Hello. I am Ken Hsiang, the Head of Investor Relations for ASE Technology Holdings. Welcome to our Second Quarter 2021 Earnings Release. Thank you for attending our earnings presentation today. Please refer to our safe harbor notice on Page 2. All participants consent to having their voices and questions broadcast via participation in this event.

If participants do not consent, please disconnect at this time. I would like to remind everyone that the presentation that follows may contain forward-looking statements. These forward-looking statements are subject to a high degree of risk and our actual results may differ materially.

For the purposes of this presentation, our dollar figures are generally stated in New Taiwan Dollars, unless otherwise indicated. As a Taiwan based company, our financials are presented in accordance with Taiwan IFRS.

Results presented using Taiwan IFRS may differ materially from results using other accounting standards including those presented by our subsidiaries in Chinese GAAP. I am joined today by Dr. Tien Wu, our COO and Joseph Tung, our CFO. For today's call, Dr. Tien 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&A session. I would like to now hand the floor over to Dr. 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 is 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 will 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 ASE'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 '21 and the first half '21 revenue and margin are both on track. Second quarter '21 ATM revenue grew 8% quarter-over-quarter in US dollar terms. First half '21 ATM revenue grew 20% year-over-year. If you exclude the EAR affected revenue, it will be 48% year-over-year. First half '21 test revenue recovered ahead of schedule.

First half '21 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 grow. Second quarter '21 HoldCo revenue grew 77% quarter-over-quarter. First half '21 HoldCo revenue grew 28% year-over-year.

First half '21 HoldCo operating margin improved 2.7 percentage points year-over-year. Let me talk about the second half '21. 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 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 '21, ATM gross margin at full year target, up 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. HoldCo 2021 operating margin target should exceed or at the higher end target 2.5% to 3%, as we previously guided. Let me turn to the business outlook. I will first talk about the short term demands indicating a strong 2022 with another better than seasonal first quarter.

As you know, first quarter of 2021 has been stronger than all of our expectation. 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 double booking and inventory control which may exist. 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 ASE'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 than 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 [indiscernible] the longest time, including 5G, AI, EV, IoT, smart manufacturing, all etc.

Now, for this type of innovation to be pervasive in scale, you need to develop the new infrastructure, which will incur instigated new demand for system and therefore demand for all semiconductor devices. However, in the last two years, unexpectedly, we had the COVID-19 impact. What the COVID-19 did is actually similar to this.

It's not the 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 up capacity at a slower pace. While we develop the infrastructure, we're also cranking up new systems.

But the COVID-19 effect is leveraged on the existing infrastructure, they 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. The COVID-19 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, we act accordingly by building up wafer capacity, we're also building up the assembly and test capacity. The whole supply chain 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-19 impact dissipate 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 5G 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-19 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 for 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 of scale 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 ASE. As matter of fact, ASE/SPIL 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 sector as their preferred choices, this is forming a positive or a virtuous cycle. Let me talk about the last tailwind which is ASE HoldCo. ASE Holding Co. today has demonstrated a clear leadership in scale, market share, margin, efficiency.

We have a very clear view about how the new wave, 5G, 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, an 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, Dr. 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 Asteelflash 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. Asteelflash's purchase price allocation was completed during the second quarter.

Accordingly, we have retroactively adjusted our balance sheet by NT$0.4 billion, representing 0.1% of our total assets as of the first quarter. On our P&L, the purchase price allocation results in incremental expenses booked into the first quarter totaling NT$88.5 million or NT$0.02 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 NT$37 million per quarter.

Impacts to future growth in 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 7 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 NT$2.30 and basic EPS of NT$2.40. 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 NT$24.8 billion dollars 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 NT$0.6 billion to NT$11.6 billion sequentially.

Our operating expense percentage sequentially stayed flat at 9.2% and declined 0.5 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 NT$0.2 billion. 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 NT$0.6 billion dollars. Tax expense for the quarter was NT$2.6 billion.

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 NT$10.3 billion, representing an increase of NT$1.9 billion sequentially, and an improvement of NT$3.4 billion dollars 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 expenses would be NT$25.7 billion dollars with a 20.3% gross margin. Operating profit would be NT$14.4 billion, with an operating margin of 11.3%. Net profit would be NT$11.5 billion with a net margin of 9.1%. Basic EPS excluding PPA expenses would be NT$2.67. On Page 8, is our ATM P&L.

