Earnings Call: Q1 2020

Apr 22, 2020

Good morning, good afternoon and good evening, ladies and gentlemen. Welcome to the ASM Pacific Technology twenty twenty First Quarter Results Announcement Investor Conference Call. Before we proceed, I would like to note that during the conference call, there may be certain forward looking statements with respect to ASM Pacific Technologies, business and financial conditions. Such forward looking statements may involve known and unknown uncertainties and risks, which could cause actual results, performance and events to differ materially from those expressed or implied during this conference call. For your reference, the IR presentation related to our twenty twenty first quarter results can be downloaded from our website, www.asmpacific.com. With us this morning are Mr. W. K. Lee, CEO of ASM Pacific Technology and Mr. Robin Ng, CFO of ASM Pacific Technology. Our CFO, Robin, who is also our CEO, Dessinet, will start with a brief discussion about our twenty twenty first quarter results followed by a Q and A session. Without further ado, let me hand this over to Robin, please. Thank you, Leonard. Good morning, good afternoon, ladies and gentlemen. Despite a challenging quarter with the COVID-nineteen outbreak, the group managed to register a very strong double digit percentage year on year and quarter on quarter growth in bookings. In fact, the bookings for this quarter was the second highest first quarter bookings after the record booking performance in Q1 twenty eighteen. All three business segments registered double digit percentage booking growth Q on Q and year on year. The group started the year with very strong bookings in January. The momentum was disrupted in February due to the COVID-nineteen outbreak in China. However, bookings in March returned to normal with immaterial amount of order cancellation. The group achieved strong double digit percentage year on year booking growth in Q1 this year led by customers in China, Taiwan and Korea. Multiple factors drove the strong booking performance of the group including the five gs infrastructure build up, localization of the China semiconductor supply chain, recovery of the optoelectronic market and the Group's strong position in Advanced Packaging. The Group achieved a revenue of US434.2 million which was at the high end of our guidance and a net profit of a HKD25.4 million dollars which was better than our guidance of a loss for this quarter. Q1 twenty twenty group gross margin at 33.5 was lower year on year and Q on Q, mainly attributed to the SMT Solutions segment's geographical mix. In terms of end application market, the Mobility Communications and IT segment remains the largest by revenue in Q1 twenty twenty, underpinned by the continued momentum in China and five gs infrastructure demand. The surge in demand for general lighting tools drove the Optoelectronics segment to register the largest growth both year on year and Q on Q in percentage terms to form the third largest revenue contributor after the automotive segment, which retained the second spot despite a slowdown of the automotive industry. Since the outbreak of COVID-nineteen, we have taken every effort to protect the safety and health of employees, which is the utmost priority. The group has implemented various measures like work from home arrangement for certain employees and enhanced social distancing measures at our workplace. These prevention control procedures have worked well so far with minimal disruption to operations. Besides focusing on employee safety and business continuity, our focus is also to ensure compliance with local authorities guidelines and restrictions and helping the community to fight the outbreak as a responsible corporate citizen. As at the date of this announcement close to 100% of employees in China, manufacturing plants have returned back to work. We lost some production capacity during the extended Chinese New Year holiday period and subsequent travel disruptions. The group manufacturing team in China demonstrated great resilience when our plants were reopened after the prolonged shutdown due to the COVID-nineteen outbreak. The group is also grateful to our suppliers who have supported us. We are working towards recovering a big portion of the lost capacity over the next few months to productivity improvement and cooking over time. The other two primary production facilities in Malaysia and Singapore are also affected. Malaysia government has imposed a movement control order closing all factories from 03/18/2020 until twenty eight April twenty twenty. Our factory as part of the essential supply chain has been granted approval to run production with a reduced workforce. On 04/03/2020, Singapore government has also announced a set of item measures effective from 07/2020 until 05/04/2020. And this by the way has been extended to June 1 based on last night announcement by the Singapore Government including suspending all non essential workplace. Our business is classified as a key economic sector and allowed to remain open, but with certain restrictions. While it is inevitable that such restriction will have an impact on our production capacities and efficiency, we are able to cushion some of this adverse impact because of our diversified manufacturing base. At the start of this year, we have renamed back end equipment segment to Semiconductor Solutions segment, in short semi, to reflect the contribution by ASM NEX for the mid end deposition tools as well as the group's transition to an integrated hardware and software solution provider in the semiconductor packaging market. Demand for traditional tools like wire and die bonders and tools for advanced packaging contributed to the strong booking performance for this quarter. China semiconductor supply chain localization effect, five gs infrastructure and general lighting demand contributed to the increase in bookings for IC discrete and Optoelectronics businesses. On the other hand, we registered relatively weaker than expected orders for CIS2s due to anticipated softness in software in smartphone demand brought about by the COVID-nineteen outbreak. For Q1 twenty twenty, the semi segment contributed to 44.7% of the group's revenue. Revenue from advanced packaging tools continued to be strong exceeding that of CIS in this quarter. Collectively both AP, Advanced Packaging and CIS contributed close to half of semi segment's billing. Gross margin increased by two zero two bps year on year and 45 bps Q on Q to 41.3% mainly due to product mix and positive results from a productivity drive in manufacturing activities. This quarter booking of US88.9 million dollars was a record high and this is also the fifth consecutive Q on Q growth that the material segment has registered. Traditionally serving as a leading indicator to the semiconductor market, this trend will have overwhelmingly suggested the recovery of the market if not for the current uncertainty introduced by the COVID-nineteen outbreak. For Q1 twenty twenty, billings of the Materials segment declined 22.3% Q on Q, but expanded slightly 1.3% year on year respectively to US51.6 million The prolonged plant shutdown in China limited the delivery performance of the segment. This segment contributed to 11.9% of the group's revenue. Gross margin declined by 188 bps year on year due to an