Taiwan Semiconductor Manufacturing Company Ltd.

Good afternoon, everyone. I am Su Zhikai from Tai Chi Dian Law Firm. Welcome to the Tai Chi Company's 2021 4th Law Firm. In order to prevent the spread of the COVID-19 epidemic, this Law Firm still has a telephone meeting. Since this law firm is broadcast to global investors at the same time, we will use English throughout. Please excuse us. Good afternoon, everyone, and welcome to TSMC's fourth 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 fourth quarter of 2021, followed by our guidance for the first quarter of 2022. Afterwards, Mr. Huang and TSMC's CEO, Dr. Cici Wei, will jointly provide the company's key messages. Then, TSMC's chairman, Dr. Mark Liu, will host a Q&A session where all three executives will entertain your questions. As usual, I would like to remind everybody that today's discussions may contain forward-looking statements that are subject to significant risk 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's CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance.

Thank you, Jeff. Happy New Year, everyone. Thank you for joining us today. My presentation will start with financial highlights for the fourth quarter and a recap of full year 2020. After that, I will provide the guidance for the first quarter 2022. Fourth quarter revenue increased 5.7% sequentially in NT dollar or 5.8% in U.S. dollar. As our fourth quarter business was supported by the strong demand for our industry-leading 5 nanometer technology, gross margin increased 1.4 percentage points sequentially to 52.7%, mainly due to the continuous cost improvement efforts. Operating margin increased 0.5 percentage points sequentially to 41.7%, slightly ahead of our guidance as we enjoyed higher operating leverage and a portion of the vaccine donation expenses got pushed out to the first quarter. Overall, our fourth quarter EPS was 6.41 NT and ROE was 31.3%. Now let's move on to the revenue by technology. Five nanometer process technology contributed 23% of wafer revenue in the fourth quarter, while seven nanometer accounted for 27%. Advanced technology, which are defined as 7 nanometer and below accounted for 50% of wafer revenue. On a full year basis, 5 nanometer revenue contribution came in at 19% of 2021 wafer revenue. 7 nanometer was 31%. Advanced technologies accounted for 50% of total wafer revenue, up from 41% in 2020. Now, moving on to revenue contribution by platform. All platforms increased in the fourth quarter. Smartphone increased 7% quarter over quarter to account for 44% of our fourth quarter revenue. HPC increased 3% to account for 37%. IoT increased 3% to account for 9%. Automotive increased 10% to account for 4%. and digital consumer electronics increased 2% to account for 3%. On a full-year basis, all six platforms experienced year-on-year growth. HPC, IoT, and automotive saw strong growth of 34%, 21%, and 51% respectively. Smartphone also increased 8%, and DCE increased 2% in 2021. Overall, smartphone accounted for 44% of our 2021 revenue. HPC accounted for 37%, and IoT accounted for 8%. Moving on to the balance sheet, we ended the fourth quarter with cash and marketable securities of $1.2 trillion NT dollars, On the liability side, current liabilities increased by $84 billion NT, mainly due to the increase of $22 billion in accounts payable and the increase of $61 billion in accrued liabilities and others. Long-term interest-bearing debt increased by $150 billion NT, mainly as we raised $157 billion of corporate bonds during the quarters. On financial ratios, accounts receivable turnover days remained at 40 days, while days of inventory increased three days to 88 days. Now let me make a few comments on cash flow and CAPEX. During the fourth quarter, we generated about 378 billion NT in cash from operations, including 80 billion NT prepayment from customers, spent $236 billion in CAPEX and distributed $71 billion for first quarter 21 cash dividends. Bonds payable increased by $157 billion due to the bond issuances. Overall, our cash balance increased $211 billion to $1.1 trillion at the end of the quarter. In U.S. dollar term, our fourth quarter dividend Capital expenditures total $8.46 billion. Now let's look at the recap of our performance in 2021. We saw a strong growth in 2021 as our technology leadership position enabled us to capture the industry's megatrend of 5G and HPC. Our revenue increased 24.9% in U.S. dollar terms, to reach 57 billion U.S. dollars. In NT dollar terms, revenue increased 18.5% as the NT appreciated by 5% during the year. Such unfavorable foreign exchange rate also impacted our gross margin by about two percentage points. In addition, N5 dilution also created a headwind to our margin. However, as we continue to drive cost improvements, we were able to achieve growth margin of 51.6% and operating margin of 40.9% in 2021. Overall, full-year EPS increased 15.2% to 23.01 NT, and ROE was 29.7%. On cash flow, we spent 839 billion NT in CAPEX, while we generated $1.1 trillion in operating