GlobalWafers Co., Ltd. (6488) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to GlobalWafers Co., Ltd. 2020 Q1 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would like to hand the conference over to your first speaker today, Mr. Haas Liu. Thank you. Please go ahead.

Thank you, Karina. Welcome to GlobalWafers' First Quarter 2020 Earnings Conference Call. This is Haas Liu, semiconductor analyst for Crédit Suisse and your host for the call with management today. I am pleased to be joined by Doris Hsu, the Chairperson and CEO; and William Chen, Vice President and spokesperson for GlobalWafers. During the call, we will start with an executive summary by Doris and followed by the review of 1Q financial results by William. We will then open the call for Q&A with Doris and William. [Operator Instructions] Also note that the company will have a replay on its website after the conference. As usual, we would like to remind everybody that today's discussions may contain forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. And now I'm pleased to turn the call over to Doris. Please go ahead with your summary and the outlook. Thank you.

Thanks, Haas. Hello, everyone. Welcome joining GlobalWafers' 1Q '20 Earnings Call. I'm William Chen, GlobalWafers' Vice President and the company's spokesman. We also have Doris Hsu, Chairperson and the CEO of GlobalWafers, in this call. Doris will give us the executive comments first, also COVID-19 impact. And then I will present industry overview and 1Q '20 performance update. The final Q&A session will be hosted by Doris. For today's material, same material we have just uploaded onto company web page around 2 hours ago. If you do not have the file on hand, please access into our website to get the most updated file. Please note that some information during our discussion today will consist of forward-looking statements, which are applied throughout the call and this presentation. These are subject to significant risks and uncertainties. Actual results or trend could differ materially from our forecast. Please refer to the safe harbor notice in our presentation, Page 2, Disclaimer. Now I'd like to hand over the call to Doris for the Page 3, executive comments and COVID-19 impacts. Doris, please.

