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

Okay. Good afternoon, ladies and gentlemen. Welcome to GlobalWafers Second Quarter FY '22 Earnings Call. My name is Patrick Chen, Head of CLSA Research, and I will be your moderator today. It is our great honor to have Ms. Doris Hsu, Chairperson and CEO; Mr. William Chen, VP and Spokesperson; and Mr. Leah Peng, Special Assistant and Deputy Spokesperson of GlobalWafers, here with us today to discuss about the company's second quarter financial results and share with some insights on the semiconductor industry outlook. The management team will give some executive comments and prepared presentation followed by a Q&A session. So now without further ado, let me pass this call over to Mr. William Chen. William, please.

Thanks, Patrick. Hello, everyone. Welcome joining GlobalWafers' 2022 Q2 Earnings Call. I'm William Chen, GlobalWafers Vice President and the company Spokesman. As Patrick mentioned, today, we also have Doris Hsu, Chairperson and the CEO of GlobalWafers and Leah Peng, Deputy Spokesperson, joining this call. Doris will give us the executive comments and the capacity expansion plan first, and then Leah will present industry overview, 2022 Q2 financial statements and the ESG highlights. Before Q&A session, Doris will answer investors' highest concerning FAQ, and I will handle the final Q&A session. For today's presentation file, we had uploaded onto company website around 2 hours ago. If you do not have the file on hands, 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 only. They are subject to significant risks and uncertainties. Actual results or trends could differ materially from our forecast. Please refer to the safe harbor notice in our presentation, Page 1 disclaimer. Now I'd like to hand over the call to Doris for the Page 2 executive comments. Doris, please.

