Earnings Call: Q2 2021

Jul 29, 2021

Kenneth Hello. I am Ken Shum, the Head of Investor Relations for ASA Technology Holdings. Welcome to our second quarter twenty twenty one earnings release. Thank you for attending our earnings presentation today. Please refer to our safe harbor notice on page two. 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. I'm joined today by Doctor. Tian Wu, our COO, and Joseph Tang, our CFO. For today's call, Doctor. Tian Wu will first give a mid year update. I will then be going over our financial results. Joseph and Tien will then be available to answer questions during the Q and A session. I would like to now hand the floor over to Doctor. Tien Wu. Thank you, Ken. Hello, everyone. Thank you for joining our conference call. 2021 has been an exciting year for all of us. I wish everyone safe and well. For today's conference call, I would like to give you a brief report on two items. First, I would like to give you a business update, including the second quarter and first half achievement. Then the third quarter and the second half outlook, which we'll touch on business sentiment towards 2022. Second, business outlook, short term and long term. In the past weeks, there has been reports from several key customers and key partners with some conflicting signals, causing some speculation about the current state of business and the landscape. I would like to give you ASC's perspective, so you have another angle in solving the puzzle. To begin with, I would like to give you our business update. Our second quarter twenty twenty one and the first half twenty twenty one revenue and margin are both on track. Second quarter twenty twenty one ATM revenue grew 8% quarter over quarter in U. S. Dollar terms. First half twenty twenty one ATM revenue grew 20% year over year. If you exclude the EAR affected revenue, it will be 48% year over year. First half twenty twenty one test revenue recovered ahead of schedule. First half twenty twenty one revenue grew 54% year over year if we exclude the EAR affected business. So starting from third quarter, we will see assembly and test business both growing. Second quarter twenty twenty one whole core revenue grew 77% quarter over quarter. First half 'twenty one HOCO revenue grew 28% year over year. First half 'twenty one HOCO operating margin improved 2.7 percentage points year over year. Let me talk about the second half twenty twenty one. We expect third quarter and fourth quarter quarter to quarter revenue and margin improvement, as we have previously indicated. We're seeing very strong ATM demand than our previous target. Our next our last guidance, we estimated semiconductor will grow 10% and we will do better than twice of that. Right now, our sentiment is better than our previous guidance. The momentum will last into 2022. First half '20 '20 '1 ATM gross margin and full year target of 25%. In other words, we have achieved a full year target in the first half. Therefore, we do expect further gross margin expansion in second half Q3 and Q4. OCO 2021 operating margin target should exceed or at a high end target of 2.5% to 3% as we previously guided. Let me turn to the business outlook. I will first talk about the short term. Demand is indicating a strong 2022 with another better than seasonal first quarter. As you know, first quarter of twenty twenty one has been stronger than all of our expectations. We're looking forward to another strong Q1 in 2022. Many of the customers are extending the long term service agreement beyond 2022 into 2023. Let me comment on the expansion, which has been many people ask about it. The capacity expansion needs to consider holistic and balanced supply continuity across the complete material, equipment, and process ecosystem. Our estimate, the earliest the balance of demand and supply will be sometime in 2023. In other words, in 2022, we still need to be very smart and be very efficient in managing the bottlenecks. Next, people ask about a double booking and inventory control, which may exist. However, that effect should be localized and temporal with the overall demand profile with very little impact to the overall business momentum, at least from ASC's OSAT perspective. Next page, I would like to comment on the business outlook longer term. What I'm trying to do here is to share with you our ASE's perspective and maybe ASE's OSAT perspective on longer term outlook. On this page, I have a diagram of a pyramid. What I'm trying to do is to illustrate a conceptual concept about the current state of semiconductor business. As you know, semiconductor business is mainly driven by innovation. If you imagine innovation is driven by technology, which is at the tip of the pyramid. As the innovation becomes more pervasive, the pyramid becomes taller. In order to support a bigger and taller pyramid, the length, the width, the height all need to increase proportionally. This is not the exact mathematical description of our ecosystem. However, conceptually you can see that. What we're seeing today is we have two driving forces. So let me comment on each one of them. The first one is what the industry already been preparing for the longest time, including five gs, AI, EV, IoT, smart manufacturing, all of the sector. Now, for this type of innovation to be pervasive in scale, you need to develop a new infrastructure which will instigate new demand for system and therefore demand for all semiconductor devices. However, in the last two years, unexpectedly, we had a COVID-nineteen impact. What the COVID-nineteen did is actually similar to this. It's not a new innovation. However, it put a step function or a sudden increase of demand on the existing systems without asking for any new infrastructure. The industry is very used to building our capacity at a slower pace. While we're developing infrastructure, we're also cranking up new systems. But the COVID-nineteen effect is leveraging on the existing infrastructure. They only demand for a large quantity of new systems. So the industry is called off guard. And this is what we're talking about now. The COVID-nineteen impact can be two years, can be five years. We actually do not know how long that will last. What we do know is we are in the short. Therefore, the industry reacts accordingly by building up wafer capacity. We're also building up the assembly and test capacity. The whole supply chains are building all of the capacity accordingly. The comment I would like to make here is, this is a great incentive for the industry to start developing a manufacturing infrastructure. Because even if the COVID-nineteen impact dissipates in the next two to five years, the new wave of innovation, which will be a much, much longer lasting impact to the industry signified by five gs, AI, EV, IoT, smart manufacturing. We are seeing a huge demand on the IoT devices, for example, on the electric vehicle, on the autonomous driving. All of this new paradigm will require new infrastructure and a brand new system. So our perspective is semiconductor is very healthy. Short term, we have a great incentive to build our