Yes. Thank you, William. Good afternoon, ladies and gentlemen, for joining us today for GlobalWafers' First Quarter 2020 Earnings Presentation. I think from the very beginning, I would like to share some update of the COVID-19 -- impacts from COVID-19 and our view, our outlook post-COVID-19. I think like what IMF Chief Economist Gita Gopinath stated, this is a crisis like no other, which means that there is substantial uncertainty on the impact it will have on people's lives and livelihood. In general, GlobalWafers is doing pretty good in Q1, financial-wise and also operation-wise. As you might know well that GlobalWafers have 16 factories in 9 countries. All of our factories are running very well at high operation rate right now. However, in Q1, we did lose some working days in 2 factories due to COVID-19. One is in China, and the other one is in Malaysia. The China fab lost around 1-month working days in Q1 due to China lockdown policy. And the Malaysia fab lost around 50% of our operation for 1 month due to Malaysia government's special MCO, move and control order, policy. Both of those 2 factories are for 150 6-inch production lines. And now both of those 2 factories are back to full operation. None of our other 14 factories, including our 2 factories in Italy, had any shutdown in Q1 for this pandemic. Now all of our 16 factories are back to normal operation right now. Very fortunately, all of our colleagues are doing okay, and our material chemical supplies are -- all these supplies are all very stable in Q1 and also now. In the past quarter, I think the most challenging issues for GlobalWafers are the following 3 items. The first one is the transportation expenses surge. And the second one is high uncertainties, low visibilities of the second half 2020 macroeconomics and also the market demand. And the third one is foreign exchange volatility and also unfavorable FX development trend, strong NT dollar, Japanese yen and weak U.S. dollar. These development changes are very favorable to us, to the industry. Okay. So if you have our presentation material, could you please turn to Page 3? I will elaborate further details of our Q1 performance and our outlook in the second half of 2020. Up to now, macroeconomic, semiconductor market, silicon wafer market are in extreme flux. Forecast predictions, to be very honest, are just a temporary best guess from our viewpoint and many of customers' viewpoint. Highly dependent -- the future forecast is highly dependent on the unknown length and depth of COVID-19 impact. There are many lockdowns and MCOs in the world, but semiconductor industry has been designated as essential by many regulators of the world's major economies. As I said earlier, all GlobalWafers production sites are now operating normally. The need for medical supplies and remote office, remote home office, home education, peripherals are boosting demand for data equipment, servers and more MBs. Most of our customers are building safety stock now to mitigate wafer supply chain risks. This was one of the main reason of the strong demand for silicon wafer shipments in the first half of 2020. So far, the near-term demand picture is still unclear, and the economic impact resulting from COVID-19 pandemic cannot be quantified at this moment yet. However, the long-term industry trend is positive as the onset of 5G, edge computing, AIoT, Industry 4.0, et cetera, and so on and so forth, this will drive the demand growth steadily. The outlook for second half 2020 heavily depends on further developments of the COVID-19 pandemic. Market supply and demand could return to normal if the disease is well contained. So actually, we closely monitor the following 5 indexes for the recovery timing. Number one is that when the global macro economy will recover. And the second one is that when COVID-19 pandemic will be contained. The third is when the data industry will drive CapEx, new CapEx. The fourth is that when smartphone sales will recover. And the last one, last but not the least, is that when automotive sales will recover. So these are what we are monitoring very closely every day, every week, with every customer to verify that how soon -- to verify the timing of the recovery. The damage caused by the pandemic is huge, but we are not very pessimistic for the overall recovery. We think all of those aggressive stimulus plans implemented by governments to soften epidemic blow may bring a potential demand surge or even a V-shaped recovery at the second half of this year or 2021. So please move to Page 4. Let me share some quick summary of our first quarter 2020 financial results on Page 4 of the presentation material. Our Q1 ended with an uptick in wafer shipments versus Q4 last year. However, the logistic challenges resulted from COVID-19 and the subsequent restrictions measures such as the temporary shutdown of our China factory and Malaysia factory, these factors offset partially our profit. Our forecast for second quarter '20 wafer demand is very stable or very close to the first quarter. Our overall cash flow from operation for Q1 was TWD 3 billion, TWD 3.168 billion, or in U.S. dollar, it's about USD 105 million. That's our overall cash flow from operation in Q1. And our cash at the end of Q1 hit as high as TWD 35.5 billion or USD 1.17 billion. This reflects our correct operation strategy and our emphasize on the strength of our business model and financial moats. Okay. Let me move to -- quickly move to Page 6 of our presentation. This is a global GDP growth forecast predicted by IMF very recently. IMF predicted the great lockdown recession would be the steepest in almost a century and warned the world economy contraction and recovery could be worse than anticipated if the pandemic lingers or even returns. This is what we are very worried about. If the pandemic lingers or even returns, the world economy will be much worse and the recovery will be much more difficult to predict. That is the most concern. As long as the pandemic is contained, stimulus packages by all governments will help the market demand surge or even a very quick recovery, especially for semiconductor industry. With high cash position and global production footprint, I think GlobalWafer is well prepared for a V-shaped recovery. Page 7 is IMF's latest world economic forecast. Every -- each country, no matter advanced economics or emerging and developing economics, would have big impact on GDP from COVID-19 this year. And if the pandemic is contained soon enough, we will see a very sharp recovery on GDP in 2021. Worldwide GDP will improve from minus 3% in 2020 to plus 5.8% in 2021. So we think that the strong balance sheet will be very important for now. Strong balance sheet will be needed for post-COVID-19 CapEx spending. GlobalWafers will have itself well prepared for the quick recovery. Thank you very much again. My presentation is concluded here. William will elaborate further details of GlobalWafers' performance in Q1. Thank you very much for your attention. William, please.

