Hello. I am Ken Hsiang, the Head of Investor Relations for ASE Technology Holdings. Welcome to our fourth quarter 2018 earnings release. All participants consent to having their voices and questions broadcast via participation of 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 risks 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. For today's event, Dr. Tien Wu will make a presentation regarding ASE's 2018 accomplishments, competitive landscape and 2019 outlook. After which, I will be going over the financial results. Then we will have a Q&A session with Dr. Wu, our COO; and Joseph, our CFO. Following the events, our VP in Charge of Public Relations, Eddie Chang, will be available to address the media in Mandarin Chinese. And now, Dr. Tien Wu.

Good afternoon. Happy New Year. My presentation today will have 3 portions; the first one is a 2018 recap, competitive landscape and then the 2019 outlook. Let me summarize the 2018 recap first. In 2018, we have established ASE Technology Holding Company on April 30, 2018. And as we have reported before, in 2019, November 24, we expect the expiration of China Ministry of Commerce conditions. Secondly, we have achieved record-high revenues, which include 2018 ATM record-high revenue of U.S. equivalent $8.2 billion on a pro forma basis. On the EMS part, we have achieved a record revenue of $5.0 billion. It is good to report that our SiP business, at a holding company level, grew 14% year-over-year to USD 2.2 billion. Specifically, our ATM portion of SiP based on new projects have reached the target we have set of USD 100 million. We expect the momentum of the new SiP project at the ATM level continues into 2019 and beyond. We're growing the 2018 CapEx with more focus on test business. Specifically, the test business grew 4% year-on-year. For the second half of 2018, it grew 8%. Again, the test business momentum will continue to grow into 2019 and beyond. ASE, we were awarded DJSI leadership for 3 years in a row. We have also been awarded the CDP leadership 3 years in a row. Let me go over the competitive landscape, which we have not done in the previous earnings report. In the following chart, we would like to show you the top 15 OSAT, the 3 years sum of their EBITDA minus the CapEx. As you can see, ASE Technology Holding on the ATM portion are equivalent of EBITDA minus CapEx for the last 3 years outperformed top OSAT. To give you a reference, the top 10…

Thank you, Dr. Wu. While the handouts are being handed out, I like to remind you, ASE Holding was jointly formed on April 30, during the second quarter of 2018. As a legal entity, our SPIL subsidiaries results are consolidated only as of that date going forward. Results for the legal entity are labeled legal entity basis. For the sake of comparability, we have also included results, which are compared against a pro forma set of results as if SPIL was a subsidiary and consolidated as of the beginning of 2017. This set of results is labeled as pro forma basis. Given that the transaction was completed during the second quarter, the legal entity and pro forma basis will have the same sequential comparisons for the fourth and third quarters. However, the pro forma numbers are still relevant for the quarterly year-over-year and full year results. Let's start the financial overview. This is our fourth quarter and year-end presentation. So in addition to having typical sequential and quarterly year-over-year slides, we have included full year results. On Page 3 through 6, you'll find our legal entity results for the holding company and our ATM business unit quarterly and for the full year. I will generally discuss the quarterly and year-over-year comparisons as part of the pro forma basis slides. Nevertheless, it is worth mentioning that as a legal entity, even though the fourth quarter is not particularly comparable between 2018 and 2017, because one period consolidates SPIL and the other does not, our SPIL transaction was made in cash. There was no share swap. And even though the growth in revenue is not organic, the net revenue increase of 36% is real, substantial and deliberate. We identified the problem of potential slowing smartphone growth, and we chose to accumulate cash…

[Operator Instructions]

Any questions? No questions. Thought I'd try. Name and company, sir.

Okay. It's Randy Abrams, Crédit Suisse. The first question. I just want you to clarify for the SiP and the fan-out, where you talked about $100 million and the $50 million to $100 million. Is that every year that you expect that growth? Or that's over several years you expect that opportunity?

Every year for the next few years.

Okay, great. And on the CapEx side, could you talk a little bit more about your allocation of the CapEx? Last year, it wasn't that much tied to these new projects. So looking ahead to 2019, how much do you see tied to the fan-out, the SiP, some of this new heterogeneous computing?