Thank you very much, William. Good afternoon, everyone. Thank you very much for joining GlobalWafers' earnings call of Q2 2022 and first half 2022. Leah Peng, the Deputy Spokesperson will guide us through the presentation. I will answer the questions we received recently and William Chen, our Spokesperson and Administration Vice President, will address the questions raised in the meeting today. First of all, let me share some comments of our financial results and update operation status. If you have the material, please turn to Page 2. Thank you. GlobalWafers achieved a quite remarkable first half 2022, considering all the headwinds like China lockdown, volatile exchange rates, drastic climate change, energy price hike and geopolitical tensions. We hit record highs in 4 runs, revenue, gross margin, operating income or operating profit and prepayment amount. Revenue-wise, June Q2 and first half revenue all hit our all-time highs with double-digit Y-o-Y growth. Our first half revenue achieved TWD 33.8 billion, which is a 12.8% increase Y-o-Y. Our growth momentum has been lasting for more than 2 years, starting from Q1 2020. And Page 3, please. Regarding to gross margin and operating profit, our Q2 2022, our gross profit margin hit 43.6%. Our overall first half 2022 gross margin hit 43.1%. Both of these 2 gross margins hit our record high -- record high. Please note that the gross margin has been increasing sequentially since Q1 2021. So it's already 5 quarters in a row. So is operating income amounted over 36% in Q2 and also first half 2022. Both of these are the best ever. Then our EPS, although our overall performance was quite strong and broke so many historical highs, but our EPS was not as good as previous quarters mainly due to the noncash mark-to-market valuation loss on Siltronic shares we hold, which eroded our EPS around TWD 16 per share in the first half. So if we exclude these valuation loss from Siltronic shares we're holding, our H1 2022 EPS would have amounted to record-breaking TWD 26.28 per share -- TWD 26.28 per share. This -- we will have further discussion on this one later on. Next, I would like to also highlight another all-time high is our prepayment. As of end of June 2022, our prepayment totaled TWD 36 billion or around USD 1.2 billion, increasing by 9% or TWD 3 billion in Q2 '22. So in Q2 only this quarter, we received and we increased another TWD 3 billion prepayment. So right now, as of end of June, our prepayment has already reached TWD 36 billion. This is, of course, all-time high. Page 4, please. I would like to move to the outlook on macroeconomics and semiconductor industry. Based on IMF forecast last week, downward pressure on global GDP has increased. IMF lowers 2022 world GDP growth from 3.6% to 3.2% and expect 2023 to stay near a similar level. And for semiconductor industry, despite short-term headwinds, which depressed consumer demand, 2022 is still resilient for semiconductor industry. Also, we are seeing momentum in automotive, industrial 5G and cloud service that will consume much more semiconductors than before, providing structural support for long-term growth for semiconductor industry. Page 5, please. I would like to make some comments about 5G and automotive. Although smartphone demand dims due to weaker global economy and geopolitical uncertainties, data traffic growth and need for connectivity propel 5G, very fast scaling up. So we are still very positive for 5G and for automotive, due to some China lockdown and Ukraine war, some shortages are likely to continue in some key components, particularly in MCUs and Pemex and some [ voltage ] regulators. However, the slowdown in mobile and consumer electronics will help to transit foundry capacity to automotive. On the other hand, we are seeing more semiconductors to be consumed to satisfy the demand for automotive HPC, EV/HEV and ADAS. Page 6 is some quick update of our dividend payout. GlobalWafers will distribute a cash dividend of around -- of TWD 8 per share on August 5, this Friday. This dividend is for GWC's performance for the second half 2021. Page 7, I would like to move on to our greenfield expansion. Please allow me to further elaborate our strategic rationale for this very important decision, which is also a great milestone for GlobalWafers. Page 8, please. First of all, I will start with the demand front. Semiconductor industry is anticipated to grow at 6% CAGR and become $1 trillion industry by 2013. Please note that it took roughly around 50 years for the semiconductor industry to reach $500 billion in 2021. But it is predicted to take only 9 more years for that to double and reach USD 1 trillion in 2030. That will be the market size, USD 1 trillion market size for semiconductor IC in 2030. Compared to last decade, which was largely driven by single factor like wireless, the growth in the next decade comes from multiple advanced technology, including wireless, automotive, computing and data storage and industrial IoT. The pillars are balanced and versatile, underpinning a sustainable growth for the semiconductor industry. So we are very optimistic that semiconductor industry will remain very healthy in the next decade. Page 9, please. I would like to, I think, talk about the demand, very solid demand for high-end 300-millimeter silicon wafer. I think we are seeing very constant and fast-growing demand for 300-millimeter wafers. Based on research, 300-millimeter shipping will continuously grow throughout the forecast period to 2026. That's our view for 300-millimeter. A matter of fact, as of today, GWC, all of our facility, the production lines for 200 and 300 millimeter are still fully loaded. For small diameter, like 4-inch, 5-inch and 6-inch wafers, the loading is slightly lower than 100%. We have 3 small diameter fabs in GWC group, China, Malaysia and Taiwan. So 2 out of 3 are fully loaded. Only one small diameter fab is around 75% to 80% loading. That's our current status. All the 200, 300-millimeter production lines are still fully loaded. Page 10. Last, I would like to elaborate our view on the equipment lead time. The average lead time of semiconductor equipment before the pandemic was approximately 6 months, roughly around 6 months, which was obliged to lengthen to 12 to 18 months due to the pandemic. Now induced by the Russian invasion, the lead time now is even further extended. So also, the rising inflation has affected the acquisition of various raw materials and manpower. Both of these 2 factors led to delays and cost us in fab construction. So the prolonged expansion process is very likely to eliminate concerns regarding oversupply in 2023. So I think the supply demand will be still very healthy in 2023. Page 11, please. The destination, I think at the end of June, last month, June actually was June 28, we revealed the destination, the location of our greenfield project. We select Texas, USA, to build a state-of-the-art 300-millimeter wafer fab. That was what we announced at the end of June. And why U.S.? I think that was one of the question I've been asked most frequently in the past several weeks. Why U.S.? There are several reasons. The first reason is complement U.S. supply chain. From Page 12 bar chart, I think it's very easy that you can see that in the U.S., silicon wafer -- there are very few silicon wafer manufacturers. Semiconductor industry has become increasingly consolidated within many segments in the value chain. As a result, expertise is often concentrate in certain markets. For instance, the U.S. has the highest presence of the fabless player and equipment manufacture, but very limited silicon wafer makers from the bar chart on Page 12, it's very clear to show the status. So the new fab secures GlobalWafers unique position in the U.S. semiconductor and supply chain to close a critical gap and to build a local semiconductor ecosystem in the U.S. So this is the first reason that why we chose U.S. And the second reason -- Page 13, please. The second reason is because of the major customer growth. The 300-millimeter silicon wafers are the starting material for all advanced semiconductor fabs, including recently announced U.S. expansions by global foundries, for example, Intel, Samsung, Texas Instrument and our TSMC 12. Taiwan is very good TSMC as well. So I think so many very good leading advanced semiconductor companies are expanding their operations in the U.S. All these requires stable wafer supply and will, in turn, afford a more diverse customer portfolio for GlobalWafers. So this is the second reason that why we chose U.S. And then another reason is for the government support, I think China just -- U.S. just passed the CHIPS Act last week, so waiting for President Biden's final side of. So government support, not only from federal but also from local government, that those support are very helpful, very important for new operation in the U.S. So government support, that's one another reason. And next reason is utility costs and land availability in the U.S. that's the strength for U.S. as well. In Green Solution, the U.S. silicon wafer will be able to provide a very good solution with a much lower carbon footprint. So that will be a very attractive solution, green solution for the U.S. fabs. That's another good reason, especially right now the global ESG trend and so many uncertainties caused by geopolitical tensions. I think a local supply in the U.S. will be definitely a good solution for those U.S. new semiconductor factories fabs. And last but not least, I think a very experienced team in the U.S. that is one of a very important reason why we chose U.S. We have a very talented team in our U.S. operations. Their profound management experience could quickly facilitate the new fab construction and operation very effectively. So the brand-new expansion in the U.S. strengthened GlobalWafers competitiveness, we have more solid and sound global presence in 3 continents, Asia, Europe and American, each equips with a complete production process of 300 millimeters all the way from InGa to epi. So I believe that we are one of the most resilient silicon wafer manufacturer in the world, both globally and locally. Above my comments, thank you very much for your time. Leah, please share more on the industry outlook and financial performance to the team. Thank you very much.

