Q2 2021 ASE Technology Holding Co Ltd Earnings Call
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.
Then our previous target.
Our net our last guidance, we estimated semiconductor.
We 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 'twenty 1 ATM.
Gross margin.
Our full year target of 25%.
In other words, we have achieved our full year target in the first half.
Therefore, we do expect further gross margin expansion in second half Q3 and Q4.
Oh call it 2021 operating margin.
Margin target.
Sure exceed or at high end target.
2.5% to 3% as we previously guidance.
Let me turn to the business outlook.
Our first talk about the short term.
Demand indicators.
<unk> a strong 2022.
With another better than seasonal first quarter as you know.
First quarter of 'twenty 'twenty 1.
Has been stronger than all of our expectation.
We're looking forward to another strong Q.
In 2022.
Many of the customer on extending the long term service agreement.
For 2022 into 2023.
Let me comment on the expansion which has been.
Many people ask about it.
The capacity.
Q1 needs to consider holistic and.
And balanced supply continuity for.
Across the complete material equipment and process ecosystem.
Our estimate the earliest for balance of demand and supply will be some tie in.
Expanded 23 in.
In other words in 2022, we still need to be very smart and be very efficient in managing the bottlenecks.
Next he.
He will ask about a double booking and.
Inventory control.
Which made them.
However that in fact should be localized and temporal.
With the overall demand profile with very little impact to the overall business momentum at least from <unk> perspective.
Next page I would like to comment on.
In 2000.
Business outlook longer term.
What I'm trying to do here is to share with you on.
Asp's perspective.
And maybe ASE is all set perspective on it.
Our longer term outlook.
On this page.
A dark.
The other pyramid.
What I'm trying to do is to illustrate a conceptual concept of other current state of the semiconductor business.
As you know semiconductor business, mainly driven by innovation.
If you imagine innovation.
It's driven by technology.
Hardware as a tip of the pyramid.
Asti innovation, because more pervasive the pyramid becomes Paula.
In order to supporter.
A bigger and taller pyramid.
Lance.
The Hyatt all needs to increase.
We just slowly.
This is not exact mathematical description of our ecosystem. However, conceptually you can see that.
What we're seeing today is we have 2 driving forces.
So let me comment on each 1 of debt.
The first 1 is was.
But for discrete already be preparing for the longest time, including 5 G. AI EV, Iot smart manufacturing and auto sector.
Now for this type of innovation to be pervasive and scale, you will need to develop new infrastructure.
Which will.
We incur instigated new demand for system, and therefore demand for semiconductor devices.
However in the last 2 years unexpectedly we had a COVID-19 impact.
For the COVID-19 did is actually similar to.
This is not a new innovation however, it put a step function for a sub debt 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.
Why would develop the infrastructure, we're also cranking up new systems.
For the COVID-19 effect is leverage on the existing infrastructure the only demand for a large quantity of new systems.
So the industry is caught off guard.
And this is what we're talking about now.
COVID-19 impact can be 2 years can be 5 years, we actually do not know how long that will last.
While we do know is we are in the short.
Therefore, the industry react accordingly by building of wafer capacity, we're also building up the.
The assembly and test capacity the whole supply chain are building all of the capacity accordingly.
The comment I would like to make here it is.
This is a great incentive for the industry to start developing a manufactured infrastructure because even if the COVID-19.
Impact dissipate.
In the next 2 to 5 years.
The new wave of innovation, which will be a much much longer lasting impact for the industry.
$65.5 AI on the Iot Smart manufacturing, we are seeing a huge.
Huge demand on the Iot devices for example on the electrical vehicle on the autonomous driving.
All of this new paradigm will require new infrastructure in a brand new system.
So our prospectuses semiconductor is very healthy short term.
We have a great incentive to build out capacity to accommodate the system requirement by the COVID-19, while we are building up the needed capacity too.
Common data future increase in demand driven by the new paradigm shift.
So.
Moving to.
For the next page, let me talk about the other 3 tailwind.
From our perspective.
The first is the consolidation for.
For the supply chain constraints has done for the industry. It is forcing everyone on.
Customer of customers customer to accept.
More stender flexible and secure supply alternatives.
This is great for open platform service provider like foundry and <unk>.
In other words, what used to be proprietary now.
For success.
The open platform alternative long term. This is the thesis why all sat and foundry will be gaining more share in consolidation over proprietary suppliers.
Let me talk about the third tailwind tell on cluster per cluster efficiency economists.
While the supply chain flexibility has been known for we're saying for the last few years is Taiwan cluster has been investing capex in a very very heavy way, including ASE.
As matter of fact.
These spill.
Merger.
And synergy is another example of the Taiwan phosphate efficiency.
So with the efficiency in hand with additional Capex investing.
With more customers.
Choosing Taiwan sector. After preferred choices this is forming a positive.
Or a virtual cycle.
Let me talk about the last tailwind, which is ASE holdco.
ASE holding company today has demonstrated a clear leadership and scale market share margin efficiency.
We have a very clear view.
New about how the new wave.
G autonomous driving.
Smart manufacturing will demand heterogeneous integration, including silicon silicon and silicon with non silicon for sensors.
We have a very clear view about the future.
Future AI.
