ASE Technology Holding Co., Ltd.

Chen Xiang, the Head of Investor Relations for ASC Technology Holdings. Welcome to our first quarter 2022 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 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. Intercompany transactions between our ATM and EMS businesses have been eliminated during consolidation. For today's call, I'm joined by Joseph Tung, our CFO. During the call, I will be going over our financial results and outlook. Joseph will be available to answer questions during the Q&A session that follows. As a reminder, we disposed of ASE Inc.' 's China sites at the end of 2021. For our financial results presented here, in addition to our legal entity results, we will also be including additional slides on a pro forma basis, or as if the disposition of ASE Inc.' 's China sites had already occurred. We believe the pro forma results give additional, more meaningful information which would assist in providing comparability of our financial results. During the first quarter, our ATM business continued to be heavily loaded. Revenues came in slightly ahead of our expectations. During the quarter, there were some customers who were reducing their forecasts, but those customers were outpaced by other customers increasing their forecasts. From a sector perspective, certain sectors do appear to be faring better, such as high-performance computing, networking, and automotive. And despite the slight volatility, net-net, there was no significant variation from our previous outlook. Our EMS business also had revenues that came in ahead of our expectations. During the quarter, stronger than anticipated demand was driven by our SIP and traditional EMS services. Logistical issues from component and chip shortages appeared to ease prior to getting worse from China's COVID mitigation practices. All in all, our EMS business fared well despite the manufacturing environment becoming more challenging. On pages 3 and 4, you will find our first quarter consolidated results with historical results on a legal entity and pro forma basis. The first quarter financial results are the same on a legal entity and pro forma basis. On page three is the consolidated legal entity P&L. For the fourth quarter 2021, the dispose sites represented $6.8 billion of revenue, $1.4 billion of gross profits, and $0.9 billion of operating profit. As a percentage, the dispose sites represented 4% of each fourth quarter 2021 revenues, gross profit, and operating profit. For the same period last year, the sites disposed represented $5.6 billion of revenue, $1 billion of gross profits, and $0.5 billion of operating profit. As a percentage, the disposed entities were 5% of each revenues, gross profit, and operating profit. On page 4 is our first quarter results compared with the pro forma basis historical results. For the first quarter, we recorded fully diluted EPS of $2.92 and basic EPS of $3.01. Consolidated net revenue decreased 13% sequentially while increasing 27% year over year. We had a gross profit of $28.5 billion with a gross margin of 19.7%. Our gross margin increased by 0.8 percentage points sequentially and by 1.4 percentage points year-over-year. The sequential margin improvement is principally the result of lower EMS business mix. The annual increase is primarily the result of higher profitability of our ATM business. Our operating expenses decreased sequentially by $0.3 billion during the first quarter to $12.4 billion, primarily as a result of lower bonus and profit sharing expenses issued during the quarter. On a year-over-year basis, our operating expenses increased by $1.9 billion, mainly from the increase in scale of both our ATM and EMS businesses. Our operating expense percentage increased a percentage point sequentially to 8.6% from 7.6%. On an annual basis, our operating expense percentage declined 0.6 percentage points from 9.2%. Operating profit was $16.1 billion, down $2.7 billion sequentially, while up $5.7 billion year over year. Operating margin was 11.2% declining 0.1 percentage points sequentially. This relatively moderate decline was principally the result of lower EMS product mix. Operating margin increased 2.1 percentage points on an annual basis as a result of higher loading and profitability from our ATM business. During the quarter, we had a net non-operating gain of $0.6 billion. The non-operating gain was primarily from our net foreign exchange hedging activities, offset in part by net interest expense of $0.4 billion. Tax expense for the quarter was $3.3 billion. The effective tax rate for the first quarter was 19.7%. We expect a full-year effective tax rate of 20%. Net income for the quarter was $12.9 billion, representing a decline of $1.6 billion sequentially and an improvement of $4.9 billion year over year. The NT dollar-US dollar exchange rate was fairly stable from Q4 2021 to Q1 2022 and, as a result, did not sequentially impact holding company-level margins meaningfully. However, from a year-over-year perspective, we estimate that the strengthening NT dollar had a 1 percentage point negative impact to gross margin. As a general 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 $29.4 billion with a 20.4% gross margin. Operating profit would be $17.3 billion with an operating margin of 12%. Net profit would be $14.1 billion with a net margin of 9.7%. Basic EPS excluding PPA expenses would be $3.28. On pages 5 and 6 are our ATM P&L with historical results on a legal entity and pro forma basis. 