ASE Technology Holding Co., Ltd. Q1 FY2020 Earnings Call

Hello. I am Ken Hsiang, the Head of Investor Relations for ASE Technology Holding. Welcome to our first quarter 2020 earnings release. Thank you for attending our conference call today. We are again unable to have our earnings release in our typical live format. We, like the rest of the world, continue to remain cautious in regards to minimizing the spread of COVID-19. Please refer to our Safe Harbor notice on Page 2. All participants consent to having their voices and questions broadcast via participation in this event. Please refer to our safe harbor notice. I would like to remind everyone on this call 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. For today, I will be going over our business update and financial results. Afterwards, we will have a Q&A session with Joseph Tung, our CFO. In late March, China's Anti-Monopoly Bureau notified us that we have successfully demonstrated our compliance with our 2-year restricted collaboration period with SPIL. We can now finally have unrestricted communication and collaboration between SPIL and ASE. This is the culmination of a series of efforts which began in 2015. Discussions on the various aspects of coordination have started, but there is plenty of work ahead of us. We believe that this combination will lay the groundwork for improved operating efficiency, lower overall costs and top line synergies. Needless to say, this quarter has been very dynamic. In the 3 months since our last earnings release, the world has become a vastly different place. 3 months ago, the focus of the world was on the impact of the spread of COVID-19 within China and the continuity of goods coming out of China. We hypothesized that the rest of the world would realize the dangers of such a virus and would take swift action to contain any potential spread. As such, we focused primarily on the supply side and logistical impacts to our China factories. To that end, I'm happy to report that our China factories have all returned to full staffing. However, our hypothesis of contained spread has failed to come true. As a result, we must now adjust to more pessimistic scenarios in which COVID-19 has a more substantial impact. We have been following the many top-down industry reports that have generally grown more and more pessimistic over the last 2 months. It seems that when the overall environment is generally upbeat, industry reports race to be the most optimistic. And now the inverse is true, with reports racing to be the most pessimistic. The global supply chain is mature and resilient and often built with significant redundancies. Aside from our China factories, which experienced labor shortages during the early part of the quarter, our factories have been running relatively smoothly. Some of our factories are working under government-imposed work rules, but by and large, such disruptions are being managed, and their overall impact remains relatively limited. We also continue to see spotty supply chain issues on a variety of components and supplies. However, we believe the majority of these issues are resolvable. We currently do not see any immediate major disruptions to our business. For the first quarter, our ATM business outperformed our initial expectations. We believe that because Taiwan was able to control COVID-19 relatively early, we were able to take on customer upsides. Our EMS business underperformed our initial expectations as it experienced downstream supply chain issues. This disruption was resolved during the quarter. We believe, as a result of this, some of our EMS revenue has been deferred from our first quarter to our second quarter. Please turn to Page 3, where you will find our first quarter consolidated results at the holding company level. Generally speaking, given this is our seasonally down quarter, sequential comparisons may not adequately reflect the performance of the company. We will generally defer business explanations of these results to our ATM and EMS P&L discussions. Intercompany transactions between our ATM and EMS businesses have been eliminated during the consolidation. For the first quarter, we recorded fully diluted EPS of $0.89 and basic EPS of $0.92. Consolidated net revenue was $97.4 billion. This represents a 16% decline quarter-over-quarter and a 10% improvement year-over-year. We had gross profit of $16.2 billion, with a gross margin of 16.6%. Our gross margin declined by 0.5 percentage points quarter-over-quarter, while improving 3.8 percentage points year-over-year. The sequential decline is primarily the result of seasonal loading. The year-over-year increase in gross margin is primarily the result of stronger ATM loading and higher ATM revenue mix. Our operating expenses decreased by $1.1 billion during the first quarter to $10.1 billion. This was primarily the result of lower operating expenses in both our ATM and EMS business units. Some of our operating expenses are not variably driven by revenues. And as such, despite the absolute dollar decline, our first quarter operating expense percentage increased 0.8 percentage points sequentially and 0.2 percentage points year-over-year to 10.4%. Sequentially, operating margin declined by 1.3 percentage points to 6.2%, while being up 3.6% year-over-year. Our sequential operating margin decline is principally the result of lower revenue from seasonality. Our year-over-year improvement in operating margin is primarily related to higher loading. During the quarter, we had a net nonoperating loss of $0.8 billion. This amount includes net interest expense of $0.9 billion. This amount was offset in part by net foreign exchange and financial gains and losses. Tax expense for the quarter was $1.2 billion, the effective tax rate for the first quarter was 22.4%. We expect a 23% effective tax rate for the first half of the year. For the entire year, we expect an effective tax rate of