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Semiconductor Manufacturing International Corp
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[Foreign Language] Welcome to Semiconductor Manufacturing International Corporation's First Quarter 2022 Webcast Conference Call. Today's call will be simultaneously streamed through the Internet and teleconference. Please be advised that if you join the meeting by phone, your dial-ins are in listen-only mode. However, after the conclusions of the management's presentation, we will have a question-and-answer session. At this time you will receive instructions on how to participate.
[Foreign Language] Without further ado, I would like to introduce Ms. Guo Guangli, Vice President, Board Secretary and Joint Company Secretary, to speak.
[Foreign Language]
[Interpreted] Greetings. Welcome to SMIC's first quarter 2022 webcast conference call. Attending today's call are Dr. Gao Yonggang, Chairman; Dr. Zhao Haijun, Co-Chief Executive Officer; and Dr. Liang Mong Song, Co-Chief Executive Officer.
[Foreign Language]
[Interpreted] Let me remind you that today's presentation includes forward-looking statements that do not guarantee future performances but represent our estimate and are subject to risks and uncertainties. Please refer to the forward-looking statements in our earnings announcement. Please note that today's earnings statement is presented in accordance with International Financial Reporting Standards, IFRS, and all currency figures are in U.S. dollars unless otherwise stated.
First of all, we invite Dr. Gao Yonggang to speak.
[Foreign Language]
[Interpreted] Greetings to all. In the first half of 2022, events such as the epidemic and local conflicts occurring overseas have brought uncertainties to the development of the global IC industry. While the demand for consumer electronics is soft, the demand for growth in new energy vehicles, display panels and industrial sectors has led to a short-term intensification of the structural shortage of semiconductor manufacturing capacity. Thanks to the company's planning and deployment to address the shortage in the market in the past 6 months, the company has carried out early capacity allocation optimization and adjustment and orderly promoted capacity construction.
[Foreign Language]
[Interpreted] This year, the cities where some of the company's fabs are located have experienced the epidemic at different times. Facing this challenge, the company went full force to implement various preventative and controlled measures. On one side guard against the epidemic to build a safety barrier for employees, ensure production and make every effort to assure customer demand. On the other side, the company has not forgotten to fulfill its social responsibility and donated RMB 10 million to support Shanghai's epidemic prevention and anti-epidemic work.
[Foreign Language]
[Interpreted] With the efforts and dedication of all employees, the company maintained solid momentum in the first quarter, and revenue is expected to continue to grow in the second quarter. Based on the company's growth expectation in the first half of the year and with the gradual release of capacity, if there is no significant material adverse change in external conditions, it is expected that our annual revenue growth rate this year will be better than the foundry industry average and the company's gross margin will be better than expected at the beginning of the year. Thank you.
[Foreign Language]
[Interpreted] Thank you, Dr. Gao. Next, I will introduce the company's financial status. First, I will report our unaudited financial results for the first quarter, followed by our guidance for the second quarter. Unless otherwise stated, the following financial data is presented in accordance with IFRS.
[Foreign Language]
[Interpreted] Both revenue and gross margin for the first quarter maintained growth. Revenue was $1,842 million, up 16.6% sequentially and 66.9% year-over-year. Gross margin was 40.7%, up 5.7 percentage points sequentially and 18 percentage points year-over-year. Profit from operations was $536 million, up 27.6% sequentially and 330% year-over-year. Profit attributable to the company and noncontrolling interest were $447 million and $122 million, respectively.
[Foreign Language]
[Interpreted] Moving to the balance sheet. At the end of the first quarter, the company had total assets of $37.5 billion, of which total cash on hand was $17.3 billion.
Total liabilities were $11.1 billion, of which total interest-bearing debt was $6.7 billion. Total equity was $26.3 billion. Total debt-to-equity was 25.4% and net debt-to-equity was negative 40.2%.
[Foreign Language]
[Interpreted] In terms of cash flow, in the first quarter, we generated $1,593 million cash from operating activities. Net cash used in investing activities was $4,266 million. Net cash from financing activities was $188 million.