capacity to accommodate the system requirement by the COVID-nineteen, while we are building up the needed capacity to accommodate the future increase of demand driven by the new paradigm shift. So going to the next page, let me talk about the other three tailwinds from our perspective. The first is consolidation. What the supply chain constraint has done for the industry is forcing everyone, our customer, our customer's customer to accept more standard, flexible and secure supply alternative. This is great for open platform service provider like Foundry and OSAT. In other words, what used to be proprietary now are being forced to accept the open platform alternative long term. This is the thesis why OSAT and Foundry will be gaining more share and consolidation over proprietary suppliers. Let me talk about the third tailwind, Taiwan Cluster. Taiwan Cluster efficiency, economy scales, and supply chain flexibility has been known. What we're seeing for the last few years is Taiwan cluster has been investing CapEx in a very, very heavy way, including ASC. As a matter of fact, ASC spill merger and synergy is another example of the Taiwan Cluster efficiency. So with efficiency in hand, with additional CapEx invested, with more customers choosing Taiwan's sector as their preferred choices. This is forming a positive or a virtual cycle. Let me talk about the last tailwind, which is ASE HOCO. ASE Holding Company today has demonstrated a clear leadership in scale, market share, margin, efficiency. We have a very clear view about how the new wave five gs autonomous driving, smart manufacturing will demand heterogeneous integration, including silicon silicon and silicon with non silicon sensors. We have a very clear view about the future AI, big data driven, high quality and tracking manufacturing, which is done by the automation. We are today a de facto choice and indispensable manufacturing partner for the semiconductor ecosystem. With that, I thank you for listening. I will turn the floor back to Ken. Thank you. Thank you, Doctor. Wu. I will now go more in-depth into our financial results. First off, I would like to clean up an order of business that needs a bit of explanation for the sake of reporting transparency. As you all know, our subsidiary, USI, completed its acquisition of the Steel Flash in 2020. Given the complexities of the purchase price allocation process or PPA, IFRS generally allows companies up to a year to complete this valuation process. After the valuation is completed, a retroactive adjustment is usually made. A Steel Flash's purchase price allocation was completed during the second quarter. Accordingly, we have retroactively adjusted our balance sheet by $400,000,000 NT, representing 0.1% of our total assets as of the first quarter. On our P and L, the purchase price allocation results in incremental expenses booked into the first quarter totaling $88,500,000 NT or $02 per share. First quarter consolidated holding company reported gross margin has been reduced by 0.1 percentage points, while operating margin has been reduced by 0.2 percentage points. For the second and future quarters, PPA impact to net income will be approximately NT37 million dollars per quarter. Impacts to future gross and operating margin will of course depend on future revenues, but in the current period, such impact is considered negligible at less than 0.1%. This amount will be added to our quarterly PPA adjustment. Please turn to Page seven, where you will find our second quarter consolidated results. Intercompany transactions between our ATM and EMS businesses have been eliminated during consolidation. For the second quarter, we recorded fully diluted EPS of $2.3 and basic EPS of $2.4 Consolidated net revenue increased by 6% quarter over quarter and by 18% year over year. This sequential increase was primarily driven by our ATM business. We had a gross profit of $24,800,000,000 with a gross margin of 19.5%. Our gross margin improved by 1.2 percentage points sequentially and two percentage points year over year. Both margin improvements are principally the result of higher ATM business mix offset in part by NT dollar appreciation. NT dollar appreciation had a negative 0.3 percentage point impact to sequential gross margin and a negative 2.1 percentage point impact to year over year gross margin. Our operating expenses increased by $600,000,000 to $11,600,000,000 sequentially. Our operating expense percentage sequentially stayed flat at 9.2% and declined 0.5 percentage points year over year. For the year, we are now expecting to see an improvement from, rather than targeting to maintain at last year's 9% level. Operating margin increased 1.3 percentage points sequentially and 2.6 percentage points year over year to 10.4%. During the quarter, we had a net non operating gain of $200,000,000 This amount primarily consists of gains related to our foreign exchange hedging activities, investments and asset sales offset in part by net interest expense of $600,000,000 Tax expense for the quarter was $2,600,000,000 The effective tax rate for the second quarter was 20%. For the third quarter, we expect to record our annual undistributed earnings tax. For modeling purposes, please use an effective tax rate of 21% for the third quarter to account for such tax impact. Net income for the quarter was $10,300,000,000 representing an increase of $1,900,000,000 sequentially and an improvement of $3,400,000,000 year over year. On the bottom of the page, we provide key P and L line items without the inclusion of PPA related expenses. Consolidated gross profit excluding PPA expenses would be $25,700,000,000 with a 20.3% gross margin. Operating profit would be $14,400,000,000 with an operating margin of 11.3%. Net profit would be $11,500,000,000 with a net margin of 9.1%. Basic EPS, excluding PPA expenses, would be $2.67 On page eight is our ATM P and L. It's worth noting here that the ATM revenue reported here contains revenue eliminated at the holding company level related to intercompany transactions between our ATM and EMS businesses. As Doctor. Wu indicated, our ATM business looks very healthy for this year and heading into 2022. For the second quarter of twenty twenty one, revenues for our ATM business were $79,000,000,000 up 5,200,000,000.0 from the previous quarter and up $9,500,000,000 from the same period last year. This represents a 7% increase sequentially and a 14% increase year over year. Our ATM revenues came in ahead of our expectations. On a U. S. Dollar basis, our ATM revenues grew by 8% sequentially. Gross profit margin for our ATM business was 25.6%, up 1.2 percentage points sequentially and 3.9 percentage points year over year. Our sequential gross margin improvement was primarily due to higher loading. The year over year gross margin improvement was primarily the result of higher loading, improved efficiency, product mix, and a friendlier ASP environment. ATM gross margin improvement was accomplished despite NT dollar appreciation having a negative 0.5 percentage point impact quarter over quarter and a three percentage point impact year