Kenneth Hsiang - Head of Investor Relations Joseph Tung - Chief Financial Officer & Director.

Randy Abrams - Credit Suisse Bill Lu - UBS Rick Hsu - Capital Markets Sebastian Hou - CLSA.

Hello. I am Ken Hsiang, Head of Investor Relations for ASE. Welcome to ASE Group's First Quarter 2016 Earnings Release. All participants consent to having their voice and questions broadcast via participation of this event. Please refer to page one of our presentation, which contains our Safe Harbor notice.

I would like to remind everyone on this call that the presentation that follows may contain forward-looking statements. These forward-looking statements are subject to a high degree of risks, and our actual results may differ materially from these forward-looking statements.

The purposes of this presentation, dollar figures are generally stated in new Taiwan dollars, unless otherwise indicated. For the earnings release, I will be going over the financial results and then Joseph Tung, our CFO, will be answering questions during our Q&A session.

Following the event, our VP In-Charge of Public Relations, Eddie Chang, will be addressing the media in Chinese. If we look back at the year, 2015 was a challenging downturn environment for our core IC ATM business. For us, much of the weakness in 2015 was driven by market share moves within the smartphone sector.

For 2016, we see indications that Android-related smartphones are rebounding from their suboptimal 2015 product cycle. Inventory looks fairly healthy, customer forecasts appear reasonable, end markets are okay. There are still challenges for the industry and us this year; however, we believe we are in the midst of a modest V-shaped recovery.

The first quarter generally performed as we expected. From an IC ATM perspective after a typical seasonally soft January and February, sales picked up during March, driven by smartphone inventory restocking. Our IC ATM business ended the quarter, declining a modest 7.5% sequentially.

The sales result is on the higher end of our expectations, especially given that our SiP product performance within IC ATM was somewhat sluggish. Our SiP product's sluggish performance impacted our EMS business to an even larger degree. As such, our EMS business performance was on the lower end of our expectations, declining 37% sequentially.

Our focus during 2016 continues to be rebalancing and optimizing our SiP portfolio instead of placing emphasis on SiP sales growth during 2015. This year, our focus will be on improving returns. Improving returns may include actions to reduce, eliminate or replace some or all of our SiP devices.

It also means readdressing how we look at new incoming SiP business. We will be significantly more selective in our decision process. From such actions, we believe we can improve the overall profitability of our services while demonstrating and leveraging technological barriers to entry. At this time, our discussions with our customers continue.

Quarter-over-quarter consolidated P&L. On a fully consolidated basis, for the first quarter, the company deliver a fully diluted EPS of NT$0.43 and basic EPS of NT$0.54. Our Packaging, Testing and EMS businesses were down 4%, 6% and 37%, respectively. Our Direct Material business was up 12%.

During the quarter, we booked other revenues of NT$2.7 billion related to real estate sales. Gross profit declined 14% from NT$13.3 billion to NT$11.4 billion. Consolidated gross margin improved 80 basis points from 17.6% to 18.4%. Operating expenses decreased by NT$200 million.

Our operating expenses as a percentage of sales increased by 1.4 percentage points to 10%. As we indicated during our last earnings release, this operating expense percentage increase was primarily attributable to lower sales and an increase in professional fees related to our tender offer.

Operating profit for the quarter was NT$5.2 billion, down NT$1.6 billion from NT$6.8 billion in Q4. Operating margins declined 0.7 percentage points to 8.3%. During the first quarter, we had a net non-operating gain of NT$500 million versus a net non-operating loss of NT$200 million in the fourth quarter.

The change from the fourth quarter to the first quarter was primarily attributable to our ECB. Our estimation of SPIL's contribution in this number for the quarter was NT$401 million. Pre-tax profit for Q1 was NT$5.7 billion, income tax for Q1 was flat at NT$1.3 billion.

The higher effective tax rate this quarter was principally tied to higher tax rates related to China real estate sales. For the second quarter, we do expect to book our annual undistributed net earnings back. Net income for Q1 was NT$4.2 billion, down NT$0.8 billion. Net margin improved to 6.7%, up from 6.6% in Q4.

Quarterly results on a yearly basis - on a year-over-year basis. Here, you can more clearly see the impact of last year's downturn. There were declines across our Packaging, Testing, and EMS businesses, declining 4%, 3%, and 13% respectively. This was principally driven by our SiP business being slower than last year.

Our Direct Material business was a highlight, growing 4%. On a year-over-year basis, our consolidated net revenues declined by 4%. Our first quarter gross profits were down 7% with gross margins down 0.6 percentage points from the previous year. Operating profits were down 17% with operating margins down 1.4 percentage points.

