During the quarter, our ATM business continued seeing a strengthening NT dollar environment in which the NT dollar appreciated 1.6%. Given that our orders are generally denominated in U.S. dollars while our factory costs are mostly denominated in NT dollars, a strengthening NT dollar brings a higher cost structure for us. If the NT dollar stays strong for a longer term, we believe that we may be able to adjust pricing to compensate and purchase relatively cheaper U.S.-denominated machinery and equipment. Shorter-term movements are more difficult to position. For the third quarter, 2020... Revenues for our ATM business were $71.8 billion, up $2.3 billion from the previous quarter and up $3.9 billion from the same period last year. This represents a 3% increase sequentially and a 6% increase year-over-year. Our ATM revenues came in somewhat ahead of our expectations due to stronger snapback of revenue post-EAR impact. Gross profit for our ATM business was $14.5 billion, down $0.5 billion sequentially, and down $0.2 billion year-over-year. The sequential and year-over-year gross profit decline was primarily related to a one-time inventory write-off of EAR-related customer substrate of $0.9 billion and a stronger NT dollar. Gross profit margin for our ATM business was 20.2% down 1.5 percentage points sequentially and year-over-year. Margin decline was primarily attributable to EAR and NT dollar impact. During the third quarter, operating expenses were $7.7 billion down $0.1 billion sequentially and $0.6 billion year-over-year. The sequential and year-over-year declines were driven by lower administrative costs. Our operating expense percentage was 10.8% down 0.5 percentage points sequentially and down 1.4 percentage points year-over-year. During the third quarter, operating profit was $6.8 billion, representing a decline of $0.4 billion quarter-over-quarter from and an improvement of $0.4 billion year-over-year. Operating margin was 9.5%, declining 0.9 percentage points sequentially and improving 0.1 percentage points year-over-year. For gross and operating margins, the one-time EAR inventory write-off had a 1.2 percentage point impact. we estimate that the strengthening NT dollar also had a 0.8 percentage point impact to gross margin sequentially and a 2.7 percentage point impact year over year. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 21.5% and operating profit margin would be 11.1%. On page 5, you'll find a graphical presentation of our ATM P&L. On page 6 is our ATM revenue by market segment. Not much has changed here. On page 7, you will find our ATM revenue by service type. As stated earlier, capacity snapped back to running near full. Outside of certain capacities requiring longer NPI time, and those MPIs are in process. From this chart, you can see here that our wire bonding business is performing particularly well. We believe that our wire bonding business is seeing a resurgence of demand. More about this from Dr. Wu later. On page 8, you can see the results of our EMS business and its associated revenue by applications. For our EMS business, the third quarter usually represents the peak quarter in terms of seasonality. However, we anticipated a somewhat delayed manufacturing cycle. With that in consideration, demand for our EMS business was stronger than anticipated, driven by strong SIP demand. During the third quarter, we had revenues of $53.1 billion, increasing 34% sequentially and 5% year-over-year. EMS revenues increased quarter-over-quarter primarily because of our seasonal business ramp. EMS revenues increased year-over-year primarily as a result of stronger demand for SIP products offset by a somewhat later seasonal product cycle. Our EMS gross profit was $5.1 billion, improving $1.4 billion sequentially and $0.7 billion year-over-year. The sequential and year-over-year gross profit improvements were driven primarily by stronger customer demand for SIP-related products. Gross profit margin for the EMS business came in at 9.7%, an improvement of 0.3 percentage points sequentially and 0.8 percentage points year over year. The margin improvement is primarily the result of product mix changes. Our EMS business unit's third quarter operating expenses were $2.8 billion, increasing $0.3 billion sequentially and $0.4 billion year-over-year. Operating expenses increased primarily as a result of increased employee profit sharing. Operating expense percentage was 5.3%, dropping one percentage point as compared with 6.3% last quarter and increasing 0.5 percentage points year over year. Our EMS operating profit for the quarter was $2.3 billion, representing a $1.1 billion improvement sequentially and a $0.2 billion improvement year over year. The sequential operating profit improvement was primarily due to increased seasonal demand. Our EMS operating margin was 4.4%, which is a 1.3 percentage point improvement sequentially, and a 0.3 percentage point improvement year over year. On the chart on the bottom half of the page, you'll find a graphical representation of our EMS revenue by application. Our consumer segment picked up seasonally, and this season we expect to add an incremental SIP product. We would expect that this segment continues to pick up into the fourth quarter. It is again worth noting that our EMS business unit runs under the name Universal Scientific Industrial and is traded as an A share on the Shanghai Stock Exchange under the ticker number 601231. We currently own 75% of the company, which translates roughly to $5.9 billion. In regards