Hello. I am Ken Hsiang, Head of Investor Relations for ASE Technology Holdings. Welcome to our second quarter 2020 earnings release. Thank you for attending our conference call today. Please refer to our safe harbor notice on Page 2. All participants consent to having their voices and questions broadcast via participation of this event. 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's call, I will be going over financial results. Afterwards, we will have a Q&A session with Joseph Tung, our Chief Financial Officer. Entering the second quarter, we were concerned about supply chain durability and COVID-19 impact on overall electronics demand. After, we do believe that supply chains generally held up while COVID-19 appears to have bolstered consumers' demand for electronics. On Page 3 is a high-level first half recap. Holding company revenues grew 18% year-over-year on U.S. dollar terms. ATM revenues grew 23% year-over-year on U.S. dollar terms with gross margins improving 3.8 percentage points or 5.3 percentage points, excluding foreign exchange impact. EMS revenues grew 12% year-over-year in U.S. dollar terms. We continue to see strong demand from our various business lines, in particular, our SiP business is driving our ATM and EMS business growth. SiP for the first half of this year grew 20% year-over-year in U.S. dollar terms. We actually expect SiP growth to accelerate in the back half…

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

The first question I wanted to just ask on the third quarter outlook. I guess, maybe big picture, the mid-single-digit growth, maybe factors comparing to foundry or TSMC, which is quite optimistic, but I'm curious if you're seeing any timing difference from the -- I think now even the flagship customers noted a little bit later, build, if there's a different seasonal profile for your second half from just different timing this year for both segments, ATM and EMS. That's kind of the first part. The second part, if you could clarify the impact from the restriction? Just want to make sure I get it right that it's mid-single-digit third quarter. And then if I could understand after that, like a full quarter and fourth quarter, once that customer is out, what the impact is? And I think I heard medium term, it's still a mid-to-high single-digit impact even with new customers. So I guess if you could just clarify how that impact will play out after or going in the second half and then beyond?

Well, I think in terms of TSMC situation in our comparison, I think we're not a full reflection of whatever TSMC is projecting at this point because of the different customer portfolio and also a different level of capacity or technology in the 2 different segments. So I think what we are projecting on our end is really the forecast that we're getting and the situation that we are in today. In terms of third quarter, I think the -- what Ken just mentioned is that if clinically just looking at the forecast, we should be having a 5% or mid-single-digit growth in the quarter. But we are looking at the U.S. export restriction impact on us. And we're taking -- although the procurement is -- the pronouncement is not finalized yet and exactly how much and what kind of an impact on us is still remaining to be seen. But just for the conservative perspective, we are saying that -- we are thinking that the 5% or the mid-single-digit growth in our ATM business should be offset by this U.S. export restriction. And therefore, in our guidance, we're saying that we're going to have a similar quarter in third quarter comparing to the last quarter. And for the fourth quarter, I think, again, nothing is finalized yet, and there will be further revisions or modifications in the restriction. And so the net impact of that is still remaining to be seen. So at this point, we're not giving out any fourth quarter projection yet.

Okay. And could you clarify the comment that mid-to-high single-digit impact? Is that the one even including some other customers making up the difference? So that's what you still see as a net impact, even factoring some benefits? Or would you expect, I don't know, in the medium term, you'd get back to run rates. I'm just curious that second part of the guidance, what you're implying.

I think the -- what we're seeing is really the -- again, to be conservative, although nothing is confirmed yet, but just for the -- for conservative per se, we are saying that we -- if we look at full-year next year, there could be a mid-to-high single-digit impact on our revenue. But still it depends on what kind of a year in 2021 in front of us, and there are a lot of things that are still moving parts. And we're just trying to be conservative about it. And there are a lot of things to be considered, including new products coming out, including the COVID-19 situation, including the overall demand situation in the 5G deployment status. And also there's going to be -- if one customer is impacted, there could be other customers having some reshuffling of business in terms of the competition landscape. So all things put together, it's still a very vague or very unclear situation in front of us. But just to be conservative, we want to say there could be mid-to-high single-digit impact on our revenue for next year.