over year. We expect to be able to deliver quarter on quarter improvement in ATM gross margins in the last half of the year, even with ATM gross margin for the first half of the year already reaching our 25% full year target. During the second quarter, operating expenses were $8,400,000,000 up $300,000,000 sequentially and up $500,000,000 year over year. The sequential and annual operating expense increase was primarily driven by increased employee bonus accruals, which are based on a profit sharing model. Our operating expense percentage was 10.6%, down 0.4 percentage points sequentially and down 0.7 percentage points year over year. Operating margin was 15%, improving 1.6 percentage points sequentially and 4.6 percentage points year over year. The strengthening NT dollar had a negative 0.5 percentage point impact quarter over quarter and three percentage point impact year over year to our operating margins. Without the impact of PPA related depreciation and amortization, ATM gross profit margin would be 26.7% and operating profit margin would be 16.4%. On Page nine, you'll find a graphical representation of our ATM P and L. When we see our ATM gross margins here almost linearizing and hitting historical highs, I think it's fair to mention that we do not believe that our business is immune to future cyclicality inherent to electronics. But we do believe that having the scale synergies and the benefits of the four tailwinds as mentioned by Doctor. Wu, we will be in position to achieve margins with gradually higher peaks and shallower troughs. On Page 10 is our ATM revenue by market segment. You can see here a decline in our communications market segment with share picked up by our automotive, consumer and other products. Meanwhile, our computing segment has held roughly steady since 2020. Again, from what we can see here, our near term performance has not been driven by communications related devices. And more importantly, with such a decline in our communications segment, it would seem that speculated widespread overproduction of communications related components to be somewhat less likely. Our near term performance has been driven primarily by growing consumer and general semiconductor expansion. This supports Doctor. Wu's earlier statement that new technology and products create an expansion of more basic supporting devices. On page 11, you will find our ATM revenue by service type. There's generally too much noise in trying to understand each quarter's individual movement here. However, when the chart is taken as a whole, it tells a more complete story. You can see here the gradual improvement and underlying strength of our wire bond related business. Meanwhile, services for advanced products have seen a gradual decline, some of which has to do with the impact of The U. S. EAR. We do, however, believe that our advanced services will start a rebound in the back half of this year. On page 12, you can see the results of our EMS business and a graphical representation of our EMS revenue by application. The information we provide in regards to our EMS business may differ materially from the information directly provided by our subsidiary as they report independently using Chinese GAAP. As mentioned earlier, the results of the first quarter have been retroactively adjusted for PPA costs. Our second quarter revenue usually represents the end of our seasonal trough. However, what is more unusual this year is that many of our customers are experiencing the impact of component shortages in the second quarter. This is the main reason why we saw our EMS revenues fall slightly short of our initial expectations. However, we do believe that the majority of this revenue shortfall gets pushed out into the third quarter. The second quarter expenses for our EMS business tends to be characterized by training investment and preparation, readying our factory lines for the third and fourth quarters when things get up to full mass production speed. As is oftentimes the case, it's the quarter that requires spending of a more spontaneous nature for upcoming product ramps. This is especially true this year when we have two new factory locations ramping up during COVID spread. As such, we have incurred extra operating costs related to R and D, logistics and factory startup costs in the second quarter to set the stage for second half growth. During the second quarter, EMS revenues increased by 3% sequentially and 24% year over year. Our EMS gross profit was $4,500,000,000 increasing $500,000,000 sequentially and $800,000,000 year over year. The higher sequential and year over year EMS gross profit was the result of product mix. Gross profit margin for our EMS business unit came in at 9.1%, which is an improvement of 0.7 percentage points sequentially and a decline of 0.3 percentage points year over year. The sequential improvement is primarily the result of cost differences from differing product mix. The annual decline in gross margin is primarily due to higher operating overhead. Our EMS business unit second quarter operating expenses were $3,200,000,000 increasing $400,000,000 sequentially, while increasing $700,000,000 year over year. Sequential operating expenses were primarily up as a result of increased R and D and factory startup costs. Annual operating expenses are up primarily as a result of a larger operating base. Our operating expense percentage increased 0.6 percentage points sequentially to 6.5%, while increasing 0.2 percentage points year over year. The sequential operating expense percentage increase is primarily driven by higher R and D and factory startup costs. We expect our operating expense percentage to temper down during the back half of the year as our mass production revenues ramp up during our typically seasonal upcycle. Our EMS business has had a more challenging start this year as a result of worsening COVID operating conditions and component shortages. Quite simply, the underlying conditions have changed, and it's now more difficult and expensive to run than expected. We do not see the component shortages or extra costs subsiding in the near term. Therefore, our target of a 4% operating margin for our EMS business has become more of a challenging one. On the bottom half of the page, you will find a graphical representation of our EMS revenue by application. The second quarter change here with consumer products declining 5% is seasonally driven, while the increase in the industrial segment is more brought about by industrial products picking up after a year of COVID softness. On Page 13, you will find key line items from our balance sheet. The only things we would like to add here are that our total unused credit lines amounted to $276,400,000,000 and our net debt to equity ratio dropped to 60%. On page 14, you will find our equipment capital expenditures. Amounts on this slide are denoted in U. S. Dollars. Machinery and equipment capital expenditures for the second quarter totaled $611,000,000 of which $450,000,000 were used in packaging, dollars 116,000,000 in testing, 39,000,000 in EMS operations and $6,000,000 in