Q3 2022 Taiwan Semiconductor Manufacturing Co Ltd Earnings Call
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Good afternoon, everyone and welcome to Tsmc's third quarter 2022 earnings Conference call.
This is Jeff Sue Tsmc's director of Investor Relations and your host for today.
TSMC is hosting our earnings conference call via live audio webcast through the company's website at Triple W. Dot T. S. M C dot com.
Well you can also download the earnings release materials.
If you if you are joining us through the conference call. Your dial in lines are in listen only mode.
The format for today's event will be as follows first Tsmc's, Vice President and CFO , Mr. Wendell Huang.
Will summarize our operations in the third quarter of 2022, followed by our guidance for the fourth quarter of 2022.
Afterwards, Mr. Huang and Tsmc's C E O. Dr. C. C. Wei will jointly provide the company's key 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 significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward looking statements.
Please refer to the safe Harbor notice that appears in our press release.
And now I would like to turn the call over to Tsmc's CFO , Mr. Wendell Huang for the summary of operations and the current quarter guidance. Thank.
Thank you Jeff Good afternoon, everyone and thank you for joining us today.
My presentation will start with financial highlights for the third quarter 2022.
After that I will provide the guidance for the fourth quarter.
The third quarter revenue increased 48, 8% sequentially in NT dollar or 11, 4% in U S dollars as our third quarter business was supported by strong demand for our industry, leading five nanometer technology.
Third quarter gross margin increased one three percentage points sequentially to 64% slightly ahead of our guidance as we enjoyed at more favorable foreign exchange rate and cost improvement efforts.
Total operating expenses accounted for nine 8% of net revenue as compared to 10% in the previous quarter.
Operating margin increased one five percentage points sequentially to 56%, mainly due to better operating leverage.
Overall, our third quarter EPS was 10, 83% and ROE was 42, 9%.
Now, let's move on to revenue by technology.
Five nanometer process technology contributed 28% of wafer revenue in the third quarter, while seven nanometer accounted for 26%.
Advanced technologies, which are defined as seven nanometer and below accounted for 54% of wafer revenue.
Moving on to revenue contribution by platform.
Smartphone increased 25% quarter over quarter to account for 41% of our third quarter revenue.
HBC increased 4% to account for 39%.
<unk> increased 33% to account for 10%.
Promotive increased 15% to account for 5%.
And DCE decreased 2% to account for 2%.
Moving on to the balance sheet, we ended the third quarter with cash and marketable securities of $1 five trillion NT.
On the liability side current liabilities decreased by 38 billion NT, mainly due to the decrease of 116 billion in short term loans, partially offset by the increase of 70 billion NT in accrued liabilities and others.
Long term interest bearing debt increased by 88 billion NT, mainly as we raised 60 billion NT of corporate bonds during the quarter.
Our financial ratios.
Accounts receivable turnover days decreased one day to 36 days.
Inventory decreased.
Inventory days decreased five days to 90 days, primarily due to higher wafer shipments during the quarter.
Now, let me make a few comments on cash flow and Capex during the third quarter, we generated about 413 billion NT in cash from operations spent 266 billion in Capex distributed 71 billion in the fourth quarter 2000.
One cash dividends.
And raised $60 billion from corporate bond issuances.
Overall, our cash balance increased by 43 billion to $1 three trillion empty at the end of the quarter and.
In us dollar terms, our third quarter capital expenditures totaled $8 75 billion.
I have finished my financial summary, now, let's turn to our current quarter guidance.
Based on the current business outlook, we expect our fourth quarter revenue to be between $19 9 billion and $20 7 billion U S.
Which represents a point.
0.4% sequential increase at the midpoint.
Based on the exchange rate assumption of one U S dollar to 31, 5%.
Gross margin is expected to be between 59, 5% and 61, 5%.
Operating margin between 49% 51%.
This concludes my financial presentation.
Now, let me turn to our key messages.
I will start by making some comments on our third quarter and fourth quarter profitability.
Compared to the second quarter, our third quarter gross margin increased by 130 basis points sequentially to 64%, mainly due to a more favorable foreign exchange rate and cost improvement efforts. Despite continue inflationary cost pressures.
Compared to our third quarter guidance, our actual gross margin exceeded the high end of the range provided three months ago as our guidance was based on exchange exchange rate assumption of one U S dollar to $29 7 million.
Whereas the actual third quarter exchange rate was one U S dollar to 30 <unk>.
<unk> 32.
<unk>.
This created about 80 basis point difference in our actual third quarter gross margin versus our original guidance.
We have just guided our fourth quarter gross margin to be flattish sequentially to 65% at the midpoint.
As a more favorable exchange rate assumption will be offset by a lower capacity utilization rate.
As a reminder, six factors determining tsmc's profitability leadership technology development and ramp up.
Pricing cost reduction capacity utilization technology mix and foreign exchange rates.
Looking ahead to 2023, we faced challenges from and free rent dilution.
Higher year over year increase in depreciation cost.
Rising inflationary cost semiconductor cyclicality and overseas fab expansions.
To manage our profitability in 2023.
We are working closely with our customers to support their growth and continue to strategically and consistently sell our value.
We are also working diligently on our internal cost improvement.
Excluding the impact of foreign exchange rate of which we have no control over and taking the other five factors into consideration. We believe a long term gross margin of 53% and higher is achievable.
Next let me talk about our 2022 capex.
As I have stated before every year, our capex spend in anticipation of the growth that will follow in future years.