increase in cost of precious metals, but improved seven bps Q on Q to 8.5%. Profit for the segment improved by 51.3% year on year and 61.4% Q on Q in the absence of Moded Interconnect substrate business, which was discontinued in early twenty twenty. Strong demand for five gs infrastructure and ICE IP packages contributed to the high booking similar to the level recorded in the 2018 for the SMT Solutions segment. Selling of the SMT Solutions segment amounted to million representing a contraction of 15.1% year on year and 23.1% Q on Q. SMT Solutions segment contributed to 43.4% of the group's revenue. Gross margin declined by two fourteen bps year on year and three twelve bps Q on Q to 32.4%, largely due to volume as well as the profit mix where there were greater proportion of customers from China with lower margin sales. Segment profit declined by 40.8% year on year and 54.6 year on year. The pickup in demand from Chinese manufacturers to localize the supply chains and the accelerated deployment of five gs infrastructure and the progress of the group in making and capturing new market opportunities such as advanced packaging, silicon photonics, industrial Internet of Things, mini and micro LED solution, power semiconductors and Industry four point zero solution underpin the group's confidence to deliver long term sustainable value to our shareholders. Second quarter booking tend to trend higher than the first quarter in the past. However, we have the view that the booking for Q2 twenty twenty will decline double digit percentage Q on Q due to the adverse impact caused by the unprecedented COVID-nineteen pandemic. While we continue to experience strong booking momentum for our material segments in the month of April to date, demand momentum for traditional tools in the semi segment was not as strong. In terms of billing, we expect the demand for information technology and data center related application to continue due to increased telecommuting and home based working activities as a result of COVID-nineteen containment measures worldwide. However, are generally more cautious than before as evidenced by some push out of deliveries to Q3 this year. While the group ended Q1 twenty twenty with a high backlog, some orders will take more than one quarter to be fulfilled due to production lead time and revenue recognition policy. In light of the above, we anticipate revenue in Q2 twenty twenty to be in the range of US500 million dollars to US580 million dollars We also expect the group's gross margin to be in the range of 34.5% to 36.5% for Q2 twenty twenty. With that, we like to proceed with the Q and A session now. Thank you. Thank you, sir. Our first question comes from Mr. Johnny Dang from Nomura, Taiwan. Thank you. Good morning, management. Thank you for taking my question. My first question is regarding to your second quarter booking guidance. So wondering if you can give us some more colors on what business segments may see booking declining into the second quarter And what are going to perform relatively well into the second quarter? And considering that, do you think that the second quarter booking will be lower than what happened in fourth quarter twenty nineteen? And my second question is regarding to the inventory correction risk across the semiconductor supply chain into the second half. Because ASM Pacific provides both equipment for upstream and downstream tech companies in general. I'm just wondering if you can give us some direction or some outlook on whether the upstream customers will see some more conservative outlook into the second half. And on the opposite side, the downstream may be turning a little bit better into the second half due to downstream companies or downstream customers have earlier impact from the COVID-nineteen? Thank you. I'll answer your first question first. So in terms of some color in terms of our booking guidance for Q2, we are guiding double digit Q on Q decline. So I think based on just pure simple mathematics, you're going to take it could be lower than Q4. Now some color, customers in general indicate that the loading is okay in Q2, but they are uncertain as what can happen in Q3. Basically, we believe that they have yet to receive also forecast from their end customers. Generally, we feel customers start to show concern due to the pandemic. But at this moment and also partly to answer your question about Q3 is really I think at this moment, nobody can really give a very clear picture yet so far down the road. Now given this backdrop, we expect customers to start to slow down or even go back their CapEx expansion program. However, we believe advanced packaging tool, CapEx continue because these are our opinion more of a technology buy rather than a capacity buy. Now you're probably aware that we have a looking at the numbers, Q1 booking was a high base. So coming off from a high base, we expect especially also if you look at our bookings in Q1 materials, we recorded a record booking and there was a consecutive high quarter increase. So we expect in terms of segment materials momentum may not be able to continue. And S and P also high base in Q1. So while semi there's a chance that it could be stable or slightly higher. So in terms of semi, a little bit more color, we expect Optoelectronics and the advanced packaging momentum to continue. Thank you. Our next question comes from Kaina Wong from Credit Suisse. Thank you. Hello management. I wanted to ask about the backlog and first quarter because I think we can't find the numbers and this is a first time that we can find it in our press release and how high is actually the backlog actually hike in the first quarter? And that's the first question. And then we also understand that there's certain push out on the delivery that we're going into third quarter. And so that what I wanted to ask is in terms of back to the booking trend, if we should expect that second quarter is declining, but the fourth quarter, fourth quarter, the seasonality this year will also change. What would you expect if like the when the customer concern is like stabilizing, would say change when the COVID-nineteen like situation is actually stabilizing later this year? I mean the second question is about we found some we wanted to know about the outlook this year because last time I think given the certain visibility, but now we have already got like two quarters booking and we also expect that you have like connecting with customer on the full year's CapEx expectation, etcetera. What will be the outlook for ASM Pacific this year by each segment? Keenan, I think let me answer your first question first. The backlog number sorry, this time now we realized that we did not put the group backlog in the slide. So to give you the number we ended up with a record backlog of US883 million dollars for quarter one. Now in terms of your second question let me get your question right first. You say you're asking about push out of the duration of Q3 and then what kind of booking trends we are looking at maybe in Q3 and Q4. Is that your question, Tina? I suppose so. Yes. Yes. Okay. Yeah. Let me let me address some of the the push up with that. As as I mentioned earlier, similarly, we see for billing. The we we tend to see the customers are a little bit more cautious, already. So they're starting to push up some of the