between 20% to 24%. This would be inclusive of our undistributed earnings tax. Net income for the quarter was $3.9 billion, representing a decline of $2.5 billion sequentially and an improvement of $1.9 billion year-over-year. On the bottom of the page, we have, again, provided here key P&L line items without the inclusion of PPA-related expenses. Consolidated gross profit, excluding PPA expenses, would be $17.2 billion with a 17.7% gross margin. Operating profit would be $7.4 billion with an operating margin of 7.6%. Net profit would be $5.2 billion with net margin of 5.4%. Basic EPS, excluding PPA expenses, would be $1.23. On Page 4 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 2020, revenues for our ATM business were $66.2 billion, down $3.1 billion from the previous quarter and up $11.8 billion from the same period last year. This represents a 4% decrease sequentially and a 22% increase year-over-year. Our ATM revenues came in ahead of our expectations due to stronger-than-expected demand, driven primarily from forecast upsides. Gross profit within ATM was down $2.4 billion quarter-over-quarter and up $4.9 billion year-over-year to $13.3 billion. The sequential gross profit decline is due to lower loading in a semi-fixed cost environment. The year-over-year gross profit improvement is primarily driven by higher loading. Gross profit margin for our ATM business was 20.1%, down 2.6 percentage points sequentially, while up 4.6 percentage points year-over-year. Margin declined sequentially is the result of lower seasonal loading and NT dollar appreciation. We estimate that NT dollar appreciation had a 0.9 percentage point negative impact on gross margins. Margin improvement year-over-year is primarily attributable to higher relative loading and a higher mix of test revenue. During the first quarter, operating expenses were $7.8 billion, down $0.6 billion sequentially and up $0.9 billion year-over-year. The sequential decline is driven by lower overall operating expenses led by lower R&D expenses. The year-over-year increase is primarily related to increased R&D and administrative expenses. Our operating expense percentage was 11.7%, down 0.3 percentage points sequentially and down 1 percentage point year-over-year. During the first quarter, operating profit was $5.6 billion, representing a decline of $1.8 billion quarter-over-quarter and an improvement of $4 billion year-over-year. Operating margin was 8.4%, declining 2.2 percentage points sequentially and increasing 5.5 percentage points year-over-year. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 21.7% and operating profit margin would be 10.4%. On Page 5, you'll find a graphical presentation of our ATM P&L. On Page 6 is our ATM revenue by market segment. Overall, not much has changed in the mix of our revenue. There is a slight move towards automotive, consumer products and others with computing slightly down from its seasonal peak in Q4. On Page 7, you will find our ATM revenue by service type. During the first quarter, our revenue mix continued to transition towards bumping, flip chip and SiP. We continue to expect our test business to outgrow our assembly business as we continue to expand our turnkey business model. On Page 8, you can see the results from our EMS business and its associated revenue by application. During the first quarter, we had revenues of $32.7 billion, representing a decline of $16 billion or 33% sequentially and a decline of $2.2 billion or 6% year-over-year. EMS revenues declined quarter-over-quarter, primarily because of business seasonality. EMS revenues declined year-over-year, primarily as a result of downstream supply chain issues related to COVID-19. Our EMS gross profit was $3 billion, declining $1.3 billion sequentially, but improving slightly year-over-year. The sequential gross profit decline was driven primarily by business seasonality, while the year-over-year improvement is the result of beneficial product mix. Gross profit margin for the EMS business unit came in at 9.3%, an improvement of 0.4 percentage points sequentially and 0.9 percentage points year-over-year. These improvements are primarily driven by product mix. Our EMS business unit's operating expenses closed the quarter at $2.3 billion, declining $0.5 billion sequentially and increasing $0.1 billion year-over-year. Operating expenses declined sequentially due to lower labor costs and administrative costs. Operating profit for the quarter was $0.8 billion, representing a $0.8 billion decline sequentially and a $0.1 billion improvement year-over-year. The sequential operating profit decline is primarily due to seasonality, while the year-over-year improvement is due to lower operating costs. Our operating margin came in at 2.4%, which is a 0.8 percentage point decline sequentially and a 0.3 percentage point improvement year-over-year. The sequential decline is primarily the result of seasonally down revenue, while the year-over-year improvement is the result of product mix. On the chart on the bottom half of the page, you will find a graphical representation of our EMS revenue by application. Our communications segment dropped off on a percentage of total basis from its peak season in Q4. Aside from communication, most movements were relatively small on a dollar basis. 