Okay. Thank you, Doris. Let me continue the COVID-19 impact the rest of pages. So let's move to Page 8, IDC's projections for COVID-19 recovery. In this page, it is showing 4 different scenarios from IDC's projections for COVID-19 recovery. Regardless of which scenario emerges, the winners will be those who prepared to respond to the demands of emerging technologies like 5G, IoT, high-performance computing and the intelligent edge. GlobalWafers have the resources to withstand the current macro headwinds and stand ready to supply customers' demand. Page 9, the semiconductor industry's vital role in the COVID-19 pandemic. During this COVID-19 impact, we're fully aware that. First, semiconductors are necessary in every aspect of the economy, keeping infrastructure and the society functioning. Besides, semiconductors are widely used in critical infrastructure such as telecommunication, energy, finance, transportation and medical devices. Also, demand for digital services has risen during the quarantine and the stay-at-home period. Furthermore, semiconductors industry has been designated as essential by the regulators of the world's major economies. Page 10, GlobalWafers' COVID-19 countermeasures. Regarding GlobalWafers' countermeasures to COVID-19, we have, the first, build a safety inventory for all necessary raw materials to guard against supply chain disruptions. The second, maximize our ability to shift orders as needed between our global manufacturing sites, pending changes in local country quarantine policies. The third, risk management of our multi-tier supply chain to lower the dependence on one single area. The fourth, continuously reevaluate the financial and the market forecasts and take corresponding actions. The fifth, monitor how the competitive environment and the supply chain shift and then quickly adapt to the new norm. Page 11. COVID-19 brings immediate challenges. COVID-19 could be a catalyst for companies to revisit their global supply chain strategies. It could reshape the global supply chain. GlobalWafers will be well positioned from our multi-site production in multi-countries. Page 12, potential supply chain responses to COVID-19. From this COVID-19 impact, there are 2 potential supply chain responses. The first, deglobalization. About our view, GlobalWafers supplies globally and locally. Our global footprint is the best contingency plan to minimize global uncertainty. Our multi-resources in multi-countries are the contingency plan. We have local supply to mitigate macro instability and geopolitical tension. We have agility to allocate worldwide capacity for faster time to market. Page 13. The second, China seeks to enhance its domestic supply chain. Our view is the Chinese new commerce development will take time and efforts. Besides, there is an R&D gap existing. Also, IP concerns and the existing industry partnerships will be a significant entry barrier for newcomers. Next, I'm showing some positive outlook of industry overview, even recent COVID-19 severely impacting. Page 15, part of tech sectors boomed in 1Q '20. As business were suddenly forced to equip a newly remote workforce, some parts of the tech supply chain benefited from work from home and the remote office, home office associated demand. Page 16, worldwide public cloud revenue. The worldwide public cloud services market is forecast to grow 17% in 2020 to total USD 266 billion, up from USD 228 billion in 2019. Page 17, AI-enabled ICs to see strong long-term growth. Chips used for AI applications are set for massive growth in the next 5 years as use of the technology expands across a variety of markets. From IHS Markit estimation, memory would have 245% growth and processor has 309% growth from 2019 to 2025. Page 18, strong server shipment. Global server shipment is forecasted to have 8.2% Y-o-Y growth in 1Q '20 and the remaining 3.5% Y-o-Y growth in 2Q '20. Page 19, medical electronics market. Semiconductors in medical electronics market are expected to grow with a CAGR of 8% each year, expanding from USD 5.5 billion now to near USD 8 billion by 2025. Page 20, accelerating 5G infrastructure construction. Although the global economy is under the shadow of COVID-19, many nations consider 5G a crucial strategy to offset the uncertainties and are accelerating infrastructure construction. In this page, you can see some significant 5G growth figures in Korea, China, Japan and U.S. Now let's move to 1Q '20 performance update. Page 22, 1Q '20 financial highlights. About 1Q '20 financial performance, as Doris highlight, right now, GlobalWafers keep same sales level as 4Q '19. However, the logistic challenge resulted from COVID-19 outbreak and the sustained restriction measures offset some partial CapEx. In overall, we have a stable 1Q '20 financial performance. For revenue, we reached a Q-o-Q 0.1% growth to TWD 13.5 billion. For EBITDA, we have Q-o-Q 1.1% increase to TWD 5 billion. Also have EBIT Q-o-Q 1.9% increase to TWD 3.8 billion. The profits are slightly offset by rising logistic costs. Gross margin is 36.5%, which is Q-o-Q minus 1.7%. Operating profit is 28.2%, Q-o-Q decreased 0.3%. Net profit is 21.3%, Q-o-Q down 0.2%. EPS, TWD 6.62, Q-on-Q is decreased TWD 0.06. Regarding financial leverage, we continuously keep sufficient cash position, that is TWD 35.5 billion. It's about USD 1.18 billion. The balance prepayment is still as high as TWD 19.4 billion, that is USD 643 million. Page 23, financial highlights 1Q '20 versus 4Q '19. In this comparison table, as previous pages stated, GlobalWafers reached the same level of sales as 4Q '19, with more than 1% Q-o-Q growth in EBITDA percentage and EBIT. However, 1Q '20 profits are slightly offset by the rising freight costs caused by COVID-19. EPS still keeps the same level as 4Q '19 as of TWD 6.62. The slightly decreasing ROE percentage and ROA percentage are the result of continuous increasing in assets. Page 24, revenue and the gross margin. 1Q '20 gross margin decreased 1.7% from 38.2% in 4Q '19, down to 36.5% in 1Q '20. This gross margin dropping is attributed to 3 major reasons: the first, freight cost increase; the second, product mixing; the third, lower ASP from those expired LTA in Q1. Page 25, EBIT and EPS. In 1Q '20, we achieved 37.1% EBITDA to revenue percentage, which is Q-o-Q 0.4% growth from 36.7% in 4Q '19. However, 1Q '20 result is still lower than the record high 39% as of the year 2019. About EPS, which is same high level as 4Q '19 as of TWD 6.62. Page 26, financial leverage. GlobalWafers keeps sufficient cash for sustainable development. The Bank loan increase is in preparation for dividend distribution. The restricted cash portion was defined for overseas site on-hand cash while back to Taiwan headquarter to enjoy Taiwan tax benefits. Page 27, dividend payout. Similar to last year, we are planning to have a high dividend payout policy, TWD 25, that is 79.7% payout ratio, to bring out profitable earnings for shareholders. Please also note, we have demonstrated our commitment to give back to shareholders with a payout ratio of nearly 80% for 7 consecutive years since 2013. Page 28, smoothing out the shareholders' dividend stream. As announced in early calls, GWC is going to change dividend distribution from once per year into once every 6 months to smooth out the income stream for shareholders. The dividend distribution schedule will be first half '20 dividend to be distributed in 1Q '21, second half '20 dividend to be distributed in third Q '21. Regarding 2019 free cash amount lower than 2018 cash flow, there are 3 major reasons: the first, higher dividend paid, TWD 25 in 2019, higher than TWD 10 in 2019 -- 2018; the second, higher CapEx spend in 2019 than 2018; the third, lower prepayment collected in 2019 than 2018. Page 29, income statement. In this income statement, here is just to recap. 2019 was GlobalWafers' record-breaking year. All these item were all-time high in company history. In 1Q '20, even severely impacted by COVID-19, we still keep same sales level as 4Q '19, even still with 1.1% Q-o-Q growth in EBITDA, just 0.2% Q-o-Q decrease in net profit percentage. Page 30, balance sheet. We are continuously increasing company's assets in 1Q '20 to TWD 96.7 billion, which is around TWD 0.2 billion increasing than 2019. We also keep reducing TWD 433 million inventories in 1Q '20 from TWD 6.8 billion inventory in 4Q '19 to TWD 6.4 billion inventory in 1Q '20. The liability increasing TWD 9 billion was mainly because of dividend accrued to be distributed to shareholders in August. That is my presentation for 1Q '20 performance update. Thank you. Next, I would like to hand over to Doris for the Q&A session. Doris? Thank you.