Three months ago, we set our 2022 capex would be closer to the lower end of our $40 billion to $44 billion range now.
Now we are further tightening up this year's capital spending and expect our 2022 capex to be around 36 billion U S dollars.
About half of the change is due to capacity optimization based on the current medium term outlook and the other half is due to continue to delivery challenges.
Out of the around 36 billion dollar Capex for 2022.
Between 70% to 80% of the capital budget will be allocated for advanced process technologies.
10% will be spent for advanced packaging and mask, making and 10% to 20% will be spent for specialty technologies.
Looking ahead, we will continue to manage our business prudently given the near term uncertainties and adjust and tightened up our capital spending where appropriate.
That said our commitment to support customers growth remains unchanged and our disciplined capex and capacity planning remains based on the long term structural market demand profile.
We will continue to work closely with our customers to plan, our long term capacity and invest in leading edge and specialty technologies to support their growth, while delivering profitable growth to our shareholders.
Now, let me turn the microphone over to Cc.
Good afternoon, everyone.
First let me start with TSMC as a more resilient near term demand outlook.
Can crude at our third quarter with revenue of 26 months readout one.
In our U S start at 22 billion supported by strong demand for our industry, leading five nanometer technologies.
Moving into fourth quarter 2022, we expect our business to be flattish as customers are ongoing inventory adjustment is balanced.
Our continuing ramp up of our five nanometer technologies supported by smartphone and HPT applications.
We expect our full year growth in 2022 to be missed 30% in us dollar terms.
On the demand side, we continue to all Joe softness in consumer and market segment.
Other end market segments, such as our data center and automotive related remained steady for now for TSMC.
But do we start to see the possibility of adjustment downward ruled.
On the inventory side, our customers and the supply chain continue to take action to adjust their inventory.
We expect the semiconductor supply chain inventory to peak in third quarter. This year.
Start to reduce in the fourth quarter this year.
We also expect <unk> take a few quarters.
First half 2023 to rebalance to a healthier level.
While the ongoing inventory correction will also affect TSMC.
We expect our business to be less volatile and more.
More resilient than the overall semiconductor industry during this period.
Supported by three key factors that are Tsmc's of course raise in the foundry industry.
Our technology leadership and depreciation.
<unk> is much stronger today as compared to previous years. These are network TSMC to win business.
Nevertheless, our customer to win business and gain market. Despite the semiconductors.
Secret category.
Secondly, through our comprehensive design ecosystem and optimize our process technologies.
We are able to address and capture the structural increase in demand for computation.
A strong portfolio in high performance computing.
Third our strategic relationship with our customers are long term in nature, and we continue to work closely with our customer and technology development capacity plenty and pricing to support their long term demand and cores.
Our resort, we continue to see strong demand for our leading node.
70 87.
Steady demand steady demand for our differentiated specialty technologies.
Our mature node.
Looking ahead to 2023 with a successful ramp up of <unk> and <unk> <unk> X <unk>.
In the upcoming ramp of Ns III will continue to expand our customer product portfolio and inquiries are traceable market.
There is.
While the ongoing semiconductor inventory correction.
To our force how transitory Sri utilization rate we.
We expect our business to be supported by.
By stronger demand for our differentiated.
Our revised and specialty technologies.
And for 'twenty to 'twenty three to be of course year for TSMC.
Next.
Let me talk about it and seven six demand outlook.
Due to market weakness in smartphone and Pcs and.
And customers are product schedule debate.
Starting <unk> this year.
And seven <unk> capacity utilization.
And not be as high as it has been in the past three years.
We expect this to persist for a few quarters. So first half 2023.
As the semiconductor supply chain inventory takes a few quarters to rebalance to a <unk>.
We will and we have <unk> and.
Kevin Lcs Capex accordingly.
We believed in seven Asia demand is more cyclical issue rather than structural.
And they expand our seven six demand to pick up in second half 2023.
Longer term, we continue to work closely with our customers to develop specialty and differentiated technology.
Our comfort and to drive additional wave of structural demand to backfill our seven NCS capacity over the next several years.
There is.
Seven nanometer family will continue to be a large and long lasting node for TSMC.
Now I will talk about our industry and as <unk> stated.
<unk> is on track for volume production data this quarter with Goodyear.
We expect a smooth ramp in 2023, driven by Bose etch PC and smartphone applications.
Our customers demand for entry exceed our ability to supply.
Partially due to the ongoing towards delivery issues.
We expect the industry to be fully utilized in 2023.
We expect the industry revenue in 2023 to be higher than <unk> revenue in its first year in 2020 and.
For entry to contribute mid single digit percentage.
While wafer revenue in 2023.
Our overall revenue base is much larger today than in 2020.
<unk> will further extend our industry firmly we enhanced the performance.
<unk> yield and <unk> compete pray for support for both smartphone and PC applications.
<unk> development is progressing ahead of plan.
Volume production is now scheduled for second half 2023.
Despite the ongoing inventory correction.
All drove a high level of customer engagement at both <unk> and LTE with a number of tape out more than two X. The tender offer and five in his first and second year there.
Yes.
We are working closely with our towards supplier to a tracer towards delivery challenges and prepare more three nanometer capacity to support our customers' strong demand in 2023 2024 and beyond.
Our three nanometer technology will be the most advanced semiconductor technology.
Both PPA and transistor technology when it is introduced.
We are confident that the industry firmly what be another large and long lasting node for TSMC.