Big data driven high quality and tracking manufacturing, which is done by the automation.
We are today is the factor choice and indiscipline simple manufacturing partner for the semiconductor ecosystem.
With that.
I. Thank you for listening I will turn it for back to Ken. Thank you.
Thank you Doctor World.
And we'll now go more in depth into our financial results first off I would like to clean up and order of business that needs a bit of explanation for the sake of current reporting transparency.
As you are.
You all know our subsidiary <unk> completed its acquisition of the steel Flash in 2000.2020, given the complexities of the purchase price allocation process or PPA IR for US General generally allows companies up to a year to complete this valuation process.
To the evaluation is completed a retroactive adjustment is usually made.
Still flashes purchase price allocation was completed during the second quarter. Accordingly, we have retroactively adjusted our balance sheet by 0.4 billion representing zero point.
On 1% of our total assets out of the first quarter.
On our P&L the purchase price allocation results in incremental expenses booked into the first quarter totaling $88.5 million empty or <unk> <unk> per share first quarter consolidated holding company.
<unk> reported gross margin has been reduced by 0.1 percentage points, while operating margin has been reduced by 0.2 percentage points for.
For the second and future quarters, PPA impact to net income will be approximately $37 million.
And <unk> <unk> per quarter impacts to future growth and operating margin will of course depend on future revenues, but in the current periods such impact is considered negligible at less than 0.1%.
This amount will be added to our quarterly PPA adjustment.
Please turn.
Turn to page 7 where you will find our second quarter consolidated results intercompany transactions between our ATM and EMS businesses have been eliminated during consolidations for the second quarter, we recorded fully diluted EPS of $2.30, SUNS and basic EPS of $2.40.
Consolidated net revenue increased by 6% quarter over quarter and by 18% year over year. The sequential increase was primarily driven by our ATM business we.
We had a gross profit of $24.8 billion with a gross margin of 19, 5%.
Our gross margin improved by 1.2 percentage points sequentially and 2 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.
I 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 zero point $6 billion to $11.6 billion. So.
Sequentially, our operating expense percentage sequentially. It stayed flat at 9.2% and declined <unk> 5 percentage points year over year.
For the year, we're 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 zero point $2 billion.
Non primarily consists of gains related to.
Our foreign exchange hedging activities investments and asset sales offset in part by net interest expense of <unk> 6 billion.
Tax expense for the quarter was $2.6 billion the effective tax rate for the second quarter was 20% for the third.
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 2 accounts for such tax impact net.
Net income for the quarter was $10.3 billion representing an.
Increase of $1.9 billion sequentially.
And an improvement of $3.4 billion year over year.
On the bottom of the page, we provide key P&L line items without the inclusion of PPA related expenses consolidated gross profit excluding PPA expense.
It would be $25.7 billion.
With a 23% gross margin operating profit would be $14.4 billion with an operating margin of <unk>.
11, 3% net profit would be 11.5 billion with a net margin of 9.1.
1% basic EPS, excluding PPA expenses would be $2.67.
On page 8 is our ATM P&L, that's worth noting here that the ATM revenue reported here contains.
Revenue eliminated at the holding company.
Spence law related to intercompany transactions between our ATM and EMS businesses.
As Dr. <unk> indicated our ATM business looks very healthy for this year and heading into 2022.
For the second quarter of 2021 revenues for our ATM business were 70.
And <unk> $1 billion up $5.2 billion from the previous quarter and up 9.5 billion 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.
<unk>.
On 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.
<unk> a 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.
For Europe, Despite NT dollar appreciation, having a negative 0.5 percentage point impact quarter over quarter, and a 3 percentage point impact year over year.
We expect to be able to deliver quarter on quarter improvement in ATM gross margin in the last half of the year.
<unk>, 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 $8.4 billion.
Zero point $3 billion sequentially and up <unk> $5 billion year over year.
<unk> sequential and annual operating expense increase was primarily driven by increased employee bonus accruals, which are based on a profit sharing model on.
Our operating expense percentage was 10, 6% down <unk> 4 percentage points sequentially and down <unk> 7 percentage points.
This every year on.
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 <unk> 5 percentage point impact quarter over quarter and 3 percentage point impact.
So year on 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 9 you'll find a graphical represent.
<unk> patient of our ATM P&L, when we see our ATM gross margins here, almost linear rising and hitting historical highs.
It is fair to mention that we do not believe that our business is immune to future cyclicality inherent to electronics.
But we do believe.
Representing the scale synergies and the benefits of the for tailwind as mentioned by Dr. Lu.
It 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.
That had a decline in on our communications market segment with share picked up by our automotive consumer and other products. Meanwhile, our computing segment has held relatively steady since 2020 again from what we can see here our near term performance has not been driven by communications related devices.
For a down 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 on.
Near term performance has been driven primarily by growing consumer and general semiconductor expansion.
This supports Doctor was 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.
Generally too much noise in trying to understand each quarters.
Spansion virtual movement here, however, when the charges taken as a whole to tell them more complete story you can see here the gradual improvement in underlying strength of our wire bond related business.
Meanwhile, services for advanced products have seen a gradual decline some of which has.
And with the impact of the U S E R. We.
We do however believe that our advanced services will start to 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.