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 $79.4 billion. Our interest-bearing debt increased $14 billion to $229 billion. Total unused credit lines amounted to $241.6 billion. Our EBITDA for the quarter was $19.1 billion. Over the next 24 months, we are looking to reduce our net debt-to-equity ratio down to around 60% to 65%. And to do this, we'll be primarily focused on monetizing components of our balance sheet and lowering capital equipment investment. On Page 11, you will find our equipment capital expenditures. Machinery and equipment capital expenditures for the first quarter in U.S. dollars totaled $410 million, of which $237 million were used in packaging operations, $156 million in testing operations, $15 million in EMS operations, and $2 million in interconnect material operations and others. Given that business for the back half of the year appears a bit more uncertain than usual, we are cautiously monitoring our capital expenditures, especially expenditures related to expanding existing capacities. However, capital expenditures for our business are not just meant to address the oscillations related to current year demand. For us, much of our capital expenditures are meant to address our technological roadmap and positioning for the new demand over the next 2 to 3 years, strategic capacities related to advanced packaging such as fine-pitch bump, fan-out and SiP need to continue. At this time, we believe the amount of CapEx for this year will be similar to last year, but we are ready to make adjustments as needed. I think we showed that we delivered a decent first quarter. But in light of the macro calls for Kaohsiung, the following statement may be somewhat unexpected. Most of our customer forecasts have not had significant downward revisions as a result of COVID-19. And it follows that pretty much all of our customers believe they will have significant product ramps during this year. This is because electronics comes out with a new and improved product every year. And in order to do that, new and improved semiconductor chips have to be made each and every year to enable those new features. This is at the very core of electronics. Every season, you come out with something new, virus or not. Our customers will build new products and for the most part, cannot make a determination of sell-through until their products or their customers' products start selling. So in this challenging environment, our customers must secure capacity with the lowest product risk. Seemingly small or insignificant components of a manufacturing supply chain can become a bottleneck and make the difference between having parts to sell or losing share to your competitor. In this environment, customers reach out to the largest and most capable player, ASE. And of course, we understand that demand can be there one moment and not the next. We are exercising extra care in regards to capital expenditures, especially as it relates to capacity expansion as opposed to technological innovation. We're also closely monitoring the timing of various key product launches and how they coincide with our available capacity. We're also holding back expenses and tightening our belts across all of our factories as we speak. We do understand the unusual nature of COVID-19 and that this is the first time that world economies have all paused within a few months of each other. What will ultimately happen in the next few months as these economies restart? How much demand is pent-up versus delayed or outright canceled? And if that's not enough, how will geopolitical situations fare? We do not believe we are in a position to know. These are exogenous variables outside of our immediate control. Our focus is on our ability to serve the longer-term industry trends. We need to invest in the capacities that will serve the trends and underlying technologies that will rise after this whole thing settles down. For example, we are confident that the need for additional bandwidth has only increased as learning and working from home become more prevalent. The need for processing power continues to grow. Ultimately, technological advancements like 5G will propagate. For us, semiconductors are becoming more and more advanced as I/O and transistor densities drive new generations of semiconductor packaging and testing forward. System-level requirements of SiP are also increasing as customers move more system-level functions into the package. Technological progress also drives additional outsourcing for us. From how we see it, these concepts are much more about when and not really about if. Most importantly, all of these factors are good for ASE. With that said, we do want to mention our synergy expectations as it relates to SPIL. We still believe that we can put in motion the actions that will generate synergies by combining our efforts. These synergies are intricately tied between revenue and expenses. And the strategic positioning of each of our sites. These actions are being taken. However, given the overall economic uncertainties during the back half of the year, the overall timeline for these financial impacts to take shape may end up stretching out past the current year. From our current first half view, we currently see SPIL synergies as a significant portion of why we will achieve significant margin growth during the first half of 2020. To that extent, we continue to expect to increase beyond the 2 percentage points of operating margin promised during the first half of the year. However, back half visibility of our business is limited. And as such, we also have limited capability to quantify our synergistic impacts during this timeframe. Due to the impact of the COVID-19 outbreak, our outlook continues to be subject to a higher degree of risk. The information provided is done so as a reference of our current view as of the date of this presentation. Our business, financial condition and results of operations are of greater adverse risk. And as a result, there may be a higher likelihood of material variances between our expected and actual results. So for our ATM business in NT dollar terms, ATM second quarter 2020 business should be similar to third quarter 2019 levels. ATM second quarter 2020 gross margin should be close to third quarter 2019 levels. For our EMS business in NT dollar terms, EMS second quarter 2020 business should be above first quarter 2019 levels. EMS second quarter 2020 operating margin should be slightly above first quarter 2019 levels. And now for a question-and-answer session.