Thank you, Doris. So let me begin with the global GDP growth forecast in Page 15. Like Doris' previous comment, global GDP is dragged down to 3.2% in 2022. The tightening monetary policy and the economic downturn resulted price stagflation will hammer future GDP growth. In Page 16, also global economy is seen. We still see growth across all geographies and all applications. In 2023, the highest growth is logic at 7.3% and APAC at 5.5%. Let's move on to Page 17. The major demand in the automotive industry is not greater than 90 nanometer. The shortage will probably persist because the semiconductor industry is unlikely to address the structural reasons for this shortage owing to its low profit margins is sufficient capacity, over ordering and increasing stock levels contribute to the shortage in selected technology node, which is anticipated to last at least 3 to 5 years. Page 18 is the revenue forecast for silicon carbide and the gallium nitride. The push for increase the sustainability and electrification it is spurring the adoption of SiC and GaN power devices. Even under the best case scenario, the growth trajectory is very steep and your market growth is expected to be 23% for SiC and 40% for gallium nitride power devices. Let's move on to our financial performance in Page 20. GlobalWafers has contributed to a quite remarkable performance, but profits were eroded due to Siltronic evaluation and the company factors. Page 21 is our first half performance. Revenue hit TWD 33.8 billion with 30% Y-o-Y. Gross margin is 43%. Operating profit margin amounts to 36.3%, our best ever. However, like Doris just said, first half EPS would have climbed to TWD 26.28. Our all-time high as such our favorable influences were excluded. In page 22, the chart shows our sequential growth of revenue and the gross margin. Revenue trends up since Q1 '20 and the gross margin has also increased starting from Q2 '21. The gross momentum has been lasting for more than 2 years. Page 23 is our EBITDA and the EPS. First half EBITDA is TWD 7.3 billion with margin at 21.5%. This excluding only impact, our EBITDA would have become TWD 16 billion with 47% margin and the EPS would have been as high as TWD 26.28. These are our all-time best. Please allow me to present our key ESG achievements in the past year starting from Page 27. To battle climate change, GlobalWafers hosts responsible growth as principal usage resources in a way that is socially equitable, environmentally sustainable and economically beneficial. First is water. Taiwan encountered the worst drought over half a century last year. By implementing sound water stewardship, we reduced 16% in water unit consumption in our global sites. Water recycle rate in Taiwan climbed by 5% to 56%. Despite all the challenges, we managed to secure a stable supply to customers without any disruption. In Page 28, by means of process improvement and energy saving measures, local wafer set a 7.1% unit electricity consumption. Please allow me to stress that we were fully loaded in global sites and some expansion projects were carried out in 2021. These savings translated to more than 3,000 tons of CO2 emission reduction. Page 29 is screening energy. GlobalWafers is one of the very few manufacturers that possessed its own power plant. Recent world events review the criticality of the energy independence. By building our own power plant, GlobalWafers is more resilient to a climate change and the power of volatility. As of June 2022, cumulative solar capacity reached nearly 27 megawatts, equivalent to 16,000 tons of CO2 initial reduction. Please refer other pages for our corporate governance and the social society devotion. Now I would like to give the floor to Doris and William for the Q&A session. So thank you, Doris, please.

Okay. Thank you, Leah. I think that the management team have received quite several questions in the past several days. So let me start the Q&A section from these questions we already received in the past several days.