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 business continued to run at a highly loaded rate. Our advanced packaging business remained strong. However, as expected, we did experience some mild first quarter seasonality from our wire bond business. On page five is the legal entity ATM P&L. From a legal entity perspective, our ATM business declined 9% primarily as a result of the disposition of ASE Inc.' 's China sites. For the fourth quarter 2021, the disposed sites were $6.8 billion and 7% of revenue, $1.4 billion and 6% of gross profits, and $0.9 billion and 5% of operating profits. For the same period last year, the disposed sites were $5.6 billion and 8% of revenue, $1 billion and 6% of gross profits, and $0.5 billion or 5% of operating profit. On page six is our pro forma basis ATM P&L. For the first quarter 2022, Revenues for our ATM business were $84 billion, down $1.2 billion from the previous quarter and up $15.9 billion from the same period last year. This represents a 1% decrease sequentially and a 23% increase year over year. Our ATM revenues came in ahead of our expectations due to higher than expected loading and production efficiency. Gross profit for our ATM business was $23.1 billion, down $1.2 billion sequentially, and up $6.1 billion year over year. Gross profit margin for our ATM business was 27.5%, down 1 percentage point sequentially, and up 2.6 percentage points year over year. As discussed in the previous quarter, Our fourth quarter 2021 ATM gross margin contained a reclassification for bonus. Without the inclusion of the reclassification, fourth quarter gross margin would be 28.1%. And as such, first quarter gross margin would only be down 0.6 percentage points. 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 NT dollar appreciation. During the first quarter, operating expenses were $9.1 billion, flat sequentially and up 1.5 billion or 20% year-over-year. The 20% annual increase was lower than our 23% net revenue growth during the same period. As such, the year-over-year increase was primarily driven by a larger scale of business. Our operating expense percentage was 10.8%, up 0.1 percentage points sequentially, and down 0.3 percentage points year-over-year. During the first quarter, operating profit was $14 billion, representing a decline of $1.2 billion quarter-over-quarter and an improvement of $4.6 billion year-over-year. Operating margin was 16.7%, declining 1.2 percentage points sequentially and improving 2.9 percentage points year-over-year. The NT dollar exchange rate did not have a significant impact on our ATM sequential margins. However, on a year-over-year basis, we estimate that the strengthening NT dollar had a 0.75 percentage point negative impact. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 28.5%, and operating profit margin would be 18%. On page seven, you'll find a graphical representation of our pro forma ATM P&L. On page eight is our pro forma ATM revenue by market segment. We would like to mention here that we expect the automotive segment to grow significantly during the year and for many years to come. We believe that this increase is not being primarily driven by shortage catch-ups. Instead, we believe that overall semiconductor content increases have accelerated recently. Further, the content increase is being amplified by a new wave of outsourcing from IDMs which have traditionally kept most production in-house. Given the necessity of quality and scalability for automotive products, we further believe that the market expansions will only be made available to Tier 1 suppliers and within those primarily ASE. On page nine, you will find our pro forma ATM revenue by service type. During the quarter, we saw strength in our advanced packaging services, which increased three percentage points. Wire bonding exhibited some seasonality, dropping two percentage points. From a forward-looking perspective, we expect our test and advanced packaging businesses, including bumping, flip chip, and fan out, to continue to ramp faster than the corporate average during the coming year. On page 10, you can see the first quarter results of our EMS business. The information we provide here 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 both our traditional EMS and SIP services. Component and chip shortages continued to persist throughout the first quarter. Overall operating conditions became more challenging as China's COVID mitigation strategy ramped. We do have countermeasures in place to continue our EMS production within China. we remain confident of the policies and procedures we have put in place to protect our employees and the overall manufacturing environment but the overall macro situation remains dynamic for our ems business during the first quarter revenues decreased 25 percent sequentially and increased 28% year-over-year. Revenues were somewhat ahead of where we expected, primarily as a result of higher than expected SIP and traditional EMS business. Our EMS gross profit was $5.4 billion, declining $1.7 billion sequentially and increasing $1.4 billion year-over-year. The sequential gross profit decline is largely seasonal. The year-over-year improvement is largely related to more EMS business. Gross profit margin for our EMS business unit was 8.8%, which is an improvement of 0.1 percentage points sequentially and 0.4 percentage points year-over-year. The margin improvements are primarily the result of product mix changes and improved operating efficiency. Our EMS business unit's first quarter operating expenses were $3.2 billion, decreasing $0.3 billion sequentially and increasing $0.4 billion year-over-year. Operating expenses declined primarily as a result of lower