Q2 2021 Taiwan Semiconductor Manufacturing Co Ltd Earnings Call

Joe 1 was it runs you through the through to the tag office refunds and single and faith in each in coffin. Princess violence from U, A Drank by T-Pain possible, who is Toad Suck and consolation trampled. So, it will make sense.

Good afternoon, everyone. Welcome to tsmc second-quarter 2021 earnings conference call. This is Jeff Su tsmc is director of investor relations and your host for today to prevent the spread of COVID-19 tsmc is hosting, our owns Converse call Via live audio webcast through the company's website at AAA, well, you can also download the earnings release materials. If you are joining us to the conference, call your dial-in lines are in listen-only mode.

Home at 40 Days event will be as follows. First tsmc is vice president and CFO Mr. Windle Wang will summarize our operations in the second quarter 20-21. Followed by a guidance for the third quarter of 2021 afterwards. Tsmc CEO doctor CC way mr. Wang and tsmc is Chairman doctor's office with join me, provide the company scheme messages. Then we will open the line for Q&A as usual. I would like to remind everybody that today's discussions may contain forward-looking statements that are subject to a significant risks and uncertainties which which could cause actual results to differ materially from those contained. In the forward-looking statements, please refer to the safe harbor. Notice that a piece are now press release. And now I would like to turn the call over to the tsmc CFO Mr. Windle Wong for the summary of operations. And yep.

Guidance. Thank you Jeff second-quarter Revenue increased 2.7%, sequentially and entitle empty dollar terms or 2.9% in u.s. dollar to our second quarter business was supported by continued strength in HPC and automotive-related demand, gross margin, decrease 2.4 percentage points actually to 50% mainly due to n v. Dilution the slower rate of cost Improvement and the absence of positive inventory. Revaluation total operating expenses slightly increased 1.47 billion and T, there for operating margins, decrease 2.4 percentage points sequentially to 39.1% off. Our second quarter, EPS was 5.18 and T and I will you was 27.3%.

Let's move on to revenue by Technologies..5 nanometer process technology contributed 18% of wave Revenue in the second quarter while 7, nanometer account for 31% Advanced Technologies which are defined as 7. Nanometer and Below accounted for 49% of wafer Revenue,

Revenue contribution by platform smartphone decreased, 3% quarter-over-quarter to account for 42% of our second quarter. Revenue HPC incorrect 20% to account for 39% iot decrease 2% to account for 8% Automotive increase, 12% to account for 4% and dce decreased 12% to account. For 4%, moving on, to the balance sheet. We ended the second quarter with cash and marketable securities of 8 hundred, seventy 1 billion dollars on the liability side, current liabilities decreased, $14 billion and mainly due to the decrease of $23 billion accrued liabilities and others partially offset by the increase of 6 billion in dividend payable long-term. Interest bearing debt increased by hundred.

34.

and then T mainly as we raised $137 billion of corporate bonds during the quarter,

All of a sudden, actual ratios accounts receivables, turnover days, increased 2 days, 42 days. While days of inventory also, Rose 2 days, 85 days, primarily due to m v away for a preview.

Now, let me make a few comments on cash flow and capex. During the second quarter we generated about a hundred and eighty 7 billion in cash from operations. Wage spend $167 billion, capex. And distribute is $65 billion or third quarter of 2020. Cash dividend short-term loans. Wage is 4 billion. While bonds payable increased by $137 billion. Over all our cash balance, increased $83 billion to $748 billion. At the end of the quarter, in u.s. dollar terms. Our second quarter Capital expenditures total 5.97 billion US Bank

I have finished my financial summary. Now, that's turned to our third quarter guidance, based on the current business Outlook, we expect our third-quarter Revenue to be between 14.6 billion and 14.9 billion US Dollars which represents a 11% sequential increase at the midnight, based on the exchange rate, Assumption of 1 u.s. dollar to 27.9 and T gross margin is expected to be between 59.5% and 51.5% operating margin between 38.5% and 40.5% off. This concludes, my financial presentation, I will turn the microphone over to our CEO CC videos. We hope everybody is staying safe. Yep.

30 during this time. First let me start with tsmc, lautan course, I'll book and investment plan. We are witnessing a structural in underlying semiconductor demand as a multi-year megatrend YG and the HPC related applications. I expected to fuel. My CV increase in computation power and greater need for energy-efficient Computing, which 1 record leading-edge Technologies.

COVID-19 is also open mentally accelerated. The digital transformation making semiconductor is more pervasive and essential in people to live off a resolved technology leadership yesterday. Customer trust. We are well, positioned to capture the structural goals from the factory. In dispatch are trained without appreciated Technologies without expert out on Revenue maker from 20..20 to 25 to be near the high end of our 10 to fifteen percent, cater range in US. Comes in the near-term. We continue to observe both short-term and balances in the supply chain driven by the need to ensure surprised security as well as structural increase in demand.

well, the short-term impact may or may not consist

Yes. Our capacity to remain tight throughout the year and into twenty twenty-two. Filled by strong demand for our industry-leading, Advanced and specialized knowledge. He's for the full year of 2021 and also costs the overall semiconductor Market. Excluding memory to go about 17% off well-funded industry, pours his full to be about twenty percent. We now is 4 to 6, then we can outperform the front, rear Revenue course and borrow 20% in 2021 in use u.s. dollar terms.

Tore trade. The structure will increase in Duncan market demand. Profile. Tsmc is working with grocery our customer to our pin, our capacity, and investing you leading-edge, and Specialty Technologies, to support their demand capital investment decision. Based on 40 degrees, there is technology, leadership, flexible and responsive benefit. Children returning customers that trust and in the back where we couldn't to ensure a proper return from the investment.

BOS pricing and close eye important.

