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Semiconductor Manufacturing International Corp
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[Foreign Language] Welcome to the Semiconductor Manufacturing International Corporation's Third Quarter 2020 Webcast Conference Call. Today's call is hosted by Dr. Zhou Zixue, Chairman of SMIC; Dr. Zhao Hai jun, Co-Chief Executive Officer; Dr. Liang Mong Song, Co-Chief Executive Officer; Dr. Gao Yonggang, Chief Financial Officer; and Ms. [indiscernible], Board Secretary. Today's call will be live streamed through the Internet at SMIC's website. Webcast playback will also be available approximately 1 hour after the event. [Operator Instructions] Today's format will be in both Chinese and English.
[Foreign Language] Without further ado, I would like to introduce to you Ms. [indiscernible], Board Secretary for the forward-looking statement.
[Foreign Language] Good morning, and good evening. Welcome to SMIC's Third Quarter 2020 Earnings Webcast Conference Call. Today, our Chairman, Dr. Zhou will make opening remarks. Following our CFO, Dr. Gao, will highlight our financials and give future guidance. And then our co-CEOs, Dr. Zhao and Dr. Liang, will provide business commentary.
This will be followed by our Q&A session hosted by Dr. Zhao, Dr. Liang and Dr. Gao. As usual, our call will be approximately 60 minutes in length. To meet the needs of domestic and foreign investors, the format of today's earnings call will be as follows: the management team will provide their commentary in Chinese and Investor Relations will translate to English. And for the Q&A session, we will accept questions in both Chinese and English.
[Foreign Language] The earnings release and presentation are available at www.smics.com. Let me remind you that today's presentation includes forward-looking statements that are not guarantees of future performance but represent our estimates and are subject to risk and uncertainty.
Please refer to the forward-looking statement in our press release. Today's earnings statements use International Financial Reporting Standard, IFRS, but we will also reference financial measures that do not conform to IFRS in order to help investors compare SMIC's past performance. Please note IFRS measures may be different than similar data presented by other companies. Please refer to the tables in our press release. Please note that all currency figures are in U.S. dollars unless otherwise stated.
[Foreign Language] I will now turn the call over to our Chairman, Dr. Zhou.
[Foreign Language]
[Interpreted] In July 2020, SMIC listed on the Shanghai Stock Exchange Science and Technology Innovation Board, opening a new chapter in the company's development. This year also marks its SMIC's 20th anniversary. On behalf of SMIC, I would like to express our heartfelt and sincere sense to our customers, suppliers, investors and the society for their trust and support over the years.
[Foreign Language]
[Interpreted] Since its founding, SMIC has consistently focused on improving core competitiveness and company value, enriching product portfolio and expanding technology platforms. In the past 2 decades, our production capacity has expanded steadily. Revenue has grown continuously, customers diversified and reputation sound. We have built more effective management, R&D, operations and support teams and accelerated innovation and development.
[Foreign Language]
[Interpreted] As the first red chip company listed on both the Asia and Hong Kong market, SMIC has received extensive attention and support from capital markets at home and abroad. The company has always attached great importance to the interest of investors, disclosed this information in accordance with the regulatory requirements of all relevant jurisdictions and further improved the level of corporate governance so as to protect the rights and interest of investors.
[Foreign Language]
[Interpreted] In recent years, China's IT industry maintained good growth. However, in the area of FinFET technology, there is still a clear gap between mainland China's companies and the industry's top-tier peers in terms of equipment, technology and talent.
[Foreign Language]
[Interpreted] The fragmentation of the global industry supply chain and high-end continuous investments are unique characteristics of foundry industry. As the largest foundry in scale in Mainland China through study and analysis of long-term market demand, the company has driven a continuous development cycle of its old and new fab based on 20 years of operational experience. And we steadily expand production capacity, improve operational efficiency, optimize our product portfolio and strive to enhance the competitiveness of the company.
[Foreign Language]
[Interpreted] This year, the global economy has slowed down, which ultimately result in some negative impact to the end demand of the semiconductor industry. However, the unfortunate epidemic has also led to the emergence of new formats, models and applications, which has ushered in a booming market opportunity. This year, customer demand continued to be strong, and the company continued to maintain high utilization.