Digitization the information we provide in regards to our Ams business may differ materially from the information directly provided by our subsidiary and they report independently using Chinese GAAP.
As mentioned earlier the results of the first quarter have been retroactively adjusted for PPA cost.
Applebee's.
Our second quarter revenue, usually represents the end of our seasonal trough.
However, what is more unusual this year 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 EMEA.
Cost 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 Ams business tends to be characterized by training investment and preparation ready.
And on our factory line for the third and fourth quarters, when things get up to for mass production speed.
As a as is oftentimes the case is.
It's the quarter that require spending of a more spontaneous nature for upcoming product ramps.
This is especially true.
Through this year when we have 2 new factory locations ramping up during COVID-19 spread as.
As such we have incurred extra operating costs related to R&D logistics and factory start up 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 $4.5 billion, increasing <unk> 5 billion sequentially and zero point $8 billion 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 for <unk>.
On the usual improvement is primarily the result of cost differences from deferring product index.
The annual decline in gross margin is primarily due to higher operating overhead.
Our EMS business unit second quarter operating expenses were $3.2 billion increasing zero.
<unk> 4 billion sequentially, while increasing the zero $7 billion year over year sequential operating expenses were primarily up as a result of increased R&D and factory start up costs.
Annual operating expenses are up primarily as a result of.
<unk> appointed larger operating base.
Our operating expense percentage increased <unk> 6 percentage points sequentially to 6.5%, while increasing 0.2 percentage points year over year. The sequential operating expense percentage increase was primarily.
And by higher R&D and factory start up costs.
We expect our operating expense percentage to tempered down during the back half of the year as our mass production revenues ramp up during a typically.
Seasonal up cycle.
Our EMS business has had.
In more challenging start this year as a result of worsening COVID-19 operating condition and component shortages.
Quite simply the underlying conditions have changed and it's now more difficult and expensive to run debt expected.
We do not see the component shortages or extra costs.
Costs subsiding in the near term therefore, our target of <unk>.
A 4% on operating margin for our EMS business has become more of a challenging 1.
On the bottom half of the page you will find a graphical representation of our <unk> revenue by application.
Second quarter change here with consumer products declined 5% as 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.
Alex sheet, the only things we would like to add here are that our total unused credit lines amounted to $276.4 billion.
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 million.
Of which $450 million were used in packaging $116 million and testing $39 million in BMS.
EMS operations and $6 million.
For connect materials and others.
As of the end of the second quarter, we are still running in the past city constrained environment.
And at this time, we continue to see our capital expenditures up from 10 to 15.
18% 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 differ or accelerate.
With that we would like to provide.
Provide our third quarter business outlook as follows in U S. Dollar terms ATM third quarter 2021 volume is to increased 12% with ASD holdings stable versus second quarter 2021 levels.
ATM third quarter 2021 gross margin.
<unk> sequential improvement should be similar with the sequential improvement in the second quarter of 2021.
For our EMS business in Us dollar terms.
<unk> third quarter 2021 business level should be slightly higher than the average level of for third.
Third and fourth quarter in 2020.
MS <unk> third quarter 2021 operating margin should be around our targeted 2021 full year operating margin.
With that I'd.
I'd like to open the floor for question.
Questions were doing it slightly differently.
We have people scattered throughout different rooms and such.
We.
When we get the question I'll repeat the question.
On the direct it over to Joseph intact. So.
Question. Please.
Our first question is from this tech Goku, how do you hold on of J P. Morgan <unk>.
Yes, thanks for taking my question.
My first question is on what Dr. <unk> mentioned in terms of.
Demand supply balance coming in 2020.3.
Could you talk a little bit about what do you expect pricing trends margin trends to be next year looks like you're still going to be in a similar situation as 'twenty 'twenty..1 so how should we think about this secondly could you also talk a little bit about how book to.
Bill is looking at the head into early 'twenty 'twenty, 2 you talked about Q1 being better than seasonal.
And you did allude to double booking which is a very big topic for investors focus on.
How do you estimate double booking within your auto book and how does that affect your book to Bill when you think about next year on demand and supply.
That's my first question.
Okay.
I have here that you were asking about.
Pricing contracts for next year.
And also a.
Outlook for 2022.
On the somehow circle back over to.
Pockets of double booking generally we were trying to keep the number of questions for up to 2 questions per kilogram. So let's go with the first 2 the pricing and the outlook for 2022, alright. So we our first priority is to make customer delivery and fulfillment.
And we have.
<unk> 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 adjustments.
Is there the higher material cost for the expedite fee.
I believe.
Believe for the second half of 2021 as well as the whole year of 2022, we will continue the current trend it.
It is very difficult to give you a quantitative estimate for what the pricing is because this is a very dynamic our first priority is day.
<unk> expedited delivery however, the price 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, we're making a timing adjustment however.
They may not be completely due to the business slow down.
Mentioned about our supply chain continuity, sometimes theres, a PGA subsidy shortage, sometimes theres a blueprint shortage. It makes no point to have over capacity on 1 equipment.
Equipment or process.
Same time, we do not have the materials. So the comment that I made in 2023, sometimes.
We'll see more of a holistic and balanced capacity supply demand balance, but definitely will not.