Finally, let me talk about the future driver of leading node adoption.
TSMC is our mission is to be the trusted technology and capacity provider for the global logic IC industry for years to come.
Our job is to help our customer.
Yes, <unk> and enable them to capture greater value and win in the end market.
The industry continues to pursue Karin it is true that CME to shrink is slowing down and becoming more challenging for everyone.
Due to rising process complexity.
However.
It is also true that demand for energy efficient computing is accelerating in the intelligent and connected award as technologies to becoming more pervasive and essential in People's lives.
As the semiconductor industry value in the supply chain is increasing and the.
Where do you up technology platform is expanding beyond the scope of geometries shrink alone and increasingly toward greater power efficiency.
As a result, our.
Our customers value much more <unk>.
Per the transistor cost system performance and power efficiency has become key motivation for customers, who adopt our leading node technologies.
By working closely with our customer and technology development.
And two what deliver full node stride in performance and power benefits, while offering the industry's most otherwise transistor scaling.
We expect strong demand for our leading node technologies driven by both smartphone yes.
And the SPG applications to fuel our long term revenue poor's of 15% to 20 depreciate CAGR over the next several years in the U S dollar terms.
With our leadership in both the leading edge process technology.
<unk> solutions.
<unk> is a technology cadence remained constant.
River the value of our technology platform.
We will continue to extend our overall competitiveness and technology leadership.
Delivering a predictable technology cadence that here of our customer two year highs.
Competitiveness and gordian market well into the future.
This concludes our key measures.
You for your attention.
Thank you cc.
This concludes our prepared statements.
Before we begin the Q&A session I would like to remind everybody to please limit your questions to two at a time to allow all of the participants an opportunity to ask questions.
Should you wish to raise your question in Chinese I will translate it to English before our management answers your question.
For those of you on the call. If you would like to ask a question. Please press Star Zero then one on your telephone keypad now.
If at any time, you would like to remove yourself from the question in queue. Please press zero two.
Now, let's begin the Q&A session. Operator can we please proceed with the first participant on the line.
Yes, Jeff the first one to ask question local hiring heartland from J P. Morgan.
Yes, good afternoon, and thanks for taking my question Congrats on the great results, especially on the margins.
First question is on <unk>, 7% and six.
This utilization slack that we are observing.
Could we give a little bit more detail on.
Why that is happening and why we think this is <unk>.
Short lived.
A couple of quarters issue and we get a big back in the utilization in second half of the year.
I think last time, we saw this was for 28 nanometer, but that was that lasted for much longer period of time. So could you also give us some.
Kind of comparison with what happened back in 28 nanometer and why this is going to be very different and maybe a little bit more color on what are the areas of backfill demand or <unk> as the.
The high end smartphone processors and HBC, Scott Maw 25, an entity. That's my first question.
Hey.
<unk>, let me. Please allow me to summarize your first question. So Goldcorp first question is on <unk> and six <unk>.
He wants to understand what is driving the utilization slack.
Why do we believe it is short lived and that the demand for <unk> and <unk> can pick up in second half and then also on the little bit longer term outlook.
Why we believe that.
And seven can be back filled.
It will not be like in 2008, a few years ago with a few years of under utilization.
While co group maybe answer your question first.
On the wide demand drop demand dropped because of market becomes soft as we said in the.
Weakness in the smartphone and Pcs.
And also a big factor is our customers' products schedule delay.
<unk>.
All in all put all together so we ship.
Our utilization.
Has been affected.
Fourth quarter this year and all the way through the first half of 2023.
For the longer term, we continue work closely with our customer and actually.
We also say that this is a cyclical issue so you'd want pick up anyway.
And we believe you will pick up in the second half of 2023 and for the longer term.
We continue to work closely with our customers to develop specialty and differentiated technology to drive additional wave of structural demand.
<unk> consumer.
Have connectivity et cetera, and other applications to get for your <unk> capacity and so for the next several years.
That's why.
Does that answer your first question Gopro.
Vocal.
Yes, sorry, my second question would be.
On the Capex outlook.
Now that we bring down.
Capex slightly for 2022.
Could you talk a little bit about what is the outlook direction for 2023 at least if not absolute numbers, but just direction.
Going to be flattish or it's likely to be good.
Going down.
And also could you also give us an update on the schedule for the new Fabs color, Sean Kumamoto Nanjing in Arizona is there any change in the schedules in terms of these fabs coming into production.
Thank you <unk>. So <unk> second question is on Capex and capacity. So first do you wants to hear of course says that we have tightened up our capex in 2022. So he is asking for 2023 Directionally is there an indication of 2023 Capex and then he would also like an update on our.
Our expansion plans in golf Zone <unk>.
<unk>, Arizona.
Kumamoto.
Okay Cocoa, let me ask answer the first part.
For 2023 Capex it is too early to comment.
We'll provide you with a specific guidance in January .
However, as we said we have tightened up our 2000 ton Youtube capex to reflect the current medium outlook as well as to delivery issues.
Looking ahead to 2023, we will continue to be careful and manage our business prudently given the near term uncertainties.
We will adjust and tightened up our capital spending where appropriate.
But we will continue to work closely with our customers to invest for the long term structural market demand profile to support their growth.
Well, let me answer the second part of <unk> question.
<unk> asked about the progress of our Arizona at 19 fab and the cow shown.
And let me say that.
Arizona will continue and on schedule.
No doubt about it because this is our <unk> family, we still have a very strong demand.
