ASM Pacific Technology Ltd

HKEX:522

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, good afternoon, good evening, ladies and gentlemen. Welcome to the conference call. Leonard, please begin the call, and I'll be standing by. Thank you.

[Leonard Lee, executive]

Thank you. Good morning, and good evening, ladies and gentlemen. Welcome to the ASM Pacific Technology 2019 First Quarter Results Investor Conference Call.

Before we proceed, I would like to note that during this conference call, there may be certain forward-looking statements with respect to ASM Pacific Technology's business and financial conditions. Such forward-looking statements may involve known and unknown uncertainties and risks which could cause actual results, performance and events to differ materially from those expressed or implied during this conference call. For your reference, the IR presentation related to our Q1 results can be downloaded from our website, www.asmpacific.com.

With us this morning are Mr. WK Lee, CEO of ASM Pacific Technology; and Mr. Robin Ng, CFO of ASM Pacific Technology.

We will start with a brief discussion about our 2019 first quarter results, followed by a Q&A session.

Without further ado, let me hand it over to Mr. WK Lee. Mr. Lee, please?

[Wai Kwong Lee, executive]

Thank you, Leonard. Good morning, and good evening, ladies and gentlemen. We appreciate your joining us for our quarterly results for the 3 months ended March 31, 2019, investor conference call today. I will first provide you with a summary of the company's performance, followed by the Q&A session.

As the group expected, the semiconductor market was in a period of adjustment during the past quarter. However, there was signs of recovery as lead frame booking, which has served as a leading indicator of the market, started to rebound.

ASMPT achieved a billing of USD 466.6 million in Q1 this year. The group's consolidated profit after taxation for the period was HKD 108.2 million. Gross margin of the group was 33.9% in Q1 this year, representing an improvement of 93 basis points over the preceding quarter and a reduction of 369 basis points against the same period last year, respectively. The year-on-year reduction of gross margin was mainly related to product mix, lower sales volume and lower production capacity utilization during the quarter. It is expected to bounce back to a higher level in the coming quarters.

Group bookings amounted to USD 460.3 million. Book-to-bill ratio was 0.99. Backlog as of end Q1 2019 was USD 652.1 million. Booking of the Materials Segment rebound 15.2% quarter-on-quarter, while booking of the Back-end Equipment segment and the SMT Solutions Segment experienced small Q-on-Q contractions of 4.2% and 5.1%, respectively.

Our Back-end Equipment Segment's billing contracted 15.9% quarter-on-quarter and 30.4% year-on-year, respectively, to USD 195.9 million. Gross margin reduced 508 basis points year-on-year and 303 -- 383 basis points quarter-on-quarter to 39.2%, mainly due to lower sales volume and underutilization of installed production capacity. As a result, the segment's profit reduced by 89.5% year-on-year and 68% quarter-on-quarter, respectively.

Materials revenue was USD 50.5 million, representing decreases of 15.5% and 32.3% over the preceding 3 months and the same period of last year, respectively. Gross margin reduced 271 basis points year-on-year, but improved 275 basis points quarter-on-quarter to 10.4%. Profit of the segment reduced by 73.3% year-on-year, but improved 214.2% quarter-on-quarter.

During the first quarter, billing of the SMT segment amounted to 222 -- USD 220.2 million, representing a growth of 11.4% year-on-year, but a contraction of 30.1% compared to the preceding quarter. Gross margin reduced 269 basis points year-on-year, but improved 423 basis points quarter-on-quarter to 34.5%. Segment profit improved by 6.4% year-on-year, but reduced 28.5% when compared against the last quarter.

Due to the low level of bookings received in Q1 this year, we anticipate that group billings in Q2 should be in the range of USD 490 million to USD 540 million, with group gross margin in the range of 34% to 36%. Back-end business is expected to lead the Q-on-Q improvement. In terms of booking, we expect the market to continue to improve. Group booking is expected to show a double-digit improvement over Q1 this year. However, we expect it would still be significantly lower than the booking of the same period last year.