In 2022, and hopefully in 2023, we will have an easier time to execute the customer delivery. Thank you.
Got it.
So just 1 clarification so on the guidance for this year I think it.
It sounded like you are looking at 20 plus percent growth for <unk>.
The ATM on a U S. B basis, just wanted to clarify if I got that right.
Correct, yes, okay. Thank you I'll go back up.
Yes.
I do want to mention that you're going on this is on top of.
The recovery on.
Our effective business that would be a U S D var.
So as as.
<unk>.
Actually we will mention in his presentation, if we exclude debt part of the business from.
From the equation our actual first.
First half 8 overall ATM growth with 48 per se and also in the year in terms of test.
Not only that we are ahead on our scheduling and making a full recovery for example.
Rather than a later part of the year.
Also the year.
Again, excluding the <unk> effect.
Effective business.
The actual growth is about 54%. So we're seeing a very very strong growth momentum in terms of our ICL business. At this point there is sales that we start.
Moving to prototyping to.
Next question.
Peter.
Yes.
On.
Next question is from Mr. Randy Abrams Credit Suisse Randy.
Thank you.
Okay.
Yes.
Okay I'm on the phone line hopefully you can hear me.
The first question back to the comment about the tenant mix until 2020.
'twenty 3.
How do you see I mean, I'm just curious the supply side.
You seem pretty heavy industry bookings for equipment.
And with timeshare stretched out but I assume.
We'd get delivered in the next year or so I'm curious for 1 on the supply side, how you're viewing it.
You'd think that bottleneck on me.
The back end equipment.
It gets resolved for moving through next year, and then from the demand side.
How are you factoring a part for Covid environment, there's a fear about some of the COVID-19 related consumer PC home electronics coming.
Coming off a high base.
I'm just curious here what you are reflecting for next.
If those factors.
For a supplier or looking for comfort us tightness continue into 2023.
Randy you're looking for.
Question regarding.
On the.
For the.
The situation or the.
Relating to backend equipment tightness.
And also looking for an impact on.
Next year, the overall market demand and whether we see changes in a Oliver overall market demand structure.
Okay. That's great. So yeah, just to give the confidence for tightness other way.
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.
Non improve the lead time stretching.
And I believe the lead time will start.
Start improve on not this year sometime in 2022, we might see the lead time becomes better for Walter Liptak gets better you still need to have a balanced capacity expansion right.
I talked about on material process and everything surrounding that.
So I believe the reasonable capacity build up will be some time for.
Throughout between 6 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 debt profile.
The total comment.
As mobile more difficult to answer the demand we have seen some adjustment for.
For example, some sector of the customers on making some pushout.
Push out and deliberate however, because of the overall demand on the overall situation.
It is very easy for ASE.
On the assembly test side to switch the necessary equipment.
Into the other application, which is clearly very very strong demand our wafer bank with.
As for very high so right now we're not terribly concerned about.
Some of the inventory correction do for whatever reasons, but I think each end customer happier unique reasons why they are making some local adjustment right now actually the local adjustments kind of welcome because multiyear delivery situation. There has been in this tight spot, which is really on a healthy mentally.
<unk> for for everyone.
So I think that demand will continue to be strong.
Our second half.
It will be strong for.
For 2022, I talk about the pyramid.
Struggled for a long time on how do we really conceptually articulate on what is going on.
COVID-19 without asking for any new infrastructure.
They just have a sudden increase of new of systems.
And therefore, all devices for short.
This is the problem and we're addressing.
When people are talking about the COVID-19 impact will dissipate.
We don't see that of course, we do understand sooner or later this will disappear.
Over you.
You have the following multiple ways of AI Iot smart manufacturing that we're aggressively building up the infrastructure, which will in turn.
Right now all require.
A lot of new system, which demand so semiconductor buys with all levels. So I think the industry will be insured and this comment that our foundry guys are making.
The 2021, 2022.29, new facts are being deployed.
Everybody.
Keep this but the industry has no incentive.
To build the manufacturing infrastructure ahead of the curve. This is standard practice.
The COVID-19 give you a very good short term incentive.
Even though we do not know this impact will be 3 years for.
Or 2 years. However, we have not believed in vision.
That all of the capacity will be needed and will be good for the world and this is what the our viewers.
Next question. Please okay great.
Good question.
<unk>, Okay, yes on the second question and 1 clarification that the first of the local adjustments. If you think things are all driven by the constraints up and down the chain or are you seeing any pockets of application weakness.
Kind of just for clarification and then my second question just on the guidance.
I know you've mentioned in the first quarter.
<unk> seasonal for fourth quarter, you are coming out for us.
Above seasonal third quarter do.
Do you expect to grow.
In the ICU, chairman and fourth quarter.
And then the other part on pricing being stable I know you talked about.
Expedites and.
From the environment. So I'm curious given we're in the peak season.
What's kind of keeping price stable or for why youre, not seeing a little bit of a sequential improvement on pricing.
Randy So youre looking for a fourth quarter somewhat of a fourth quarter outlook and also.
Pricing.
Rising environment commentary.
And.
For the rest of the year.
Okay.
Okay, great. So the first comment is we're seeing some local adjustment and we do not know the reason why their local adjustments it could be a business related or it could be a concern.