Net profits were down 7% with net margins declining slightly by 0.2 percentage points. IC ATM P&L. Please note, the intercompany revenues including the SiP technology business, performed by our IC Packaging business unit on behalf of our EMS business unit, are eliminated during consolidation.

Our IC ATM net revenues declined NT$2.9 billion or by 7% during the first quarter to NT$35.5 billion. Revenues for our IC Packaging and Testing businesses decreased 8% and 6% respectively. Our Direct Material business increased 2%. The declines within our Packaging and Test businesses were of a seasonal nature.

However, our SiP business within IC ATM was somewhat more sluggish than our traditional IC ATM business itself. NT dollar depreciation had a 1.19% favorable impact on revenue and a 0.62% favorable impact to gross margins. Gross profit was down NT$2.1 billion to NT$7.8 billion. Gross margin declined 4 percentage points.

The gross margin decline was principally the result of the seasonally soft first quarter. The margin decline was the result of product mix, shift in lower seasonal revenues, and a semi-fixed cost structure. Operating expenses were down NT$50 million to NT$4.6 billion. Operating expense percentage was up 0.9 percentage points to 13% from 12.1%.

As anticipated, our OpEx percentage increased during the first quarter with regards to professional fee related to the tender offer. Operating margin was down 9.1% from 13.8%. Operating profit was down NT$2.1 billion to NT$3.2 billion. Here, you can see our year-over-year comparison for IC ATM business. We don't really have much to add.

Please take a dander of that. Our Packaging operations. In Q1, our Packaging revenue declined 8.1% sequentially and 9.4% year-over-year to NT$28.6 billion. Our Packaging gross margin decreased 4.4 percentage points to 19.1% sequentially.

The margin decline was caused by typical seasonality during the first quarter resulting in lower revenues and a semi-fixed cost structure. Raw materials were flat at NT$8.7 billion, up 2.3 percentage points of sales. Labor was NT$5.6 billion, down NT$0.1 billion, up 1 percentage point of sales.

Depreciation, amortization and rental expenses were at NT$4.4 billion, up 1.4 percentage points of sales. Factory supplies were NT$2.5 billion, down 0.2 percentage points of sales. Utility was NT$0.9 billion, up 0.1 percentage points of sales.

During the quarter, capital expenditures were $62 million, composed of wafer bumping flip chip equipment at $30 million, common and SiP equipment at $28 million, and wirebond-related equipment at $4 million. During the quarter, we added 68 and retired 7 wirebonders. We exited the quarter with a total of 15,629 wirebonders in operation.

8-inch bumping capacity remained unchanged at 95,000 wafers per month and 12-inch bumping capacity increased 6,500 wafers to 89,000 wafers per month. Segment share within Packaging.

Within our Packaging products breakdown, our advanced packaging including SiP decreased to 29%, our IC wirebonding business increased to 62%, and our discrete and other segments remained flat at 9%. The quarter's performance was predominantly the result of lower SiP order flows within our Packaging business. Test operations.

Test revenues of NT$6 billion were down 5.7% sequentially and 3% year-over-year. Gross margin was sequentially down 4.7 percentage points to 32.9%. The changes in gross margin were principally the result of lower seasonal loading and a semi-fixed cost environment. Overall, cost of services for Test stayed flat at NT$4 billion.

Our testing utilization rate declined to the low - mid-70%. CapEx for the Test business was $47 million in Q1. We added 73 and retired 55 testers during the quarter. At the end of Q1, our total tester count stood at 3,453. Revenues for our Material business of NT$2.3 billion were sequentially up 14.6% and 4.5% year-over-year.

This result in particular gives us an extra cause for optimism, as our Material business may be viewed as a leading indicator for our other lines of business within IC ATM. During the quarter, NT$892 million was from sales to external customers. Our internal self-sufficiency rate increased to 31% from 25% by value.

Gross margins were sequentially up by 3.9 percentage points to 16.9%. The gross margin increase was principally the result of higher loading and more favorable product mix as compared to the fourth quarter. IC ATM market segment. During the first quarter, our communications market segment share percentage declined from 55% to 51%.

Our computing market segment stayed flat at 12%. Our automotive, consumer and others increased to 37%. The changes in our segment share generally relate to the seasonal decline in communication products, and, to a lesser extent, lower loading within SiP. EMS.

During the first quarter, revenues for our EMS business unit were sequentially down 37% to NT$24.8 billion from NT$39.3 billion. Revenues year-over-year were down 12.5% as compared to NT$28.3 billion in Q1 of 2015.