shipment to Q3. So I think that's expected in view of the current climate. Now in terms of Q3 and Q4, honestly, I mentioned earlier, it's really too far for us to predict how this will develop because it all depends on how the COVID-nineteen situation will pan out. Now looking at the situation right now you know in certain countries like even in Singapore where and you know the situation is actually getting more serious So it all depends how this COVID-nineteen situation pan out. Now if I may refer you to I think you guys may have all the data right now. Look at the forecast recently done by IMF. They are projecting that the world economy will actually contract this year provided even provided that if the COVID-nineteen situation can be contained by the end of the first half. So they are projecting a worldwide economic contraction of minus 3%. So looking at such a forecast, think we have to be a little bit more conservative and prudent in terms of how we look at the future in the immediate future in the next Q3 and Now your third question is account related I think. To be honest, we only have three weeks of visibility into April. So as we have stated in announcement, we see materials booking are still very strong, very, very strong, Whereas the traditional tools in the semi segment not strong, you know. So that's what we are seeing at this point then after three weeks into the month of April. Okay. Thank you. Our next question comes from Liqing Huang from CICC. Thank you. Thank you for taking my question. The first question is about your full year on the second half visibility. So if you look at your customers by geographical distribution, by the different regions, what do you see any difference on visibility since you have a very strong first quarter and then second quarter, you have double digit decline. So and if you're looking forward, so do you have any difference in the order availability or the preference on the order on on this type of region? This is the first question. The the second question, just want to understand more. So why are you first quarter is so strong and but so which is driving the first quarter strong order? Is it because of the technology upgrade? Or it's because we are we were already in the COVID nineteen situation, but why the first quarter is so strong? Thank you. Now the first question is whether we see any differences or Yes. In terms of customer by region. By region, like, sometimes, yes. Yes. In terms of bookings, right? When you look at the bookings, I think the China I mean, the main drivers are still very much intact in terms of bookings. So China localization of supply chain, five gs infrastructure, advanced packaging, for high performance computing, to advanced packaging like SiP as well and also optoelectronics general lighting in particular. And a little bit less in terms of photonics, but all these are still driving we believe the near term booking trend. The only thing that we see that buck this trend is really the CIS. So the booking in CIS in Q1 this year declined on a year on year basis. So in terms of region, I think so far we don't see any significant deviation so far in the three weeks of the booking compared to Q1 this year. Now your second question is why so strong in Q1? What's really driving the orders? I think I mentioned earlier just now, I think those factors China supply chain, the five gs, AP, optoelectronics are the underlying drivers boosting up the performance of the booking in Q1. Despite the fact that we told you that during the February call, January, we think was very strong, but however February came down because of the China situation, primarily China lockdown and the world is starting to see that the crisis may get a bit more serious in February. But however, after February, March booking came back and returned back to kind of normal level. So customers, this is what we see in terms of Q1. Thank you. Our next question comes from Lai from Citigroup in Taiwan. Thank you. Good morning, management. This is Arthur Lai from Citi. First of all, I want to congratulate you have a strong first quarter result and also demonstrate your management quality across this virus outbreak crisis. In your so I have one question and one feedback. In your presentation, Page 31, you highlight that May is strong Q1 booking, but deliver over several quarters due to production lead time as well as some delivery push out. Can you elaborate more like this is from the advanced packaging or this is from the other application? What drive this longer lead time and is driven by the supply constraint, some component shortage or is driven by the demand push out? This is my first question. And also, have one big thing. Compared to the previous quarter, I noticed that you changed the category of your revenue. So you changed your name from the again to semi solution. And I think this is a very change. Can you elaborate in the future where we see more new semi solutions products or service coming to this category? Thank you. Arthur, to answer your first question first, what are the factors driving the long lead time? Not so much supply chain kind of constraint, more so of the type of equipment. We've got certain type of equipment like for example our next tools, the silicon photonics tools for example, they take a longer time for production to manufacture them and deliver to customer. So this is the users with nothing to do with any of the supply chain constraint that we talk about. So and then in terms of revenue recognition policy, we have talked about this before. Under the new accounting standard, if we deliver a new tool, typically the accounting standard require us to make sure or to ensure that the customer actually accept our tool before we can book the entire revenue. So we are shipping constantly shipping new tools to customer. So as a result, some of these tools, although we have already delivered to the customers, we wait have for customer acceptance before we can recognize the revenue. So this is just accounting kind of treatment. Now your second question is changing from back end semi, I suppose you probably asked why it changed. We have indicated the reasons in earlier quarter. I think with the addition of NEX into our business as you are aware, NEX is primarily focusing on the mid end segment. So once we have next starting to make material meaningful contribution I would say to the revenue base, we felt that it's more appropriate to rename this to semi to reflect the nature of next business which is really not the back end business. And also the fact that I think going forward the semi segment we also make an we also indicate that we are tying up with a leading software company together to collaborate together and to offer IoT software solutions to our customers. So I think with these two factors in the background, we felt it's appropriate to change or to renew the back end equipment to semi. So I think that's the reason. Thank you. Our next question comes from Mr. Bill Lu from UBS. Thank you. Yes. Hi, good morning. Thank you very much for taking my questions. I have three quick ones. One is, I totally appreciate that visibility right now isn't so good. A lot of things are sort of out of your control. But if I look at maybe what you can control in terms of some of the growing areas, can you talk a little bit about, one, the