The first to ask a question is Bill Lu from UBS.

I would like to start with the ATM business. It was up really nicely in 1Q. If I'm doing the math correctly, I think Q2 is up maybe another 15% or so year-on-year. I'm wondering if you could talk about, first of all, if you look at the OSAT business, what is the industry year-on-year growth this year? I think TSMC has said that foundries will be up high single digits. I'm wondering what is that outlook for the back end? And then secondly, if you look at this really strong growth for ASE year-on-year, how much of it is share gains? And how much of that is sustainable into the second half of the year?

As we mentioned at the beginning of the year, we anticipate a fairly strong year for 2020. However, there are many uncertainties ahead, including the pandemic and potential geographical tensions. For the first and second quarters, we are observing the seasonal pattern continuing. Regarding the second half of the year, there are simply too many uncertainties for us to make any comments.

If I can ask maybe a little bit more specifically, if you look at Q1, up 20% year-on-year, how much of that do you think is share gains?

I think that's very difficult to answer, but considering our scale and broad exposure across different segments of the industry, particularly our strong position in the 5G arena, I wouldn't be surprised to see some share gain. In the first quarter, we did notice some order transfers from other regions to us. I believe that when times become challenging, customers are likely to choose the strongest player to ensure their supply.

Okay. My second question is on CapEx. Ken talked about maybe bringing down the debt-to-equity ratio and having some flexibility on the CapEx side. I know you're saying and you're maintaining CapEx at a similar level to 2019. But can you just talk a little bit more about if you look at the overall CapEx, how much of it is the capacity buys versus the technology buys?

I believe the split is around 40-60. About 40% of the capital expenditures are driven by technology and specific projects, especially in the SiP area. The remainder is mainly for maintenance and investing in additional capacity to meet demand. Over the past two years and this year, we have been witnessing significant capital spending due to industry movements and the necessary investments in capacity and technology advancement. I expect this investment will start yielding returns. Moving forward, as we improve our communication and alignment with SPIL, the increased scale, added manufacturing flexibility, capacity sharing, and better alignment of capital expenditures will help us manage our capital spending more effectively. We anticipate that more efficient capital investments will enable us to generate higher cash flow to reduce our overall leverage. Hence, we are aiming for a 24-month target to lower our overall leverage.

Next to ask a question is Randy Abrams from Crédit Suisse.

Okay. Yes. I wanted to follow-up a bit on Bill's questions on the CapEx and what you're doing with the balance sheet. Could you elaborate a bit more when you mentioned monetize the balance sheet assets, what the potential is there, what you're thinking on that side? And from the CapEx, is there a way to think about kind of a range, whether it's a percent of the CapEx or the dollar amount that you're looking at for a year out from now. Because one scenario we're coming out of the virus and then it's picking up. If you really have a way to pull down CapEx, say, 1 to 2 years further out. But I'm curious on both of those this if you have numbers on what could be possible?

We have stated that we will maintain our capital expenditures for technological advancements, ongoing projects, and new products. We will continue to invest in these long-term opportunities while keeping our capacity and maintenance spending flexible and adaptable based on market conditions. Currently, it's challenging to estimate a specific dollar amount due to limited visibility, especially in the latter half of the year. The pandemic is expected to have a short-term effect on demand and may lead to logistics challenges and delays in product launches. Overall, this makes it quite difficult to predict how the second half of the year will unfold. We will assess the situation step-by-step and adjust our capital expenditures accordingly.

Okay. And if I could follow-up on that, the SPIL synergy. I think you mentioned but I wanted to clarify that first half, I think you mentioned something a 2-point operating or maybe it's an OpEx synergy. Could you talk about the base or just clarify what the base is like on that 2 point, if it's an OpEx or an operating margin improvement? And I guess the other part was the balance sheet asset. What you meant by monetizing kind of bring down working capital or there are other assets you might go to monetize?

In terms of margin improvement, we have an overall target we set for ourselves. This target includes margin expansion from increased loading and synergies created through our alignment with SPIL. We actually exceeded our target for the first half of the year and expect to continue doing so. If everything continues smoothly, we believe we will meet our target for the entire year, which also incorporates the synergies we are developing with SPIL. We have already initiated several collaboration programs, including procurement, capital expenditure alignment, capacity sharing, and joint R&D roadmap alignment. There are many areas where we can create value. Our goal is not just the integration of the two companies, but rather to collaborate extensively to enhance value, improve efficiency, and reduce costs. We plan to share these benefits with our customers, making the combined entity much more competitive moving forward. As for the second part of your question regarding our assets?

