ASE Technology Holding Co., Ltd.

Hello, I am Ken Xiang, the head of investor relations for ASA Technology Holdings. Welcome to our first quarter 2021 earnings release. Thank you for attending our earnings presentation 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. If participants do not consent, please disconnect at this time. I would like to remind everyone 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. The results presented using Taiwan IFRS may differ materially from results using other accounting standards, including those presented by our subsidiary using Chinese GAAP. I'm joined today by Dr. Tian Wu, our COO, and Joseph Tung, our CFO, for today's call. I will first be going over our financial results. Joseph and Tian will then be available to answer questions during the Q&A. During our last earnings release, we talked about seeing an increasingly tight semiconductor supply chain. At the time, we indicated that we saw tight supplies of wafers, components, substrates, and capital equipment. The tight supply environment continues to be true today. During the quarter, headline-citing semiconductor shortages have spread into daily newspapers. Semiconductor companies, our customers, have started to plan further out, with orders being placed now for products to be delivered in 2022. Longer-term loading agreements are which seemed like an unusual request in the back half of 2020, now are being regarded as a requisite by not only us, but by our customers as well. Last quarter, we expressed that we expected the logic semiconductor industry to grow between 5% to 10% during 2021. We also stated that our ATM business generally targets to grow two times that number, Since that time, we've certainly seen an overall step up in our business. However, we also see some constraints becoming more of an obstacle for further growth. Nevertheless, even with these constraints considered, we still see an improved growth environment with our growth outlook to be on the very high end of the original range. All signs continue to point towards 2021 being a banner year for our ATM business. Meanwhile, our EMS business went through its seasonally stopped quarter. The first quarter is usually when companies gauge their inventories and zero in on when to ramp down manufacturing while getting ready for the next product cycle. As a result, for us, volatility tends to be the norm during the first quarter. This year is no different, with business coming in a little behind our expectations during such order fine-tuning. This year's target manufacturing was made even more complex by bill of material constraints. Looking forward, we do see various product ramps coming, including new SIP and traditional EMS projects in the next few quarters. please turn to page three where you will find our first quarter consolidated results. Intercompany transactions between our ATM and EMS businesses have been eliminated during consolidation. For the first quarter, we recorded fully diluted EPS of $1.94 and basic EPS of $1.99. Consolidated net revenue decreased 20% quarter over quarter, but increased 23% year over year. This sequential decline was primarily driven by seasonality of our EMS business. We had a gross profit of $22 billion with a gross margin of 18.4%. Our gross margin improved by 2.7 percentage points sequentially and 1.8 percentage points year over year. Both margin improvements are principally the result of higher ATM business mix. Our operating expenses decreased by $1.1 billion to $11 billion, mainly as a result of lower bonus expenses during the quarter. Our operating expense percentage increased 1.1 percentage points sequentially and declined 1.2 percentage points year-over-year to 1%. 9.2%. The operating expense percentage increase is mainly the result of seasonality. On a full-year perspective, we should see improvement from last year's 9% level. Operating profit was $11.1 billion down $0.1 billion sequentially and up $5 billion year over year. Sequentially, operating margin increased 1.7 percentage points to 9.3% and increased 3.1 percentage points year over year. From a total year perspective, we previously expected to be able to achieve 1.5 to 2 percentage point improvement. We now expect to be able to improve our full year consolidated operating margin by 2.5 to 3 percentage points. driven by increased scale, a friendly ATM pricing environment, and spill synergies. During the quarter, we had a net non-operating gain of $0.3 billion. This amount primarily consists of gains related to our foreign exchange hedging activities, investments, and asset sales offset in part by net interest expense of $0.6 billion. Tax expense for the quarter was $2.5 billion. The effective tax rate for the first quarter was 22%. We expect to have an effective tax rate for the year of between 20% to 21% during the full year. Net income for the quarter was $8.6 billion, representing a decline of $1.5 billion sequentially and an improvement of $4.7 billion year over year. 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 $22.9 billion with a 19.2% gross margin. Operating profit would be $12.2 billion with an operating margin of 10.2%. Net profit would be $9.7 billion with a net margin of 8.2%. Basic EPS excluding PPA expenses would be $2.26. 