cash flow and $273 billion in free cash flow. We also paid $266 billion in cash dividends in 2021. I have finished my financial summary. Now, let's turn to our current quarter guidance. We expect our business in the first quarter to be supported by HPC-related demand, continued recovery in the automotive segment, and a milder smartphone seasonality than in recent years. Based on the current business outlook, we expect our first quarter revenue to be between $16.6 billion and $17.2 billion, which represents a 7.4% sequential increase at the midpoint. Based on the exchange rate assumption of $1 to 27.6 NT, gross margin is expected to be between 53% and 55%, operating margin between 42% and 44%. Lastly, our 2022 effective tax rate is between 10% to 11%. This concludes my financial presentation. Now I will move on to key messages. I will start by making some comments on our 2022 capital budget and depreciation. Every year, our CAPEX is spent in anticipation of the growth that will follow in the future years. We are witnessing a structural increase in underlying semiconductor demand underpinned by the industry megatrend of 5G related and HPC applications. In 2021, we spent $30 billion to capture the strong demand and support our customers' growth. In 2022, our capital budget is expected to be between $40 to $44 billion. Out of the $40 to $44 billion CAPEX for 2022, between 70% and 80% of the capital budget will be allocated for advanced process technologies, including 2 nanometer, 3 nanometer, 5 nanometer, and 7 nanometer. About 10% will be spent for advanced packaging and mask making, and 10 to 20% will be spent for specialty technologies. Our depreciation expense is expected to increase by low to mid-teens percentage year over year in 2022, as newly incurred depreciation will be partially offset by other notes rolling off depreciation. With this level of CAPEX spending in 2022, we reiterate that TSMC remains committed to a sustainable cash dividends on both an annual and quarterly basis. Now, let me turn the microphone over to C.C.

Thank you, Wendell. We hope everybody is staying safe and healthy during this time. First, let me start with our 2022 outlook. We expect 2022 to be another strong growth year for TSMC. For the full year of 2022, we forecast the overall semiconductor market, excluding memory, to grow approximately 9%, while foundry industry growth is forecast to be close to 20%. For TSMC, we are confident we can outperform the foundry revenue growth and grow between mid to high 20% in 2022 in U.S. dollar term. Our 2022 business will be fueled by strong demand for our industry-leading advanced and specialty technologies, where we see strong interest from all four growth platforms, which are smartphone, HPC, IoT, and automotive. Entering 2022, we expect the supply chain to maintain a higher level of inventory as compared to the historical signal level, giving the industries a continued need to ensure supply security. While the short-term imbalance may or may not persist, we continue to observe the structural increase in long-term semiconductor demand underpinned by the industry megatrend of 5G and HPG-related applications. We also observe the higher silicon content in many end devices, including automotive, PCs, servers, networking, and smartphones. As a result, we expect our capacity to remain tight throughout 2022 as we believe our technology leadership will enable TSMC to capture the strong demand for our advanced and specialty technologies. Next, let me talk about TSMC's long-term growth outlook and profitability. We are entering a period of higher structural growth, As technology becomes more pervasive and essential in people's lives and the digital transformation accelerates, the semiconductor industry value in supply chain is increasing. As we embark upon the 5G era, an intelligent and more connected world will fill massive requirements for computation power and prepare greater need for energy-efficient computing which demand great use of leading-edge technologies. The multi-year megatrend of 5G and HPC-related applications will drive multi-unit volume growth and, more importantly, substantial semiconductor content enrichment in HPC, smartphone, automotive, and IoT applications. To address the structural increase in the long-term market demand profile, TSMC is working closely with our customers to plan our capacity and investing in leading-edge and specialty technology to support their demand. At the same time, we are committed to achieve a sustainable and proper return that enables us to invest to support our customers' goals and deliver long-term profitable growth for our shareholders. Over the last three years, we have raised our CAPEX spending from U.S. $14.9 billion in 2019 to U.S. $30 billion in 2021 as we invest in anticipation of the growth that will follow. During the same period, our revenue in U.S. dollar terms has increased from $34.6 billion in 2019 to $56.8 billion in 2021, or 1.6 times, and our EPS by 1.7 times. Looking ahead, as the