Hello. I am Ken Hsiang, the Head of Investor Relations for ASE Technology Holdings. Welcome to our Fourth Quarter and Full Year 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. As a reminder, we disposed of ASE 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 fourth quarter results sequentially compared with third quarter legal entity results, and year-over-year compared with pro forma fourth quarter 2021. We will also discuss holding company level and ATM full year results compared with pro forma 2021. I am joined today by Dr. Tien Wu, our COO; and Joseph Tung, our CFO. For today's call, I will be going…

Hi, everyone. I would like to give you a 2022 recap. The 2022 revenue and margin improvement achieved our targets. ASE ATM revenue grew 13% year-over-year. Here, I'm referring to everything in U.S. dollar term, also on a pro forma basis. The 13%, we believe, is more than twice of the logic semiconductor industry growth. The 2022 ASE ATM gross margin, operating margin was 28.5% and 17.9%, respectively, surpassing historical peak levels of 27% and 16.6%. 2022 ASE consolidated revenue grew 16% year-over-year. 2022 ASE consolidated operating margin improved 1.1 percentage points year-over-year, with net profit growth of 29% year-over-year. 2022 advanced packaging revenue grew 27% year-over-year, test revenue grew 15% year-over-year, momentum continues in mid to long term. 2022 consolidated automotive revenue grew 50% year-over-year, achieving $1.6 billion. 2022 ATM automotive grew also 50% year-over-year, reaching close to $1 billion milestone. I would like to give you 2023 outlook. ASE continue will be industry outperformer. With enhanced structural profitability, we expect ASE ATM first quarter 2023 revenue to be subseasonal due to industry destocking. However, ATM business should trough in the first quarter, followed by sequential quarter-to-quarter growth for the remaining of the year. With multiple market uncertainties, 2023 ATM revenue year-over-year will range from flattish to high single-digit decline. Expect higher mix of advanced packaging and test business. We also expect continuing market share growth due to increased semiconductor complexity, IDM outsourcing and also our smart manufacturing offering. We reiterate ASE ATM annual structural gross margin of mid-20%s to 30%. We believe ASE is late to fall, early to rise during this market correction because scale, technology leadership, flexibility, also the proven record, make ASE an indispensable manufacturing partner, resulting in more resilient pricing and expanding lead against our competition during this volatile market timing. ASE's global footprint gives strong competitive advantages in current geopolitical environment. ATM, we have high-end supply chain in Taiwan. We also have a group of diversified capacities in China, Korea, Malaysia, Singapore, Japan. EMS supply chain, primarily in China. We also have diversified capacities in Taiwan, Vietnam, Mexico and Europe. Future expansion will be planned based on customer and end market requirements. Capacity expansion continues in second half of 2023, although at a slower rate comparing to 2022. However, more expansion in building infrastructure and smart manufacturing, preparing for the next cycle. Further improvement of cash flow based on disciplined capital investment, scale efficiency and sustained profitability. I will pass the floor to our CFO, Joseph.

Thank you, Tien. Well, echoing what Tien just mentioned, with the aggressive destocking and software end demand, we are looking for a softer-than-expected trough first quarter, both in terms of revenue and margin performance. However, at this point, we are seeing signs of improvement, including increasing NPIs, seizing forecast revisions, some rush orders and continued pricing resiliency. We are now of the view that things will turn up from second quarter, with decent recovery and further ramp up to full capacity in the back half of the year. Now based on our current business outlook and exchange rate assumptions, management projects overall performance for the first quarter of 2023 to be as follows. In NT dollar terms, our ATM first quarter 2023 business levels should be similar with pro forma second quarter 2021 levels, which was TWD 72.7 billion. Our ATM first quarter 2023 gross margin should be above second quarter 2019 gross margin, which was 18.6%. For EMS business, in terms -- in NT dollar terms, our EMS first quarter 2023 business levels should decline high single digit year-over-year. Our EMS first quarter 2023 operating margin should be similar with first quarter 2021, which was 2.5%. Now with that, I gave you the first quarter guidance. Thank you.