<unk> shortage related however, those are very localized and temporarily.
We're seeing the adjustment down an adjustment up right away.
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 way we can see now.
Component a comment on the debt.
For Q3 for Q4, yes, we are expecting Q3 growth, we're expecting Q for growth.
Just like last year.
The comment about Q1 of 2022 of course, I am hoping to see another record.
Q1 was better than Q for the previous year. However, on now going to save that right now, but this will 1 hoping for and I believe if we have a clear a good optimistic Q1.2022 that momentum will carry us through all of 2022 and this is our current view and then we'll deal with 2000.
23 at a later date.
Also on a business Joseph here also on the margin side.
We will see sequential growth on a quarterly basis for her.
Second half of the year as well as we continue to see volume expansion as well as well.
Continuous operating.
Efficiency improvement.
Coding for automation.
So.
Adjusted <unk> bought online.
For next year, we're still seeing.
There's also room for improvement further in terms of our margin.
We're seeing a very very healthy.
Our development and our overall financial performance going forward.
I mean, there's 1 comment I will not talk about the debt.
The over a pricing comparison on.
However, pricing is given by the market is not defined by any individual supplier.
Under a constant pricing.
<unk> profile, we can make that assumption.
When you look at the margin improvement quarter to quarter.
And we are doing a detailed analysis based on the last 8 quarters on.
How much efficiency improved net expense synergy how much efficiency improvements from the automation all of this number will add up to.
For the confidence when we said that in 'twenty, 2 and may be in the future cash on made a comment that we are looking for.
A more solid baseline going forward.
Thank you.
Alright. The next question Okay. Thank you.
Our next question is from Mr. Bruce Lu of Goldman Sachs.
Hello can you hear me, yes, yes, okay. Thank you for the great results.
My question is regarding to your long term contractual agreement assigned no debt you're big on business in fact, they're very complicated you have wildly different.
On kind of wire bond flip.
So it should help us that work for your long term contract how much of your capacity is secured by this long term contract.
So on the assets. So your first question on it relates to the character and.
Our loss.
Term of our long term contracts yes.
Help me to understand.
Well I think the comment you can give it to you as soon as on a large majority of customers covered by the service contract I don't think I can give you anything more specific.
Yeah.
Very very large percentage.
And in EMEA.
I mean this for this country is sexually.
You know a secure most of the capacity or the only for the incremental capacity.
For all of the capacity non incremental.
And also the I think the comment and I keep referring to.
You'll have to look at when people secure assembly capacity will average Abbas.
There is intrinsic inherent assumption.
Assembly capacity will have the needed.
Leif Brian.
Moving 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 secure the assembly capacity.
Also support the customer adds was ASE as well as.
Our supplier partner.
To secure the needed overall balanced supply continuity.
Beyond 'twenty, 1 into 2022 and 'twenty 3.
And this is the part of the overall efficiency.
And flexibility management I was referring to.
You are really asking for the wheel or the affected competitiveness.
You have to look beyond the assembly and test per Se you should look at the overall supply for our wafer materials the whole 9 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 reach low competition, and we're seeing that ASE competition against our peer set.
It is following the same analogy you will be.
To understand the number and the meaning behind it.
What I was referring to.
Are you seeing.
Do you believe that your competitor also have secured a reasonable long term contract or.
It is pretty much the the supplier who can get.
April ensure this kind of lumpy on contract.
I don't know the answer but asked a good competitor I have to assume they do.
Or or on the other hand, you know how much your customers.
Their demand is fully secured by discount on contract.
We'll get the customers.
The motivation can be best illustrated by the long term service agreement.
Well as all of the diluted share technology development.
And if you are the stack for choice.
For the customer not only you will have a short.
Term long term loyalty.
We'll also have all of the future pipelines.
So when we make statements about the factor versus our key customer.
Or whether IC system.
Our automotive IMAX.
I'm actually referring to the existing loading ask why.
For future pipeline and everything that I just talk about it.
All inclusive.
I see.
Okay. So my next question is for Joseph.
For the gross margin for ATM again congrats.
Congrats on the Great result, but I'm, a little bit greedy debt a lot of other semiconductor.
On the other companies already posted that you know she's.
He spoke of high gross margin and you know the.
You know when do you expect if you exceed your.
Historical high gross margin as a cash.
On some of these basis.
Well, if we have the free cash.
FX fluctuations.
[laughter].
The third path our historical peak as.
Well.
No. If you use the pro forma basis, you know you feel at out sales gross margin and <unk>.
In aggregate not yet.
I don't know.
For him.
Okay.
Even including spills from.
Volume basis, he already has.
If we have bad debt, but FX fluctuations as last year PPA that we have to bear.
It has the historical peak.
So how do we if you've already surpassed on how.
Do we know what is the new norm for the gross margin how do we.
Because.
How do we see the value per precision increase and to reach fully retract to your gross margin.
In fact in Europe.
If I layer on even more per year.
And you are on a nominal basis.
Yes.
Both on the.
If I don't count for CBA.
Heading to.
Reaching a historical peak on an annual basis.
You have reached back in 2014.
Yes.
Gross margin was about 27%.
And.
On a quarterly basis I'd be.