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. During the first quarter, our ATM factories not only held fourth quarter production run rates as per our original expectations, our factories were able to surpass them. As you will see, we were also able to achieve higher than expected profitability as a result of these stronger revenues and on higher test revenue mix. For the most part, the majority of our ATM product lines were running at full or near full capacity. Our wire bond business continues to be capacity constrained, driven not by just increased unit demand, but also by unit bonding complexity. During this time, our ATM factories have remained diligent to our customers trying to supply as much capacity as possible. To cope with the current environment, Our preference has been, in no particular order, to pass through raw material price increases, correct for underperforming engagements, enter into long-term loading contracts, and secure key customer relationships. We continue to work with our customers who are trying to work through an extremely challenging production environment. For the first quarter of 2021, Revenues for our ATM business were $73.8 billion, up $1 billion from the previous quarter, and up $7.6 billion from the same period last year. This represents a 1% increase sequentially and a 11% increase year over year. Our ATM revenues came in slightly ahead of our expectations. On a U.S. dollar basis, our ATM revenues grew by 3% sequentially. This marks the first time in near-term history in which ASE's first quarter had sequential revenue growth. Gross profit for our ATM business was $18 billion, up $1.5 billion sequentially, and $4.7 billion year-over-year. Gross profits improved both sequentially and annually, primarily as a result of higher manufacturing efficiency. and significantly higher off-season loading. Gross profit margin for our ATM business was 24.4%, up 1.8 percentage points sequentially, and 4.3 percentage points year-over-year. Our gross margin improvement was due to improved loading and a high percentage of low raw material product. ATM gross margin improvement was accomplished despite NT dollar appreciation having a negative 0.8 percentage point impact quarter over quarter and a 2.7 percentage point impact year over year. Looking forward, we do expect this beneficial product mix to reverse itself in the second quarter and even switching to a high raw material product mix in the third and fourth quarters. However, even with this product mix shift looming, we expect to be able to deliver gradually improving gross margins throughout 2021. We are well on our way to achieving full-year gross margin in the mid-20s. During the first quarter, operating expenses were $8.1 billion, down $0.4 billion sequentially. and up $0.3 billion year-over-year. The sequential operating expense decline was primarily driven by a decline in employee bonuses. Meanwhile, the year-over-year operating expense increase was the result of higher employee salaries due to higher headcount and higher bonus accrual. Our operating expense percentage was 11%, down 0.6 percentage points sequentially and down 0.7 percentage points year over year. During the first quarter, operating profit was $9.9 billion, representing an improvement of $1.9 billion quarter over quarter and an improvement of $4.3 billion year over year. operating margin was 13.4%, improving 2.4 percentage points sequentially and 5 percentage points year-over-year. Without the impact of PPA-repleted depreciation and amortization, ATM gross profit margin would be 25.6%, and operating profit margin would be 15%. On page 5, you'll find a graphical representation of our ATM P&L. On page 6 is our ATM revenue by market segment. You can see here the typical seasonal decline in the communications market segment. However, our automotive consumer and other products picked up to fill the typical seasonal decline gap. On page 7, you will find our ATM revenue by service type. The quarterly movements tend to be too small, but the chart taken as a whole tells a more complete story. You can see here the gradual improvement and underlying strength of our wire bond related business. Meanwhile, our advanced and testing service types have seen a decline, much of which having to do with the impact of the USEAR. On page eight, you can see the results of our EMS business and a graphical representation of our EMS revenue by application. The information we provide in regards to our EMS business may differ materially from the information directly provided by our subsidiary, as they report independently using Chinese GAAP. During the quarter, our China-based factories were subject to a special government policy for lowering the risk of COVID-19 by means of reducing travel across China during the Lunar New Year holiday. China highly encouraged factories such as ours to maintain staffing levels throughout the Lunar New Year holiday. This resulted in extra unexpected labor expense. This, along with softer-than-expected business, contributed to the lower-than-expected profitability. During the first quarter, EMS revenues declined 40% sequentially, primarily due to product seasonality. EMS revenues increased 46% year-over-year as a result of having an expanded revenue base of products. Our EMS gross profit was $4.2 billion, declining $2.8 billion