employee profit-sharing expenses. Operating expenses increased annually as a result of higher scale of operations. Our EMS unit's operating expense percentage was 5.2%, up 0.9 percentage points sequentially and down 0.7 percentage points year-over-year. The operating expense percentage increase is primarily due to seasonally lower revenue. On an annual basis, the operating expense percentage decline is due to increased scale of business with a lower increase in operating expenses or more operating leverage. Our EMS operating profit declined $1.4 billion sequentially while growing $1 billion year-over-year. The sequential decline is due to seasonality of the business. The annual increase is the result of a higher scale of operations. Our EMS operating margin was 3.6%, which is down 0.8 percentage points sequentially and up 1.1 percentage points year-over-year. On the bottom half of the page, you will find a graphical representation of our EMS revenue by application. Outside of automotive applications, most other applications had a seasonal decline in revenue during the first quarter. Our consumer segments drop was stronger as it was tied to the seasonality of underlying high volume SIP products. On page 11, 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 $89.1 billion. Our total interest bearing debt was $225.1 billion. Total unused credit lines amounted to $285.9 billion. Our EBITDA for the quarter was $30.7 billion. Net debt to equity was 52%. On page 12, you will find our equipment capital expenditures. Machine and equipment capital expenditures for the first quarter in US dollars totaled $443 million, of which $311 million were used in packaging operations. 96 million in test operations, 26 million in EMS operations, and 10 million in interconnect material operations and others. 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. Looking out into the second quarter, we continue to believe the business environment remains relatively healthy. We still believe we have a strong growth year ahead of us. Our view of double the logic semiconductor industry growth remains unchanged. And though we understand there are certain macro elements that may cause future retuning of the logic's semiconductor growth outlook, we believe that amongst back-end service providers, we are our customers' first choice. From a macro concerns perspective, worldwide inflation and the Russia-Ukraine war's impact on overall electronics demand remains relatively unknown. Our outlooks and corporate plans are tied to the outlooks and expectations of our customers. And, as mentioned earlier, some customers in certain sectors have reduced their overall outlooks. However, these reductions have been fully offset by increases from other customers in other sectors. If we look at our top five customers, during the past quarter we had a net positive forecast adjustment. And even if there is adjustment to demand, we believe our customers will flee to security, which benefits us the most. Further, we do see China's COVID mitigation strategy as a concern. We currently have adequate immediate workarounds within our China operations to continue running, but secondary and tertiary impacts to factory supplies and raw materials can reach far beyond the PRC. Obviously, mitigation duration and severity will directly correlate to how severe the repercussions are along the entire supply chain. We currently believe our factories have effective workarounds and alternate vendors during the second quarter to avoid manufacturing disruptions. Finally, Taiwan-centric issues such as the recent COVID surge are also creating factory-level operational complexities. Our Taiwan factories are taking appropriate measures to prevent the spread of the disease within our factories. Taiwan's pragmatic approach should create manageable disruptions in Taiwan due to COVID mitigation. However, such policies may make running our various Taiwan factories less efficient. Due to these factors, we do see a near-term increase in running costs related to the suboptimal macro environment. At this time, we expect the higher cost environment to last between one to two quarters. Even with extra costs, we continue to expect improving full-year gross margins. For our EMS business, a large portion of our manufacturing is in China. The overall operating conditions there have become more challenging with China's COVID mitigation strategy, especially staffing and logistics. we do have countermeasures in place to continue our EMS production within China. For our business, the second quarter is generally part of the seasonal trough, and as such, keeping up with slow season demand should not pose a significant challenge. For the near term, we remain confident that the policies and procedures we have put in place will protect our employees and our manufacturing environment. At this time, we do not see major disruptions to our production, but like our ATM business, we do see some incremental costs. With that said, our guidance for the second quarter is as follows. For our ATM business on a pro forma basis in US dollar terms, our ATM second quarter 2022 business level should be slightly above fourth quarter 2021 levels. On a pro forma basis, our ATM second quarter 2022 gross margin should be slightly above our first quarter 2022 gross margin. For our EMS business, in US dollar terms, our EMS second quarter 2022 business level should be similar with first quarter 2022 levels. Our EMS second quarter 2022 operating margin should be slightly lower than first quarter 2022 levels. With that, we can start the Q&A section at this time.