Now we would like to open the floor for questions. [Operator Instructions] We have a question from Mr. Gokul Hariharan.

Yes. Can you hear me?

Yes.

Okay. First of all, can I ask a little bit, I think Q1 clearly is quite weak. It looks like you're seeing most of the order cuts coming through in Q1. Quick question on gross margins, I think it looks like gross margins are declining about 800 basis points or so. Could you help us understand how much of that is primarily a utilization cyclical thing versus are you also having to give up some pricing in the downturn, so how do we think about the gross margins? And given that you're expecting recovery starting from Q2, how cyclical are gross margins going to be? When you talk about the mid-20%s to 30% gross margin, do we kind of fall within that range for 2023 overall as well, or is that a long-term guidance and not so much for 2023? That's my first question.

Well, we're still holding on to the structural margin that we mentioned earlier on. I think we are very confident that throughout the year, we can continue to maintain a 20% -- mid-20% to 30% gross profit margin for ATM business. And also for EMS, we continue to target a 4% and above operating margin. In terms of the margin erosion in the first quarter, I think mainly, it's really from the volume because of the lower loading and also impacted by NT dollar appreciation versus fourth quarter '22. I think the price -- ASE has very, very minimum -- ASE has very, very minimal impact on the overall margin performance in the quarter.

Understood. That's very clear. My second question, could you talk a little bit about what are you hearing from your customers that gives you the confidence that we get back to sequential growth in Q2? Could you give a little bit more color on any subsectors or any particular areas where you're starting to see these rush orders, or like customers kind of coming back at a more accelerated pace in terms of demand when we think about Q2 and beyond?

Our confidence in the second quarter pickup are primarily based on the -- our conversation with -- actually all customers. And starting December, as a matter of fact, the destocking effort started quite early in 2022. Different sectors have gone through different pace of their destocking effort, so I will not comment too much detail in that. What we're seeing today is some sector seems to accomplish their short-term target, and they start to have rush order, and we have seen that in January. Also, we have seen some forecast revision upward. Now in terms of the pricing environment, if we believe there is a sustained downturn, then we believe that the pricing pressure should be worse than what we're seeing today. And there are quite a few reasons why we believe this is the case. If you look at the Industrial and Automotive, we continue to see strength. Also, our light-out factories provide very high quality and consistent high reliability output. So that part of the business, we continue to see strength, and we are seeing the consumer sector to going through some of the destocking efforts. In December, the -- as well as Q1, they have gone through very severe destocking effort. And with all indicators, by talking to our customers, they believe the normal shipment should resume in second quarter.

Next question is from Mr. Randy Abrams.

Actually, I'll ask 1 follow-up to it, just with that across customer pickup. First quarter was a much sharper decline, especially versus outlook a few months ago. Do you see that prospect in second quarter starts resuming quite a strong pickup, or do you still see its kind of gradual rebound where it's much more a second half-weighted year?

That is -- that remains to be same, all right? So today, we are -- we have high confidence the second quarter will pick up, and we believe the pickup should at least be double digit. That's what we know today. Now the forecast is actually stronger, however, the -- we would like to be a little bit more conservative right now.

Okay. So do you expect it to be a double-digit pickup from this lower first quarter?

Correct.

Okay, good. Okay. And then I wanted to ask actually the mix, the -- you expect the advanced packaging and test to outgrow relative this year. Just -- if you take the 2 areas, are there certain areas you're seeing on the advanced side? Is it like the traditional mobile, or do you see anything -- there's a lot more attention to things like the AI, if you're seeing the HPC pick up? And then I'm just curious on the mainstream, it's been weaker for a while, where that's at? Is that lagging on the pickup, or do you think they have further to go?

We are seeing the strong pick up in the second half for both sectors, based on the NPI activities.

Okay. And for -- and just 1 other application. The automotive, which has been very strong, does it look like you kind of avoided the downturn just given share gain? And because you mentioned that's still stronger, any signs or worries about that segment that it's -- it will follow in the other areas? Just curious how -- I think last year, at the start of the year, you expected 40% growth in delivery, at least that. But how auto looks, and if you see any maybe flags that they're kind of an elevated inventory, or the strength looks to continue?