While it's still too early to predict with certainty that the market will recover at the later part of the year, many of our customers believe that at the moment the chance of a market improvement is significantly higher than the chance of further market deterioration.

With this, we thank you for your attention, and we are ready to take your questions.

[Operator]

[Operator Instructions] Our first question come from Kyna Wong from Credit Suisse in Hong Kong.

[Kyna Wong, analyst]

So my first question is about the booking trend by segment in the second quarter because you expect a double-digit growth quarter-over-quarter and that's still down year-over-year. And the second question is about the back-end result in the first quarter. Because the previous expectation is about flat to slightly dip quarter-on-quarter -- quarter-over-quarter that at the end it drops like double-digit quarter-to-quarter -- quarter-over-quarter decline. So what's the miss here? What's the gap between your prior expectation and the result? And the third question is about the inventory adjustment you mentioned in the fourth quarter earnings. So will you continue this inventory adjustment in the second quarter? Or you think that it's ready to prepare for a second half rebound?

[Wai Kwong Lee, executive]

Okay. Thank you. Talking about the booking trend by segment for Q2, we expect this Back-end Equipment and Materials Segment, they both to show a strong double-digit kind of booking improvement. That's what we are anticipating at this point of time. I will say up to now, this recovery of the lead frame market seems to be quite obvious. The movement is really pointing to a healthy direction. Whereas on the back-end equipment market, compared to a year ago, still shows a relatively shorter stage. I will say that probably, hopefully, in Q2, during Q2, we will see a much more clear sign, the back-end equipment market also going to recover. So typically, in the past, we noticed that the lead frame booking will be lifting the back-end equipment booking by 1 quarter. So we are hoping to see this continue.

However, based on this past experience, we do not expect a significant order pickup for SMT solutions in Q2 yet. It will typically be -- will be another quarter delay. So that's what we see as of this point in time. But when you go down into more of the products, we see CIS actually is generating a lot more momentum. As we shared with you during our results announcement, during the first quarter, CIS booking actually experienced a more than double Q-on-Q improvement, although it's still 20% below Q1 level last year. However, Q1 level last year was a pretty high level. So I will say we are happy to see the CIS bounce back. And recently, there are signs that due to some probably successful launch of some handphones in the market, we are seeing an increased booking for CIS. We expect this trend will continue.

Therefore, the back-end results, originally, we are expecting -- factor a small dip. But at the end, it's slightly larger than what we expect, mainly due to the development in China is lower than what we had expected, partly also due to change of the VAT in China and we suddenly see customers are quite reluctant to receive a shipment before the new VAT moves at current year. So other than this, I will say we don't see any significant deviation from what we had projected. So however, in terms of the market, as we have reported, what continue to concern us will be we don't see a significant order pickup momentum after Chinese New Year that used to be there. So although it cannot be exactly be the case, but when it really happened, we are disappointed also.

So in terms of inventory adjustment, we expect the effort will continue reduce a wave in Q2 because we are also, at this point in time, as we shared, our customers think a chance of market pickup is higher than a further deterioration. So today, we are, internal -- for internal planning purposes, we are also seeing our result not able to satisfy market demand when there's a market pickup is higher than a continued inventory buildup. So we are also adjusting ourselves at this point in time. So I will say that probably we still control our production run rate to keep the inventory level at the level we'd like to see. But at the same time, we are also prepared to turn on more production capacity utilization anytime when we see a much more clear this market signal. So I will say, expect some -- we'll do some inventory adjustment exercise in Q2, but it also can be reversed anytime soon, yes.

[Operator]

Our next question comes from Donnie Teng from Nomura.