James. He's a pricing strategy. Strategic, not optimistic. At the same time, we place manufacturing cost challenges due to increasing process complexity palm reading, Note, new investment. Immature knows extension of our Global beneficiary footprint and writing materials and basic Commodities. Costco cancel. We are forming up. Our pricing. You are continuing to work closely with our customers to provide our Radio Shack. So, continuing to work diligently with our supplier, to deliver and cost Improvement.

By taking such actions would be, we can continue to earn proper return that never us to your best, to support our customers, of course, and Thursday, and profitable course, for our shareholders.

Miss maybe talk about the automotive supply update has taken steps throughout the first half of this year, we will continue to do. So in the second half to address, the chief Supply challenges for All Automotive customers, the auto body supply chain is known and come place, which is on Inventory, management practices.

So, once you go down to car production, it takes every 6 months to reach, the automotive, oems with several tiers of suppliers between them. However, we have worked, dynamically weasel all the customers to your locater, our River capacity to support the worldwide automotive industry off in the first-half will be. Here, we successfully increase our output for MC. Use 1 of the key component in automotive, semiconductor Products off, about 30%, as compared to for twenty twenty.

Here, we expect.

Wait a sec to increase output by close to 60% over the 2020 river. Which also represent about 70%, increase over the 2018 pandemic level.

By taking such actions. We expect the automotive components royalties functioning contact to be greatly reduced for tsmc customers, starting this quarter,

No, let me talk about the Indian for progress tsmc is a fund industry. So most of the ones with solution with the best, a p p, a n v is already in the second year or volume production we sealed. We're on track and I demand continue to be strong and HPC appreciations experience. Prior to contribute, a run, the 20% of our rental Revenue in 2021 am considering in Hinesville, performance, power and density. Improvements for the next wave, Dental me to products. We took the info technology which is a straightforward. Migration for me and drive with considerable design rules in service production. What begin this quarter dead?

In volume production in 2022, just expect demand for our M522. Continue to go in the next several years review page demand for smartphone and HPC,

Finally talked about the entry station in swabi another security for our info and why use transistors structure off to deliver the best. The technology maturity performance and cost for our customers is we technology development is on track with good progress. I give it over the complete support for both HPC and the smartphone application against we we continue to see a high level of customer engagement and sweet and expect the moon. You tape out for industry for the first year as compared with m v.

Let me talk to you. Need to schedule..2021 and production was started in second half of 2022. Plus with technology will be the most often technology in both p p. A and 22nd ology when it is introduced.

Nissan dealership in strong customer demand. We are confident that industry or be large and do not signal, bulb tsmc, and become important driver of our long-term goals. Now, let me turn over the microphone to window.

Let me start by making some comments on our near-term demand and inventory. We concluded our second quarter with revenue of 352.1 billion then t or thirteen point 3 billion dollars slightly above our guidance. Mainly due to better demand from HPC app KO T and automotive-related applications. Then our forecast 3 months ago.

Moving into third quarter 2021, we expect our business to be supported by strong demand for our industry-leading, 5, nanometer and 7 a.m. Technologies driven by all for growth platforms which are smartphone HPC and automotive-related applications.

On the inventory side we expect our service. Customers overall inventory to exit second quarter of Twenty-One at a healthy level. We expect our customers in the supply chain to gradually prepare higher levels of inventory in the second half of the year as compared to the historical seasonal level, given the service Industries. Continue need to ensure Supply security, following supply chain disruptions due to COVID-19 and uncertainties brought about by geopolitical tensions.

Next, let me talk about our profitability, our second quarter gross margin of 50% slightly below the midpoint of our guidance may need to an unfavorable foreign exchange rate. Our gross margin guidance. Provided 3 months ago was based on exchange rate Assumption of 1 US dollar to 28.4 and T whereas the actual second quarter exchange rate was $1 to twenty 8 point zero 1 and T this created about a 5 percentage-point difference in our actual second quarter gross margin versus our original guidance. In other words, if the exchange rate had maintained at $1 to a 28.4 and t r a second quarter, gross margin would have been 50.5%.

So the exchange will Assumption of $1.227.9 and we have just guided third quarter 2021 gross margin to increase by point..5. Percentage points sequentially to 50.5% at the midpoint mainly due to a better back and profitability home. Despite the rapidly Rising depreciation costs and unfavorable foreign exchange rate. We are able to maintain our gross margin at about 50%, mm bolts, second quarter, and third quarter.

Bill a higher level of capital intensity is necessary in the near-term. As we are accelerating our investment pays in anticipation of the strong growth that will follow.

We expect to continue to earn a similar level of ringtone return. Our long-term Financial objectives remained unchanged. We reiterate long term. Gross margin of about 50% is achievable with operating margin to be about 39% and hourly to be above 20% through the cycle.

No, let me make some comment on our cash dividend distribution policy. Tsmc remains committed to a sustainable test evidence samples and annual and quarterly basis in June tsmc board of directors approved the distribution of a 2.75 per sure, cash dividends for the first quarter of 2021, which will be distributed in October 2021.

Therefore tsmc shareholders will receive a total of 10.25 cash dividend Pusher in 2021.

That also means shareholders will receive at least 11:20 for sure. Cash dividend for 2022 and the quarterly cash dividend is expected to be at the the 2.75 here. Now let me turn the microphone over to our chairman mark

Thank you and good afternoon everyone. Today, I will talk about tsmc global manufacturing footprint.

Tsmc's mission is to be the trusted technology and capacity. Provider for the global logic. I see industry for years to come tsmc always treat our customers as partners. We do not compete with our customers. We grow our business by unleashing our customers in foundations and enabling their success. We earn our business by providing solid values by providing industry-leading Technologies off the world's largest logic capacity, and efficient and cost-effective Manufacturing to our customers while maintaining trusting relationship with them.

In our capital investment. Our responsibility as tsmc management, is to make the best decision in the interest of the company and our customers. And our fiduciary duty is to our shareholders

Passing me for Semiconductor infrastructure. Security has increased in recent years. We are expanding our Global manufacturing footprint to sustain and enhance our competitive advantages and to better serve our customers in the new geopolitical environment. In Taiwan Thursday, we are building capacity for in 5 and and 3 in China and Science Park.

due to the,

A strong customer demand.

