ASE Technology Holding Co., Ltd.

Hello, I am Ken Shung, the Head of Investor Relations of ASE Technology Holdings. Welcome to our second quarter 2024 earnings release. Thank you for attending 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, dollar figures are generally stated in new Taiwan dollars unless otherwise indicated. As a Taiwan-based company, our financial information is 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 Dr. Tian Wu, our COO, and Joseph Tang, our CFO. For today's presentation, I will be going over the financial results and Joseph will give the company's outlook. Dr. Wu and Joseph will then be available to take your questions during the Q&A session that follows. During the Q&A session, each caller will be limited to two questions at a time, but may return to the queue for further questions. With that, let's get started. The second quarter can be summed up as the tale of two businesses. One business representing the leading edge products and the other, the more traditional products. For the traditional business, the second quarter had selective products with signs of reemergence. But, by and large, general product demand lacked the strength and durability necessary to be considered a sustained healthy pickup in the immediate term. while the leading edge business saw increasing demand with the development of increasing product pipelines. Equipment utilization for traditional products looked to be near 60%, while utilization for the leading edge products are effectively full. To support the bifurcated market, we will need to continue to increase our investment in the leading edge space, in particular, labor and equipment. From the labor perspective, we will need to hire more engineers as the level of product complexities are increasing with the leading edge. We will also need to invest in incremental capital equipment to provide for incremental demand. For our EMS business in the second quarter, demand for our services was slightly ahead of our initial expectations. We believe this was principally the result of a slightly faster start to the manufacturing season. Please turn to page three where you will find our second quarter consolidated results. For the second quarter, we recorded fully diluted EPS of $1.75. and basic EPS of $1.80. Consolidated net revenues increased 6% sequentially and 3% year-over-year. We had a gross profit of $23.1 billion with a gross margin of 16.4%. Our gross margin improved by 0.7 percentage points sequentially and 0.4 percentage points year over year. The sequential improvement in margin is principally due to NT dollar depreciation and product mix changes at both our ATM and EMS businesses. Our operating expenses increased by $0.7 billion sequentially and by $1.7 billion annually. The sequential increase in operating expenses are primarily due to higher R&D labor-related expenses. The year-over-year increase in operating expenses is primarily attributable to continued R&D staff up and other labor-related costs. Our operating expense percentage remained flat at 10% sequentially and increased by one percentage point year over year. The annual increase was also related to higher R&D staff up for both ATM and EMS, overseas expansion, and higher incentive stock option and bonus expenses. Operating profit was $9 billion, up $1.5 billion sequentially and down $0.4 billion year over year. The year-over-year decline in operating profit is primarily related to higher operating expenses related to the ramp-up of our leading edge advanced packaging and overseas expansion. Operating margin increased 0.7 percentage points sequentially and declined 0.5 percentage points year-over-year. During the quarter, we had a net non-operating gain of $1.1 billion Our non-operating gain for the quarter primarily consists of net foreign exchange hedging activities, profits from associates, and other non-operating income offset in part by net interest expense of $1.2 billion. Tax expense for the quarter was $2 billion. Our effective tax rate for the quarter was 19%. Net income for the quarter was $7.8 billion, representing an increase of $2.1 billion sequentially and flat year over year. The NT dollar depreciated 3% against the US dollar sequentially during the second quarter, while depreciating 4.2% annually. From a sequential perspective, we estimate the NT dollar depreciation had a 0.85 percentage point positive impact to the company's gross and operating margins. while from an annual perspective, we estimate the NT dollar depreciation had a 1.21 percentage point positive impact to the company's gross and operating margins. 