event packaging business and maybe what how much you expect that to grow this year? Second, if you could talk about also the Opto business, maybe specifically mini LED and what that looks like this year? My second question is on Q2 gross margin. I'm wondering if there are any remaining impact from the supply disruptions in China. And then my last question is on Q2 SMT bookings. It looks like that is down in Q2. Can you talk about the trends maybe in consumer versus auto? Thank you. Hi Bill, your first question is you're that visibility isn't so good. What are the areas that we can control? So your focus is really on advanced packaging expected growth this year as well as opto and mini LED. Right? So I suppose Okay. Thank you. Correct? In terms of advanced packaging, we see advanced packaging momentum continue to be strong since couple of quarters ago and moving into Q1. And we also see this trend will continue because as said earlier, advanced packaging tools are more for technology buy. So I think customers are preparing also such tools for the future. So this momentum we see will continue And also the fact that some of these tools actually go into high performance computing kind of market. So I think in that particular segment, you probably realize that that segment is still relatively healthy compared to say the consumer segment, compared to the automotive segment or even the smartphone segment. So that's the reason why the AP, We are confident that the AP demand will continue to be okay compared to the rest of the segment. Now in terms of Opto, this time around we are seeing the Opto demand coming mainly from the general lighting, not so much of the RGB display market. Possibly there could be a reason I know with the COVID-nineteen outbreak, the postponement of the Tokyo Olympics for example and all these RGB display, outdoor displays probably customers are a little bit more cautious in placing a new CapEx whereas for generalizing it's something that is a replacement. So I think that makes the difference why the general lighting market we see is relatively healthy compared to the RGB for the optoelectronics. Now in terms of mini and micro LED, as we mentioned before, these are still very much at a prototyping space right now. So we will consider this also as a more of a technology buy. So technology buy typically are not so much affected by situation like this because customers are preparing for the future. So they will continue to purchase advanced packaging tools like those I mentioned before. Now coming back to your second question, you said do we see any impact from China on our gross margin? I mentioned earlier, our workforce in China are close to 100% better work. In fact, we are also pleased to note that since they came back to work after the long shutdown, we also been driving a lot of productivity improvement and that's also the reason why you see our semi segment margin performed quite well this quarter vis a vis the other quarters. So in short, we don't see any more impact coming from China. However, in the other location, we have manufacturing location in Malaysia. So the lockdown in Malaysia is still continuing up to the end of this month, '28. So that will have some impact on our operational capacity. However, the diversified manufacturing base that we have, we are able to manage the situation quite well. So China plant are able to take some load from our Malaysian plant. And for equipment, we also have the luxury of outsourcing more during this period to make up for the lost capacity in Malaysia. So I think on the semi side, we should be able to manage the capacity effect pretty all right for this particular quarter. Now of course when it comes to metering materials, slightly different story because for materials we can't really outsource. So the impact on material will be relatively a little bit more impactful compared to the semi side. As you're aware, Malaysia is in a lockdown. So we only at this moment probably close to 50% of workforce able to work in our plant. So our material segment in terms of the ash leaflet will be slightly impacted because of this lockdown in Malaysia. Now the third question is on S and T, the GM down. Now you're absolutely right. We see consumer market, automotive market and based on those independent research files as well the smartphone demand for this year will also come down. So that will impact the SMT. However, we see five gs infrastructure demand as I mentioned, it is still very strong and we also see customers also requiring very advanced packaging tools from SMT in terms of SFP packages. So that's the application in SMT. Our next question comes from Angus Li from HSBC. Thank you. Hi management, this is Angus Li from HSBC. I have a couple large questions. The first one is you have a very good Q1 and you're getting Q2 to trend up in revenue as well. But you also mentioned that you're going to see some like shipment delivery pushed out maybe late in 3Q. So does that mean that your Q3 is going to head up pretty well as well with a possible bid in maybe end of this year? Or do you see any difference compared to my comments here? And the second question is regarding your OpEx. So you have your OpEx pretty well in control in Q1. And I'm wondering if going to Q2 or further into the year, do you see your OpEx to spike up further or to stay at a relatively stable level as we start to see in Q1? Yes, these are the two questions I have right now. Thanks. Okay. Let me answer your first question first in terms of Q3 kind of outlook. Now to be sure, to be very clear, when we talk about push up from Q2 to Q3, we are not talking about a significant number at this point in time. Of course, speaking compared to Q1, we see more customers pushing up because they're getting a little bit more cautious. Now Q3 performance in terms of billing will very much also depend on Q2 booking. So if you have been following us closely, we have been always saying typically we will fulfill our booking in one quarter typically. So very much depend on how the booking will pan out in Q2 for Q3 performance. However, having said that, this year is really something exceptional. So it depends on how the COVID-nineteen outbreak pan out. So that is really an uncertain event that we also cannot control. So if that can be contained fairly quickly, as I mentioned earlier, then perhaps second half may not be too bad, but it all depends how this will pan out in the near future. Now in terms of OpEx, you're right, I think we have controlled our OpEx pretty well. So on the year on year basis, we see I think OpEx kind of flat. So excluding some of the acquisition in fact the organic on the original semi business actually OpEx actually came down slightly. So well controlled in terms of OpEx. Did I answer all your questions? Yes. Thanks a lot. Thank you. Our next question comes from Sebastian Hou from CRSA Taiwan. Thank you. Yes, hi. Thanks for taking my questions. Some of my questions have been answered by the previous by you. Just a few follow-up. Where do you see the most interest and the highest momentum of the semiconductor segment in the second quarter? Because I remember you say that relatively speaking, semi seems to be better than material and SMT. And particularly, in terms of the I think you mentioned about advanced packaging. And can you elaborate more