First question is that how about GWC customers' inventory status? That's the question we received, one of the most frequently asked question. So our answer is that first GlobalWafers, first of all, our -- GlobalWafers, ourselves, we keep our inventory in a very healthy level at around TWD 7 billion to TWD 7.5 billion, this range. So it's as always, it's still the same range. And the second answer to this one is that also we would like to update our customers' inventory. Customers' inventory levels vary on size and application. For example, smartphone customers have relatively high inventory while the customers targeting high-performance computing or large-diameter wafer products have relatively low inventory. So we see a very big difference from customer to customer or from application to application. So that's the answer to the first question. And the second question is that have you seen any -- are you seeing any order-cutting? Our answer is that up to now no order-cutting has been recorded so far. But the demand for upside volumes above LTA for 200-millimeter, 300-millimeter is getting a little bit lower. We see lower traction for a smaller diameter, the demand is weaker than 200 millimeters and 300 millimeters. That's our answer for the second question. And the third question is that what's the weight of GWC's electricity -- what's the weight of electricity cost of GWC's total COGS for -- because recently, we have seen the price hike, which is the energy price hike, including Taiwan, we just had a 15% electricity price increase effective from July 1. So the question is asking about the weight of our electricity cost for our COGS. The answer is that the electricity cost is accounted 6.1%, 6.1% of our total cost, roughly consolidated. This is first half this year data. But this percentage definitely increase in the second half because not only Taiwan but also several countries, including Japan has very high electricity costs increase. And although we are seeing some electricity cost increase, but the impact is relatively small. It's still manageable. So that's our view for the electricity talking. That's the third question. And the fourth question is about silicon carbide. So the question for -- the fourth question is that how about -- how soon will you, GWC, start supplying silicon carbide epi wafers to the market? Our answer is that GWC will start supplying mass production silicon carbide epi wafer to the market from 3Q 2022. Actually, starting from this quarter. It's very likely that a couple of weeks from now we will start -- we will make the first silicon carbide epi mass production equipment for our [indiscernible]. 4Q levels are similarly on target. And question #5. How about your customers' expansion [indiscernible]? Are they suspended, canceled or on track? Our answer for this is that, of course, we work very closely with our customers. We have very close communication with our customers, trying to figure out their expansion projects, the status of their expansion projects. And so far, up to now we are not seeing our customers suspend expansion projects, no suspension. But we are seeing several projects scale down on equipment purchase or lead times extended. That's our feedback for this question. And next question is that as your announcement as GlobalWafers announcement on June 27, you are expecting financial aid from CHIPS Act for -- from the U.S. government for your big investment in the U.S. or name GWA. Will GWA delay your groundbreaking if CHIPS Act can pass this goal? I think we received this question a couple of weeks ago, but of course, on Wednesday, last Wednesday, July 28, both Houses of the U.S. Congress have passed the CHIPS Act legislation and President Biden is scheduled to sign it into law this week, that's the roughly schedule. So that's our answer for this one. And next question is that it is said that the CHIPS Act has special guide rails that would ban receipt for chip funding from making investments to expand capacity in countries of concern, namely China. So please advise how it will affect GlobalWafers' future strategy. I think this is -- we received so many investors asking about same question about this China special -- CHIPS Act special regulations, special guard rail for China for some future investment in the next 10 years in China. I would like to take this opportunity to make it clear that silicon is not considered part of this stipulation. And GlobalWafers up to now we did not have 300-millimeter wafer production in China. Right now the CHIPS Act special stipulation is for up to higher than 28-nanometer product cannot be invested in China. That's the regulation. So that is not -- that doesn't apply to silicon wafers, our business. So that's our answer for this one. And okay, next question is that will GWA be -- GWA is our new operation in the U.S. Will GWA be as efficient and profitable as other GWC operations in Asia like Taiwan, Japan and Korea? Our answer for this is that based on CHIPS Act, federal and local government support from U.S. Government and based on our full utilization and also the energy cost and land cost of this -- based on all of these factors, we are very confident that GWA will be quite efficient and profitable, and we will be able to be included as effective, as efficient and as profitable as all of our operations in Asia. That's our view. And the last question is about -- the last question is about our ECB. I think we already expressed several times that in June last year, we had USD 1 billion ECB and that ECB will be due in 3 years and 5 years. That's the terms of that ECB. But also, if you see our announcement to the market, actually we buy back a small portion of our ECB. So we received a question from investors and analysts asking about that why did GlobalWafers buy back a portion of ECB issued at par in just over a year ago? I think there are several reasons for doing so -- for us to do so. The first reason is that that's an opportunistic repurchase of ECB issued at par in just over a year ago, given overall market dynamics. And the second reason is that the reduction in debt on balance sheet, we will have lower debt ratio and also we can improve our gearing ratios. And the third reason is that the ability to book P&L gain is the ECB was repurchased below sharing value on our balance sheet. And then we can reduce future potential dilution for existing shareholders. And the last reason is that we can save on future noncash interest expense. So these are the reasons that why we purchase -- why we buy back a small portion of our ECB. The ECB, the size of our ECB is USD 1 billion and we buy back USD 58 million. So it's still just a small portion of our ECB. And the following question for similar ECB question is that will GlobalWafers, will you buy back more ECB? If so how much more do you plan to spend? I think it will be subject to the market conditions and our overall capital arrangement for an optimal capital structure. So for now we don't have any further plan for further repurchase of the ECB. So no plan, but that doesn't mean that we're not going to do so. I think we will -- it depends on the overall market condition and also our overall capital arrangement. So if the overall situation is good for company, then we will consider to make next repurchase. But so far, we don't have a firm plan for this. Thank you very much. That's all the frequently asked question in the past 2, 3 weeks we received from the investors. So I'll make a quick update and answer all of those questions to everyone. Thank you very much. I think I finished my Q&A portion, and we have around 20 minutes time that we can have our Q&A. So we can open our Q&A section now. Thank you very much.