It is 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 Dr. Wu 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 NT$79 billion, up NT$5.2 billion from the previous quarter and up NT$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.

On an US 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 $8.4 billion, up $0.3 billion sequentially, and up $0.5 billion 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 9, you'll find a graphical representation of our ATM P&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 Dr.

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 communication 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 Dr. 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 US 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, [indiscernible] 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 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&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 NT$4.5 billion, increasing NT$0.5 billion sequentially, and [grew] NT$0.8 billion year-over-year. The higher sequential and year-over-year and EMS gross profit was the result of product mix.

Gross profit margin for EMS business unit came in at 9.1%, which is an improvement of 0.7 percentage point sequentially, and a decline of 0.3 percentage points, year-over-year. The sequential improvement is primarily the result of cost differences from different product mix.

The annual decline in gross margin is primarily due to higher operating overhead. Our EMS business unit's second quarter operating expenses were NT$3.2 billion, increasing NT$0.4 billion sequentially, while increasing NT$0.7 billion year-over-year. Sequential operating expenses were primarily up as a result of increased R&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&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 NT$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 and US dollars.

Machinery and equipment capital expenditures for the second quarter totaled US$611 million, of which US$50 million were used in packaging, US$116 million in testing, US$39 million in EMS operations and $6 million 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 differ or accelerate.

With that we would like to provide our third quarter business outlook as follows. In US dollar terms ATM third quarter 2021 volume is to increase 12% with ASE Holding status stable versus second quarter 2021 levels.

ATM third quarter 2021 gross margins sequential improvement should be similar with the sequential improvement in the second quarter of 2021. For our EMS business, in US dollar terms, EMS third quarter 2021 business level should be slightly higher than the average level of the third and fourth quarter in 2020.

EMS third quarter 2021 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 time around. 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 Tien. So question, please..

Question-and:.

Our first question is from Mr.

Gokul Hariharan of JPMorgan? Gokul?.

Yeah, thanks for taking my question. My first question is on what Dr. 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 2022? 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 were asking about pricing contracts for next year, and also an outlook for 2022. And then somehow circle back over to a concepts of double booking. Generally, we were trying to keep the number of questions for up to two questions for go around. So let's go with the first two, the pricing and the outlook for 2022..

Alright, so our first priority is to make customer delivery and fulfillment. Now we have been very efficiently handling all of the customer requirements 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, either the higher material cost or the expedite fee.

I believe for the second half of 2021 as well as the full 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 a very dynamic. Our first 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, they may not be completely due to the business slow down. I mentioned about the supply chain continuity.

Sometimes there's a BGA substrate shortage, sometimes there's a lead frame shortage, and 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 that 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. 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 IC ATM 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..

But I do want to mention that this is on top of the recovery of our affected business via US EAR. So as Dr. 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 terms of tests, not only that we are ahead of our schedule, making a full recovery in the first half, rather than the later part of the year, also the - 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.

Yeah, and it seems that it's also leading to 2022..

Next question..

Next question is from Mr. Randy Abrams of Crédit Suisse.

Randy?.

Okay. Yes, and 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 of 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 and 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 environment? There's the fear about some of the COVID-related consumer PC, home electronics coming off the high base.

Some I'm just curious, what you're reflecting for next year, if those factors either the supplier, or what gives the comfort as tightness continuing to 2023?.

So Randy, you're looking for a question regarding the situation or the -.

Yeah, equipment..

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..

That's right.

Yeah, 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 has 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. Well, I talked about the material process and everything surrounding that.

So I believe the reasonable capacity build up will be some time 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 sector of the customers are making some - the 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 width are 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 welcome, because now the - our delivery situation has been in this tight spot, which is really not healthy mentally for everyone. So I think the demand will continue to be strong second half, it will be strong for the 2022. I talked about the pyramid.

Now I struggled for a long time of how do we really conceptually articulate what is going on right now. COVID-19, without asking for any new infrastructure, they just have a sudden increase of new - of systems. And therefore all devices are short. This is the problem 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.

However, you have the following multiple waves of AI, IoT, smart manufacturing, that we're aggressively building up the infrastructure, which will in turn require a lot of new system which demand semiconductor devices all levels. So I think industry will be in short. And this is a comment that the Foundry guys are making.

