ASE Technology Holding Co., Ltd.

Hello, I am Ken Shun, the head of investor relations for ASC Technology Holdings. Welcome to our fourth quarter and full year 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... Hello, I am Ken Shun, the head of investor relations for ASC Technology Holdings. Welcome to our fourth quarter and full year 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, including those presented by our subsidiary using Chinese GAAP. I am joined today by Dr. Tian Wu, our COO, and Joseph Tung, our CFO. For today's call, I will be going over our financial results. Tian will be providing a business recap, and Joseph will provide financial highlights and our guidance. We will have a Q&A session following the prepared remarks. Please turn to page three, where you'll find our fourth quarter's consolidated results. Intercompany transactions between our ATM and EMS businesses have been eliminated during consolidation. For the fourth quarter, we recorded fully diluted EPS of $2.30 and basic EPS of $2.35. Consolidated net revenue increased 21% quarter over quarter and 28% year over year. We had a gross profit of $23.2 billion with a gross margin of 15.7%. Our gross margin declined by 0.3 percentage points sequentially and 1.4 percentage points year over year. Both margin declines are principally the result of higher EMS business mix. Our operating expenses increased by $1.5 billion during the fourth quarter to $12.1 billion as a result of higher profit sharing expenses issued during the strong quarter. Despite the absolute dollar increase, our operating expense percentage declined 0.5 percentage points sequentially and 1.5 percentage points year-over-year to 8.1%. Operating profit was up $2.1 billion sequentially and $2.5 billion year-over-year. Sequentially, operating margin increased 0.2 percentage points to 7.6% and increased 0.1 percentage points year over year. During the quarter, we had a net non-operating gain of $1.4 billion. This amount primarily consists of gains related to the sale of our Fujian plant of $0.8 billion, gain on sale of operating assets of $0.5 billion, and net foreign exchange and investment income of $0.2 billion. This amount was offset in part by net interest expense of $0.6 billion. Tax expense for the quarter was $1.8 billion. The effective tax rate for the fourth quarter was 15%. The decline in the effective tax rate this quarter was the result of research and development tax credits that are able to be recognized during the quarter. Net income for the quarter was $10 billion, representing an improvement of $3.3 billion sequentially and an improvement of $3.6 billion year-over-year. At the holding company level, we estimate that the strengthening NT dollar had a 0.9 percentage point negative impact to gross margin sequentially and a 2.3 percentage point negative impact year over year. As a rule of thumb, for every percent the NT dollar appreciates, we see a corresponding 0.4 percentage point impact to our holding company gross margins. On the bottom of the page, we provide key P&L line items without the inclusion of PPA-related expenses. Consolidated gross profit excluding PPA expenses would be $24.2 billion with a 16.2% gross margin. Operating profit would be $12.4 billion with an operating margin of 8.3%. Net profit would be $11.2 billion, with a net margin of 7.5%. Basic EPS, excluding PPA expenses, would be $2.63. Please refer to page 4. Here you will find the 2020 consolidated full-year results. Fully diluted EPS for the year was $6.31, while basic EPS was $6.47. For 2020, consolidated net revenues grew by 15% as compared with 2019. ATM revenues grew 10%, while EMS revenues grew 23% annually. In 2020, our gross margin improved 0.7 percentage points to 16.3%, principally as a result of stronger loading. This margin improvement was achieved despite higher EMS product mix and negative impact from the strong NT dollar. Operating expenses increased $2.3 billion for the year and came in at $43.1 billion. we were able to lower our operating expense percentage by 0.9 percentage points to 9%. Operating profit for the year was $34.9 billion, improving by 48% to $11.4 billion. Operating margin improved by 1.6 percentage points as a result of increased gross profit margins with a lower operating expense percentage. Total tax expense was $6.5 billion. The effective tax rate for the year was 18.1%. During the year, we confirmed the deductibility of certain holding company level expenses for tax purposes. This resulted in a catch-up of tax assets during the year, leading to a lower effective tax rate. For ongoing purposes, we believe our current effective tax rate to be about 22%. Net income increased by $10.7 billion to $27.6 billion. On a full-year basis, we estimate that the strengthening NT dollar had a 1.8 percentage point impact to gross margin. Removing the effect of PPA depreciation, our gross margin would be 17.1%. Our operating margin would be 8.3%. Our EPS would be $7.60. On page 5 