Revenues within our EMS business unit decreased primarily as a result of seasonality, but also as a result of lower order flow related to SiP. Gross margins increased 0.8 percentage points to 8.1%. The margin increase was principally the result of product mix. EMS gross profit decreased to NT$2 billion.

CapEx for our EMS business unit was $2 million during the first quarter. EMS business segment mix. During the first quarter, our communications products segment decreased its segment share from 64% to 51%. We also saw segment share increases within our computing and consumer segments.

During the quarter, our industrial EMS segment increased from 5% to 7%, and our EMS automotive segment share increased from 4% to 7%. Looking out into Q2, we believe that the shape of things to come will most likely resemble that of the previous year where the communication segment share continues to decline until the third quarter. Balance sheet.

At the end of the quarter, we had cash and cash equivalents and current financial assets of NT$49 billion, decreasing from NT$59.1 billion the previous quarter. We also had our interest-bearing debt decline slightly from NT$120.4 billion to NT$118.7 billion in the quarter.

During the quarter, we spent an additional NT$13.3 billion on the purchase of SPIL common stock. As of March 31, we owned 1.029 billion shares or 33.02% of SPIL, NT$48.3 billion worth. This amount is recorded in investments equity method. We still have NT$173.2 billion in unused credit line.

EBITDA declined to NT$13.2 billion from TWD14.2 billion during the seasonally down quarter. Capital expenditures for the first quarter totaled $115 million, of which $62 million was used for packaging, $47 million for testing, $2 million of EMS, and $4 million for interconnect materials. EBITDA for the first quarter amounted to $400 million.

The cash flow environment here remains very healthy for the company. Looking out into Q2, we feel that we are in the midst of recovery of our IC ATM business. The recovery looks to be fairly broad-based with all sectors involved. The recovery also looks to be gradual. We are not seeing a sudden uptick. However, the trend is up.

The rate and extent to which the business declined during 2015, we should see a recovery of equal proportion in 2016. Our SiP business should remain seasonally soft through Q2. Historically speaking, SiP typically picks up during the latter half of the year. Our EMS business is much more tied to our SiP products.

We would expect inventory control of SiP products to remain tight during the second quarter. Our traditional EMS business, excluding our Wi-Fi module business, should see a moderate recovery. For IC ATM, we see our Q2 business approaching our fourth quarter 2015 levels, with our SiP business remaining seasonally soft.

Given that the Q2 product mix will be significantly different than that in Q4 of 2015, we expect our gross margins to improve meaningfully for Q1, but our gross margin may end up being a bit lower than Q4 2015 levels. For our EMS business, we see a moderate decline from Q4 levels. We will attempt to hold EMS margin steady during the quarter..

You're supposed to say you are concluding the presentation..

I'm concluding the presentation. Our Q&A session with Joseph..

Okay. Thank you. For the second quarter outlook, you have up here looks like a decent recovery. Could you talk about the areas across your business in ATM, if it's across end markets that you're recovering, I guess, moderate to approach fourth quarter would be about 8% growth.

And is there any degree of pricing, like your competitor highlighted or flagged more pricing. If you're seeing like an annual price reset or across any parts of your business you're seeing more price pressure..

I think it's very typical to us as the every latter part of the year, they will see a round of price renegotiations and most of the price adjustments were down at that point. So, going into second quarter, I think the pricing environment strategy stabilizes.

So, whatever we're seeing in the second quarter is going to happen in stable pricing environment..

How does this year compare like the annual reset this year versus the last couple of years? Was there any different....

I think because of the softness in the second half of last year, we've seen a bit more severe pricing pressure last year. Well, I think that's very typical to nothing that's really abnormal and I don't think it's a result of any transaction that is taking place..

Then I wanted to ask on the SiP business where you're rebalancing projects, maybe if you talk about a moderate decline if that would be double digit? I mean just a rough framework for how to think about a moderate decline in EMS? And then for full year, your view for a kind of cross permit declined.

I mean just given some projects going, what you might expect full year a ballpark range or how that looks and also for gross margin if you stay around this level?.

Well, I think as mentioned, this year we're focusing on rebalancing. We'll be very, very selective in terms of choosing what to do and what not to do. And if we're looking at the current portfolio, I think there will be projects that we'll be holding steady. There will be projects that we will try to improve its overall margins and also returns.

There will be projects that we may gradually wind down because of the low-margin perspective was also the - there is not that much value-add that we can provide. And also there will be projects that we may see - that we supply for the year-end.

But at the same time, we will continue to build our pipeline for new devices or new projects with new customers.

So, all-in-all, I think it will be a challenging year in terms of difficulty for us, not because of the overall - but of course one is the whatever portfolio that we're having now is going through some difficult time, and we have to wait until second half of the year to see how things will shape up.