Now we would like to open the floor for questions. If you have any question, please raise your hand now. When you ask questions, please hold two questions at a time. Thank you. Our first question is from Mr. Randy Abraham of Credit Suisse.

Okay, yes, thank you. And a good result and outlook considering all the COVID disruptions. First question, it sounds like the EMS business tracking better than you were expecting a few months ago, just given macros changed a bit. And I believe USI also on their call talked about a bit better outlook. Could you give the view for growth this year for that business and maybe discuss a bit more on where you're seeing the strength or upside in EMS?

I think the overall EMS business of ours is continuing to remain strong, although there will be some foreseeable disruptions, particularly coming into second quarter and may last to end of second quarter or even into some degree to third quarter. But all in all, I think the overall momentum remains to be strong. We'll continue to make inroads in terms of expanding our SIP projects with new customers. The traditional EMS business will continue to see strong momentum, particularly in the automotive sector. All in, I think the overall business environment or the business momentum continues to be strong for the year. Same as our ATM business.

Is it in the same automotive? How much of a driver? I know in ICTM, I think last quarter, 40% growth this year. Is it starting to move the needle for EMS or it's still fairly small?

Yeah, I think the growth for this year in terms of automotive will be even stronger than last year. And I think the USI has already put out a target of reaching about a billion dollar revenue by 2024, which is actually a year earlier than our previous target. So I think they're seeing very strong momentum in that area, particularly with the addition of Steel Flash, who has a fairly large and growing exposures in the automotive sector. Putting the two together really makes the momentum much stronger now.

And I wanted to ask two offsets on the margin. One is the cost. Is there a way to think how much that cost is? You mentioned for like one to two quarters, higher costs, like how much impact is, and is that a gross or at the operating margin level? And on the plus side for the NT dollar, when you mentioned the gross margin slightly above first quarter, is that factoring a certain currency assumption?

Yes, I think we will put all the considerations into it. And, you know, I think, first of all, we are coming off a very, very strong first quarter and the margin was was much higher than we originally expected. So going into the second quarter, because of a lot of the disruptions that we are seeing, we would rather be more cautious or more conservative in terms of protecting our margin situation. The additional costs coming from this COVID disruption come from many directions, including the additional costs that we need to spend on protecting our employees, some logistics costs will be increasing, some material costs will be increasing. There's a lot of factors that are kind of pushing a lot of pressure on the cost side. So I think it will be very, very naive if we don't put those consideration into our margin expectation for the quarter.

And I'm curious on the environment. Earlier this week, TI took quite a big haircut, $500 million from guidance, where it looks like slowing shipments due to all the factory disruptions. From your side, are you seeing any pause where customers are reflecting the downstream disruption or slowing? technically a bit of a demand disruption. So have you seen much impact to our customers continuing to keep relatively steady flows through some of the issues?