sequentially, and increasing $1.1 billion year over year. The lower sequential EMS gross profit was the result of lower loading due to seasonality, and the higher year over year gross profit was the result of higher sales from a wider product base. Gross profit margin for the EMS business came in at 8.7%, which is a decline of 0.1 percentage points sequentially and 0.6 percentage points year-over-year. In addition to the aforementioned level staffing rule, the gross margin sequential decline was primarily the result of lower scale during the seasonally down quarter. Year-over-year, this decline is principally the result of the level staffing rule and product mix. Our EMS business unit's first quarter operating expenses were $2.8 billion declining $0.7 billion sequentially, while increasing $0.5 billion year over year. The operating expense sequential decline is the result of lower bonus expense, while the annual increase is the result of China's level staffing rule. Our operating expense percentage increased 1.4 percentage points sequentially to 5.9%, while declining 1.1 percentage points year over year. The operating expense percentage movements are driven by lower bonuses in the first quarter and sales seasonality. Our EMS operating profit declined $2.2 billion sequentially while improving $0.6 billion year-over-year. Our EMS operating margin was 2.8%, declining 1.6 percentage points sequentially and up 0.4 percentage points year-over-year. From a full-year perspective, we continue to target a 4% operating margin for our EMS business. On the bottom half of the page, you will find a graphical representation of our EMS revenue by application. You can see here that seasonally driven products in consumer and communication segments each declined by 6 percentage points. Other segments were generally seasonally soft, but were not as strongly pronounced. On page 9, you will find key line items from our balance sheet. The only things that we would like to add here are that total unused credit lines amounted to $255.2 billion, and our net debt-to-equity ratio dropped to 51%, the lower end of our targeted range. Page 10, you will find our equipment capital expenditures. Amounts on this are denoted in U.S. dollars. Machinery... and equipment capital expenditures for the first quarter totaled $471 million, of which $337 million were used in packaging, $118 million in testing, $11 million in EMS operations, and $5 million in interconnect materials and others. From the full-year perspective, we currently expect to increase our wire bond capacity by about 10% to 15% during the year. We ended 2020 with slightly more than 26,000 wirebonders. We also currently expect our 2021 equipment capital expenditures to increase 10% to 15% as compared to last year. We expect to invest roughly 65% of our capex on packaging equipment and 20% on testing equipment. The current environment is a challenging one. It is incredibly difficult to manage capacity allocations. We continue to see tight wafer, substrate, component, and capital equipment deliveries throughout the remainder of this year. It's even coming full circle for us. Some of our capital equipment vendors are telling us that their equipment delivery schedules are slipping because of lack of semiconductors. We are well aware that perceived capacity scarcity potentially perpetuates a snowball effect, with customers scrambling for even more incremental supply chain security. There are rumblings that capacity has been systemically under-built for years, but We have only been capacity constrained outside of typical seasonality for just this quarter. At the very most, under-ordering in early times of COVID created an artificial lull in demand and capacity build. We don't believe the current situation is simply explained away by saying the semiconductor industry has under-invested specifically to us, in fact, and capacity. The worldwide capacity was in balance two quarters ago. For us and others, there is a resurgence of the trailing edge underway. We see longer-term shifts in product complexity, the expanded use of trailing edge technologies, and geopolitical disruptions as having a hand in this supply and demand imbalance. Regardless of the cause, we believe we stand to extend our competitive advantage during the coming year. Not only do you look at who has the largest capacity at this time, what you have to ask is who gets the allocation of capital equipment in these times. Who has the advantage in getting allocation of components and substrates at this time? Who invested during the last three years while everyone else held back? Who can supply chain managers trust with their jobs to deliver on long-term loading agreements? Industry leaders like us stretch their leads in times like these. With that we would like to provide our second quarter business outlook as follows. For our ATM business, our ATM second quarter sequential business growth rate should be similar with our second quarter 2020 sequential business growth rate. Our ATM second quarter 2021 gross margin should slightly improve from the first quarter. For our EMS business in U.S. dollar terms, EMS second quarter business should be similar with third quarter 2020 business levels. Our EMS operating profit margin should be slightly below full year 2020 levels.

