Hello. I am Ken Hsiang, the Head of Investor Relations for ASE Technology Holdings. Welcome to our fourth quarter earnings release. Thank you for attending our conference call today. We apologize for not having our earnings release in our typical physical format. As with most people in Taiwan, we are acting with an overabundant caution in regards to minimizing the chance of exposure to the coronavirus. Please refer to our safe harbor notice on Page 2. Our lawyers have worked very hard on this disclosure. So please give it your utmost attention. All participants consent to having their voicing 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 stated generally 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 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. As a reminder, because ASE Holdings was jointly formed on April 30, 2018, as a legal entity, our SPIL subsidiaries results are consolidated only as of that date going forward. For the sake of comparability, our full year 2019 results will be compared against a pro forma set of results for full year 2018 as it still was a subsidiary and consolidated during the entire year of 2018. This set of results is labeled or will be labeled pro forma. Please…

[Operator Instructions]. The first to ask questions is Randy Abrams, Crédit Suisse.

Yes. I appreciate you're still giving out the guidance I wanted to ask the first question just on, as you're factoring in the first quarter guidance, it sounds like you're implying more of the production side impact. I'm curious from the demand side, if you've seen any customer revisions at this stage from the demand side. And within that guidance you gave, is that more profile of how orders look now? Or have you taken a discount to factor in any demand-side weakness?

I think what we are -- whatever we are providing now is really based on the situation at our factory level. So it's more on supply side, the of constraint that we have. And we've made those kind of the best guess adjustments into our first quarter outlook. But in terms of demand, I don't think we are in a position to comment on the overall demand situation because there's still a lot of uncertainties in front of us. But indirectly, I think this demand situation should be reflected into the forecast that we're getting from our customers. So whatever we're providing at this point is really looking at our own situation and looking at the forecast that we're still getting from our customers, maybe the overall estimation of what kind of impact it will have on the first quarter and remaining of the year.

Okay. And if I could ask on the investment side, you're running at a high level through second half, I think, in -- ahead of some of the good drivers you were expecting for this year. How are you thinking about maybe the CapEx relative to what you were doing the last few quarters, holding -- or if you have a full year CapEx, knowing that it could change based on what's happening?

At this point, we're still very optimistic about the 2020, and we will continue our CapEx as required. But at the same time, there is some of the CapEx being made earlier in 2020, what we call the upfront investments that we were already making. So for 2020, we're expecting for CapEx now to exceed whatever we had spent in 2019.

Okay. It won't exceed 2019, okay. And if -- okay. If I could then ask on the -- and maybe if I missed it, the SiP business, you had the 13% growth last year. Do you have a potential, what you're kind of seeing at this stage in terms of SiP, how much -- or what the outlook could be for this year? And then maybe on the broader business, factoring in like the virus gets contained. Do you have kind of a view on maybe full year for the overall company versus industry? Maybe a rough view what type of growth could come through?

I'm sorry, the latter part of the question?

Okay. Yes, the first was more micro, just more looking at the SiP, what you expect for this year. And then second was, if you have kind of a broader baseline view, maybe going into the year, if the virus is contained within a quarter or so, how your business and also how the industry looks on a full year growth?

Well, I think in terms of SiP, we had a very good run-up in the -- in 2019. And I think that momentum will continue. I think Wu was mentioning it that the new projects revenue exceeded our target of $100 million incremental revenue in 2019, and we're expected to get momentum to further strengthen in 2020 as well. So there will be a fairly healthy growth in our SiP business in 2020 as well. As for the whole year, it's taking the virus situation aside, I think we still remain very optimistic about the whole year situation. And we're expecting a healthy -- a very healthy growth in terms of overall revenue, particularly on the ATM side of this. And first quarter, we are still expecting an above-seasonal quarter. And for the remaining of the year, we're still expecting sequential growth on a quarterly basis overall.

Okay. And last question, if I can ask the margins in IC ATM. Maybe the factors you mentioned, just the start of the margin improvement. And it looks like test may be one factor. But if you could go through the areas, giving confidence that margins and maybe how much you might be seeing in that front? And if you could give an update then on the EMS, where first quarter looks like a lot of impact on the production side, but maybe the -- how second half could look for margin versus the second half last year, like except for -- through the virus setback?