[Foreign Language]
[Interpreted] For the second quarter 2022, our guidance is as follows; revenue is expected to grow 1% to 3% sequentially and gross margin is expected to be in the range of 37% to 39%, non-IFRS operating expenses are expected to increase sequentially, while profit attributable to noncontrolling interests are expected to decrease quarter-over-quarter.
[Foreign Language]
[Interpreted] This concludes the financial statements. Next, let me recap the relevant matters related to the company's 2021 Annual Report. According to the relevant regulations of Shanghai Stock Exchange, when a listed company has made profit during the annual reporting period and its accumulated undistributed profit a positive, but no cash dividends are distributed, the company should provide a key explanation on matters related to the cash dividend plan in the earnings webcast after the disclosure of the Annual Report and before the record date of the Annual General Meeting.
[Foreign Language]
[Interpreted] The company's 2021 key financial metrics significantly improved as compared to that of previous year. According to China accounting standards, by the end of 2021, the accumulative undistributed profit was RMB 18.8 billion. In 2021, the net cash flow generated from the company's operating activities after deducting cash paid for the purchase and construction of fixed assets, intangible assets and other long-term assets resulted in a negative free cash flow of RMB 7.5 billion.
The company announced its CapEx plan of 2022 to be around RMB 32 billion. Taking into account the company's current operating situation and future development and other factors, the company plans not to distribute profit for the year of 2021, which is in line with the company's long-term development needs and the long-term interest of shareholders and in accordance with relevant laws and regulations, regulatory documents and the company's profit distribution policy.
There are no circumstances that harms the interest of the company and its shareholders. The plan has been reviewed and approved by the Board of Directors and published in the Annual Report and will be submitted for approval at the Annual General Meeting on June 24. We would like to thank our shareholders for their understanding and support.
[Foreign Language]
[Interpreted] Next, I will hand the call to Dr. Zhao Haijun to comment on market, operations and technology platforms.
[Foreign Language]
[Interpreted] Hello, everyone, and thank you for attending the first quarter earnings webcast. In the past few years, with the continuous upgrading of electronic products, the interaction of everything, digitalization mega trends, cloud storage volume increase, the exponential rise in demand for automotive electronics, the rise of green energy and other industries and so on, the overall incremental demand for end-user silicon content has not been met, while the average annual growth of global IT manufacturing capacity fluctuates only within the single digits.
And even so fabs have accelerated their pace of capacity of construction in recent 2 years, the corresponding supporting capacity still cannot be built in place in a short period of time due to the tight supply chain. The shift of the industry and concerns about regionalization of the supply chain segmentation have exacerbated the capacity gap for localized production demand.
[Foreign Language]
[Interpreted] In February this year, we also shared with you our view that as we expected after the accelerating market consumption, inventory accumulation in the past 6 months, especially after China enter into the stage of strict epidemic control, the industry supply and demand trend has shifted from overall shortage to structural [ kindness ].
Some existing markets such as consumer electronics and mobile phone, et cetera, has moved into destocking stage and hopefully, can be soft-landed soon, while incremental markets such as high-end IoT, electric vehicle, display, green energy and industrial still lack sufficient inventory, putting forward higher and more urgent requirements for production capacity, technological innovation and customer experience services. In order to respond to the needs of the industry supply chain, the company has launched new product process platforms, improved customer service and implementing our tactic direction by securing the existing volume and expanding their incremental volume.
[Foreign Language]
[Interpreted] In addition to closely tracking industry dynamics, the evolution of the epidemic has tested the company's risk response capabilities. The company has taken a multi-pronged approach to ensure safety and production with one hand, immediately carry out closed-loop operations, implement zoning and classification management of the premises and unclog transportation and logistics. With the other hand, administration logistics were secured and [indiscernible], epidemic prevention supplies were stopped and emergency response plans and job security were prepared. The company is united and basically ensures the continuity of production and operation and the delivery of customer orders in an orderly manner.
[Foreign Language]
[Interpreted] With the concerted efforts of all in the first quarter, the company's revenue exceeded $1.8 billion and gross margin exceeded 40%, driven by a 13% sequential increase in ASP due to product mix optimization and price adjustments and a 7% sequential increase in shipments. Gross margin exceeded guidance primarily due to 2 reasons. First, due to the epidemic, the company postponed the scheduled annual maintenance of some fabs. Second, the impact of the epidemic on the Tianjin and Shenzhen fab was lower than expected.