A very comprehensive illustration. [Operator Instructions] So let me start with Nomura, Donnie.

My first question is regarding to the capacity expansion plan across the semi wafer company. So you mentioned in your presentation that you are seeing foundry companies are expanding with a slower pace. But I'm curious what about the semi wafer companies' capacity expansion plan. Is there any delay or you are seeing that most of the peers, including GlobalWafers are expanding on track without much overhead on like equipment or infrastructure-related materials? This is the first question.

This is William. Regarding for the capacity expansion, our material -- our greenfield project in Texas would be completed by 2025 -- 2025. And regarding for the peers, I do not think we can comment for the other peers' situation. But for our company, as Doris just explained, currently because of macro uncertainty, overall equipment supplier, they do have a little bit delaying because of the core supply chain. But basically I think considering our project expansion lead time, I think our peers could be -- have the similar over lead time like ours, given some equipment, we are tailor-made by ourselves, but some are commercial model. But in general, the overall expansion detail should be quite similar. Thank you.

So I would say maybe in the short summary slide should be mostly on track despite maybe a little bit delay, but still largely on track. Is that correct?

Yes, basically, yes, you are correct. Still on track for our planning. Thank you.

Okay. And my second question is regarding to gross margin trends. So we are seeing quite like foreign exchange volatility a lot in past 1 to 2 months. So wondering if you could comment on the impact to our gross margin and also considering the rising material cost across the semi supply chain and also rising depreciation costs potentially along with the brownfield or greenfield expansion. Just wondering if [indiscernible] or William can comment on the gross margin trend. When should we see gross margin to pick up in the future?

Maybe -- I mean, William, let me make some quick feedback on this one. I think it's very hard to predict for several reasons. The most critical one is energy cost. Actually, we are seeing continuously increasing -- continuous increase in Japan for electricity costs. You know that we have 5 fabs in Japan. And that's one of our major power consumption country, but Japan keep increasing their electricity costs and with the latest information we received it starting from September, electricity costs will increase again another big jump. So I think there are several uncertainties. One is electricity cost. And the second one is currency. You know that, of course, U.S. dollar is our main currency for most of our business, but we do have around 30% of our revenue in Korean won, U.S. dollar and euro. I mean, around 70% U.S. dollar, but another 30% is Korean won, Japanese yen and euro. And you know that all those currencies are so much weaker than NT dollars. So I don't know -- because our functional currency is NT dollars, so it's a little bit hard to predict which one -- which factors will be -- what will be the trend for the currency. And another factor is that we will have month by month, we will have more and more new capacities online. So that means that we will start adding new depreciation from the second half. So I would say that we have a lot of positive things, including that our LTA price for the second half will be better than first half, and we will have more epi wafers and high -- and some very good products in the second half because of new capacity available pushing online, broader online. So we have some positive stuff and we have some uncertainties, including energy cost and currency, some Asian currency, euro currency as well. So it's very far for us to predict that how good -- how good will be our gross margin. So I think our best estimation is that second half gross margin should be close to the first half. I don't expect that too much big improvement or big impact going down. So it should be flat or slightly better than first half. That's our view.

