ASE Technology Holding Co., Ltd.

Hello, I am Ken Shung, the head of investor relations for ASA Technology Holdings. Welcome to our first quarter 2023 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. I am joined today by Joseph Tang, our CFO. For today's call, I will be going over our financial results and outlook. Joseph will then be available to take your questions during the Q&A session to follow. During our year-end 2022 earnings release, we reported that the company and the overall semiconductor industry was entering a period of inventory digestion. We touched upon the impending soft environment and noted prognosticating outlooks can be incredibly difficult, especially when trying to spot the end of an inventory correction. Our business during the first quarter ran expectedly soft, given that we expected many customers were going to be drawing down product inventories. For the large part, our customers generally met their near-term plans. However, towards the end of the first quarter, when many customers reviewed their channel inventory relative to their expectations, they realized their inventory depletion was happening slower than anticipated. Apparently, end markets had not performed as they expected, whether it be poor Lunar New Year sell-through, or a missing corporate IT refresh, sluggishness and excess inventory persisted. For our ATM factories, during the quarter, key equipment utilization rates were hovering slightly above 60%. And given these levels are near-term record lows, our factories focused on how to lower ongoing expenses. Working hours and bonuses were trimmed, raw materials pricing was scrubbed with our vendors, projects were reviewed and reprioritized, all in the name of costing down. However, the soft loading environment did allow us to continue automating factory lines, scaling up new product introductions, and completing R&D projects. Our EMS business entered into its seasonally soft period. The front half of the year generally acts as a preparation and buildup for the back half mass production builds. Our EMS business actually came in slightly better than our guidance last quarter. But as you will see, the overall macro environment did appear to have an impact, albeit somewhat smaller than the impact to our ATM business. With that, please turn to page three where you will find our first quarter consolidated results. For the first quarter, we recorded fully diluted EPS of $1.30 and basic EPS of $1.36. Consolidated net revenues declined 26% sequentially and 9% year over year. We had a gross profit of $19.3 billion with a gross margin of 14.8%. Our gross margin declined 4.4 percentage points sequentially and 4.9 percentage points year over year. The margin declines are principally the result of inventory digestion and a weak macro environment. Our operating expenses declined 2.7 billion sequentially and 0.7 billion annually. The declines were primarily attributable to lower profit sharing expenses across the company. Our operating expense percentage increased 0.8 percentage points sequentially, and 0.3 percentage points year over year to 8.9%. The operating expense percentage increases were primarily related to lower revenues during the quarter. Operating profit was 7.7 billion, down 12.1 billion sequentially, and 8.4 billion year over year. Operating margin was 5.9%, declining 5.2 percentage points sequentially, and 5.3 percentage points year over year. During the quarter, we had a net non-operating gain of $0.2 billion. This amount includes net interest expense of 1.1 billion. Tax expense for the quarter was 1.8 billion. The effective tax rate for the quarter was 22.6%. The rate variance during the quarter was largely due to incremental controlled foreign company tax expenses. We believe that our annual tax rate will be between 20.5 to 21%. Net income for the quarter was 5.8 billion, representing a decline of 9.9 billion sequentially and 7.1 billion year over year. The NT dollar appreciated 3.05% against the U.S. dollar during the first quarter. From a sequential perspective, we estimate the NT dollar appreciation had a 0.88 percentage point negative impact to the company's gross and operating margins. From a year-over-year perspective, we estimate that the depreciating NT dollar had a 2.63 percentage point positive impact to gross and operating margins. As a rule of thumb, for every percent the NT dollar appreciates, we see a corresponding 0.29 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 $20.3 billion with a 15.5% gross margin. Operating profit would be $8.9 billion with an operating margin of 6.8%. Net profit would be $7 billion with a net margin of 5.3%. Basic EPS excluding PPA expenses would be $1.63. On page 4 is a graphical presentation of our consolidated financial performance. You can see the impact of the current week environment here. Unusually soft loading, even for a correction environment, are leading to lower revenues and a low utilization rate environment impacting our ATM and EMS businesses. 