And for 19, we just get our one year authorization for 28 nanometers expansion. So it is on schedule. So.
For Cardiome.
Initially we plan to fire at the beginning of our 28 nanometer expansion.
And in seven now in seven has been adjusted and so but 28 nanometers exploration is continue on schedule.
And also Kumamoto, Okay also the Japan fab is on schedule.
To meet our customers' demand.
Okay. Okay got it. Thank you very much alright. Thank you call operator can we move on to the next participant please.
And the next one to ask questions Bruce from Goldman Sachs Go ahead. Please.
Thank you for taking my question. So my first question is regarding to the HPT, which is a key growth driver for TSMC for the coming years, although with the recent U S. New restriction to the China, What do you think about.
HPT demand moving forward, what kind of impact.
See a slowdown in China or you can see that.
<unk> fund.
<unk> China site.
Okay. So Bruce his first question is on HBC.
Its HBC, we have said repeatedly will be TSMC as a key growth driver in main engine in the next few years.
Wants to know I believe Bruce the impact of the recent U S regulations does that affect the overall.
HBC demand.
Or the overall profile is that correct.
Yes.
Pat from funds this new registration to Jay Cynthia and overall.
Our industry.
Okay.
The answer to that.
Bruce is.
Based on our initial region and feedback from our customers.
The new regulation set the controls for each call to act very high specification, which is primarily used for AI or supercomputing applications.
Therefore, our initial assessment.
Is the impact to TSMC is limited and manageable.
We will continue to closely monitor the situation to ensure that we are all in four comprised with all the rules and regulation.
And for the longer term.
Early to really assess or the true impact or influence.
Give you the update in the <unk> earnings call.
Okay.
Okay understand that.
So my next question is regarding to the cyclical.
Cyclical nature or the seven nanometer, but we also noticed that most of your other nodes.
The capacity utilization rate is still at a very.
I have a high level.
Much better than seven nanometer manager mentioned, while sales are not so cyclical because.
Maybe because you've got to take that.
Thank you.
Neil with the industry or what is the difference between your seven nanometer and your other notes.
Okay. So Bruce second question is looking at and.
Seven specifically.
He wants to know other notes seem to utilization still seems to be.
Holding up well so why specifically.
Seven is more cyclical and utilization is.
Not as high as it has been is that correct Bruce.
Yes.
Okay.
It just happened.
Most of my.
Smartphone and PC as a customer.
<unk>, seven and 686 node and it.
It just happen the market weakness in our smartphone and PC happening at the same time.
And also as our customers are product schedule delay all in all that's why it become lower.
Sure.
Utilization rate as compared with other node.
If you want to compare with say in five or compared with 28 nanometer are all those are very.
Is it still a very high demand and we continue to enjoy a higher market share.
I want to dig in the bigger we get used to like TSMC, well manage your customers products and overall look even with some Paypal did aiken. Thank you dealt with someone else but.
I mean anything different with this time that seven nanometer you cannot have.
That's good.
Other notes.
So Bruce wants to still understand.
Why the seven nanometer utilization cannot be as high as the other nodes.
We work closely with customers and it's well planned.
Well again Bruce.
We work closely with our customers, but our customers get caught in this inventory correction in the market downturn.
I didn't notice one probably two parts of that before.
And.
And.
At the beginning of this year. They are still gives us a very high number of forecast.
And.
We just happen it does happen as we said we believe this is a cyclical issue any <unk> pickup.
And.
But before that you probably will take a few quarters.
Alright.
We just get used to it to be that into two.
Expect the SMT OLED.
I understand.
Okay. Thank you Bruce operator can we move on to the next caller. Please.
And next we have <unk> from credit Suisse.
Yes, okay. Thanks for taking my question I wanted to ask.
Two part first question.
And in the prepared remarks about HBC and auto are continued to be stable, but seem to signal may change.
Give us your view, how you see inventory levels and some of the forward demand outlook from those areas.
Second part just wanted to see if we could get a bit better visibility.
And the first half.
First quarter, how do you see it versus normal.
And then for the trucks do you expect first quarter it could be the bottom where do you see the trend that we could be towards second quarter.
Okay. So randy's question is really looking at.
Again from the end demand segments data center and automotive, we say are remaining steady at TSMC for now.
He wants to understand what is the outlook down the road and what does that mean for inventory levels. And then secondly is also he wants to see if we can provide some more granularity about first quarter.
Outlook versus seasonality and whether we think the first quarter can be the bottom for the industry is that correct Randy.
Yes, that's correct.
Okay, Let me answer this one.
Ah.
Of course, we say that so far our customers give us their demand forecast.
So the data center and automotive related skilled stagey.
But now the market becomes solved and we are taking a more conservative way in our planning for 2023 and Thats why we say that we don't rule out the possibility they might have some correction also but.
We did not see it right now.
To be Frank with you.
And.
For the inventory correction.
2023.
All you want to say is like that.
I expect probably 2023 the semiconductor industry.
Likely to decline.
But TSMC also you should know that we believe our technology position.
Trunk portfolio SPG and longer term strategic.
Issue with customer.
And never our business to be more resilient than the overall semiconductor industry and Thats why we say in 2023 still a core CEO for TSMC and the overall industry probably declined.
Okay.
I'll ask a quick follow up and then the second question I guess just.
Because it's still very firm in fourth quarter. If you are seeing a pretty meaningful falloff into first quarter I'd like Samir is 10% 2019 declined over 20%. So just trying to get a rough feel that type of decline.