Now we open the floor to Q&A. If you have a question, please raise your hand in the... WebEx and the WebEx. First question is coming from Randy Abrams, credit service. Randy?

Okay, yes, thank you. Yeah, actually, if I could ask the first question, I tried to get down the guidance real quick, but wanted to just make sure I have it, the right understanding. For ICATM, so we should apply 5% sequential, about 5% if I look back to last year, in U.S. dollar terms with slightly up gross margin. And then for EMS, I think I saw compared to the third quarter, 20 growth rate. Is that a sequential or a year-on-year for that growth? And then for operating margin, I assume it's slightly below. So it's a good sequential improvement. But if you could just recap it just so we have the right assumption on those guidance metrics.

I didn't hear you.

I didn't write it down.

Oh, the guidance that we provided for ATM, your correct. In terms of our ATM, on the top line, we're expecting the same level of growth that we saw in the previous second quarter. In terms of the gross profit margin, we're looking at slight improvement in the quarter. For EMS, we are looking at EMS second quarter. The pipeline will be similar to third quarter 2020 level. and the operating margin is slightly below full-year 2030 levels.

Okay. If I could follow up the two things on the constraints. Is there a way to think about how much it is limiting you or how much behind you are on ICATM? And is it strictly a wire bond that's still the bottleneck? or do you now have constraint on your, like, more advanced packaging, the flip trip and wafer-level packaging as well?

The constraint we were referring to applies to capsule equipment, including wire bounder, also related to substrates, leaf frames, and other components that are required to do the final assembly. So every product is different. I cannot tell you, but technically it's not just the wire boundary thing. In terms of how do we manage the line balance, I think that's the operations job. Whenever we're missing some components or materials, we'll try to do the line conversion and switch back to the other assembly where we have materials, the In terms of how much that limits our potential growth, it's very difficult to quantify that because the process right now is very dynamic. I won't be able to give you a quantitative number.

Okay. And the second part of the guidance outlook, the EMS actually picking up in second quarter. Last year it did, but some years it's still down. If you could talk about the drivers for the pickup, if there's some SIP projects or just existing EMS business we're covering a bit earlier. Sure. And if you could give an update on the overall SIP outlook, how that's now looking, whether on a year-over-year or if any change versus the incremental growth you were expecting.

Okay. I think from second quarter as well as for the full year, in terms of EMS, we will continue to see growth. And for this year, I think EMS will go through a difficult year. kind of first and second half distribution of revenue. It will be similar to roughly 44, 56, or 43, 47 type of allocation distribution. And I think the overall growth comes both from the traditional EMS as well as SIP. In terms of SIP, I think last year we went through a phenomenal growth in terms of the uh, in terms of, uh, same revenue. Uh, we have been entertaining, uh, many more projects and many more customers as well. And, uh, some of the, uh, new, in terms of the, uh, new project revenues, uh, we, uh, we've hit, uh, we had about close to $400 million, uh, revenue coming from new projects. And we are seeing the same kind of momentum this year. Uh, and overall, I think the, uh, In terms of the composition of the SIP revenue, there are some mature products going through some gradually tapering off because of feature transition, and there is some projects that we are seeing second sourcing coming in. But at the other front, there are new projects, and the newer projects that we started to entertain from last year We're seeing a lot starting to also expand for this year. So we're going to see decent growth in the SIP overall, and particularly in terms of new projects, we're seeing still very strong momentum going forward.

Okay. And I could try to do the math. I think on the 4753, is this the implication that ICATM, you had mentioned high end of the 2X, which seems to imply U.S. dollar up kind of mid to high teens. Is EMS a similar type of growth profile factor you consolidate?

I think the overall annual growth in the EMS business will be slightly better than the ICM overall growth. will be here.

Okay, great. Okay, and if I could ask a follow-up on the – actually, two questions on the CapEx. One is the upgrade. I think if I have it right, it was originally maintained at the high level you invested last year, but now increasing. That's one, I guess, the area that – relative to the prior, the area you're increasing. And then the second one on the wire bond at 10% to 15%. year over year, is that more what you see as kind of a need, like based on real demand, or is it a constrained number that you would add even more if the capacity? And if I could fit a third, I'm curious. The boundaries, usually they'll talk, it takes a couple years to bring up FAB, so we might have a shortage for two years. Do you have kind of a view on sustainability of the tightness? Where traditionally lead times, they're stretched, but a bit shorter than building a FAB. How long it looks like, like if this looks like it may extend into next year at this stage?

