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?