Thank you, William.

Yes. Thanks, Doris and William, for the prepared remarks. While we are waiting for the questions from the audience, I can start with 2 questions for Doris and William. The first question I would like to ask is on the profitability. Could you quantify the factors dragging gross margin in 1Q? And do we expect it to recover in the coming quarters? And also for OpEx, you also managed your OpEx quite well, down 13% quarter-on-quarter. What should we think about the OpEx and the cost model for this year?

Thank you, Haas, for your question. Let me explain our OpEx. Our overall OpEx, we used to have very good control on our OpEx. It's always somewhere around 8%. Yes. So it's always around 8%, and it is still 8%. And I don't expect that we will have big change on this one. So we're always somewhere around 7% to 9%. So it's about this range. So this is quite stable. Profitability. I think our Q1 -- I think William mentioned about the reason of our profitability down in Q1 as well. There are several reasons for our a little bit lower gross margin. Our gross margin in Q1 was about 1.7% lower than Q4 last year, and there are several main reasons for this gross margin down. Number one, I think William also explained that because our LTA coverage of this year is slightly lower than last year, so that -- this caused that our ASP is slightly lower than last year. [indiscernible] it's very mild, but the ASP is down due to a little bit lower LTA coverage. This is the first reason. And the second reason is the product mix. That's definitely one of the reasons as well. The product mix in Q1 is a little bit -- margin-wise, is a little bit lower than last year, Q4 last year. That's the second reason. And there are some short-term issue. Number three reason is the transportation costs surged a lot. Our -- we pay -- because of COVID-19, actually, our transportation costs increased a lot in March -- February, March and also April. So that is another reason that our gross margin dropped a little bit. And the fourth reason for our a little bit lower profitability is that if you check our inventory number at end of 2019, our inventory was TWD 6.8 billion. But in Q1, our inventory, end of Q1, our inventory amount was TWD 6.4 billion. This is about 6% down. Our inventory is very low at the end of Q1, and that was because that we had a lot of lockdown. We lost quite some working days in China and Malaysia. And those two, no matter if government lockdown or Malaysia MCO, movement control order, no matter for whatever reason, as long as that the fab is locked down, then we have to recognize idle capacity expenses. So in Q1, we had higher idle capacity expenses than ever. So these are the main reasons for a little bit lower -- 1.7% lower gross margin in Q1 versus Q4 last year. These are the main reasons. In this situation, these factors -- I think, in Q2, in general, ASP is flat. We don't really see any price erosion in Q2 or Q3 anymore. So ASP basically is flat. Transportation cost is still high. We haven't really seen the transportation cost back to the normal track yet. So transportation cost is still high. But our overall idle capacity is much lower than Q1. Basically, in Q2, so far, in April, we had 0 idle capacity, 0 line down at all. So all of our fabs are running full. So I think in general, our Q2, the situation so far looks quite okay. So that's what we see. So we think basic gross margin-wise, we will be doing okay. Okay. Thank you very much, Haas, for your questions.