[Donnie Teng, analyst]

My first question is regarding to your first quarter bookings. So your first quarter booking slightly declined quarter-on-quarter in terms of the Back-end Segment. But if I look into your announcement, it's like your bookings were actually increased 30% Q-on-Q, excluding NEXX, and your CIS booking increased more than double Q-on-Q. So I'm just wondering what's the reason behind the overall back-end booking to slightly decline if you have very strong IC/Discrete and CIS booking in the first quarter. And secondly is that I did not hear very clear on Kyna's question. So in terms of second quarter booking, you are expecting a double-digit Q-on-Q increase. If we separate into different business units, IC/Discrete, CIS, LED, SMT and -- which segment will increase, which will be still sluggish? And the third question is regarding to your gross margin in the second quarter, how should we expect the gross margin and OpEx for the quarter?

[Wai Kwong Lee, executive]

Okay. Well, in Q1, the booking relating to the back-end equipment compared to Q4, the LED was still slow. So that is one of the reason. In Q4 last year, we received very good booking for advanced packaging, packaging equipment. However, as you can expect, this level of booking cannot be consistently Q-on-Q. So in Q1 this year, while we shipped more back-end equipment to our customers, but compared to Q4 last year, we received less new order bookings for back-end equipment. So I will say, as I mentioned, the -- leading it was the CIS, followed by the IC/Discrete. However, it was offset by the -- this LED booking and also advanced packaging. So this is for the Q1, okay?

For the trend in Q2, which segment will see -- continue to see a sluggish, and I -- we believe the LED will continue to be low, probably LED will start to pick up the momentum in the second half of the year, but probably not at Q2 -- in Q2 yet. So this will be the major area. Similarly, we also -- because combining -- although I mentioned about Q1, that advanced packaging booking has come down compared to Q4 last year, but it was still at pretty good level. So we have 2 quarters of very strong booking for advanced packaging in Q4 and Q1, so we do not expect this momentum necessarily to continue in Q2, okay? So Q2 probably -- we are focusing more on delivering for those backlog order of back-end equipment to our customer, one of them taking in more new order and increase our backlog. So that will be the booking trend in Q2 by business.

Gross margin-wise, we expect a better -- a slightly higher capacity utilization in Q4, and we also expect a higher billing in Q2. Sorry, this capacity utilization in Q2 and also billing in Q2. So that probably will lead to an improvement for us in terms of gross margin.

In terms of headcount control, we expect there will be slightly a little bit more flexible workforce reduction in Q2, but the magnitude would be probably very small compared to the past 2 quarters. Last 2 quarters combined together, we have trimmed down our manufacturing workforce in China by 1,000 people already, so we expect this magnitude will be smaller in Q2.

So overall, we do expect our manufacturing expense, our manufacturing cost will come up. On the other hand, as I mentioned, the sales level should go up. The factory utilization will go up, so this should help our gross margin. The only factor that will hold back our gross margin improvement will be, we expect some advanced packaging equipment to be delivered to customer. The cost will be incurred in this quarter and even in Q1. However, billing is only expected to be in Q3. So that -- this slight time effect may affect the gross margin a bit, but we don't really expect it to be big. So other than that, we expect gross margin improvement for back-end equipment in 2Q.

[Operator]

Our next question comes from Emily Zhang from Citigroup.

[Emily Zhang, analyst]

So just following up with last gentleman's question. So the gross margin in the second quarter, can we expect like a slight recovery? Or it is still in line with the Q1 margin?

[Wai Kwong Lee, executive]

Well, I think it's still probably in line with the Q1 margin, with some small upside potential. So we are giving out the range of 34% to 36%, okay, while Q1 is 33.9%. So Q1 was on the low side of this guidance range. We are expecting a 1% to 2% -- potentially 1% to 2% improvement in Q2, yes.

[Emily Zhang, analyst]

Okay. And also, I think -- so based on the content -- business nature, I think the gross margin is more driven by the product mix rather than the revenue scale. Is this the right way to think about that? So that's all my questions.