In the second half will be accessing debt and I'm pretty confident that next year.
The annualized basis.
That that is total.
The record will be broken.
Okay. Thank you.
Next question please.
Next question is from Easter week shoe Huh.
<unk> Securities.
Yeah.
I can't go ahead Jeremy.
Yes, we havent here you're going on.
Okay, great Yeah, I'll just add.
A little questions. The first 1 is for the housekeeping question for Joseph <unk> Whats your utilization rate across the board for wire bond for a human testing in.
In Q2, and we shall look in Q3.
A Q2 in.
Assembly work on 85 per cent and.
For test is close to 80%.
In third quarter.
We will be over 85 for it then Lee.
And over 80 for test.
As we mentioned.
Running.
In terms of Africa for capacitor.
Okay great.
Second question is about your pricing.
When you buy your friendly pricing so.
For Q3, and I presume as scope is going to be the definition for Q4 and maybe into next year and it's.
It's pretty much across the board.
Or just more.
Specifically for your for your web on them.
I think you're asking about.
Whether we raised prices on our plan on raising prices across the board or on on just <unk>.
Wire bonding.
Yes, that's right.
Yep. Thank you.
Our utilization will be for.
For for Q3.
We're already for in Q2 from Q3, and Q4 was for ramping up the U S.
So the fact that.
It will be very busy.
The pricing adjustment.
It's not a contract.
We have to follow the business dynamics based on need and require.
I am not I don't have the privilege and I'll, let mark answer however, we want to raise price.
So on bottom line. However, there's a possibility that we might do so.
Sorry.
Oh, Okay. Yeah, yeah. That's good enough. Thank you so much thank you.
Yes.
Next question please.
Our next question.
He is from Easter C Hilton of China Renaissance.
No.
Hi, Good afternoon, gentlemen, ask 2 question. The first 1 just before the merger the company per case out there substrate self sufficiency ratio I'm not sure. If you have the number ready and for.
For the latest quarter.
Can you repeat that question on Walmart.
Oh, yeah, the substrate of self sufficiency in the past you gave out guide before debt measure would be for Aspira.
I'm not sure. If you have the same pad percentage you have on hand.
All of Us Youre looking for our substrates sufficiency percentage right.
Exactly yeah.
Hovering around $22.95 per day.
Yeah.
Okay. All right do you think it's still are on that I think the key.
So for.
Here also frustrated.
Actually gave us the additional add.
Overall competitiveness.
So far stronger volume in house capability or capacity.
It sounds like that's my second question, Yes, you are right answer Okay and also to your other question could you provide an update on to Wi Fi on day to day for Rescheduling last time, you mentioned debt the company's Atlanta at roughly 3000 from 1005 on this year.
So I was just wondering if that would be upside from that number.
For second quarter, we added close to 1500 founders.
For being able to be set.
Yes.
Yeah.
The guidance.
I think the delivery.
And we're seeing.
Yes.
We are we are.
Maintaining our target for the for the year and hopefully that would help.
We will have for delivery.
Oh, Okay great.
I can remember last time, you mentioned roughly.
Total time for that day.
Before we get ready for it.
Yes.
Tim mentioned that piece of it with debt at this point so.
So thats the target, but we'll see how it goes.
Okay, alright, okay great.
Congratulations.
Yeah.
Next question.
If you have a question please raise your hand now.
We have a question from Mr. Goh cool hunting hat on.
P Mod.
Morgan.
Okay Alright.
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 billion Mark on even higher do you feel.
Next year. It also capex is going to remain in this 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 youre looking for an outlook on our.
Our capital expenditure plans into 2022.
I just wanted to yeah.
Okay, well for this year, we are still maintaining our.
Previous plan.
But youre right I think.
The actual.
We will be at the high end of the range.
On 15% and price.
By the way it's going.
<unk>.
IPhone preclude the possibility of.
Racing on Capex for this year again.
I think is the other big.
For a little bit too premature to talk about our 2022.
Capex.
It really depends on other market overall market situation, although we are gaining.
And next year.
There will be additional demand.
Just the other Tien I just wanted to give you another angle and.
E.
For example, yes, we are.
Are talking about high Capex for ASE low fat for 2020 in 2021.
Same time, it will be very interesting to look at all of the IV and capex for the backend.
I believe you will see a very very different scenario. The reason we want to make a statement is.
Keep in mind in 2022 and 'twenty 3.
There will be incoming wafers from ordered the new fab Tech.
<unk> started since 2020.
So all of the new way for aimed for 12 inch.
Who will be.
No I can't service provider for all of the wafer or if there is a system did net infrastructure demand.
If there's no demand that's a different scenario.
In case, there are demands if the IV and are investing less for the backend.
Then.
For consolidation thesis with guidance that <unk> needs to double down in order to make up for Delta.
Therefore in 2022, even though it is little bit earlier to say, but depending on the business dynamics for 2000.
The bad 1.
And the early part of 2022.
By working with all of the IC system customer.
We will have a much better view about the overall system demand.
And the backend demand as for as all of the other subsequent different suppliers.
And that will be a dynamic process, we will give you a much much better number in terms of the capex scenario.
Understood.
<unk>.
Maybe 1 follow up on on that front.
