ASE Technology Holding Co., Ltd.

Hello, I am Ken Shum, the Head of Investor Relations for ASE Technology Holdings. Welcome to our second 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 in 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. 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 Tang, our CFO. For today's call, Dr. Tian Wu will first give a mid-year update. I will then be going over our financial results. Joseph and Tian will then be available to answer questions during the Q&A section. I would like to now hand the floor over to Dr. Tian Wu. Thank you, Ken.

Hello, everyone. Thank you for joining our conference call. 2021 has been an exciting year for all of us. I wish everyone safe and well. For today's conference call, I would like to give you a brief report on two items. First, I would like to give you a business update, including the second quarter and the first half achievement. Then the third quarter and the second half outlook, which will touch on business sentiment towards 2022. Second, business outlook, short term and long term. In the past weeks, there has been reports from several key customers and key partners with some conflicting signals, possibly some speculation about the current state of business and the landscape. I would like to give you ASC's perspective so you have another angle in solving the puzzle. To begin with, I would like to give you our business update. Our second quarter 21 and the first half 21 revenue and margin are both on track. Second quarter 21 ATM revenue grew 8% quarter over quarter in U.S. dollar terms. First half 21 ATM revenue grew 20% year over year. If you exclude the EAR affected revenue, it will be 48% year over year. First half 21 test revenue recovered ahead of schedule. First half 21 revenue grew 54% year over year if we exclude the EAR affected business. So starting from third quarter, we will see assembly and test business both grow. Second quarter 21, whole coal revenue grew 77% quarter over quarter. First half 21, whole coal revenue grew 28% year over year. First half 21, whole coal operating margin improved 2.7 percentage points year over year. Let me talk about the second half 21. We expect third quarter and fourth quarter, quarter-to-quarter revenue and margin improvement, as we have previously indicated. We're seeing very strong ATM demand than our previous target. Our last guidance, we estimated Semiton Doctor will grow 10%, and we will do better than twice of that. Right now, our sentiment is better than our previous guidance. The momentum, will last into 2022. First half 21 ATM gross margin at full year target of 25%. In other words, we have achieved a full year target in the first half. Therefore, we do expect further gross margin expansion in second half Q3 and Q4. Local 2021 operating margin target should exceed or at a high end target of 2.5 to 3% as we previously guided. Let me turn to the business outlook. I will first talk about the short term. Demands indicating a strong 2022 with another better than seasonal first quarter. As you know, First quarter of 2021 has been stronger than all of our expectation. We're looking forward to another strong Q1 in 2022. Many of the customer are extending the long-term service agreement beyond 2022 into 2023. Let me comment on the expansion, which has been, many people ask about it. The capacity expansion needs to consider holistic and balanced supply continuity across the complete material, equipment, and process ecosystem. Our estimate, the earliest balance of demand and supply will be sometime in 2023. In other words, in 2022, we still need to be very smart and be very efficient in managing the bottlenecks. Next people ask about a double booking. And inventory control, which may exist. However, that in fact should be localized and temporal. with the overall demand profile with very little impact to the overall business momentum, at least from ASE's OSAP perspective. Next page, I would like to comment on the business outlook longer term. What I'm trying to do here is to share with you ASE's perspective and maybe ASE's OSAP perspective on longer term outlook. On this page, I have a diagram of a pyramid. What I'm trying to do is to illustrate a conceptual concept about the current state of semiconductor business. As you know, semiconductor business mainly driven by innovation. If you imagine innovation is driven by technology, which is at the tip of the pyramid, As the innovation becomes more pervasive, the pyramid becomes taller. In order to support a bigger and taller pyramid, the length, the width, the height, all need to increase proportionally. This is not the exact mathematical description of our ecosystem. However, conceptually, you can see that. What we're seeing today is we have two driving forces. So let me comment on each one of them. The first one is what industry already for the longest time, including 5G, AI, EV, IoT, smart manufacturing, and all et cetera. Now, for this type of innovation to be pervasive in scale, you need to develop a new infrastructure, which will incur instigated new demand for system and therefore demand for all semiconductor devices. However, in the last two years, unexpectedly, we had a COVID-19 impact. What the COVID-19 did is actually similar to this, It's not a new innovation. However, it put a step function or a sudden increase of demand on the existing systems without asking for any new infrastructure. The industry is very