Taiwan Semiconductor Manufacturing Company Ltd.

We will use English all the time. Please excuse us. Good afternoon, everyone, and welcome to TSMC's first quarter 2021 earnings conference call. This is Jeff Su, TSMC's Director of Investor Relations, and your host for today. To prevent the spread of COVID-19, TSMC is hosting our earnings conference call live via live audio webcast through the company's website at www.tsmc.com, where you can also download the earnings release materials. 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 first quarter of 2021, followed by our guidance for the second quarter of 2021. Afterwards, Mr. Huang and TSMC's CEO, 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 on our press release. And now, I would like to turn the call over to TSMC CFO, Mr. Wendell Huang, for the summary of operations and current quarter guidance.

Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. My presentation will start with financial highlights for the first quarter 2021. After that, I will provide the guidance for the second quarter 2021. First quarter revenue increased 0.2% sequentially in NT dollars or 1.9% in US dollars. Our first quarter business was supported by HPC related demand, balanced by a milder smartphone seasonality than in recent years. Gross margin decreased 1.6 percentage points sequentially to 52.4%, mainly due to relatively lower level of capacity utilization in an unfavorable foreign exchange rate. Total operating expenses slightly increased by 0.8 billion NT, mainly due to a higher level of R&D activities for the N5 family. Therefore, operating margin decreased by two percentage points sequentially to 41.5%. Overall, our first quarter EPS was 5.39 NT. and ROE was 29.5%. Now let's move on to revenue by technology. 5 nanometer process technology contributed 14% of wafer revenue in the first quarter, while 7 nanometer accounted for 35%. Advanced technologies, which we now define as 7 nanometer and below, accounted for 49% of wafer revenue. Now moving on to revenue contribution by platform. Smartphone decreased 11% quarter over quarter to account for 45% of our first quarter revenue. HPC increased 13% to account for 35%. IoT increased 10% to account for 9%. Automotive increased 32% to account for 4%. DCE increased 10% to account for 4%. Moving on to the balance sheet, we ended the first quarter with cash and marketable securities of 797 billion NT. On the liability side, current liabilities increased by 45 billion NT, mainly due to the increase of 49 billion in short-term loans an increase of $50 billion in accrued liabilities and others, partially offset by the decrease of $51 billion in accounts payable. Long-term interest-bearing debt increased by $23 billion NT, mainly as we raised $21.1 billion of corporate bonds during the quarter. On financial ratios, Accounts receivable turnover days increased one day to 40 days. Days of inventory increased 10 days to 83 days, primarily due to N5 wafer pre-built. Now, let me make a few comments on cash flow and CAPEX. During the first quarter, we generated about 228 billion NT in cash from operations, spent 248 billion in CAPEX, and distributed 65 billion for second quarter 2020 cash dividend. Short-term loans increased by 52 billion, while bonds payable increased by 18.5 billion due to the bond issuance. Overall, our cash balance increased 4.6 billion to 665 billion at the end of the quarter. In U.S. dollar terms, Our first quarter capital expenditures total 8.8 billion. I have finished my financial summary. Now let's turn to our second quarter guidance. Based on the current business outlook, we expect our second quarter revenue to be between 12.9 billion and 13.2 billion U.S. dollars, which represents a 1% sequential increase at the midpoint. This revenue guidance includes the minor impact from the power outage that occurred yesterday at our Fab 14 in Tainan. Based on the exchange rate assumption of one US dollar to 28.4 NT, gross margin is expected to be between 49.5% and 51.5%. Operated margin between 38.5% and 40.5%. The sequential decline in second quarter gross margin is mainly due to the margin dilution from higher 5 nanometer contribution, the slower rate of cost improvement as our FAPs continue to run at a very high level of utilization, and the absence of positive inventory revaluation. This concludes my financial presentation. Now let me turn to our key messages. I will start with our near-term demand and inventory. We concluded our first quarter with revenue of $362.4 billion NT, or $12.9 billion U.S., which was in line with our guidance. The slight sequential increase was mainly driven by HPC-related demand. balanced by a milder smartphone seasonality than in recent years. Moving into second quarter 2021, we expect our revenue to be flattish as HPC related demand will continue to grow offset by smartphone seasonality. On the inventory front, our Fabless customers overall inventory was healthy exiting fourth quarter of 2020. Amidst the lingering macro and supply uncertainties, we expect our customers and the supply chain to gradually prepare higher levels of inventory throughout the year as compared to the historical seasonal level. We expect this to persist for a period of time given the industry's continued need to ensure supply security. Looking ahead to the second half of the year, we expect our capacity to remain tight throughout the year, supported by strong demand for our industry-leading advanced and special technology. For the full year of 2021, we now forecast the overall semiconductor market, excluding memory, to grow about 12%, while foundry industry growth is forecast to be about 16%. For TSMC, we are confident we can outperform the foundry revenue growth and grow by around 20% in 2021 in U.S. dollar terms. Next, let me talk about our capital budget for this year. Every year, our CAPEX is spent in anticipation of the growth that will follow in future years. As we enter a period of higher growth, underpinned by the multi-year structural megatrends of 5G related and HPC applications, we believe a higher level of capital investment is necessary to capture the future growth opportunities. In order to meet the increasing demand for our advanced and specialty technologies in the next several years, we have decided to raise our full year 2021 CAPEX to be around 30 billion US dollars. About 80% of the 2021 capital budget will be allocated for advanced process technologies, including three nanometer, five nanometer, and seven nanometer. About 10% will be spent for advanced packaging and mask making, and about 10% will be spent for specialty technologies. Now, let me turn the microphone over to CC.