to our regulatory filing to complete our acquisition of a steel flash, the current COVID-19 resurgence in Europe is impacting the duration of our regulatory reviews. As of yesterday, France announced its second countrywide lockdown, As a result, we currently expect the completion of our combination with a steel flash to be somewhat delayed. We now expect for the regulatory process to complete before year end. On page 9, you will find key line items from our balance sheet. At the end of the quarter, we had cash, cash equivalents, and current financial assets of $61.8 billion. Our interest-bearing debt increased $7.1 billion to $224.6 billion. Total unused credit lines amounted to $255.6 billion. Our EBITDA for the quarter was $23.2 billion. We continue to target a net debt-to-equity ratio of 60% to 65% by the end of 2021. On page 10, you will find our equipment capital expenditures. Machinery and equipment capital expenditures for the third quarter and U.S. dollars totaled $415 million. of which 288 million were used in packaging operations, 73 million in testing operations, 52 million in EMS operations, and 2 million in interconnect materials operations and others. 2020 is providing us an unusual situation. we understand that there is an expectation of perfect fungibility where replacement business uses entirely the same package types or tester platforms and requires no incremental tooling. And in such a perfect scenario, incremental capital investment becomes completely unnecessary when replacement business comes on board. Unfortunately, This perfect scenario almost never happens. One customer may have used a fan-out process when another one uses bumping and flip chip. Customers may even use the same model tester but with different instruments or configurations. As a result, in many cases, we have to make smaller investments on tooling or instruments to load previously purchased larger investments. In addition to facilitating the refill, we are seeing a significant pickup in our demand in wire bond-related capacities. As a result, we do see the need to invest in our wire bond lines. Tian will speak shortly on this also. On page 11, we have a brief year-to-date recap. All information here is presented on year-to-date terms. Holding company revenue grew 15% year-over-year on U.S. dollar terms. ATM revenues grew 19% year-over-year on U.S. dollar terms, with gross margins improving 1.9 percentage points. Removing the impact of currency and EAR-related expenses, gross margins improved 4.2 percentage points. EMS revenues grew 12% year-over-year on U.S. dollar terms, Year-to-date EPS is $4.12. For an update of the overall market environment, I'll now turn the microphone over to Dr. Tianwu.

Hi, this is Tianwu. I would like to offer you a business environment. If you look at page 12, the assembly capacities are tight. In particular, wire bond capacity is extremely tight. The tightness situation, we expect that to last at least until Q2 of next year. In this particular environment, because we're seeing the tightness in wire bond as well as in all other assembly capacities, we believe the ASP environment will be friendly in 2021. In fact, we're seeing the margin improvement starting Q4 this year, but we do expect the ASP environment to be more friendly in 2021 comparing to the previous years. Let me talk about the sectors from our perspective. In the communication sector, we have 5G driving a portion of the growth. We also have a lot of Wi-Fi 6 standards driving the multiple upgrade cycles in communication as well as in automotive. We have seen slowdown in automotive in Q1 and Q2. In Q3, we're seeing a remarkable recovery and strength in automotive sector. We believe this will be reflected in Q4 as well as next year. Computing and consumer demand have been strong and they remain strong for Q4. We also believe that computing and the consumer demands will be strong for 2021. A lot of investors are asking us about the COVID-19 effect. And I would like to share our perspective with you. The COVID-19 has created new values for technology products. namely the technology products are viewed to be an alternative to reduce medical risk, which I will elaborate a little bit more. Also facilitating social connectivity in addition to the traditional value of digital efficiencies. What I was referring to is because of work from home, because of learn from home, People are buying IT products to minimize and reduce the medical exposure and the medical risk because of COVID-19. Because of COVID-19, the social connectivity will be augmented by the IT products. So in this scenario, we're seeing two fundamental changes in consumer behavior. First, more people tend to buy IT products. Second, people are willing to pay higher price to buy IT product with performance. It is in this regard we believe we are seeing during the COVID-19 days why the IT products in almost all sectors are showing particular strength, especially the communication products. So in that regard, with the 5G, with the Wi-Fi, With all of the upgrade cycles, which were permeated through the cell phone, the automotive, as was PC, Bluetooth, and all of the IOTs, we believe there are fundamental changes in the way people are willing to spend money to buy IT products. Also, in the product mix, we're clearly seeing the product mix as well as product complexity increasing. In particular, in the wire bond, the number of stack dies that we're doing now is more than before. The type product we're doing for RF, for analog, and we're seeing