Well, I think the overall order looks very healthy. But then there's a lot of different situations that may have some negative impact on the actual delivery of the parts or the materials that was needed for the production. So, I think selective customers may have their different views on how things are going with them, but as a whole, particularly in the EMS, particularly in China area, we are seeing some logistics difficulties in terms of moving our products out and moving the materials in. So there are a lot of obstacles that we need to go through. So far, we have been managing this quite well, and therefore we haven't seen that much of an impact on the overall. And whatever impact there is in terms of the revenue side, we do feel confident that we can recuperate them in the later part of the year.

Great. Hey, my final question on CapEx, the last few quarters running about 425, 440 million. Are you now, I think the original guidance was it would be up a bit, like 2 billion plus. I guess if you have an update how your CapEx view and there's been a lot of front end.

I'm sorry, Randy? Randy?

Can you hear me?

Yes. Randy? Yes. We're going to let the next analyst to ask questions. Thank you.

Well, let me answer this question. I think for the whole year, our CapEx remained at what we've been saying before. It's about $2 billion level. But the composition of it will be somewhat different from the last year. I think this year we think we will increase the percentage of our test investment. I think the overall breakdown will shift to about 51% for assembly, 34% for tests, 11% for EMS, and then another 3% for material.

All right, our next question is from Mr. Goku. How do you hold on? Goku.

Yeah, hi. Good afternoon. Thanks for taking my question. Could you talk a little bit more in detail about where, which are the kind of customers who have started to see some weakness? Just some more detail on the dynamics you're seeing. Some segments you're starting to see some weakness. You're able to fill up some of the capacity with other segments. Is it more happening in your wire bond business? Is it happening more in the flip chip and bumping areas? And could you also kind of talk a little bit about, I think you reiterated your double the logic semi growth and seems like first half is tracking quite well. Do you feel that there is a potential risk coming in second half as a result of kind of some of the end market weakness that you're seeing? Or do you think that there is enough of an order book that can cover for any kind of weakness in the consumer segments in second half?

Well, I think everybody knows that we're seeing some softness, particularly in the Android area. So cell phone or some of the consumer products seems to be relatively weaker than the other sectors. But I think from our standpoint, I think the overall situation still remains very healthy. I think in terms of high performance computing, in terms of networking and automotive, we're still seeing very, very strong momentum. And I think overall, even at the weaker sectors, I think because of the increasing application and also IC contents that will provide a good layer of support to the overall growth, unit growth. And also, I think one of the drivers for us is the increasing outsourcing trend, particularly from the IDM, particularly in the automotive area. Putting all things together, I think we still see very healthy unit growth for us. And also, I think as Ken mentioned earlier on, in this uncertain period of time, I think that most of the customers will flee for security. And a company like us that has more secure capacity and also much better sourcing power, I think that we will become the customer's first choice. And that's all things put together still give us very strong confidence in the growth here for this year. And also, as we mentioned, although we are a little bit conservative about second quarter margin, all in all, we will continue to see sequential growth in our margin. And in the first quarter, we already surpassed our historical peak of 27% growth margins. And, um, and we will, we will see that trend continue and, uh, we will have a new, uh, peak for the, uh, in terms of gross margin for the year.

Understood. Uh, thanks very much, uh, for that. Um, so just to follow up on that, on automotive, um, could you talk a little bit about how much is automotive now as a percentage of, uh, ATM? I know that your kind of combined consumer industry automotive and others is 30 plus percent, but what is automotive alone? Uh, and, uh, How do you see that evolve in the next four, five years, given that a lot of tailwinds are coming in terms of outsourcing, dollar content growth, et cetera? Is it something like 25% of revenues could be coming from automotive in the next three, four years?

Yeah, I think the overall momentum is very, very strong at this point. I think last year was about 6%. And we're seeing that to grow to over 7% for this year in terms of our ATM automotive business. and we will be reaching a billion-dollar mark this year. Same kind of momentum in EMS. I think for EMS, we had about 50% growth, and that growth rate will further expand this year. And as a whole, I think for EMS, it will also reach about 7% of the overall revenue in automotive.

Got it.

And the longer term, I think we will continue with the automation, further automation of our factories I think there will be more and more automotive business coming in. I think the name of the game in terms of automotive is not on the legacy or the existing products, but the new application or new chips that are coming out. First of all, this will be the new business that we will get. And second is that these are the business that the IBM will be outsourcing. And when these automotive chips with higher performance reliability requirement, I think the customers will go to the tier one supplier like us who has the capacity and the technology and also the quality to secure that part of the production for them.