Okay. The third one is basically on the business outlook. In the prepared remarks, you mentioned that the wafer demand is pretty "similar" in 2Q. Is it compared to the demand in March when your fab's back to normal operations? And for second half this year, what is your view of second half shipment or utilization? And how do you see pricing trends through the year?

Basically, Q2 orders, we have all the firm orders on hand for Q2. So basically Q2, so far, I think according to the orders we have already received and all the backlog from -- based on this information, I think our Q2 is pretty safe. We will have very stable production, very stable shipment and revenue in Q2 versus Q1, so quite stable. But second half, certainly will be hard, I mean, we keep communicating with all of our customers talking about the forecast of second half. So far, the visibility is still low. Customers, they do give us a lot of projection or forecast for the second half. But as I explained at the very beginning of the meeting, I think customers are giving those forecasts to us on their -- based on their best guess. Nobody knows how long this COVID-19 will be lasting and nobody knows that -- if the disease will return or what. So customers just give us their best guess, and we do our plan based on their best guess. So it's the visibility for second half is still low. Uncertainty is very high. So, so far, it's very hard for us to quantify that how much the impact will be and how soon the recovery will be seen. So it's hard to predict the second half. But in general, as I explained at the very beginning of my presentation, I think in general, the most critical checking point is how soon the whole pandemic can be contained. If it's contained, then I think every country, no matter it's advanced economies or developing countries, I think everyone, every country, every government is trying to accelerate the economic recovery and also almost every country has its own stimulus package. So we are very confident that, as William said, the disease is contained, then we will see very quick recovery because of the government stimulus package and also a lot of QE. So we're positive. But the only -- the most critical thing for us is that how soon the disease will be over. So this is what we cannot predict for now. Thank you.

Okay. Thank you, Doris and William. Karina, please proceed for the Q&A session. Thank you.

[Operator Instructions] Your first question comes from the line of Donnie Teng from Nomura.

So my first is that I missed some parts of Haas' question, so could you elaborate a little bit more on gross margin decline in the first quarter? So I heard it that the long-term agreement percentage is lower and some idle capacity expense. And logistics expense is higher as well. I'm not sure whether there is another reason behind the gross margin.

Yes, a quick answer. Donnie, a quick answer is that the another one is the product mix. We had a little bit different product mix in Q1 versus Q4 last year. But in total, all those four reasons together account for 1.7% gross margin difference. So it's very mild.

Got it. And the ASP trend, when we are looking into the third quarter, what would you think about the ASP trend in terms of different diameters?

I don't think that Q3 -- I don't think that we will see any big fluctuation on pricing on ASP in Q3. So far, I think price is kind of flat and stable for the second half of this year. And even for some 300-millimeter, some special products, actually prices are getting better because, as I explained last time and also this time, our 300-millimeter production lines are fully booked even for the second half. Of course, I understand that customers are giving us their forecasts based on their best guess. But so far, 300-millimeter lines, all the forecasts from customers are still over our capacity. So I believe that second half this year, for 300-millimeter, price will be flat to up, maybe even higher than Q1. That's our view, for now, of course, a lot of uncertainty. For small diameter, I think maybe a little bit different from the market. Actually, our -- all of our 6 -- all of our small diameter fab now are running at very high utilization now. Still very high utilization right now. It's a little bit more difficult to predict for small diameter than larger diameter, because there are more supplies in China than bigger diameters. So, so far, it looks like that our small diameters are doing okay as well. 200 millimeter is not as strong as 300 millimeter, but price-wise, still quite stable. So the best -- as I mentioned, the best forecast we can make today for the price development for the second half this year is that I think that second half of this year, overall ASP price-wise, will be same, very flat versus the first half of this year. For 300 millimeter, will be even a little bit better than this year but small diameter maybe will be a little bit lower than the first half of this year. That's our forecast for now. But again, still a lot of uncertainty. And also FX, foreign exchange rate, this is something very hard. I mean, it's very -- the volatility is very high. So it's a little bit hard for us to predict as well as for the ASP. So I mean, in general, the second half this year, price is not our concern. Our concern is volume.

