ASE Technology Holding Co., Ltd.

I am Ken Shung, the Head of Investor Relations for ASE Technology Holdings. Welcome to our fourth quarter and full year 2021 earnings release. Thank you for attending our conference call today. Hello, I am Ken Shung, the Head of Investor Relations for ASE Technology Holdings. Welcome to our fourth quarter and full year 2021 earnings release. Thank you for attending our conference call today. Please refer to our Safe Harbor Notice on page 2. 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 represented 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 our annual business recap and outlook, and Joseph will then provide an update on our China site dispositions and our quarterly guidance. We will have a Q&A session following the prepared remarks. please turn to page three where you will find our fourth quarter consolidated results. Intercompany transactions between our ATM and EMS businesses have been eliminated during consolidation. During the quarter, we announced and completed the disposition of our subsidiary ASE Inc's major China sites. From a financial perspective, the sites were valued at an enterprise value of US dollar 1.46 billion And the final consideration was US$1.33 billion after adding cash balances and deducting the existing debt. We recorded in the fourth quarter a gain of US$551 million net of related expenses and taxes. Joseph will give more details regarding this transaction towards the end of our prepared remarks. For the fourth quarter, we recorded fully diluted EPS of $6.99 and basic EPS of $7.20. Without the inclusion of our China site disposition gain, fully diluted and basic EPS would be $3.45 and $3.66 respectively. Consolidated net revenue increased 15% sequentially and 16% year-over-year. We had a gross profit of $32.9 billion with a gross margin of 19%. Our gross margin declined by 1.4 percentage points sequentially and increased by 3.3 percentage points year-over-year. The sequential margin decline is principally the result of higher EMS business mix. The annual increase is primarily the result of higher profitability of our ATM business. Our operating expenses increased by $0.9 billion during the fourth quarter to $13.3 billion as a result of higher profit sharing expenses issued during the quarter. Despite the absolute dollar increase, our operating expense percentage declined 0.5 percentage points sequentially and 0.4 percentage points year-over-year to 7.7%. Operating profit was $19.6 billion, up $1.2 billion sequentially and $8.4 billion year-over-year. Operating margin was 11.3%, declining 0.9 percentage points sequentially as a result of higher EMS product mix, while operating margin increased 3.7 percentage points year over year as a result of higher profitability from our ATM business. During the quarter, we had a net non-operating gain of $17.7 billion. The gain from the China site dispositions accounted for $17.3 billion of this net non-operating gain. The remaining non-operating gain was from our foreign exchange activities, government grants, and other non-operating gains. This amount was offset in part by net interest expense of $0.6 billion. Tax expense for the quarter was $5.6 billion. The effective tax rate for the fourth quarter was 15%. The lower effective tax rate during the quarter was principally the result of differing taxation methodology related to our China site disposal. Net income for the quarter was $30.9 billion representing an improvement of $16.7 billion sequentially and an improvement of $20.9 billion year-over-year, excluding the gain net of taxes and related expenses from the sale of our China sites, our net income would be $15.6 billion, which would still represent substantial earnings growth of $1.4 billion sequentially and $5.6 billion year over year. The NT dollar-US dollar exchange rate was fairly stable from the third to fourth quarter. and as a result, did not impact holding company level margins meaningfully. However, from a year-over-year perspective, we estimate that the strengthening NT dollar had a one percentage point negative impact gross margin. As a rule of thumb, for every percent the NT dollar appreciates, we see a corresponding 0.3 percentage point impact to our holding company gross margin. 