Taiwan Semiconductor Manufacturing Company Ltd.

Good afternoon, everyone. I am Su Zhikai from Taichi.com's Legal Relations Department. I welcome you to participate in the Legal Explanation Conference of Taichi Company in the first quarter of 2024. Due to the fact that this conference will be broadcast to global investors at the same time, we will use English throughout. Please forgive us. Good afternoon, everyone, and welcome to TSMC's first quarter 2024 earnings conference call. This is Jeff Hsu, 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 www.tsmc.com, where you can also download the earnings release materials shortly. 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 Senior Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the first quarter 2024, followed by our guidance for the second quarter 2024. Afterwards, Mr. Huang and TSMC's CEO, Dr. Cici Wei, will jointly provide the company's key messages. Then we will open the lines for the question and answer session. 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 the current quarter guidance.

Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. My presentation will start with the financial highlights for the first quarter 2024. After that, I will provide the guidance for the second quarter 2024. First quarter revenue decreased 5.3% sequentially in NT dollars, or 3.8% in U.S. dollars, as our business was impacted by smartphone seasonality, partially offset by continued HPC-related demand. Growth margin increased 0.1 percentage points sequentially to 53.1%, mainly reflecting product mix changes due to smartphone seasonality, partially offset by a less favorable foreign exchange rate. Total operating expenses accounted for 11.1% of that revenue, which is lower than the 12% implied in our first quarter guidance, mainly due to tighter expense controls. Thus, operating margin increased 0.4 percentage point sequentially to 42%. Overall, our first quarter EPS was 8.7 NT dollars and ROE was 25.4%. Now, let's move on to revenue by technology. Three nanometer process technology contributed 9% of wafer revenue in the first quarter. whilst 5 nanometer and 7 nanometer accounted for 37% and 19% respectively. Advanced technologies, defined as 7 nanometer and below, accounted for 65% of wafer revenue. Moving on to revenue contribution by platform, HPC increased 3% quarter over quarter to account for 46% of our first quarter revenue. Smartphone decreased 16% to account for 38%. IoT increased 5% to account for 6%. Automotive remained flat and accounted for 6%, and DCE increased 33% to account for 2%. Moving on to the balance sheet, we ended the first quarter with cash and marketable securities of 1.9 trillion NT, or 60 billion U.S. dollars. On the liability side, current liabilities increased by $113 billion NT, mainly due to the increase of $140 billion in accrued liabilities and others, partially offset by the decrease of $44 billion in accounts payable. The increase in accrued liabilities and others was mainly due to the reclassification of the temporary receipts from customers from long-term liabilities. Our financial ratios, accounts receivable turnover days remained at 31 days, while days of inventory increased five days to 90 days, primarily due to ramp of three nanometer technologies. Regarding cash flow and CAPEX, during the first quarter, we generated about 436 billion NT in cash from operations, spent 181 billion in CAPEX, and distributed 78 billion for second quarter 2023 cash dividend. In addition, we raised 23 billion NT in cash from bond issuances. Overall, our cash balance increased 233 billion NT to 1.7 trillion at the end of the quarter. In U.S. dollar terms, our first quarter capital expenditures totaled 5.77 billion. I have finished my financial summary. Now, let's turn to our current quarter guidance. We expect our business to be supported by strong demand for our industry leading three nanometer and five nanometer technologies, partially offset by continued smartphone seasonality. Based on the current business outlook, we expect our second quarter revenue to be between 19.6 billion and 20.4 billion U.S. dollars, which represents a 6% sequential increase and 27.6% year-over-year increase at the midpoint. Based on the exchange rate assumption of one U.S. dollar to 32.3 NT, gross margin is expected to be between 51 and 53%, operating margin between 40 and 42%. Also, in the second quarter, we will need to accrue the tax on the undistributed retained earnings, As a result, our second quarter tax rate will be slightly above 19%. The tax rate will then fall back to 13% to 14% level in the third and fourth quarter, and the full-year tax rate will be between 15% to 16% compared to 14.5% in 2023. This concludes my financial presentation. Now let me turn to our key messages. I will start by making some comments on the impact from the April 3rd earthquake. On April 3rd, an earthquake of 7.2 magnitude struck Taiwan and the maximum magnitude of our FAPs was five. Safety systems and protocols at our FAPs were initiated immediately and all TSMC personnel are safe. Based on TSMC's deep experience and capabilities in earthquake response and damage prevention, as well as regular disasters trails, the overall tool recovery in our FAPs reached more than 70% within the first 10 hours and were fully recovered by the end of the third day. There were no power outages, no structural damage to our fabs, and there's no damage to our critical tools, including all of our EUV lithography tools. That being said, a certain number of wafers in process were impacted and had to be scrapped, but we expect most of the lost production to be recovered in the second quarter and thus minimum impact to our second quarter revenue. We expect the total impact from the earthquake to reduce our second quarter gross margin by about 50 basis points, mainly due to the losses associated with wafer scraps and material loss. Next, let me talk about our first quarter 24 and second quarter 24 profitability. Compared to fourth quarter 2023, our first quarter gross margin slightly increased by 10 basis points sequentially to 53.1%, primarily driven by product mix changes due to smartphone seasonality. We have just guided our second quarter gross margin to decline by 1.1 percentage points to 52% at the midpoint, primarily due to the impact from the earthquake on April 3rd, as just discussed, and higher electricity costs in Taiwan. After last year's 17% electricity price increase from April 1st, TSMC's electricity price in Taiwan has increased by another 25% starting April 1st this year. This is expected to take out 70 to 80 basis points from our second quarter growth margin. Looking ahead to the second half of the year, we expect the impact from higher electricity costs to continue and dilute our growth margin by 60 to 70 basis points. We also expect the higher electricity cost to indirectly lead to higher materials, chemical and gases and other variable costs. In addition, we expect our overall business in the second quarter of the year to be stronger than the first half, and the revenue contribution from three nanometer technologies is expected to increase as well, which will dilute our gross margin by three to four percentage points in second half of 24, as compared to two to three percentage points in first half of 24. Finally, as we have said before, we have a strategy to convert some 5 nm tools to support 3 nm capacity given the strong multi-year demand. We expect this conversion to dilute our gross margin by about 1-2 percentage points in the second half of 2024. To manage our profitability in second half 2024, we will work diligently on internal cost improvement efforts while continuing to sell our value. Longer term, excluding the impact of foreign exchange rate and considering our global manufacturing footprint expansion plans, we continue to forecast a long-term gross margins of 53% and higher is achievable.

Okay, sorry to interrupt Wendell because we have been informed that some of the audience are having difficulty linking through the website to the call. So let's pause a few minutes and we'll continue once we've resolved the IT issue. Thank you everyone for your patience.