interconnect materials and others. As of the end of the second quarter, we are still running in a capacity constrained environment. And at this time, we continue to see our capital expenditures up from 10% to 15% from last year, although more on the higher end of this range. However, this year's capital expenditure timing may be more volatile than previous years. The timing of equipment may defer or accelerate. With that, we would like to provide our third quarter business outlook as follows. In U. S. Dollar terms, ATM third quarter twenty twenty one volume is to increase 12% with ASP Holdings stable versus second quarter twenty twenty one levels. ATM third quarter twenty twenty one gross margins sequential improvement should be similar with the sequential improvement in the second quarter of twenty twenty one. For EMS business, in U. S. Dollar terms, EMS third quarter twenty twenty one business level should be slightly higher than the average level of the third and fourth quarter in 2020. EMS third quarter '20 '20 '1 operating margin should be around our targeted 2021 full year operating margin. With that, I'd like to open the floor for questions. We're doing it slightly differently this go round. We have people scattered throughout different rooms and such. We when we get the question, I will repeat the question, and then I would direct it over to Joseph and Tian. So, please. Our first question is from Mr. Gokul Hariharan of JPMorgan. Gokul? Yes, thanks for taking my question. My first question is on what Doctor. Wu mentioned in terms of demand supply balance coming in 2023. Could you talk a little bit about what you expect pricing trends, margin trends to be next year? It looks like you're still going to be in a similar situation as 2021. So how should we think about this? Secondly, could you also talk a little bit about how book to bill is looking as we head into early twenty twenty two? You talked about Q1 being better than seasonal. And you did allude to double booking, which is a very big topic for investor focus. How do you estimate double booking within your order book? And how does that affect your book to bill when you think about next year demand supply? That's my first question. Okay, Gokul. I have here that you are asking about pricing context for next year and also an outlook for 2022. And then somehow circle back over to concepts of double booking. Generally, we're trying to keep the number of questions for two questions per go round. So, let's go with the first two, the pricing and the outlook for 2022. All right. So, first priority is to make customer delivery and fulfillment. And we have been very efficiently handling all of the customer requirement throughout 2020 and 2021. We will continue to do that. Now occasionally, we'll get into a situation where we need to make pricing adjustment, either the higher material cost or the expedite fee. I believe for the second half of twenty twenty one, as well as the whole year of 2022, we will continue the current trend. It is very difficult to give you a quantitative estimate for what the pricing is because this is very dynamic. Our third priority is to make expedite delivery. However, the pricing environment remains to be very friendly. The second question about the overbooking. We have seen some customers making adjustments. We have also seen some equipment delivery were making a timing adjustment. However, that might not be completed due to the business slowdown. I mentioned about the supply chain continuity. Sometimes there's a BGA substrate shortage. Sometimes there's a D frame shortage. It makes no point to have over capacity on one equipment or process while at the same time you do not have the materials. So the comment that I made, in 2023, sometimes we will see a more of a holistic and balanced capacity supply demand balance, but definitely will not be in 2022. And hopefully in 2023, we will have an easier time to execute the customer delivery. Thank you. Got it. Exactly. So just one clarification. So on the guidance for this year, I think it sounded like you are looking at 20 plus percent growth for iCATM on a USD basis. Just wanted to clarify if I got that right. That's correct. Okay. Thank you. I'll queue back up. Thank you. Well, I do want to mention that this is on top of the recovery of our effective business from The U. S. EAR. So as Doctor. Wu mentioned in his presentation, if we exclude that part of the business from the equation, our actual first half overall ATM growth was 48%. And also in the in terms of tests, not only that we are ahead of our schedule and making a full recovery in the first half rather than the later part of the year. Also the if you if again excluding the EAR affected business, the actual growth is about 54%. So we're seeing a very, very strong growth momentum in terms of our ATM business at this point. And it seems that it's going also leading to 2022. Next question. Next question is from Mr. Randy Abrahams of Credit Suisse. Randy? Okay. Yes, thank you. Okay, I'm on the phone line. Hopefully you can hear me. The first question, back to the comment about the tightness until 2023. How do you see I'm just curious the supply side, we've seen pretty heavy industry bookings for equipment and lead times are stretched out, but I assume those equipment would get delivered in the next year. So I'm curious one on the supply side, how you're viewing it, if you think that bottleneck on the back end equipment gets resolved moving through next year? And then from the demand side, are you how are you factoring parts of the environment? There's the fear about some of the COVID related consumer PC, home electronics coming off a high base. So I'm just curious what you're reflecting for next year, if those factors ease the supplier or what gives the comfort of tightness continuing to 2023? So Randy, you're looking for a question regarding the situation or the Yeah, get it. Relating to back end equipment tightness and also looking for an impact on next year's overall market demand and whether we see changes in the overall market demand structure. Okay. Yes, that's right. Yes, just to give the confidence for tightness all the way to '23. Well, let me talk about the machine delivery. I think the machine delivery lead time right now is as bad as our last conference call. It's not improved. The lead time is stretching. And I believe the lead time will start to improve, not this year. Sometime in 2022, we might see the lead time becomes better. But once the lead time gets better, you still need to have a balanced capacity expansion, right? I talk about the material process and everything surrounding that. So I believe the reasonable capacity build up will be sometime throughout between six months ago, all the way this year, as well as next year. And I believe in 2023, we will probably see more of a balanced profile. Okay. The second comment is a little bit more difficult to answer, the demand. Now we have seen some adjustment. For example, some sectors of the customers are making some push out in delivery. However, because of the over demand on