about in which application and which region of the advanced packaging you see the most strength? Thanks. Okay. So I suppose you're referring to booking. So advanced packaging, as I mentioned earlier, we see high performance computing, you know, devices going into data center. I suppose these are if you try to triangulate all these, I suppose it's relating to to what is happening to the world right now as well. Right? I mean, we are telecommuting more, we are working from home more, school children are also having lessons from home. So all these will place a lot of demand in terms of all these devices. So we believe that probably is part of the reason we see that sector still relatively resilient compared to the other sector. Now in terms of advanced packaging tool, we actually provide a wide range of advanced packaging tools. And foremost, I think on next deposition tools are still very strong, still doing very well. So we have a good backlog in terms of the next business. So this momentum will continue for a period of time. And then also SiP packages, we talked a lot also this quarter about SiP packages. We see that also demand going to our SMT. So so SFT packages typically devices like RF, MEMS, modules, you know, going into smartphones, going into wearables, smartwatches, AirPods. So we see the demand in the last few quarters for this are pretty strong. As a result, we see our SMT also shipping advanced packaging tools to customers related to those areas. Now we also mentioned a little bit more color that in this quarter, we we see AP and the advanced packaging and CIS2 making up close to 40% of our semi revenue 50% of semi revenue. So in this quarter AP is actually stronger than CAS because CAS has actually declined on a year on year basis. So what else is your did I answer all your questions already? Yeah, yeah, yeah. That's very helpful. Very helpful. Thank you. Thank you. Our next question comes from Arthur Chao from Hong Kong. Thank you. Hi, good morning. Thank you for taking my question. Regarding the relocation of lead frame operations in Singapore to Malaysia you announced last quarter, can you give me some detail on how these savings are to be achieved, savings from headcount, rent, etcetera? And also an update on how these plans have been affected if at all by the virus and the government's response, I guess both in Malaysia and in Singapore? Thank you. Okay. So we mentioned in the last quarter that we have decided to shift our lead frame operation in Singapore to Malaysia after we have completed successfully completed the extension to our Malaysian plant. Now obviously you can it's quite intuitive, I mean if you look at the living standard of Singapore compared to Malaysia, obviously the savings really coming from the take up. So it's quite obvious. And also in terms of exchange rate, Singapore exchange rate is one to three in Malaysia and main state. So obviously there is a great impetus for us to shift from Singapore to Malaysia and hence we expect these savings to kick in once this plant is fully operational. Now however because of this outbreak of course as I said earlier Malaysia went into a lockdown situation. So to a certain extent that that will push back our plan by a couple of months. So once once the situation resumes, you know, we will you know, we will start to throughout the Malaysian plant and then the we have totality by maybe third quarter next year, the plant in Malaysia will be fully throughout and operational. Thank you very much. Thank you. Our next question comes from Mr. Hong from China Merchant in U. S. Thank you. Can we move on to the next question? Our next question comes from Chris Yao from Qualcomm. Thank you. Chris Yao, please go ahead with your questions. Oh, hi. Hi, sorry. Yes, thanks for taking my questions. My first question is on, again, the Malaysia Singapore situation. How much is it just LeafGreen being impacted or are there other products being impacted? And how much did it contribute to your overall manufacturing capacity? Number two is on your gross margin, second quarter gross margin. I see your revenue in the second quarter expected to rise about maybe 25% to 30%, but your gross margin is only going up by about maybe two percentage points. I was wondering what is historically your gross margin trend pretty well with your revenue. So I was wondering if there's any product mix impacted or are there any more COVID-nineteen expenses going to be broken for the second quarter? That's why you're feeling a bit more conservative in your gross margin. The third question is on Advanced Packaging. I was wondering if you can disclose how much ASM mix is accounting for your overall revenue? And how much exposure do you have in the data center space? Thank you. Let me answer your first question. It's concerning the Malaysian situation. Is it just impacting late frame or the shipment? Now the Malaysian plant in fact the manufacturing center for all three segments. So we have the material segment there, we have the semi as well as the S and P. So all three segments are impacted by the lockdown. However, as I mentioned earlier, for the equipment side, the semi and the S and T, we have pretty much a diversified manufacturing base. So I think that helps. So we could for example, China could take some load off Malaysia as well as Munich and Weimert for the SMT, they can also take some load off the Malaysian class during this period. So we are managing quite well. So on the equipment side also we can outsource. So if there's this avenue to outsource some of these constrained capacity that we are facing in Malaysia to external manufacturing. So equipment side, I think we are able to contain the situation pretty well. The only impact we see is a lift rate because lift rate is something that we or materially something that we cannot easily outsource. And that's why I mentioned earlier that mid frame may see some impact in terms of delivery performance this year. But we still expect the mid frame going to be better than in Q1 because the Q1 situation was a complete lockdown in China for three weeks. So that's back to normal already. So China in terms of lead frame are contributing more to the top line compared to the Malaysian side. Now in terms of Q2 GM improvement given revenue increase in Q2, yes, Typically when volume increase, we typically see an increase in gross margin. That's why we are guiding 1% to 3% better than Q1 twenty twenty as a blended margin. Now I think of all the three segments we foresee we still see there's a little bit of a weakness in the SMT margin going to Q2. As we mentioned before, we like the fact that we have been doing very well in China penetrating into China's smartphone areas, but however the trade off is always on the margin side. So that's probably the reason why we are guiding the kind of margin performance in Q2. Now in terms of AP, how much next is contributing to the overall revenue now? I'm sorry we have not been so granular in this particular area, but let's put it that way. It is meaningful, we will not Qiao mentioning that NEST has been playing a part in terms of contributing to AP revenue. Thank you. Our next question comes from Simon from Bank of America Merrill Lynch. Thank you. Yes. So thank you very much. Congratulations on the Q1 results. A few things very quick, please. Number one, the