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. During the quarter, we did see three major challenges. First, the most important challenge was the strengthening NT dollar, appreciating 2.3% from Q3 to Q4. A strengthening NT dollar environment is generally negative for us. As a rule of thumb, for every percent the NT dollar appreciates, we see a corresponding 0.5 percentage point impact in our ATM gross margin. Second, the strength in the current market has created tightness across large parts of the semiconductor manufacturing chain. We are seeing longer delivery times for many products, including lead frames, substrates, components, capital equipment, as well as upstream wafer supply from our partner foundries. As a result, we have seen some higher manufacturing costs, but for the most part, with the positive ASP environment, we have been better able to pass along these cost increases. Finally, the current COVID environment continues to make operations and logistics difficult. However, being mostly Asia-based, we have been less impacted than many operations elsewhere in the world. And to a certain extent, because of our ability to provide supply chain stability during COVID, our businesses have been performing relatively well. From the business perspective, throughout the entirety of the fourth quarter, most business lines within our ATM business ran pretty much at full capacity. Strength was across the board in all product categories. Wire bond and advanced packaging, consumer communications and computing, even our test business recovered more rapidly than expected. Heading into the first quarter, things are loaded and running fairly smoothly. We continue to see a strong loading pattern with a positive ASP environment. More on this from Dr. Wu a bit later. For the fourth quarter 2020, revenues for our ATM business were $17.8 billion, up $1 billion from the previous quarter and up $3.5 billion from the same period last year. This represents a 1% increase sequentially and a 5% increase year-over-year. Our ATM revenues came in ahead of our expectations due to higher-than-expected loadings and a more positive ASP environment, offset in part by a stronger NT dollar. On a U.S. dollar basis, our ATM revenues grew by 3.7% sequentially. Gross profit for our ATM business was $16.5 billion, up $2 billion sequentially, and $0.8 billion year over year. $0.9 billion of this increase was due to a one-time inventory-related write-off during the third quarter. The remaining sequential and year-over-year improvement in gross profit are primarily the result of higher loading levels. Gross profit margin for our ATM business was 22.6%, up 2.4 percentage points sequentially, and down 0.1 percentage points year-over-year. The inventory write-down in the third quarter accounted for 1.2 percentage points of gross margin improvement in the fourth quarter. The remaining improvement was the result of stronger loading and a positive ASP environment, offset in part by the strengthening in T dollar. During the fourth quarter, operating expenses were $8.5 billion, up $0.7 billion sequentially, and $0.2 billion year-over-year. The sequential and year-over-year increases were primarily driven by higher employee bonuses tied to corporate performance. Operating margin was 11%, improving 1.5 percentage points sequentially and 0.4 percentage points year-over-year. We estimate that the strengthening NT dollar had a 1.2 percentage point negative impact to our ATM gross margin sequentially. and a 2.9 percentage point impact year-over-year. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 23.9%, and operating profit margin would be 12.6%. On page 6, we have our ATM full-year P&L. We're fairly proud of our 2020 full-year ATM results. On this page, you can see that we saw significant improvement in all aspects of our business. And bear in mind, all of this achievement was done despite the loss of a 20% run rate customer in September. Revenues for our ATM business increased by 12%, with our packaging business and test businesses up 12% and 11% respectively. At the outset of the year, we did expect to see our test business to significantly outgrow our assembly business. However, the EAR impact was much more harshly felt by our test business, and as a result, we did have to rebalance our tester capacity. Gross profit for the year improved 19% to $59.4 billion. Gross margin was up 1.3 percentage points primarily as a result of higher loading offset in part by NT dollar appreciation. Operating expenses were up for the year by $0.9 billion. The increases in operating expenses are related to bonuses tied to ATM business performance. Meanwhile, our operating expense percentage declined 0.9 percentage points. operating income improved 45% to $27.6 billion, with operating margin improving 2.2 percentage points to 9.8%. On a full-year basis, we estimate that the strengthening NT dollar had a 2.3 percentage point impact to gross margins. Without the impact of PPA expenses, gross profit margin would be 