Decline factoring youre, gaining some content and share.
After the first and then the second question.
Actually just on gross margin because of a lot of headwinds I think you talked about if you could give just a couple of these.
Depreciation factoring the recent capex.
How much up and whether it's hospital front and are more back half loaded given the three nanometer ramp and then for the startup costs for <unk> III. If you expect similar two and five given smaller percent of revenue how much dilution.
From entry Okay. Thank you Okay. Randy So let me summarize slow Randy quick I think we will not comment on the first quarter, but I think we can make some comment just sort of in terms of the.
The overall inventory picture.
Looking into next year.
Yeah.
Well.
Actually.
If you ask my opinion.
Inventory picture in the inventory correction.
It's too early to provide a specific number however.
The inventory correction you likely.
She is peak is impaired some times in the first half of 2023.
Okay, and then the second part related to the gross margin maybe window can address what is the outlook for depreciation.
Next year some of the and then is it front or back end loaded and also what type of dilution, we expect from three nanometer as it ramps in 2023.
Okay Randy.
For a full year depreciation for next year is too early to talk about that but this year is mid single digit increase year on year, but next year, we expect it will likely to be meaningfully higher.
We will give you the guidance in January .
As to the dilution from entry it will be between two to three percentage point.
For the whole year basis.
Our gross margins.
And actually one follow up do you think on a single quarter with the inventory correction.
Do you expect to keep the 53 and above.
Factoring we're coming from a very high level, even through that first half inventory correction.
Right.
Is too early to talk about 2023.
Gross margin.
Including a quarter over quarter, but even with all the all these cost challenges.
We believe our structural profitability can be maintained.
And we are confident to deliver a long term gross margin of 53% and higher.
Okay. Okay, great. Thanks, a lot. Thank you Randy operator can we move on to the next participant please.
Next one to ask questions and Charlie Chan from Morgan Stanley .
Hi, good afternoon. Thanks for taking my question so.
The first question to management.
What are the accompanying consider share buyback because as a company.
Such as the recent.
Inventory correction you suggest our six eco youll see already.
Our long term.
And I think the share price really reveal kind of things that don't have value right.
Shareholders value.
I'm not sure if a company wants to do share buyback or cash returns.
Okay. So charges first question is.
That.
Although there is cyclicality the long term outlook appears good would the company consider doing share buyback yes.
Yes, Charlie we constantly review all the different options of returning cash to shareholders.
For share buyback at this moment we are.
Not considering it.
We think our cash on hand will be better cap to invest in.
In our capital expenditure.
To make a better return for our shareholders.
Okay understood.
Thank you and also my second question is about the USS sanctioning.
I know the campaign.
That in pace and limited and long term impact remains to be seen but.
My question is that at all.
Sure.
China market.
Is that S strategic X before after this event.
Okay. So Charlie second question he wants to know with the recent U S regulations and the impact.
How do we see the China market is it still a strategic market for TSMC is that correct Charlie.
Yes.
In.
Yes.
That's kind of it can get.
China for us.
Okay.
And a long term picture, how important China going forward.
Charlie.
To say that every region is importantly to TSMC.
However, let me say that under the condition of will comprise with all the rules and regulations <unk>.
We continue to serve all the customer logos award.
That's our position.
Okay, including China.
All the customers.
Okay. Okay got it thank you.
My questions. Thank you. Thank you Charlie operator can we move on to the next participant please.
Next I want to ask questions Sunny Lin from UBS.
Okay.
Hi, Thank you for taking my questions. Congrats on that is performance.
My first question is on that.
Geopolitical tensions.
I wonder given some of the considerations regarding the geopolitical issues.
Or would you.
A longer term impact from customers potentially diversifying from Asian foundries and how are you managing the risk. Thank you.
Okay. So <unk> first question is that given the geopolitical tensions.
<unk>.
How do we evaluate the long term impact.
And the risk of customers using other foundries is that correct plenty.
Thank you Sandy.
We still believe the most important issue is a technology leadership in manufacturing and our customer Trust.
And so you can get one location.
Victory or whatever steel, we still assume that technology leadership with the most important issue.
And so that's our strategy we make it simple.
Technology manufacturing and customer trust.
Got it and so a quick follow up is that going forward should we assume an acceleration of your overseas expansion just to diversify the production side.
If there could be a fab build in Europe .
Okay. So <unk> conversion and then does the country assumed debt.
We will continue to increase the overseas.
Global footprint expansion and also particularly in Europe .
Well, we will continue to increase our overseas a portion in.
In manufacturing based on customers' need in fact.
Based on the business opportunity and also based on the operation's efficiency and economics.
And so whether we are going to be.
In Europe , we are in preliminary evaluation and do not rule out any possibility.
Again, I would like to say that decision was based on customers that need.
Business opportunities operation efficiency and cost economics.
Got it thank you.
We have a second question.
SPC.
With the increasing usage of <unk>.
How would you manage the risk in the case that some time I made at the other foundries and that have production issues and therefore impacting the production at TSMC as well. Thank you very much.
Okay. So on the second question is with increasing.
Usage and adoption of shipments sorry chip, let's in HBC.
So would we manage the risk in case, I think sunny youre, saying its ties at other.
Companies or places have production issues.
How does how do we manage the risk of that impacting TSMC.
Well. Thank you suddenly in fact, we would lag though.
Our customer manufacturing every chip in.
Besides TSMC for sure, but if there is a case that they have to use the other.