Okay. And then if you could give an update? I think, right after the merger, you had mentioned about the synergy that you could have, I think, 2 points at the operating margin level. And it looks like first half, I think you're on track with that, but the sales are also -- recovered in first half. But I guess now that you've had a bit more time to assess, if you could give a view how to think about the margin if it's in measure of synergy? And then if -- how we can think about the OpEx growth and also the CapEx outlook now?

I think the -- after the lift of the restriction -- lifting of the restriction, I think we have been initiating quite a bit of efforts in terms of having a better alignment with SPIL. And that includes some of the capacity sharing, procurement, also CapEx alignment and so on and so forth. And we are seeing very good progress in the first half, although the COVID-19 situation, also the U.S. restriction may have some of the offsetting impact on us. But nonetheless, I think in terms of operating expense, I think we are definitely on track in terms of getting back to the 2018 level, which was 1.4%. In fact, by the way it's going, even with the -- a lot of the uncertainties in front of us, we -- our expectation is that we're not only going to be hitting that target but also maybe ahead of the target a bit. So we are seeing some of the synergies being created with a better cooperation and better alignment with two entities.

Okay. Great. And for CapEx, if you have a view if now -- I think you mentioned a little bit of conservatism, but then some new opportunities for how that may net out for overall CapEx spending.

I think for this year, we're still maintaining our original budget. We're saying -- we have been telling the street that we are expecting similar level of CapEx for this year. And that hasn't been changed yet.

Okay. And if I could ask one final. On the -- I guess, the latest news from Intel, where they're starting to consider at the foundry, one is a chiplet strategy and then the second is potentially contingency plan to do some outsourcing. I'm curious if you see opportunity on the CPU market or from some of this potential contingency or strategy shift may be taking place?

Well, I think it's still early to comment on that. I think the overall impact still remains to be seen. But generally, we are seeing Intel's competitors that are ramping up, and that'll certainly benefit our overall business. And going forward, it's kind of a natural tendency that if TSMC does better, then we do better.

Next one, we're having Gokul Hariharan, JPMorgan.

The first question I had is just to understand the impact of this U.S. restrictions. I think if you think about your market share in various competitors of this company, which has been restricted, how quickly do you think you start to get back some of this market share, even if these restrictions were to remain in place? And secondly, since we don't have clarity in terms of how the final restrictions are going to shape up, if we think about -- I think you talked about 5%, 6%, mid-single-digit growth in Q3 without these restrictions coming into place. Would you think that this is a normal kind of year without these restrictions coming in place, would you have expected the Q4 also would be kind of a growth quarter for IC ATM? And I had a follow-up question on this one.

I think it's fair to say that the impact is without the U.S. export restriction impact. We should have a stronger than what we're projecting now second half. And there was a fair chance that we will continue to see quarter-on-quarter growth in terms of the overall business. But still, I want to qualify it by saying that nothing is finalized yet and how big the impact will be still remaining to be seen. And we're just taking one step at a time. Without any changes so far, we're just projecting that in third quarter, there may be some impact on us, which could be in the mid-single digit kind of an impact on the -- on our revenue.

Okay. Quickly on the margin, I think just following up on Randy's comment. I think previously, we had talked about 200 basis point gross margin expansion in IC ATM as a result of the combination synergies, et cetera. When should we expect that to come through? Is that something that you now expect maybe some kind of next year? Or would that be affected by this U.S. restriction as well for the medium term?

Well, I think the -- well, certainly, the first half, we have reached our target, but going into second half, I think there's a lot of uncertainties in front of us, including the COVID-19 situation that has an impact on our overall situation. And the U.S. recession. And by and large, I think the NT dollar appreciation also had a very large impact on us. So I think it will become a bit difficult for us to reach our 2% saving -- margin improvement target for the year. We will work on it, and situation changes, and then we need to perhaps put in more efforts in terms of controlling our costs. And hopefully, we can maintain that -- we can reach that target sometime in next year.