We have further, expand plan to expand in Austin Central and Southern science parks in Taiwan. And someone will continue to be the home base wage and center of R&D for tsmc.

St. Initial phase of volume, production of a leading-edge, technology has to be in close proximity and closely coupled with Iron Chef Masters. Collaborative engineering activities are leading, note will continue to be ramped in Taiwan, as well.

In the US, we are increasing our presence, Advanced 12 inch semiconductor fat in Arizona and the progress is well on track package plan.

We are actively a fast learning face to optimize the operating efficiency for the US fact. The first wave of us hired Engineers package, arrived Taiwan in late April for training on 5, nanometer technology.

Construction of the Fab has already begun with equipment moving schedule for second-half 2022.

Seis 1 volume production of 20K wafer per month of 5 millimeter technology will be in first quarter 24. At that time are 5 nanometers company. Will still be the most advanced high-volume production technology commercially available in the US.

Our customers welcome us to build capacity in the US and pledged their strong support and business commitment. Therefore, I do not have the possibility of a second phase of expansion to meet our customers, strong men in China as our fault Construction in, nineteen has finally completed in 2017. We have completed phase 1 volume ramp in full quarter 2020. Now, we 25k wafer per month capacity of 16 nanometer technology.

We are further expanding our presence in nineteen, with 28-nanometer technology. To support our customers. Urgent needs with volume production, beginning in a second half 2022.

And reaching 40K way for per month capacity by me$..20.23

For the long time, we for 28-nanometer will be the sweet spot, for our embedded memory applications, and our structural demand for 28-nanometer month, you will be strongly supported by multiple specialty Technologies. Manufacturing expansion pack is based on customer needs business opportunities, operating efficiencies and the cost economics considerations.

Well.

Lucy's Fab are not initially.

Able to match the cost of manufacturing operations. In Taiwan, we will work with governments to minimize the cost Gap. To ensure we start with a Level Playing Field.

We are working closely with our customers to further up our way for pricing to reflect the cost increases and ensure we are in a proper return.

We will work diligently, enhancing our operations and service capabilities and optimize. Our efficiencies in overseas locations to continue to provide technology leadership with efficient and cost-effective Manufacturing for our customers.

By taking such steps. We believe in expansion of our Global manufacturing footprint will enable us to reach Global talents better choice, sir, our customers needs and the proper return from our investment and deliver long-term profitable growth for our shareholders. Thank you for your patience.

Thank you, chairman this concludes, our prepared statements. Before we begin the Q&A session. I would like to remind everybody to please limit your questions to 2 at a time to allow all the participants an opportunity to ask questions. Should you wish to raise your question in Chinese? I will translate it to English before management answers. Your question, for those of you on the call, if you would like to ask a question, please press the zero, then 1 on your telephone keypad. Now, questions will be taken in the order in which they are received. If at anytime you would like to remove yourself from the questioning to please press zero. Then to now, let us begin the Q&A session. Operator, can you please proceed? What's the first caller on the line?

Yes, the first call.

Thanks for taking my question. Maybe my first question I would focus on the semiconductor supply and demand. See see you mentioned that. Yep. And demand to still remain extremely strong Supply to remain tight through end of this year, potentially through next year as well. Could you talk about when did not expect supply and demand to come back into balance? Do you see a situation where your customers go into a bit of an inventory, correction most sometime soon or you think that this structurally higher inventory is something that is likely to last for a much longer period of time than what originally the market. Okay? OK, Google, let me summarize your first question Coco's. First question is on the semiconductor supply and demand, which he notes that CC has said our capacity.

He will be tight throughout this year and 2. Sorry operator.

We can hear you. Can you please press 1? I'm sorry. All right, so let me ask this question again. ON Semiconductor supply-demand he's wondering or asking when do we see supply and demand in the semiconductor. Coming back into the balance is the risk of the inventory? Correction uh any time soon. And how long can you higher level inventory? Continue.

Well, let me answer your question. Let me share with you our perspective on the shortage right now, the current choices shortages. My balls are structural increase on the market demand and also a short-term imbalance in the supply chain, you to unlock twenties 1 copy nineteen, political tensions. And that may or may not persist.

We do not have the possibility of an inventory correction in the future, but we expect our capacity to remain tight throughout this year. And I tend to into twenty twenty-two, but let me share with you also that even inventory correction to occur. We Believe should be less bored of higher than previous of Duncan underlying structural megatrend or 5G related and SPC application. What continue

twenty, so you a question,

Gokul does that address your first question and do you have a second question? If so?

All right. Operator, I think we have lost Goku. Maybe we'll move on to the next caller. First.

Yes, the next 1 is, Randy happens. Quickest. Way to go ahead, please. Yes, thank you. I wanted to ask the question on the trend for cost per month. I'm curious for 5 nanometer and 3 nanometer. How you're seeing continued Improvement. And for the customer motivation, to migrate, always that shifting between a power performance. Densely in cost versus also increasingly seek out the back-end system level integration.

Okay, Randy, let me summarize. Your first question, your first question is on the cost per transistor. Wendy wants to know what is it cost present transistor Trend at 5 a.m. and we nanometers and also, what do I guess? Randy, your question, sort of what are their customers, uh, value or evaluate? When they look at the technology package? Well, is that correct? Yeah. Right between the power performance density vs cost and also back-end integration.

Okay.

Randy. No actually today the technology has getting more complex than the simple scaling.

Actually, we work with our customer very closely.

And we have been working on the performance and energy efficiency of a technology and we took our approach. Of course, material Innovation, transistor structure Innovation. We also in recent Generations, we work heavy on the design and Technology cooperation, and also more recently, we work on the 3D. I seized all these Innovation combined is to deliver the value of a customer to improve the system performance and the system's power efficiency and tsmc is at the Forefront of delivering this month and as evidenced by the strong demand and continued technology, migration as 5 to 3.