Companies are dies, we will work with our customers closely and minimize all the risk.
As time goes by.
Last quarter, we are doing right now.
Got it.
That's very helpful. Thank you.
Thank you Sunny operator can we move on to the next participant please.
Right now we have Laura Chen from Citi.
Hello, Hi, Thank you for taking my question.
Appreciate that if you can share with you later.
I'll answer that I can think you already mentioned that.
The license for the 28 nanometer in 19, Joanne just wondering back to.
And you also need the license for the 16 nanometer in the 19 Fad and <unk>.
Also going.
Going forward it sounds like to your plans.
Our operation in China. That's my first question. Thank you.
Okay. So lowest first question is about managing fab and our plans are.
She noticed that we have received the one year authorization. So our 28 nanometer expansion continues as planned.
Question is do we also need a license for the 16 nanometer that we have in Nanjing and then also her also what is our long term future expansion plans in China.
Suddenly let me answer the first lot.
<unk>.
Let me answer the first part.
The one year authorization that we receive cover the Nanjing facility. So it's both the <unk> and <unk>.
Okay, great. Thank you.
And then the second part is what is our long term extension plans.
For China.
As this is that we will be operating a serving all the customer under the condition that we will fully follow.
In compliance with all the rules and regulations.
Okay, that's clear.
My second question is also about the fact globally in the lung.
We note that.
Separation, usually that we're able to have much higher.
Operational cost so how would that impact.
As a long term margin trend.
Maybe you can give us some estimation about the estimate of the percentage of our margin.
The region or the cost difference comparing to Taiwan.
Okay. So second question is around our global expansion of our global manufacturing footprint.
She knows she wants to know that overseas fabs are the costs higher.
Do we have a breakdown of how much the cost differences in Japan U S versus Taiwan, and then overall with overseas expansion and if they are higher cost how does this impact our long term profitability and margin.
Okay.
Let me answer this question.
The initial cost of overseas sites are indeed higher than Tsmc's fab in Taiwan, and its mainly because of higher labor costs in different layers of the supply chain.
We continue to work closely with the U S government as well as with our customers and supply chain partner.
To manage and minimize the cost gap now through these efforts. We believe we can continue to earn the proper return and deliver the long term gross margin of 53% higher.
Okay, that's very clear thank you very much.
Thank you Laura operator can we move on to the next participant please.
Next one to ask questions as <unk> from New Street research.
Thank you for taking my question.
I was hoping you could give some more context around the three nanometer tool shortages that you mentioned is that primarily lithography and then specifically related.
Or do you also see shortages in order to segment.
Thank you.
So <unk> first question is around three.
Three nanometer and the tool shortages. He wants to know if this is just specific to lithography tools in <unk>, specifically or is it more.
I guess broad based.
Let me answer the question actually is a more broad based because of our.
Demand is high and certainly the photo result worry towards is included.
One of the most important one.
Thank you.
Very useful.
Then as my follow up question.
It would be great to get an update on your end to notes, which your current visibility is the notes still on track timing wise and is there anything you can share on how you think about yields of two versus <unk> 5 million to be at the same stage of development.
Okay. So <unk> second question is on and two he would like an update.
Are we still on track what is the timing.
<unk>.
And also if there's any update on yields as compared to three and five at similar stage.
Okay.
<unk>.
I've said it before and two is a very deep kalra one but.
Our parkway so far so good actually.
Baird.
We.
We are going to have a mass production introduce it in the 2020 fly in our customers' engagement so far.
Sorry.
Let me say that comparable with the industry in fly ash.
The status today is very comparable to the <unk>.
And also your industry.
So we are happy to see that.
Our progress so far.
Does that answer your question. Thank you very much. Thank you Ralph Okay, operator, let's move on to the next participant please.
Next one we have <unk>.
From any company.
Oh good afternoon. Thank you for taking my questions I had two both on Capex.
The first question.
Really.
I understand you are not you could guide plenty plenty of three capex, but I think a few years ago. You did provide some long term capex a range of Capex I'm aware your long term CAGR guidance was 5% to 10% and 10.
And to top alien.
Opex is going to support that long term CAGR.
I think you just reiterated your long term CAGR to be take longer quantity percent do you kind of have a similar range of capex for us to think about over longer again, I'm not asking you about 'twenty three capex here.
Okay.
So Charles first question.
He is about really I think Charles you are asking about capex correlation with growth. So he notes that in the past we.
I have said, our long term growth would be 5% to 10%. So during that period. We said, we would spend between $10 billion to $12 billion. So without asking about 2023, specifically Charles wants to know.
Now, we believe we will grow between 15% to 20% CAGR.
In the next few years, what type of Capex.
Range does that imply or should we assume is that correct Charles.
Yes, correct.
Okay, Charles I think it would be.
Let me try to answer this question from the capital intensity point of view.
When we invest heavily to capture the future growth.
The capital intensity will be high like last year this year.
That is C.
Growth slows down the capital intensity may become lower.
Longer term wise.
We think that normal.
Reasonable capital intensity, maybe somewhere between.
Mid to high 30 percentage longer term wise.
Thank you.
The second question is about the very near kind of into the next quarter basically because you just us glass your quantity quantity to Capex I mean from what you guided a one quarter ago by about $1 billion. In fact, you are correctly half of that is.
It can be attributed to the tool delivery issues, but the other half can you clarify a little bit because you you kind of that it's about capacity.
Optimization is there.
Kind of like a 2 billion reduction in Capex, mostly I reduction the.