Okay. Got it. Just one small question on SiP. I think you talked about some of the new millimeter wave related projects coming through. How should we think about the new wave of SiP projects that are -- that ASE is entering? Should we expect that that will be more margin accretive to the business? Or would it be similar to the margins that we're making in the current EMS business?

One second, please?

Sir, are you still with us?

Yes, I'm with you. I think the new products that we are going in, particularly in the SiP products, I think right now we're in the stage of ramping up, and we're expecting fairly good progress on momentum going into the second half, particularly on some of the new projects that we're going in. I think -- in terms of margin, I think these new projects should be marginally accretive. And that will help our overall momentum for the year and following to us next year. We have been making a lot of progress in our SiP business buildup. I think in terms of our EMS business, right now, I think, about 40% -- in second quarter is about 40% of the overall business, and that percentage will continue to rise. In terms of ATM, is the mid-single-digit level. And we are seeing this SiP business momentum start to accelerate in the second half. We set out to say that we have a goal of new SiP business revenue to be $100 million a year. And it looks like we're going to triple that -- more than triple that in 2020. So we're making a lot of headways or progress in terms of building the SiP business, which has not only helped the revenue, but also on the margin.

Right now, we're having Roland Shu from Citigroup.

For U.S. restrictions, I would like to know what extent of the U.S. technology equipment or software you are using for doing your business? Is it possible for you to build production line totally without using U.S. technology or equipment going forward?

There is a portion of the equipment or capacity that are U.S. made or with U.S. content. There are other alternative solutions to that. Although I don't think that is really the main issue. I think the -- about result is reflected in the whole value chain, whole manufacturing chain, it's not just on the assembly and test per se. So if we -- it comes all the way from chip design to foundry to wafer fabrication to assembly and test. So we cannot isolate this just by looking at whether we can replace our capacity or equipments with non-U.S. equipments to try to solve that problem.

Understood. But for the assembly and testing point of view, I think -- the extent of this U.S. technology or equipment, I think at this time it will be much lower than the foundry or others, right?

That's correct.

Okay. Understood. Okay. Second question, can you just say -- you started EMS seasonal production earlier than the previous year. And also, I think this morning, I think, the [indiscernible] talked about their smartphone. Launch schedule will be about a week later than expected. So for that one, I think this actually is a little bit different from what the customer is talking about. So I'm wondering what kind of a product you started the production in second quarter for EMS business? And with this early start, will that result in the 4Q the EMS revenue will be low than previous years?

I think we're talking about two different things. I think in the second quarter, the better-than-expected revenue growth was twofolds. One is some of the quarter 1 demand because of the operation disruption, it was being pushed out to second quarter. And second is that we did have a better-than-expected ramp on some of the SiP products, which are not related to the smartphone that is coming on stream in third quarter, although there's a bit of a delay. But what happened in the second quarter is not related to that.

So what kind of the product it is? So is that for computer or for...

It's for communication and for consumer as well.

Understood. Yes. Sir, when you think on the seasonality for your EMS business in 3Q and 4Q, will be well maintained. So definitely, we are not going to see 4Q seasonality will be impacted, right?

Judging from the whatever forecast we're getting, we're seeing a very strong momentum in the second half. We will see quarter-to-quarter growth as well.

Right now, we are having Bruce from Goldman Sachs.

I wanted to take on more about why the gross margin for the ATM decreased. I think that we do see the currency impact in the second quarter already, but management mentioned that there will be another like close to 1 percentage gross margin impact. Can you be more quantified that what is the impact from the low international rate in the second part of the quarter and also the ForEx for the second quarter. Sir, but still -- -- sorry, for the third quarter?

I think the -- in terms of the utilization in the second quarter, we're looking at around 85% across the board including assembly and test. And going into third quarter, I think in the first 2/3 of the quarter, I think we will remain to be full with fairly high -- very high utilization. But just to be conservative, we're saying we could see some impact starting from late August. And therefore, the utilization may drop a bit to still above 80%. So overall, I think the margin impact because of the utilization rate differences, it's very marginal. I think most of the margin pressure will come from -- really coming from the NT appreciation.