world's largest reliable and effective capacity provider, with our technology leadership, manufacturing excellence, and customer trust, we are well positioned to capture the growth from the federal industry megatrend with our differentiated technologies. We expect our long-term revenue to be between 15% and 20% CAGR over the next several years, in U.S. dollar terms, of course, fueled by all four growth platforms, which are smartphone, HPC, IoT, and automotive. With an increasing need for computation, HPC will be the strongest driver of TSMC's long-term growth and expected to be the largest contributor in terms of our incremental revenue growth with CPU, GPU, and AI accelerators are the main growth area for our HPC platform. As we invest in Leading Edge, and specialty technology to support our customers' demand, we continue to face manufacturing cost challenges due to increasing process complexity at leading-edge node, new investment in mature node, expansion of our global manufacturing footprint, and rising materials and basic commodity costs. We are continuing to work closely with our customers to support their growth, and our pricing strategy will remain strategic, not optimistic, to reflect our value creation. We will also work diligently in our own flag operation and with our suppliers to deliver on cost improvement. By taking such actions, we believe a long-term gross margin of 53% and higher is achievable. and we can earn a sustainable and proper return of greater than 25% ROE through the cycle. Thus, even as we shoulder a great burden of CAPEX investment for the industry, we can continue to invest to support our customers' goals and deliver long-term profitable goals for our shareholders. Now I will talk about EN5. N4P, and N4X status. As our N5 entry is 30 years of ramp, demand continues to be very strong, driven by smartphone and HPC applications. Our N5 has proven to be the industry's most competitive leading-edge technology. To further enhance our N5 family's performance, power, and density improvement, For next wave 5 nanometer products, we also introduce N4P and N4X technologies. N4P offers 11% performance boost as compared to N5, with 22% improvement in power efficiency and 6% density gain. N4P is designed for easy migration from N5, which is products taping our schedule for second half 2022. We also introduced N4X as an offering spatially optimized for workload-intensive HPC applications. N4X will offer much more circuit performance boost over N5 and is expected to enter risk production in first half 2023. With our continuous enhancement of our N5 process technologies, We expect demand for our N5 family to continue to grow in the next several years, and for N5 family to be a large and long-lasting node for TSMC. Next, let me talk about N3 and N3e status. N3 technology will use FinFET transistor structure to deliver the best technology maturity, performance, and cost for our customers. Our N3 technology development is on track. We have developed complete platform support for both HPC and the smartphone applications. N3 production was started in the second half of 2022. We continue to see a high level of customer engagement at N3 and expect more new tape-outs for N3 for the first year as compared with N5. N3E will further extend our N3 family with enhanced performance, power, and yield. We also observe a high level of customer engagement at N3E, and volume production is scheduled for one year after N3. Our 3-nanometer technology will be the most advanced 1G technology in both PPA and transistor technology when it is introduced. With our technology leadership and strong customer demand, we are confident that our N3 family will be another large and long-lasting node for TSMC. Finally, let me talk about our mature node capacity strategy. TSMC's strategy at a mature node is to work closely with our customers to develop specialty technology solutions to meet customers' requirements. and create depreciated and long-lasting value to customers. We expect the multi-year industry megatrend of 5G and SPC and the higher silicon content in many end devices to drive increasing demand and mature node for certain specialty technologies. We forecast 28 nanometer will be the sweet spot for our embedded memory applications and our long-term structural demand at 28 nanometers to be supported by multiple specialty technologies. In support of our specialty technology strategies, we are expanding our 28 nanometer manufacturing capacity at a size in China, Japan, and Taiwan. Our capacity expansion is based on customers' needs, business opportunities, operating efficiency, and cost economics considerations. We believe the expansion of our mature node capacity will enable us to better serve our customers' needs and reach global talents, and our differentiated specialty technology will enable us to capture the demand generated from the industry megatrend and deliver long-term profitable growth for our shareholders. This concludes our key message. Thank you for your attention.