In the ever-changing macro environment, we are pleased to see that our third quarter performance continued to reach new record highs. We have also raised our annual revenue guidance up to 24% to 26%.
[Foreign Language]
[Interpreted] Currently, the international situation has become increasingly complex. SMIC is a foundry that serves diverse customers domestic and overseas. Since its inception, SMIC strictly operates in compliance with the laws and regulations of all jurisdictions in which it operates. We feel deep regretting regard to U.S. export restrictions.
At present, the company is operating as usual. And though the export restriction will have an impact on SMIC in the near term, we believe it's manageable. We will continue to follow-up on this matter and further evaluate the impact. The company will maintain close cooperation with suppliers and customers. And continue to maintain active communication with the relevant department of the United States government working to resolve possible differences.
[Foreign Language]
[Interpreted] The world has entered the Internet of everything era. The interest of all countries are closely tied and their outcomes are shared. Although the current global trade situation has many uncertainties, and the external environment is becoming more complex, we believe that the pace of innovation and development in the semiconductor industry will continue.
In the long run, the demand for the IC industry remains strong. And challenges and opportunities coexist. SMIC will continue to pursue openness, cooperation, development and successful collaboration, deepening cooperation with domestic and foreign customers, suppliers and partners contributing to promote the development and innovation of the semiconductor industry. Thank you.
[Foreign Language] Thank you, Dr. Zhou. I will now hand the call over to our CFO, Dr. Gao Yonggang, for financial highlights.
[Foreign Language]
[Interpreted] Thank you, Dr. Zhou and [ Gani ]. Greetings to all our listeners. Please be reminded that all earnings figures are prepared in accordance with IFRS, unless otherwise stated.
First, I will highlight our third quarter results and give the fourth quarter 2020 guidance.
[Foreign Language]
[Interpreted] Our third quarter 2020 revenue reached another record high of $1,083 million, an increase of 15.3% sequentially and 32.6% year-over-year. Mainly due to strong customer demand and sequential increase in wafer ASP. In addition, incremental growth in other revenue was also another major driver for the revenue increase.
Our third quarter 2020 gross profit also hit another record high of $262 million. Gross margin was 24.2%, higher than original guidance mainly due to better product mix and growth in wafer ASP and other revenue. Gross margin was sequentially down mainly due to higher depreciation and amortization in the third quarter 2020.
[Foreign Language]
[Interpreted] Non-IFRS operating expenses were $215 million, lower than guided range, mainly because of the control of R&D and G&A expenses. Profit for the period attributable to SMIC was $256 million, another all-time high, while noncontrolling interest was $7.15 million of debt to SMIC's attributable profit. EBITDA also achieved a record high of $653 million and increased 40.3% sequentially.
[Foreign Language]
[Interpreted] Moving to the balance sheet. At the end of third quarter, cash on hand, including current financial assets and restricted cash was close to $12.3 billion. Total assets were close to $29 billion, and total equity was around $21 billion, including noncontrolling interest. Gross debt-to-equity was 20.3% and net debt-to-equity was negative 38.4%.
[Foreign Language]
[Interpreted] In terms of cash flow, we generated a historical high of $719 million of cash from operating activities in the third quarter.
[Foreign Language]
[Interpreted] On July 16, SMIC listed on stock market and raised total net bonds close to RMB 52.5 billion, including the greenshoe option. According to our plan, RMB 18 billion will be used for SN1 project, RMB 17.7 billion will be used to supplement working capital, RMB 9.8 billion will be used for capacity buildup for non-FinFET technology. RMB 7 billion will be used as reserve funds for research and development of FinFET and non-FinFET technologies. We thank our domestic and overseas investors for your support and trust.
[Foreign Language]
[Interpreted] Now looking ahead into the fourth quarter of 2020. Our revenue is guided to be down 10% to 12% quarter-over-quarter, mainly due to, one, a decrease in wafer shipments; two, a decrease in other revenue. However, if you look at the midpoint of guidance, our revenue in the fourth quarter is expected to grow around 15% compared to the fourth quarter of last year.