I see. So compared to like earlier this year, we just had a similar foreign exchange rate. What kind of gross margin we are looking in the third quarter? So the question I'm trying to ask is that without the ForEx impact, are you on track to deliver the gross margin improvement because ForEx is nothing we can control, but the product mix, the cost saving is something the management can do?

Yes. I think, as I mentioned earlier on, we are on track in terms of controlling our OpEx. And on the -- like I said, on the -- in terms of crystal side of it, there is -- aside from the currency issue, there is a little bit of an impact not only utilization, but really on the utility costs because we entered summer periods; therefore, there could be some impact on the margin.

I see. Lastly, again, I want to follow up with Roland's question about the seasonality for the EMS business. I think the third quarter, you are guiding for flattish year-on-year decline -- I'm sorry, flattish year-on-year revenue. So -- but your key customer is having some delay for their production, and you have a very, very strong second quarter as well. So can you walk us through the seasonality again for your EMS business?

You're referring to third quarter?

Yes. With your guiding third quarter revenue to be year-on-year flattish, right?

Yes.

Right. Right, your key customer is actually having some delay in terms of the production. So how can you deliver the flattish year-on-year growth?

Well, I think the -- what we're seeing here is we are using NT dollar to -- for third quarter. But if you look at it in U.S. dollar terms, there actually is -- there's still actually some growth.

I see. So even though your customer might delay their production, you are still generating revenue growth for the third quarter for the EMS business?

Yes. I don't think -- our third quarter is still growing in terms of our EMS. One-week delay, I'm not sure how much of an impact.

All right. I should ask this way; do you see any schedule delay for your customer full-year production in the third quarter as a year-on-year basis?

No comment.

No or no comment? They're very different.

Okay. No comment.

We are now taking questions from Sebastian Hou, CLSA.

So my first question -- sorry, that I probably had joined later. So I just want to clarify one thing that the mid-to-high single-digit impact from this U.S. sanction on one of your customers. Is that for next year or for third quarter or for second half this year?

Both.

Okay. Got it. But you see that -- okay. So okay. So -- but for third quarter, the impact should be less. Is that right?

The third quarter impact will be what?

Will be less than that magnitude because you are probably still doing shipping something to that customers in the first half of the third quarter.

We're not commenting on any particular customer.

Okay. Got it. Right. But if I -- if I look at the -- compare the guidance you have, I understand there's a time difference between you and foundry. So I think -- clearly, I think TSMC will also have a similar exposure to you to the customer -- that customer in question. But apparently, the company seems to have been able to backfill or find other customers to fill that hole pretty soon. So even raise the full-year guidance. So my questions to ASE is that it is just a temporary issue that you have a -- given the time difference, time lag between foundry and OSAT, so we -- probably some of that strength will be seen in fourth quarter or there's a more bigger question -- bigger issue where I think TSMC can find someone to backfill while we are -- difficult for us to find -- to do that?

Well, I responded to this question earlier on, I think. First of all, we're not a full reflection of TSMC's business model. We do have different customers, and we do have different technology. We're not exactly in the same arena. So there's going to be some natural differences between us. Second is the -- like I said, nothing is finalized yet. So whatever impact on us may or may not be the same as everybody else. And we're not even sure that how much of an impact and how long the impact would be because nothing is finalized yet. What we're trying to say is if we have to be on the -- more on the conservative side, we want to -- we're trying to say that this thing could be contained. And also, it doesn't really change the overall -- the ongoing growth driver for our industry remains the same. 5G, HPC also -- all kinds of different new applications and new products that are coming on stream. So there are a lot of uncertainties involved. And also different players. There's going to be a lot of reshuffling in the industry. So there's so many different factors that could have an impact on the overall situation. So whatever we are saying now is really just the guesstimation that what could be the impact on us.