From a consolidated point of view, we do expect a healthy margin improvement in the year. Because the -- first of all, higher loading and also a lot of the investment that we're making in 2019 will start to pay off in 2020. We are expecting a better control over our OpEx ratio. We are expecting, although, I cannot quantify at this point, but we do see room for more efficiency improvement after -- with the restriction period is lifted. So overall, I think the margin situation in 2020, we'll see some healthy -- quite a bit of healthy improvement. That's both on the ATM and also on the EMS part of the business as well.

Next question we're having Bill Lu from UBS.

A lot of information given. So I'm just hoping for some clarifications first. I think Ken said that test would grow faster than 2x logic. I think -- did I hear that right? And if so, what is the -- what's your expectation for the logic growth this year?

People are expecting somewhere around 7% to 8%.

Okay. So can you just talk a little bit about the key drivers for test this year? And also, I don't know if I'm heard, besides that, was there also a guidance given for total ATM growth this year over last year?

No, no. we didn't give out total ATM for 2020.

Okay. Can you try to help me a little bit around that?

Just as I mentioned, we are expecting a healthy growth, particularly in the ATM part of it because a lot of the new initiatives that we're taking will start to pay off in 2020. We're seeing a strong momentum in our SiP business. We're seeing strong movement in in our test business as well. So overall, I think we're going to have a pretty -- if taking all the uncertainties aside, particularly in the this virus situation, whatever we're getting at this point, whatever information we're getting at this point leads to quite a healthy year for us in 2020.

Okay. Maybe I'll ask that slightly differently because you have said that if you look at the growth this year, 5G is one of the bigger drivers. If I look at 5G, a lot of it is China. I guess my question is, is there way to quantify how exposed you are to China and to 5G within that, the optimistic outlook for ATM, IC ATM?

What percentage of our revenue will be 5G related, is that the question?

Yes. That would be very helpful if you could answer that.

Well, that's one question I cannot answer. I think we -- of course, 5G will be a major driver for growth for us, including 2020 and beyond. But in terms of what percentage of 5G -- what percentage of revenue will be 5G related, I think that, that's a very difficult number to come by because everything is interconnected, some can be 5Gs, direct 5G or some 5G related, some can be riding out of 5G implementation. But I think the key for us is really to maintain our first-mover advantage in terms of the 5G development or deployment, and this is driven by the -- our overall -- our business -- by this coverage over all the 5G players. So whatever players, whoever that comes out with 5G more applications or products, I think we want to maintain our first-mover advantage, and we think we'll be -- stay as a dominant player in the 5G field.

Great. Sorry, can I sneak in one more? So you talked about production out of your China-based factories, and how that's going to be back to normal by the end of the quarter. But assuming issues do not get resolved, what's your ability to shift manufacturing away from the Chinese factories?

I think the -- or right now, the overall capacity in our China factory. In terms of ATM, it's about 15%. And I think most of the products can be taken over by our Taiwanease side or other areas as well. So I think this is the point Ken decided to make earlier when the -- when there is a crisis, I think, the leader with the higher scale and flexibility tend to be the -- a safer bet for all our customers. So I think that's -- a silver lining is here, if there is a crisis in front of us, there is some challenges for -- in terms of overall strategic positioning for ASE. You could look at it as a plus for us.

The next to ask question is Gokul Hariharan, JP Morgan.

First of all, could you talk a little bit about CapEx, looking at 2020. It seems like 2019, eventually CapEx ended up being higher than the expected range. What do we expect for 2019. And secondly, I think you talked about some of the NPI investments, which drove OpEx higher in Q4. What are the time frame roughly in terms of when we see these investments come through in terms of revenues? And how should we think about OpEx in 2020? Are we expecting OpEx to start -- OpEx as a percentage of sales to start coming down, given that we are expecting meaningful revenue growth? And I had a follow-up question on the guidance as well.

Well, as mentioned, we are expecting. This is not a budgeted number, but as -- but the forecast we're getting from our customers, we're expecting a relatively steady CapEx compared to 2018 -- sorry, 2019. And -- but the combination of that CapEx would be somewhat different because in 2019, up to 44% of the CapEx was spent on test, but going into 2020, that ratio will come down to below 30%. So more resources will be put in assembly and packaging.Also, a larger CapEx will be spent on EMS. So some of the new SiP project that we put the NPI in already in the second half of -- or fourth quarter of 2019.

Okay. Could you talk a little bit about the OpEx as well and the NPI? Yes.