I think we mentioned that last year we put more focus on, or more resources on test CapEx, which represents about 35% of the overall CapEx with, last year. This year, I think, well, last year, I think, we were doing a bit of a catching up in terms of test investment. This year, we'll go back to the normal level. But we are putting more resources this year for some of the new projects or new technology that we're bringing on stream. And also, some of the CapEx for the new sites that we are preparing for further diversification also to meet the customer demand. In terms of the overall percentage allocation, this year, I think assembly, including the new projects or new technology, will represent about two-third of the CapEx that we are going to be spending this year, while test will be lower to about 32% from 35% last year and then the rest will be 40%, our EMS and also for material.

Okay. And could you talk a bit more on both SiP, what type of projects or applications this incremental growth you expect to come from? And also, for the fan-out, will that start, will you start to get additional revenues at more the single dye? Or do you think it now will be fan-out more of the advanced chips like application processor or high performance computing?

The SiP project has a variety. And I will not tell you any more detail other than the $100 million incremental revenue for 2019 expected. In terms of the fan-out, I think, what we would like to demonstrate for 2019 is a successful ramp on cost efficiency of the fan-out structure with reliability and revenue generating and the profit capability. By the end of 2019, we should have around $50 million to $100 million of incremental revenue to demonstrate that. Now in terms of a detail structure, it will have a combination of single-chip, primarily, but we'll have elements of multichips. Of course, this is typical manufacturing ramp up. You really have to learn how to walk before you run. Now what we do believe is, and as we're really ramping into the 5G, whichever timeframe that is, a lot of people believe that that'll be in the 2022 to 2021 arena. We will believe that the multichip combination of low power requirement, digital memory as was radio and we are really setting up against those requirements in the future. Design skills as well as manufacturing know-how as well as the capacity already installed that this space is where we're ramping up. Same thing applies to the SiP.

Okay, great. The last question on gross margin. I think EMS was a little bit down year-over-year, like, back to like 9.1%. It was running closer to 10% for a while. Could you maybe, I guess, talk about gross margin in that category, how some of the SiP projects look? I think you talked about generational change for the new product might have been a bit lower margin. So the outlook what you might expect, if it's stable or could come back, and then you talked about gross margin improvement programs kind of broadly, I guess, ATM. So maybe the view, margin if kind of outlook is more stable or you see some of those programs helping out this year on ATM?

I think it's more meaningful to look at EMS margin from an operating standpoint is really the operating margin that reflects the true performance because, at the growth level, it really depends on the product mix, but some of the products may have lower growth, has a larger, it has a thinner operating expenses that needs to be a growth, associated with the, with that particular business. So all in, I think, in terms of EMS, at the operating level, we'll continue to see improvement at the operating margin level. As a result, I think, it's really, we have been improving the overall efficiency across the broad, particularly in some of the specific projects that we are running. The probability is really showing a lot of improvement.

And then, maybe the ATM, kind of outlook for ATM margin?

I think, for 2018, there were a few factors that affected our gross margin, including the, some of the provisions that we need to take for our cryptocurrency business. And also, a part of our business we have a higher material content because of the passthrough arrangement that we have with the customers. Also, I think the overall FX in the year, particularly in the first half of the year did have some impact on the gross margin as well. Also, as we mentioned, there were some organizational changes that require some of the more administrative expenses. Also, we are initiating some of the preparation works for allocating or expanding the operation in our overseas sites. So all these put together have put some pressure on the margin for ATM in 2018. Now most of these factors will be gone for the year, except at the operating level in terms of operating expenses, operating expenses ratio, it will be slightly higher than 2018 because of the higher R&D efforts that we're putting in. But all in, I think, 2019 although there's quite a bit of uncertainties in front of us, but from the way the things are going, I think there is, because of the, a lot of the factors that affected our margin in 2018 has already been taken care of, I think, there is really room for us to further improve our margin for the year.

