Hello. I am Ken Hsiang, the Head of Investor Relations for ASE Technology Holdings. Welcome to our Third Quarter 2022 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 in this event. If participants do not consent, please disconnect at this time. I would like to remind everyone that the presentation that follows may contain forward-looking statements. These forward-looking statements are subject to a high degree of risk, and our actual results may differ materially. For the purposes of this presentation, 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, including those presented by our subsidiary using Chinese GAAP. Intercompany transactions between our ATM and EMS businesses have been eliminated during consolidation, but appear within business unit results. For today's call, I am joined by Joseph Tung, our CFO. During the call, I will go over our financial results and outlook, Joseph will be available to answer questions during the Q&A session that follows. Also as a reminder, we disposed off ASC Inc.'s China sites at the end of 2021. For our financial results presented here, in addition to our legal entity results, we have included information on a pro forma basis or as if the disposition of ASE Inc.'s China sites had already occurred. We believe the pro forma results give additional meaningful information, which would assist in providing comparability of our financial results. For the purposes of this presentation, we will generally discuss our full company and ATM third quarter results sequentially compared with…

[Operator Instructions] Now we have a question from Mr. Randy Abrams of Credit Suisse.

Yes. Okay, the first question I wanted to ask, actually on your acknowledgment of the slowdown. Could you talk about the CapEx outlook? It looks like you slowed it down a bit for third quarter. If you could give a latest how you expect '22 to come in and then also a view for '23? And then within that, you've had relatively better utilization and strength on advanced technology, whether you're seeing that start to slow or do you still see, into the coming quarters, to advanced holding up better than some of the mature wire bonding?

Yes, I think for this year's CapEx, we will bring this down a little bit, roughly around 10%. For next year, we're still in the process of formulating the overall outlook, and we will decide how much we will be spending for next year. In terms of utilization in quarter 3, we continue to have pretty tight utilization with assembly and tests, both over 80%. But going into fourth, I think the overall utilization will range from 75% to 80% for both assembly and test with the advanced packaging capacity slightly higher than wire bonding.

And then the -- I guess I'm going to get to -- okay, the second question I wanted to ask, actually, if you could give a bit more detail about the margins, where it looks like in your guidance, it's going back to first quarter level, sales back to Q2, so implies a bit more a dip despite currency being favorable. So if you could talk about that trend and then also how the -- I think you mentioned it should be a better pricing environment, but just how you are seeing that, whether customer pressure, competitive pressure, how that's shaping up? And then just a factor on the margin, what's driving a little bit bigger decline there?

Well, I think overall in the fourth quarter, I think the pricing still remains to be stable. And although we do expect that there will be around going back to a normal pricing negotiation going into next year. In terms of margin, I think, of course, the loading really is the determining factor of our margin and going into quarter 4, because there is going to be some softness in terms of the overall utilization and the volume will be – will come down a bit. So the margin certainly will have some impact. In quarter 3, we had a b–ter margin Ie the Loading continues to be high. But I think going to quarter 4, the margin prospects we are looking at, it really reflects the differences in our loading. And also, I think the – as we mentioned earlier, we are entering into a higher cost structure, higher cost environment because of developing macro situations that we’re facing.

Next question is from Ms. Sunny Lin of UBS. Sunny?

Hi, can you hear me?

Yes.

So my first question is to get your thoughts on how we should think about the seasonality going to first half 2023. I understand things are still moving pretty quickly, but any initial expectation will be appreciated?

Like we said, there's a lot of -- still a lot of uncertainties in front of us, and we are not giving out any guidance for first quarter yet. What we can say is, we're going to see a normal seasonality factor that comes into play. And typically, in the first quarter, in the past, under the normal seasonality, we should be looking at a 5% to 10% drop in the revenue.

