Semiconductor Manufacturing International Corp

HKEX:981

Earnings Call Transcript 2022-Q2

[Operator]

[Foreign Language] Welcome to Semiconductor Manufacturing International Corporation's Second Quarter 2022 Webcast Conference Call. Today's call will be simultaneously streamed through the Internet and telephone. [Operator Instructions]

Without further ado, I would like to introduce Ms. Guo Guangli, Senior Vice President, Board Secretary and Joint Company Secretary of the company to speak.

[Guang Li Guo, executive]

[Foreign Language] Greetings. Welcome to SMIC's Second Quarter 2022 Webcast Conference Call. Today's call are hosted by Dr. Gao Yonggang, Chairman; and Dr. Zhao Haijun, Co-Chief Executive Officer.

Let me remind you that today's presentation may contain forward-looking statements that do not guarantee future performances but represent the company's expectations and are subject to inherent 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.

Next, I will introduce the company's financial status. First, I will report our unaudited financial results for the second quarter and the first half of 2022, followed by our guidance for the third quarter.

The second quarter's financial results are as follows: revenue was $1,903 million, up 3.3% sequentially and 41.6% year-over-year. Gross margin was 39.4%, down 1.3 percentage points sequentially and up 9.3 percentage points year-over-year. Profit from operations was $539 million, up 0.6% sequentially and 0.3% year-over-year. EBITDA was $1,220 million, a record high, up 7.4% sequentially and 3.7% year-over-year. Profit attributable to the company and non-controlling interest were 514 and $115 million, respectively.

Moving to the balance sheet; at the end of the second quarter, the company had total assets of $40.5 billion, of which total cash on hand was $18.6 billion. Total liabilities was $13.1 billion, of which total debt was $7.3 billion. Total equity was $27.3 billion. Total debt to equity was 26.5% and net debt to equity was negative 41.6%.

In terms of cash flow in the second quarter, we generated $2,122 million cash from operating activities. Net cash used in investing activities was $681 million. Net cash from financing activities was $1,228 million.

[ Above is ] the company's financial results for the second quarter. Accordingly, the unaudited financial results for the first half of 2022 are as follows: Revenue was $3,745 million, up 53% year-over-year. Gross margin was 40.1%, up 13.3 percentage points year-over-year. Profit from operations was $1,075 million, up 52.4% year-over-year. Profit attributable to the company was $962 million, up 13.6% year-over-year.

For the third quarter 2022, our guidance is as follows: revenue is expected to be flat to up 2% sequentially, and gross margin is expected to be in the range of 38% to 40%. The full year guidance for 2022 remains unchanged.

This concludes the financial statement. Next, I will hand the call to Dr. Zhao Haijun to comment on market, operations and technology platforms.

[Haijun Zhao;Co-Chief Executive Officer, executive]

[Interpreted]

Hello, everyone. Thank you for attending the second quarter earnings call.

In the first half of 2022, the IC industry supply chain entered affected by 2 overlapping cycles. The first is the macro cycle, which is experiencing global economic growth slowdown. The global economic growth is under relatively big pressure and consumption momentum is weak due to the effect of multiple factors, including the permit impact, high inflation and regional conflicts overseas.

The second is the semiconductor industry down cycle, which has entered a phase where the overall supply and demand have gradually balanced and some segments have entered a phase of destocking after accelerated consumption over the past few quarters and expansion of manufacturing capacity. The interaction of the current due cycles has brought some panic and uncertainty to the market and some parts of the industry supply chain have even seen extreme quick freeze reaction.

In the current overlapping cycle, there is a structural divergence trend in different areas of applications. Smartphones are still digesting inventory. Consumer electronics demand is weakening, while demand in automotive, electronics, green energy, industrial controllers and other areas still maintain solid growth. SMIC has been planning ahead since last year to strengthen communication with customers, especially with high end user companies to thoroughly understand the actual market demand, strategically adjust capacity in advance, cut capacity in saturated markets, such as large screen LCD drivers, fingerprint and low-end CIS to avoid disorderly competition.