Could you talk a little bit about.
To think about.
Returns on net Capex now that your gross margin is clearly gone up.
Like how how are these LTE is being structured and how are you thinking about capex in the future you talked about.
Okay.
A lot of capacity being spoken for in LDH.
So how should we think about returns on and just to give some context I mean, historically that has been seen as more cyclical in terms of margins and returns.
Is there something that we can talk about that.
On how you'll cycle like.
Value on returns.
Likely to be higher on much higher given what we are seeing that.
The pricing dynamics and the willingness of customers to comment much more longer term contracts.
So you're asking about.
Through how we.
<unk> Capex.
And especially in the context of.
This tight semiconductor.
Supply environment.
Could give our auto IC or are we kind of what are the crush hold on.
The hurdle rates that you use when you think about capex.
Investment in general.
I think it's a very parent debt.
The return is getting better as we continue to.
Marketing expenses.
Although the CFS does have some impact on the overall return situation.
For our submission.
<unk> debt, we are looking at as the peso is.
For 40, 45%.
You paid per cent for new investment right.
That's correct.
Got it thank you that's.
That's very clear.
Next question.
Next question is from me as chair relating shoe of Citigroup.
Hi can you hear me we.
We can hear you go ahead, okay, sorry, our Italian.
In a late so excuse me if my questions that we'll ask a quick question for me is that TSMC has several players to build new fab overseas. So are you considering to increase your cobalt prices as well to catch on the business opportunity funnel of newly built a wafer fab Ah why.
And if we want to do so how will it impact your capex spending plans that in the mid to long term.
So your question relates to.
Our longer term thought process in terms of our global footprint expansion yeah.
Alright.
To answer that question is if you look at the ASE footprint.
I believe ASE is by far the most diversified manufacturing company in OS at World.
We have.
Factories.
Across 3 continents.
And.
2.2 on Japan, Korea, Singapore, Malaysia as growth U S and in.
China of course, Taiwan, So in terms of the global diversification, we are already there.
So the next question is on.
Under the geopolitical.
Sensitivity.
As well as the U S incentives for the China initiative.
How do we respond to like TSMC, or Samsung or Intel initiative and building up the <unk>.
Different capacity in different parts of the world.
For now at 50.
The short answer.
That is it really goes by the business dynamics.
If I want to be a little more specific.
You will look at the all for all semiconductor demand on.
Which is given by the debt the pyramid picture day to everyone.
If you dissect the pyramid into 2 portion you.
For a desk, which part of the pyramid are cost centers.
And you would develop your manufacturing in a massive scale.
To offer the most cost effective flexible delivery.
To that part of the pyramid.
On a profit.
After that you will have a little piece of smaller piece, which is national security sensitive technology sensitive per location sensitive.
Then you will look at it who are the end user who are the service provider.
For those.
Service provider and the end user which portion of the assembly and test can we contribute to.
To add efficiency.
To the alternative route.
So this process sounds very complicated, but it's very very simple.
So is any of the foundry partner.
Wants to build a fab anywhere in the world will look at the output will look at the assembly or test requirement then we ask the question.
Does it have to be ASE.
If it does well.
What will be the volume that is required compared to any other on.
<unk> relative route.
We're all fails, we will make the investments accordingly based on for business need.
So right now we already have a globally diversified footprint.
But to make adjustment on the footprint by adding different service.
Our total yield will really depend on the business and by the way that business requirement as of today is not clear for the assembly and test is.
As a very very low answer to a short question because we have been asked this question for everybody in the world. Thank you.
On the fence.
My second question for you on testing business in.
In the past 2 for 2 years you have other co tried to oral or Youre testing business, but I think last year, probably was not a good year for your testing because of about.
A far ways that you know.
Had been pent.
Per foot.
So how do you look up on your testing business on now and going forward.
Are you still planning to sell the world Youre testing business.
In the interest of the percentage of the total IC ATM revenue.
Yes.
And I think the first half of the year, we were kind of busy.
Realigning our tech.
For the 2 therapy other customers.
And we have done so very.
Very successfully.
We have fully recovered our test business. The first day of the year accounted for sketch.
Yes.
And going forward, we will continue to make.
We sell through.
India Tech business back to a growth mode.
We will be making the necessary investments further too.
To further expand our tech business going forward.
Do you have a specific target of the percentage.
On the revenue from testing for.
I think right at the peak we were on.
For example, and I think that's the first thing that we are we need to go back from.
Okay. Okay.
Thank you.
Our next expense. It next question is from Mr. Randy Air France on Chris Credit Suisse.
Randy.
Hey, Ken Thanks for the follow ups I guess.
Follow up puts on P. Sip if you could give an update for you.
Contribution now for ICF.
And the U S I what percentage. It is and then could you give an update just how the pipeline is looking for expansion next year both debt at your primary customer and also diversification into additional customers.
So youre looking for basically an overview on.
Chairmanship it's contribution.
From our EMS and our ATM and the team and also potential view on our pipeline.
Yes, that's correct.
I think in terms of overall Sip business last year, we had a 50% of growth for this year.
The.
On goodwill.
We'll cut down on the bid.
But overall I think the momentum has slowed their growth.
Continued to make necessarily.