This is Rick from Daiwa Securities. Quickly, can you put back the guidance slide because I missed the last part of it, the EMS gross margin? Okay. Thank you so much. The second question is, well, I should say the first question, is again the housekeeping. Across your wirebonding, testing, bumping, can you share that number with us about your Q4 capacity and also utilization rates? And how do you see for first quarter this year?

Okay. In terms of wirebonders, at the end of first quarter, last quarter, we have total of 25,172 units of wirebonders. The net change is minus 47. We actually retired more than we bought. In terms of testers, we have altogether 4,822 testers and we added 20 testers in the quarter. In terms of utilization in fourth quarter, the wirebond, we have a high 70% utilization. For the non-wirebond, we are above 80%. And testing, we are close to 80%.

Okay. The second question is about your, can you comment on your customers' inventory level? And when do you see, how severe do you see the inventory level right now? And when do you foresee that assessment total to normalize? And also, do you, just like TSMC, do you expect a pretty strong back end loaded recovery in the second half of this year for your business?

Well, I don't think we want to comment on the overall industry inventory situation, but it's purely based on our own customer forecast. I think in terms of first quarter, it does seem to be slightly weaker than the normal seasonality. And we are seeing things turning up starting from second quarter. Although, again, there's a lot of uncertainties in front of us and purely based on our own forecast, it seems to be that for the whole year, we will continue to see sequential growth on a quarterly basis. And for the whole year, we're still expecting some growth.

You can dial, I think we can take a call.

Hello, you are on the line, please go ahead and ask your question.

So Dr. Wu gave an outlook for 2019, which was very helpful, but I'm wondering if you can also talk about what you think is the OSAT industry growth in 2019?

Giving the performance of the last few years, I think, the overall OSAT will continue to grow. I do understand there are a lot of macro uncertainties surrounding the industry, but if you really look at OSAT sector performance for the last few years, it has been quite steady, mainly driven by the efficiency that OSAT can provide to the semiconductor industry. I believe that trend will continue. I will not be able to comment on the overall OSAT growth because each company will have a different focus and different strength. If you want my guess, I believe the OSAT industry next year will continue to grow.

Okay. That's helpful. As you ramp the fan-out business, can you talk about the gross margin trend for that specific business?

Can you repeat that question?

Yes. I'm wondering can you talk about gross margin for fan-out maybe in the initial stage because I know volume and CapEx are key initially but then how does it look longer term?

My apology. We won't be able to comment on the gross margin of the fan-out. As we are really ramping up, we are also doing the calibration and there is a lot of design work, there's a lot of materials work, there's a lot of automation work. So right now, we are at the investment stage.

Okay. My last question is, I think, Ken made a comment on cryptocurrency inventory obsolescence. I didn't quite catch the details there. Can you talk a little bit more about that?

Yes. I think the, most of the provision that we took is really on the inventory or specifically the materials that we prepare for the business. And since starting from actually the second half of the year, we're seeing that part of the business actually start to disappear. So we had to take some provision on some of the materials that we have. But the number is not substantial to cause it to make any alarm for us.

Got it. I visited some of your competitors in China. And I feel like many of them build too much capacity for the crypto guys in 2018. Is that a concern at all that may be because a little bit excess capacity for China?

In terms of cryptocurrency, I don't think we prepare any specific or specialized capacity for that part of the business. It's really just part of the flip-chip business that we have. So in terms of our overall China capacity, I think, it's roughly about 15% of the overall ATM capacity that we have.

Yes. Sorry, I don't mean you, I mean, your competitors in China, I think, build capacity for their cryptocurrency customers. I'm wondering if that might have a negative impact in terms of maybe pricing going forward?

If you look at the cryptocurrency demand, without being specific, a large part of 2018 we have already experienced that. So any kind of extra capacity and any kind of regional, we should have experienced that already for more than a few quarters. In terms of how will the excess capacity play into the margin erosion for future, and I think each company will have a different strategy to encompass that. Just another additional comment, we do not want to downplay the cryptocurrency. The cryptocurrency will, might come back in a different form or different application. So the rule of thumb, we will never write off any kind of new emerging technology or potential application for any region. Do we have any more questions on the floor?