Yes. I think you mentioned two things. It was over 24 months, CapEx could come out and you also focused on monetizing balance sheet assets to generate cash?

We are still hopeful that we can generate internal cash flow to support our deleveraging efforts. Additionally, monetizing some of our investments may provide another option for us to obtain the necessary funding for deleveraging. Currently, there is nothing specific to report, but we will evaluate how things progress and determine the best assets to monetize and the appropriate timing for that.

Next we're having Roland Shu from Citigroup.

This is Roland Shu from Citi. I think first question is I think I probably had missed what you said about this synergy target. You continue to make a balance in synergy targets. So can you remind me again what are these synergy targets you meant for?

Synergy target?

Yes.

Are we talking numbers?

Yes. Are you referring to your numbers or are these related to your other targets? I didn't quite understand, so please remind me again.

We are starting several programs, including procurement, aligning our capital expenditures, and capacity sharing upon customer requests. We are also adjusting our research and development efforts to make better use of our resources in that area. These initiatives are expected to generate synergies for us. While I cannot specify a dollar amount, I want to highlight that we are aiming for a margin improvement of 2% moving forward, both in terms of revenue and costs. We anticipate achieving this target in the first half of the year, although there is considerable uncertainty for the second half. However, I believe our initiatives will ultimately help us to meet or possibly exceed that target in the long run.

Okay. You have a 2% synergy target for operating margin profit. What about gross margin? Do you have any target for this synergy from an operating margin perspective?

I think I'm mainly talking about ATM operating margin, as mentioned.

So you said 2% is ATM operating margin improvement?

Yes. But that's the overall, including synergy can be created. That's not the synergy margin.

Understood. Yes. Okay. Then for your overall second quarter guidance. I mean, in first quarter, at that time, you expect you will have a slightly dip in first quarter and be followed by a strong quarter-over-quarter growth through the end of this year. So if you look at your second quarter revenue guidance compared to what you thought in January, do you think the growth in second quarter you guided now is as strong as you expected back in January?

I believe the first quarter was actually stronger than we anticipated due to some increases in final demand from our customers. There has also been some transfer of orders because of the challenges faced in other regions. When situations become more challenging, our customers often prefer to work with the strongest players to ensure they can secure what they need. Taking all of this into account, we not only experienced a better-than-usual first quarter, but also one that exceeded our expectations. I think this trend will continue into the second quarter. We have not lowered our expectations for the second quarter since the beginning of the year, and everything is currently on track. However, I must point out that as we look toward the second half, the outlook becomes less clear due to the ongoing pandemic. There is uncertainty regarding its impact on overall demand and potential logistical challenges. Therefore, we are not providing guidance for the second half at this time.

Okay. So this strong quarter-over-quarter growth to end of this year, this is probably not valid anymore?

I wouldn't say that. I'm just saying, we're not commenting on this.

Okay, yes. Okay. My next question is for EMS. Can I just say, there was some EMS revenue just to defer from the first quarter to second quarter. And now you guided your second quarter EMS revenue is similar as of first quarter, last year level. So I would like to say to add how much of this EMS revenue is deferred from the first quarter to second quarter?

I don't have a specific dollar amount for it, but we anticipate that in the first quarter, we faced more disruptions than expected, not only in staffing at our China operations but also due to other logistics challenges. As a result, we believe some of the orders intended for the first quarter are being pushed to the second quarter. Historically, our EMS business pattern shows that the second quarter either declines from the first quarter or remains relatively flat. However, this time, we are seeing our second quarter demonstrate stronger than usual quarterly growth. Therefore, we assume that some of the orders originally scheduled for the first quarter are now being deferred to the second quarter.

Okay, understood. For your first quarter EMS, the gross margin increased due to a change in product mix. With a lower focus on the communication business and a higher emphasis on the computer and storage segments, can we assume that your communication business is associated with a lower gross margin?

You're saying the second quarter or...

No, I'm talking about the first quarter.

Roland, there's a lot of things that go into what the profitability of any particular factory. Some of that has to do with loading, etc. So maybe in this particular situation, in this particular first quarter, how it panned out, that's kind of how it looks, right? But I wouldn't say this is always the case. So I don't think you can make that particular assumption at this time.