We increased the production capacity of differentiated platforms such as analog and mixed signal, including power management, high-end MCU, OLED full HD-display, WiFi 6, et cetera, to dynamically meet the rapidly changing market and fulfill the needs of different application scenarios of end users.

In the second quarter of this year, the company's revenue exceeded $1.9 billion, up 3.3% sequentially with a small increase in both shipments and ASP. Capacity utilization was 97.1%, and gross margin was 39.4%. In the May webcast, we estimated at the time, that the overall impact of the epidemic on output in the second quarter would be around 5 percentage points. In reality, due to the limitations on people's movement as a result of the epidemic, some of the fabs did not conduct annual maintenance in the second quarter, causing the overall impact of the epidemic on output to be lower than expected. Thus, revenue and gross margin in the quarter slightly exceeded guidance.

By region, revenue from Chinese Mainland and Hong Kong China, North America, Europe and Asia in the second quarter accounted for 69%, 19% and 12%, respectively, with no major changes from the previous quarter. Wafer revenue by application, smartphone, smart home, consumer electronics and others accounted for 25%, 16%, 24% and 35%, respectively, with smart home growing 24% sequentially, driven by demand for wireless network, routers and other local area network connectivity.

Consumer electronics grew 8% sequentially, driven by incremental demand in high-end analog and MCU platforms. The industrial subsegment in others grew 18% sequentially. By application, only smartphones saw revenue decline of 7% sequentially, due to market destocking. By size, wafer revenue for 8-inch and 12-inch accounted for 32% and 68%, respectively. Overall, the revenue structure in the second quarter was in line with the company's expectations of market demand and deployment of capacity allocation.

In the third quarter, the company's overall capacity utilization is expected to remain at a healthy level, and ASP is expected to be firm. Revenue is expected to be flat to up 2% sequentially with gross margins in the range of 38% to 40%.

The company will continue to carefully monitor and analyze the market trends and make quick responses based on the company's characteristics to adjust the company's tactics, business focus and product portfolio in a timely and effective manner.

First, we take full advantage of the flexibility of our manufacturing lines and diversity of our technology platforms. Our production capacity is able to switch between different nodes in one fab, running multiple product platforms at each node. Although our market share is relatively small, our customer count and platform variety are almost the largest in our industry. And because of these flexibilities, we are relatively quick to react to market change.

Second, through the implementation of a multipronged approach by optimizing high value-added technologies and products, prioritizing the resolution of bottlenecks, increasing the capacity of the mass shop, cooperating with the company's design service IT development. We accelerated the development and introduction of new products, solidify the product portfolio and make competitive products that others cannot do well.

Third, optimize customer structure on a solid customer base and their diversified business areas. On one hand, we strengthened cooperation with top customers and those who have the most potential to become top customers in the incremental market, to enhance customer stickiness. On the other hand, we continue to serve global customers. During industry cycle fluctuations, demand in different regions may not be synchronized on the timing of a drop for various reasons, and the magnitude of the dip may not be the same. SMIC relies on its own global presence and that of its customers to flexibly deploy capacity according to the demand of different regions and different customers and to deal with uncertainties caused by headwinds.

We believe that the structural shortage in some segments will continue in the second half of the year. We will speed up the pace of adjustments, balancing strength and bottlenecks of each fab to allocate more capacity into corresponding platforms that are ensured supply, making less of the products in oversupply and more of the products with good demand, technological innovation and good pricing.

Following, I will speak briefly about capital expenditures and capacity expansion. In the first half of the year, the company spent a total of $2.5 billion on capital expenditures and increased its 8-inch equivalent capacity by 53,000 wafers per month, which is in line with the expectation and the new projects are progressing as planned. The company will continue to adhere to the principle of prudent planning and will invest and expand capacity based on market and customer demand.