I mean, the 2021/2022, 29 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-19 give 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..

Thanks, great. And the second question - okay, yeah in the second question and one clarification in the first too. 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 just kind of just a clarification.

And then my second question just on the guidance, I know you mentioned that first quarter above seasonal. For fourth quarter, if you're coming up with above seasonal third quarter, do 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 for the rest of the year..

Yeah, yeah..

Okay, I think the first comment is, yes, we're seeing some local adjustment. And I - we do not know the reason why there are local adjustments. It could be business related or it could be a component shortage related. However, those are very localized and temporal. And 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 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 expected Q3 growth. We're expecting Q4 growth, just like last year. The comment about Q1 of 2022, of course, I'm hoping to see another record.

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 throughout the 2022. And this is our current view, and then we'll deal with 2023 at a later date..

A thing on the - also, this is Joseph here. I'd say, 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 and efficiency improvement, including automation. That is an aggressively growing bottom line.

And for next year, we're still seeing, there's also room for improvement further in terms of our margin. And we're seeing a very, very healthy development in 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 improvements from synergy, how much efficiency improvement is from the automation. All of this number will add up to the confidence when we said that in 2022 and maybe in the future.

Ken Hsiang made a comment, now we are looking for the - 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.

Bruce?.

Hello, can you hear me?.

Yeah..

Yes..

Okay. Thank you for the great result. Oh, my question is regarding to your long term contract agreement. So I know that you're a big end business is actually very complicated, that you have wirebonder. You have different kinds of wirebonder, you have [indiscernible].

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 this?.

So your first question relates to the character and the - of our long term contracts?.

Yes. Help me to understand..

Well, I think the comment I can give it to you is that a large majority of customer is covered by the service contract. I don't think I can give you anything more specific. I mean, it's a very, very large percentage..

Yeah.

I mean, this contract has actually secured most of the capacity or the - only for the incremental capacity?.

For all of the capacity, not incremental.

And also the - I think the comment and 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 support the customer as well as ASE as well as our supplier partner, to secure the needed overall balanced supply continuity beyond 2021, into 2022, and 2023. And this is the 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 yard 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 it's 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'd assume they do..

Or on the other hand, how much of your customers, 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 statement of our de facto versus our key customer, or 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, the 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 the - when do you expect you exceed your historical high gross margin as a comparative basis?.

Well if we - we can't be..

That is motivation..

And we've already surpassed our historical peak..

Well, no, if you use a pro forma basis, if you add SPIL's gross margin in aggregate, not yet?.

That's what I'm saying, even including SPIL's on a combined basis, we're already passed the - if we, - if we add that plus FX fluctuation, as well as the PPA that we have to bear, we already passed our historical peak..

So how do we, if you already surpassed that, how do we know the - 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, in your - if I may, I'm being more clear than you are. I mean, on the nominal basis, if I don't count the FX, if I don't count the PPA, I'm still heading to - reaching the historical peak on an annual basis. We have reached it back in 2014, our highest gross margin was about 27%.

And 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 the annualized basis that historical record will be broken..

Okay, thank you..

Next question, please..

Next question is from Mr. Rick Hsu of Daiwa Securities.

Rick?.

Now, can you guys hear me?.

Yes. We can hear you. Go ahead..

Yes..

Okay, great. Yeah, just two little questions. The first one is the - the housekeeping question for Joseph.

So what's your utilization rate across the board for wire bond, for assembly and testing in Q2 and what's the outlook in Q3?.

In Q2, in terms of assembly, we're about 85% and for test, it's close to 80%. And in third quarter, I think assembly wise we will be over 85% for assembly and over 80% for tests. As we mentioned, we're running relatively our full capacity now..

Okay, great. And the second question is about your pricing.

When you - about your friendly pricing, so for Q3 and I presume it's going to be the assumption for Q4 and maybe into next year and it's pretty much across the board or just more specifically for your wirebonding?.

Rick, you're asking about whether we've raised prices, or plan on raising prices across the board or on just wire bonders? Is that the question?.

Yeah, that's right..

Yeah. Thank you..

Our utilization will be full for Q3. We're already full in Q2. In Q3 and Q4, we'll start ramping up the SiP product. So the fabs will be very busy. The pricing adjustment is not a concept. 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 product line. However, there is a possibility that we might do so. Sorry..