Q1 bookings showing 50% quarter on quarter increase for the group. Could you recap the Q1 utilization ratio and then the whether your order second quarter production will be good enough to meet the 50% potential revenue increase. In other words, the Q1 bookings means almost the second quarter phase this time and then I have a follow-up question. Okay. You're right. Q1 booking was very high, but the booking and the utilization ratio actually are not The billing and the utilization ratio is actually more correlated. Now utilization ratio in Q1 as you could expect February was low because of the shutdown. But as I mentioned earlier, we recovered fairly quickly in March. In fact, March was a very good quarter for us. Looking at the continuous strength in terms of booking, our factory were really at full speed in terms of turning out delivery to meet the demand from our customer. So overall I think in Q1 the utilization rate for factory are pretty healthy maybe in the 80 to 85% range that kind of range we're talking about in Q1. Now whether Q2 will be production will be I suppose the question is sufficient to meet the Q1 strong booking. Yes, that's why we are guiding the kind of range RMB500 million to RMB580 million, which is still an increase in terms of billing compared to Q1. Yes, very clear. Yes, very clear, sir. And then a little bit details regarding the traditional tie wire bundles. Could you recap what kind of the semiconductor chips for the tie and wire bundles? Because this seems sound very traditional over the semiconductor chips. So why this area, the demand is growing, because the new chip the demand is more and more advanced packaging related. So whether this kind of trend is sustainable or not? And then the also regarding the SMT, what do you mean the five gs infrastructure and the SiP? It sounds that there are some base station related because of all the smartphone demand is quite weak. So could you provide a bit details what kind of the chips components based on your traditional die wire bonding and the five gs infrastructure and SiP? Thank you. No, traditional die wire bonding are still very cost effective tools. Typically a lot of our revenues still coming from the traditional tools because they are very cost effective compared to advanced packaging. So if the requirement in terms of precision, in terms of performance of the device is not very high. Customers still prefer to employ and use traditional tool because they are as I say very cost effective compared to advanced packaging tool. Advanced packaging tools are only used for very high end packages. I can give you an example, for example, going to high performance computing. So that kind of requirement, then customers will be looking at using advanced packaging tools for the packaging process. Now is this trend sustainable? Now typically for traditional tools, we like to view it this way. They are more for what we call capacity buy, whereas for advanced packaging, we are viewed really as more of a technology buy. So we're trying to differentiate these two. So looking I mean, it all depends for capacity buy, it all depends on how the loading customers. So if their loading reaches certain high level, typically they will start to buy new tools to meet the increased capacity needs. Well, however, as I say in light of this current situation, we can't really see beyond Q2 at this point in time. So I can't really answer you whether is this trend sustainable going into q three and and and q four. Now five g infrastructure, you're asking what kind of exactly what kind of end devices are we packaging. So I can give you some some ideas. So so these are typically more high end chips, modules that require more precise tools, you know, more advanced tools. So this tool can be supplied both from our SMT as well as from our semi site. And we believe for when we talk about five gs infrastructure, so these devices actually go into those base stations. So you're probably aware that for five gs compared to four gs, we need much more base station. So that's why the demand for more chips, more modules, more components, semiconductor components are there when it comes to five gs infrastructure. Now SiP, I think you also talked about SiP. So system in package are basically devices whereby customers pack a lot of components into a small package that go ultimately into your airports, into your smartphones, into mobile devices like watches. So because of the I suppose because of this more real estate, they need a pretty precise tools in order to package those small components into a small estate platform. That's why SIT require more advanced packaging tools. Very clear, sir. Thank you so much. Tim Pao from Hong Kong. Thank you. Hello. Please go ahead, Hi. Just a quick question. Can you give us some guidance about tax? Good. Now if you have been following us closely, our tax or ET, I would call it estimated tax rate whereby we just simply take the tax expense over the PPT typically tend to trend higher on a few factors. One is the business segment mix. When we have higher SMT mix compared to say the semi mix and the material mix, we tend to have a higher ETR and that's because our base for FMC is in a high tax duration area in Germany, in UK and also so as a result when they contribute more to the top line and the bottom line, we tend to see our ETR tend to trend higher compared to normal quarter. Now the other factor that we could take into consideration is the tax is a very complicated subject. We typically on a quarter on quarter basis when the profitability is low the tax for the group tend to be higher because in certain jurisdiction we to pay tax when they make money and if those jurisdiction happens to be a high tax area we still have to account for the tax. Now if you look at last year 2019, the first three quarters tax rate was also on the high side. However, towards the end of quarter four, we tend to up our tax and then overall our ETR on a normalized basis for 2019 if I recall correctly should be 28%, 29%. So I think in terms of how you guys plan for tax as I always mentioned don't plan tax on a quarter to quarter basis, look at tax on a more annual basis. So if we have them, I mean, if our top nine if you look at last year top nine around 2B, so our tax is around 38%. That's the fact that you guys should be taking as a question. Thank you. Our next question comes from Kaina Wong from Credit Suisse. Thank you. Hi. Robin, just have a follow-up questions on two things, right. One is about the gross margin that in second quarter, because actually you reclassified some of the COVID-nineteen expenses. Does it include extra labor hiring or something? What else if we go back to the normal standard like in the CGS or in the OPAS? And how much gross margin will be really impacted in the first quarter? And then the second is about there's other income, which is like much higher than historical in the first quarter. So where does it come from? I mean, is this like interest income or something? The third small question is the third question is about the CIS because we see the first quarter is actually come down a bit in terms of like booking and what kind of like expectation you will have this year because CIN is actually a multi year side driver for ASM Pacific. Would you see this trend intact this year? Okay. Let me