used to building a capacity at a slower pace while we're developing infrastructure, we're also cranking up new systems. But the COVID-19 effect is leveraging on the existing infrastructure, the only demand for a large quantity of new systems. So the industry is caught off guard. And this is what we're talking about now. The COVID-19 impact can be two years, can be five years. We actually do not know how long that will last. What we do know is we are in a short, Therefore, the industry react accordingly by building up wafer capacity. We're also building up the assembly and test capacity. The whole supply chains are building all of the capacity accordingly. The comment I would like to make here is this is a great incentive for the industry to start developing a manufacturing infrastructure because even if the COVID-19 impact dissipates, the next two to five years the new wave of innovation which will be a much much longer lasting impact to the industry signified by 5g ai ev iot smart manufacturing we are seeing a huge demand on the iot devices for example on the electric vehicle on the autonomous driving all of this new paradigm will require new infrastructure and a brand new system. So our perspective is semiconductor is very healthy. Short term, we have a great incentive to build our capacity to accommodate the system requirement by the COVID-19, while we are building up the needed capacity to accommodate the future increase of demand driven by the new paradigm shift. So going to the next page, let me talk about the other three tailwinds from our perspective. The first is consolidation. What the supply chain constraint has done for the industry is forcing everyone, our customer, our customer's customer, to accept more standard, flexible, and secure supply alternative. This is great for open platform service providers like Foundry and OSAT. In other words, what used to be proprietary now are being forced to accept the open platform alternative long-term. This is the thesis why OSAT and Foundry will be gaining more share and consolidation over proprietary suppliers. Let me talk about the third tailwind, Taiwan cluster. Taiwan cluster efficiency, economy scales, and supply chain flexibility has been known. What we're seeing for the last few years is Taiwan cluster has been investing capex in a very, very heavy way, including ASE. As a matter of fact, ASC spill merger and synergy is another example of the Taiwan cluster efficiency. So with efficiency in hand, with additional CapEx invested, with more customers choosing Taiwan sector as their preferred choices, this is forming a positive or a virtual cycle. Let me talk about the last tailwind, which is ASE HOCO. ASE holding company today has demonstrated a clear leadership in scale, market share, margin, efficiency. We have a very clear view about how the new wave 5G autonomous driving, smart manufacturing will demand heterogeneous integration, including silicon-silicon and silicon with non-silicon sensors. We have a very clear view about the future AI, big data driven, high quality and tracking manufacturing, which is done by the automation. We are today a de facto choice and indispensable manufacturing partner for the semiconductor ecosystem. With that, I thank you for listening. I will turn the floor back to Ken. Thank you.

Thank you, Dr. Wu. I will now go more in depth into our financial results. First off, I would like to clean up an order of business that needs a bit of explanation for the sake of reporting transparency. As you all know, our subsidiary, U.S.I., completed its acquisition of the Steel Flash in 2000 of 2020. Given the complexities of the purchase price allocation process, or PPA, IFRS generally allows companies up to a year to complete this valuation process. After the valuation is completed, a retroactive adjustment is usually made. A steel flashes purchase price allocation was completed during the 2nd quarter accordingly. We have retroactively adjusted our balance sheet by 0.4Billion dollars representing 0.1% of our total assets as of the 1st quarter. On our P&L, the purchase price allocation results in incremental expenses booked into the first quarter, totaling $88.5 million or 2 cents per share. First quarter consolidated holding company reported gross margin has been reduced by 0.1 percentage points, while operating margin has been reduced by 0.2 percentage points. For the 2nd and future quarters, PPA impact to net income will be approximately 37M dollars per quarter impacts to future gross and operating margin will of course, depend on future revenues. But in the current period, such impact is considered negligible at less than 0.1%. This amount will be added to our quarterly adjustment. Please turn to page 7, where you will find our 2nd quarter consolidated results intercompany transactions between our ATM and businesses have been eliminated during consolidation for the 2nd quarter. We recorded fully diluted of 2 dollars, 30 cents and basic of 2 dollars, 40 cents. Consolidated net revenue increased by 6% quarter over quarter and by 18% year over year. This sequential increase was primarily driven by our ATM business. We had a gross profit of $24.8 billion with a gross margin of 19.5%. Our gross margin improved by 1.2 percentage points sequentially and 2 percentage points year over year. Both margin improvements are principally the result of higher ATM business mix offset in part by NT dollar appreciation. And T dollar appreciation had a negative 0.3 percentage point impact to sequential gross margin and a negative 2.1 percentage point impact to year over year gross margin. Our operating expenses increased by 0.6Billion dollars to 11.6Billion sequentially. Our operating expense percentage sequentially stayed flat at 9.2% and declined 0.5 percentage points year over year. For the year, we are now expecting to see an improvement from rather than targeting to maintain at last year's 9% level. Operating margin increased 1.3 percentage points sequentially and 2.6 percentage points year over year to 10.4%. During the quarter, we had a net non operating gain of 0.2Billion dollars. 