Okay, yeah. Yeah, that's good enough. Thank you so much. Thank you for the time..

Next question, please..

Our next question is from Mr. Szeho Ng of China Renaissance.

Szeho?.

Hi. Good afternoon, gentlemen. I have two questions. The first one is that before the merger, the company would take out their 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?.

Oh, yeah. The substrate self-sufficiency, in the past you gave out that before the merger with SPIL.

I'm not sure if you have the same percentage on hand that you could share with all of us?.

You're looking for our substrate sufficiency percentage..

Right, exactly. Yeah..

Well, it was hovering around 22% to 25%. And -.

Okay, well do you think -.

I think it is still around that. I think the current tightness 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, or capacity..

Oh, that's my second question. Yeah, you already answered. Okay. And also the other question, could you provide an update on the wire bonder delivery schedule? Last time, you mentioned that the company is planning to add roughly 3000/4000 wire bond this year.

So just wonder if there will be upside to that number?.

Well, in the second quarter, we added close to 1500 bonders, 1,482, to be exact. And our test slots, we added 135 testers. I think that delivery is still ongoing and we're seeing - we are still maintaining our target for the year. And hopefully, in the second half we will have a full delivery..

Okay, great.

And delivery, I can remember last time you mentioned is roughly October timeframe, right? The full delivery, I mean?.

Yes, but as Ken mentioned, things are very dynamic at this point. So, that's the target, but you know, we'll see how it goes..

Okay, all right. Okay, great. Well, 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 Hariharan of JP Morgan.

Gokul?.

Go ahead, Gokul..

Yeah. 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 or closer to the $2 billion 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?.

Yeah, just wanted to know, yeah..

Okay, well, for this year, we are still maintaining our previous plan of maybe - but you're right, I think the actual, will be at the high end of the range, or the 15%. And by the way it's going, I don't - I don't preclude 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 after that, next year, there will be additional demand..

Just the - this is Tien. I just want to give you another angle and the - for example, yes, we are talking about high CapEx for ASE 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 backend. I believe you will see a very, very different scenario.

The reason why 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 the new wafer, 8-inch or 12-inch, who will be the backend service provider for all of the wafer if there is a system demand, infrastructure demand.

Or if there's no demand, that's a different scenario. But in case there are demand, if the IDN are investing less for the backend, then the consolidation thesis will guide it. 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 backend demand as well as all the other substrates/lead frame supplier.

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 the CapEx now that your gross margin is clearly gone up? Like how are these LDAs 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 LDAs.

So how should we think about returns? And just to give some context, I mean, 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're seeing with the pricing dynamics and willingness of customers to commit much more longer term contracts?.

Gokul, you're asking about how we evaluate the CapEx especially in the context of this type of semiconductor supply environment, right?.

Could you give ROIC or ROE kind of, what are the threshold or hurdle rates that you use when you think about CapEx and investment in general?.

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 about 20% to 25%..

25% for new investment, right?.

That's correct..

Got it, thank you. That's very clear..

Next question..

Next question is from Mr. Roland Shu 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 I will ask. A first question from me is TSMC has several plans to build new fab overseas.

So are you considering to increase your global prices as well to catch the business opportunity on the newly built a wafer fab ROI? And if you want to do so, how will it impact your CapEx spending plans in the mid to long term?.

So your question relates to our longer term thought process in terms of our global footprint expansion?.

Yes..

All right, to answer that question is, now if you look at the ASE footprint, I believe ASE is by far the most diversified manufacturing company in OSAT world. We have factories across the three continents, and Japan, Korea, Singapore, Malaysia, as well as US and China, and of course, Taiwan.

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 US incentive, as well as the China initiative, how to respond to like TSMC or Samsung, or Intel initiative, in building up the different capacity in different part 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 processed. 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 provider and end user, which portion of the assembly and test can we contribute to add efficiency to the alternative route? So this process sounds very complicated, but actually is very, 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 ASE? If it does, what will 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, by adding different service portfolio will really depend on the business. And by the way, that business requirement as of today is not clear for the assembly and test.

It is 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 about 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 our [indiscernible] have been banned 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 IC ATM revenue?.

Yes, I think the first half of the year, we were 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, 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?.