So, at this point, I think it's a bit early to tell that how the overall SiP business for us, particularly from the EMS perspective, will shape up for the whole year.

Right now, I think we are at the very bottom in the first half, and that's a combination of - so we had an exceptional year last year - first half of last year, combined with the overall softness in particular products..

And I guess is there a way to think about moderate like the type of decline because down 37% in Q1, a rough range for what moderate?.

It will be single digit..

Okay. Good to know. The last question, I wanted to ask on the Deca, the deal you signed, that gives you fan-out packaging and maybe talk if that's exclusive with Deca and how it compares to others in the market like you licensed Infineon before.

How it compares to InFO or the eWLB and positions you for fan-out business?.

Well, I think the Deca transaction is really one of our continuing efforts to expand our overall technology portfolio particularly in the fan-out area. This is one we see as a lower cost solution, addressing a different market segment or customer base from InFO. I think the licensing - it comes up - it's composed of two parts.

One is of course the technology transfers. And also there will be equity investment in Deca itself so that we enjoy whatever upside there is once the technology is fully developed..

But, how does the sales channel work, like Deca has their own sales team and ASE would have a sales team or do you....

I think after the arrangement, I think most of the mass production capacity will be set as ASE. And Deca will remain as a research center or R&D center for the technology itself..

And I guess, roughly, when will you expect revenue [indiscernible]..

I don't think there will be meaningful revenue this year because we're in the phase of having the technology transferred over. And there will be a lot of further development for us to get into the panel [indiscernible] the CapEx will set up the capacity. So I think the overall revenue would only be meaningful maybe next year..

Name and company, please..

Hi. Bill Lu, UBS. So I think Randy asked the same question, but I'm not sure that I heard the answers.

If you look at the moderate growth in 2Q, what segments are doing well? Is it China smartphones? What are the outperformers?.

Well, I think it's pretty much across the board except maybe we can see further strength - a bit more strength in the industrial and automotive. But communication will continue to be relatively weaker for us largely because of the SiP movement..

Can you give us the number of bonders added and testers added this quarter?.

Bonders added were 68, seven retired. Testers added 73; 55 retired..

And then just a last question on the pricing adjustment this year.

Again, is that pretty much across the board or is it within a certain vertical?.

First of all, I think it's across the board, but it's a normal business arrangement every particularly last quarter of the year, there will be a round of pricing renegotiations, but there are some with very little adjustments, some with larger investments depending on the customers..

You still cited the competition from China as one of the reasons.

Do you see the same thing?.

Yeah. I think China's competition is always there and after the acquisition of STATS ChipPAC I think allows the JCET to be more aggressive because there will be more technology offerings that they can provide. Yeah. But I think the overall competition is there and the market unfortunately is softer. So it looks a bit thinner last year.

But I think things are starting to stabilize as we see the overall markets start to recover..

Sorry, one last question.

Ken, can you tell us the expectation for CapEx for capacity increases in 2Q?.

I think for the....

Well, I'll be answering that..

Sure..

CapEx as a whole, I think, for this year would be higher than last year. I think last year we had overall equipment and machinery above close to NT$600 million. I think this year it will be a notch higher. But I don't think it will go over our depreciation - below depreciation amount..

I guess I'm just a little bit curious because at the tone that I hear, sort of, cautious on the demand and yet you guys still [indiscernible] everyone's adding equipment or bonders.

How do you explain that?.

Well, I think wirebonding, I think we still have the - we have the largest copper wire on the installed base. And I think still it's really the second largest in that space. So I think I should say both of us are getting shares in terms of wirebonding.

And therefore, there is still some further investment in wirebonders required for the year, although it's not going to be at the kind of magnitude as before..

Thank you very much..

The rate of CapEx investment is actually still below depreciation and amortization [indiscernible]..

[Operator Instructions].

Name and company, please..

Yeah. Rick Hsu from Daiwa Securities..

Thank you..

I just want to elaborate a little more about Bill Lu's - maybe some housekeeping questions.

Regarding your Q1 wirebond [indiscernible] and also your bonders, can give us your traditional rates?.

In terms of Q1, I think that - let me put it out - in Q1 in terms of wirebonding, we're about low 70s. Advanced packaging, we're mid-70s. Testing at low 70s [indiscernible] high 70s. I think going into the second quarter, I think in terms of Packaging, it will all be increased to high 70s while testing will also improve from low to mid 70s..

All right. So second quarter will be high 70s for your wirebond and [indiscernible] mid 70 for Testing, right? Okay, just to make sure.