In terms of OpEx, I think this year, the overall OpEx ratio grew from 9.4% in 2018 to 9.9%. And this is because of the -- we have additional ASP-related expense. We have more -- we spend more on R&D. And also, we are expanding some of our sites -- some of our non-China sites given the trade war situation. So we are looking at 2019 as a year of investments. And I think a lot of this front line investment will start to pay off in 2020. So that gives us a better margin outlook for the -- for 2020 as well. In terms of the overall control of the OpEx, our target for this year is really to come back to 2018 level of life 9.4% or 9.5% level.

Okay. Just a quick question on the guidance. Could you talk a little bit about how you handicap the guidance for any demand shortfall? I know that it's very early for customers' feedback to you in terms of any potential demand risk on -- by the products, et cetera, in China. So could you talk a little bit more in detail about, are you already handicapping some of those potential demand -- near-term demand disappointments in your Q1 guidance? Or the caution in Q1 guidance is primarily related to supply disruption and not really counting on any potential demand related to China 5G?

Well, as I mentioned, whatever outlook numbers that we -- our guidance we've provided is based on the forecast that we're getting from our customers. So without directly commenting on the demand -- over demand situation, we would like to say that, that is somewhat reflected in the forecast that we're getting from our customers. And with that forecast, we look at our own capacity situation and made the necessary adjustments in -- particularly in the first quarter, outlook. So that's how we come up with the overall outlook that we provided.

Right now, we're having Charlie Chan, Morgan Stanley.

So first of all, can I ask how you're going to split the [indiscernible] with AiP revenue between ASE and subsidiary, USI, both revenue and profits?

So what?

The [indiscernible] with AiP, how are you going to split the revenue and the profits between you and the USI?

No. We're not commenting specific parts of that performance.

Okay. And then, Joseph, you mentioned about this year, you're expecting higher margin, better control of OpEx ratio, does that discount the merger synergy already? Or there's a kind of separate factor?

Right now, I don't think we are -- we are not putting a lot of weight on the synergies that can be created, particularly on the operation after the merger with [indiscernible]. At this point, we're not in a position to comment on that because the restriction hasn't been listed yet. So no, we're not budgeting this into the overall.

Okay, okay. And then on that front, any time line or any reason that, that restriction is still there? When that is going to be removed?

Well, I think the -- we have already filed the -- I think the appointed reviewer has already filed their last report to the antitrust bureau in China. And we are waiting for them to review such reports and give us a clear state of health. But because of the virus situation, I think it's kind of put -- I think if there is some delay, that is well understandable. But at this point, we're still hoping that by the end of the quarter, we should be able to get the full clearance.

Okay. And lastly, maybe also related to your ATM business growth in 2020. So if you can compare your ATM business versus the industry growth in 2019 and 2020, do you think you're outgrowing or under growing the industry? And I think that associated to another question, whether you think local, Chinese back-end foundries are gaining share? And do you think Chinese semi customers, they have any preference between using ASE or the local vendors?

Well, I think we will be able to outgrow the industry, overall, if you're talking about the logic of it. I think you were pretty confident that we will be outgrowing not just the industry, but also all of our competitors. And I think -- what's the latter part of the question?

Yes. Because China is pushing this semi localization, right? So I'm not sure you've said us the change customers' preference. I mean for those local China semi customers, do they -- do you see the shift from your China factory to those local vendors? And I'm not sure that if there's a such kind of a preference, does those local vendors need to -- still need to discount your price versus yours?

Well, I think, preference is one thing about the capability is the other. So they can prefer their local vendor. But if their local vendor cannot provide service or the quality or the products, as a whole, I would think our customer have -- really have as a choice. So yes, we will review the overall situation or competition very seriously, and we will try to -- try our best to accommodate whatever our customer demand is, or requirement is. And that includes ramping up our China factory as well, if local manufacturing is preferred by our customer.

Right now, we're having Rick Hsu, Daiwa Securities.

The first question, as usual, is housekeeping for modeling purpose. So can I know your utilization rate in Q4 across the packaging, testing and bumping? And also, what's your view on first quarter loadings?

Fourth quarter, we are at a range of 80% to 85% utilization and going to across board. And first quarter, we're looking at 75% to 80%.

75% to 80%? Okay.

Yes.

Okay. Then second question, now this a little bit of hypothesis, assuming there's some impacts from the virus in your first half business, then would you be able to make up the shortfall in second half?