We have a question from Mr. Rick Xu. of Daiwa security.

Yeah. Hi, this is Su Rui. Can you guys hear me?

Yes.

Okay. Right. Good afternoon. So I guess the first question is still housekeeping for Joseph. What's your capacity utilization rates across the packaging testing and bumping for Q1 and also for the coming quarter?

I think our bumping is full, and as a whole, in terms of packaging, it's 80% to 85%. It will continue to be so in the second quarter. Test is saying above 80%. It will continue to be 80% above in second quarter as well.

Okay, thank you. And another question is about your four-year guidance board. for the year 2022, I remember one quarter ago, you guys talked about the global SEMI as memory growth was about five to 10% this year, and ESC was going to double that growth. Is this expectation still held?

Absolutely. I think we're still seeing two times the logic semi growth for the year. So if we're looking at 5% to 10% growth, that means 10% to 20% growth for us, if not higher. Because I think in this more uncertain environment, I think the market share expansion will be more likely for us.

Okay, great. That's pretty helpful. Thank you.

Thank you.

We have a question from Mr. Bruce Lu of Goldman Sachs. Bruce.

Hello, can you hear me? Yes. Okay, great. Thank you for taking my question. I mean, let me follow up with Rick's question. I mean, TSMC just revised up the five-year semi-X memory growth from 4% to high single digit for the next five years. So does that imply that AAC will also grow double than semi-X growth, which is 8% for the next five years as well?

Well, certainly. Yes, I guess the short answer is.

All right. I'm very happy to hear that answer. Okay. Well, the second question I want to ask is that, you know, Joseph just mentioned that even with all the uncertainty, you know, your gross margin for Aegean business will still grow, expand for 2022. Can I ask, what's your assumption for the currency for this year? And what's your like-to-like basis of, You know, you have all the incremental costs from that confirmation for the COVID, you know, increasing material costs. What is your assumption for that? I mean, the bottom line I'm asking is what is the life-to-life basis in terms of the margin expansion for 2022?

Well, I think we will certainly be above 28% in terms of ATM gross profit margin. Of course, the currency helps, but to what degree, it depends on the movement of the currency. So right now, we're just using the existing exchange rate as our basic assumption. You know, with the favorable currency movement, of course, the margin should be higher than what I just mentioned. But, you know, as I said, you know, there's a lot more logistics related costs that we need to bear because of the COVID situation, also the geopolitical issues. you know, kind of events that are happening today. That really has a lot of impact on the logistics, on the material supply, parts supply, on the health monitoring and health protection type of investments that we need to make. So I think the overall, and also in terms of energy costs, that will also have an impact. So we are at this point being a bit conservative, although we're very confident that we'll continue to see margin expansion. But at this point, we're looking at, we're setting our goal at a lower than, lower than, lower level than we would like to have if we put all of these different... Let me make it clear.

I mean, you have all the dynamics of cost pressures. So do you believe that your position is strong enough when you see the inflated cost, either from like, you know, all the countermeasure or the raw material cost, you are able to pass it to your customer, which is the main reason why you maintain the profitability target, or you've got like big enough buffer, which, you know, regardless the potential material hike, you can also swallow it. Which one will be?

Well, I think both. I think in terms of our scale, in terms of our leadership, in terms of customers, we prefer to go for secured capacity and technology. I think that gives us very good protection over our margin and pricing. But at the same time, there is a lot of macro events that will have an impact on the overall how you run business. It's not necessarily on the ecosystem. the pricing of materials or parts, but also a lot of the logistic and all around costs that we need to bear. That includes labor as well. So there's a lot of uncertainties here. So it's very difficult to quantify how much of an impact these macro events will have on our cost side. But judging from our own operation situation, I think we are still confident that we will have margin expansion. maybe not necessarily to the level that we would like to have, but then we need to start somewhere, right? And so we're setting that this quarter, we will be closing in on 28. And for the whole year, we say we want to be above that level.