The equipment spending or is it something else.
Youre, reducing yes, im trying to improve the capital capacity optimization, yes. Thank you.
Okay. So trial's second question is on the Capex and.
He is asking we have now guided to around $36 billion versus <unk>.
Close to $40 billion last time, we said half of it.
As related to the debris and the other half as capacity optimization for the mid term demand outlook. So his question is.
With the capacity optimization is this mainly also reduction in tools or is there some other issue.
Is that correct Charles.
Yes, correct. Thank you, Okay, Charles I think Youre right.
Of that difference comes on to delivery issue. The other half is the capacity optimization by that and that's because of the current uncertainty in market conditions. So we're tightening up.
Capital budget.
It relates to the whole capacity.
Including tools, including.
The other stuff within the.
Yes, and Thats, mainly answered thank you very much.
And so I think Luca thank.
Thank you. Thank you.
And also as Cc and Wendell mentioned.
Some of the adjustments, we have made to our <unk> six capacity and Capex.
Due to the aforementioned reasons.
Okay. Thank you Charles operator can we move on to the next participant.
And that's the one we have rattling from Bofa Securities go ahead. Please.
Thank you very much for taking my question. So first off Osteo congratulations on the strong rns and my first question is about well if we look at the loan paid yourself that new regulation from the U S. On China. It can be really broad and with a key of course, it with I can't add on the.
Super computing, but however, given the wider variety and also a wider application of chips that TSMC makes.
In theory difficult to identify a mixture there.
And that business complying with the regulation or where there be some ashok cost and overhead cost by about that which we show in our tests in the future. Thank you. That's my first question.
Okay. So perhaps first question is with the new U S regulations, he noticed very long.
And very wide and scope. So he is wondering if its very hard to interpret and therefore would this result in greater overhead cost.
For TSMC to ensure that we are and continue to be fully compliant with all the regulations.
Well actually.
Although as Lucas about the more than 100 pages, but.
Initial reading and feedback from our customer actually the regulation is very simple to to be understood.
Tours to each quarter at a very high end space vacation for example, like 600 or beat per seconds.
Ben we saw those kind of thing.
It's very very.
Very easily to be understood and we continue to work with our customer to make sure that we fully complied with our regulation.
And so that will also like title window from a financial standpoint will we incur more overhead costs.
As a result.
At this moment, we don't think so.
I see thank you very much just a slight follow up because the regulation is just.
<unk> of our computing.
I know in a super computer is definitely there are some still some low end chips used in Si so fully happened.
Happened to Mexico.
Sure.
That is go in there when we put their stamp with that well.
That caused some confusion or bring some travel out to us. Thank you.
So second question is.
In a supercomputer there may be very specific high end restrictions, but there's also a companion chips other chips use would that cause us an issue.
To continue to achieve.
Yes or no.
No restriction or no regulation at all so we've redone our customer.
To work with one customer.
For that kind of a product.
Got it. Thank you very much and then maybe if I may 2nd question would be clearly many countries will likely be at their own foundry or be on domestic supply Chad. We have learned that the cost will be a major a dallas Si. So my question would be can we charge different.
Pricing.
That's basically demanded by our clients or ISO with higher cost if they want that <unk> use a pipeline Europe can we charge a higher pricing if thats based on the same node and also buy before you think about the price side. What would you. Please share how TSMC could utilize these kind of opportunities to strength.
And our competitiveness tetanus in the long run. Thank you that will be my question. So Brad second question is about.
He notes that many countries would like to have a domestic semiconductor manufacturing.
TSMC, we are since you said, it also increasing and expanding our global manufacturing footprint.
So with higher cost will we.
Be able to charge a higher price I guess.
That is essentially his question.
Actually TSMC is the pricing is strategic.
The consistent.
Yes.
All I can say is we will continue to see our value.
The value has come from the technology manufacturing and also that are.
Our relationship with our customers.
Whether it is in a different country or.
Different plays is not in our consideration.
Again, I would like to say, we'll continue to see our value.
And.
And our pricing is a strategic.
Okay.
Thank you very much. Thank you Brad operator can we move on to the next participant please.
Next one we have but the husseini from Susquehanna International go ahead. Please.
Yes, thanks for taking my question.
I also have my first multipart question.
I'm just looking at your customers' inventories.
On a days of inventory are at a 25 year high.
And it seems based on your commentary that the demand forecast, especially looking at the first half.
As we can.
So it seems to me that inventory correction is going to sustain into Q2 and most likely your shipment would be declining sequentially in Q1 and Q2, just looking at your customers' inventory.
Is it is that is there a realistic.
Do you have the first half because you also highlighted the fact that inventory correction is going to sustain throughout the first half.
Please go ahead I'm just trying to better.
And reconcile to your customers' inventory with your comment and I have a follow up okay. So on <unk> first question is on inventory. He notes customers' inventory levels are very high.
We have talked about our observation from an industry level that demand is softening.
Consumer segment and so his question is.
What is the outlook and do we expect the inventory correction I guess.
To be more notable.
As we go into first half 'twenty three is that correct Mindy.
Yes, and particularly you've always had.
Very quick shipments up in Q2, but I think 23 could be an extension exception and it could probably decline.
And.
And that's how I spend my question. So the question is.
Wafer shipment.
A decline in Q2 for the first time in many many years.
Well Manny.
Our current forecast actually.
Our supply chain inventory will peak in third quarter this year.