more multiple dies require wire bond, which we have not seen before. So in this particular cycle, it's not just the volume, it's also the number of dies, the number of wires, as well as the complexity. On top of that, because this product, some are going to medical devices and automotive. The kind of quality requirement is also different from the consumer. That is why for quality wire-bound service, we can command a premium in this year, and I believe in 2021, as well as years going forward. Let me comment about the OSAT, overall CapEx expenditure. If you go back to 2018, 2019, as well as the 2020 number, which we do not have the complete view, you will see that the overall OSEC industry, we believe, has been underinvested. In that particular scenario, ASE has been spending CapEx in 2018 and 2019, as well as in 2020. Going forward, we will accelerate in spending in Q4, such that we can put more capacity in place in anticipating as well as fulfill the commitment based on our customers' demand. Going into 2021, we will be moderating on the CapEx, which Joseph, our CFO, will talk a little bit more. Based on the new design wins, as well as all of the long-term contracts and forecasts, as of today, we believe we will have a strong 2021, and we're quite optimistic about that. Once again, which I'll be happy to talk to you about our growth, as well as market share gain. In our calculation, if we exclude the EAR impact, we believe ASE is gaining shares in all sectors, in all package types. Please turn to the next page, page 13. Ken already talked about the painful experience and the sudden nature of the EAR action. The EAR affected ATM revenue in Q1 and Q2 were about 20%, comparing to our overall ATM run rate. In Q3, it was down to about 13%. In Q4, it will be zero. Greater than 75% of the lost revenue and the lost capacity has been backfilled, which Ken already talked about it, by many other customers with the help through all of our partners throughout the supply chain and customers. the remaining 25 percent will be backfilled by end Q1 2021. So, as of today, we're confident that our year-over-year growth in 2021 will still be positive. In other words, all of the tooling, all of the asset disposition has been completed either in Q3 or the latest will be completed by Q4 of this year. Ken already talked about it. We had a one-time write-off, which was included in the Q3 number that we just reported. With all of the additional work in Q4 or Q1 of next year, they will not incur any additional charges. With that, I will turn the floor to our CFO, Joseph Tung.

Okay, good afternoon, everybody. And this is Joseph. Before I get into the further comments on the financials, I would like to give a very brief comment on quarter three. Certainly, we have successfully managed through a very chaotic third quarter and came out with a much stronger than expected quarterly results. It was with close collaborations among different operating units that we can substantially reduce the negative impact of the EIR restriction and quickly regain our momentum going forward. Now with that, I want to take a few minutes to update on the progress we are making on some of the financial targets we set out to achieve at the beginning of the year. First, on OPEX ratio. Our target is to go back to 2018 level of 9.4%. In quarter three, it had come down to 8.6% from 9.7% a quarter ago, way below the target level. Now, with continuous effort going into Q4, I strongly believe that we will not only reach our target, but more likely to exceed that. Second, on OPM, or operating margin, we stated we shall see 2% improvement in the year. And I believe we are ahead if we take out the negative impact from NT dollar appreciation and EIR-induced inventory write-down. Although it is difficult to quantify, the overall improvement of operating margin came from synergy Part of the overall operating margin improvement came from synergy created between AAC and SPIL through increasing coordination. Going forward, we will further deepen and broaden such coordination on various parts of our operation, including capacity alignment, business development, procurement, and R&D. Thirdly, on CAPEX, After heavy investment in the past three years to support our strong business momentum going forward, our CapEx in 2021 should start to moderate. At this point, I believe 2021 CapEx amount should fall between 2018 and 2019 level, while more leaning toward 2018 level. With the improved profitability and reducing CapEx, our cash flow position in 2021 will see good improvement. Therefore, it will allow us to increase our cash dividend payout to no less than $3 per share, while still reaching our deleveraging target of 60% to 65% net debt-to-equity ratio by end of 2021. Okay? Now, with that, let me give you our... fourth quarter guidance. Based on our current business outlook and exchange rate assumptions, management projects overall performance for the fourth quarter of 2020 to be as follows. In NT dollar terms, ATM fourth quarter 2020 business should be similar with first half 2020 level. ATM fourth quarter 2020 gross margin should be similar with first half 2020 level. On EMS, in NT dollar terms, fourth quarter revenue, the business sequential growth rate should be similar with the average of second and third quarter 2020 levels. While EMS fourth quarter 2020 operating margin should be slightly better than the average second and third quarter 2020 levels. It is a bit complicated, but I'm sure everybody will figure that out. Thank you very much.