[Wai Kwong Lee, executive]

Revenue mix definitely have a contribution to our gross margin. If you look at our Q1, actually, we shipped less to China in Q1 and shipped more to the rest of the region. So actually, strictly speaking, if you go to the individual business segment, there was a favorable contribution to the gross margin. But unfortunately, if you compare Q1 this year to Q1 last year, a significantly higher portion of SMT billing compared to a significant lower portion of the back-end equipment billing. So this segment mix dragged down the gross margin. So that's a one of it. However, in Q1, I think that if you add the 2 factors, comparatively low sales volume, so drag down the gross margin; and also the intention or the controlled low utilization of production capacity also dragged down the gross margin. So I think in Q1, the capacity utilization and the sales volume are the key factors pulling down the gross margin. Thank you.

[Operator]

Our next question comes from Leping Huang from CICC.

[Leping Huang, analyst]

The first question is about your full year guidance. So in the previous quarter, you mentioned that you expect 2019 to be a challenging year and that you expect the revenue year-over-year decline and the advanced packaging revenue to be improved. What's your latest view on this 2019 full year guidance? And do you expect any revision, either the total revenue or because you see the advanced packaging start to show some weakness in Q1, do you also change your view on the advanced?

[Wai Kwong Lee, executive]

We do not expect or do not see any reason to change the guidance. Leping, let me clarify on advanced packaging booking trend. For Q1, we received less booking compared to Q4 last year, has been expected because Q4 last year was exceptionally strong, okay? While advanced packaging business at this point in time, the customer base is still relatively lower than the other products. So because of that actually, we do not expect a very consistent pattern of booking quarter-on-quarter. So I will say there was no unexpected weakness of the advanced packaging equipment market in Q1. On a full year basis, we still hold on to our earlier forecast. We still expect it to come down. On the other hand, we still expect the advanced packaging equipment to contribute more in 2019. As you probably can recall, advanced packaging, even without counting in the 1 quarter contribution from ASM NEXX, already accounts for -- contribute to more than 10% of our back-end equipment revenue in 2018. So we are expecting this contribution will grow significantly in 2019. So as of this moment in time, I will say, we don't see any reason we change this forecast yet, okay?

[Leping Huang, analyst]

The second question is about the geographical change. So I remember last few quarter, you mentioned that the -- because of the trade tension between China and the U.S., you see the customer are slowing down the -- their CapEx in China. They need to look and see what's -- where to put their new capacity. Today, when you -- the last few months, when you discuss with your customers and -- have they fixed their mind where to increase capacity or they are still watch and look on the future?

[Wai Kwong Lee, executive]

Well, as you can see when we update the quarter, the numbers, actually, by geographical distribution, I will say dropped, but the biggest drop is from China. So China actually contribute -- its contribution to our revenue has come down significantly. This is really reflecting the major OSATs in China are really holding back in Q1, while the smaller players in China market continue to expand. So our order in China -- China's still the biggest market for us in Q1 this year. However, it has come down significantly compared to the past. People are talking about many talks in the market, talking about they have to make some adjustments outside China, but as of this moment or up to Q1, we don't really see a lot of new action being taken. One of the American IDMs even told us while they expect their CapEx in 2019 will be at a pretty low level. But on the other hand, they are telling us their plan to expand one of their factory in China to continue and expect to -- that, that will be a major CapEx installation in 2020. So I will say today these are the picture. While we, in our announcement, we mentioned how Vietnam will become the #4 market for us in Q1 this year, but when we carefully look at the order pattern builder, I will say it has probably nothing to do with the trade war mainly because customer, CIS, they have got active alignment solution, the other major region is related in advanced packaging. So advanced packaging and CIS solution are the reason why Vietnam has gone up by -- to the #4 position by geographical distribution for ASMPT in Q1, not so much related to trade war. So I think, up to this point of time, we don't see a very obvious trade war event leading to a significant investment by our customers in the Southeast Asian countries yet.

[Operator]

Our next question comes from Chris Yim from BOCOM International in Hong Kong.