Just one last housekeeping question. So first quarter OpEx -- sorry, second quarter OpEx ratio was only like 7.1%, so still below the previous normal level like 8%. So what should we expect the OpEx ratio going forward? And what's the reason behind the second quarter?

Yes. I think second quarter is a little bit lower, but second quarter is normal, it's a normal level. Our OpEx is supposed to be somewhere around 7.5%. That's our internal -- we always try to make it below 8%. That's our goal. But the revenue keeps increasing, so the percentage will start going down a little bit, so it's around 7% -- 7.5%. That's our goal, 7% to 7.5%.

Let's move on to [ Eric Chen ]. Eric, could you unmute yourself? Maybe some technical issues here. Eric, why don't you type the question, I'll ask for you. So let's move on to [ Bruce ]. Bruce, please unmute yourself.

Okay. A couple of questions. The first one is that, Doris, you mentioned when you announced $100 million CapEx, you mentioned that your CapEx will depends on your LTA you signed with your customer. Can you give us some update for that? And what is your CapEx plan for your U.S. fab?

Yes, our U.S. fab -- our plan, the total CapEx for our Phase 1 U.S. fab is about TWD 555 billion. That's our total CapEx plan for Phase 1 of our U.S. operation -- U.S. expansion greenfield project. Yes. Is that your question?

Not really, because at that moment, you mentioned that your plan for next year was -- I would say, I think it's TWD 40 billion for next year, and you would see how it goes for the year after, right?

Okay. So...

Based on your LTA -- depends on your customer LTA savings, right? So I just want to know what is the current LTA you signed with your customers?

I think that if you check our prepayment amount that you know that we have -- we keep receiving more and more LTA. So our construction, everything will be on schedule, but the LTA is still ongoing. That's our status. When we reach 80%, we will kick off and then we will start the production. It's not possible that if we have 10%, then we build 10% capacity, no that's not the plan. The plan is that we have to reach 80%, then we will start the construction. So we are still working on that. And we have already concluded quite a lot of LTA. It's not 80%, yes, but we're still working on this. I mean signed...

I'm sorry. So without hitting 80%, you will not kick off the equipment moving, is that right?

That's correct.

Understand that. So one thing I want to ask is that [ Morris ] mentioned that the U.S. factor -- U.S. fab, their operating cost is 50% higher. But you just mentioned that your operating cost is as good as other side. Can you tell us what's the secret sauce? I mean, how do you delever that it's coming from like or even manufacturing costs, different utility costs or highly rely on the...

We are different. No, we are silicon wafer fab. We are not foundry, not like TSMC, that's different. We can -- it's not apple-to-apple comparison. And another very important point is that we already have 2 operations in the U.S. One in Tennessee's already over 20 years and another one in St. Peter's, already over 50 years. And the teams are running operation. I think in the past several earnings call, I also explained that our U.S. fab, the Texas fab is a epi fab, by far is the largest epi fab in the industry by far, single fab, very huge capacity. And we have another 3 epi fab, epi operations in other countries like Japan, Taiwan and Europe. But whenever -- William is the head of the overall costs benchmark -- cost monitoring, checking each site's operation performance. So he knows much better than I do that our U.S. fab overall epi cost performance is always the champion in our team. So that's our -- that's why in my presentation, why U.S., I said that the last item is an experienced management team. It's not a new team. We don't send any Taiwan management team to the U.S. No, management we have very good U.S. management team in the U.S. We have 2 very strong U.S. operation management team.

So you don't expect the cost structure is different between your U.S. fab and Japan fab or Korea fab?

Right. That's how we -- the only difference -- the only difference is that all of the -- all of the capacity tools will be brand new because it's a greenfield. It's totally different from Taiwan or Korea because many of them already 50% depreciated. But in U.S., that will be a brand new fab. So depreciation definitely will be higher than Korea and Taiwan. But that's not -- no matter where you build a greenfield depreciation, it's always the heaviest part of the cost. So all the others, I think it's equivalent.

I see. Understand that. Last question is that, what do you want to do with your Siltronic holding at this moment? The share price went back to pretty much the level when you tried to acquire them. What do you want to do with those holdings?

Sorry, no comment for this question. I think we've been asked if we have plan. But it's -- I have no comments today. Sorry about that. Thank you.

Eric, your turn.

So it's actually Sunny from UBS. My first question is on how you think about the supply-demand outlook for next 2 to 3 years? Obviously now the visibility is quite different from the start of the year. Demand is slowing down. But as you said, the industry expansion are mostly ongoing. So just wanted to know if any changes on the outlook over next 2 to 3 years.