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 $33.8 billion with a 19.6% gross margin. Operating profit would be $20.8 billion with an operating margin of 12%. Net profit would be $32.1 billion with a net margin of 18.6%. Basic EPS excluding PPA expenses would be $7.48. Please refer to page 4. Here you will find the 2021 consolidated full year result. Fully diluted EPS for the year was $14.40, while basic EPS was $14.84. Fully diluted EPS for the year without inclusion of our China site dispositions would be $10.86, and basic EPS would be $11.30. For 2021, consolidated net revenues grew 20% as compared with 2020. ATM revenues grew 21%, while EMS revenues grew 17% annually. Gross profit for the year was $110.4 billion, increasing $32.4 billion year over year, or 42%. In 2021, our gross margin improved 3.1 percentage points to 19.4%, principally as a result of higher profitability in our ATM business and slight improvement in EMS. Operating expenses increased $5.1 billion for the year and came in at $48.2 billion. We were able to lower our operating expense percentage by 0.5 percentage points to 8.5% for the year. Operating profit for the year was $62.1 billion, improving 78% or $27.2 billion. Operating margin for the year was 10.9%, an improvement of 3.6 percentage points. We recorded a net non-operating gain of $18.2 billion for the year. As mentioned earlier, $17.3 billion of this was attributable to the disposition of our China sites. The remainder was primarily attributable to investment income, government grants, and other non-operating income offset by net interest expense of $2.3 billion. Total tax expense was $14.3 billion. The effective tax rate for the year was 17.8%. Our full year effective tax rate was primarily lower as the result of differing taxation methodology related to our China site disposals. For ongoing purposes, we believe our effective tax rate to be about 20.5%. Net income increased by 132% to $63.9 billion. On a full year basis, we estimate that the strengthening NT dollar had a negative 1.6 percentage point impact to gross and operating margins. Removing the effect of PPA depreciation, our gross margin would be 20%. Our operating margin would be 11.8%. Our basic EPS would be $15.96. On page five 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 fourth quarter, our ATM business continued to run at a fully loaded rate. Operationally, it was almost a continuation of the third quarter with slightly more business. We had a reclassification of bonus expense from cost of goods sold to operating expense during the quarter. We will explain sequential fluctuations that are impacted by this after the reported numbers are presented here. For the fourth quarter 2021, revenues for our ATM business were $92.0 billion, up $1.9 billion from the previous quarter, and up $19.2 billion from the same period last year. This represents a 2% increase sequentially and a 26% increase year over year. Our ATM revenues came in slightly ahead of our expectations due to higher than expected customer loading. Gross profit for our ATM business was $25.7 billion up $1 billion sequentially and $9.3 billion year over year. Gross profit margin for our ATM business was 28%, up 0.6 percentage points sequentially and up 5.4 percentage points year over year. The year over year gross profit margin improvement was primarily attributable to higher loading, improved efficiency, and a friendlier ASP environment offset in part by a stronger NT dollar appreciation. During the fourth quarter, operating expenses were $9.7 billion up, $0.6 billion sequentially, and $1.2 billion year-over-year. The year-over-year increase was primarily driven by a higher employee headcount and incremental bonuses tied to corporate performance. Our operating expense percentage was 10.5%, up 0.4 percentage points sequentially and down 1.1 percentage points year-over-year. During the fourth quarter, operating profit was $16.1 billion, representing an improvement of $0.5 billion quarter-over-quarter and an improvement of $8.1 billion year-over-year. The year-over-year mark represents a 101% increase from last year. Operating margin was 17.5%, improving 0.2 percentage points sequentially and 6.5 percentage points year-over-year. The NT dollar exchange rate did not have a significant impact on our ATM sequential margins. On a year-over-year basis, we estimate that the strengthening NT dollar had a 1.5 percentage point negative impact. During the quarter, we made a one-time reclassification of $0.4 billion relating to how bonuses were classified between cost of goods sold and operating expenses during the first three quarters of the year. In the fourth quarter, this reclassification lowers cost of goods sold compensation expenses while increasing OPEX-level compensation expenses. Adjusting for bonus reclassification, our gross profit margin would be 27.6% or flat sequentially. Our sequential operating expenses would be flattish, up $0.1 billion, and our operating expense percentage would be 10.1%. down 0.2 percentage points sequentially. This reclassification has no impact to ATM operating margins. It also has no impact at a full-year level. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 28.9%, and operating profit margin would be 18.7%. On page 6, we have our ATM full-year P&L. On this page, you can see how that we saw significant improvement in all aspects of our business during the year. 2021 revenues for our ATM business increased by 19% with our packaging business and test business up 22% and 6% respectively. Gross profit for the year improved 49% to $88.7 billion. Gross margin was up 5.3 percentage points primarily as a result of higher loading and efficiency, a friendly ASP environment, and offset in part by NT dollar appreciation. Our operating expense percentage declined by 0.9 percentage points from 11.4% to 10.5%. operating profit improved 94% to $53.4 billion, with operating margin improving 6.2 percentage points to 16%. 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 27.5%, and operating margin would be 17.3%. On page seven, you'll find a graphical representation of our ATM P&L. The commentary we would like to reinforce here is that we believe the improvements in our business are not only related to a prolonged semiconductor cyclical uptick. We strongly believe that we have substantial systemic improvements from our combination with spill. And while cyclicality in the industry is a given, from a longer-term perspective, we believe that our margins still have further room to rise given our strengthened market position after the combination with spill. On page eight is our ATM revenue by market segment. There's not a significant change here. However, it is worth noting that our computing segment appears to be outperforming our communication segment. This appears to be driven by strong demand from high performance commuting products. On page nine, you will find our ATM revenue by service type. As we have mentioned, we expected a significant uptick in our advanced packaging services during the quarter. We expect continued strength within advanced packaging to persist through 2022. We also expect our testing revenues to outperform during 2022 after a muted 2021, which was impacted by EAR-related business adjustment. As a percentage of revenue, our wire bond revenues have declined but were flattish on an absolute dollar basis. On page 10, you can see the fourth quarter and full year results of our EMS business. The information we provide in regards to USI may differ materially from the information directly provided by our A share listed subsidiary as they report independently using Chinese GAAP. During the quarter, demand was stronger than anticipated, driven by stronger than expected demand for our SIP services. As production was slowed by component and chip shortages in its third quarter, Such operating conditions continued to persist throughout the fourth quarter. Further, in 2020, our consumer SIP business had a significantly later start as compared to the current year, 2021. We believe the combination of these two factors distorts fourth quarter year over year comparisons. And as such, we believe that comparing back half numbers may be more telling of our EMS business's performance in such situations. For our EMS business, during the fourth quarter, EMS revenues increased 33% sequentially and 3% year-over-year. As a result of component and chip shortages, this year's production cycle of certain SIP products was more evenly spread out across our third and fourth quarters. Some production will push into the first quarter of 2022. In 2020, the production cycle for some of our consumer SIP products launched later than 2021. As such, the year over year percentage increase was a bit muted. If we compare second half numbers between 2020 and 2021, we saw a 13% improvement in revenues. Our EMS gross profit was $7.1 billion, improving $1.2 billion sequentially and $0.1 billion year-over-year. The sequential gross profit improvement is the result of the seasonal ramp of our SIP-related products. The year-over-year improvement is again the reflection of comparing two manufacturing cycles at different times. Comparing second half gross profits, we saw a 7% improvement from 2020 to 2021. Gross profit margin for the EMS business unit came in at 8.7%, which is a decline of 0.9 percentage points sequentially and 0.1 percentage points year over year. The margin declines are primarily the result of product mix shifting to higher material pass-through products. Our EMS business unit's fourth quarter operating expenses were $3.5 billion, increasing $0.3 billion sequentially and flat year over year. Operating expenses increased primarily as a result of increased employee profit sharing recorded during the year end. Our EMS unit's operating expense percentage was 4.3% down 1%. percentage points sequentially and 0.2 percentage points year-over-year. The sequential decline in operating expense percentage is primarily attributable to higher revenues while containing operating expenses. Our EMS operating profit improved $0.9 billion sequentially and $0.1 billion year-over-year. The sequential improvement was primarily due to increased seasonal demand for SIP products. Our EMS operating margin was 4.4%, which is up 0.1 percentage point sequentially and is flat year over year. On a full year perspective, our