Taiwan Semiconductor Manufacturing Company Ltd.

Good evening, everyone. I am Su Zhikai from Taiji.com's Legal Relations Department. Welcome to the 2021 Legal Explanation Conference of Taiji. In order to prevent the spread of COVID-19, the Legal Explanation Conference is still being held. Due to the fact that this conference is broadcast to global investors at the same time, we will use English throughout. Please excuse us. Good afternoon, everyone. Welcome to TSMC's second 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 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 second quarter of 2021, followed by our guidance for the third quarter of 2021. Afterwards, TSMC's CEO, Dr. Cici Wei, Mr. Huang, and TSMC's Chairman, Dr. Mark Liu, 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 you, Jeff. Second quarter revenue increased 2.7% sequentially in NT dollar terms, or 2.9% in U.S. dollar term. Our second quarter business was supported by continued strength in HPC and automotive-related demand. Gross margin decreased 2.4 percentage points sequentially to 50%, mainly due to M5 dilution, the slower rate of cost improvement, and the absence of positive inventory revaluation. Total operating expenses slightly increased 1.47 billion NT. Therefore, operating margins decreased 2.4 percentage points sequentially to 39.1%. Overall, our second quarter EPS was 5.18 NT and ROE was 27.3%. Let's move on to revenue by technology. 5 nanometer process technology contributed 18% of wafer revenue in the second quarter, while 7 nanometer accounted for 31%. Advanced technologies, which are defined as 7 nanometer and below, accounted for 49% of wafer revenue. Moving on to revenue contribution by platform, smartphone decreased 3% quarter over quarter to account for 42% of our second quarter revenue. HPC increased 12% to account for 39%. IoT decreased 2% to account for 8%. Automotive increased 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 871 billion NT dollars. On the liability side, current liabilities decreased 14 billion NT, mainly due to the decrease of 23 billion in accrued liabilities and others, partially offset by the increase of 6 billion in dividend payable. Long-term interest-bearing debt increased by 134 billion NT, mainly as we raised 137 billion of corporate bonds during the quarter. On financial ratios, accounts receivables turnover days increased 2 days to 42 days, while days of inventory also rose 2 days to 85 days, primarily due to M5 wafer pre-build. Now, let me make a few comments on cash flow and CAPEX. During the second quarter, we generated about 187 billion NT in cash from operations, spent 167 billion in CAPEX, and distributed 65 billion for third quarter of 2020 cash dividend. Short-term loans increased 4 billion, while bonds payable increased by 137 billion. Overall, 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 totaled 5.97 billion U.S. I have finished my financial summary. Now let's turn 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 U.S. dollars, which represents a 11% sequential increase at the midpoint. Based on the exchange rate assumption of 1 U.S. dollar to 27.9 NT, gross margin is expected to be between 49.5% and 51.5%, operating margin between 38.5% and 40.5%. This concludes my financial presentation. I will turn the microphone over to our CEO, C.C.

Thank you, Wendell. We hope everybody is staying safe and healthy during this time. First, let me start with TSMC's long-term growth outlook and investment plan. We are witnessing A structural increase in underlying semiconductor demand as a multi-year megatrend of 5G and HPC-related applications are expected to fuel massive increase in computation power and greater need for energy-efficient computing, which will require leading-edge technologies. COVID-19 has also fundamentally accelerated the digital transformation, making saving conductors more pervasive and essential in people's lives. With our technology leadership, manufacturing excellence, and customer trust, we are well-positioned to capture the structural growth from the fabric industry megatrend with our differentiated technologies. We now expect our long-term revenue kicker from 2020 to 2025 to be near the high end of our 10% to 15% CAGR range in U.S. dollar terms. In the near term, we continue to observe both short-term imbalances in the supply chain driven by the need to ensure supply security as well as a structural increase in long-term demand. While the short-term imbalance may or may not persist, We expect our capacity to remain tight throughout the year and into 2022, fueled by strong demand for our industry-leading advanced and special technologies. For the full year of 2021, we now forecast the overall semiconductor market excluding memory to grow about 17%, while foundry industry growth is forecast to be about 20%. We now expect for TSMC, we are confident we can outperform the foundry revenue growth and grow above 20% in 2021 in U.S. dollar terms. To address the structural increase in long-term market demand profile, TSMC is working with closely our customers to plan our capacity, and investing in leading-edge and specialty technologies to support their demand. Our capital investment decisions are based on four disciplines, that is, technology leadership, flexible and responsive manufacturing, retaining customers' trust, and earning the proper return. To ensure a proper return from the investment, both pricing and cost are important, TSMC's pricing strategy is strategic, not opportunistic. At the same time, we face manufacturing cost challenges due to increasing process complexity at leading node, new investment in mature nodes, expansion of our global manufacturing footprint, and rising materials and basic commodities costs. Therefore, we are firming up our wafer pricing, We will continue to work closely with our customers to provide our value. We will also continue to work diligently with our suppliers to deliver and cause improvement. By taking such actions, we believe we can continue to earn proper returns that enable us to invest to support our customers' growth and deliver long-term profitable growth for our shareholders. Next, let me talk about automotive supply update. TSMC has actively taken steps throughout the first half of this year, and we will continue to do so in the second half to address the chip supply challenges for our automotive customers. 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 to reach the automotive OEMs, with several tiers of suppliers in between. However, we have worked dynamically with other customers to relocate our wafer capacity to support the worldwide automotive industry. In the first half of this year, we successfully increased our output for MCUs one of the key components in automotive semiconductor products, by about 30% as compared to first half 2020. For the full year, we expect to increase output for MCUs by close to 60% over the 2020 level, which also represent about a 30% increase over the 2018 pandemic level. By taking such actions, we expect the automotive component shortage from semiconductor to be greatly reduced for TSMC customers starting this quarter. Now let me talk about the N5 and N4 progress. TSMC's EN5 is the foundry industry's most advanced solution with the best PPA. EN5 is already in its second year of volume production, with yield well on track. EN5 demand continues to be strong, driven by smartphone and HPC applications, and we expect EN5 to contribute around 20% of our wave revenue in 2021. To further enhance our 5 nanometer family's performance, power, and density improvements for the next wave 5 nanometer products, we introduced N4 technology, which is a straightforward migration from N5 with compatible design rules. N4 risk production will begin this quarter 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. Finally, I will talk about the N3 status. N3 will be another full node scaling from our N5 and will use FinFET 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 have developed complete platform support for both HPC and the smartphone application on N3. We continue to see a high level of customer engagement at N3 and expect more new tap-outs for N3 for the first year as compared with N5. This production is scheduled in 2021, and production will start in second half of 2022. Our 3 nanometer technology will be the most advanced foundry technology in both PPA and transistor technology when it is introduced. With our technology leadership and strong customer demand, we are confident that both N5 and N3 will be large and long-lasting loans for TSMC and become important driver of our long-term growth. Now let me turn over the microphone to Wendell.