Got it. Then my second question is, if we look at the demand environment for the second half of the year, automotive, consumer, industrial are still relatively stable. But how would you think about the sustainability going to early 2023? I guess in recent weeks, we started to hear from the supply chain regarding the increasing uncertainties. So just wanted to get your thoughts here. And also, would you expect the IBM outsourcing to also slow down somewhat going to 2023?

I think it’s, we’re not different from anybody else in the industry that we are facing the same uncertainties in front of us. And our best estimate for the year is that, we should be looking at a flattish year. And given our position, we remain confident that we will outperform the industry as a whole and also the our competitors. Going into the first quarter, I think the – I think the same pattern remains that the automotive and networking will continue to be performing stronger than the other sectors. And I think the industry inventory digestion will continue in the first half of next year. And also the new restrictions imposed by the U.S., that remains to be seen. So there are a lot of moving parts in front of us, and we will be closely monitoring the situation.

Our next question is from Baya Kumar. Baya, please state your company name before your questions. Baya? Our next question is from Rick Hsu.

Yes, can you guys hear me?

Yes.

Okay. Just one question to Joseph. I just wanted to clarify, when you said, next year you're looking for kind of flattish 2023. Does that mean the total -- your total business or the total industry IC, ATM business or the global semiconductor market?

No, no, we're talking about ourselves. I think the general idea is that the market returns softer next year. And -- but from our best estimates, we're looking at our overall situation and the customer forecast, we're still confident that we will outcompete everybody else and maintaining at least a flattish year for ourselves in terms of our ATM business. And another factor to look at is that we believe that in a down -- particularly in a downward market situation, our market share expansion should actually accelerate given our leading position there.

Right. Okay. Just one quick follow-up. Can you give us more color about what's your view on the global semiconductor market next year? Were a bit declining or just give us some direction?

Well, I think the chance of coming down seems to be higher.

Okay. Great. Yes, that's helpful. Yes, that's all I have.

You are welcome.

Next question is from Evelyn Yu of Goldman Sachs.

This is Bruce. Can you hear me?

Oh, Bruce.

Hi, Bruce.

Let me try to add some simple questions. So can you give us what's your capacity distribution? How much of a capacity in China? How much of a capacity from different geographic location? And what is the revenue coming from the different geographic location, for ATM alone? And for EMS, for your consumer and communication business, how much of the business and the capacity is coming from China?

In terms of ATM, we have about 7% out of China in terms of capacity. And our Taiwan operation is about 85%.

For EMS?

EMS around 60%-some in China and the others are all over the place.

Do you see a strong customer demand asking for Taiwan plus 1 or China plus 1 capacity or, i.e., that they're asking you to have some big upside outside of Taiwan and China?

I don't think it's that obvious in terms of ATM. I think the -- our going rates still continue to be strong in Taiwan because of the much larger and more complete infrastructure. It's very difficult to go outside to set up something new in the short run. And I think all the technology development are still here. So I think the customers are still pretty confident that working with Taiwan is a safer bet for them. But in terms of EMS, we do see more requests from our customers to further expand to outside of China. And so we are making a lot of progress in terms of expanding our capacity outside of China, including our investment in Poland, in Vietnam, also in Taiwan.

I see, so which means that you don't have the capacity or you don't have any plan to increase your non-Taiwan and non-China ATM capacity, and do you see any building out plan at this moment?

We'll continue to monitor the situation, and we'll go where our customer wants us to go, provided that makes commercial sense for us. So it's going to be a dynamic process. We'll continue to monitor the situation and make the right decision.

So current customer demand is not strong enough for you to make a decision to go aggressive to expand the ATM capacity outside of Taiwan and China?

I think what you're referring to is really the U.S. and yes, I think there are some inquiries about whether we will be having something sizable in the U.S. And like I said, we are monitoring the situation and see how we can better address that when the time comes.