The wide-bounded delivery right now is one year. It's anywhere between 40 weeks to 52 weeks. And that's the wide-bounded delivery. In other words, Whatever wire bonder that I ordered now, it won't be delivered until next year. So the wire bonder lead time, as well as the other equipment that go with the wire bonding line, also got elongated. The wire bonder demand right now is clearly above the efficiency improvements as well as the new capital equipment that we can receive this year. So right now, the wire boundary is under allocation and highly constrained. Previously, I made a comment that for the whole year of 2021, we will see a wire bond constraint. My view remains the same except that the wire boundary constraint might last a little bit longer. The back-end equipment has a shorter lead time compared to the fab, so I will not draw a comparison between one to the other. But right now, the supply-demand imbalance is obvious for the whole industry, which is why many of our customers who already signed a long-term agreement, and we are talking about how do we collectively, through the design optimization, material standardization, we can collectively improve the efficiency to support them for 2021 as well as 2022.

Okay, great. That's helpful. And I guess just if you could clarify, like the increase in CapEx, it sounds like that might be an area you could place order to get additional tools. So was there kind of a versus the prior framework where the new spend is directed?

The CapEx right now is literally across the board. We're seeing the test equipment. We're seeing the fan-out equipment. We're seeing the bumping equipment, we're seeing the wire bond equipment, almost all kinds of equipment we're issuing CapEx. Right now, we are working with our suppliers trying to prioritize delivery schedules. In terms of the total equipment that we plan to order, we will stay at the top level, the high level, if not exceeding last year. In terms of actual delivery, that is what we need to do from the operation perspective. Now, why are we placing order knowing that we have such a lonely time? Because our customer's development and product cycle, as well as the long-term service agreement, dictates that. We're working closely with our customer to understand the demand profile long-term. And all of the caps of equipment expansions we'll take that into consideration.

Okay, great. No, appreciate the call. Thank you.

The next caller we have is Goku from Jason Morgan.

Thanks so much. Yeah, can you hear me? Yeah, we can hear you. All right, thank you.

The first question, could we talk a little bit more in detail about what are you seeing, what is the nature of these longer-term commitment orders? Are you talking about two to three years, fixed price, fixed contact, contracted volume kind of order? What does that mean for commissioners? APM pricing, margins, etc. And are these primarily for wire bonds or are we also seeing this spread to other areas in advanced packaging as well? Could you talk a little bit more detail about what are the dates of these kind of longer-term commitment orders that you're getting?

It's a long-term service agreement It depends on customer. If one is different, I will not comment in detail on that. The comment that I can make is the service agreement right now covers more than just the wire bounder. It was wire bounder the second half of 2020, and now we're spreading into flip chip and the other areas because we do see a general constraint of the assembly capacity. In terms of the pricing environment, the pricing environment remains friendly. But as you know, we do not do tactical pricing. What we're doing right now is we're working closely with our customer to reflect the raw material and the other component pricing increase. We took that into account. And we're also working closely with customer on long-term service agreement in terms of total demand the capacity we need to build on behalf of their demand. The only area that I would like to comment is there are specific sectors where we have super hot run as well as the expedited product requirement. And normally we will have the expedite fee to apply for those particular cases. But in general, the pricing environment remains friendly, and I believe that condition will at least apply to the whole year of 2021, if not longer.

Thank you. Thank you, Dr. Mo. If I may also ask about and the 2.5D3 packaging, clearly a lot of your compute customers especially seem to be talking about this in a very aggressive fashion. Could we refresh what is AAP's view on this area? When we think about the gap, are we allocating some of the gap maps to your plan out as well as 2.5D targeting efforts as well, or are most of the tests just going to come a little bit later?