answer your first question first. Maybe I can give you a little bit of color how we classify the COVID-nineteen expenses. Now if you look at say in February, so there was a government mandated shutdown in China for three weeks. So we take because you see we have to incur we still have to incur on the staff salary, what they cannot come back to work during the prolonged downturn. So we thought that maybe to give the investors and shareholders a more accurate view of the finances. Should classify this cost. I would say these are all sunk cost whether they come to work or not we still have to pay the salary and because they cannot come to work due to government shutdown, we classify this as COVID-nineteen expenses under the other expense line. So typically, I mean, you can see now in our announcement, we only classify a few key components, staff salary, some associated depreciation of the tools, the equipment in the factory, some space cost. So only these three components were actually reclassified up from the cost of this aligned to the COVID-nineteen line. And the amount we classified out is not that material. It's only about million. For these expenses in Q1, majority are related or were related to China because China was affected mostly in Q1. A little bit a smaller proportion coming from Malaysia because Malaysia lockdown started in the March. So we also had to classify on a like to like basis some of the Malaysian similar sunk cost into the other expenses, but much smaller compared to China because the base in Malaysia is also much smaller than China. Now your question is whether this will continue? Yes, for Malaysia it will continue because Malaysia is still in lockdown mode. So as far as there is a lockdown affecting our plan, will try to reclassify these expenses as accurate as possible so as to give to facilitate on more like for like comparison with the prior quarters. Now we also incurred in terms of COVID-nineteen expenses. These are not some costs, a smaller proportion are additional costs or incremental costs that we have to incur to protect the well-being of employees. So we have to for example buy more masks, sanitizers, so we have to incur more expenses cleaning our facility. We also have to arrange additional transportation for our workers in China, so that they don't take public transport and get themselves exposed. So all these costs, incremental costs we also classify as COVID-nineteen expenses, but this is a smaller portion compared to the earlier one that I mentioned about. Now as to your second point, other income, basically other income comes from government grants. So you probably are aware that because of the COVID-nineteen situation, governments in China, particularly mostly in China are helping businesses like us to defray some of these fixed costs. So they are granting us some savings in terms of for example insurance, retirement funds. So all these are classified as other income mainly in the financial statement. So when you see other income they are mainly coming from couple of clients. Now the third question is CIS came down in booking what is the expectation this year? Well, we started on a low base for CIS. CIS is a business segment that declined year on year. So depending on how things pan out in quarter three and going forward, for sure CIS to answer your question is really a multiyear driver. We see that impact the trend the multi year trend impact. So could be tempered by this outbreak situation only. Thank you. Thank you. Following question comes from Alpha Lai. Thank you. Hi. I have a quick question. So I want to confirm one thing is that today we mentioned a lot of new growth drivers from the technology side. Does it imply we can have a better gross margin and pricing? As I understanding the technology migration actually we have less and less competitor because most of development is usually the the single source and the code developed with our key clients. My understanding is right? Thank you. Arthur, I can only catch the first part of the question, but let me answer the first part. Then you can repeat the second part. In terms of margin, as we have been saying, generally speaking we can't be too granular. Generally speaking advanced packaging tool by nature of the complexity So they tend to command a better margin compared to traditional tools. So that would help in terms of our gross margin. Now Arthur, can you repeat your second question because you're kind of muffled second part? Yes. In this advanced packaging project or revenue, are we the sole source or the single vendor working with clients? Typically client may also may not tell you to be honest, but typically client would like to also a dual source for advanced packaging tools, but certain tools, you know, whereby, you know, pretty new, you know, so for a period of time, we we can certainly be the sole source. So typically, that's that's Thank you. Another following question comes from Sebastian Hou from CRSA. Thank you. Thank you. Actually I have three small follow on if I may. The first one, I just want to clarify that you already mentioned about the second quarter booking may potentially be below 4Q $20.19 level. Is that right? Sorry, Sebastian? Yes. Can you hear me? Yes. So is on the yes. So my question is just to clarify whether if I hear it incorrectly or correctly that the second quarter this year booking could potentially be below 4Q twenty nineteen booking level? No. We don't think so at this point in time. We don't think so at this point in time. Yes. Okay. So it's a double digit decline, but not seeing that going back to 4Q twenty nineteen level. We hope so. Yes, hope so. Yes, at this point in time, doesn't suggest. Okay, got it. Thank you. And my second question follow-up is that the it's also a quick follow-up on the tax rate. So what you mentioned is that based on the similar revenue scale we see in 2019, then high 30% of the effective tax rate could be the reasonable assumption. Is that the right way to interpret? Yes. It very much also depends on how the mix pan out at the end of the year. So I would say that if you base just on 2019, the account mix, the account revenue and DBT, that will be the kind of ETR we are looking at. Okay. Okay. Okay. So the last follow-up from me is the what's your experience in the past downturn when there is a significant economic crisis about customers' order behavior? And I wonder usually I think the company mentioned that you already see some noticed some customers push out from delivery from second to third quarter. And in your past experience, what's the possibility what's the odds of these push out turns into cancellation? And what happened if that turns into cancellation? Do you charge penalty from customers or do you write off those already prepared inventory? WK maybe you want to step in and maybe answer this question. Okay. Since you are talking about the part. Oh, I think it's difficult to generalize. The most of the case in the past, cancellation is not most serious. So my property will enable one quarter because the market situation, the economic situation really deteriorate. Look anything, maybe very good for the one quarter, but finally they will take delivery. I think most of the cases is like that. But however, as many people has warned that this time pandemic actually also potentially being in global