I see, I understand that. The next question, I'll try to follow-up with the seasonality. I'm actually very surprised that you mentioned that the first quarter is going to be a pretty -- it will follow a seasonality, which is not the case for most of the foundry at this moment. I mean, we are looking at 16%, 20% sequential decline in the first quarter for most of the foundry names. And if there's no wafer, how can you have the similar like previous years. So can you tell me where -- can you tell me that my thought process with this is might go wrong?

There is a time lag between our foundries and production in our -- and our production. I think the wafer bank has already been there. And we're looking at the quarter performance based on the forecast that we're getting from our customers. Right now we do see a normal seasonality pattern in the first quarter.

I see, well, that's a lot better than expectation. One quick follow-up for the LTA. What's the current situation for those LTA you saw like a couple of quarters ago. And you also mentioned some -- a little bit different pricing environment in the fourth quarter. Can you elaborate a bit more?

Well, I think the LTA is signed doing a – relatively a special circumstances and is one of the ways for us to secure a – better our relationship with customers. I think it did serve its purpose and the LTAs are going into a retirement cycle now. I think coming next year, I think things will start to be normalized in terms of our pricing negotiations and I think our position does give us a good leverage to have a suitable pricing strategy that works for both ourselves and our customers. And that would be the pricing environment for next year.

Next question is from Szeho Ng of China Renaissance.

Yes. Two questions for me. The first one, is it possible to quantify any additional cost synergy we can expect from the ASE/SPIL merger? Because I can't really mention that, does the merger actually make a small resilient in the downturn?

Well, of course, the synergy can come from our business negotiations with our customers. It comes from the better usage or better allocation with our resource, in terms of our R&D efforts, in many different areas we can have synergies created and sharing of best known message is also one of them. So that's really what Ken was mentioning earlier on in the session. And that through the merger with SPIL, it does give us a better cost structure and also more -- higher efficiency when we're facing a challenging environment now.

Now maybe just coming to OpEx intensity perspective, can we expect further improvement?

Well, I think we have been making a lot of improvement in terms of our OpEx, right? In third quarter, our OpEx ratio was 7.6%, down from – if we look at the same period last year, it was probably 8.2%. So we’re making a lot of progress in operating expenses. And for quarter 4, I think the OpEx ratio will remain at the similar level to quarter 3. So we will continue to have a tight control over our operating expenses.

Our next question is from Mr. Gokul Hariharan.

Congrats on the resilience on the margins, especially. I had a couple of questions. One, could you talk a little bit about the inventory situation that you're seeing today compare it with the last maybe couple of cycles. What -- based on the wafer banks that you see, as well as what you see with customers, it feels like inventory is definitely much more elevated compared to the last few cycles. So just wanted to understand why you feel by first half this year, we should be -- first of next year, we should be done within inventory correction? Or do you think that it could take longer than first half of next year to kind of clear out the inventory?

I think the inventory correction already started in the first half of the year and it's continuing. I think it's stretching a little bit longer than what was originally expected. And same as everybody else, we're expecting this to last throughout first half of next year. I think partially, it will be consumed. And also, some of the inventory will be actually replaced by the new products that we introduce in the next year.

Okay. So on your rough guidance or indication for next year being flattish, what is your expectation of industry -- industry is down mid-single digit or something like that? Is that how we're thinking about how much ASC will outgrow the industry next year?

No, I don't really have a view except like I said, the chance of coming down is higher.

Understood. And on pricing, should we expect that we should see pricing going back to the -- maybe mid-to-high single-digit kind of decline next year? Or we think when we talk about the more normalized pricing environment, it will still be better than the mid-to-high single-digit kind of price declines that we were used to in the past?

Well, it’s going to be a normalized pricing environment. And there will be price hikes throughout the year. But like I mentioned, our position does give us better pricing capability when we start the negotiation process, and we believe that we will have the capability to come up with a suitable pricing strategy that works for both ourselves and our customers. And like I said, like we mentioned, we do believe and we remain very confident that the margin that we’re going to have will move up from previously between cycles, 20% to 25%, now to mid 20% to 30%. So we remain confident that we will have a structural margin improvement.