Well, right now, the automotive remains to be very strong, and we are looking at the continued growth in 2023 for the full year. But in terms of percentage right now, it's very, very difficult to make that judgment call. But we are seeing strong forecast.

Our next question is from Ms. Laura Chen.

Can you hear me?

Yes.

Yes. I also have a follow-up question on the gross margin. Aside from the lower utilization rate and also the foreign exchange impact, I'm just wondering that it's more due to the lower loading, bumping or wirebonding? Or could you also give us some utilization rate for different applications or technology, is that possible?

I think the overall margin erosion is across the board because of the lower loading that we're facing now. But in terms of different services, I think advanced packaging is doing relatively better than wirebonding at this point. And I think across the board, the margin structure is pretty similar across different services.

Okay. And also my follow-up question is on the testing business. Could you remind us what's the current internal supply or internal percentage of the testing business, and do you see that will further grow for the coming years?

Internal supply?

Yes. Sorry, I mean the testing business portion internally. Like, we previously mentioned that we were -- strategy to increase our testing business and the equipment, I'm not sure if that will continue the direction.

I think in '22, I think the test portion of the business continue to grow a little bit, still hovering around 15%. And with the growing momentum, we believe that in 2023 or this year, that ratio will continue to rise. So we -- in this year's CapEx, I think the compensation will be a little bit different from last year. In terms of the overall CapEx for ATM -- for the group, roughly 55% is for assembly and then 35% is for test. I think that would -- that's going to change this year to 44% and 38%. So the investment in test will continue at a faster pace than the assembly.

We have a question from Ms. Vian Chu of Daiwa.

Yes. This is Rick. No worries, I'm using my associate's name. So right. It's a housekeeping. Can you provide your utilization rates across the board of packaging, bumping and testing for Q4 last year and Q1 this year?

I'd say last Q4, I think as we expected, it's around 80% across the board. But for this quarter, I think it's really not very meaningful to talk about utilization at this point, because the destocking and the soft demand has been driving our loading quite substantially. So I don't think it's really meaningful at this point to report these numbers for this quarter.

Okay. So basically, suboptimal, right.

Right.

Yes, a quick follow-up, yes? Right, suboptimal. So a quick follow-up. Based on this low loading in Q1, and I guess, the logic affects your gross margin for ATM. And apart from that, you also mentioned about the currency exchange for Tier 3. And anything else that's dragging down the gross margin for ATM? Is -- would that be coming from the pricing?

Yes. As I mentioned, the pricing impact is very, very minimum. In fact, in the first quarter, we have gone through a round of pricing negotiation and the -- as Tien mentioned, I think we are still maintaining our pricing resiliency.

Next question is from Mr. Szeho Ng of China Renaissance.

Gentlemen, I have 2 questions regarding the CapEx this year. Can you share with us the CapEx breakdown by your major site locations?

Let me get back to you on this.

Okay. No problem. And regarding the CapEx spending at the first half compared with the second half, how to remodel here?

I'm sorry?

I mean the spending pattern, first half compared with the second half of this year?

Spending pattern. I think the bulk of the investment will be made in the second half of the year. Maybe with the 45:55 type of split.

Okay.

Let me ask a question. Did you -- were you referring to site type of...

At the location. Let's say, China, Taiwan, Korea, the cash breakdown.

Okay. I'll pass it to the numbers, later for you.

Yes. Very rough breakdown review.

Okay.

Next question is from Mr. Brad Lin of BoA.

I have 2 questions. One is on the outsourcing trend from the IDM, and secondly is on the ABF substrate. So the first question is that are we foreseeing a larger outsourcing trend from maybe a, well, global-leading IDM? And then should we expect any tech or capacity difficulty if the order really come? And then second question would be on the ABF substrate. Is the ABF substrate supply turning loose in this year? And also, is the ABF cost trending lower recently, and should we expect it to turn tighter again when demand come back in second half of the year or 2024?