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 $24 billion with a 17.1% gross margin. Operating profit would be $10.2 billion with an operating margin of 7.3%. Net profit would be $9 billion with a net margin of 6.4%. Basic EPS excluding PPA expenses would be $2.08. On page 4 is a graphical representation. of our consolidated financial performance. You will see a troughish but gradually improving environment for both our ATM and EMS businesses. Gross margins are gradually improving also. On the operating margin front, as was stated earlier, operating expenses are increasing for expected ramps in leading edge advanced packaging products. We expect these leading edge advanced packaging products to be accretive to margins. On page five is our ATM P&L. The ATM revenue reported here contains revenues eliminated at the holding company level related to intercompany transactions between our ATM and EMS businesses. For the second quarter of 2024, revenues for our ATM business were $77.8 billion, up $4 billion from the previous quarter and up $1.7 billion from the same period last year. This represents a 5% increase sequentially and a 2% increase annually. Gross profit for our ATM business was $17.2 billion, up $1.6 billion sequentially, and up $1 billion year-over-year. Gross profit margin for our ATM business was 22.1%, up 1.1 percentage points sequentially, and up 0.9 percentage points year-over-year. The sequential margin improvement was primarily related to foreign currency and higher loading efficiency offset by higher utility costs. The annual margin improvement is primarily the result of foreign exchange, product mix offset, in part by higher utility costs. During the second quarter, operating expenses were $9.9 billion, up $0.5 billion sequentially and $1.2 billion year-over-year. The sequential increase in operating expenses was primarily driven by higher compensation expenses from ramp-up of leading-edge advanced packaging. The annual operating expense increase was driven primarily by the continued scale-up of R&D labor and other labor-related expenses. Our operating expense percentage for the quarter was 12.8%, flat sequentially and up 1.3 percentage points annually. Sequentially, operating expenses kept pace with revenue expansion. The annual increase was due to higher compensation expenses primarily at the R&D level. During the second quarter, operating profit was $7.3 billion, representing an increase of $1.2 billion quarter over quarter, and a decline of $0.2 billion year over year. Operating margin was 9.3%, increasing 1.1 percentage points sequentially and declining 0.4 percentage points year-over-year. For foreign exchange, we estimate the NT to US dollar exchange rate had a positive 1.47 percentage point impact on our ATM sequential margins and a positive 2.1 percentage point impact on a year-over-year basis. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 23.3%, and operating profit margin would be 10.8%. On page 6, you'll find a graphical representation of our ATM P&L. As you can see here, the first half of 2024 is shaping up very similarly with the first half of 2023. On page seven is our ATM revenue by 3C market segments. Our communications application dropped three percentage points while our computing and consumer segments increased. During the quarter, we experienced some spotty pickups in our consumer space. However, end demand was insufficient to sustain a more robust growth rate. As a note here, Our leading edge advanced packaging services are recorded within computing and communications accordingly in line with their underlying usage. On page eight, you will find our ATM revenue by service type. There are only some small movements here with other services declining two percentage points and wire bonding and advanced services increasing one percentage point each. On page nine, you can see the second quarter results of our EMS business. Our EMS revenues came in a bit ahead of where we expected, mainly as a result of slightly earlier than expected start to the manufacturing season. During the quarter, EMS revenues were $62.9 billion, improving $3.5 billion, or 6% sequentially, and improving $2.5 billion, or 4%, year-over-year. These sequential and annual revenue improvements are primarily attributable to our customers' timing of this year's product manufacturing start. Sequentially, our EMS business's gross margin improved 0.3 percentage points to 9.6%. This change was principally the result of better loading. Operating expenses within our EMS business was $4.1 billion, increasing $0.2 billion sequentially, and $0.5 billion annually. Our second quarter operating expense percentage was 6.5% flat sequentially and up 0.6 percentage points annually. The higher annual operating expense percentage was primarily related to higher expenses related to NPI development. Operating margin for the second quarter was 3.1%, improving 0.3 percentage points sequentially and declining 0.4 percentage points year over year, primarily due to increase in compensation expenses on higher headcount, mainly due to the consolidation of an acquired entity. Our EMS second quarter operating profit was $2 billion, up $0.3 billion sequentially, while down $0.1 billion annually. On the