What's the impact of the virus?

Okay. Yes, because I'm just thinking -- I'm just trying to resemble the situation to the SARS back in the [indiscernible].

Well, I think -- first of all, I think within reason, of course, we can now -- we can make it up. And we do have the scale or the flexibility to handle that unless there is a total collapse of the whole situation. Then I think right now, what we're seeing is, things are still within a manageable level.

Okay. That's fair enough. The final question is about the 5G. I think a couple of days ago, [indiscernible] when they put out their business outlook, they actually say something about a slowdown in the 5G bill this year. So would you worry about that the demand given by your customers for the 5G bill this year a bit too bullish? Do you see any risk on that?

Oh, I think there is always risk whatever forecast or whatever market assessment there is, but we -- the forecast that we're getting still suggests that we are having a year. And we'll try to analyze the situation better and make the proper adjustments on whatever we're seeing, i.e., if there is any overbooking or any over optimistic kind of forecast that we're getting, and we'll try to make some more read into -- because we do have a very diversified customer base. So there's some level of check and balances we can get among our different customers. So I think we have been managing our business for over three years. So we should have the experience or knowledge, how to view the overall situation.

The next one to ask questions, Bruce, Goldman Sachs.

So my question is regarding for the -- your USI, you just mentioned that you have 85% production in Taiwan for ATM. How about your production in China? Are you able to move those AIC -- SiP productions back to Taiwan?

That will be a larger scale of work to do. Yes. But I don't know how to answer this question, actually.

Okay. So basically your assumption is based on that -- your labors and everything is going back to your factory around like 80% or 90% by the end of the first quarter? Is that your assumption for the USI business as well?

Yes.

I see. Okay.

Well, I think to answer your question -- your first question. If we can't do it, then I don't think anybody else can do it either. So that will be a real problem for [indiscernible].

Well, I don't -- well because you -- that's why we need to ask you, right? Okay. That's fine. I'll ask a different question. So regarding to your profitability for the ATM, so if you look at your profitability for ATM for 2020, you are looking at much better years, with high inflation rate and better product mix. And the profitability for ATM in third quarter is still lower than the historical level or before the ASE-SPIL opposition? So what kind of profitability or what kind of the new norm of profitability we can expect in 2020 or 2021 onwards? This one should be a lot easier.

Yes. It's a lot easier, but then I won't to give you the answer though.

You didn't give me the first one, you said -- you have to give me this one.

No. I want to get into trouble with the SEC here. If I give you any numbers, then I need to put out a full blown, what do they call it?

Right, [indiscernible]. Yes.

And we're not allowed to do that.

Well, the way the [indiscernible] they use is what they call it a structural profitability.

A what?

They call it structural profitability.

Structural probability, what do you...

Yes. No, that's what they -- what -- so in what terms do you think? Instead of getting into trouble.

I don't understand.

No. I mean, so for me it's that we are expecting some profitability improvement. So historically, ASE still are able to generate somewhere along by 25% or 28%, even 30% gross margin at the peak quarter. So are we expecting those kind of numbers in the foreseeable future?

Well, let me do this. Let me do this. I am -- as a CFO, I am asking for at least 2% improvement.

I see. In 2020?

Yes.

I see. I believe everyone listens to you, right?

Huh?

I believe all the staff listens to you and will follow the instruction.

Okay. You believe what?

I believe all your staff will follow your instruction in delivering results.

Well, remember, they're not all my staff. It could be my wishful thinking, right?

True, true.

Right now, we're having Sebastian Hou from CLSA.

Yes. My first question, just to -- want to clarify some of the numbers that I didn't hear very clearly. So I think Ken mentioned that the utilization rate in your EMS fab in factory in China was like 8% in Chinese New Year and expect that to go up to 4 percentage point by end of February and then fully utilized by the end of this quarter. Forgot the numbers. Could you repeat that again?

Yes. All right. We are looking at around a -- so 60% to 70% staffing during the Lunar New Year. And then we expect to return to 80% to 85% by the end of February. And then, hopefully, to get close to full by the end of the quarter. That's the more optimistic outlook at this point.

So these are the okay scenario?

Yes. That is the okay scenario.

Okay. But what's the usually passing rate increase a month after -- or in 2Q which is after CNY Holiday? Let's say, an attractive yield?

Normal year?

