ASE Technology Holding Co., Ltd.

Hello, I am Ken Shung, the head of investor relations for ASC Technology Holdings. Welcome to our third quarter 2024 earnings release. Thank you for attending our second consecutive typhoon holiday earnings release. 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'm joined today by Joseph Tong, our CFO. For today's presentation, I will be going over the financial results and company outlook. Joseph will then be available to take your questions during the Q&A session that follows. We are altering our Q&A format slightly. During the Q&A session, I will be moderating, receiving and clarifying each question and repeating your questions to Joseph. With that, let's get started. The third quarter ATM seasonality came in slightly better than originally anticipated. The pickups were mostly driven by strength and leading edge advanced packaging and the seasonal ramps of some communications devices. Our overall equipment utilization was between 65 to 70%. For our EMS business, in the third quarter, demand for our services was also slightly ahead of our initial expectations. However, the higher demand was most likely attributable to an earlier seasonality. Please turn to page three where you will find our third quarter consolidated results. For the third quarter, we recorded fully diluted EPS of $2.17 and basic EPS of $2.24. Consolidated net revenues increased 14% sequentially and 4% year over year. We had a gross profit of $26.4 billion with a gross margin of 16.5%. Our gross margin improved by 0.1 percentage points sequentially and 0.3 percentage points year over year. The sequential improvement in margin is principally due to improved operating leverage offset by higher EMS product mix. Our operating expenses increased by $0.9 billion sequentially and by $1.4 billion annually. The sequential increase in operating expenses are primarily due to higher labor, bonus-related expenses, and other administrative 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 came down by 0.7 percentage points to 9.3% sequentially and increased by 0.5 percentage points year over year. The sequential decline in operating expenses is attributable to higher operating leverage due to higher loading levels, The annual increase was also related to higher R&D staff up for both ATM and EMS. Overseas expansion and higher incentive stock options and bonus expenses. Operating profit was 11.5 billion up 2.5 billion sequentially and 0.1 billion year over year. Operating margin increased 0.8 percentage points sequentially and declined 0.2 percentage points year over year. During the quarter, we had a net non-operating gain of $0.8 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 $1.3 billion. Tax expense for the quarter was $2.1 billion. Our effective tax rate for the quarter was 16%. The effective tax rate during the quarter was lower primarily because of tax impacts of foreign currency fluctuations. We continue to expect an ongoing annual effective tax rate of approximately 20.5%. That income for the quarter was 9.7 billion, representing an increase of 1.9 billion sequentially and 0.9 billion year over year. The NT dollar was relatively steady during the third quarter. depreciating 0.3% against the U.S. dollar sequentially, while depreciating 2.7% annually. From a sequential perspective, we estimate the NT dollar depreciation had less than a 0.1 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 0.7 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 27.4 billion with 17.1% gross margin. Operating profit would be $12.7 billion with an operating margin of 7.9%. Net profit would be $10.8 billion with a net margin of 6.8%. Basic EPS excluding PPA expenses would be $2.51. On page four is a graphical presentation of our consolidated financial performance. Since the start of 2023, you will see here a troughish but gradually improving environment for both our ATM and EMS businesses. On a year-over-year basis, gross margins have been gradually improving. On the operating margin front, As was stated earlier, operating expenses are increasing for expected ramps and leading edge advanced packaging products, and to a lesser extent, offshore site expansion costs from our EMS businesses. 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 third quarter of 2024 revenues for ATM business were 85.8 billion up 8 billion from the previous quarter and up 2.1 billion from the same period last year. This represents a 10% increase sequentially and a 3% increase annually gross profit. for our ATM business was $19.8 billion, up $2.6 billion sequentially and up $1.2 billion year-over-year. Gross profit margin for our ATM business was 23.1% up 1 percentage point sequentially and up 0.9 percentage points year-over-year. The sequential margin improvement was primarily related to higher equipment utilization, offset in part by higher raw material product mix and higher utility costs. We expect the higher raw material product mix environment to extend into the fourth quarter. The annual margin improvement is primarily the result of favorable foreign exchange and product mix. During the third quarter, operating expenses were $10.6 billion, up $0.6 billion sequentially, and $0.8 billion year-over-year. The sequential increase in operating expenses was primarily driven by higher labor-related expenses, much of which is related to the staffing for leading edge advanced packaging services. 