Revenue by region, Chinese Mainland and Hong Kong, China, North America, Europe and Asia accounted for 68%, 19% and 13%, respectively, with revenue growth in each region. Wafer revenue by application, smartphones, smart home, consumer electronics and other categories accounted for 29%, 14%, 23% and 34%, respectively, with revenue growth of 10% to 30% for each category, while smartphones and consumer electronics accounting for a decline and our smartphone and other category accounting for an increase in line with the company's judgment on market demand and capacity allocation deployment.
[Foreign Language]
[Interpreted] In the second quarter, the company expects revenue to increase 1% to 3% sequentially and gross margin to be in the range of 37% to 39% due to the deferral of annual maintenance at some fabs into the current quarter and the short-term impact of the epidemic on utilization at the Shanghai fab. Gross margin is expected to be down sequentially, also due to the gradual reflected impact of increase in depreciation of new capacity and higher cost of raw materials and labor.
The current impact of epidemic on the production of the Shanghai fab will be remedied gradually through subsequent accelerating of production and output growth of other fabs. This year's CapEx and expansion of capacity is progressing as planned. The company added 28,000 8-inch equivalent wafers monthly capacity in the first quarter. It is expected that by the end of this year, the capacity increment this year will exceed that of last year.
[Foreign Language]
[Interpreted] Since the first quarter, the company starts to disclose the revenue contribution of 8-inch and 12-inch, respectively. 8-inch covers the processes from 0.35 micron to [ 90-nano ], while 12-inch covers the processes from 90-nano to FinFET. This kind of disclosure is more in line with the company's operation flexibility and business features with same fab running multiple nodes and applications.
[Foreign Language]
[Interpreted] All in all, the hit from the epidemic and the local war in Europe has been mitigated correspondingly without much impact on the company, but the impact on the logistics supply chain has disturbed the existing business lines and the structural shortage has become intensified. Overall, customer demand remains strong and the company's capacity is expected to remain tight throughout this year. The company will continue strategy of seeking progress in a stable manner, keeping its feet on the ground and walking the talk to fulfill its promises to customers.
Finally, we would like to thank all employees, customers, suppliers, investors and community for their trust and support. Thank you all.
[Foreign Language]
[Interpreted] Thank you, Dr. Zhao. Next is our Q&A session. Questions will be answered by Dr. Gao and Dr. Zhao. Chinese questions will be answered in Chinese. English questions will be answered in English. Please limit your questions to 2 per person.
I would now like to open up the call for Q&A. Operator, please assist.
[Foreign Language] [Operator Instructions] First question comes from the line of Randy Abrams from Credit Suisse.
Good job managing through the COVID-19 so far. The first question I wanted to ask on the 1% to 3% growth, how much you view sales impacted by the COVID-19 disruptions? And for the gross margins, how much impact from the maintenance you discussed? And as we look at second half, as you come out of that, should we expect the sequential growth to ramp a bit faster?
Randy, thank you for the first questions. Talking about the numbers for revenue growth, only showed up to 1% to 3% in the second quarter. And we said that because the postpone of the APM. Usually, for this kind of APM, it happens 2 to 3 days. But to the disruption of manufacturing can be up to 5 to 6 days. And ratably, you can calculate 5 to 6 days divided by 92 days in the second quarter, more or less, that's the impact for the production.
And for the gross margin from this kind of pandemic, we haven't got the detailed numbers, but we do see some delays, some disruption on the wafer start during this kind of pandemic, timing. Until today, we are still in the process of this kind of differencing pandemic, haven't finished yet. So, we can't give exact number, but we already put enough buffer there for this kind of forecast.
A follow-up on that question. The 5 to 6 days, do you make that up? Or like should we see third quarter, you would have a normal quarter plus you can make some up? And then could you give an update how capacity would sequentially ramp up in the coming quarters since you've been...