The IDM outsourcing, I think a good example would be the automotive business because automotive business traditionally are being conducted within the IDM, the front-end and the back-end capacity of the facility. We continue to see the automotive business and the industrial business to move up in this environment. That lead us to believe that either we are processing something the IDM cannot do or they prefer not to do it. I think the light-out factory, as well as some of the advanced technology, are good examples. So I think that trend will continue. The ABF substrate situation, the supply is better. I will not say that we're completely out of the supply constraint situation. I will not comment on the pricing, because the pricing is quite dynamic.

We have a question from Mr. Bruce Lu of Goldman Sachs.

Can you hear me?

Yes, we can hear you.

Yes. I think the first 1 is for the smart manufacturing. I mean, I think this is the first time the company was talking about that. Can you be more specific what is the tradition of smart manufacturing? What's the revenue contribution from the smart manufacturing? What kind of profitability for that, and what kind of growth should we expect for the smart manufacturing in 2023?

Well, it's basically fully-automated factories that we have. We sometimes call it unmanned factory or lights-out factories, means everything is on automated lines. And right now, we have about -- at the end of '22, we have 36 lights-out factories already, and we're going to 44 factories this year. We will continue to make further investment into automating our manufacturing capacity. I think the -- in terms of the revenue contribution, the capacity represents about 15% of our overall ATM in 2022, and it's going to increase to close to over 20% this year.

22% increased to 20%?

No, 15% to 20%.

Okay, okay. Sorry about that. Okay. Good. I think the next question is for the SiP business. I mean, I understand that you might have the inventory corrections for the last year's product or whatever, right? Can you talk about the -- what kind of like new SiP projects can we expect for this year onwards? What kind of SiP revenue growth is excluding -- well, that's excluding the first quarter abnormal situation, what kind of like SiP growth outlook can we expect there?

Well, I think by and large, I think it's going to be a more challenging year in terms of our SiP business for the year given that it's, first of all, mostly in the consumer sector, and that's still going through a lot of turmoil at this point. And so it's still a lot of uncertainties in front of us. We believe, in longer-term sense, the trend will continue as we continue to see further heterogeneous integration. But in terms of how much growth or how much business we will have in terms of SiP for this coming year, I think that remains to be seen. But by and large, it's more challenging than last year. But we are still making pretty good progress in terms of expanding our project as well as with new customers at this point.

Next question is from Ms. Sunny Lin of UBS.

Could you hear me?

Yes.

So my first question is to follow up on the smart manufacturing. So if we look at fully-automated fabs versus your traditional fabs, how much margin expansion could you expect?

The margin expansion is difficult to quantify because the smart manufacturing, it is easier to gain business when you have a fully-automated factory. Also, the business you're gaining tend to be requirement on high reliability. So we do have some tangible as well as intangible benefit from the fully-automated manufacturing. We also provide customers with the full transparency of all of the data that go with the automated manufacturing. If you are thinking about the margin expansion, I believe the -- since we started building the first automated factory, the margin continues to improve. I think all of the margin improvement has been revealed in the previous years of margin expansion. As I've indicated this year, we have -- last year, we had 1%. If you go back to the 2021, 2020, and then we'll continue to have margin expansion.

Got it. And maybe a quick follow-up on your full-year EMS outlook. You provided some growth expectation for IC ATM, I wonder if you could also provide us some color on EMS as well?

Well, I think -- yes, USI has reported 2 days ago. I think what they're projecting is that this year will be a flattish to a slightly-downward year. But it really depends on the -- how the overall economic situation in China turn out, they still believe that they will have a chance of a small growth for the year.

Next question is from Mr...

I'm sorry. I think they are also expecting sequential growth on a quarterly basis over the year.

Next question is from Mr. Gokul Hariharan of JPMorgan.

So first of all, on the CapEx for this year, could you give us a little bit more color how much CapEx is likely to be down year-on-year, given your more conservative stance and spending? And also, any idea -- are customers asking you to have capacity more built up outside the Greater China region, especially Southeast Asia? And any request from clients also to go to maybe U.S. or other locations in terms of the supply chain diversification, especially for ATM?