Got it. Got it. Fair. Can I revise my previous question? So you probably mentioned before, I just want to clarify that the mid-to-high single-digit revenue impact is for the consolidated revenue or for the IC ATM only?

IC ATM only.

IC ATM. Okay. Got it. The last question from me is on the SiP business. I think that currently we have been pretty positive and have a leading technology here. How do you evaluate this opportunity when we go to 2021? And how do you see the competition? Do you see the competition that is intensifying or the gap between us and the second or third tiered players are getting widening or narrowing based on your judgment?

Well, there's going to be -- any industry or any market, there's going to be in and out of different competitors. And we're totally open to that. I think the key strategy for us is to continue to maintain our leadership in technology and also our product offerings and solution offerings. So the overall impact remains to be seen. But I think the overall growth momentum in the SiP business is still very strong. And we're definitely the dominant player in this. And there will be others coming in as the second or third -- even third source. And we actually welcome that because it adds to the integrity of the whole business.

Next one we are having Gokul Hariharan from JPMorgan.

Just quick one, follow-up question from me. I think we've had talked about very strong growth in our turnkey business and increasing the exposure for test. With this U.S. restriction coming in, do you see that the growth in test is likely to slow down as well. I think some of your equipment lenders have talked about orders drying up pretty quickly as a part of this restriction earlier today or actually yesterday. So could you just talk about what is the outlook for the test, especially the turnkey part? Are other customers picking up some of the capacity over the next 2 to 3 quarters?

I think there could be some short-term impact. But overall, I think the general trend remains to be the same. And we do plan to continue to leverage on our turnkey capabilities and continue to drive the test business of ours. I think there's still plenty of room for us to grow in this particular area. And this is a business that has ample growth opportunity, and also, it's a margin-accretive business for us to continue to focus on.

Okay. And could you talk a little bit about what is the status of Asteelflash? How quickly should we see that consolidation coming into the P&L for ASE? And what are the things that you're looking for to kind of drive some synergies up given that the revenue mix for the company seems to be a little bit different?

Well, I think the schedule remains the same that we are expecting to close this by end of third quarter. And I think the very rationale for having this acquisition is really the businesses are very complementary to each other. In the Asteelflash -- first of all has a very extensive footprint, particularly in the Europe area. And also its product and service offerings are very complementary to USI. And also the business model-wise is also very complementary while Asteelflash is mostly in the early stage, smaller quantity, going into mass production type of business. Well, USI is very, very strong in mass production. So I think the 2 entities have very, very strong synergy that can be created among the two.

Next one to ask questions, Elina Lin from Daiwa.

Joseph and Ken, this is Rick. So I guess, just 1 question from me. You guys worry about the year-end inventory risk? Because -- the reason why I'm asking is, I think one of the reasons why the demand strength in Q3 across the board, the SDN companies is the continued restocking from customers because of the worry of the COVID-19 will continuously affect the supply chain operations. So -- on the other hand, the inventory at the end of the second quarter is already kind of excessive. And the COVID-19 overhang will likely further weigh down -- weigh in demand in second half. So I'm just wondering whether you guys worry about any big mismatch [indiscernible] when we move toward the end of this year?

Well, I think like everybody else, we cannot exclude possibility of there's. There could be some inventory buildup because of the overall supply chain situation. But so far, we are running based on the forecast that we're getting. And we're just -- we're not in one particular area, and we have a diversified customer base and product offerings. So we're seeing a fairly strong overall momentum going forward. So we're not overly concerned on that.

Okay. Just 1 quick follow-up. I think some management indicate this high inventory build could become a new norm in this industry going forward. Do you guys agree? Hello?

Can you repeat the question again?

Okay. Well, I'm saying that some companies recently indicated this high inventory buildup could become the new norm in the industry going forward. For example, in the past, as I say, we won't have a seasonal norm. It could be -- seasonal norm could be based at 70 days. But now it could be maybe 80 days, or even 90 days will become a new norm for the seasonal inventory build. Would you guys agree?