So in doing that, we believe we can continue on the proper return on our investment.

Thank you, Randy. Okay. Yeah, my second question. If, if you could give an update on the 5 nanometer where there's still some dilution, be how much dilution you see in a second? Half an update on how you see a trending toward the corporate gross margin. And as we look to next year, if if green animator ramping late in a year off that we see a favorable like a bit more of a sweet spot for profitability as you have a more mature 5 nanometer, but not a new node yet ramping.

Hey Randy, this is Randall, let me answer your question. The fiber me to a contribution to our Revenue will be much higher this year compared to last year's. Then also we expect that the margin pollution from inside this year will be between 2 to 3 percentage point. Now we all expect that inside like previous notes will be able to reach the module reach, the corporate average is about 7 to 1/4 with respect to the 2022. It's a bit too early to talk about it but we believe our long-term gross margin Target of fifty percent wage continues to be achievable.

Okay.

Thank you, Randy operator. You want to the next participant on the line, please.

Yes. And the next 1 is Bruce Lowe from Goldman Sachs. Go ahead please. Hello thank you for taking my question I think a lot of your customer have like different suppliers Supply Chain management policy off. A lot of your customers, find a long-term contract with other funds, your players, which are favorable pricing and and payment turns. So, the Schism expect this will become the new known for The Foundry. Industry does the industry-wide profit pool become bigger and the earning fluctuation will be last in the future.

Okay, thank you Bruce. Let me summarize your first question Bruce's. First question is about the semiconductor supply chain and he observes off of customers seem to be signed in long-term contracts with boundaries. So do we expect this to be the new 1 in the future and could this by the bigger or larger industry-wide cockpit pool?

Okay, let me answer the question. We are not able to come in and specific business terms with customers. However, we are working with our customers on different ways to secure their commitment and customers, understand our effort to support their goals. And if we pay off, our capacity, will is on the structural increase in the doctor market demand profile. We believe our utilization and profitability can be maintained

Okay, thank you Bruce. Do you have any second question? Oh sure. So I want to focus on the automotive automotive, revenue is roughly last and to be home in 2020, out of like forty billion market. So with most of the automotive, IDM companies are passive in capacity expansion, this create a big address for market for the country. So what is the address for market for funky in the automotive industry in in in in the coming years?

Okay, Bruce, let me see. What is your second question? So Booth is asking about the longer-term outlook for the automotive industry. Automotive was less than 2 billion of our revenue office, but he cleans out the automotive cameras about forty billion. So he's wondering about sort of the long-term cam addressable market for tsmc right away. Sir again. We are quite positive on the long-term trend of the semiconductor. Seem content in automotive as a trend towards safer cleaner. And smarter than Echo, what continue to drive silicon continued. Increase as well as a demand for wines and Specialty technology posts.

Okay, thank you. Does that answer your question, please?

Can we have somehow like some specific numbers? Can you quantify that a little bit? We cannot forecasting. The future security, right? I mean, that's awful, it's so, so Dynamic. But let me assure you, the Silicon content will be very important and will be increased. I say thank you. Thank you, operator, let's move on to the next participant, please.

The next 1 to ask question, Goku on JPMorgan.

Thank you very much. Let me ask my, yeah, let me ask my second question. My second question. Is that on your business? Clearly the mark expecting you to make a lot more inroads into the HPC segment 1 of your existing IDM customer have redoubled their efforts to get back into The Foundry business. Could you talk a little bit about how you manage this kind of what they call us? What they call as co-optation petition as well as cooperation? How does tsmc think about this when it thinks about capacity allocation given? That HPC is now becoming a very important driver for growth. And this is probably the biggest wage HPC customer out there in terms of Revenue size. Thank you, ok. Google, thank you for your second question. Let me summarize, he points out that dead.

HPC is seems to become a larger and larger, contributor, or driver, particularly at a 3 nanometer. He also points out that existing IBM, customers are redoubling efforts. So, his question is really how I guess, how do we manage this Duality? How do we manage the capacity allocation and the relationship off? Okay, in the end. So the question, by first you mentioned the IDM is important customer. Let me see that page and we are collaborating in some area and my compete in our area.

Then explain again, tsmc is everybody's friendly. And we support all our customers opening. And fairly often, locate the necessary engineering resources to ensure all of our customers support access, both existing customer, and for the future, customer how to log in our capacity to support. Actually our capacity planning is based on the long-term Market moment and thus is underpinned by the industry. Ma'am.

Okay. Does that answer your question Goku?

So maybe just 1. Follow-up is do you require a lot more Assurance in terms of

demand quality and demand is longevity from IBM customers given. They're also they're also competing on process technology with you compared to Pure fabulous.

So cool was asking whether that we would require more longer-term for my IDM. Customers versus our tablets customers, we might not see if we could he come in on that.

Iris tilting customer.

Okay, thank you. Thank you Google. I'm sorry for the disruption. All right, let's move on to the next caller, please. Next 1 to ask question. Thanks for taking my question. And first of all, I would like to thank you and see for donation of the backseat. I want I think that insurance business community of cases and also Global semy Supply. Chan and my, my question is about a month or so, first of all is your AC or vents packaging. It seems like window mentioned that the bacon possibilities are getting better in 3 Q. I'm not sure, you've says, it's true. So, the question you said currently the percentage of advanced packaging of cases revenue, and we're currently happening. Still believe in God.

Can steal outgrow the wiper business and whether they would create margin delusion. So the first question is about the 3D Advanced package. Thank you.

Okay, let me summarize your question Charlie asking about our 3 VIP business Charlie is asking you know back in possibility that windows I didn't record. It is just the truth and then also sort of the outlook for our 3D. I see business and comparison to our overall business and whether ddic business will I loot or possibility?

