ASE Technology Holding Co., Ltd.

Hello, I am Ken Shung, the head of investor relations for ASC Technology Holdings. Welcome to our second 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 am joined by Dr. Tian Wu, our COO, and Joseph Tung, our CFO. During the call, Dr. Wu will first provide a mid-year update and overall industry outlook. I will quickly go over our financial results, and Joseph will provide the third quarter outlook. Tian and Joseph will both be available to answer questions during the Q&A session that follows. Also, 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 have included information 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 meaningful information which would assist in providing comparability of our financial results. For the purposes of this presentation, including that of Dr. Wu's, we will generally discuss our full company and ATM second quarter results sequentially compared with first quarter legal entity results and year over year compared with pro forma second quarter 2021. Dr. Tian Wu will now present our mid-year update. Dr. Wu.

Good afternoon. I would like to give you some highlight. First, I would like to talk about our first half, 22, and second quarter performance. Our second quarter ASE whole core revenue grew 27% year over year. US dollar term. First half 22 revenues grew 28% year over year, as Ken already pointed out, all on the performance basis. Second quarter 22 ASE ATM revenues grew 25% year over year, while the first half 22 revenue grew 25% year over year. First half 22 We saw advanced packaging revenue up 48% year-over-year. First half 22 AAC-HOCO automotive revenue grew 64% year-over-year, while the ATM automotive revenue in the first half grew 54% year-over-year. We do expect a momentum to continue into the second half as well as 23 and 24. First half 22, whole coal operating margin improved 2.3 percentage points, out of which 0.5% were from the favorable currency. First half 22, ATM operating margin increased 3.4 percentage point, out of which 0.6 percentage point were from the currency. Let me turn to the next page. I would like to give you a highlight of the 2022 full year. First of all, our full year outlook is on track. The overall market is undergoing inventory correction, with some sectors more aggressive than the others. However, we're still seeing some sectors remain constrained. With our diversified customer portfolio and manufacturing flexibility, we're seeing a solid second half 22 with quarter over quarter growth of our whole coal revenue. 2022 full year, ATM revenue year over year growth will be 2X of the logic semiconductor industry with EMS also seeing solid top line growth. We do expect further margin expansion for both ATM and EMS business comparing to 2021. The next page, I would like to give you some highlight for the accomplishment for the past few years. Namely, I would like to give you a structural improvement of our efficiency and margin. For the past two years, we have made great strides in the ASE and SPIL synergy in R&D, operation, capacity planning, business consolidation, and also the customer portfolio calibration and procurement. With that, the synergy is offering us some percentage of margin improvement. We also made a lot of effort in the automation. The automation has improved significantly our ability to entertain high volume, high reliability business, has also improved our manufacturing efficiency, cost structure, and flexibility. We do see increasing demand in multi-die, co-packaging, And that trend is adding the complexity of ATM know-how. And therefore, we believe AS is value in the total supply chain at a system level. With the above three, the synergy, automation, and also the value, we do believe that we have a structural improvement of our margin structure in this single digit. That is going forward, we will see higher peaks and shallower troughs in future cycles comparing to our past performance. Now the last page, I would like to give you some business outlook. For next year, I know many of you are concerned about the business state. It is too early to comment on the macro environment and potential and market demand shift. However, The general perception is seasonality will resume in Q1 2023. We believe backend capacity is in a healthy position because if you look at the overall investment for the past few years in backend, the incremental backend capacity added is relatively low when compared with the front end. and especially considering back-end investment are needed for technology migration, as well as volume expansion. When I talk about technology migration, I was implying to density, package type, as well as multi-die. That is for the same equipment in the advanced technology you might only be able to support fewer units due to the complexity and density. We are also seeing increasing resource allocation or resource demand needed for MPI after more than two years of COVID lockdown. The MPI trend is very healthy. We're monitoring the MPI trend for all customers because that is a key indicator which can set our direction for future capacity investment, planning, equipment type upgrade, automation, and technology roadmap. Lastly, we are optimistic that ASE's capacity utilization will stay at a higher level, giving our customer engagement, LTA, technology, automation leadership, manufacturing scale, and as I pointed out in the last few bullets, relevance to all MPIs. Thank you. With that, I'll pass to Tian.