I see. And my second question is regarding to our progress, our Korean fab progress. Could you give some update on that? When will we see meaningful volume there later on, this year?

Yes. Yes, thank you. This is a very, very good question as well. I missed this part when I made the general presentation. Thanks, Donnie, for asking the question. Our Korean fab is the fab which we had a big CapEx last year and also this year, and that was for a big new 300-milliter fab expansion. We start -- we completed the whole construction in -- at the end of October last year, and we started the tools moving and installation from November last year. Unfortunately, starting from early -- from end of January because of COVID-19, many foreign engineers who went back to their country, because Korea was very bad at that time. And then when Korea is more stable but now European engineers, Korean government do not want to have any European engineers come to Korea. So we are -- our charge now is that we need the tool equipment engineers, field engineers coming to Korea to help us to fine-tune the tools in Korea. But this one is delayed. We thought that maybe May, maybe we will be able to invite the engineers coming to Korea. But so far, it looks like they're still quite challenging. And also many countries, special regulation for quarantine. If overseas foreign engineers come in to Korea, then you need 14 days or 21 days quarantine and plus a lot of tests. So that would delay a lot of things. So, so far, what we are doing now is that we use our local Korean engineers plus a lot of video conference with the field engineers of European and American engineers from the original toolmakers, but that is slow. So my -- our forecast is that the MKC, our Korean fab ramp-up schedule, will be around 3, 4 months delayed due to COVID-19, due to the late, late installation and late qualification. But the good thing for us now is that we -- fortunately, we were able to install the complete line, at least the small portion for line -- with the new line. So we can produce samples for customer qualification. Now we can produce small volume right now. And matter of fact, we are delivering -- we are using our new fab to produce some test monitor wafer right now and also some very singles pad and four-pad, in fact, right now, starting from April. So we have a little bit of volume now. But the ramp-up schedule will be much -- it will be around 3, 4 months behind the original schedule. Our guess is that Q4 this year, we will see more meaningful output from MKC. But, of course, this again depends on the global strategy for COVID-19 quarantine strategy, especially the border control. Thank you.

My last question is regarding the inventory-correction risk. Because currently, previous cycles, it's like 8 inch or small diameter, it's always -- are more vulnerable to overall inventory cycle. And it recover also later than 12-inch wafer set. So I'm not sure whether this time, the situation could be a little bit different like only 8-inch and below, Q1 would be tougher than into the second quarter or into second half, but 12-inch is still impact, like hasn't now so many are still -- I'm not sure how big the percent -- how -- outside the chains that the 12-inch, thin wafer will also see the inventory correction into the second half, do you think, according to the historical experience.

First of all, there's no historical experience for this business. This crisis is totally different from all the crises we experienced in the past. So far, according to our discussion with customers, it seems that 300-millimeter -- the risk of 300-millimeter is a little bit lower than other diameter. But I think that -- I would say that small diameter, I mean, 150 6-inch wafer, I think this correction -- inventory correction, the risk of small diameter will be much higher than 8-inch and 12-inch. We -- according to our understanding with our customers, I think inventory wise, so far, seems okay. Yes. But I think it's very hard to predict, because when we check the GDP and we check the spending in every country, to be very honest, we are concerned as well. Because no matter how well controlled the inventory, I think at the end of the day, the most of the real -- what really matter is consumer really buy the stuff. That's what really matters. But so far, it seems that spending is a little bit slow. So we see a lot of stimulus package from all countries. But as long as the disease is contained, we believe that the inventory will be consumed very soon. So yes, in general, we have more concern for our 6-inch and maybe okay for 8-inch and basically no concern for -- not much concern for 12-inch. That's our view for now.

Your next question comes from the line of Thurston Lee from GS.

Congrats on the very steady results in the first quarter, Doris and William. I just have a couple of follow-up questions on some of the previous questions. My first one is with regards to your first quarter results and perhaps sort of your second quarter guidance. You talked about in the presentation, you're saying because of the global supply chain disruptions, you expect some sort of the market share gain perhaps. How much of that is factored in to our first quarter results and our second quarter outlook? That's my first question.