[Seeching Yim, analyst]

Just a couple of quick follow-ups for me. You just mentioned that China was the biggest drop in 1Q. I was wondering if you can -- if you're seeing billing -- improvement in billing -- in bookings, I'm sorry, improvement in bookings from China in -- recently? Because -- perhaps the economy is improving, and perhaps the trade tension is easing. My second question is on the SMT. I was wondering if you can you give us a full year outlook on SMT demand this year. If you can talk to us about the demand you're seeing both from the automobile side as well as the smartphone side? Because last year was a high base, was a very strong year, I was wondering if you can give us an update on that.

[Wai Kwong Lee, executive]

Okay. For the booking in China, as I had mentioned earlier, we see them increased booking activities coming from the CIS business. While in Q1 this year, a related part of the CIS, [indiscernible] deliver to Vietnam, this is not relating to the Chinese supply chain. But on the bookings side, we start to see increased booking order momentum from Chinese supply chain for the smartphone for the CIS application. We believe it's partly also driven by one of the successful introduction of one of the latest phone. So the bookings, the customers are excited about it but to talk about this year increased loading and planning for this increased capacity to cope with this demand. In terms of SMT demand, I will say the booking level in Q1 actually was not bad. This was more on a single-digit kind of Q-on-Q reduction. So typical to track this low, Q1 is a slow quarter for SMT in terms of booking. So I will consider the booking we have received in Q1 this year for SMT at a pretty healthy level. And this continue to, I will say quite -- a little bit surprised, we still continue to see a very strong momentum for SMT market compared to the semiconductor market.

Talking to the demand, some automotive customers stand a little bit, I will say, contrary to, on one hand, and also optimistic on the other. They are concerned with -- they are concerned about the slowdown of the automotive shipment they are seeing today happening in China and also in the Western part of the world. They do not expect the automotive shipment volume will see a significant pickup anytime soon. However, they're optimistic, on the other side because they are seeing a lot of new design has been designed into the new models. So the semiconductor content of the car actually will surely continue to increase. So while they are concerned by their quantity, but they kind of believe and even excited about it will be compensated by the dollar value, by semiconductor content. So overall, this is the situation.

So with that, you can expect more SMT equipment continue to be related for the automotive industry to place the component into all those electronic modules. So today, we are seeing the market of SMT is healthy at this point in time. We are also seeing more activities related to the IT infrastructure buildup wider than the handset. Don't expect a significant investment for structural for this India market at this point in time because India, last year, has put out significant capacity. We expect there could be a drive of all the additional capacity for China supply chain-related handset business, but at this point in time, it was not obvious yet. Thank you.

[Operator]

Our next question comes from Mr. Eric Chao from Morgan Stanley.

[Eric Chao, analyst]

So first of all, can you comment a little bit about the demand in your categorized and application segments like automotive, mobility and others, like, have they seen any demand improvements comparing to 1 quarter ago? And to other announcement you guys talked about like the second half recovery, like, with all the application segments, do you see any particular segment that you have more visibility or you are more confident that the second half recovery will actually take place beyond regular season fluctuation?

[Wai Kwong Lee, executive]

To date, I will say the most obvious area is the CIS. So I will put it this way. At this point in time, the CIS momentum is a bit better than we have expect forecast a quarter ago. So we -- originally, we expect that 2019 will be quite slow. However, in Q1, we have already started to see customer want to continue to order equipment and also including the Chinese supply chain are excited about it. So today, while we -- it's still too early to see the actual development of this CIS market, but these are obvious momentum are picking up and among them, all the back-end equipment application area, this is the first area showing a very clear sign of picking up of activities at this point in time, yes.

[Eric Chao, analyst]

I would like to follow up a little bit. So when you're answering the CIS, you were talking about like there's this particular China smartphone model that has received a lot of excitement from customers. Like, how do you actually track the excitement? Or like would you be able to know if the customer is just basically building out inventory, additional semi inventory, instead of having actual demand? Is this something you have a concern with?