Well, I think you can see from the general, the MAGF friends, you understand that for the 2.5D, the 3D, or the chiplet, whichever architecture you're referring to, there has been growing acceptance as well as growing demand from all regions, all application sectors. So AAP has been developing with our key customer for those architecture. So that has been in place for quite some time Now, the 2020 and the 2021 scenario, as we're in right now, has modified the situation a little bit in the sense that because we have long-term service agreement with all of our key customers, the chip-led, the 2.5V, the fan-out also becomes a strategic development requirement as part of that overall long-term service agreement. So in other words, as we're going through better delivery cycle with our key customers, we are expected to do more development with them, trying to further improve efficiency and the performance from an architectural standpoint as well as from a process point. I'm not sure the exact question that you're asking, but I believe those are the answers that I can offer you today. Thank you.

Got it. Thank you. Are we all set there, Goku?

Yes, I'll go back into the queue. Thanks. Okay. The next question will be coming from Bruce Liu, Goldman Sachs. Bruce, are you on the line?

Yes, yes. Thank you for taking my question. Very, very good result. Can you give us a little bit more color in terms of 2021 ATM overall. I think that the first quarter revenue was very, very strong. Do you expect the same young year performance for the whole year? And also for the profitability, the gross margin seems to improve more than 2.5 percentage point already, but the company was tied only by 2.5 percentage operating margin improvement. I would be greedy to ask for a little bit more because of the operating level. Thank you.

I think the overall momentum in terms of ATMs remains to be strong. And in the previous earnings call, we were saying that our overall growth will be two times of the logic market growth. And I think that principle remains. And although we're seeing the overall industry growth is kind of stepping up, But because of some of the capacity constraints, we're now saying that our overall growth should be pushing the high end, which we actually said in the last call, we're expecting growth to be anywhere from 10% to 20%. And we're seeing that the growth is likely to be reaching the high end of the range. And in terms of profitability, I think at the growth level, we'll continue to see sequential growth in our growth margin as we continue to enlarge our overall operation, also improving the efficiency that we have. And for the whole year, we are very confident that we will be reaching the mid-20% level. The operating margin improvement that you mentioned is really on the consolidated basis of local level. We're projecting 2.5 to 3% improvement now. And so when it translates to ATM, of course, the improvement will be higher because we're only setting the EMS operating margin target to be 4% for the EMS.

Thank you. Can I trace down a little bit for the ADM gross margin improvement in the first quarter? The gross margin was improved by 180 pips compared to the previous quarter, but the earlier guidance for the first quarter of GPM for ADM is flat. So where are the positive surprise coming from? And can you also give us a rank? in terms of the gross margin among different businesses in APM, such as PowerBounder, testing, you know, Fletcher, you know, SIP. What was the rank for the gross margin now?

We don't give out, you know, separate gross margins in our different business. But as a whole, I think the improvement that we see, that we saw in the gross profit margin in this quarter is, largely coming from, first of all, the higher than expected revenue that we can generate in a quarter. The other is really, we have a higher test revenue as well, in terms of the percentage of overall revenue. Test percentage is higher than expected. So that leads to a better than expected gross margin performance in the quarter.

Just one additional comment. When we offered the guidance last year, we were planning for the seasonality. In other words, the communication sector will go through the typical Q1 and Q2 seasonality. At the time, we were planning on some of the equipment dealing with the communication sector might not be fully utilized as well as the test equipment, as well as assembly or SIP equipment. What has transpired in the first quarter was because of the loading situation of strong demand, we were able to collectively cooperate with our customers trying to utilize some of the ideal equipment that would have been underutilized otherwise. And that, as a result, improved the revenue stream as well as the gross profit. That is just another comment. We believe the similar thing were permeating to Q2. In other words, What is unique about 2021 is we sort of are removed from the typical communication sector in Q1 and Q2. Now, having said that, in Q3 and Q4, we will go through the reverse part of the seasonality. So right now, from operation execution-wise, we have to work very hard to secure all of the supply, all of the equipment, and all of the necessary resources to make sure that after clear Q1 execution, we execute too well, and we can deal with the second half, including the ATM, as well as SIP, as well as the traditional seasonality of the communication sector. So overall, I think 2021 will be a very exciting year. Now, in terms of the supply situation that covers paper, covers lead frame, ADF substrate, capital equipment that you're all very familiar with, we will try to give you a quarter-to-quarter update. As of today, we have done a decent Q1 because all of the factors that Ken, Joseph, and I have just outlined, we're optimistic about Q2, and we're quite excited about the second half of 2021. I mean, there are some headwinds. The NT dollar, that we have not discussed much about it. The other type of constraints. And, of course, the general global political situation, as was the pandemic. With all of this considered, we are giving you the best guidance that we believe is pertinent to the current down certainty scenario. I hope that clarifies a lot of the questions on Q1, and also the outlook for Q2 and the second half.