Thank you, Tian. Let's quickly go over the second quarter financial results. Please turn to page seven, where you will find our second quarter consolidated results with legal entity and pro forma basis comparisons. For the second quarter, we recorded fully diluted EPS of $3.61 and basic EPS of $3.69. Consolidated net revenue increased 11% sequentially and 33% year over year. We had a gross profit of $34.4 billion with a gross margin of 21.4%. Our gross margin increased by 1.7 percentage points sequentially and 2 percentage points year over year. The sequential margin increase is primarily attributable to favorable currency conditions within our ATM and EMS businesses. From an annual perspective, the margin improvements are primarily the result of higher profitability, scale efficiency, and a favorable currency environment within our ATM business and scale efficiencies within our EMS business. Our operating expenses increased sequentially by $1.4 billion during the second quarter to $13.8 billion primarily as a result of higher bonus and profit sharing expenses during the quarter. On a year-over-year basis, our operating expenses increased by $2.7 billion, mainly from the increase of scale in both our ATM and EMS businesses. Our operating expense percentage stayed flat sequentially at 8.6%. On an annual basis, our operating expense percentage declined 0.6 percentage points from 9.2%. Improvements in operating expense percentage were achieved as a result of operating leverage created. Operating profit of $20.6 billion up $4.5 billion sequentially and $8.2 billion year over year. Operating margin was 12.8%, increasing 1.6 percentage points sequentially. Operating margin increased 2.5 percentage points on an annual basis as a result of higher loading and increased profitability. During the quarter, we had a net non-operating gain of $0.5 billion. The non-operating gain was primarily from our net foreign exchange hedging activities offset in part by net interest expense of $0.7 billion. Tax expense for the quarter was $4.5 billion. The effective tax rate for the second quarter was 21.2%. During the quarter, we saw slightly higher tax expenses primarily related to undistributed earnings and Treasury activities. We expect a full year effective tax rate of between 20 to 21%. Net income for the quarter was $16 billion, representing an improvement of $3.1 billion sequentially and $5.7 billion year over year. The U.S. dollar strengthened against the NT dollar and the Chinese yuan during the second quarter. Sequentially, we estimate that currency fluctuation had a 1.6 percentage point beneficial impact to our holding company gross margin. From a year-over-year perspective, we estimate that currency fluctuation had a 1.4 percentage point positive impact to 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 $35.3 billion with a 22% gross margin. Operating profit would be $21.8 billion with an operating margin of 13.6%. Net profit would be $17.2 billion with a net margin of 10.7%. Basic EPS excluding PPA expenses would be $3.97. On page 8 is a graphical presentation of our consolidated financial performance. On page 9 is 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 second quarter, our ATM business ramped up significantly ahead of where we thought it would. The revenue level achieved in the second quarter is near our original estimation of our third quarter revenues. It almost goes without saying that capacities were tight with overall demand for our services remaining strong during the quarter. From the cost perspective, and as we mentioned last quarter, we encountered some higher costs of operations during the quarter Namely, logistics, labor scarcity, lower efficiencies from COVID, and higher energy costs. These incremental costs offset the scale efficiencies that were created during the quarter. Going forward, while costs related to COVID and labor shortage issues appear to be more under control, energy costs appear to be more ongoing. For the second quarter, revenues for our ATM business were a record $95 billion, up $11 billion from the previous quarter and up $22.3 billion from the same period last year. This represents a 13% increase sequentially and a 31% increase year-over-year. Our ATM revenues came in ahead of our expectations due to broad-based higher-than-expected loading. Gross profit for our ATM business was $27.8 billion, up $4.7 billion sequentially, and up $8.9 billion year-over-year. Gross profit margin for our ATM business was 29.2%, up 1.7%. sequentially and up 3.3 percentage points year-over-year. The sequential gross margin improvement was primarily due to NT dollar depreciation. The year-over-year gross profit margin improvement was primarily attributable to NT dollar depreciation and scale efficiencies. During the second quarter, operating expenses were $9.8 billion up $0.7 billion sequentially, and $2 billion year-over-year. Our operating expense percentage was 10.3% down, 0.5 percentage points sequentially, and year-over-year. During the second quarter, operating profit was $18 billion, representing an increase of $4 billion quarter-over-quarter and an improvement of $7 billion year-over-year. Operating margin was 18.9%, improving 2.2 percentage points sequentially and 3.7 percentage points year-over-year. The NT dollar depreciating against the U.S. dollar had a positive 2.3 percentage point impact on our ATM sequential margins. On a year-over-year basis, we estimate that the strengthening U.S. dollar had a 2 percentage point positive impact to margins. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 30.2%, and operating profit margin would be 20.1%. On page 10, you'll find a graphical representation of our pro forma ATM P&L. On page 11 is our pro forma ATM revenue by market segment. The market segments were unchanged as compared with the previous quarter. And though the automotive segment is not separately displayed here, it continues to outpace the other market segments' performances. On page 12, you will find our pro forma ATM revenue by service type. There was a small move in which our wire bond products grew slightly faster than our other product lines. This was primarily the result of seasonality of underlying products. On page 13, you can see the second quarter results of our EMS business. During the quarter, demand was stronger than anticipated, driven by stronger than expected demand for both our traditional EMS and SIP services. Overall, operating conditions started improving halfway through the quarter. However, China's COVID mitigation strategy continues to have spotty impacts throughout our EMS business. And though the situation is still somewhat dynamic, our EMS factories are poised and ready for the third quarter seasonal uptick. During the second quarter, EMS revenues increased $5 billion, or 8% sequentially, and increased $17 billion, or 35% year over year. Revenues were somewhat ahead of where we expected, primarily as a result of higher than expected SIP and traditional EMS business. Overall profitability for EMS business improved with gross margin increasing 1.2 percentage points to 10% and reaching our 4% operating margin target. On the bottom half of the page, you will find a graphical representation of our EMS revenue by application. The reduction in the communications related segment is primarily due to seasonality. On page 14, 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 billion. Our total interest bearing debt was $218.3 billion. Total unused credit lines amounted to $312.4 billion. Our EBITDA for the quarter was $35.2 billion. Net debt to equity was 50%. On page 15, you will find our equipment capital expenditures. Machinery and equipment capital expenditures for the second quarter in US dollars totaled $515 million, of which $290 million were used in packaging operations, $161 million in test operations, 53 million in EMS operations, and 11 million in interconnect material operations and others. We continue to provide our EBITDA and U.S. 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. For the quarter, EBITDA was 1.2 billion U.S. dollars. Joseph Tong will now present our outlook. Joseph.