We continue to grow their business.
In second quarter, a big overall.
Overall, the business represents the ball segment.
18% of our overall.
Growth business there.
From the holding standpoint for.
E S.
For a 40% and for assembly and test per quarter.
And all of these.
Rachel will grow in the second half.
Overall.
And for the EMS business for you.
You're a little bit it sounds like a much better environment for semi.
Relative to Dms right now with the tightness so is that 4%.
I mean does it feel like that's difficult until we get back to a better balance.
There's kind of a program in place.
To improve that.
Or do you have a bit of like Youre doing an ATM a little bit of pricing too.
Offset the higher cost to get back to that type of margin target.
I think for the ATM it will continue to grow.
Percentage of overall business.
Third and fourth quarter and.
For the whole year it will be.
Sure.
At a higher rate.
What we're seeing in the third quarter.
Yes.
So for us.
We'd actually have Oems margin EMS operating margin, Okay were still yes.
For the year.
Here on that okay. So it's still for a person yes, we're still looking at okay. Okay. Okay.
It's becoming a more challenging.
Target.
Because of the overall logistic cost is rising or the operating room.
We're on business.
Yes.
Yes.
At this point.
But still we will.
Maintaining their target for Tanger.
Okay.
And the last question I have just on the advanced packaging for.
Things like cash so I see in TSMC SMIC.
As for <unk>.
If we get some move to the treaty stack is that a market you have.
C O shatter TASC.
Participating in or would that really if we go to for 3 D. I see it.
Theres not as much for you to do or is there still like some final assembly to substrate.
Intel I'm curious, if you've seen opportunity on that area.
For the short answer is yes, we have always been in development with key customer.
On the line of 2.5 D and the breakthrough.
For example, we're the first 1 to launch the 2 points that the with a key customer in Texas.
<unk>.
The IC debt develop when we never stop for 1 of the thing that we're trying to articulated we really have to understand the service growth.
This business model.
If we have any company, providing a service that is.
<unk> per week.
Serving.
Unique customer.
That is not all sat business.
That's the initial <unk> business you should have at least 2 alternative service provider.
Asia at least at 2 customers.
So we have multiple customers with multiple open platform.
That becomes a viable all set business with a sustainable volume.
While ever comes into the <unk> World and there are plenty of that.
We'll take our clear leadership in debt.
Now when the 2.5 D order 3 the IC or whichever.
Average shipment architecture becomes all set 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 from performance.
ASE.
Absolutely we'll be a participant.
And I believe this kind of open.
Platform.
Versus the proprietary and not only <unk>, it's driving debt.
Everybody in the world, including our end customers eventually we'd like to see that.
So I think the macro trend is very clear, but in terms for the how do we take 1 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 same with.
We'll take a unique pump.
Company to put a lot of R&D resource to make sure. They can defined a standard for that and I think that's what we're seeing today and the good thing is packaging.
Emerging as a more critical integral part for the whole segment.
Ecosystem and that work on but in terms of which technology will be more industrial wide pervasive.
And I think the on time will prove that ASE will not be missing this part.
Great. Thank you.
And our next question.
Next question is from Mr. Bruce Lu of Goldman Sachs Bruce.
I wonder if that for a quick follow up on the Capex.
What's the Capex on location for testing bonding wire bonding for this year.
The capex location location location.
Okay. So you are asking about basically cash.
Planned capex for for task.
For everything I mean, what's the capex allocation yes.
Our sales for this year the likely allocation will.
I'll be around <unk> 65 per share for or assembly roughly.
Roughly 43 reported.
75% for test.
A little bit for material and then roughly <unk> 97 per cent for.
Yes.
Okay, so assuming that.
Income and lead time right now it's more than a year. So your capex for next year should be foreseeable.
Oh.
Because you already mentioned that the capex.
Equipment lead times right now, it's more than a year.
Right.
<unk>.
Thank you all.
Do you know how many equipment you're going to spend for the coming like 12, 15 months already so which means that your capex for next year should have a very clear pictures well always possible probable capex, we're talking about require capex.
Non necessary for cash Capex that we have.
Oh I.
Okay.
The next question is a quick question can you give us the revenue contribution from automotive or from the IBM in your ATM business.
Okay.
This is what youre looking for how much revenue for the automotive.
<unk> represents.
Yes in ADM.
Roughly a third quarter, it's around 6%, 6% do.
Do you see a clear uptrend.
Yes, I think were pretty aggressive for in terms of cell programming on our auto business day.
We expect it to be more than 10%.
2022.
Okay.
Well.
Whoa Whoa whoa.
Total look at it.
For the year quite a bit of growth this year over 50% guidance growth.
Wow, Okay. So what is the IDM revenue exposure right now.
The IBM explore yes IBM customers.
Yeah.
Okay.
Around 1 third of our visits come from IBM.
On the day. Thank you.
Do we have additional questions at this time.
There is no question.
Okay.
Okay.
Ill.
Turn it over to our Doctor can look to wrap up the call on.
Thank you very much for.
For patients and support ASE 2021 has been a very challenging but extremely exciting year for us.
Much of the year 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 will talk to you next quarter and in the meantime, please stay safe and healthy. Thank you. Thank.
Thank you very much.
Okay.