I'll give you that. Yes, I'll come to that, Randy. Usually, for this kind of APMs, annual preventive maintenance and this kind of pandemic interruptions and the time's gone, just gone, but we do not have any canceling of customer orders. That means we will use the future days, future months to expedite the manufacturing to recover this kind of [ pure ] gaps. Basically, we have additional capacity either on to the existing capacity.
Just now we mentioned that for the first quarter, we have 28,000 per month type of addition of capacity normalized. And we believe that we will have a similar capacity add-on in the second quarter. By doing that, by making that, we will have additional capacity to recover the capacities we lost in the first quarter. So more or less, we promise to customers that and we do not have any canceling of the wafer orders and we will make up the shipments in the coming days.
And by the simple calculation, you ask that whether or not removing this kind of APM effect after the finish of this pandemic fighting was our revenues, our gross margin. More or less, when you compare the first quarter and second quarter gross margin, you'll come to the point that without this kind of APM, without this kind of pandemic fighting, how much we can recover. But we do factor in additional factors that one is additional capacity with a higher depreciation ratio. For existing capacity, they already have a certain part of machines are already out of the depreciation period and so the idle capacity got a higher depreciation ratio.
And the second factor, even though small, but is still factor in is the additional price rising for the material. For the first quarter, more or less, we still have a lot of wafer started in the last quarter last year and we also have a lot of materials parts, they are stocked last year, so they have a lower price. But our refurbishing materials, they come in, they have a higher price. Normalized this year the incoming materials, consumable materials, they have a 10% higher price than that of last year. So, when we factor in these kind of factors and then we can come to the revenue growth and gross margin recovery.
And if I could ask one more just on the customer momentum because you mentioned tight through the year. We've noticed they have been growing quickly on revenue, but also have been building up inventory as well. What's your take on the inventory levels and feedback from customers if they want to keep the levels where they are or start to deplete inventory and could that be a headwind?
Yes, Randy. Just now, if you notice the numbers we shared with everyone and the mobile phone ICs are already lower down to 29% only. This mobile phones, smartphone type of things used to account for 50%, 40% something of a foundry revenue, but to SMIC, it's already lower than 30%. That means we already adjusted capacity to this area a lot. Basically, we should say for smartphones, consumer products, PCs and Internet, this kind of area, they jump like a rock very seriously. Some customers hold on [ 50, no 50 -- 5-month ] type of inventory on the supply chain to the mobile phones. For this kind of area, the oversupply is very serious and they are happening very quickly.
Currently, at the meeting time of today, I really believe they are -- they already happened in a very serious situation of the high inventory. And this kind of customer, more or less, they already stopped the wafer ordering, they already stopped the shipments of the wafers. But even for these kind of mobile phones, consumer PCs area, there are still some parts are still in a very big shortage like the power management, like the AMOLED drivers and like analog related. And also the others IC parts for the industrial and new energies like MCUs, like Wi-Fi 6, like the power management, they are still in a huge shortage.
So, just now we say that at this moment, we already find, already saw a certain area in a very big oversupply. Some of the customers are holding more than 5-month type of inventory. But in the other area, the parts are still in a very big shortage. And we should say that the power management, analog, MCUs for the industry, for the electric cars, for the green energies, they are still in a very big shortage and for the Wi-Fi 6, for the IoT, they are still in relatively short type of supply.
But another thing I'd like to share with you is the market difference. If the customers only serve Chinese markets, they possibly already in the over inventory stage. If the customer handles a lot on the recovering markets of the United States and the European and the other overseas markets, they possibly in a very good situation. We really see a very quick recovery of the American markets, European markets, overseas markets, but we are seeing the static and over inventory stage of Chinese markets.
Randy, that's my answer.
I'll move on to the next question from Szeho Ng from China Renaissance.
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Next question comes from the line of Leping Huang from Huatai.
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Next question comes from the line of Andrew Lu from Sinolink Securities.
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[Interpreted] I would now like to hand the call back to Ms. Guo Guangli for closing remarks.
[Foreign Language]
[Interpreted] Thank you for participating in today's conference call. Thank you for your trust and support.
[Foreign Language] This concludes SMIC's first quarter webcast conference call. We thank you for joining us today. You may disconnect.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]