the overall situation, it is very easy for ASE on the assembly and test side to switch the necessary equipment into the other application, which is clearly a very, very strong demand. Our wafer bank WIPS is still very high. So right now, we're not terribly concerned about some of the inventory correction due to whatever reasons. But I think each end customer will have their unique reasons why they are making some local adjustment. Right now, actually the local adjustment is kind of welcomed because our delivery situation has been in this tight spot, which is really not healthy mentally for everybody. So I think the demands will continue to be strong second half. It will be strong for the 2022. I talked about the pyramid. I struggled for a long time. How do we really conceptually articulate what is going on right now? COVID-nineteen, without asking for any new infrastructure, They just have a sudden increase of new systems. And therefore, all devices are short. This is the problem we're addressing. When people are talking about the COVID-nineteen impact will dissipate, we don't see that. Of course, we do understand sooner or later, this will disappear. However, you have the following multiple ways of AI, IoT, smart manufacturing that we're aggressively building up the infrastructure which will in turn require a lot of new system which demands semiconductor devices at all levels. So I think industry will be insured. And this is a comment that the foundry guys are making. I mean the 2021, '20 '20 '2, '20 '9 new fabs are being deployed. Everybody sees this, but the industry has no incentive to build the manufacturing infrastructure ahead of the curve. This is standard practice. The COVID-nineteen gives you a very good short term incentive even though we do not know this impact will be three years, four years, or two years. However, we have enough belief and vision that all of the capacity will be needed and will be good for the world. And this is what the our view is. Next question, please. Okay. No, Greg. And the second question okay. Yeah, and the second question and one clarification to the first is the local adjustments, if you think those are all driven by the constraints up and down the chain or are you seeing any pockets of application weakness? That's kind of just a clarification. And then my second question, just on the guidance. I know you mentioned the first quarter above seasonal. For fourth quarter, you're coming off above seasonal third quarter. Do you expect to grow in the IC ATM in fourth quarter? And then the other part on pricing being stable. I know you talked about there's expedites and a friendly environment. So I'm curious given we're in the peak season, what's kind of keeping price stable or why you're not seeing a little bit of a sequential improvement on pricing? Randy, so you're looking for a fourth quarter somewhat of a fourth quarter outlook and also a pricing environment commentary in for the rest of the year. I think the first Yeah. Keep The first comment is the we're seeing some local adjustment. And I we do not know the reason why they're local adjustment. It could be business related or it could be a component shortage related. However, those are very localized and temporal. We're seeing the adjustment down and adjustment up right away. So at this point of time, I think the best comment we can give it to you is, it does not affect the overall business momentum. At least this is what we can see now. The comment on the Q3 to Q4, yes, we are expecting Q3 growth. We're expecting Q4 growth, just like last year. The comment about Q1 of twenty twenty two, of course, I'm hoping to see another record that Q1 is better than Q4 of the previous year. However, I'm not going to say that right now, but this is what I'm hoping for. And I believe if we have a clear, a good optimistic Q1 in 2022, that momentum will carry us throughout the 2022. And this is our current view. And then we'll deal with 2023 at a later date. I think on the also this is Joseph here. I'd also on the margin side, we will see sequential growth on a quarterly basis for the second half of the year, as well as we continue to see volume expansion as well as continuous effort in efficiency improvement, including our automation that is being aggressively brought online. And for next year, we're still seeing, you know, there's also room for improvement further in terms of our margin. And we're seeing a very, very healthy development in our overall financial performance going forward. I mean, there's one comment. I will not talk about the overall pricing comparison. However, pricing is given by the market. I mean, it's not defined by any individual supplier. Under a constant pricing profile, if you make that assumption, then you look at the margin improvement quarter to quarter. And we are doing a detailed analysis based on the last eight quarters. How much efficiency improvement is from synergy? How much efficiency improvement is from automation? All of this number will add up to the confidence when we said that in 2022 and maybe in the future. Kenshon made a comment, now we are looking for the a more solid baseline going forward. Thank you. All right, the next question. Okay. Thank you. Our next question is from Mr. Bruce Lu of Goldman Sachs. Bruce? Hello, can you hear me? Yes. Okay. Thank you for the great results. My question is regarding to your long term contract agreement. As I know that your Vegan business is actually very complicated. You have wirebond. You have different kind of wirebond that you have for fleet chip. How does that work for your long term contract? How much of your capacity is secured by this long term contract? How do I ask it? Your first question relates to the character and the our long term con of our long term contracts. Yes. Help me to understand. Well, I think the comment I can give it to you is that we have the large majority of customers covered by the service contract. I don't think I can give you anything more specific. I mean, a very, very large percentage in the I mean, this contract is actually, you know, secure most of their capacity or the only for the incremental capacity? For all of the capacity, not incremental. And also, I think the comment that I keep referring to is you have to look at when people secure assembly capacity, whatever that is, there is intrinsic inherent assumption that assembly capacity will have the needed lead frame, molding compound, substrate, and all of the processing materials to go with it. That today is a big assumption. So the long term service contract not only secures the assembly capacity, it also supports the customer as was ASE, as well as our supplier partner to secure the needed overall balanced supply continuity beyond 2021 into 2022 and 2023. And this is a part of the overall efficiency and flexibility management I was referring to. If you're really asking for the real or the effective competitiveness, you have to look beyond the assembly and test per se. You should look at the overall supply from wafer materials, the whole nine yards. And this is what we're seeing. We're