Sebastian from CLSA. My first question is on the, I think you already mentioned that you still expect this year to grow. So how about separately for ATM and EMS, both will grow?

The answer is yes.

Okay. So which will be, which will outperform? Which one grow faster?

It really depends on the market. I won't be able to comment on that, but we're pretty confident that this year any kind of major disaster that we cannot foresee, we do expect positive growth for both segments.

Okay. So is this regardless of the macros that are in. So this is basically based on the pipeline, the visibility that we have so far?

That's correct. Based on the best knowledge and estimate that we have based on our customers' collective forecast.

Okay. And second question is on the CapEx for some new sites to diversify the geopolitical risk. So this is more related to EMS, right?

That's correct.

So do, will we expect the, this will impact the overall efficiency of, and overall return on investment of the EMS business this year or next year?

There are 2 elements in this kind of global footprint deployment expansion. We do expect the overall efficiency to be improved giving any kind of geopolitical condition they will impose. So it will not be an absolute comparison but will be a relative comparison. For example, if unfortunately, the tariff condition turns into a different direction then you need to have some kind of a backup plan to encompass the new ruling or in case you cannot ship anything into any country or the, vice versa and this is really the risk mitigation plan that we are working on right now.

Okay. So when do you expect this site diversification to complete?

I think this is ongoing. I think if we look at the EMS part of the business because of the tariff situation, I will say less than 10% of the business is affected and some of the customers may require us or have the purpose of us moving some, allocating that part of the business over to some other sites and we are already doing that. That's one category. And the other is there will be new products or new markets that we need, or we wish to penetrate. There will be new facilities being set up and capacity put in as, and the timing of that is really depending on the overall demand situation. So these are all ongoing. On the ATM side, I think, the site that we are, I think this is also a housekeeping issue is that the [indiscernible] new factory as we, like we explained last time, it was never meant to be a captive factory for the memory house that they are building in [indiscernible] but for, to serve the all the numerous customers within the region and that is continuing. But in terms of the investment or the collaboration with the memory house Jinhua in China, that is permanently put on hold.

Okay. Can I go back to Dr. Wu's, my first question regarding the efficiency question? So I just want to get a sense that for this CapEx now reporting to the site expansion this year, would it be more just to diversify where or actually is it net incremental capacity? What I'm trying to get is that, for example, you have customers now maybe in China, it has to move to Mexico. So can you just simply relocate your capacity from China to Mexico? Or you have to add new incremental capacity in Mexico, while those capacity in China may become idle in the near-term depends on whether you can backfill it?

Okay. I'm going to answer the question in 2 different category. If you look at the short-term, most likely, we are relocating capacity into a factory for the risk mitigation due to specific customer requirement or regional political requirement. However, I have emphasized this over the years, which I want to once again to emphasize this, maintaining a global footprint of manufacturing base is an extremely costly thing. ASE, over the years, has been criticized for trying to maintain joint venture manufacturing site and design collaboration with all of the ideal customer in all geographies. I think it's timely to point out that with the recent geographic, geopolitical conflict, we do understand the sensitivity of manufacturing base our, as well as the IP right as well as the ownership by different regions. You also need to understand that when we are talking about 5G, autonomous driving, smart CD, smart medical, industrial 4.0, the design, the protocol, the standard as well as the manufacturing and distribution because of the IPR and the security concern, it will become more distributed than concentrated. For the concentrated, economic model based on cost and efficiency, it applies to certain domain. But by you move to a different sector, when you hit the sensitivity of IPR and national security, the manufacturing base needs to be more, relatively speaking, distributed. What we're telling all of the shareholder over the years is, ASE always understand the potential of this. That's why we are the only OSAT today have a large global footprint, which we maintain for years just to have the local skill, the connectivity to the government, to the IDM, to the regulatory control, everything that we have deployed is to get ready for both business model, concentrated, efficiency cost model as well as more sensitive, more distributed model commence.