Okay. Thanks for your question. I think in Q1, Q1 and Q2, basically, so far, we see -- how you say that, I think quite a lot of demand from our customers are for their risk management. So it's very hard for us to really check the inventory. So to make it a very simple answer is that we don't really factor in any too much the potential impact from COVID-19 in Q1. Or I should put it this way that in Q1 and Q2, we have firm orders from customers. But if the disease is contained by end of Q2, then I believe that maybe our customers will consider then how to adjust their inventory from the second half. That's our view. But so far, it's very hard to predict. And also for our customers, it's very hard to predict.

Understood. Second, my second question is you just talked about -- with Donnie a couple of minutes ago, that the inventory so far looks all right. I think I just want to get -- if possible, could you give us more granularity of the inventory, especially on the memory side? As we're looking at the overall picture, we're seeing the work upon demand, the U.S. hyperscaler yesterday, a couple of days ago, was talking about the CapEx, that spending is still there, the reduction perhaps from [indiscernible] besides are still -- are quite modest. I guess just on the memory consumption side, are we seeing -- where are we seeing that inventory for the memory side?

For memory side, I think our information is similar as everyone from the public information. But what we care most is that what about the customers we are serving. Because our customers' inventory, our customers' inventory is -- so far is quite close to where they are in Q4 last year. We don't really see big surge. I mean, if we are talking about memory inventory, the increase is very mild. And what we check much closer than their total inventory is their wafer input quantity every month. And we found that they input wafer very steadily, like what they did in Q4 as well. So our shipment -- our total shipment to our memory customers remain intact, basically no change. And our memory customers, none of our memory customers are asking us to push out the wafer shipment, not in Q1 and also for Q2. So far, the backlog, the order plan, shipment plan, everything is stable, intact, no change at all. So this is our view of the inventory. But we do have some concern. Of course, we still have some concern because those home office and home education, when the demand is fulfilled, maybe the second half, the demand will be a little bit weak. We don't know. But so far, customers cannot give us any further comments for the second half. So that's for memory. And what we see the most critical application we see heavy inventory is automotive. That's where we see -- we have more concern for automotive than memory. That's what we see for now.

Got it. My last question, I think it's one follow-up. Could you just give us an update on what are your expectations of the company's LTA, the proportion of LTA contracts for, I guess, just the 12-inch and 8-inch? I think for the full year, perhaps. I think in the past couple of years, you've talked about giving sort of a ballpark range, for example, 90%, 80%. Could you just give us an update on your expectation of that for this year?

Sorry about that, I think, starting from last earnings call, we decided not to disclose the percentage. But I can update a little bit about the range. I think it's still -- for 12-inch, it's still very high percentage, much higher than 8-inch. And the small -- the lowest one is small diameter. But we do -- we still have okay LTA coverage even for a small diameter. I think an easy way to check our LTA coverage is that if you check our prepayments, the balance of our prepayment at end of Q1, our prepayment amount at the end of Q1 is TWD 19.4 billion. That's the prepayment balance at the end of Q1, and that is still very, very high. If you compare with end of last year, I think it's slightly over TWD 20 billion, 20 -- how much is that? TWD 20.4 billion, yes, it was TWD 20.4 billion at the end of last year. But now it's TWD 19.4 billion. So it's very, very close. So that means that our LTA coverage is very close to last year. And we did present our -- we did disclose our LTA coverage last year, but we changed the policy starting from this year that we don't disclose anymore. Yes, it's going down but just very mild.

Just a follow-up. Are we seeing any -- I guess, because some of these contracts are closing in out there, the first contracts, are we starting to get some more -- starting that discussion with customers, signing them, resigning them again or because the environment, the macro environment is still pretty uncertain, and the customers are just still going to wait a little bit more. Even though that pricing seems to have bottomed pretty much.

We do -- yes, we have some LTAs under discussion with our -- we are working on some LTAs with several customers now. And all of those LTAs are -- well, I should put it this way, most of those LTAs are for 300-millimeter. Some are 300-millimeter MPE, some are 300-millimeter SOI. So to answer your question, we have new LTAs under discussion right now. We also have a couple LTA renewal under discussion as well. I think that we are working with our customer very closely, but I don't think that our customers will finalize and sign the LTA very, very soon because of the uncertainty in the market. But I think many of our customers agree that maybe 2021, if no more COVID-19, 2021, especially for 300-millimeter, wafer supply will be very tight again. That's why the -- many of our customers are willing to study, again, talking about the new LTA for 2021, 2022 and beyond. They want to lock up some supply for -- especially for 300-millimeter.

Congrats on the steady results.

Your next question comes from the line of Roland Shu from Citi.