22.5%, And operating margin would be 11.5%. On page 7, you'll find a graphical representation of our ATM P&L. And despite the significant impact of the U.S. EAR, we took a hit on our third quarter margins and have recovered. However, we do believe the appreciating NT dollar has flattened out our recent year margin performance. Without such NT dollar appreciation, gross margin would have otherwise made a more pronounced move up and to the right of this chart. On page eight is our ATM revenue by market segment. We understand that this may run contrary to recent interpretations of the overall market environment, but we would like to point out here that our communications segment has actually been trending down as a percentage of our overall business. Though communications demand is healthy, what we are actually seeing is our automotive, consumer, and other business segments rebounding. On page nine, you will find our ATM revenue by service type. As mentioned previously, we rebalanced our test capacity after the USEAR went into effect. Here you can see the negative impact that the USEAR had on our test business. with its revenue share declining two percentage points. As expected, our wire bond business has picked up. Meanwhile, our advanced service type declined two percentage points. On page 10, you can see the fourth quarter and full year results of our EMS business, USI. The information we provide in regards to USI may differ materially from the information directly provided by our subsidiary, as they report independently using Chinese GAAP. For our EMS business, demand was stronger than anticipated, driven by strong SIP demand. During the quarter, we completed our acquisition of the Steel Flash Group, or AFG. Their results are being fully consolidated as of December 2020. Currently, AFG represents about 10% of our ongoing EMS revenues. We do not expect to report ASG details in future earnings. During the fourth quarter, EMS revenues increased 49% sequentially, primarily because of our seasonal business ramp and strong demand for SIP products. EMS revenues increased 62% year-over-year as a result of stronger demand for SIP products. Gross profit margin for the EMS business unit came in at 8.8%, which is a decline of 0.9 percentage points sequentially and 0.1 percentage points year over year. The market declines are primarily the result of product mix changes. Our EMS business unit's fourth quarter operating expenses were $3.5 billion in increasing $0.7 billion sequentially and $0.8 billion year-over-year. Operating expenses increased primarily as a result of increased employee profit sharing. Our operating expense percentage was 4.5%, down 0.8 percentage points sequentially and 1.2 percentage points year-over-year. Our EMS operating profit improved $1.2 billion sequentially and $1.9 billion year-over-year. These improvements were primarily due to increased seasonal demand for SIP products. Our EMS operating margin was 4.4%, which is flat sequentially and up 1.2 percentage points year-over-year. On a full-year perspective, our EMS business delivered a banner year driven by strong SIP sales. On a full-year perspective, our EMS business revenues increased 23%. Gross profit increased 29%. Gross profit margin also improved 0.4 percentage points to 9.2%. Operating margin increased 0.9 percentage points to 3.8%. On page 11, you will find a graphical representation of our EMS revenue by application. With sales increasing 49% sequentially, interpreting this chart gets a bit tricky. What is fairly straightforward to see is that our communications segment increased by five percentage points as a result of product seasonality. Other categories generally grew in absolute dollars. However, their growth was not as pronounced as that of the communications segment. On page 12, 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 $56.4 billion. Our interest-bearing debt decreased $15.5 billion to $209.1 billion. total unused credit lines amounted to $275.2 billion. Our EBITDA for the quarter was $26.1 billion. EBITDA for the year was $90.9 billion. Our net debt-to-equity ratio for the quarter dropped to 65%, the higher end of our targeted range. As of the end of 2020, our ownership of USI listed on the Shanghai Stock Exchange under the ticker number 60231 is 73.4%. On page 13, you will find our equipment capital expenditures. Machinery and equipment capital expenditures for the fourth quarter totaled $379 million, of which $296 million were used for packaging, $60 million for testing, $19 million for EMS, and $4 million for interconnect materials. For the full year, machinery and equipment capital expenditures were $1.7 billion, $1.1 billion was spent on packaging, $0.4 billion on tasks, and $0.2 billion on EMS. We continue to provide our EBITDA and US dollars here as a reference. We believe that the company's EBITDA relative to our equipment capex serves as a key financial performance metric for the company.

I would like to turn the floor over to Dr. Tianwu.