I don't think we could comment on that. But the inventory could come in, in many different shapes or forms. I think the -- if we look at the kind of the legacy products, there could be some inventory buildup. Well, in terms of more advanced products or new applications, I don't think there's just really inventory buildup at this point.

[Operator Instructions].

If there are no more questions, we can -- oh, wait. We have 1 more question. I announced it too late.

Right. So, right now, we are having Randy Abrams from Crédit Suisse.

Okay. I actually wanted to clarify on fourth quarter because it's -- gets noisy with a lot of moving parts. Because I think from the impact from the restriction, it moved from mid-single to mid-to-high single, so there's a few points net impact. But I'm curious, you're also mentioning pretty good momentum. So is there a way to think how you're netting it out? Or like I think in the past, sometimes when things have been good, you said, hey, business actually looks so good, fourth quarter looks like it's growing. I guess if you can give a snapshot, knowing it will change in a few months, but how the net of all this based on forecast looks?

Well, I think the -- I think, fundamentally, we want to -- I want to say that we're still seeing a very healthy and very strong demand momentum for us in the overall view of things, particularly in the 5G area, the HPC and so on and so forth. There are a lot of new things that are going on. A lot of the further investment that we made last year and also the early part of this year are starting to pay off, and that's why we're seeing a very strong first half. And even in the third quarter, if everything remains the same, we're still seeing quarter-to-quarter growth. And the momentum seems to be continuing. The restriction will have -- definitely have a -- if it stays as it is, we -- there could be a -- there should be a short-term impact on us. And if it involves any particular customer, we are here to serve the whole industry, there are other customers as well. And the -- whatever that's being left out could be picked up by somebody else. So it's -- it really depends on how situation -- how things move along. And at this point, since nothing is confirmed, we're not -- we're really not saying that the things are falling apart just because of this restriction. We're just saying that to be conservative, we want to put this in the fair state of mind, I guess. And things can change very fast. And how soon and how fast the things could turn around, we don't really know. We don't really have a good grasp of it. But we do know that the basics remains the same. The industry is still moving toward more technology advancement, toward new products introduction and so on and so forth. And we continue to maintain our technology leadership, so that whenever there is a new opportunity, we will have the first-mover advantage. Whenever there's a customer switch -- market share switches, we will be best positioned to capture that opportunity as well, so to mitigate the -- whatever impact it could or may or may not have. So we're just trying to put things in the right state of mind at this point. So whatever we're saying now is really still very, very uncertain, but just -- so hopefully, things can turn back to normal in a fairly short of time and then we can all go back to a normal growth pattern again.

Okay. And is it possible to say what percent of revenue either in IC ATM or percent of consolidated?

Well, whatever we are referring to is basically on the ATM side.

No, how -- the contribution, like what percent customer? That was just a number.

But we don't comment on that.

Okay. And just the last question I want to ask to clarify because I think your guidance similar level for ATM is about 160 basis points. NT dollar, I think, based on a moving, maybe 2%, 3%, probably about half of that. You mentioned utility costs. I'm curious if anything else in terms of material. I don't think you have much gold, but there's been a huge increase. So if there's any other material costs or product mix or pricing? Just -- I just want to understand all the factors, if any others.

Okay. Aside from the NT dollar appreciation, there could be some -- utility is also one factor, and there could be some product or even business mix changes. That will all have some impact on the margin. I think it's an overall consideration that we put in to look at our third quarter margin.

Okay. And are you -- to clarify, you have no real gold exposure anymore? Or is there anything to that, any sensitivity anymore?

Gold?

Yes.

Okay. It's very, very minimum.

Okay. Thank you very much for attending the conference call. I think to summarize, we had a strong first half. We'll continue to see business momentum going into the second half, particularly in our SiP business as well as our EMS business. ATM wise, there could be some more uncertainties in front of us. We're doing everything we can to try to face this challenge, and we remain very, very optimistic about the overall business momentum going forward. Thank you very much.

See you next quarter.