First, I would like to follow up on the gross margin questions. Talking about the product mix change, I would like to know what's your gross margin on 12-inch, 8-inch and smaller diameter compared to your corporate average?

Yes. Our gross margin for 12- and 8-inch are very close, basically no difference. Small diameter gross margin is much lower than those two. And also -- this is diameter-wise. And product-wise, I think our gross margin for SOI percentage-wise is lower than -- percentage-wise, a little bit lower than others because of the value is high. The wafer value is high. So the gross margin is high, but gross margin percentage is low because of the value is high. So I hope this is clear. And I'm sorry that I cannot give you the detailed number of the...

Yes. Yes. So in first quarter, your product mix changed, so that is mainly for the product change not from -- it's a diameter change. Can I say that?

Yes, that's correct. Yes.

Okay. Yes. So going forward, I think this product mix will be always changed and also going forward, for your LTA coverage business is also declining. So that means, for the 8, probably one has some weakening. So how can we look at the overall gross margin in 2021, 2022? Is it -- I mean for your gross margin able to go back to 40%. Or with this kind of change, the cost probably will come under pressure?

Yes. I think we are very positive, very confident for gross margin, that gross margin should be better than where we are in Q1 and should be back to very close to last year. One of the main reasons is because we spend -- all the new capacity we spend are 12-inch and the 12-inch product's gross margin is lower than small diameter. And small diameter, the weight of our small diameter is getting lower. So we believe that gross margin will improve because of the weight of 300-millimeter is improving. But another uncertainty right now, which we monitor very closely is FX volatility. That most of our orders are in U.S. dollar, but we do have a lot of cost -- production sites in Asia, in Japan, in Korea, Taiwan. And you know that those Asian currencies are stronger than U.S. dollar. So as I explained at the very beginning of the presentation that these FX, FX rate at exchange rate trend, development trend is not really very favorable to us. But of course, from risk management -- from overall contingencies viewpoint, we do have a lot, because we have so many production in so many sites. So we have more major hedge than many of the other companies. So in short term, looks like that currency wise maybe can be one of the reason for our gross margin fluctuation as well. And so far, this is very hard to predict yet for now.

Yes. Yes, I say. I remember, I think this one time, we also discussed probably sensitivity for this currency exchange change impact. At that time, I think that you also said that because you have the manufacturing factories in many different operations and these are different currencies. So you have this kind of mutual natural hedge. So let's say, I think later from you, you don't think the currency change will have a big impact to gross margin. But this time, you said that this is just because of the Asian currency are stronger. So that actually will have a higher impact compared to previous year natural hedge is different in May.

That's correct. If you check our Q1 financial results, actually, we had FX gain not loss in Q1. But starting from April, we never expect that, for example, NT dollar surge in such a short time. I think the appreciation too much. That was not what we expect. We did have our hedge. We have natural hedge, and we have some -- our special hedge program. But the movement, especially in April, I think that is totally beyond our expectation. That was why I would like to have a pre alert that FX can be something affect our gross margin. That is not the long-term thing. I think for long term, it is not that kind of surge change, I think we will have much better management. So you are right that last time or in the past, we always -- I think natural hedge is always one of our -- that is our strength. But this time, it's a little bit too strong. So we're -- I think it's not stabilized yet. We will check and see then how we can manage -- how we can minimize the impact from FX fluctuation.

Okay. Actually, I think that, Doris, you just said you look at going forward that gross margin will be very close to 2019 level. So do you mean this is a gross margin starting from second quarter or second half? Or this is some kind of longer-term target for the gross margin?

It's very hard to give any outlook or forecast for the gross margin this year, because too many uncertainty, too many changes, unpredictable changes in the market. And also for Q2 revenue-wise and order-wise, shipment-wise, should be very close to Q1 or a little bit better than Q1. But unfortunately, I think the exchange rate in Q2 may be very different from Q1. So I'm very sorry that I cannot predict. I cannot forecast what our gross margin will look like in 2020. But for long run, I think, because there's more and more 300-millimeter capacity will be increased, we will achieve more and more 300-millimeter wafers to our customers. So I believe that our gross margin should be back to 2019 level, but maybe not 2020, not this year, yet.

So yes, maybe from 2021?

Yes, that's right. That's our view.

Due to the time constraint, we thank Doris and William for the call today. The replay will be available on the company's website later. We thank you for joining the call. For further questions, please reach out to Crédit Suisse representative. This is the wrap-up of the call, and you may disconnect.

Thank you very much.