And we observed that the inventory will start to reduce in the fourth quarter of last quarter of this year and we expect EUR six bps of impact in the first half actually first half of 2023.
Uh huh.
The detail of the first quarter second quarter or something like that we are now ready to share with you yet.
Because of we continue to work with our customer and to understand that.
<unk>.
Demand.
Okay.
And if I may have just a quick follow up.
Does that imply that your customer book.
So rapidly that we have to wait for January .
To get the final read on the first half.
<unk> I think we have always in the past we will guide for 2023 and talk about 2023 outlook and first quarter.
In the January conference right, but I think Cc has already said that.
With the inventory correction.
We expect our business to be more resilient during both the down an upturn given our technology leadership and that 2023 is a growth year for TSMC. Okay. We will not comment further on gas corridor of second quarter.
Okay and my second question.
Has to do with depreciation that was down.
In Q3 down year over year in Q over Q and this is despite the fact that capex was up 65%.
2021.
Yes.
Does that have anything to do with.
Through optimization and to that extent as the second part of the question would you consider converting seven nanometer to five three.
The second question first is depreciation.
It is down Q on Q and year on year.
And then also would we.
Consider converting capacity.
Okay.
Depreciation we look at it from a whole year point of view for this year as I mentioned.
We expect it to be up year on year by mid single digit.
And for next year, it will be meaningful higher meaningfully higher but we will share with you more in January .
But please understand that every year.
Depreciation newly.
Going into the depreciation table.
Table and also the depreciation coming off of the depreciation table. So what you are looking at is the net result.
As to converting seven capacity two and five.
As we mentioned earlier and seven demand issue is cyclical.
Rather than structural so at this moment I don't think we have that kind of plan.
Okay. Thank you Mindy in the interest of time, operator, maybe we can take the last.
Questions from the last two participants please.
Yes, Sir.
The next one to ask question Petro Cheng from CLSA go ahead. Please.
Thank you for taking my question you talked about the 2023 to.
A growth year.
That's gross.
Justin I'll compare to what you expected.
Quarter ago or it is slower.
If so what's driving the slower growth expectation.
Okay. So patricks first question is.
About 2023.
Is the growth that we see for 2023, how does that compare versus our expectation for three months ago for 2023, and what is driving this.
Yes, well.
I think it's too early to talk too much about the 2023, but we will maintain our statement that 2023, we still expect it as a growth year.
Okay.
Do you.
Have a second question Patrick.
Yes, that's helpful and maybe a follow up any.
I mean any.
Leading indicators that you.
Are or you are monitoring.
That could help you or help us determine the growth outlook aside from monitoring decline wafer orders.
Okay. So Patrick second question is looking with inventory correction. He wants to know if theres any leading indicators.
That.
We can look at or you should look at to see.
When indications that the cycle is bottoming.
That's really hard to answer your question actually.
If you look at it the whole industry, that's informed the smartphone and Pcs.
You read all the quarterly report on form or major player you can change that when the euro.
Go up.
One is a downturn so we.
We definitely do.
Some information internally, we do the analysis and today, we are taking a very conservative way for our pending that's all I can share with you.
Yeah.
Thank you.
And I guess that what we've been doing.
Obviously.
<unk>.
Well I don't have any further questions. Thank you for taking my question. Okay. Thank you operator can we take the last participant please.
Yes. The last one to ask question is frankly from HSBC go ahead. Please.
Alright. Thank you I wanted to ask I guess, a question on your <unk> III and <unk>.
Is the ramps for both known it's going to be around the same time or as youre going to be some differential scheduling.
Okay. So thanks first question is on the ramp.
Four and three versus <unk> is it at the same time.
Yes.
Okay.
He is not at the same time right now we are ramping up I and III.
<unk> supposed to be one year apart, but because of the program. So we're so we might for you a little bit more towards three months that's all.
So they are still not at the same time alright.
Yeah.
Okay.
And my second question is.
I know you've reiterated your margin long term gross margin target being unchanged.
But I guess given the headwinds you are seeing now through the first half of next year.
Just turnkey move already gone up quite a bit utilization rates dropping.
Is this.
Are you going to see any potential change in the pricing strategy I know you can't comment too specifically, but you have seen some price increases in the last 12 months or so so from going forward, though with the pricing strategy is still be relatively unchanged given the change in the overall market environment.
Okay. So <unk> second question is related to pricing.
With the inventory correction.
And with some of the cost challenges he wants to know.
Should there be any changes to our pricing strategy during this correction.
Is that correct Frank.
Yes, Thanks, Frank Let me answer the question.
Again, I want to stress that our pricing actually strategic and consistent.
So.
You say that that we have any plan to change you Didnt know it wont be consistent.
Alright.
Not based on any cycle or opportunistic and.
We actually most importantly, we always work closely with our customer to provide to our value and to hear of gym to win.
You get a market.
Right no I am not.
Suggesting.
Optimistic pricing, but I just gave.
Margin situation has changed for your clients, we're probably going through a difficult time.
Would there be some change the strategy to help align with them as well or was it largely still be the same policy that we've seen.
We stayed the same.
We are consistent.
Yes.
Okay. Okay. Thank you. Thank you Frank.
This concludes our Q&A session.
Before we conclude today's conference.
Please be advised that the replay of the conference will be accessible within one hour from now the transcript will become available 24 hours from now both of which will be available through Tsmc's website at Triple W. Dot TSMC dot com.
Thank you for joining us joining us today and we hope you will join US again next quarter Goodbye and have a good day.