Hi, everyone. To begin with, I would like to wish all of you a happy Chinese New Year. Here I would like to provide two updates. The first one will be a business recap, mainly addressing some of the comments which I made at our Q3 earning calls back to October 30 of last year. First item, the EAR-affected ATM business has been recovered by Q4 of last year versus our previous commentary and expectation to be fully recovered by end of Q1 of this year. So, that is good news. Second item, capacity remains tight. Last time, I made a comment that the wire bond shortage will be at least to Q2 of this year. Right now, we're slightly adjusting our view. We believe the wire bond shortage will be throughout the whole year of 2021. The machine delivery schedule, last time we talked about between six to eight months. Right now, we're slightly elongated. The machine delivery lead time now is more like six to nine months. CAPEX. The whole code 2020 of machinery CAPEX was 1.7 billion U.S. dollars. versus our previous estimate of $1.8 billion. The total $1 billion was mainly due to the machine delivery schedule tied to the machine lead time. For this year, we believe our machinery CapEx will not be lower than $1.7 billion. The actual number depending on the business landscape and how do we collaborate with our customers as well as the machine delivery schedule. 2020, the group SIP business grew nicely, 50 percent year-on-year, to U.S. dollars 3.5 billion. We made a comment, target our incremental SIP revenue from new customers or new projects should exceed our target of 100 million. In Q3 timeframe, we made a comment that it will be three times of 100 million target. The actual came in 386 million. That is, in year 2000, from new SIP customers and projects, we have accrued 386 million of revenue. I would like to make a comment on the SIP momentum. For 2021, this year, We do believe the momentum will continue, and we will have new SIP customers and new SIP projects in the north of 400 million. That will be a very, very nice momentum and ramp. With that note, I would like to turn to the next page. I would like to give you highlight for the 2021 business outlook. For this year, we expect quarter-to-quarter growth at a HOCO level. In other words, after Q1, we expect sequential growth in Q2, followed by Q3 and Q4. The second message here is, for this year, we expect, at the group level, our operating margin will further expand by 1.5 to 2 percentage points. Next, let me make some comment on the ATM and also the EMS separately. The semi-logic market growth, we estimate between 5 to 10 percent. We're seeing a very strong ATM run rate. As a matter of fact, we just closed our January. In our Q1, our run rate actually is the same as Q4 of last year. Just for your information, we have never seen this kind of run rate in the last 30 years in semiconductor industry. The ATM 2021 full-year growth, we were targeted at two times of semi-logic market growth in U.S. dollar terms. This is the current expectation. The 2020 ATM operating margin that Ken just went through with you has improved 2.2 to 2.3 percentage points. For 2021, we expect this margin expansion will continue. As a matter of fact, our margin expansion in 2021 will be better than the 2.3 percentage points, mainly from civil synergy, economies of scale, efficiency improvement, as was technology leadership, despite the foreign exchange impact for NT against U.S. dollar. The EMS business should have a higher year-on-year growth rate than our ATM business, with operating margin target at 4 percent, another slight improvement. Future growth engines to drive the rising trends into the next five years I put five years here with some optimism. From where we stand right now, I think the 2021 loading is very strong and we're quite confident of that. Right now, our optimism has expanded into 2022. I would like to make a comment about our next five years with our growth strength and growth strategy. I think in 2020, as well as in 2021, we will demonstrate efficiency in ramping up and the overall supply chain management to all of our key customer and to our shareholder and our investors. In 2020, we have pandemic as well as supply chain constraint at all levels. The ramping up is such a dramatic rate was not a simple challenge. Also, we have replaced one of our high runner due to the ER effect. The retooling, recalibration, readjustment of our manufacturing portfolio, as well as requalification for many of the products asked by our customers was not an easy task. So in 2020, We have clearly demonstrated our capability to ramp up as well as procure necessary materials in a very adverse and challenging environment. We're confident we will repeat the same thing in 2021, and that will give a boost of confidence to our key customers and securing the future business based on that performance. Following that comment, we do see very strong loading agreements, mostly two years, as well as very strong MPI pipeline, which covers a wide variety of applications, namely 5G, SIP, sensors, and very strong ramp in automotive, as well as smart devices and edge devices. We made a comment previously to talk about our LIDAR factory or the fully automated line. At the end of 2020, we have a total of 18 LIDAR factories. In this year, we have more than 25. The comment I would like to make here is those LIDAR factories proven to be very efficient and very useful in ramping up new volume, particularly with customers who have to do this remote. All of the LIDAR factory or the automated lines are in very, very high demand from two types of customers, either high reliability seeking or data seeking for a variety of reasons. Our LIDAR factory can provide real-time information in a very detailed manner to our customers, either in medical, automotive, or high reliability applications. We're seeing more volumes demanding multiple dyes and sensors. And we believe this will fall into ASE's sweet spot. In other words, since 2013, we have been building a portfolio covering multiple dyes as well as different packaging, algorithm, methods, process, material set for all kinds of sensors. And we're seeing huge demand due to the IoT edge device and smart device enabled by the 5G. In net, what AAC is trying to do is to build a pervasive foundation and to be the preferred choice for all high volume applications. We do see that the pandemic, learn from home, play from home, work from home, has created a slight uptick on the overall semiconductor demand. With the high performance computing, the cloud, e-commerce, as well as the 5G load latency and high data rate, we're seeing more application released into the smart device, electrical vehicle, and all of the IoT application. With that, the traditional packages will be expanding to multiple die and sensors. We believe the OSAP market, we're taking a clear leadership Also, because of our performance and economy scales, we have better traction with all of our key customers. And this describes why we're having such a demand curve in 2020 as well as 2021. With that, I would like to pass the floor to our CFO, Joseph. Joseph.