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. For the first quarter of 2023, revenues for our ATM business were $73.3 billion. down 21 billion from the previous quarter and 10.7 billion from the same period last year. This represents a 22% decline sequentially and a 13% decline year over year. This decline, though steep, was in line with our outlook. Gross profit for our ATM business was 14.7 billion, down 11.5 billion sequentially and 8.4 billion year over year. Gross profit margin for our ATM business was 20.1%, down 7.7 percentage points sequentially and 7.4 percentage points year over year. The overall margin declines are the result of lower loading due to customer inventory digestion and the weak macro environment. During the first quarter, operating expenses were $8.3 billion, down $2.1 billion sequentially, and $0.7 billion year over year. The declines in operating expenses were primarily driven by lower labor costs due to lower profit sharing and bonus accrual. Despite having significantly lower absolute operating expenses, their declines did not keep up with the pace that revenues declined. Our operating expense percentage for the quarter was 11.4%, up 0.4 percentage points sequentially, and 0.6 percentage points year over year. During the first quarter, operating profit was $6.4 billion, representing a decline of $9.4 billion quarter over quarter, and $7.6 billion year over year. Operating margin was 8.7%, declining 8 percentage points sequentially and year-over-year. For foreign exchange, we estimate that the NT to US dollar exchange rate had a 1.52 percentage point impact on our ATM sequential margins and a 4.55 percentage point impact on a year-over-year basis. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 21.3%, and operating profit margin would be 10.3%. On page 6, you'll find a graphical representation of our ATM P&L. You'll note here the impact of a semi-fixed cost base with a low correction level loading. On page seven is our ATM revenue by market segment. Even though the current software loading environment is fairly broad-based, we do see the communications market segment inventory digestion to be more pronounced than other market segments. On page eight, you will find our ATM revenue by service type. There isn't a significant change here, but the advanced packaging side of the business is somewhat more impacted. On page 9, you can see the first quarter results of our EMS business and a graphical representation of its market segment allocation. During the quarter, demand was impacted by an overall weaker SIP demand environment along with our typical seasonality. During the first quarter, EMS revenues were $57.7 billion, declining $26.2 billion, or 31% sequentially, and 3.4 billion or 6% year over year. Our EMS businesses gross margin declined 1.4 percentage points while our operating margin sequentially declined 2.4 percentage points. These sequential declines were primarily driven by seasonally soft loading and to a smaller extent a soft electronics demand environment. Our EMS first quarter operating profit was 1.3 billion, down 2.7 billion sequentially, and 0.9 billion annually. Given the overall quarter decline significantly as compared to last quarter, the percentage share information here may be somewhat biased. For our EMS market segment, our consumer and communication segments declined off of their seasonal peaks into their typical trough periods, while our computing segment was also impacted by inventory corrections. Our industrial and automotive segments were more resilient and flattish on an absolute dollar perspective. But from a percentage of business perspective, their relative percentage share increased sharply. It is worth noting here that from a year-over-year perspective, our automotive segment grew close to 30% year-over-year. On page 10, 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 $68.4 billion. Our total interest-bearing debt was down 12 billion to 190.3 billion. Total unused credit lines amounted to 337.2 billion. Our EBITDA for the quarter was 23.8 billion. Net debt to equity was 42% at the end of the quarter. On page 11, you will find our equipment capital expenditures. Machinery and equipment capital expenditures for the first quarter in U.S. dollars totaled $231 million, of which $101 million were used in packaging operations, $90 million in testing operations, $32 million in EMS operations, and $8 million in interconnect material operations and others. Given the overall slowdown within the industry, we are taking incremental action to push out more of our originally planned capital expenditures during the year. However, we will continue to spend on implementing incremental automation capabilities, including additional investments in our lights out factories. Current EBITDA was $0.9 billion relative to our capital expenditures of $0.2 billion. For our outlook, we will first address our EMS business. Our EMS business will continue its typically soft season during the first half of the year. However, based on continued relative strength within its automotive business, paired with some order improvement in our consumer and computing segments, we're looking for a slight pickup in business during the second quarter relative to the first. Similarly, margins should move off our expected trough and improve roughly 50 basis