William, please, could you please reply first? Thank you, William.

Okay. Thank you. Thank you, Sunny. I think let's -- in terms of different meter, I think it will be quite different, the situation. So talking about the macro demand, we knew that the mainstream of the wafer is still 12-inch. So the 12-inch macro demand still growing, also growing much bigger than the 200-millimeter and the small diameter. So basically we have no question at all for this 12-inch wafer will be keep growing. And considering for the current macro 12-inch capacity, we knew that they are -- they cannot meet for the demand for the 12-inch until the greenfield added from the 5 peers. So no problem at all from now till the 2024, 2025, the new greenfield joining. Basically, the 12-inch wafer will be serious shortage. So given for the '24, '25 greenfield join, we do not think there will be a big problem for the oversupply issue because of the -- all the new demand application also advanced the node wafer or join from the 12-inch wafer. So the coming years for the 12-inch wafer demand, we do not think any issue at all. That's for 12-inch. Regarding for the 8-inch demand, they are still moderately growing in terms of the macro demand from now till the coming years. So the macro demand, we do think some application and the devices are still using the 8-inch foundry or IDM. And regarding the macro supply for the 8-inch wafer, we knew that these 5 major tier players, we do not have any greenfield capacity to be come out in the coming years. So considering this macro demand still growing and the macro supply from the 5 peers already fixed there, so we think there is still on the healthy balance situation for the 8-inch. Of course, regarding for the small diameter, the macro demand would be kind of flat or even decline and macro supply might be still slightly increasing from the Tier 2, Tier 3, the wafer supplier. So this small diameter might be have the excess capacity for the macro economy situation is not good as expected. So that's the view for the coming years in terms of 12, 8 and small diameter. Thank you.

Got it. A quick follow-up is that I understand probably the order in the coming quarters are still pretty much unchanged. But I wonder when key customers, they communicate with you guys on the future capacity allocation, have you seen customers turning slightly more cautious, or overall still pretty bullish on the longer-term demand?

Thank you. Okay. Actually what we got from customers, especially for the bigger diameter, the 12-inch wafer, actually, as I just mentioned for the current macro supply, still quite short-term supply to meet the total demand from all our customers. So given just like Doris mentioned right now the macroeconomic a little bit slower, softer than the year beginning, but the gap is still pretty large. So under such a situation, actually customers still need our 12-inch wafer supply and the commitment to battery. So that's the reason why as report today, our prepayments still accumulate bigger and bigger from quarterly. So that's the situation, what our main customer, no matter for the IDM or foundry, their demand for the 12-inch wafer still quite strong. They do need our wafer commitment, not only this year and next year or the year after. So as I mentioned before, actually, what the new batch of LTA has been signed from early -- from second half last year and then first half this year, so our LTA coverage percentage has been reaching pretty high, very, very high actually, not only this year, but also next year. Customers' LTA requirement actually is already from last batch 5 years expanded to this batch as long to 8 years, even longer to 10 years. So that's the situation for our 12-inch customer. And you know that there are only 5 Tier 1 wafer makers can supply this 12-inch wafer, especially for the advanced node of wafers. And the coming green capacity would not be available until 2 to 3 years later. And also the 12-inch, no matter parish or epi wafer actually, actually it's just a very low single-digit of borne cost to our customers. So this is -- I mean, the wafer, 12-inch wafer is the strategic role material to our customers. So they do need to secure these wafer stable supply with the highest, best quality. So that's the reason why customer need to secure and the customer is willing to sign the LTA with prepayment for such long years. And also customers do know that the 12-inch wafer is the trend for the coming year-by-year and even moving to more advanced than node wafer. And they also need wafer makers to construct the new advanced node, newest capability and the capacity wafer greenfield to supply to net. So that's the overall situation for customers' demand. So let's just refer to Doris mentioned, our customers still signing the LTA and paying the prepayment with us month-by-month and quarter-by-quarter. Thank you.

Got it. So my last question is to follow up on your expansion in the U.S. Could you share with us your latest target of capacity expansion by 2025? And I think the total capacity is expected to be 1.2 million units per month. Any time line for the capacity to achieve that scale?