[Wai Kwong Lee, executive]

Well, we really cannot track this one. Probably, you guys would be much better to track this one. For the CIS business, as I mentioned, the shipment in Q1, a larger portion is not related to the Chinese supply chain. So as I've mentioned, Vietnam is the key destination, country of destination for this CIS equipment. While China also taking some more time. So the Vietnam one is a Korean supply chain rather than a Chinese supply chain. However, by booking activity, in Q1, we start to see the Chinese supply chain start to place order and coming to this March and April, we are seeing increased booking momentum from this Chinese supply chain for the smartphone. When we talk to customers, they are citing about the reason of that. Of course, we can't tell because we have no idea how much has been showed. But our customers are prepared and are willing to put in additional capacity to prepare for their anticipated demand. That's what we see today.

[Operator]

We have a follow-on question coming from Donnie Teng from Nomura.

[Donnie Teng, analyst]

So my first question is regarding to my earlier question is the OpEx ratio, how should we do expect the OpEx into second quarter? Because looking at the first quarter result, it's like the SG&A was pretty high. So I'm not sure about how should we expect the OpEx into the second quarter -- the rest of the year. And secondly is maybe we look beyond the first half. So what businesses are you seeing more growth momentum into second half and next year? In my opinion, it's like you have a pretty high base on SMT and probably IC/Discrete as well because you acquired NEXX last year. But you have pretty low base on LED probably as well as CIS this year. So how should we look at the momentum into second half and next year? What kind of growth driver should we expect moving forward?

[Wai Kwong Lee, executive]

Okay. Regarding your first question on OpEx, our OpEx was relatively fixed, I would say, less variable. So as a result, when the sales volume has come down, the OpEx as a ratio to sales revenue will go up, okay? So at this point in time, I will put less focus on the percentage. On actual level on -- we actually are comparing to the last year, if we take out the acquisition effect, actually, there was a small reduction compared to a year ago. So including the acquisition, everything in, so OpEx increased by 6.6% year-on-year. So as I mentioned, you take out the acquisition effect, you can see actually the actual OpEx for the original business has come back, okay? So in comparing the Q2 to Q1 this year, so typically OpEx in Q2 will go up compared to Q1. So we do expect this to go up. So -- however, we continue to exercise our cost control effort. So we do not expect a significant change in the OpEx ratio because, on one hand, absolute will go up; on the other hand, this sales revenue also go up. So probably, in a ratio point of view, there's not too much changes Q-on-Q.

For the driver for the rest of this year, SMT will probably continue to play a key role. However, we expect this contribution to the group's revenue start to come down in Q2 because we expect the other business will start to pick up the momentum. So on a full year basis, probably, it will be similar to 2018. We don't expect it to change significantly from the 2018 level on a full year basis.

By application area, advanced packaging definitely will be a segment contributor to the group's revenue as well as to the back-end equipment segment revenue this year. Then it will be followed by IC/Discrete. Other than the advanced packaging, I think the IC/Discrete will continue. And also between IC/Discrete, also the driver for automotive electronics as well as this power management. So these are the key areas. We also expect on this, smartphone, IT-related will start to show some momentum. For example, in the RF filters, this will start to show momentum in the coming quarters, okay? As I mentioned earlier, CIS really picking up nicely, better than what we had expected. Although we still don't expect we'll be able to surpass 2018. So we still expect on a full year basis, CIS will be lower than 2018, but I think we will pick up this momentum from now on. LED will be the area that we have income softness at this point in time, partly due to the market and also partly our key customer has installed so much capacity for the last 2 years. So they are taking the time to digest that capacity. However, we carefully monitor this customer's capacity utilization. So we expect the customer will be once again on expansion trend in the second half of this year. So I will say LED probably will start to pick up in the second half. So overall, automotive, power management and followed by 5G and smartphone, CIS, then these will be the drivers for this year.