Okay. So ATM last year, we had total machinery CapEx of around $1.6 billion, a little -- about $1.6 billion. And this year, I think it's going to be a few hundred million dollars below that number for this year. But as I reported earlier on, the composition of such CapEx would be a bit different. It will be more test heavy this year than last year. The composition will be 44%. At this point, we're looking at 44% to 45% for assembly and then 38%, 39% for test, about 10% to 11% for EMS and the rest for material. And also to answer the earlier question about site allocation. I think in terms of different regions, in Taiwan, we will have roughly 65% of the CapEx being spent in Taiwan sites, 25% or lower in China and roughly 10% for the rest of the world.

Let me comment on the geographic locations for the ATM part of the business. As you know, in the next few years, majority of the high-end packaging wafers will continue to be out of Taiwan. So when we talk to our customers, it is very clear that we will focus on the execution to make sure all of the advanced packaging demand get fulfilled. There is no question about the integrity of the Taiwan supply chain. Let me comment on -- customers do have requirements for expanding capacity outside of Taiwan. The proposal today depending on working with each customer on their requirements. We have made announcement that we will be continuing to be the capacity expansion in Malaysia, Singapore and Korea. Some of the factories will expand traditional packages to make sure the customer does have flexibility to have order fulfilled in Taiwan or outside of Taiwan. For the high-end advanced packaging outside of Taiwan, the first question we need to ask is the source of the wafer. Until that question's get answered, it is really not a real question. There has been a lot of conversation in terms of in future when the advanced wafer is ready, how do we fulfill? Then we're talking to each customer regarding the source of the wafer, the number of the wafers, the required advanced packaging type and also the necessity to be fulfilled with indeed different geographic locations. So it's a very, very convoluted conversation right now. But I do acknowledge that the ASE is under a lot of attention, negotiating or discussing with the multiple layers of customers as well as agencies regarding the future requirement. However, that is a longer-term implementation. For the shorter term, we are expanding facilities to make sure the -- if a customer requires anything to have flexibility, it will get fulfilled within our current footprint. We do acknowledge the possibility of expanding our footprint, ATM, other than the current facility that we have. Geographically, we do acknowledge that. However, that will be longer term.

Understood. That's very clear. If I may ask 1 more question. Could you talk a little bit about ASE's current exposure and presence in 2.5D and 3D packaging? You already have some HPC customers who are already ramping up their 2.5D and 3D offerings, and it seems like this is starting to become a little bit more adopted. So could you talk a little bit about ASE's environment? We do hear a lot of foundry environment, but just wanted to also get about ASE's involvement in this area? And any kind of exposure in terms of revenue, et cetera, that you could share?

The 2.5D, it's a very, very long engagement history of ASE. And I think we're the first one to produce the -- one of the leading edge product with 1 of our key customers. We present the first generation machines using 2.5D, and there has been ongoing development with almost all of our customers, tried to polish the 2.5D, the fan-out and also different form of fan-out as well as the different form of chiplet in 3D. That's a major initiative of the whole company, and I can only say that we will continue to be very interested and very engaged with all of our customers as well as a foundry partner, and a big growth business. Our customer would like to have the -- all of the flexibility, all of the possibility out of the channels, and ASE is committed to be one of the channel to fulfill the customers' requirement, working with customers as well as our partners in foundry.

We have a question from Mr. Bruce Lu of Goldman Sachs.

I have a question about the SiP geographical production. I think that your SiP production is highly, highly concentrated in China. I mean, do you have any plan to expand like other capacity, or do you have the customer requesting you to have additional ex-China capacity?

Yes. Actually, this is a work in progress. We already have something set up in Vietnam, and it has started mass production already. And we will continue to look at our customers' request to further expand within or outside of China to suit our customers' needs.

So what kind of capacity outside of China in 2 years, like 20%, 30%, or?

Right now, I think the overall in terms of non-China production is about 35% of the company's revenue.

Yes. But you have to exclude the AFG one?

Yes, that includes AFG.

How about excluding AFG? Because I don't think AFG can do SiP, right?

25%. 25%.

It's roughly 25%.

I see. So 25% of SiP's capacity will be outside of China in 2 years. Is that the right expectation?