Okay. But you said previously for your prepared remark, you said the higher gross margin from EMS was mainly due to this product mix change. So that actually made me think this way, yes. So you think they also have some factor for this different loading.

It's in the products we're working on, and I wouldn't suggest comparing them across different quarters. In our view, the shift in product mix did impact our overall margin movement, but the change in margins was not significantly large.

Okay, understood. And lastly, for your EMS revenue, for the whole year, are you expecting the whole year EMS revenue to increase or to flat or decrease this year?

Again, we are not commenting on our full year.

Next to ask question, Bruce Lu from Goldman Sachs.

First, I want to ask about the SiP. Your management is guiding for like additional $100 million to $200 million more on revenue for SiP, starting from this year. Can we have more granularity about like what kind of SiP project is maybe ready? And what kind of profitability we can expect for this new SiP project?

The target of a $100 million increase in SiP revenue remains unchanged. Based on current trends, I believe we will exceed that target this year. Regarding our portfolio, we currently have around 15 ongoing projects, both old and new, that we are actively working on. The overall profitability of these projects aligns with our corporate average at this time, and everything is progressing as planned. While I anticipate these projects will continue into the second half of the year, there may be changes to their timing, but we will have to see how that unfolds.

So the target for additional $120 million, assuming no changes in terms of the product launch? Or you already factored that in?

Well, we're discussing new revenue from the project.

Yes, yes.

So these are from new ones.

So these are new. I understand. So, I want to double-check: if I'm getting this right, your profitability for the new SiP project aligns with the existing profitability of both EMS and ATM businesses?

Yes.

Okay. Again, I want to double-check that. Do you still maintain that the target for operating margin for the EMS business is more than 4% for 2020? Does that remain...

It's 4%. 4% remains to be the target. But I think, given the situation that we're in, I think, it's going to be very, very tough for this year for us to reach that target. I think, there's a lot of variables in front of us. And at this point, it's very, very difficult to predict.

I see. Understand. Okay, lastly, on the panel-level packaging. Both of your competitors are talking about their production yield has reached to the wafer level, packaging level and they are expecting to ramp up the mass production. So what's your current status for the panel-level packaging?

It's still under development. We are making progress with the panel, and we are continuing to move forward. However, we believe this will be more of a 2021 event at this time.

So you are suggesting that your competitors will have already mass production scheduled than you?

I can't speak for our competitors.

And right now, we're having Sebastian Hou from CLSA.

I have a follow-up question regarding the CapEx. It appears that the government is projecting flat CapEx for this year. Have you considered how this decision might impact the potential capacity alignment with SPIL?

To some degree, yes.

Can we discuss the division between testing and packaging? Should we assume that testing will see growth while packaging is likely to decline compared to last year?

You mean this year compared to last or what?

Yes, yes, this year compared to last year.

Yes. I think this year, the percentage for assembly will be higher than last year.

Yes. And tests would be lower than last year. So last year, we did spend significantly on cash.

Okay. I mean, percentage-wise? So we mean, the testing this year, the CapEx will go down year-on-year?

Yes. Because I think, bulk of the investments were made last year.

My second question is about the OpEx ratio target. Previously, the company expressed confidence in reducing that ratio to 2018 levels, which I believe was around 4%. Is that target still attainable?

All things being equal, I think, we're still hopeful that we can reach that target. But I think, at this point, it's just very, very difficult for us to predict, actually. I think, the second half is really just too much variables involved. And so I think, first half, we're still on track. But second half, it really depends on the situation.

Right. Okay, okay. But if we go back to a quarter or two ago, when you set that target, given that you haven't received a final approval from MOFCOM on SPIL's mergers, I would assume that you didn't consider the potential R&D or OpEx synergy at that time when you set the target, correct? But now you can, or you already have?

What do you mean?

When you established the goal of reducing the OpEx ratio this year in January or February, did you account for the potential synergies from SPIL's mergers before receiving final approval?

That's being considered, but I wouldn't say that we had a clear idea of how much savings so to speak. It's coming from the lift of the restriction.

Okay, understand. The third question is regarding your plan to reduce leverage over the next 24 months. Do you have a specific target for your debt-to-equity ratio? Last year, it was around 100%. What is the target for two years from now?

I think, Ken mentioned that our target is, in the next 24 months, we want to bring our net debt-to-equity ratio to 60% to 65%.

Okay, okay. That's pretty helpful. Is it more near decline? Or it will be more centered in the later part of the 24 months? I mean, is it more of a near decline? I mean, the next year, or the next 24 months, or would you like to see more of a step function, maybe a slow decline this year in the first couple of months and broader decline in the 13 to 24 months?