recession that has this unforeseen. I mean, there's there's a the past, you know, half a century. So how is the economic situation will play out? We really don't know. However, as a first part, we talk to customers. Customers generally are optimistic. Other industry sectors, probably semiconductor sector, and it is the factor to be the the industry. Offer the news impact, know, I think we are cautiously optimistic in the sense, probably short term or near to short term may have some impact, but I think probably once the economy stabilize, once the situation stabilize, probably we could talk about the first industry to rebound. Got it. I certainly understand. I think the reason I'm asking this, maybe there's still more of a hypothetical questions, but I think the I think it's more of a texture instrument, the bill whether of the semiconductor industry is with like sixty, seventy years of experience. I think they are modeled we're using assumption that this downturn could be similar to global financial crisis. I know a lot of the people are using that sometimes. I'm just saying that if that were to be the case, if I look back on your revenue or performance back in 2008 and 02/2009, from 3Q two thousand and eight to 4Q two thousand eight and 1Q two thousand nine, the revenue basically declined significantly. I think that's also the case for all the industry, not just for ASM Pacific. So I'm just wondering if that were to be the case, maybe customer in the back then, can you remind us your experience that and the those push on maybe initially, has it turned into cancellation? Even back then, actually most of the orders, I know the customer took delivery. Within the actual cancellation at the point of time, we call for that is still four. Take some of them we take a few cultures, you know, for the customer to take delivery. But finally, most orders has taken delivery. Okay. Alright. Well that's very helpful. Thank you. Thank you. Our next question comes from Angus Link. Thank you. Hi, thanks for taking my follow-up questions. So I have just two. So I think the first one is on your five gs is actually doing good for both semi and SMP, we all know that. And smartphone weakness is actually we have already seen it being happened for your CIS, especially as it has in your semi solution. I'm wondering if this smartphone weakness is going to impact your SMT segment as well. Do you see samplers to slow down their SMT procurement or replacement cycle, especially given that those assemblers, they should be able to use SMT tools for four gs phones for their five gs ones as well? And the second one is, you mentioned a lot on China localization being one of the main drivers for you. Can you provide us with some color on maybe China also CapEx What does that mean for you guys? Thanks. I think your first question on the smartphone weakness whether that will impact SMT. It all depends on really this year the end our customers and customers demand. I mean if you based on the research of those independent research, if it is a smartphone the volume will come down. So that means that we I don't think we are also immune. Okay. So of course it all depends whether how fast the five gs smartphone will roll up because quickly five gs smartphone require higher and kind of a component. So and our SMT tools are actually very well suited for the kind of devices. So it all depends really on the end customer, the ultimate customers demand their own business outlook and that will impact the supply chain for the smartphone. Now in terms of China localization, your question is for OSAT right? You're talking about any color on China CapEx trend for OSAT this year. Now we I think Q4 the China OSAT was strong. WK you can step in if you think you want to supplement. The China OSAT was the bigger boys in China were more they were placing more orders compared to the second tier or the third tier OSAT. However, we see the second tier of the OSS become a little bit more active in Q1 twenty twenty compared to Q4 last year. Thank you. Our next question comes from Simon. Please go ahead. Thank you. Okay. Thank you very much. Very quickly for the financial related question. So could you explain why your net cash I mean, the gross cash improved by $1,000,000,000 quarter on quarter even with lower profit level? And then could you recap your CapEx and dividend target for 2020 versus could you recap the 2019 CapEx and dividend again to compare the year on year trend? By the way, when we look at the year on year material, we cannot find any balance sheet items and the cash flow items. So maybe next time, it will be great if you can add some balance sheet and cash flow items, if you don't mind, because the cash, yes, you said $3,000,000,000 but we don't know the amount of your total debt. So it will help if you can recap the Q1 end total debt. Thank you. I think to answer your last question first, typically Q1, Q3 we don't provide balance sheet details. Only the half year and full year results then we provide the balance sheet details. Now back to your question on cash, you're right. I think our cash has increased. I think one reason is two reasons I would say despite the upward situation in Q1 twenty twenty, we see the collections from are still very healthy. So we also we continue to be very aggressive in terms of collection from our customer. That's one. And secondly, looking at the situation, we want to be very prudent in the way we manage our cash. So what we did is that we actually drew down some bank facilities if I recall correctly to the tune of close to US70 million US80 million dollars just to bolster our liquidity and prepare just in case. This is just a case just in case scenario and by pandemic situation play out worse and we expected at least we want to be very sure that we have enough liquidity. So in fact we will not touch those. We will lock them aside and lock them aside for contingency use. So correspondingly you will see when we announce our half year results, you will see our bank loans also increase and our interest for the matter our interest expense will also show a slight increase because we have drawn down this loan. Now dividend, you talk about dividend target for 2020. I think it's too early to really talk about dividend at this point in time. However, I can assure the shareholders and investors that we are still fully committed to meet our policy of sustainable and gradually increasing policy. Now in terms of CapEx, think we should have one page in the investor slide on CapEx. So far I think in view of the situation in Q1 our spend on CapEx is very, very low. So we are controlling our CapEx spending very tightly and very prudently in view of the situation. Yes. Thank you, sir. Thank you. Ladies and gentlemen, that is star one to register for question. Thank you. Mr. Lennar Lee, there seems to be no further pressure at this point in time. Okay. Thank you. I think we've had a very good discussion this morning. Many good questions and also covered a lot of ground. And I think at this point in time, we will conclude our conference call and thank you again for joining us this time. And please stay safe and healthy in this COVID-nineteen environment and we'll talk to you again next time. Thank you very much. Goodbye. Goodbye. Thank you for your participation. This concludes your conference. Thank you.