seeing the campaign between the open platform service provider versus proprietary. We're seeing the regional competition and we're seeing the ASE competition against our peer. But if you follow the same analogy you will be able to understand the number and the meaning behind it that's what I was referring to I see because do you believe that your competitor also have secured a reasonable long term contract? Or AAC is pretty much the supplier who can get who can ensure this kind of long term contract? I don't know the answer, but as a good competitor, I have to assume they do. Or or on the other hand, you know, how much customers, you know, their demand is fully secured by this long term contract? I think the customers, the motivation can be best illustrated by the long term service agreement as well as all of the future technology development. If you are the de facto choice by the customer, not only you will have the short term, long term loading, you will also have all of the future pipelines. So when we make statements about our de facto versus our key customer, whether IC, system, or automotive, I'm actually referring to the existing loading as well as the future pipeline and everything that I just talked about it, all inclusive. I see. Okay. So my next question is for Joseph. I mean for the gross margin for ATM, again, thanks congrats for the great result. But I'm a little bit greedy that a lot of the semiconductor companies already posted that historical high gross margin. And when do you expect you exceed your historical high gross margin as a consolidated basis? Well, if we we count the FX fluctuations, it's in quarter one, we already surpassed our, say, sort of big. Well, If you use a pro form a basis, you know, if you add SPILs gross margin in aggregate, not yet. No, that's what I'm saying. Even including SPILs on a combined basis, we have already passed the if we have that FX fluctuation as well as the PVA that we have to bear, we already passed our historical fees. So how do we if you already surpassed that, how do we know that what is the new norm for the gross margin? How do we because how do we see the value proposition increase and to fully reflect to your gross margin? In fact, if I may, I'm even more greedy than you are. I mean on a nominal basis, if I don't count the FX, if I don't count the CBA, I'm still heading to reaching the historical peak on an annual basis. We have reached in back in 2014, our highest gross margin was about 27%. And, you know, on a quarterly basis, I think this in the second half, we will be passing that. And I'm pretty confident that next year, on an annualized basis, that historical record will be broken. Okay. Thank you. Next question please. Next question is from Mr. Rick Xu of Daiwa Securities. Rick? Can you guys hear me? Yes. Can hear you. great. Yes. Just two little questions. The first one is the housekeeping question for Joseph. So what's your utilization raised across the board for web bound for achievement testing in Q2? And what's the outlook in Q3? In Q2, in terms of assembly, we're about 85%. And for tests it's close to 80%. In the third quarter, I think assembly wise we will be over 85% for assembly and over 84 tests. As we mentioned, we're running relatively on full capacity now. Okay, great. The second question is about your pricing. You about your friendly pricing. So for Q3 and I presume it's going to be the same trend for Q4 and maybe into next year. And it's pretty much across the board or just more specifically for your your web bonding? Greg, you're asking about whether we've raised prices or plan on raising prices across the board or on just wire bonders. Is that Yes. That's right. Yep. Thank you. Our utilization will be full for Q3. You know, the we're already full in Q2. In Q3 and Q4, we'll start ramping up the SiP product. So the factory will be very busy. The pricing adjustment, the it's not a concept. You know, we have to follow the business dynamics based on need and requirement. I am not I don't have the privilege, and I will not answer. However, we want to raise price across our problem line. However, there's a possibility that we might do so. Sorry. Okay. Yes, that's good enough. Thank you so much. Thank you, everyone. Next question please. Our next question is from Mr. Siyoh Ng of China Renaissance. Siyoh? Good afternoon gentlemen. I have two questions. The first one is that before the merger, the company would give out the substrate self sufficiency ratio. I'm not sure if you have the number ready for the latest quarter? Can you repeat that question one more time? Yeah. The substrate self sufficiency in the past you gave out before the merger with Spill. I'm not sure if you have the same percentage on with all of You're looking for our substrate sufficiency percentage. Right, exactly, yeah. Well, it was hovering around 22% to 25% and Okay. All right. But do you think think it's still around that. I think the current tightness of of the materials or substrates in a sense actually give us an additional edge over our competitors because of our stronger buying power and also our in house capability for capacity. Sounds great. That's my second question. Yes, you already answered. Okay. And also the other question, could you provide an update on the wire bond delivery schedule? Last time you mentioned that the company is planning to add roughly 3 thousand, 4 thousand wide bond this year. So just wondering if there will be upside to that number. Well, in the second quarter we added close to 1,500 pounders, fourteen eighty two to be exact. And on Tesla we added 139 testers. I think the delivery is still ongoing and we're seeing we are still maintaining our target for the year. And hopefully, second half, we will have a full delivery. Okay, great. Delivery, can remember last time you mentioned roughly October timeframe, right? Before delivery, I mean? Yes. But as Ken mentioned, things are very dynamic at this point. You know, that's the target, but you know, we'll see how it goes. Okay. All right. Okay, great. Thank you very much and congratulations. Thank you. Next question. If you have a question, please raise your hand now. We have a question from Mr. Gokul Hariharajan of JPMorgan. Go ahead. All right. Yes. Thank you for taking my question again. Could you talk a little bit about how you think about capital spending? Looks like this year is going to be at the high end of the 10 to 15% range, so closer to the $2,000,000,000 mark or even higher. Do you feel next year also CapEx is going to remain in this high range given supply is still going to be quite tight and customers are willing to sign up for longer term agreements? That's my first question. So you're looking for an outlook on our capital expenditure plans into 2022? Yes. Just wanted to yes. Okay. Well, for this year, we are still maintaining our previous plan of maybe you're right. I think the actual will be at the high end of the range more than 15%. And by the way it's going, I don't don't recall the possibility of raising our CapEx for this year again. I think it's a little bit too