Thank you. Can I ask a question about EMS? I mean, the guidance for the second quarter for EMS grew about like 10% despite the typical low seasonality. How much is due to the steel flash acquisition and also the consumer segment in EMS in first quarter seems to go down, went down a lot. Do you see a rebound in the second quarter as well for the consumer segment in EMS?

Second quarter compared to first quarter, we're seeing that both the – I think really it's the organic growth that we're going to see, especially because it's mainly from the supply chain security continuity. I think a lot of the customers are, you know, Because in the whole value chain, there's constraints in terms of components and some of the material supply. And I think some of the customers are really bumping up their inventory, hoping to get their safety stock go up. So we're seeing an uptick in second quarter, which is not a typical second quarter performance. But that's what we're seeing now for EMS business in third quarter.

So the whole year, how do we see the whole year revenue growth for EMS? Because nowadays it doesn't really seem to be a good reference anymore?

In terms of the overall EMS business, we're expecting kind of a 44% 56 kind of a split between the first and second half. So I think going into the second half, we'll see new products coming on screen, and we're seeing more product launching, and then we'll go back to the typical seasonality, seeing a much stronger update in the second half.

Okay, let me try to squeeze one more question. I mean, we do see a somehow different production utilization rate, especially the wire bonded between AAC and a lot of Chinese OSET makers. I mean, you know, most of the Taiwanese companies in OSET are having like extremely high utilization rate, but China is high, but not, you know, it's like a step down compared to most of the Taiwanese guys. Can you let us know what happened and why is that?

Well, I think the supply security applies somehow into that scenario. In other words, if a supplier has a longer working relationship who can cooperate, not only the assembly complexity for you, the quality, We can also secure better component molding compound as the leaf grain and substrate supply. I believe that plays into the fact why people tend to place more order, even though it's on the allocation mode. They still prefer to work with the AFC or peers in Taiwan. I can't really comment on the China OSAP because I'm sure you know this scenario better than I do. But I think the product complexity, the product security, and geopolitical sentiment might play, might not play into their decision. That you have to talk to the customers.

That's Yeah, don't get me wrong. I'm fully agreed that, you know, AAC should have a much stronger customer demand. But your customers are actually dying or, like, you know, in serious shortage. I mean, they need to grab, like, dying people, they grab whatever they have, right? So the gap seems to be a bit larger than I expected. So that's why I tried to get some cash.

That's precisely the point. I think when things are tight, I think most of the customers will look for the safest bets. And given our scale and given the leverage that we have in terms of sourcing capital equipment as well as materials, I think we are much safer bets to our customers. That's one front. And I think the other one is that, you know, given the geopolitical situation, I think there is a growing concern on the longer term or mid to longer term sustainability of some of the Chinese players. I think it does play into the current situation a bit.

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

All right. Thank you.

Next question is coming from Roland Xu of Citi.

Hi. Thanks for taking my question. I think I just want to ask you a quick question on the CAPAS. So I think for today, I don't hear you update your total CAPAC spending plan this year. So how is the CAPAC spending plan this year?

I think Ken briefly mentioned that this year we are expecting to spend roughly 10%, 15% more than we spent last year in terms of equipment CAPACs. And this is really to support the surging demand that we're seeing now. And although we kind of brought up the overall capex spending amount this year, but in terms of actual spending, it really depends on the delivery that we will have. But nonetheless, I think that's the current situation. We are upping our capex spending. And in terms of distribution, I think out of the total spending, roughly 65% of it will be for assembly, roughly 21% for tests, 12% for EMS, and the rest for our material. I think that will be the distribution for this year.

Understood. So it sounds like I think the total number should be somewhere around 1.9 to 2 billion. You are planning, right?

Yes, last year we spent close to $1.7 billion.