Right.

Okay. Another question is we do see that your EBITDA is much higher than the CapEx number. I mean, you have improved that for the last say, 7, 8 quarters already. Can we expect a much higher payout ratio in 2023 and onwards, because the cash flow generated is impressive.

I know this is coming. We will maintain our payout ratio of 60% to 65%.

I'm sorry, I won.

We hope -- I think it's important to keep the transparency and clarity on the payout ratio. We said it's 60% to 65%, and that number is there.

I see. Understand. So the excess cash flow will mainly be used for -- to improve the debt ratio, or?

Right now, I think we still need to fund our overall operation, including CapEx. And not just on the machinery side of it, we're also expanding quite a bit in terms of our buildings and land. Actually, last year alone and continuing in this year, we'll be spending more than $800 million for real estate as well. And also, we did lower our leverage quite a bit last year. So at the end of the year, we only have a net debt-to-equity ratio of 43%, which we believe is more health -- it's a healthier level. Going -- and looking at this downturn or market softness, we do want to have a better reserve in terms of our cash to see because there could be consolidation opportunities as well. So I think that's the general picture of our overall test situation.

Just a sign out. If you look at in the past 20 years, every single downturn, ASE gained share without any exception. I'm not saying that this is a downturn, but we are going through a correction. It can be 1 quarter, it can be 2 quarters. Right now, we have high confidence we will also gain share in this correction. Then the question is the next op cycle. I know it's a little bit long term, but this is what the operator needs to think about it. How do we expand our footprint as well as land space, facility space. Because keep in mind, in the COVID days, in the previous 2.5 years, we have literally depleted all of the factory reserved space because of the high demand. We are going through Q1 destocking effort, but let's not forget the longer-term horizon in case semiconductor will resume the path of GDP plus. ASE resumed the path of gaining share. In the next few years, we will need more building space in Taiwan as well as outside of Taiwan of different technology. And also, if you look at NPI, right now, there's a lot of very exciting new applications and new technology, and all of which will require a lot of attention and investment. So I believe that, yes, ASE is very mindful of the short-term cash management as well as the payout ratio. But also, I think for the shareholder as well as for the semiconductor industry, we really need to be mindful of the long-term potential. And ASE really would like to be a responsible partner to make sure we fulfill all of the possible scenarios.

[Operator Instructions] We've got a question from Bruce Lu of Goldman Sachs.

Well, I have another question. Sorry about that. I just have 1 more. TSMC was talking about like sales and value for their product, which the geographical location is a value. I think as you mentioned, like ASE has the most diversified capacity globally in all kind of different countries and cities, which is the value, right? Do you consider to sell this value, which means that you increase your price in your overseas capacity?

The value, how do you define the value? The value is really the service the -- as well as the quality and the timing that you provided to customers. And I believe the -- you are correct. There could be 1 scenario where the timing, the location would present. It becomes a tangible value for the customers. But all of these are in the making. The fact that we are expanding over -- we're expanding Singapore and Malaysian footprint, and they were also creating a mirror side of some of the facilities from Taiwan to overseas, that secure the long-term partnership and further gain the confidence from our customer that ASE is willing to do whatever it takes to make sure the local, the customer, the regulatory requirements are fulfilled. Does that present a value long term? Yes. Now, with that value, can we only reflect the value from a pricing increase? I'm not exactly sure because NPI, the every generation, 8 months or 18 months, I think the business is really look at the technology partnership, volume partnership, and I think it goes much, much deeper than ASE.

I see. I mean, for -- I would say from the -- at least what TSMC were saying was like, they just charge a different pricing in different geographical location. I mean, of course, I understand that the value includes a lot of things. And the investors in general are more simplistic, that -- can we expect some of the pricing differential among the different capacity geographical locations?

I'm not sure. I'm not sure what is the politically correct way to answer that question. My apologies, all right. So I'm sorry, I'm going to pass that question.

Okay. I understand that.

[Operator Instructions] There is no more questions on forum.

Okay. Thank you, everyone.

Thank you very much. Happy Chinese New Year.

Okay. Bye-bye.