Okay, Charlie first of all the gross margin that I was talking about Improvement of back-end service in the third quarter actually took a season seasonal Factor, as you know, packing Services has seasonality. So second-half normally has a higher higher gross margin but longer-term, we stack is module to continue to improve. Although uh it's still not as high as a gross margin of our way for Revenue, uh, but it has a lower asset Capital intensity there for the returns from back in Services is satisfactory.

in terms of a

What a new percentage. We expect that back in services to account for about 80% of our total revenue this year and in the next 5 years will expect it will grow slightly higher than the corporate average.

Okay. Okay, thank you. When do you have a second question Charlie? Yes, I do. Thank you for coming. Yeah, my next question is about the long-term across from the entrance, right? Because, you know, we we did create some debate about the truck will be higher intensity, you know, your Italian power against wage and vendors and also customers I want to ask these open you too, needs management does tsmc plz U has acquired the Monopoly off of the age, you know, industry why? And why not? And if if yes you do think you have the Monopoly. Why cannot charge higher with a prize to cover. The wage increase of intensity and let's see if something were to need to choose between the margins and ability and also the manager wage

Be your choice. Thanks, let me summarize your second question Charlie. So Charlie is asking about the long term, gross margin Trend, wage, and bargaining power. And he is wondering, he wants to know whether we see or believe we have a monopoly at the Leading Edge, uh, or not. And if we do, I guess part of your question, Charlie is then, uh, how, you know, pricing? And then also, if we have to choose between public market, share and profitability, how should we choose?

Charlie, let me answer this question. First, we do have a very high market share and leading-edge, Technology node home. I'll price use strategies, a strategic, and we don't take optimistic approach. And, you know, as far away from you say off. So when you try to plugging in power, in fact, we work with our customer close early and we want have them to be successful while we get proper wage. So I can do for you for our pricing and looking ahead, we continue our package type of pasta to hear our customer to call and want to get the proper return. So that's why we are firm enough away for pricing dead.

And we are confident that we can.

At about a 50% or above.

Okay, okay. Thank you. Thank you. Operator in this move, on to the next participant, please.

the next 1 to ask, question, from UVs

It's a good afternoon. Thanks for taking my question earlier you referred to you expansion of capacity in in Nanjing for about 15 years, okay? With the bomb, if the demand in training is effectively structurally higher and and tying up to the Leading Edge. Are we going to see additions, incapacity new training Edge? Becoming more recurring feature for tsmc as for the rest of Industry, going forward. Thank you.

Okay, Nick. Let me try to summarize your first question. So, nuclear saying that, as chairman said, we are expanding our capacity in Nanjing life meter. So his question is that do we see the the, uh, demand at the trailing Edge, or the maturing notes, become structurally, higher wage then, where we consider or add capacity in those trailing Edge nodes?

Okay, this is Mark. Let me ask you a question of strategy more recently. And mature note, is to work closely with our customer to develop speech technology solution.

This is just not described by the Numbers. Actually, we are leading in many 28-nanometer specialty Technologies and we can meet their appointment and create differentiated long-term value for them and we expect this structure demand will continue and of course focus on the our investment on specialty technology to support that.

So for the manufacturing Greenfield knows expansion and we do not wrote it out, we will build case-by-case, as long as akane justify and customer commitment can be secured.

Okay. Thank you. You have the second question.

Yes, very quickly. I think Jack, speaking of figuration, effectively for the 4, we investment the equipment moving in in h222 office environment, production in if you want 24 it's reasonably long Runway. I guess. So is that because you you need to obviously run in a pre-production van, and I'm going to be reasonable

Yes, we we we make a prepared a little bit longer preparation time and just because that's a new new semiconductor office environment for our operations, but of course, we will, we will continue compress the schedule as much as we can.

Okay, thank you. Operator. Can move on to the next participant, please.

The next 1 to ask question early and she from Citigroup. Hi, good afternoon. My first question is, you know, for Japan Thursday. Well, it is a state and more than 20 Japanese companies with you at the Honda Center in Japan. So, I want to know what are the roles and responsibilities for lunch? Every pot party include yourself in this at your Center and also do you plan to start with the icy packaging make potassium in Japan, 1 day, and do you want to build a wafer Fab in Japan for Foundry? Business going forward?

Okay Roland's. First question he wants to know about our 3 I see Research Center in Japan. There's more than 20 companies involved according to him. So what are the roles and responsibilities of that? And also where we build a packaging ddic, packaging integration am in Japan and where we consider a wafer Fab in Japan. So, 3 parts to this question.

Okay, well, let me answer your question first. Yes, there are some more than 20 membership to nase. Ddic is, uh, Research Center, uh, impact, what the role and responsibility he is in charge of this 1 and I'm sorry you cannot see. We also in charge of that integration for all the major partner together too. So that we can be successful in the most wise, packaging technology which include tsmc cdic. And some of our partners up wage wise material and our partners are supposed ones suffering technology. Everything put together which is necessary for the Dead.

HPC some application that we needed. We have a plane to mass production in the city. I see in life is not in our current payment yet and what's your next question? I thought there was a problem. We are actually really say that we are. We we do not want any possibility and inject an we are into teaching process now to find to, to expect to do that with apply app. Let me check. Cleary.

Okay.

No, thank you. My second question is, you know, Mark also set the key concern to build up overseas is considering the cost yet and I can wait for the government to cost yet. However, I didn't reset the label, some noises in the US to request the US government to invest wisely in the main companies to support you as a priority. So it's change us, government's plan and the lead to fail to close the cost Gap to to see SMG in us, are named Operation. And how are you going to cost the cost yet if there is no adequate support from the US government? Okay, let me summarize a question. You said about r u s Tab and the cost Gap? He points out that recently. Uh, there's some discussion for the US in San Jose.