Understand, thank you. Just double check that the gross margin sensitivity for the ATM loan to the currency, what is that?

I'm sorry?

The currency sensitivity for the ATM margins.

Because you have the negative... About 1% is about 40 basis points. 1% of movement will have a 40 basis point impact.

I see, understand. Thank you. I'll go back to you.

If you have any question, please raise your hand now. We have an online question from Laura Chen. I'm going to read her question. Can you elaborate more on your automotive business? What's the revenue contribution and growth in 2021 and outlook for this year? Do you see any potential weakness in auto business due to current China lockdown and demand uncertainties in Europe? Also, on advanced packaging, what kind of application you are seeing strongest growth? Thank you.

Uh, in terms of, uh, events, uh, packaging, a thing, or we're both, we're seeing flip chip as well as SIP, uh, both showing a pretty strong momentum. And, uh, I think in terms of overall packaging, uh, events packaging, including flip chip and, uh, and, uh, SIP will definitely have the highest growth rate for the year. Uh, in terms of automotive, I think the, uh, As I mentioned earlier on, we target to reach about a billion dollar revenue or over 7% of our overall ATM business for the year. That is posting a very strong growth from last year as well. And we do expect this strong momentum to continue in the foreseeable future, given that, as I mentioned, I think the new name of game is not really on the legacy or the existing products. In terms of getting that part of this, it's really the new application or new chips that are coming on stream to creating a new business for us and also these new business roughly are mostly being outsourced by the idea and we used to do it all the automotive parts themselves. So putting these two together, that really creates a very good business potential for us. Plus, as I said, in terms of automotive parts, the durability or the reliability is the most important consideration when customers go out for a supplier. And with the quality or the technology that we have, or the level of automation that we have in our factory, I think we are the most preferred supplier for this type of new chips that are coming on screen in terms of automotives. So we do expect a very strong momentum going forward.

Next question is from Mr. Goku Hariharan. Goku.

Yeah, hi. Thanks for taking my follow up. I had one follow up, which is, I think previously you had said that you're expecting ATM sequential momentum to continue through the course of the year. Every quarter will be growing sequentially. Is that still your expectation right now, given some of these changes in the demand?

Yes, from the forecast that we're getting, customer remains fairly stable and very strong. So we do expect, we continue to expect that we will have sequential growth in our business and also on the margin.

Understood. Thank you. And just to elaborate on the question from Bruce, I think in Q2 looks like you have some cost pressures coming through. Are you able to dynamically pass these on to your customers in Q2 itself? Are there some delays in terms of some of these cost pass-throughs? I think over the last 18 to 24 months, we have definitely seen a fair bit of cost pass-throughs and price increases given the demand, high demand and supply tightness. But are we still seeing those happen or kind of not that much anymore in terms of room to increase price?

Well, I think we continue to see a very friendly pricing environment And if compared to our peers, I think we have the most secure position in that front in terms of protecting our margin as well as our pricing. In terms of the, you know, Because of the macro event that are happening, they may have some impact on the overall cost structure or cost environment. Some of it, you can pass it on. Some of it, you cannot. It depends on the different nature of that cost. cost increases or whatever. So yes, I think in a longer term sense, we do have the best protection in our pricing structure. But it's a very, very dynamic situation now. I think we will not hesitate to pass these regulations cost hikes to our customers if we can. But at the same time, we do have the customer relationship to consider. And these relationships are long-term relationship. So you don't want to be seen as a very, very opportunistic supplier, which will have a longer term damage on your overall customer relationship. I think there's a fine line that how we manage this cost situation and also how to manage our relationship with our customers.

Got it. That's very clear. Thank you very much.

Thank you.

Next question is from Mr. Frank Lee of HSBC. Frank?

Can you hear me? Yes. Okay. Sorry. Thank you, guys. I just wanted to ask, I guess, a question about the advanced packaging, the flip chip. The major demand drivers, are there any that you can highlight to besides what we're seeing on 5G handset? Is that still the major driver?

Actually, we're seeing handset as well as automotive. It's going into flip chip as well. Okay. And networking, HPC, these are all major users of our flip chip.