And one more question, what about your capacity increase for second quarter? Any plan for that capacity increase in the second quarter across the board?.

I think we will start to shift some bonders. And I think, right now the wirebonding is pretty full, and there will be some investment starting from second quarter, then going into pumping [indiscernible]..

Okay. Thank you. That's it from me..

I think to put things into perspective, I think the overall distribution of our CapEx for the year would be roughly 60% in Packaging, roughly a quarter into Test. I think evenly spread it out between Material and EMS..

Any additional questions. We don't have any questions online. Name and company, please..

Thank you. Sebastian from CLSA. So my first question is to follow on the first quarter margin because as you recall that in the last conference, Joseph, you guided that the margin of IC ATM will be similar to your first quarter of 2014, so that's around 24%, but then the margin is 22%. So there is a 2 percentage miss.

And then on your EMS margin side, you guided to down sequentially, but you're up sequentially in the end. So can you explain to us what's the [indiscernible] here? Thank you..

It's the same answer for the two different results. On the IC ATM, I think the margin is a bit lower because the overall SiP revenue decline is larger than expected. Therefore, it created further pressure on the margin [indiscernible].

For the same reason, because most of the - some of the, let's say, product EMS or EMS side is only looking after the logistics part of it, so it will be based on a fee kind of arrangement. And therefore the margin if you have a look at the fee as a margin, then this margin is lower.

So we'll see lower SiP revenue in EMS, it actually helps the product mix in terms of the margin - the gross margin. So one is lower, the other is higher for the same reason..

Thank you.

And going forward, can we have this expectation for your structural margin on the EMS side to be better to improve because in your prepared remarks that you mentioned that you're going to be more selective on the SiP project, but supposedly, we could expect the margin on that side can improve, so the overall EMS structural margin may likely improve.

So can we assume that?.

Yeah. That's the game plan. Yes..

And my third question is on the - Joseph, can you give us an updated guidance on your expectations for the IC ATM business [indiscernible] this year. As you recall, three months ago, I think the COO mentioned that the IC ATM would be flat or slightly up, [indiscernible] goes up flat to slightly up, so what's your expectation now after three months..

Well, in terms of the overall IC ATM, I think we remain - the way we look at the overall business, I think our view remains the same except the composition may be a little bit different.

I think the traditional IC ATM could be a bit stronger than we originally expected for the year, whereas in terms of [indiscernible] as I mentioned earlier, we are really in the mode of rebalancing the whole business.

And so we're not aggressively trying to increase the volumes to take on more projects unless the return or profit growth is justifiable. And also I think one of the factors that we have to look at is really how the end market would be - or the sell-through would be in the later part of the year in terms of the SiP products.

So I think overall it would be a bit challenging for us to keep the same SiP revenue from EMS perspective as last year. But IC ATM, I think we are still keeping the same view on this..

Yesterday, still they talked about they expect the overall OSAT business to grow 78% year-on-year this year. That's even higher than the overall semiconductor growth and even higher than the foundries growth. Foundries [indiscernible] guidance given by TSMC and UMC.

And I'm not sure what do you think?.

I obviously can't speak for him, but....

I mean, what's your expectation for the group?.

Well, as I mentioned, we are giving the same view as [indiscernible] we're seeing good potential of, first of all, sequential growth on a quarterly basis and also a moderate growth for the year. Whether 8% is moderate or not depends on how you do think..

So on the SPIL stock, sorry, I want to dig into more detail because earlier the guidance was flat to slightly up, so does this still hold?.

No. As I mentioned, it will be challenging..

More challenging than....

It will be challenging..

[Indiscernible] months ago..

I think the reason I said this is because we're seeing first quarter and second quarter of the year seems to be weaker than we originally have said for very obvious reasons. But then again, it's even harder to tell how second half will [indiscernible] sell-through of the next-generation product that we're going through..

Okay. Sorry, I have another question on the Deca, your cooperation with Deca. So I noticed that in your official announcement because you're paying the fixed licensing fee upfront and then there will be a royalty following when you sell the product.

So I wonder what's the margin of this look like because you [indiscernible] and then you need to pay the royalty to Deca.

So, will that [indiscernible] fan-out technologies from Deca when you sell this, the margin will be higher or similar or too below your IC ATM average?.

Of course, when we get into this, we look at the technology. We believe that it will generate very reasonable, healthy return for us to get into it. And when we're kind of evaluating this, of course we will put the payment of royalty into consideration. We decide what kind of margin or returns. Overall, return or margins, we should be happy..

Thank you..

Any more questions? No questions online..

Again, thank you very much for attending the ASE conference of earnings release..