Is to invest in domestic companies. And so therefore, If This Were to be the case, how would that affect tsmc? And how would we manage the cost wage? Okay, rolling, right? This is this is I think this current events team developing wage. You know that the u.s. originally proposed Chiefs for America act as game bipartisan support and we're very happy that off in the Senate. They pass the Bill of us Innovation and competitive act. Already passed the Senate right now is in the hand of House of Representative and the reality optimistic that they will gain pipeline is support.

So the reason we that a bipartisan support for this is to create a Level Playing Field for the semiconductor Fab investment in US wage so that they'll be a renewal fact industry in the US. Of course how well you can be done in operation up to each company to uh to do operating. Uh, well and we are still learning the cost structure in the US. But in the meantime, in addition to take on this Level Playing Field opportunities, and further all the operating cost will have to be shared with a customer. So that's the part of a firm price.

For my swimming that pricing including the increased Global manufacturing footprint.

Pricing for me. I help you. Yes, yes. In that way we can continue to sustain our profitability as before 6. Okay. Thank you chairman. Thank you Valen operator, can we move on to the next participant? Please?

Next 1, we have lower Tang from KGI hi. Thank you for taking my question can you hear me? Yes we can hear you. Laura. Yes. First of all I just want to ask about our Global expansion plan. Can you give us more details about potential friend other than like off the advanced node in the US market just mentioned that the $20 will be the 3 spot. So when we expand more other than China or other region where we consider that and how would that impact? Our already announced 100 billion dollar jet pack the next few years. That's my first question. Thank you.

Okay, well, let me summarize your question. Your question is about global manufacturing footprint and I think your question is on our tour node. Do we have plans for further expansion of MacEwan notes in different locations and if so, how will this affect our capex in the next few years? Thank you, Laura. I think several project is still under claiming. We do not rule out the possibility in Japan, actually CC just mentioned that off. We are in the due diligence process. Now to have a specialty technology that in Japan. But of course, the decision still too early to the wage close because the final decision will be based on our customer needs operating efficiency, evaluation and cost economics.

So for those project, we have not included into the hundred billion other capex budget.

Okay. Yeah, and my second question is about the 16 and 12, My Religion. You know, that the current supplier is also quite tight and currently manages to Ami, particularly for the receiver, Etc. So I'm just wondering, we also have the planning to expand on, 1612 South Saint. Louis second, question continues to more specifically on, ugh. So, you know, uh, 16 nanometers in a meter to supply continues to be tight. Demand, not strong, any plans to expand at this node.

Well no, I never be inside his question. We again, this is kind of mature know the 40th and Thursday. We will expand the our capacity without the customers that you know, commitment, and also do, we have to Akita the economics and so if everything is positive and you that you are consider to explain capacity wage to support our customers actually.

Thank you. Okay, thank you. Laura operator. Can we move on to the next caller? Please?

Next 1, we have Simpson from Arrow to research.

Thanks very much. I had a question on Gross margins. I guess you've talked about 50% gross margin as a long.

Doesn't doesn't say your position warrant, some structural margin expansion at the gross margin level. Thanks. Okay. Let's first question, is about a smart key notes. That, of course, we have been facing headwinds from the foreign exchange rate and also the 500-meter rep which case some level of diversion. But he points out customers, gross margin is you know, a particularly in the last 12 months is been structurally higher than ours. So he wants to know giving our position I think 50% is you know, the achievable. Why would it not be something? Structurally? Higher is that correct? But

Yeah, it really whether it's what a 50% is, is it appropriate level of return? You know, given everyone else is delivering higher gross margins. Why wouldn't psmc look for structure? The Hardware's margins as well like everyone else.

Right. This is Wendell. Let me answer your question first. If we look at shorter-term, you talked about in the last 12 months, for exchange students play, a very big role in the gross margin between last year. And this year yesterday, last year, the dollar against entryway was $29.43 in average this year year today is 28th somewhere around..28, that creates a 2 percentage points difference in gross margin, IEEE is the gross margin in the foreign exchange rate stays where it was last year. We would be uh, having a 52% gross margin in the second quarter already dead. And also I talked about the diversion from the n v this year, another 2, to 3 points. So with all these negatives, we still can log

50% in second quarter and 3 and the third quarter. That's the short-term. Now, longer-term the investment that we are making is for future business office, at some point of time at the beginning. We may be short-term uh as the advanced technology is getting more and more challenging cost then we are working closely with our customers to firm up the way for pricing, and also working with our suppliers to ensure that the cost impact can be delivered. And with all these efforts, we still think that 50% is a good Target and it's achievable

Okay, so thank you Wendell and maybe just a follow-up. I noticed your China business Grew From 6% of sales in Q2, so 6% off on to 11% of sales and Q2 can you talk about some of the drivers that deliver that upside and and long-term how do we think about China scheme within your your your business? Do you think we'll get back to you sustainably? Double digits percent of sales and and what would drive that? Thank you.

Okay.

Opex. Second question, is related to our China business. He knows in the near-term that China contribution is uh, gone from 6% in first quarter to eleven percent. So he wants to know what is driving this. And then a longer-term question, which is how should we think about our China business over the next few years? And kind of return or sustain adding improving or double level, let me summarize, I think China remains of very strong and growing market and Thursday. We have given up a large customer base in China and we'll walk with them to grow our business and expect our business from China Wok. Continue to increase in all the markets sector. That's we talking about smartphone. HPC OT. Yep.

Versal.

And also begs question on on the improvement from China from 6%, in first quarter to eleven percent in the second quarter. What I'm typing that that's because mainly the HPC platform

Okay, thank you. Okay, thank you. Thank you. Operator, let's move on to the next question. Next 1 we have from Nissan company.

Hi, thanks for taking my question. Can you guys hear me? Yes, we can hear you fine.