EMS business, in challenging conditions, delivered another strong year. On a full year perspective, our EMS business revenues increased 17%. Gross profit increased 14%. In these challenging operating conditions characterized by wafer and component shortages, our full year gross and operating profit margins each declined by 0.2 percentage points. On page 11, you will find a graphical representation of our EMS revenue by application, with sales increasing 33% sequentially. Interpreting this chart gets a bit tricky. What is fairly straightforward to see is that our consumer segment increased by five percentage points as a result of product seasonality. Other categories generally grew in absolute dollars. However, their growths were not as pronounced as that of the consumer 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 $79.1 billion. Our total interest bearing debt was $227.2 billion. Total unused credit lines amounted to $278.8 billion. Our EBITDA for the quarter was $51.9 billion. EBITDA for the year was $136.8 billion. and our net debt to equity was 54% at the end of the year. On page 13, you will find our equipment capital expenditures. Machinery and equipment capital expenditures for the fourth quarter and US dollars totaled $472 million, of which $231 million were used in packaging operations, $160 million in test operations, $68 million in EMS operations and $13 million in interconnect material operations and others. For the full year, machinery and equipment capital expenditures were $2 billion. $1.3 billion was spent on packaging, $0.5 billion on tests, and $0.2 billion on EMS. Our ATM business continues to be constrained by substrate and wafer availability, in addition to a lack of our own manufacturing capacity. Given that we can generally put in capacity faster than our upstream foundry partners and our substrate suppliers, we can be a lot more nimble in our approach to our business. Although our smart factories do take somewhat more investment and time to build, we still believe that many of our investments are granular, which allows us to adapt quickly to market conditions. We continue to provide our EBITDA and US dollars here as a reference. The earnings related to the China site disposition are separated for better comparability. We believe that the company's EBITDA relative to our equipment capex serves as a key financial performance metric for the company. Before we move on to Dr. Tianwu and Joseph Tang's sections, I would like to inform everyone that they will make forward-looking references on a pro forma basis, removing the results of the China factory sold. As a reference, we have included an appendix to the slide deck that has a set of quarterly pro forma financial statements for the consolidated holding company and one for our ATM business unit. With that said, I pass the presentation over to Dr. Tian Wu. Dr. Wu.

Hi, everyone. I would like to give you the 2021 recap as well as the outlook for 2022. I will also touch base on the industry perspective from where we can see. First of all, 2021 was a good year. We have seen a revenue and margin improvement better than target. For example, in 21, the ATM revenue grew 26% year-over-year or 45% year-over-year, if we exclude the year-affected business. The ATM margin, gross margin was 26.5%, approaching historical peak level of 27%. ASE consolidated revenue grew 26% year-over-year. and ASE consolidated operating margin improved 3.6 percentage points versus the target that we set at the beginning of the year of 2.5 to 3%. So overall, 21 was a good year. We have seen broad-based growth in all sectors with momentum that carry over to at least 2022. For example, The 2021 wire bond revenue grew 36%. We continue to see the wire bond to be fully loaded, and we do expect wire bond revenue in 2022 will achieve double-digit growth. Even with the EAR impact, which was very significant in test business, the 2021 test revenue grew 12% year over year. We do expect a test business in 2022 without the EAR impact. The growth rate will double from the 2021 level. So we do expect the testing business to play more of an important role for our business in 2022 and beyond. Advanced packaging based on the customer's requirements we're seeing more complexity and more demand. In 2021, we have seen the advanced packaging revenue grew 23% year over year. We do expect the growth rate in 2022 to be better than that number, which is another important sign that we're migrating more mix to the testing business as well as advanced packaging business while we're maintaining the established base in Weyerbach and everything else. ATM automotive revenue grew over 60% year over year. The momentum will continue in 2022 and beyond. The good news is we do expect to achieve 1 billion automotive revenue in 2022, which will be a significant milestone for ATM business.

Let me talk about the 2022 outlook.