[Donnie Teng, analyst]

So regarding to 5G smartphone form factor, how should we expect it will change the -- or improve our equipment exposure to the back-end companies or EMS companies? I'm just thinking whether it will benefit more on your back-end equipment or SMT equipment because we are seeing more and more space constraint in the smartphone so probably it will trigger more usage there. However, SMT is the area in between back-end industry and the EMS industry, so how should we evaluate this kind of industry dynamic change? And how it will benefit our back-end or SMT equipment?

[Wai Kwong Lee, executive]

Actually, we are seeing the trend in the market very accurately today. A little bit difficult for us to quantify whether they will benefit more the SMT or benefit more the back-end. Actually, it will benefit both. As you have pointed out, space constraint is the biggest challenge for 5G handsets. So we expect there will be increased adoption maybe for 5G actually. It is almost a must to adopt to SLP, to substrate-like PCB. That will be in favor of our SMT equipment because our SMT placement is still not capable -- or proven able to handle very small components, placing them closer to one each other, but still maintaining a very high productivity, a very stable performance. So this probably will be in our favor. We expect that. On the other hand, as you mentioned also, the markets really moving towards the trend of SIP. So we see increased demand, increased capacity installation relating to this SIP. So for this SIP applications, it will benefit both our SMT as well as our back-end equipment. So on the back-end equipment side, it probably will be a little more demanding of those advanced packaging high-end equipment relative to traditional die bonders. On the other hand, there's also a lot of capacity component due to be placed in the SIP. So that will demand this SMT placement machines for that.

So we are seeing both and probably in a slightly medium term, we expect the market will move into more and better applications, okay? So this and better applications because of space constraint, people -- for example, 5G, they even try to design the antenna into the package. So these are the trend in the market. So this will require all the advanced packaging equipment and even advanced packaging material, replicating the antennas into the substrate. So this will be the trend. So we expect both the back-end equipment and the SMT will benefit. But as I mentioned that this will be a little bit difficult to quantify which segment will benefit more at this point in time.

[Donnie Teng, analyst]

Then you mentioned about you are seeing more activities on RF filters. So could you elaborate more there. Is that more like top 6 or medium wave modules?

[Wai Kwong Lee, executive]

SAW filters is about right. So in only the 5G phones, they did a lot more SAW filters than in the past just simply because they widen this -- the bandwidth into different segments. So they use the filters to cater for this different frequency range applications. So today, we are seeing the demand for more SAW filters. And last year, we shipped a high level of machines to customer-focused applications because our machine are capable to offer a very interesting inspection capability, able to detect some very small, we call it a micro crack. So that will affect the performance of those filters. So because of the outstanding performance of these machines so we are gaining a lot of traction. But the market will -- from SAW filter to BAW filter. So this -- our application will be one of the key driver, in our opinion, for this 5G and beyond. So we look at that today. Customers need our RF business, the radio frequency business, every one of them are preparing for growth. So our equipment, this will be one of the market driver with this new generation of communication standards.

[Donnie Teng, analyst]

Sorry, a small follow up. Is the -- customers are classified as OSAT or IDM companies, then also is that equipment is classified as IC/Discrete segment?

[Wai Kwong Lee, executive]

For those RF customers more in the IT end, but some OSAT are also engaged in doing all those. But I will say at this point in time, we are seeing more IDMs direct handling their business -- IDMs directly handling their business. Yes, they are classified in our IC/Discrete business at this point in time.

[Operator]

Our next question comes from Kevin Zhang from JPMorgan.

[Yashen Zhang, analyst]

My question is that recently one of your key advanced packaging customer announced to exit 5G smartphone modem business. Will this impact to your TCB business in 2019 and the future?

[Wai Kwong Lee, executive]

Well, I won't -- I'm not able to comment on any customer activities at this point of time. But at this point of time, what I can share with other investors is that we don't see any of our TCB business being affected.