Thank you so much. So I want to ask the first question really is about your adoption of your most leading-edge know the process. Um, historically, if I understand correctly, um, smartphone platform seems to lead the adoption in the past, at least, especially in the first year of the off-ramp. And I, I think you did say that the high performance Computing will becoming increasingly important. It's also the question really is about 3 nanometer, which we are about a year from the mass production. So high performance Computing from what you see today, really play a bigger role or even like the leading role in the first Rambo..393 specially in the first year. Do you even see like high performance Computing, could eventually be like the, the actual leader adapter of the Leading Edge notes? Going forward month?

Okay. So Charles first question is about the driver's of leading node adoption. He notes in the past tradition is pinging. Come from smart phones, but I see also seems to become more important for his questions on Entry. Do we expect HPC to play a bigger role in the ramp up and 3 particularly the first year, including the um, become the first adapter or primary adapter

DCTC. Wait, let me answer this 1. The industry is is when paying off still smartphone plays. The biggest role, of course, you all observation is correct. It's also important and getting more and more important. And in fact, HPC would be our national Revenue driver in the next 5 years. Uh-huh. So in the entry note, uh, it was issued to the smartphones. We do a job application. What become important also,

Does that answer your question? Yes. Yes. Thank you so much. So, maybe the second question, I still am such a pound your Global expansion. I know you probably are tired of answering that already, but the forgive me. I'm going to ask another 1. You announced you yourself a result of which the technology now will be 5 nanometers. And as I understand, we'll 5 centimeter waivers. Will very likely require your in-house at the best packaging solution is like either info or maybe even soic going forward. So so but your current packaging facilities as I know back home in Taiwan and I can imagine that if you are really out putting waivers from Arizona, nanometer, you based on your current footprint, you got to ship them.

Back to Taiwan for packaging and sent back to your customers which I can imagine. It's like could be a little bit challenging in terms of house logistical efficiencies. So I'm not going to ask for a specific plan but you kind of possi maybe you want to set up an advanced packaging facility in Arizona in the near future.

Right? So Charles shorten your second question, I think Charles is asking emails on that. We are building wafer capacity with 5 nanometer. When we also consider setting up 3D, I see integration capacity or in Arizona as well.

This is Mark Charlie's, I understand your concern but if you look at the current industry landscape, what do you just said is nothing new everyone have their way for producing 1 location and package another you including major producer in US Bank. So for that matter, we do not see in compose any logistic difficulties. We just continue to evaluate and currently we do not have that choice. I see fat and in Arizona at this point.

Okay, thanks.

New chairman. Uh, thank you. Operating want to the next caller, please?

next 1, we have and, and

Is that me?

Hello and online now. Okay? Thank you. Thank you for taking my question. My first question is regarding for me to ramble for a second half of next year, I recall the 7 hours on a ramble in a year..2018 second quarter with some Revenue contribution and the final meter in second quarter last year twenty-twenty. But since I clearly says something late for 6.1/2, this next year. So I want to ask is that is that because the technology difficulty, we cannot remember in second quarter or we don't have a big customer to use. So in our meter at beginning of stage, that's why we push back. The ramp are being second-hand next next year.

That's my first question. Thank you. Okay. So Andrews, first question, let me summarize is asking about 3 hundred meter Ram. He knows that 5 millimeter and centimeter long past few years basically ramped. In the middle of the year. In 3, we said the ramp will be in second half of next year or so why what is the reason behind this?

And you have a very good observation and you calculate that, you know, yes about the 3 to 4 minutes as long as compared with 5. Nanometer. Serial me, to technology, actually, very complicated. And in both processing technology and also my customers product design. So we are walk with customer. And and finally we decided to ramp up off the second half of next year. And this is a we decided with our customer with that the best of it. There need

Okay, thank you. Okay. My second question is, the question is, is recently, we we believe St in life. Either have some power down outage and also the fire resulting. The second quarter of first-quarter utilization down to almost zero. And recently, we are hearing, these guys are packing that utilization rate..200% the wafer output might appear in Q4. Most of these companies are, like, cleaning company in automotive semiconductor, including, and see you, do we have a son concern, once this customers renting out their own staff wage and that will resolve the next year or starting from cure, for the order Automotive semiconductor to us will be reduced gradually reduce thank you God.

Okay, so Andrew second question is on Automotive, he asks as a idms ramp up their production in the second half, are we concerned or Thursday? We have concerns that heading into the end of this year or in 2 twenty twenty-two, that tsmc's Automotive, customers will greatly reduce their orders to tsmc

DC way again, W. Answer your question is a note, we don't have any concern. The reason is very simple because of 6 p.m. for the technology and our customer working codes in recess and for some of the Technologies, uh the most of em. Yeah. It's not a I'm sorry, it's a 5514 and 28 millimeter that our customer needs a tsmc support and demand will continue to go off and so we don't worry about it when I bring up and then and tsmc be decreased. The issue is in and he remember it tight and actually very tidy in 2022. Also

Thank you. Okay, thank you. Andrew operator. Can you move on to the next caller, please?

Next 1, we have from SSA. Go ahead, please. Hello, hi. Hi, thank you for your time off. From the politics. I counted you set up geopolitical 5 times today score and someone mentioned about the faction, and it seems to affecting things like it getting even more political I just wonder for management. How, how concerned are you with politics? It seems the wage in China Taiwan and and what things have you thought about in to mitigate if anything such political risk? And, and also are your customers concern, Chef Glen Cove, it happened in Taiwan when China's from time, to time threat in a war against Taiwan, and your customer is concerned that they're so rely on you.

Thank you. Okay, so Martin's question is about politics in geopolitical, risks, that geopolitical, you know, talked about more and more. Here's observation is that vaccines in Taiwan has become political issue as well. So he wants to know how this tsmc manage or mitigate off the political risks looking at us, China, Taiwan relations and do our customers have concerns on things, such as the recent, uh, increase in wage. Uh, or you know, the the threat of invasion from China and how this tsmc manage these risks.