premature to talk about 2022 CapEx. It really depends on the market overall market situation, although we remain confident that next year there will be additional demand. Just the this is Tian. I just want to give you another angle. And the for example, yes, we are talking about high CapEx for ASC and OSAT for 2020 and 2021. But at the same time, it will be very interesting to look at all of the IDN CapEx for the back end. I believe you will see a very, very different scenario. The reason I want to make that statement is now keep in mind, in 2022 and 2023, there will be incoming wafers from all of the new fab that has been started since 2020. So all of the new wafer, eight inches or 12 inches, who will be the back end service provider for all of the wafer if there is a system demand, infrastructure demand? If there's no demand, that's a different scenario. But in case there are demands, if the IDNs are investing less for the back end, then the consolidation thesis will guide the OSAT needs to double down in order to make up the delta. Therefore, in 2022, even though it is a little bit earlier to say, but depending on the business dynamics for 2021 and the early part of 2022, by working with all of the IC and system customer, we will have a much better view about the overall system demand and the back end demand as well as all of the other substrate and different supply. And that will be a dynamic process. We will give you a much, much better number in terms of the CapEx scenario. Understood. Maybe one follow-up on that front. Could you talk a little bit about how you think about returns on that CapEx now that your gross margin is clearly gone up? Like how are these LTAs being structured? And how are you thinking about CapEx in the future? You talked about bulk of a lot of capacity being spoken for in LTAs. So how should we think about returns? And just to give some context, I think historically, OSAT has been seen as more cyclical in terms of margins and returns. Is there something that we can talk about that is through the cycle, like where your returns are likely to be higher or much higher given what we are seeing with the pricing dynamics and willingness of customers to commit much more longer term contracts? Gokul, you're asking about how we evaluate CapEx, especially in the context of this tight semiconductor supply environment, right? Could give a ROIC or ROE kind of what are the threshold or hurdle rates that you use when you think about CapEx and investment in general? Well, I think it's very apparent that the return is getting better as we continue to have margin expansion. Although the FX does have some impact, a negative impact on the overall return situation. But as you mentioned, the ROE that we are looking at as a threshold is good, right, about 20% to 25%. Fifty five % for new investment, right? That's correct. Got it. Thank you. That's very clear. Next question? Next question is from Mr. Roland Hsu of Citigroup. Roland? Hi. Can you hear me? We can hear you. Go ahead. Okay. Sorry, I dialed in late. So excuse me if my questions were asked. First question from me is TSMC has several plans to build new fab overseas. So are you considering to increase your global presence as well to catch the business opportunity from the newly built wafer fab worldwide? And if we want to do so, how will it impact your CapEx spending plans in the mid to long term? So, question relates to our longer term thought process in terms of our global footprint expansion. Yes. All right. To answer that question is, no, if you look at the ASC footprint, I believe ASC is by far the most diversified manufacturing company in the OSAT world. We have factories across the three continents: Japan, Korea, Singapore, Malaysia, as well as The U. S. And China, and of course, So in terms of the global diversification, we are already there. Okay. So the next question is, under the geopolitical sensitivity, as well as The U. S. Incentive as of China initiative, how do we respond to like TSMC or Samsung or Intel initiative in building up the different capacity in different parts of the world? And I think the short answer of that is the it really goes by the business dynamics. If I want to be a little bit more specific, you will look at the overall semiconductor demand, which is given by the pyramid picture that I gave to everyone. When you dissect the pyramid into two portions, You ask which part of the pyramid are cost sensitive. And you will develop your manufacturing in a massive scale to offer the most cost effective, flexible delivery to that part of the pyramid that are cost sensitive. After that, you will have a little piece, a smaller piece, which is national security sensitive, technology sensitive, or location sensitive. Then you will look at who are the end user, who are the service provider. For those service providers and end users, which portion of the assembly and task can we contribute to add efficiency to the alternative route? So this process sounds very complicated, but actually it's very, simple. So if any of the foundry partner wants to build a fab anywhere in the world, we look at the output, we look at the assembly and test requirement, then we ask the question, does it have to be ASC? If it does, what would be the volume that is required comparing to any other alternative route? When all fails, we will make the investment accordingly based on the business need. So right now, we already have a globally diversified footprint. But to make adjustment on the footprint that adding different service portfolio will really depend the business. And by the way, that business requirement as of today is not clear for the assembly and test. It's a very, very long answer to a short question because we have been asked this question by everybody in the world. Thank you. Understood. Thanks. My second question is for your testing business. In the past two to three years, you have the goal, try to grow your testing business. But I think last year probably was not a good year for your testing because of, you know, Huawei's, you know, have have been banned, you know, in the supply chain. So how do you look for your testing business now and going forward? Are you still planning to further grow your testing business in terms of the percentage of the total ICT and revenue? Yes. I think the first half of the year we were, you know, kind of busy in terms of realigning our test capacity to serve the other customers. And we have done so fairly successfully as I said as I mentioned, where we have fully recovered our test business in the first half of the year ahead of our schedule. And going forward, we will continue to make we'll start to bring the test business back to a growth mode. And we will be making the necessary investment further to further expand our test business going forward. Do you have a specific target of the percentage of the revenue from testing? I think right at the peak we were around 20% and I think that's the first thing that we need to go back from. Okay. Thanks. Thank you. Yeah. Our next question is from Mr. Randy Abrahams of Credit