Yes.

Normal year, it's back to full.

Okay. So basically, you are saying that it's 80% to 85% by end of February, but the normal years by end of February, should have already gone back to 100%, right?

That's correct.

That's like 20 -- almost 20% below?

That's correct. But during this time frame, we're also going through basically the trough seasonal quarter, right? So that gives us a little bit more cushion to work with. We can also work with a little bit more over time planning workers' schedule and such. But in a positive scenario, this is what we're seeing.

Got it. I have a question, a follow-on, on this because typically, your EMS business is a -- as you -- as your definition, the trough quarter, with the low season in 1Q. So even if you can't get back to the quite fairly decent staffing rate, would that still be a bottleneck to your manufacturing facility with the full year customer demand? After all, it's low season in Q1.

It still has some impact.

Still has an impact. Or this year is somewhat different? Like, you see a better than typical Q1 seasonality, so that's why this will matter?

Even during -- so we're basically trying to get to an optimal percentage, right? So we're trying to get to 100%. But that 100% is 100% of the seasonal quarter.

Okay, got it. And my second question is, about your EMS business. I look at your 2018 to '19 change, you have the 9% revenue growth, but the operating profit dropped 14%. OP margin contracted by 0.8%. Can you explain, again, what drives that OP margin -- operating income decline? And also, what's your outlook for 2020?

So our EMS entity is in the process of some different type of expansion. There's geographic expansion, there is also trying to expand the current site. And then they're also buying Asteelflash, right, and doing a number of other transactions that have been talked about. These things, these expansion plans are actually generating additional costs within OpEx this year. Hopefully, these are not -- we don't see these necessarily a structural in nature for OpEx at this time.

Okay. Sure. But has most of the expands -- you will likely -- or do you expect we -- these will mobilize this year?

To a much lesser degree, yes. There will continue to be some ramp-up, and in particularly in Poland, in Mexico, in Taiwan, from -- in terms of EMS. In terms of NPI, it really depends on what new projects we'll be getting so -- but most of -- I think that most of the -- the costs for expanding non-China sites from EMS perspective is done in 2019. And things are starting to get much more streamlined. So there will be additional expenses put in. But in terms of overall percentage of revenue, I think, it's back to a more normal level.

Okay. So to the conclusion for the EMS business outlook this year is that the top line will grow and margin -- OP margin will stabilize here or will potentially improve.

Yes.

The next question is Szeho Ng from China Renaissance.

I just want to touch base on the EMS acquisition, Asteelflash. When will that start contributing to the company's top line?

We don't have -- we're not giving out the -- this year's number for Asteelflash because we don't -- the transaction is not closed yet. But as a reference, last year, they had a revenue of $1.1 billion. And if you look at their first and second half split, it's about 45%, 55%. And they had a net income of around $53 million for last year. So you could probably take that as a reference. And we're expect -- the schedule is to close the transaction by early third quarter.

Okay. All right. So is it fair to assume that, that business, the net margin, at least, right, is better than our existing EMS business?

Yes.

Any the reason for that? Is it 1/4? Or it's because of the mix issue?

I think it's the -- it's the different nature of business. I think what they're focusing on is smaller volumes, but larger variety. And it's -- a lot of it is not the traditional 3C type of business. So I think the biggest benefit to -- out of this transaction is 3-fold. One is, it does expand our overall geographical coverage throughout Europe. And the second is that the business model is different. They are serving a lot of the new application, smaller volume. And once those business turn into mass mass production, then it's very natural for the -- for Asteelflash to move these to USI. Clearly that's -- yes. I think there is the -- really, the customer portfolio is very, very complementary. I think there's very little overlap between their customers.

Okay, sounds great. And my last question regarding the second part. Is it fair to assume, at least for this year's dividend, will be flat from last year's level?

The what?

The cash back -- cash dividend will be at least flat compared with the last year?

Well, I think -- well, we'll be paying off 60% to 65%, seeing we're not changing it at this point.

I mean, from the dollar perspective -- dollar amount perspective.

Almost remain the same. Remains similar -- the EPS we've made this year, they're going to last. So dollar-wise, I'd say -- the amount was...

Okay. Good.

Yes.

Anything else you have? Do we have any more callers? Okay. Thank you for attending ASE's fourth quarter earnings release.

One of the things, I did not give any guidance on margin.

All right. Thank you very much. See you next quarter.