[Operator Instructions] Next question is from Szeho Ng of China Renaissance.

Yes, I have a follow-up. Regarding the China ATM operation, can we assume that we are primarily serving the domestic clients in that factory?

Yes. It is more of local customers. And I think the operation there remains to be -- still working quite nicely at this point at a healthy level. We believe that come next year, it will remain to be a resilient operation of ours.

And the other one on the dividend one. Going forward for the dividend policy, would it be more based on the payout or based on the absolute dollar level?

I think the -- it was -- it will be more payout.

Okay. Okay. That means sticking to the ballpark around 50%, right?

I'm sorry?

The ballpark is around 50%, yes.

I think we have been paying out roughly 60% to 65%.

Okay, all right. Okay, got you.

Next question is from Mr. Gokul Hariharan of JPMorgan.

One follow-up question from my side. Could you talk a little bit about the demand environment in smartphones? Are we seeing mostly demand weakness in the Android camp? Or are we starting to see some demand weakness in the high-end smartphones as well? Is it becoming a little bit more broad-based? And for your auto and industrial demand, do you now factor in any potential correction in that demand as well next year? Or you think that it will be reasonably resilient through most of next year as well, unlike the rest of the semiconductor industry?

Yes. I think automotive continues to be the brightest spot at this point. And we do believe that the momentum will continue into next year. In fact, year-to-date, I think our automotive has been growing very fast. We have over 50% growth this year. And from an ATM perspective, I think we’ll be able to hit the NT$1 billion revenue mark. And also for EMS, it will be – it will hit a NT$700 million threshold and we’ll continue to be going strong. I think in terms of EMS, the original goal was to reach a NT$1 billion mark by 2024, but I think that was – that’s going to accelerate. We have a very, very good chance in 2023, we already reached that goal. In terms of smartphone, I think across the board, I think the Android system continues to be soft. Although in terms of unit growth, in terms of unit volume, it does come down, but the one offsetting factor is the rising IC content in it. So it’s going to be softer, but it’s not going to crash.

Our next question is from Randy Abrams of Credit Suisse. Randy?

Actually, just one on the USI, which has had a very strong year. And I think you discussed pull-in and a bit earlier build. Could you give a framework actually for that part of the business for next year, both the first half coming off a high base and then full year? And if you see any just set and also traditionally EMS, what the outlook is?

Well, we're not going to talk about any customer in particular, but I think overall, we remain confident that we'll be seeing growth in our EMS business come next year.

Okay. So that should still grow. I mean you talked auto still has a lot of growth. But overall, it sounds like better than IC/ATM from what you're seeing?

EMS, yes.

Okay. The second question, it relates to the China, not much direct impact. Could you discuss just the behavior, and it might be early, but one is if there's any change in more localization, trying to -- like we're domestic customers prioritizing domestic and flipside international customers, if you've seen any inquiry that could be an incremental business that might have been using domestic. I'm just curious if you're seeing ships in either direction there?

You mean the local?

Yes. Like one would be China based -- your China-based customers, if they start prioritizing it even a bit more local supply. And then the flipside is international customers, if they're a bit worrying, actually move a bit out from domestic OSATs, if there's been any shift?

Well, I think the customer come to us regardless it's Chinese customers or other customers, they come to us for value, is not coming for geopolitical. This is a business. It's not a political decision here. I think right now we're seeing that our Chinese customers are giving us normal forecasts, there's not much of a movement there because of the tension.

Okay. No, that's good. And it sounds like not much movement internationally either. So it's -- because it's kind of targeted on certain parts, so --

No, I think it's up and down, still going --

With the normal --

With the normal industry situation. Okay. Great. That’s helpful.

There is no more question.

Okay, if there is no more question, I will end the session. And I think there's a lot of challenges ahead of us, but we are confident that we can weather this very nicely. And given our leading position, we are very confident that we will continue to have a healthy year in front of us. Thank you very much.