Okay. Thank you. Actually as I mentioned, for our -- actually, for this Texas new plant, we do have a huge land just next to our current epi factory in GlobiTech. So actually, just referred to right now, we will have very good synergy to manage these new greenfield 12-inch wafer cost. And regarding for the capacity, we are taking off the Phase 1 by considering the LTA amount required from customer. Okay. So whenever we collected like 80%, we just mentioned of capacity, we are kicking the Phase 1. And after that, we do believe the customer will continue to ask more wafer supply, just like I mentioned, they do need a stable commitment from we wafer makers especially that they are more in the more new fab constructing in U.S. So our greenfield in U.S. would be kind of local supply to name. So we will -- we are foreseeing to collecting more and more inquiry and the commitment to even the LTA prepayment from these new U.S. customers. So after the Phase 1, definitely we will be collecting the Phase 2 prepayment NIM whenever reach the same similar high percentage like Phase 1 we were kicking off the Phase 2 and so on. Thank you.

So how meaningful is the capacity for Phase 1?

Sunny, this is kind of business confidential information. So we do not think any wafer makers would be sharing the precise number, but basically just the Phase 1 of this new greenfield to be available by 2025, just basing on the actual demand we collected from the customer, as I just mentioned.

Haas, please unmute yourself.

My first question is about your brownfield investment. With extending equipment lead time is your brownfield investment still going to ramp from second half 2023? And if that is the case, could you provide update on how much capacity would you be able to expand in the existing facilities?

Okay. Thank you, Haas. Our brownfield actually have been ongoing and a couple brownfield projects in Taiwan, Korea, U.S. -- and Taiwan, Korea, Japan, U.S., even Italy, mainly for the 12-inch wafer and special wafer like SOI in U.S. and the FZ in Denmark. That's for the 8-inch. Of course, SOI also 12-inch in U.S. at the same time. So all of these brownfield are going smoothly as our expecting schedule, just even a little bit macro uncertainty in supply chain delayed, but not an issue at all. So basically for this brownfield schedule would be completely from end of this year and mainly for the 2023 and later. So all of the schedule still as expected. And as mentioned the 12-inch wafer for the brownfield, it could be up to the 10% to 15% of our current capacity. But of course, that will be depending on the product mixing and the product mix in mainly and advanced node wafer. Of course, we are focusing. That's the answer. Thank you.

That is very clear. My second question would be on the pricing outlook. You mentioned the role for demand upside beyond long-term agreement is lower for 8-inch and 12-inch. Does it mean the wafers you are shipping in the spot market could have more pricing pressure if demand further slows down? If the stock price drops below the contract price, would you worry your customers cancel their LTAs?

Thank you, Haas. Actually, as mentioned, we are fully loaded currently for the 12-inch, 8-inch, not only this first half and the second half, even next year. So actually for the current capacity, the price order already fully loaded in the book and also the trend of ASP, no matter for the spot or the LTA, actually it is increasing. So that's the reason why given our total capacity we're not increasing significantly, but look at our revenue, look at our gross margin percentage, we are still increasing quarter-by-quarter, even reaching the record high. So I think there's a couple of reasons for why we can have the record high in terms of revenue and the gross margin percentage quarter-by-quarter. One, of course, is the -- one of the most major factor is because of the ASP improving, not only for the LTA pricing, but also the spot pricing. Actually we are fully loaded in first half and the second half. So the ASP improving is the very important and helpful factor to help the quarter -- every quarter's revenue and profit.

Okay. That is very helpful. If I could ask one more. You discussed about your own end market inventory levels. But could you discuss about the role for inventory levels at foundries, IDMs and your memory-maker customers?

Haas, I think Doris right now has been answered this question. It's the inventory -- I mean, the customer inventory level is different by customers' applications. So the mobile phone consumer devices, they are with a relatively higher level. But comparing the high computing devices, actually they are still with the very strong demand and the layer inventory levels still quite low. And if our -- if talking for our products, actually we are making to order, we are not making to stock. So that's the reason why all our making products can well be shipped to customers when it is finished. So that's the reason why you can see our quarterly inventory levels almost keep the similar level. So that's the inventory situation of today. Thank you.

And for the interest of time, we will have to conclude the call now. But before we go, Doris, or any of the management team, do you have any closing remarks?

Yes. This is Doris again. I would like to thank again for everyone's participating in the meeting. I think the most important message I would like to deliver to everyone is that so far for silicon wafer in this sector, I think the supply/demand is still very healthy. And even for next year, I think especially for 12-inch still very -- demand is still very strong and 8-inches' demand is quite comfortable. So that's our comment. Thank you very much for everyone's time. Thank you.

Thank you, Doris and management team, and thank you all for your participation. Please have a lovely evening and take care.

Thank you. Have a good day. Thank you. Bye-bye.

Thank you. Bye-bye.