Suisse. Randy? Okay. Thanks for the follow-up. Yes. And my follow-up was on the SIP. If you could give an update, the contribution now for iCATM and the USI, what percent it is? And then could you give an update just how the pipeline is looking for expansion next year, both at your primary customer and also diversification into additional customers? So, you're looking for basically an overview on SIP, its contribution and from our EMS and our ATM entity, and also potential view on the pipeline? Yes, that's correct. Well, I think in terms of overall SIT business, last year we had a 50% growth. And so this year, I think the growth rate will start to will come down a bit. But overall, I think the momentum is still there and we're continuing to make the necessary investment to continue to grow our SIT business. In second quarter, I think the overall business represents about 17% of our overall business from the holding standpoint. And for EMS about 40% and for assembly and test is about 4%. And all these ratios will grow in the second half. Okay. And for the EMS business where you're a little bit it sounds like a much better environment for semis relative to EMS right now with the tightness. So is that 4%, I mean, it feel like that's difficult until we get back to a better balance or there's kind of program in place to improve that or you have a bit of like you're doing in ATM, a little bit of pricing to offset the higher costs to get back to that type of margin target? I think the for the ATM, it will continue to grow in terms of percentage of overall business in third and fourth quarter. And for the whole year, it will be at a higher rate than what we're seeing in the second quarter. Yes, operating margin. You asking about EMS margin? Yes, EMS operating margin. Okay, we're still Yeah, yeah, it was about the yeah. Okay, so it's still 4%. Yeah, we're still looking at 4%. It's becoming a more challenging target because of the overall logistic cost is rising or the operating certainty is higher at this point. But still we're maintaining that target. Okay. And the last question I have just on the advanced packaging for things like SOIC and TSMC SOIC, Intel has their Favaros. If if we get some move to the three d stack, is that a market you see OSAT or CASE participating in, or would that three d if we go to full three d IC, it's there's not as much for you to do? Or is there still like some final assembly to substrate? I'm just curious if you see an opportunity in that area. Well, short answer is we have always been in development with key customer along the line of 2.5D and the for example, we're the first one to launch the 2.5D with a key customer in Texas. And three d IC, that development will never stop. But one of the things I was trying to articulate is we really have to understand the service versus the business model. If we have any company providing a service that is proprietary, serving unique customer, that is not an OSAT business. The definition of OSAP business, you should have at least two alternative service providers. You should at least have two customers. So we have multiple customers with multiple open platform that becomes a viable OSAT business with a sustainable volume. Whatever comes into the OSAT world, and there are plenty of that, ASE will take a clear leadership in that. Now when the 2.5 d or the three d IC or whichever chip in the architecture becomes OSAT, in other words, there are multiple foundry offering that service, and there are multiple people accepting alternative process, achieving the same architecture and similar cost and performance. ASC absolutely will be a participant. And I believe this kind of open platform versus the proprietary, and not only OSET is driving it, everybody in the world, including our end customers, eventually would like to see that. So I think the macro trend is very clear. But in terms of how do we take one step to another, the reality is very complicated. You really have to have a foundry development, you have to have architectural development, material process, the mechanical, thermal, and all of the things will take a unique company to put a lot of R and D resources to make sure they can define the standard for that. And I think that's what we're seeing today. The good thing is packaging is emerging as a more critical integral part for the whole semiconductor ecosystem, and that's welcome. But in terms of which technology will be more industrial wise pervasive, and I think the time will prove that. But ASC will not be missing this part. Great. Thank you. Next question? Next question is from Mr. Bruce Lu of Goldman Sachs. Bruce? Okay. I want to have a quick follow-up on the CapEx. What's the CapEx location for testing, bumping, wire bonding for this year? The CapEx location or allocation? Allocation. Allocation. Okay. So you're asking about, basically cap, planned CapEx for for test? For everything? I mean, you know, what's the CapEx allocation? Yes. Think for this year, the likely allocation will be around 65% for assembly, roughly 23 to 22 25% for test, a little bit for material, and then roughly nine to 10% for for EMS. Okay. So assuming that, you know, your equipment lead time right now is more than a year, so your CapEx for next year should be foreseeable? Because you you you already mentioned that the the CapEx, the other you know, equipment lead time right now is more than a year. Right? So, basically, all you know how many equipment you're gonna spend for the coming, like, twelve, fifteen months already. So which means that your your your CapEx for next year should have a very clear pictures. Well, when we talk about when we talk about CapEx, we're talking about required CapEx. It's not necessary to cash CapEx that we're talking about. Oh, I see. Okay. Oh, the next question is a quick question. Can you give us the revenue contribution from automotive or from the IDM in your ATM business? This is what you're looking for how much revenue the automotive sector represents? Yes, in ATM. Roughly, second quarter is around 6%, five % to 6%. Do you see a clear uptrend? Yeah. Well, I think we're pretty aggressive in terms of our ramping up our auto auto business. Do you expect it to be more than 10%, you know, in 02/2022? Well, we'll we'll we'll we'll look at it. But that's gonna be it's gonna be, quite a bit of growth this year, over 50 growth. Wow. Okay. So what is their IDM revenue exposure right now? The IDM exposure? Yes. IDM customers. Yeah. Around one third of all this has come from IBM. I see. Understand. Thank you. Do we have additional questions at this time? There is no question. Okay. I'll turn it over to Doctor. Tianwu to wrap up the call. Well, thank you very much for your patience and support to ASE. Twenty twenty one has been a very challenging but extremely exciting year for us. Much of the ER impact, which plagued us last year has been resolved. And I would like to thank all of you for supporting us. And I look forward to a successful 2021. And we'll talk to you next quarter. And in the meantime, stay safe and healthy. Thank you. Thank you very much.