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 12.3%, declining 0.5 percentage points sequentially, but up 0.6 percentage points annually. Sequentially, our lower operating expense percentage was driven by higher loading and thus higher operating leverage, while the annual increase was primarily due to labor ramp-ups preparing for higher leading edge advanced packaging revenues. During the third quarter, operating profit was $9.2 billion, representing an increase of $2 billion quarter over quarter and $0.4 billion year over year. Operating margin was 10.8%, increasing 1.5 percentage points sequentially and 0.3 percentage points year over year. For foreign exchange, we estimate the NT to US dollar exchange rate had a positive 0.1 percentage point impact. on our ATM sequential margins and a positive 1.3 percentage point impact on a year-over-year basis. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 24.1%, and operating profit margin would be 12.1%. On page six, you'll find a graphical representation of our ATM P&L. As you can see here, we've generally seen a very gradual recovery when looking at revenues and margins from a year over year basis. On page seven is our ATM revenue by the three C market segments. You can see here a slight blip in regards to communications product seasonality. Otherwise, not much has changed during the current quarter. Our leading edge advanced packaging services are in both our computing and communications segments. On page eight, you'll find our ATM revenue by service type. Here you can see that our business, at least during the softer environment, is shifting towards more advanced services. The gray color represents both our advanced and leading edge advanced services. We believe our strategies involved with growing our test business are paying off. As a percentage of ATM business, our test business is just under 16.5% total. And though it may not be immediately visible here, our test business is actually significantly outgrowing our assembly business this year. Current year-to-date growth is 6% relative to 1% for our assembly business. we see growth momentum for our test business. Further, given that test follows assembly from a process flow perspective, we expect a more pronounced pickup for our test business during the fourth quarter. On page nine, you can see the third quarter results for our EMS business. During the quarter, EMS revenues were 75.4 billion, improving 12.5 billion, or 20% sequentially, and improving 4.4 billion, or 6% year over year. The sequential and annual revenue improvements are primarily attributable to our customer's timing of this year's product manufacturing start. It is important to note here that this year's seasonality has moved earlier as compared to last year. Sequentially, our EMS business's gross margin declined 0.6 percentage points to 9%. This change was principally the result of product mix, Operating expenses within our EMS business was $4.3 billion, increasing $0.2 billion sequentially and $0.6 billion annually. The inclusion of our newly acquired subsidiary accounted for the majority of the annual increase. Our third quarter operating expense percentage was 5.7%, down 0.8 percentage points sequentially and up 0.5 percentage points annually. The higher annual operating expense percentage was primarily related to overseas expansion expenses and integration expenses related to a newly consolidated subsidiary. Operating margin for the third quarter was 3.3%, improving 0.2 percentage points sequentially and declining 0.6 percentage points year over year, primarily due to higher operating leverage from the current quarter seasonality. On an annual basis, operating margin decline was due to higher overseas expansion costs, including the addition of a newly acquired subsidiary. Our EMS third quarter operating profit was 2.5 billion, up 0.5 billion sequentially, while down 0.3 billion annually. On the bottom of the page, you will find a graphical representation of our EMS revenue by application. The third quarter segment shares of 2024 looks very similar to the third quarter last year, showing similar seasonality. The only more substantial difference has been an increase in the automotive segment as a result of increased overall automotive business. On page 10, you will find key line items from our balance sheet. At the end of the third quarter, we had cash, cash equivalents, and current financial assets of 78.4 billion. Our total interest-bearing debt increased by 29.3 billion to 213.2 billion. Total unused credit lines amounted to 361.3 billion. Our EBITDA for the quarter was $28.6 billion. Our net debt to equity this quarter was $0.41. On page 11, you will find our equipment capital expenditures relative to our EBITDA. Machinery and equipment capital expenditures for the third quarter and U.S. dollars totaled $603 million, of which $312 million were used in packaging operations, $274 million in testing operations, $14 million in EMS operations, and $3 million in interconnect material operations and others. We are in the midst of a substantial pickup in our leading edge advanced packaging revenues. As was stated in our second quarter earnings release, we continue to expect at least a doubling of such revenues for the next fiscal year of 2025. We