What?

Well, we're going to play by years, but that's the target.

My next question is about your perspective on why your customers and supply chain are concerned about supply chain disruptions. It seems that many are stockpiling significant inventory of their products. What is your view on this? Are you receiving requests from your customers to do the same? Additionally, are you also increasing your stock of higher materials inventory as a precaution?

Well, I think, we are producing based on the forecast that was given to us. I don't think we're in a position to comment on our customers' inventory levels. And they have their plans, they have their schedules. We're here to serve them and to meet their demand. I think, that's the position we're taking now.

All right, then how are we addressing the situation with packaging and sourcing the substrate? This was a concern a few months ago. What is our current status? I’ve heard that some OSAT companies have been accumulating inventory levels that exceed safety margins for I/O substrates. Are we also taking similar actions, or are we not overly concerned about that?

No, I think there were some disruptions, but overall, we are still at a normal level at this point.

And right now, we're having Rick Hsu from Daiwa Securities.

The first question, as usual, is a housekeeping about your utilization rates across the wafer bump in flip chip bumping and also testing in Q1? And what do you expect for the second quarter?

I think, the first quarter, we were running at around 75% to 80%, as expected. And going to second, I think, it will be around 80% across the board.

Okay. Around 80% plus for the second quarter, right?

Right.

The second question is about your competitor, Amkor, who also released their guidance for the second quarter. Their revenue is expected to decline by about 10% quarter-on-quarter. Should I conclude that you are continuing to gain market share in the second quarter, or is Amkor lowering their second quarter guidance due to COVID-19? How should I interpret the discrepancy between these forecasts?

I believe we have different exposures, customer mixes, and focus areas. The overall situation is quite distinct between the two companies. However, as I mentioned earlier, in times of greater uncertainty, customers tend to choose the strongest player to more effectively meet their needs.

Okay. The last question from me is about the supply chain perspective. You and the Samsung foundries are part of the same supply chain. However, considering the Hsinchu measures and TSMC and UMC, their business outlook for the first half appears to be as strong as yours, but they mentioned concerns regarding customer inventory ahead of the second half. UMC indicated that they do not dismiss the possibility of cancellations in the second half. So, both UMC and TSMC seem to be lowering their second half outlook due to customer inventory levels. Do you have any insights on that?

The front-end wafer fabs may have a clearer view of the overall inventory situation. However, we are producing based on our customers' forecasts and cannot comment on the overall inventory. As mentioned, the second half looks quite uncertain, and various factors may come into play. Therefore, we cannot dismiss the possibility of forecast reductions or delays occurring. This uncertainty is why our outlook for the second half is more cautious.

Yes. I know it's quite difficult to get a number, right? But just one quick follow-up, if I may. So when I look at the foundries market outlook for this year from TSMC, UMC, I guess, they're still looking probably around a single digit, right? It's a mid-single, low single-digit growth, year-on-year. So do you expect the global offset the market revenue this year to follow the same pattern?

Yes. I think, whatever wafers that's been producing needs to be packaged. I think, as long as they continue to crack out wafers, we're here to take on the back-end part of it.

Now we're having Gokul Hariharan from JPMorgan.

A couple of things. So first of all, I know that you're not offering guidance in the second half, but could you talk a little bit about which areas you are feeling more comfortable about from a vertical perspective and which areas are where you're taking service because it's likely to be bigger, as we think about second half?

I believe, like many others have mentioned, that currently, in terms of communication, infrastructure appears to be more resilient than other sectors. We're also observing that data center and high-performance computing are gaining momentum, likely due to the shift to home schooling and remote work. Considering the current situation, this seems to be how the industry will evolve, especially in the latter part of the year. I think our perspective aligns with that of others. Regarding capital expenditures, it's true that OSAT investments have lagged behind front-end spending in the past few years. However, starting from 2018 through 2019 and into 2020, we are now in a phase of catching up. Additionally, due to numerous changes and investments in technology and new applications, these capital expenditures are necessary to address the shifts in demand.

Could you discuss your expectations regarding the potential outsourcing of certain IDM segments and your interest in pursuing some of these IDM businesses, especially considering that some of your Chinese competitors have been more aggressive in acquiring captive assembly and test operations and making larger capital investments during this downturn in the second half of the year?