Gross margin is expected to range from 16% to 18%, mainly because of, one, sequential decrease in other revenue; two, increase in depreciation and amortization; three, decrease in utilization to a healthy level.
Foundry is a CapEx-intensive industry with a long investment cycle, the initial introduction of products in the new fab line has negative impact to the overall profitability due to depreciation cost.
[Foreign Language]
[Interpreted] In addition, referencing industry practice, we will not provide guidance for non-IFRS OpEx and noncontrolling interest starting this quarter. However, I will give some color on the 2 index to help investors to better understand the outlook of the fourth quarter. Now IFRS OpEx is expected to have no big difference compared with third quarter, while losses to be borne by noncontrolling interest are expected to be substantially higher than previous quarters.
[Foreign Language]
[Interpreted] If you look into the year of 2020, we revised our annual revenue growth target of mid- to high teens to an increase of 24% to 26%. Our annual gross margin target remained to be higher than last year.
In terms of capital spending, we decreased our CapEx plan from $6.7 billion to $5.9 billion mainly due to, one, extended or uncertain delivery lead times of certain equipment from U.S. suppliers due to export restriction; two, delaying equipment moving schedule caused by logistics.
Annual depreciation and amortization is expected to be close to $1.3 billion. Annual EBITDA is expected to be close to $2 billion. This concludes the financial remarks. Thank you.
[Foreign Language] Thank you, Dr. Gao. I will now hand the call over to our co-CEO, Dr. Zhao Hai jun, for his business remarks.
[Foreign Language]
[Interpreted] Thank you all for joining us. This year is a very special year. The world has encountered a huge epidemic. Major customer has seen change and urgent demand has emerged in the market. In the third quarter and since the beginning of this year, SMIC continued to maintain high utilization, operating results were in line with expectations, and the full year is forecast to reach a growth of 24% to 26%. Recently, news of U.S. imposed export restrictions on SMIC has resulted in concerns with regard to the company's future development. I thank all of you for your consideration and reiterate that SMIC only provides products and services for civilian end users and has no military end users.
As an international foundry, SMIC strictly complies with the laws and regulations of all jurisdictions where we conduct business. Over the years, we have established good cooperative relations with well-known customers and semiconductor equipment suppliers in the United States and internationally.
After the event, we immediately issued an announcement sorted through the information with our suppliers and informed customers of possible risk. At the same time, we have communicated an exchange with relevant U.S. government departments. At present, the company is operating as usual. However, some U.S. origin equipment, parts and raw materials may have uncertain deliver lead times. We hope to build mutual trust through openness and transparency and restore normal procurement processes as soon as possible. We also thank our customers and suppliers for their trust and support.
Now I will briefly report our status of our non-FinFET technology platform operations in the third quarter. By product segment, power management, radio frequency signal processes, fingerprint sensors and image signal processor-related wafer revenue grew 8% quarter-over-quarter and 22% year-over-year.
Micro processors and specialty memory-related wafer revenue grew 6% quarter-over-quarter and 26% year-over-year. Looking at application market. The rapid upgrade to 5G mobile phones and the change of at-home work and study during the pandemic has triggered global acceleration of demand for Internet and consumer products. With revenue from smartphone, smart home and consumer electronics grew 13% sequentially and 25% year-over-year.
The fourth quarter will follow the trend of the first 3 quarters, maintaining strong demand for CMOS image sensors, image signal processor, IFP IoT, BCD power management and specialty memory. The capacity shortage is still significant for 14-nano, 65/55-nano (sic) [ 55/65 nano ] and 0.15, 0.18 micron process nodes.
Looking at industrial landscape and customer demand, it is expected that non-FinFET capacity will be relatively tight through the first half of next year for the whole industry. We will work hard to calculate our segmented product platforms to meet customer and market development needs.
[Foreign Language] Thank you, Dr. Zhao. I will now hand the call over to our co-CEO, Dr. Liang Mong Song for his business remarks.