Thank you, Wendell. We hope everybody is staying safe and healthy during this time. First, let me talk about the capacity shortage and demand outlook. Our customers are currently facing challenges from the industry-wide semiconductor capacity shortage, which is driven by both a structural increase in long-term demand as well as short-term imbalance in the supply chain. we are witnessing a structural increase in underlying semiconductor demand as the multi-year megatrend of 5G and HPC related applications are expected to fuel strong demand for our advanced technologies in the next several years. COVID-19 has also fundamentally accelerated the digital transformation making semiconductors more pervasive and essential in people's lives. In addition, the need to ensure supply security is creating short-term imbalance in the supply chain, driven by supply chain disruption due to COVID-19 and uncertainties brought about by geopolitical tensions. Now let me talk about TSMC's investment plan and disciplines. TSMC's mission is to be the trusted technology and capacity provider for the global logical IC industry for years to come. In order to support our customers' goals, TSMC is taking several actions to help address the capacity shortage for our customers. We are working hard to increase our productivity, to drive more output, to help support our customers for the near term. To address the structural increase in the long-term demand profile, we are working closely with our customers and investing to support their demand. We have acquired land and equipment and started the construction of new facilities. We are hiring thousands of employees and expanding our capacity at multiple sites. TSMC expects to invest about 100 billion U.S. dollars through the next three years to increase capacity to support the manufacturing and R&D of leading-edge and specialty technologies. Increased capacity expects to improve supply certainty for our customers and help strengthen confidence in global supply chains that rely on semiconductors. Our capital investment decisions are based on four disciplines. Technology leadership, flexible and responsive manufacturing, retaining customers' trust, and earning the proper returns. At the same time, we face manufacturing cost challenges due to increasing process complexity at leading node, new investment in mature nodes, and rising material costs. Therefore, we will continue to work closely with customers to share our value. Our value includes the value of our technology, the value of our service, and the value of our capacity support to customers. We were looking to firm up our wafer pricing to a reasonable level. We were continuing to work diligently with our suppliers to deliver on cost improvements. By taking such actions, we believe we can continue to earn a proper return that enables us to invest to support our customers' goals and fulfill our mission as trusted fund-raising partners. With our technology leadership, manufacturing excellence, and customer trust, we are well-positioned to capture the goals from the favorable industry megatrend. We reiterate our long-term revenue to be 10% to 15% CAGR, from 2020 to 2025 in U.S. dollar terms. Next, let me talk about the automotive supply update. The automotive market has been soft since 2018. Entering 2020, COVID-19 further impacted the automotive market. The automotive supply chain was affected throughout the year and our customers continue to reduce their demand throughout the third quarter of 2020. We only began to see sudden recovery in the fourth quarter of 2020. However, the automotive supply chain is long and complex with its own inventory management practices from chip production to car production, It takes at least six months with several tiers of suppliers in between. TSMC is doing its part to address the chip supply challenges for our customers. In January of this year, TSMC announced that capacity support for automotive customers is our top priority. Since then, we have worked dynamically with our other customers to reallocate our wafer capacity to support the worldwide automotive industry. However, the shortage further deteriorated due to the unexpected snowstorm in Texas and the fire manufacturing disruption in Japan. Together with our productivity improvement, we expect the automotive component shortage from semiconductors to be greatly reduced for TSMC's customers by the next quarter. Now I will talk about Taiwan water supply update. The water supply in Taiwan is currently tight due to the lack of rainfall in the past year. We have been prepared for this. TSMC has a long established enterprise risk management system in place which cover water supply risk as well. Through our existing water conservation measures, we are able to manage the current water usage reduction requirement from the government with no impact on our operations. We also have detailed response procedure to handle water shortage at different stages. We will continue our collaborative effort with the government and the private sector on water conservation and new water sources. With our comprehensive enterprise risk management system, we do not expect to see any material impact to our operations. I will talk about N5 and N3 status. TSMC's N5 is the factory industry's most advanced solution with the best PPA. N5 is already in its second year of volume production, which yields better than our original plan. N5 demand continues to be strong, driven by smartphone and HPC applications. and we expect N5 to contribute around 20% of our wafer revenue in 2021. N4 will leverage the strong foundation of N5 to further extend our 5nm family. N4 is a straightforward migration from N5 with compatible design rules while providing further performance, power, and density enhancement for the next wave of 5nm products. N4 risk production is targeted for second half this year and volume production in 2022. Thus, we expect demand for our N5 family to continue to grow in the next several years driven by the robust demand for smartphone and HPC applications. N3 will be another four-node strike from our N5 and wide-use spin-flare transistor structure to deliver the best technology maturity, performance, and cost for our customers. Our N3 technology development is on track with good progress. We continue to see a much higher level of customer engagement for both HPC and smartphone applications at N3 as compared with N5 and N3 at a similar stage. Risk production is scheduled in 2021. The volume production is targeted in second half of 2022. Our three nanometer technology will be the most advanced of country technology in both PPA and transistor technology which it is introduced, one is introduced, I'm sorry. Thus, we are confident that both our 5 nanometer and 3 nanometer will be large and long lasting nodes for TSMC. This concluding our key message. Thank you for your attention.