points. From a longer perspective, we continue to expect a strong ramp during the third quarter with a peak during the fourth quarter, primarily driven by new product launches. Continuing our earlier comments about our ATM business, at the end of the first quarter, what became more apparent was that the expected improvement in the macroeconomic environment did not materialize. Instead, world governments continued aggressive policy trying to curb hyperinflation. Unintendedly, this even led to separate banking crises in the US and, surprisingly, in Switzerland. Meanwhile, more and more consumers and businesses around the world are grappling with spreading higher energy prices that initially stemmed from supply shocks related to the Russia-Ukraine war. And rather than seeing an overall post-COVID recovery and a return of electronic spending during and post the Lunar New Year, we along with our customers saw consumers instead catching up on spending on other items like services, travel, and leisure. It should be noted that our customers' sell-through of their devices are generally not visible to us, and usually inventory draw and replenishment are in sync. With this current inventory digestion period, customers are selling inventory without the action of replenishing inventory. which gives us even less visibility. With wafer banks fully loaded, we basically can only wait for our customer's signal to restart production. And given the lack of recovery, a broad set of customers have communicated to us that their restocking will most likely happen later than anticipated. What was originally scheduled to ramp during the May June timeframe now has been pushed back into the third quarter. On a somewhat more positive note, we do see some level of rush orders sporadically happening across our ATM factories. We remain optimistic and expect that rush orders should continue to rise during the second quarter as various product restocking and new product launches start to happen. With a large amount of orders being pushed out for the second quarter as a whole, we expect continued sluggishness and a suboptimal loading environment. As a result, we effectively see revenues much the same as the first quarter. From our cost perspective, we are actively pursuing various avenues to trim costs, including expanding our automation efforts. However, given the higher utility rates instituted by the Taiwan government effective April 1st, increasing electricity rates by 17%, and the higher summer rates in the back half of the second quarter, our utility costs will rise sequentially. We currently see the rate increase and the start of the summer rate season is expected to have a 0.5 percentage point negative impact to our gross margin when compared to the first quarter. However, we are hopeful that a number of cost savings efforts will bear fruit during the quarter, and we will be able to offset most, if not all, of the impact of the utility rate increases. Such offset is not guaranteed, but we are targeting to keep our gross margin at a similar level with the first quarter. And if we step back and look at the bigger picture at this point, despite all the distracting noise related to this correction, we believe we are in the process of proving that we have a fundamentally improved business. we've already seen higher margins through the cycle peak. Now we are seeing structurally higher trough margins going through the cycle bottom. We are seeing pricing resiliency and the minimization of irrational competition. We also see our scale of manufacturing continue to give us competitive advantages in the form of lower manufacturing costs thereby maintaining customer resilience. We basically see an industry possessing a wider moat with ASE outpacing its competition. We would like to summarize our outlook for the second quarter as follows. For our ATM business and NT dollar terms, Our ATM second quarter 2023 revenues and gross margin should be similar with the revenues and gross margin of the first quarter 2023. For EMS business in NT dollar terms, our EMS second quarter 2023 revenues should increase mid single digit percentage wise quarter over quarter. Our EMS second quarter 2023 operating margin should improve by 0.5 percentage points versus the first quarter 2023. This concludes our prepared remarks. I'd like to open the floor for Q&A.

If you have any question, please raise your hand. When you ask questions, please limit two questions at a time. Thank you. Our first question is from Mr. Randy Abrams of Credit Suisse.

Okay, yes, thank you. I want to test the first question. If you could talk a little more about the outlook. First, for rush orders, if you could talk about the areas you're seeing rush orders. And then for the area of resilience, if you could go through the view automotive, if you see auto, and I think you mentioned industrial, if you see those areas holding up. And the second part of that first question is for the spillover. How much do you see the weakness spilling into third quarter? Do you think we're back to normal seasonal third quarter? And what do you view as a reasonable normal for a third quarter. So just curious that as well. Thank you.