Since its establishment 22 years ago, SMIC has experienced the ups and downs of many cycles, at different stages of cycles. The company has had deep experience on how to respond in the short term and how to plan in the long term. At present, it seems that this cycle adjustment will last at least until the first half of next year. And when it will end, depends on the macroeconomic trends, the pace of consumer demand side recovery as well as industry destocking. However, what is certain is that the IC industry's demand growth and global localization trend, as well as the long-term logic of indigenous wafer manufacturing remain unchanged. Although there are short-term adjustments. We remain confident in the company's medium to long-term growth.

Finally, we would like to thank all employees, customers, suppliers, investors and the community for their trust and support. Thank you all.

[Unknown Executive]

[Interpreted] Thank you, Dr. Zhao. Next is our Q&A session. Questions will be answered by Dr. Dr. Zhao and Ms. Guo. 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.

[Operator]

[Operator Instructions] Our first question comes from the line of Randy Abrams from Credit Suisse.

[Randy Abrams, analyst]

[Audio Gap]

changing environment. The first question on the cycle adjustments. Could you discuss the impact on your utilization in the coming quarters from these adjustments? And if you could elaborate a bit more on your view, the adjustments continue at least through first half? And just taking it into applications, what's your view on the areas correcting early smartphone consumer, whether you get stabilization? And then the view on the more resilient applications, if you see risks that -- adjustments start spreading to those areas?

[Haijun Zhao;Co-Chief Executive Officer, executive]

Randy, thank you for raising the first question. About these adjustments of the markets, the first thing is how deep the adjustments, the second is when we possibly see the recovery or the stabilization. Currently, we see -- the biggest area for the inventory correction is on the mobile phone area, latest smartphones. The sales from the data recently I got, the total sales of about 17% jump. But this kind of 17% jump in the first half year, mainly happens in April and the May timeframe. That makes that kind of a [ month ] about 30% jump in sales, especially for the Chinese smartphone makers.

And then more or less the demand jumped by half. But because clearly they have a very big chunk of inventory, they do not need any additional chips from the markets that triggered a panic in the supply chain. So we see a lot of orders just get stopped, mainly for the supply of the smartphones.

On the consumer side, we mainly see the very big panel, because the supply chains get a lot of capacity to supply the LCD driver ICs for the large panel, like TV, [indiscernible] these kind of products.

And that area got a lot of price erosion. That's the area we see. The other areas, the segments like industry, like automotive, like high end of analog power, high end of connectivity, the demands are still very strong. More or less, we can still say, they are in a very [indiscernible] short supply type of situation.

Overall, we also see that, for the industry leaders that maintain very strong demands and for overseas markets, just last time we mentioned and they also got a recovery from last year, so their demands are increasing. More or less, that's the situation. And our belief that this kind of adjustment currently possibly gets into the worst case, and when we near the end of this year, every company, decision makers, mobile phone makers, headphone makers, automotive makers, they all plan for the next year.

At that moment, if the plan for next year is good, they will start to get better inventory, they start to put in orders. We believe the first [ changing ] point is the end of this year, -- and when we get through the Chinese New Year timeframe, next year, in February, and we will see the overall economics, whether or not they get stronger, and there's the recovery of the total demand.

[Randy Abrams, analyst]

Okay. Great. That's helpful. Just one quick follow-up on the first one and then I'll ask the second. Just for your business, as we get to kind of the worst, if you could give a rough feel for the utilization or shipment, how it may hold up into like fourth and first quarter? And then the second question I have on the pricing environment and your long-term agreements, just given some channels panicking, just a view on the pricing environment, how it's holding, how many LTAs are holding up. And in your view, you've kept margins quite solid, but your view on margins as you go through the worst of the adjustments?