[Foreign Language]
[Interpreted] Thank you, Hai Jun, and [indiscernible]. Thank you all for joining us today. This year is an unusual year for the semiconductor industry and SMIC. Everyone is very concerned about SMIC's current situation, as we stated in our previous webcast, we have always operated in compliance with the relevant growth and regulation of all jurisdictions where we do businesses.
[Foreign Language]
[Interpreted] Regarding export restrictions, we are actively communicating with the U.S. government and coworking with our U.S. suppliers to apply for the required export licenses for certain U.S. equipment, parts and raw materials in accordance with relevant laws and regulations.
[Foreign Language]
[Interpreted] We are keeping communication channels open and are in close contact with our customers and suppliers to reiterate our robust client procedures. While export restrictions may lead to extended lead times or uncertainty, we are still evaluating the overall impact.
[Foreign Language]
[Interpreted] I would like to share some details on our current FinFET technology progress. As the pure-play international foundry, we provide services to a variety of commercial and civilian customers. Our first-generation FinFET technology 14-nano platform is relatively compressive. Our product covers a wide range of applications, including, but not limited to, communications, consumer, computer, IoT, auto and others.
[Foreign Language]
[Interpreted] Last year, 14-nano process entered into mass production in the fourth quarter, and our yield has already reached industry standards as we showcase our ability to execute in research and development. Customers' confidence in SMIC's technology capability has also gradually increased. We will continue to enhance the competitiveness of our products and services enjoying more customers locally and abroad.
[Foreign Language]
[Interpreted] Our second-generation FinFET technology, N+1 is progressing steadily. Our N+1 process is undergoing customer verification and entering small volume risk production. This product will be mainly used for high-performance computing applications.
[Foreign Language]
[Interpreted] As compared to the first generation FinFET technology, our second-generation FinFET technology platform is driven by lower cost, more engaged customization. And when comparing to our 14-nano process, the performance is improved by 20%. Power consumption reduced by 57%, logic area reduced by 63% and SoC area reduced by 55%.
[Foreign Language]
[Interpreted] Overall, we are currently working on more than a dozen FinFET tape-out projects for technologies 14-nano and below with both domestic and overseas customers. We believe with the rise of 5G, IoT and digitization in schools and workplaces, there will be huge market opportunities for the IC industry.
[Foreign Language]
[Interpreted] To promote innovation and development, the company will continue to push forward with our R&D activities so we can meet the needs of our customers and growing digital consumer market. The development of these new nodes and projects take time. We will expand our FinFET technology one step at a time.
[Foreign Language]
[Interpreted] In terms of capacity, we commit to prudent planning to build capacity based on the market and our customers' demand. As a foundry, we are actively engaging with global customers to create a more diversified customer and product portfolio.
[Foreign Language]
[Interpreted] Our FinFET technology capacity is comparatively small in scale, and our expansion is relatively steady. At the same time, for equipment that may be adversely impacted by export restriction, we are actively resolving the issues and coming up with corresponding solutions with our suppliers.
[Foreign Language]
[Interpreted] To conclude, we have reached our R&D milestones for this year, and I want to take this opportunity to thank our team for their hard work and perseverance. Although, we have accomplished certain achievements in the R&D and operations of FinFET technology, we are still lagging behind the top-tier peers in terms of technology. There is still a long way to go. We are an independently operated and international foundry, and we endeavor to serve the global customers.
[Foreign Language]
[Interpreted] Although, we are now facing some difficulties, we are actively responding and carefully assessing the overall impact of the export restrictions and corresponding solutions. We will continue to pay close attention to this matter and will share further information as appropriate if there are any significant changes of progress.
[Foreign Language]
[Interpreted] We thank you for your continued support, and thank you for joining us today. I will now turn the call over to [indiscernible] for Q&A session.
[Foreign Language] Today's Q&A will be hosted by our co-CEOs, Dr. Zhao and Dr. Liang; and our CFO, Dr. Gao. We will accept questions in both Chinese and English.
Questions asked in Chinese will be answered in Chinese. Questions asked in English will be answered in English. [Operator Instructions].
[Foreign Language] I would now like to open up the call for Q&A.