I think this is Mark. Thank you for asking. First of all, the, on the recent situation, Taiwan, I think confirmed case has stopped. And, of course, the current first priority is to get the people of Taiwan, get vaccinated, uh, upon variants. I keep coming but I'm really grateful that us and you lean and fast car come together, a humanitarian nation of 10 million, doses of vaccine to the time, 1 government CDC CDC and be able to vaccinate our faith in Taiwan because

Because tsmc's employees, inevitable in bladed, embedded in the community of Taiwan. And that is the important. The reason I, you know, this, this could be political in the beginning, but at the end, we completed the contract and we did get support from both sides. So I don't think at the end is as pretty as political any more. Otherwise, this is donation, wouldn't wouldn't be successful in a global sense. The geopolitical department is continuing, I think this is a challenge every company, every company's management has to deal with it. And but I think

In the new Administration from us, I think the development is more more predictable, more fact-based. So as long as the rule-based I think is better for every company to adapt it to. So uh, that all the talk I have early earlier that the global manufacturing footprint, I need to do a adjustment for our customers off.

Our customers in different country, their infrastructure, Supply security semiconductor related infrastructure, security wage, maybe come up a higher priority and we do that adjusted to it. Of course, there is. The customers needs that we may just need to a pound the greater geopolitical development.

as to as a invasion of China, let me tell you, nobody, I mean, everybody wants to have a peaceful Taiwan Strait wage and because not only uh, because it is to every country's uh, uh benefit

So because of the semiconductor supply chain Taiwan, no 1 wants to disrupt it, you have a coded, only a Kobe situation already made, made a major disruption for the global economy. And I don't think that any any, uh, uh, disability in Taiwan Straits is any country we wish to make it happen. So uh, uh, I'm optimistic on that. Thank you, buddy. Thank you. Do you have any second question Martin? Yeah. Yep. Yep. Can I follow up with a second? 1 is kind of related. You mentioned about global manufacturing. You also mentioned about the need to maintain your highest, most fun technology in Taiwan, because of the approximate, my understanding is majority of our Engineers are from Taiwan. As you go for This Global manufacturing to get talked about how you are changing. Say, for example, your talent acquisition,

Like how you try to get more people outside, have 1 so that maybe over time, you can become more more more manufacturing outside Taiwan and also maybe on the board. I mean, because when I look forward is Remains The Last Detail and is the recent 2 editions. When is Doctor, Who's a minister again? See who's from Toyota, do you see it? Also the the board with the changes become more International? Or maybe if I try to prove some debate, have a main in Chinese on the board. Thank you.

Okay. So Martin second question is Around Talent in for conversation, basically with our expanding manufacturing footprint? He wants to know what is our life strategy to attract more Global talents for psmc. And the secondary question is also on the board. His observation is that we the new team members are primarily only from Taiwan. So we'll reconsider or members from other countries. The question about Talent, indeed. I think, Thursday, we have been advocating the talent development in semiconductor filled in Taiwan as well as in u.s., I think, uh, dead semiconductor industry Talent as being underdeveloped over the past decades. And in today, everyone, look at the semiconductor as wow.

To economic drivers. So, the talents needs to be connected with that. And in Taiwan, I think we be advocating on the government to set up the office. Hi, hi, hi, hi, hi. In advanced research, colleges in across the Taiwan major universities in the US and also, uh, press and bite. And talked about semiconductor human infrastructure, that is to develop the human talent in semiconductor through the vast investment off the Indies.

So, did he?

Is this is uh catching up in every place and the particularly in Taiwan we get very strong support from the local government, to be able to continue Supply talent in by 1 a.m. as far as the board member. Yeah, Delta has joined a year ago and more recently, I think this is coming. Um, uh, she offered meeting, we will nominate Rafael reif who is the president of MIT to, to come back on board. And we hope that if we go through the blessing of our shareholders, and that is a major increment of our corporate governance in particular, in the lounge area of the talent development,

We invited share members upon. They have a very strong.

Knowledge and experience on the corporate governance.

and that is will continue to look for and without any differentiation about personality nationalities,

Okay, thank you. Chairman, thank you, Martin. In the interest of time, I think we will take the, the questions from the last participant. Please operator? Yes, ma'am..1 to ask question, please, send Kar from Cowen and Company.

Yeah, hi, thanks for taking my question. I had 2 of them. The first 1, you spoke about investing $300 in capital over the next 3 years and how that does not include tax would be processed you know like the ones in Japan, I'm kind of curious. Can you just be more specific on how much you plan to invest in your us, Arizona Fab or flat fat plus tax. For the next 3 years in terms of capex, haven't had a follow-up,

Okay, so Chris is first question is about our investment in capex. Looking at the next 3 years, he wants to know how much specifically we are investing in Arizona. Okay. Chris, we have announced at the Arizona project will be a twelve billion dollars project. This was announced last year

Got it and how much you plan to do in the next 3 years. So you he wants a Christmas asking, how much will we should invest in, Arizona, over the next 3 years?

Yeah, 2 billion next 3. Next. Next week

Well, basically is naturally is about a billion.

God. Okay. All right. And then click on auto revenue of total revenue down. What technology knows is that.

Okay, so Christian second question is on Alton Road if it was 4% of our Revenue. What particular specific notes is Automotive using wage increase? I, I think I had mentioned. Automotives MCU. Is that the 1 that we have and it's in 5546 nanometer. We sell majority still forty, 5 and forty and you're next 2 to 3 years, it will be moved to 28-nanometer that's email, and we are working with our customers and that

Thank you, thank you. All right, this concludes our Q&A session before we conclude today's conference. Please be advised that the replay of the, will be accessible within 4 hours from now and the transcript will become available 24 hours from. Now. Both of these which will be available through tsmc website at triple W, so thank you for joining us today. We hope everyone continues to say safe and healthy and we hope you will join us again next quarter. Thank you and have a good day or good evening.