Yes, and 10% to 15% higher. Okay, cool. Thank you. And then probably 85% for assembly and testing. So our question is, you look at TSMC's cap spending on advanced back-end and the mark-making, it's going to be around $3 billion this year. So this actually is much higher than your total spending about $2 billion this year. So does it mean that you have to raise cap expense significantly going forward if you are also trying to do more advanced packaging business?

The comment about the TSMC cap tax for the back end, I think the first clarification I would like to make is, You really cannot make a – it's not a direct comparison. The CAPACs that they're referring to for their back end versus the CAPAC we are referring to for the assembly equipment are very, very different in nature. If you really go back to the CAPAC equipment list, you understand that. So there is no direct comparison that I can draw between those levels. Now, the second comment is if our customer demands us to engage in the type of configuration or the architectural design where our customer is designing with foundry suppliers, then we are obligated to work with our customer to come up with our proposal. Our proposal could be in the form of what the foundry is using, but it might not be in the form. And it's up to the customers how to design their packaging, the architecture with us. So that is a hypothetical question. Right now, we are engaging with several customers trying to explore our end of the proposal. Now, in some form, there will be overlap, but in the majority of the form, it will be quite different, right? So I don't believe our CapEx will be at the factory level because in nature, it is extremely different. Also, in terms of the variety, it's also quite different because we're not dealing with the large, high-volume capacity for a few customers. the process and the architecture design we need to come up with has to be able to fit into the application segment for a basket or a number of customers interchangeably. And that is the key difference between the business model versus the CapEx.

Okay, so correct me if I'm wrong. So you are pretty much meaning TSMC is building its technology and proprietary technology for their customers. And this technology probably is different from the platform technology you are doing for customers' products, of course. Am I reading you right on that?

Yes. Yeah, that I believe. But again, it's not what the ASG wants. It's what ASG customers want.

Understood. Okay. Yeah. Thank you. And I think the follow-up question is for the past, you said, you know, for every $1 cap has you invest on assembly, it probably will generate about $1 new revenue in the first year and more than $1 new revenue generation for testing for the first year. For the cap that you are spending now, and because of this capacity technique, are you still going to generate a similar return for the investment that you invest in your new capacity now?

Well, I think as a rule of thumb, a dollar of investment in packaging, we can generate about $1.20 of revenue. And for a test, A dollar of investment will generate about 50 cents of revenue. So from a blended point of perspective, I think a dollar of what we're saying is in terms of assembly and test, a dollar of investment should generate a dollar of revenue for us, a blended revenue for us to make it an economically viable investment. I think from a different angle to look at TSMC's investment into back-end, that's totally different scenario.

Yeah, I know it's very different. So in general, you said from the back-end, you probably will have, for every $1 investment, you probably will generate $1 return. So this is still the final rule, still value, right?

That's still the rule, yes.

Okay, okay, cool. Okay, thank you. Thanks for taking my questions. Thank you.

All right. The next caller we have is Zico Ng. Zico, where are you at this case?

Hey, hey, I'm talking. Yeah, thanks. Yeah, I have two questions for you guys. Anyway, a good result. First one, regarding the wide-border delivery. Welcome to Matt. In Q1, you got roughly 1,000 wide-borders, right? So I basically want to know the wide-border delivery schedule for the rest of this year.

I think currently we're looking at, you know, 3,500 to 4,000 borders for this year, addition. And we're expecting full delivery by maybe October, November time frame. It will be delivered progressively, and I think full delivery will be expected by October, November time frame.

Okay, got you. Okay, all right. And then the other one is on the housekeeping. What is the utilization for your wife on the business and testing that you want? What number would you like?

I think in terms of advertising, we're around 85%, and for tests, around 80%.

That's the utilization, right?

Yeah, that's pretty much what pretty much maxed out.

Okay, good. And last one, on the dividend policy, any update compared with three months ago?

No, I think we've announced it already. It's going to be $4.20 this year, and the payout ratio is roughly 65%.

Okay, and then that will be the real sum for the future, at least for the near future, right? Yeah, yes. Okay, great. Okay, congratulations. Thank you.

We don't have any additional hand raisers in the queue.

If you want to ask any questions, please raise your hand. Five seconds.

Four, three. Okay, thank you for attending our first quarter earnings release. See you next time.

Thank you.

Thank you.