[Foreign Language]
[Operator Instructions]
Your first question comes from Randy Abrams from Crédit Suisse.
Okay. Yes. And I appreciate the updates on the business situation. My first question, you mentioned in the remarks, the restriction will have some impact near-term on SMIC. Could you elaborate with areas you see the impact in terms of revenue, capacity expansion or technology development?
Hi, Randy. Here is Hai Jun. I'd like to answer your question this way. The first impact is the schedule of the capacity expansion, and we do have some machines scheduled and just about to ramp-up in the fourth quarter and the first quarter next year. But now -- and we are still in the process of application. So -- and we already have 2 month type of delay for certain type of machine like the high-energy implanter type of machines. That's the delay.
On the others, [indiscernible] we need to work together with our customers, and with this kind of delay on the expansion of capacity, how can we settle down their requirements in the fourth quarter and first quarter next year.
Hi. Randy, this is Mong Song. I will add on Hai Jun's comment on the technology development. Technology development side, there is a very limited impact. We would proceed as our plan, yes.
Okay. And if I could ask just 1 follow-up to that and then I have a second. Are there any critical bottlenecks to maintaining production on mature 8-inch or 12-inch. And maybe now it's okay, but are there any bottlenecks if the restrictions continue that may open up a few quarters? Or do you expect you have the tools and spare parts to at least maintain your 8-inch and 12-inch operations?
Hi, Randy. Here is Hai Jun again. And we do not have immediate issues for the short term. But in the long run, you know that certain type of material, especially for the consumables, cannot be stored for very long time. So currently, I worked together with our suppliers, including the second of suppliers and -- to get solutions to this kind of concerns. So far -- and both parties are working together, and including our counterparts in the United States. And we have concerns, but we have the confidence that we can resolve it without impact on the normal production of -- and running so far in the factories and no impact to the deliveries to our customers.
Okay. Great. And then my second question on the fourth quarter sales decline your growth in third quarter was led by advanced nodes, 40, 28, 14. For fourth quarter, would advance nodes pull back more and maybe the reason? And also, could you discuss the other revenue that grew in third quarter and now declining in fourth quarter?
Randy, you already mentioned that the decline on the advanced technology part, mainly cover on the other revenues. And the other revenues are actually this way, and SMIC, if you see the third quarter, actually, it's very special. That means there are urgent requirements on the delivery, the customer has deadlines to deliver these kind of products. So we have to slow down certain type of the other products, we know they're urgent. And get everything done to your customer requests in the third quarter. So that means if we swap certain type of capacity and the products in the third quarter and make it third quarter so high and the other quarter -- fourth quarter seems lower. But if we normalize the 2 production and the loading situation in SMIC suffers, actually, we are very normal running. And floating in fourth quarter, floating in the third quarter, it's just swapping. And that's why I mentioned the -- that part.
And another thing, other revenues also means certain part of a turnkey and our subsidiaries in the back end wafer bunking this kind of revenues. And they also have this -- the same patent that means we were putting in, they do more. And when we finish that part, they also recover to normal.
Okay. And to follow-up, do you expect to recover or rebound the other in advanced technology after the fourth quarter pull back?
Hi, Randy. In advance technology the customer need to take about a year and 1.5 years to start from design to the production. So when we cannot serve for a key customer, existing key customers' production and it may take some time, a few quarters to recover our utilization in advanced technology production.
Your next question comes from Szeho Ng from China Renaissance.
[Foreign Language]
[Foreign Language]
[Foreign Language]
[Foreign Language]
Your next question comes from Huang Leping from CICC.
[Foreign Language]
[Foreign Language]
We've got time for one final question. And your last question comes from Chen JunJie from Tianfeng Securities.
[Foreign Language]
[Foreign Language]
[Foreign Language]
[Foreign Language]
[Foreign Language] I would now like to hand the call back to Ms. [Indiscernible] for closing remarks.
[Foreign Language] In closing, we would like to thank everyone who participate in today's call. And again, thank all of you for your trust and support. Thank you.
[Foreign Language] This concludes SMIC's third quarter earnings 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.]