Okay. Okay, great. And then also the, if I look at the breakdown for your EMS, the consumer did drop a bit and you said it's seasonality. But I guess if we look at the first quarter of 2021, it seems to be a much higher consumer mix than the first quarter this year. So just trying to get a sense of how much of a seasonality there was in terms of the difference in terms of the weakness.

Well, I think part of the reason is that the other areas, all these other sectors this year has a stronger momentum than last year. So that kind of dilute the communication part of it a little bit. In fact, even in terms of consumer, I'm sorry, you were talking about consumer. Yeah. So the consumer part of it did get a little bit diluted by the other sector's growth.

Okay, so you're seeing just better growth in other EMS sectors. Right.

Actually, consumer this year is performing actually better than what we were expecting because of some shift in market share.

Okay, great. All right, thank you.

We have another question from Mr. Randy Abrahams of Credit Suisse again. Randy?

Yes, I want to ask on one other piece of market share. After selling the China footprint, your exposure in factory is actually lower. I see ATM. Is there, because of disruption with competitors having more capacity in China, is that just too short and transitory or is there potential to pick up a bit of market share or take on some allocation if there's technically more disruption in some of the China footprint?

I'm sorry, I didn't quite get your question. Can you repeat that again?

Yeah, if you're seeing any benefit or transfer of orders. I mean, you mentioned customers in times of uncertainty. So if you're gaining any market share, either near term or it could be a midterm help with a bit less footprint now in China, like if they continue this hard zero COVID policy.

Yeah, I think from, although I don't think it's published already, but from American intelligence, we do see weaker performances in terms of China peers in the quarter. I think the lockdown or the overall geopolitical situation is somehow, I think the China peers are taking advantage it does have some impact on, on, on the China peers. So in that sense, we, we are seeing, uh, some of the business, uh, moving, um, toward us out of, uh, out of China.

And when, when you mentioned geopolitical, is that the international customers, um, just trying to keep, uh, overseas source for export?

I think both. I think the internationals, they'd rather come to us than moving in a big way to China. And also, because of the overall situation or the lockdown situation in China, the Chinese customers are also going through some difficulties in giving out their orders.

Okay. Great. And for the mature business, most of the emphasis is on advance. For wire bonding, is it the assumption you still stay at a full level or that's an area you get a bit of underutilization? And are you still at the point you still need to add a moderate amount of bonders this year?

Well, as a whole, I think our wire bonding is still being maintained at a very high loading level. But I think in the China operation, where we still have our Suzhou factory, because of the pandemic situation, it did have some impact on the wire bonding utilization. But that's a very small percentage overall.

Okay. And the last question I had just on We're seeing the fabulous, I mean, they're having a higher target inventory level and it's been building up a number of them. Do you see that as a overhang or is it your view it's more wafer bank, like not necessarily packaged chip inventory or it's, I guess, do you see any overhang from the buildup of inventory if that slows or reverses?

Well, I think doing this on certain platforms I think it's natural that the inventory will increase. I think it's a normal phenomenon that we're seeing inventory level being higher than before. In terms of our own business, we are seeing wafer banks piling up as the customers want to secure their capacity. in terms of some of the advanced packaging, because the substrates, it's a gating factor here, it's a bottleneck. So the, you know, we can only do so much to serve, try to serve all the demands that we're getting now.

Okay. It sounds like your view is substrates still multi-year issue or any change? in that looking out midterm to resolve that?

The substrate situation, I don't think it's going to be solved anytime soon. I think it's going to take quite a bit of time, maybe two, three years before we start seeing things easing up.

Great. Thanks a lot, Joseph.

Thank you.

We have no more questions from the group. If you have any questions, please raise your hand now. We have another question from Randy.

Sorry, I didn't, I'm okay. Yeah, thank you.

Okay, thank you very much. And, you know, to summarize, we came up with a very strong first quarter and things looking, continue to look very healthy for us throughout the year. We'll continue to have sequential growth in both revenue and margin. You know, we are facing some challenges in the short term, but we're managing well at this point. So thank you very much. I'll see you next quarter.