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 0.6Billion dollars. Tax expense for the quarter was 2.6Billion dollars. The effective tax rate for the second quarter was 20%. For the third quarter, we expect to record our annual undistributed earnings tax for modeling purposes. Please use an effective tax rate of 21% for the third quarter to account for such tax impact. net income for the quarter was ten point three billion dollars representing an increase of one point nine billion dollars sequentially and an improvement of three point four billion dollars 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 $25.7 billion with a 20.3% gross margin. Operating profit would be $14.4 billion with an operating margin of 11.3%. net profit would be 11.5 billion dollars with a net margin of nine point one percent basic eps excluding ppa expenses would be two dollars sixty seven cents on page eight is our atm p l it's worth noting here that the atm revenue reported here contains Revenue eliminated at the holding company level related to intercompany transactions between our ATM and businesses as Dr, who indicated our ATM business looks very healthy for this year and heading into 2022. For the second quarter of 2021, revenues for our ATM business were $79 billion, up $5.2 billion from the previous quarter and up $9.5 billion from the same period last year. This represents a 7% increase sequentially and a 14% increase year over year. Our ATM revenues came in ahead of our expectations. On a US dollar basis, our ATM revenues grew by 8% sequentially. Gross profit margin for our ATM business was 25.6%, up 1.2 percentage points sequentially, and 3.9 percentage points year over year. Our sequential gross margin improvement was primarily due to higher loading. The year over year gross margin improvement was primarily the result of higher loading, improved efficiency, product mix, and a friendlier ASP environment. ATM gross margin improvement was accomplished despite NT dollar appreciation having a negative 0.5 percentage point impact quarter over quarter and a 3 percentage point impact year over year. We expect to be able to deliver quarter on quarter improvement in ATM gross margins in the last half of the year, even with ATM gross margin for the first half of the year already reaching our 25% full year target. During the second quarter operating expenses were eight point four billion dollars zero point three billion dollars sequentially and zero point five billion dollars year over year. The sequential and annual operating expense increase was primarily driven by increased employee bonus accruals, which are based on a profit sharing model. Our operating expense percentage was 10.6% down 0.4 percentage points sequentially and down 0.7 percentage points year over year. operating margin was 15% improving 1.6 percentage points sequentially and 4.6 percentage points year over year. The strengthening NT dollar had a negative 0.5 percentage point impact quarter over quarter and 3 percentage point impact year over year to our operating margins. Without the impact of PPA related depreciation and amortization, ATM gross profit margin would be 26.7% and operating profit margin would be 16.4%. On page 9, you'll find a graphical representation of our ATM P&L. When we see our ATM gross margins here almost linearizing and hitting historical highs, I think it's fair to mention that we do not believe that our business is immune to future cyclicality inherent to electronics. But we do believe that having the scale synergies and the benefits of the 4 tail winds, as mentioned by Dr, we will be in position to achieve margins with gradually higher peaks. And shallower troughs on page 10 is our revenue by market segment. You can see here a decline in our communications market segment with share picked up by our automotive consumer and other products. Meanwhile, our computing segment has held roughly steady since 2020. Again, from what we can see here, our near-term performance has not been driven by communications-related devices. And more importantly, with such a decline in our communications segment, it would seem that speculated widespread overproduction of communications-related components to be somewhat less likely. Our near term performance has been driven primarily by growing consumer and general semiconductor expansion. This supports Dr. Wu's earlier statement that new technology and products create an expansion of more basic supporting devices. On page 11, you will find our ATM revenue by service type. There's generally too much noise and trying to understand each quarters individual movement here. However, when the chart is taken as a whole, it tells a more complete story. You can see here the gradual improvement and underlying strength of our wire bond