bottom of the page, you will find a graphical representation of our EMS revenue by application. As is typical in the second quarter, there isn't much movement here on a sequential basis. However, on an annual basis, we are experiencing decent growth within our automotive products. On page 10, you will find key line items from our balance sheet. At the end of the second quarter, we had cash, cash equivalents, and current financial assets of $75.3 billion. Our total interest-bearing debt declined by $11.4 billion to $183.9 billion. Total unused credit lines amounted to $417 billion. Our EBITDA for the quarter was $26.1 billion. Our net debt to equity this quarter was 0.34. On page 11, you will find our equipment capital expenditures relative to our EBITDA. Machinery and equipment capital expenditures for the second quarter in US dollars totaled $406 million, of which $215 million were used in packaging operations, $154 million in testing operations, $31 million in EMS operations, and $6 million in interconnect material operations and others we continue to be excited by the expanding portfolio of products that our leading edge advanced packaging addresses As we look further out, we continue to see signs that business is shaping up for the next super cycle. However, if we look into the more immediate future, we believe we will continue to have a tale of two businesses, the leading edge and the more traditional business. When we look at the leading edge business, including AI and high-end networking, business is continuing to boom. We cannot seem to get the capacity installed fast enough. For us, this is also not a single customer phenomenon either. And the interesting part is that it appears to be accelerating. On the more traditional business side, there is some excitement regarding potentially shortened refresh cycles on a number of products due to new AI features. But by and large, our customers are still proceeding cautiously. For us, that means our customers generally are in a trial and error mode. They start with a conservative forecast. If their products hit, they will quickly adjust their outlooks. There is an increasing optimistic sentiment in the market and we are looking forward to when such optimism manifests into increasing forecasts. If we look at our overall cost environment heading into the third quarter, we will need to continue to manage our costs of production with higher utility costs and ramping labor needs. On the operating expense front, we also see continued spending on R&D labor, tools, and equipment related to leading edge advanced packaging and testing. And as I stated earlier, we will continue to bear higher operating expenses before the majority of revenues come into place towards the latter part of this year and next year. we are looking to hold our full year operating expense percentage increase to within 75 basis points of that of 2023. With that, I would like to hand the floor over to Joseph Tung to speak to our corporate outlook. Joseph?

Thank you, Ken. Let me give you a... guidance for third quarter. In terms of ATM and in NT dollar terms, our ATM third quarter 2024 revenue should grow by a high single digit quarter over quarter. And our ATM third quarter growth margin should be between 23 to 23.5%. In terms of EMS, in NT dollar terms, our EMS third quarter 2024 revenue should grow mid to high clean quarter on quarter. Our EMS third quarter 2024 operating margin should be slightly above fourth quarter 2023 level of 3.5%. And in addition to the revenue and margin guidance, I would like to also provide an update on our CapEx. In anticipation of the booming demand for leading-edge ATM capacity and further technology advancement, we believe we will need to step up our CapEx investment, starting from raising full-year 2024 consolidated machinery CapEx to double from last year's US $914 million level. And as these investments carry a higher value contribution and are becoming more critical to the overall semiconductor manufacturing, we believe such investment will be both return and margin accretive. On geographical expansion, we started a Malaysia expansion two years ago and now phase one has been completed and we will start volume production in quarter one 25. Also, we're soon to close the acquisition of two Infineon operations, one in the Philippines and one in Korea, and expect revenue contributions of these two sites starting from third quarter this year. We have also acquired land in Mexico and we've identified potential locations in Japan. The land will be developed and buildings be constructed in anticipation of future customers' demand. And all these efforts are made to shorten the lead time for capacity ramp up. With that, we will open the floor for questions.

If you have any questions, please raise your hand. When you ask questions, please hold two questions at a time. Thank you. Our first question is from Mr. Goku Hariharan of JP Morgan.