[Operator]

Our next question come from Mr. Chris Yim from BOCOM.

[Seeching Yim, analyst]

My follow-up is on advanced packaging. I was wondering if you can disclose the advanced packaging contribution to your back-end business in 1Q '19. And also after a bit slow down in 2Q, do we expect this -- the advanced packaging business to pick up in the second half? I was wondering if you can tell us again what type of equipment or technology is driving your advanced packaging business right now. Or whether you -- we should think of it as highly dependent on a couple of customers, including the one you mentioned which is the Korea supply chain customer?

[Wai Kwong Lee, executive]

Okay. Well, advanced packaging contribution in Q1 are tracking very well, you can imagine because overall Q1 was relatively slow for the other capacity-related equipment. So I can share, actually, advanced packaging really contribute very nicely to our billing in Q1 this year. However, I feel I should not disclose the number at this point in time because I don't want to mislead the market. I don't think on a full year basis, unless it's unable to stay at the level like Q1, okay, because we are expecting other -- demand for other equipment to go up in the subsequent quarters. On a full year basis, we still expect that this advanced packaging will to track nicely because as I mentioned earlier, last year, we received good orders, even this first half of this -- first quarter of this year, we continue to receive orders for advanced packaging equipment. Many of them will be shipped out actually in Q2 and Q3 this year. So this one -- this, too -- however, when it comes to revenue recognition, it will be in Q3 and Q4.

So when we complete all of this shipment and also realize all the billing, so it will contribute significantly. Now advanced packaging actually in our presentation, we have a wide product portfolio ranging from this laser dicing, lase grooving, this is one of them. Then we also have a phase 1 machine, including PCB bonder, also phase 1 machine for wafer level, fan-out as well as panel level fan-out. Then we also have this wafer level impact machine. So last year, we also delivered significantly for the RF filter applications. Then, of course, with the newly acquired business from this ASM NEXX, so we also add into our product portfolio the ECD and the purity machines. So Q1 -- in Q1, I will say, we've got good contribution from advanced packaging equipment delivery. We expect in Q2 and Q3 the ECD equipment will increase their contribution to our billing -- or to our shipment at least this year.

[Operator]

We have another follow-on question coming from Kyna Wong from Credit Suisse.

[Kyna Wong, analyst]

I just want to chat on a housekeeping purpose. Because the current convertible bond are essentially fully redeemed and there is a [indiscernible] that long of the [ HKD 2.5 billion ]. What's the interest rate and what the interest expenses should we assume or expect to impact in coming, yes, quarters, years? And about the cash rate, we also see a pretty high level in first quarter. Is this due to the regional and product mix, again?

[Cher Ng, executive]

Kyna, this is Robin. On the CB, right, we have successfully, redeemed the CB, with a syndicated loan. Now the interest for the syndicated loan compared to the CB is lower. Probably, at this point in time, of course, depending on how the interest rate will trend, less than half. So you can expect going forward the effective interest rate in the books for this part of the loan will be lower than the CB. Now you also may notice the finance costs in this quarter is much higher than, say, compared to the previous quarter. As a result, the syndicated loan we have to book a onetime arrangement fee, in fact. So that is the major contributor to the difference in terms of the interest or the financial cost Q-on-Q. As for the tax rate, as always mentioned, don't look at 1 quarter. We believe that as we progress through the year, Q2, Q3, cumulatively, the tax rate will trend towards the 20% to 25% region.

[Operator]

[Operator Instructions] There seems to be no further question at this point in time, sir.

[Leonard Lee, executive]

Okay. Yes, thanks very much, and I think we have had a very good discussion this morning, very good questions and lots of comments. I'm going to conclude this conference call now, and thank you very much for joining us today, and we will talk to you again next time. Thank you very much. Bye-bye.

[Operator]

Thank you for your participation. This concludes your conference. Thank you.

[Wai Kwong Lee, executive]

Bye-bye.