[Haijun Zhao;Co-Chief Executive Officer, executive]

Yes, Randy. At this moment, the third quarter, we already gave the forecast, our capacity, the utilization is more like the same as the last quarter. It's more or less to the very high level, very healthy. And we cannot see very clearly for the fourth quarter. And by industry's consensus I read very carefully from our customers and other companies' reports, and they are expecting about 10% type of [ cross creation ] in the utilization.

[Randy Abrams, analyst]

Great. And then on the pricing and the margin?

[Haijun Zhao;Co-Chief Executive Officer, executive]

On the pricing, just now I mentioned like the LCD drivers for the large panel and for the smartphones, smartphone needs a lot of ICs like CMOS-imager like fingerprint, these kind of products and their price will go low, if they like to maintain their market share because the demand have already jumped. Just now I mentioned this year, the first half, the total sales of mobile phone lowered by 17%. That's the published data and definitely the inventory getting higher, and in order to sell -- to sell ICs to the mobile phone makers, currently, the only way to do that is to lower the price, I mean, the product makers. And if that's the case, they will drop the price. Definitely, they come back for foundry service. They need to drop the price also. But it mainly comes to that kind of we call that commodity products. But for the other products, I really believe their pricing will be very firm. And for the LTA contract makings, the price will be there, no change.

[Randy Abrams, analyst]

So you may have some change on the weaker segment. So factoring utilization drop in some areas in pricing, should we factor gross margin like towards low to mid-30s, or do you think it can hold with your shift into some of the better areas and still tight areas?

[Haijun Zhao;Co-Chief Executive Officer, executive]

The utilization impact is not that big for the gross margins, roughly 1:1 type of things. And at this moment, sorry, I really cannot give too much information on the fourth quarter. We are working very hard to communicate with our customers, and we are starting the overall market situation. I guess [Technical Difficulty] to talk too much on the fourth quarter.

[Operator]

[Foreign Language] Our next question comes from the line of Szeho Ng from China Renaissance.

[Szeho Ng, analyst]

[Foreign Language]

[Haijun Zhao;Co-Chief Executive Officer, executive]

[Foreign Language]

[Szeho Ng, analyst]

[Foreign Language]

[Haijun Zhao;Co-Chief Executive Officer, executive]

[Foreign Language]

[Szeho Ng, analyst]

[Foreign Language]

[Haijun Zhao;Co-Chief Executive Officer, executive]

[Foreign Language]

[Operator]

[Foreign Language] Our next question comes from the line of Leping Huang from Huatai.

[Leping Huang, analyst]

[Foreign Language]

[Haijun Zhao;Co-Chief Executive Officer, executive]

[Foreign Language]

[Leping Huang, analyst]

[Foreign Language]

[Haijun Zhao;Co-Chief Executive Officer, executive]

[Foreign Language]

[Leping Huang, analyst]

[Foreign Language]

[Haijun Zhao;Co-Chief Executive Officer, executive]

[Foreign Language]

[Operator]

[Foreign Language] Our next question comes from the line of [ Jingxiang Zhou from Guosen ].

[Unknown Analyst]

[Foreign Language]

[Haijun Zhao;Co-Chief Executive Officer, executive]

[Foreign Language]

[Unknown Analyst]

[Foreign Language]

[Haijun Zhao;Co-Chief Executive Officer, executive]

[Foreign Language]

[Unknown Analyst]

[Foreign Language]

[Haijun Zhao;Co-Chief Executive Officer, executive]

[Foreign Language]

[Unknown Analyst]

[Foreign Language]

[Haijun Zhao;Co-Chief Executive Officer, executive]

[Foreign Language]

[Operator]

[Foreign Language] Thanks to all for your questions. I'd now like to hand the call back to Ms. Guo Guangli for closing remarks.

[Guang Li Guo, executive]

[Foreign Language]

Thank you for participating in today's conference call. Thank you for your trust and support.

[Operator]

[Foreign Language] This concludes SM Second Quarter Webcast Conference Call. We thank you for joining us today.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]