Well I think right at the peak we were around 10% and I think that's the first thing that we need to go back for..

Okay, thanks. Thank you..

Yeah..

Next question..

Our next question is from Mr. Randy Abrams of Crédit 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 IC ATM and the USI, what percent it is? And then could you give an update just how the pipeline is looking for expansion next year about 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?.

Yeah, that's correct..

Well, I think in terms of overall SiP business, last year, we had a 50% growth and so this year, I think the growth rate will start to - will cut down a bit. But overall, I think the momentum is still there and we will continue to make the necessary investment to continue to grow our SiP business.

In second quarter, I think the overall SiP 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 semi's relative to EMS 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 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 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..

EMS is operating at 4%?.

Well, you asked me about EMS margin..

Yes, EMS operating margin..

Okay, we're, we're still - [cross talk]..

Yeah, okay, so it's still 4%..

Yeah, we're still looking at 4%..

Okay, I get that. Okay..

It's becoming a more challenging target because of the overall logistics cost is rising, all the operating certainties is higher at this point. But still we're maintaining that target..

Okay. And the last question I have. Just one the end packaging for things like SoIC, and TSMC-SoIC, Intel has their Foveros. If we get some move to the 3D stack, is that a market you see? OSAT or CAC participating in or would that 3D, if we go to full 3D 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, the short answer is, we have always been in development with key customer along the lines of 2.5D in the, for example, we're the first one to launch the 2.5D with a key customer in Texas. And a 3D-IC that development we 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 OSAT business.

The definition of OSAT business, you should have at least two alternative service provider and 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 value.

Whatever comes into the OSAT world, and there are plenty of that, ASE will take a clear leadership in that.

Now, when the 2.5D or the 3D-IC or whichever chiplet architecture becomes OSAT, in other words, there are multiple foundry offering their service and there are multiple people accepting alternative process, achieving the same architecture and similar cost and performance, ASE absolutely will be a participant.

And I believe this kind of open platform versus the proprietary and then not only OSAT is driving that. Everybody in the world, including our end customers eventually will 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 will really have to have a foundry development, you have to have the architectural development, material process, the mechanical, thermal, and all of the things will take a unique company to put a lot of R&D resource 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 which technology will be more industrial lies pervasive. And I think the time would prove that but ASE will not be missing this part..

Great and thank you..

Next question?.

Next question is from Mr. Bruce Lu of Goldman Sachs.

Bruce?.

Okay. I want to have a quick follow up for the CapEx.

What's the CapEx allocation for testing, bonding, wire bonding for this year?.

The CapEx location or allocation..

Allocation?.

Okay.

So you're asking about basically cap, planned CapEx for test?.

For everything, I mean, you know, what's the CapEx allocation? Yes..

I think for this year, the likely allocation will be around 65% for assembly, roughly 23% to 25% for tests, a little bit for material and then roughly 9% to 10% for EMS..

Okay.

So assuming that your equipment lead time right now is more than a year, so your CapEx for next year should be foreseeable?.

Ah?.

Because you already mentioned that the CapEx, the equipment lead time right now is more than a year, right?.

Yes..

So basically 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, when we talked about CapEx, we're talking about required CapEx. It's not necessarily the test CapEx that we're talking about..

Oh, I see. Okay. Oh, then the next question is a good question.

Can you give us the revenue contributing from automotive or from the IDM in your ATM business?.

Bruce, so you're looking for how much revenue the automotive sector represents?.

Yes, in ATM..

Oh, roughly, the second quarter is around 6%, 5% to 6%..

Do you see a clear uptrend?.

Yeah. Well, I think we're pretty aggressive in terms of programming of our auto business..

Do you expect it to be more than 10% in 2022?.

Well, we'll look at it. But it's actually - it's going to be quite a bit of growth this year, over 50% type growth..

Wow! Okay.

So what is the IDM revenue exposure right now?.

The IDM exposure?.

Yes, IDM customers..

Yeah. Around 1/3 of all this is coming from IDM..

I see, I understand. Thank you..

Do we have additional questions at this time?.

There is no question..

Okay. I'll turn it over to Dr. Tien Wu to wrap up the call..

Well, thank you very much for your patience and support to ASE. 2021 has been a very challenging, but extremely exciting year for us. Much of the EAR 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, please stay safe and healthy. Thank you..

Thank you very much..