related business. Meanwhile, services for advanced products have seen a gradual decline. Some of which has to do with the impact of the U. S. We do, however, believe that our advanced services will start a rebound in the back half of this year. On page 12, 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. As mentioned earlier, the 1st quarter have been retroactively adjusted for costs. Our 2nd quarter revenue usually represents the end of our seasonal trough. However, what is more unusual this year is that many of our customers are experiencing the impact of component shortages in the 2nd quarter. This is the main reason why we saw our revenues fall slightly short of our initial expectations. However, we do believe that the majority of this revenue shortfall gets pushed out into the 3rd quarter. The 2nd quarter expenses for EMS business tends to be characterized by training investment in preparation. readying our factory lines for the third and fourth quarters when things get up to full mass production speed. As is oftentimes the case, it's the quarter that requires spending of a more spontaneous nature for upcoming product ramps. This is especially true this year when we have two new factory locations ramping up during COVID spread. As such, We have incurred extra operating costs related to R&D, logistics, and factory startup costs in the second quarter to set the stage for second half growth. During the second quarter, EMS revenues increased by 3% sequentially and 24% year over year. Our EMS gross profit was $4.5 billion, increasing $0.5 billion sequentially and $0.8 billion year over year. The higher sequential and year over year EMS gross profit was the result of product mix. Gross profit margin for EMS business unit came in at 9.1%, which is an improvement of 0.7 percentage points sequentially and a decline of 0.3 percentage points year over year. The sequential improvement is primarily the result of cost differences from differing product mix. The annual decline in gross margin is primarily due to higher operating overhead. Our EMS business unit's second quarter operating expenses were $3.2 billion, increasing $0.4 billion sequentially, while increasing $0.7 billion year over year. Sequential operating expenses were primarily up as a result of increased R and D and factory startup costs. Annual operating expenses are up primarily as a result of a larger operating base. Our operating expense percentage increased 0.6 percentage points sequentially to 6.5% while increasing 0.2 percentage points year over year. The sequential operating expense percentage increase is primarily driven by higher R&D in factory startup costs. We expect our operating expense percentage to temper down during the back half of the year as our mass production revenues ramp up during our typically seasonal upcycle. Our EMS business has had a more challenging start this year as a result of worsening COVID operating conditions and component shortages. Quite simply, the underlying conditions have changed and it's now more difficult and expensive to run than expected. We do not see the component shortages or extra costs subsiding in the near term. Therefore, our target of a 4% operating margin for our EMS business has become more of a challenging one. On the bottom half of the page, you will find a graphical representation of our EMS revenue by application. The second quarter change here with consumer products declining 5% is seasonally driven while the increase in the industrial segment is more brought about by industrial products picking up after a year of COVID softness. On page 13, you will find key line items from our balance sheet. The only things we would like to add here are that our total unused credit lines amounted to 276.4Billion dollars and our net debt. To equity ratio dropped to 60%. On page 14, you will find our equipment capital expenditures amounts on this slide are denoted and us dollars. Machinery and equipment capital expenditures for the second quarter totaled $611 million, of which $450 million were used in packaging, $116 million in testing, $39 million in EMS operations, and $6 million in interconnect materials and others. As of the end of the second quarter, we are still running in a capacity constrained environment. And at this time, we continue to see our capital expenditures up from 10 to 15% from last year, although more on the higher end of this range. However, this year's capital expenditure timing may be more volatile than previous years. The timing of equipment may defer or accelerate. With that, we would like to provide our third quarter business outlook as follows. In US dollar terms, ATM third quarter 2021 volume is to increase 12% with ASB holding stable versus second quarter 2021 levels. ATM third quarter 2021 gross margins sequential improvement should be similar with the sequential improvement in the second quarter of 2021. For EMS business and U.S. dollar terms, EMS third quarter 2021 business level should be slightly higher than the average level of the third and fourth quarter in 2020. EMS third quarter 2021 operating margin should be around our targeted 2021 full year operating margin. With that, I'd like to open the floor for questions. We're doing it slightly differently this go round. We have people scattered throughout different rooms and such. When we get the question, I will repeat the question and then I would direct it over to Joseph and Tian. So, question please.