Well, I think, the outsourcing will continue. I think, the overall complexity of back-end assembly and test is getting far more complex than before. And therefore, the investment of which becomes more difficult for the IDMs to continue. And I think that's the added complexity or the technology investment is really the driver for continuous outsourcing more. So I think, that's the general trend. I don't think it will reverse anytime soon.

Does ASE feel that acquiring some captive assembly and test business is the right move to expand the revenue base, or would it be better to focus on organic growth?

It really depends on the situation. We don't acquire capacity just for the sake of having more capacity. It needs to complement either our business portfolio or technology portfolio in any specific area, provided it makes both economic and strategic sense for us. We also consider if it makes sense for our peers or an internal captive operation.

Okay. Last question for me. On the EMS side, could you talk a little bit about how your footprint in China versus non-China will be evolving, especially as we have some of the Asteelflash acquisition coming in as well as some of the investments that U.S. by itself has done outside of China. Could we talk maybe what it looked like last year and maybe what you want it look like in maybe a couple of years' time?

Up until last year, about three-quarters of their capacity was in Mainland China, but I believe that ratio is decreasing for various reasons. We are expanding our operations in Taiwan, Poland, and Mexico. Additionally, after finalizing the deal with Asteelflash, that percentage is likely to drop even further since Asteelflash's geographical coverage enhances USI's current operations. On the product side, Asteelflash offers a larger presence in non-3C segments, while USI primarily focuses on 3C. Their business model is also complementary; Asteelflash mainly targets early-stage, small-volume, diverse business, whereas USI is geared toward mass production of high-volume products. This combination is beneficial across various aspects of the overall business and I believe it adds significant value to us.

Next on your line, Szeho Ng, China Renaissance.

My question is regarding the company's priority on capital allocation say between CapEx, debt repayment and dividend. Can Joseph elaborate a little bit on that.

What if I say, I put them with the last?

Well, maybe I'll try a different way. The dividend policy, should we expect for this year's dividends to be at least flat from last year's level?

As I mentioned, we are prioritizing deleveraging. We hope to achieve this through improved profitability in the future. However, we need to balance our strategies to address various interests, aiming for an approach that keeps everyone comfortable, even if it may not fully satisfy everyone.

Okay. Maybe on the net gearing side, yes, 60%, 65% is not the optimal level, right? You still have more room to go, if you guys have more time to bring down the spending.

I believe that optimal is a very subjective term, and I’m unsure if 60% or 65% is the right target. However, that is the initial goal we are focused on. In times of uncertainty, it makes sense to strengthen our overall financial position, and if we are able to do more, we will. We will strive to achieve our objectives.

Okay. All right. Okay. Got you. And maybe the last one on advanced packaging, maybe on the fan-out test stuff. How should we expect to have more meaningful revenue contribution, let's say, around maybe a few hundred million of U.S. dollars revenue contribution a year?

Our goal is to achieve an additional $50 million in fan-out revenue annually. We have been successful in meeting our targets, and this year, we are quite confident that we will not only meet but also surpass our goal.

Now our line is open to Randy Abrams, Crédit Suisse.

I wanted to follow-up on the Asteelflash. Could you give the update on timing to close and then of view sales and margin with the incremental change to the EMS or USI division after you consolidate?

Due to the current situation, I cannot provide specific numbers at this time. However, we are still aiming to complete this process by the end of the second quarter or early in the third quarter.

Okay. And then if I could ask on the deleveraging process. Originally, when you acquired SPIL, I think, your attention was you could achieve low cost debt. I'm curious now, if you think about equity financing to help deleverage? Or that's still largely off the table?

We want to move forward with our deleveraging by carefully examining our overall CapEx spending. We are also considering monetizing some of our invested assets as a main source for this effort. At this time, we do not have plans for a capital injection through public offerings.

Okay, great. That's helpful. And the last question, just to clarify, in terms of the order pattern, and it does get to OSAT. The other piece of pricing, if they are still counting on this third quarter rebound like you get the normal product ramps. I'm curious, 2 parts on that. Have you seen last few weeks changes where it feels like orders held firm and you mentioned some upside. But have you noted any change last few weeks, as we progress through this, that customers have actually turned more conservative? And then on the part about the pickup, I know you're not giving kind of full year, but in terms of the launches, are you still seeing that normal pattern? So you may get inventory corrections in some place. But do you still see that pattern or lift in terms of those product launches? Or you see some delayed activity this year?

No, I think there are fluctuations in the customer forecast. For the second quarter, we aren't observing anything unusual. Looking ahead to the second half, our visibility is currently quite limited.

I think, we don't have any more questions online. Thank you for calling in to our conference call. See you next quarter.