continue to see substantial growth opportunities related to packaging and testing for leading edge products. These revenue opportunities are not only related to AI and high-performance computing, but also touch upon high-end networking and communications. As these high-end processes become more complex, this impacts our capital investment methodology in two major ways. First, the time it takes to put in place our equipment extends. Advanced products have significantly more process steps and each step has become more complicated. As a result, our capital expenditures will need to be made further ahead of anticipated revenues when compared to traditional ATM capital expenditures. Second, because of the increasing precision necessary for leading edge services, the cost of equipment has become more expensive. Relative to our traditional businesses, this increases our capital intensity per unit along with our unit ASP. This is starting to play out in the current quarter. We are seeing an increased level of capital equipment investment to satisfy 2025 business. As a result, we now project our annual machinery and equipment capital expenditures to end the year above our annual depreciation and amortization levels of 1.9 billion US dollars. From a historical perspective, 2021 was the last year we spent more on machinery and equipment than our depreciation and amortization. This inflection point not only represents ASE's belief in the revenue opportunities ahead, it also signifies a major step into the next evolution of packaging. For us, the leading edge component is becoming more mainstream and significant in terms of size and scale. We expect this elevated rate of investment to stretch into next year as we prepare for services to be delivered during 2025 and beyond. Looking into the fourth quarter from a business outlook perspective, we can separate our business into three separate service categories. Leading edge products, typically seasonal products, and everything else. Leading edge is going gangbusters. Whether it's AI, networking, or other products in the pipeline, the need for our advanced interconnect technologies in all its forms looks extremely promising. Seasonal products such as communications and handset-related products are going through its paces. Not really great, not really bad, and some devices doing better than others. It's kind of really neither here nor there. For everything else, there just isn't a lot of demand or optimism. Recoveries related to general demand for this year have not really happened. The fourth quarter pickup is not as strong as we would like it to be, but at least we still see a pickup, albeit slight. From the expense perspective, there are three items impacting our expenses for the fourth quarter. One, typhoon costs. Even though our factories are still running, such as today, typhoon holiday labor counts as overtime hours for much of our direct labor. Two, utility costs. Base utility rates were increased by Thai power. The higher base rate went into effect mid-October, coinciding with the end of summer rates. And three, a stronger NT dollar environment. With these impacts in place, we will attempt to keep our ATM fourth quarter margins flattish. The environment for our EMS business appears to be a bit more challenging. As was mentioned in our second quarter results, our EMS business appears to have an earlier manufacturing cycle or shifted seasonality. This combined with lackluster general demand is creating a declining fourth quarter outlook. Given this unusual seasonality and the ongoing costs related to geographical rebalancing, we are expecting lower operating margins for the fourth quarter for our EMS business. We would like to summarize our outlook for the fourth quarter 2024 as follows. For our ATM business in NT dollar terms, our ATM fourth quarter 2024 revenues, should grow slightly quarter over quarter. Our ATM fourth quarter gross margin should be flattish quarter over quarter. For our EMS business, in NT dollar terms, our EMS fourth quarter 2024 revenues should decline mid single digit quarter over quarter. Our EMS fourth quarter 2024 operating margin should decline one percentage point quarter over quarter. In order to make all our hardworking analysts have fair opportunities to ask questions during our earnings call, we are adjusting our Q&A format slightly. During the Q&A session that follows, we would appreciate if questions can be kept concise and asked one at a time. Callers will be allowed to ask two questions per turn, but questions are asked one at a time. I will be receiving each question and repeating the asked question to Joseph. Again, we will be limiting the number of questions asked to two questions per turn, but ask one at a time. Callers may return to the queue for additional questions. Thank you.

If you have any questions, please raise your hand. We have a question from Ms. Sunny Lin of UBS.

Hi, could you hear me okay? Yes. Thank you very much for taking my questions. So my first question is on your opportunity in leading-edge events packaging. As you said, you continue to raise K-Pack t-shirts to support businesses into 2025. So any updates that you could share with us on your revenue target for 2025, whether it's going to be higher than the $1 billion target that you provided back in July? Yeah, that would be my first question.