Last question from me is that, when I look out around the past 4, 5 years, the OSAT, the top OSAT vendors, the aggregate probability from the OP margin level, gross margin level, it seems like the overall industry profitability has been on the declining trend in the past few years. So I just want to ask these questions whether, Dr. Wu, what do you think about the trend going forward? Is there any way that the industry or as a leader, ASE can do to stop this derating trend?

We, ASE, what ASE can do is to do the contribution of ASE towards the industry. When you're making more contribution in terms of disruptive technology, innovation or the next level of new efficiency, then the ASE value and the cash-generating capability will incrementally improve. I will not be able to speak for the rest of the OSAT industry. However, when the leader of the OSAT start moving disruption, inevitably will put pressure on all of the other players. The chart that I have demonstrated is really twofold; first is the cash-generating capability, the second one is the percentage of that versus the industry. And then, we need to bundle is who in the last 10 years have introduced disruptive technology from the OSAT. Now after you introduce the disruptive technology, how does the market respond and reward you or penalize you, right? So we do understand that there is extra capacity and there is cost pressure and there's excess build up, right, in some region of the world. So what ASE needs to accelerate is twofold. We build our own scale, right? Organic scale development sometimes too slow. Therefore, you have acquisition. Then, combining all of the resource, then you start investing in a bigger chunk to create a bigger disruptive introduction into the system. And hopefully, that over the years, you can see the margin improvement at a company level, and hopefully, this will propagate downstream and affect the other OSAT members. It's a long answer to a great question. We do understand the OSAT sector pressure. So you look at it, how can OSAT expand our value to cross the boundary into the country manufacturing portion and how do we build up our own influence within the OSAT because the boundaries are getting very blurred. And of course, now the, when people talk about the slowdown of Moore's Law, there's got to be a new efficiency to come in to augment the slowdown portion of the Moore's Law. We believe that is the heterogeneous integration, which coincides with the 5G because radio comes in. It coincides with all of the IoT because sensor MEMS comes in. So with everything that we can accomplish right now, we believe the future few years for the OSAT industry, for all of the technology we have, lay down the foundation in introducing over the fact that the last few years are extremely promising. We really think the opportunity is really there. We cannot speak for anybody else, but from the ASE perspective, it's very clear what do we need to do.

Just the last follow-up. Beside all these organic measures, do you also continue or proactively consider consolidation as a strategy to, both in terms of the skill and also the profitability?

Of course, that will continue to be one option for growth if it makes strategic sense. I think we will continue to look at the, what's happening in the market and what's needed in our portfolio and see if there is a right fit for us to look at. And I think this is an ongoing, it should be an ongoing program running any business.

Do you have any additional questions? All right, we have a follow-up here.

I just had one follow-up because the 10-year comments about the investment. Like 2010, 2013 was, like, I think when you're going through it I was expecting you to announce some big CapEx number because in those periods, you spent a lot for copper and then had some of the SiP. Is it the expectation we're kind of in a slow year? But looking ahead the next couple of years, are you preparing us for, we should expect CapEx to start really growing to go after the opportunity?

If everything goes well, yes. But right now, we do not know how things will develop. For example, the big question is now, who is going to launch 5G? And how big 5G is going to be? And how big is the 5G derivative due to the low latency? What kind of new application do we expect? So I have a thousand questions. However, I mean, go back to the core. Do you think those applications will be pervasive in volume? If you do, who's got the capacity and technology to do the heterogeneous integration? And if that really showed up, now who is going to capture the first wave and the second wave? Those are the questions that I'm posting to all of you.

Okay. The second question. I know you mentioned synergy, we have to wait till the end of the year. It looks like since you acquired SPIL, even though it's operating separately, there has been a bit higher OpEx. I guess your take, when you consolidate the company, do you think there's still areas both CapEx and OpEx that you might be able to take some out? Or is it more now about more revenue synergy and going after the next opportunity so it's more to get scale and push revenue growth?

This is not the right time to talk about it. Next year.

Any additional questions? Thank you very much for attending. See you next quarter.

Happy New Year.