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

Good afternoon, everyone. Welcome to GlobalWafers First Quarter Audited 2023 Earnings Conference Call. This is Jason Tsang from CLSA Taiwan. Today it is our honor to have Doris Hsu, the Chairman and CEO; and Ms. Leah Peng, the spokesperson, here with us. They will share the operation update and outlook on the company and the industry and then we will open the floor for Q&A section. So let me turn this call over to Leah. Leah, please go ahead.

Okay. Thank you, Jason. Dear all, thank you very much for joining GlobalWafers Q1 2023 earnings call. This is Leah Peng, the Spokesperson. We also have Doris Hsu, the Chairperson and CEO of GlobalWafers. Doris will guide us through the executive comments. Then I will elaborate on the industry overview and the financial results. Doris will answer the questions we received from the investors followed by an open Q&A section. Kindly note that the presentation has been uploaded on to our web homepage. If you do not have the file on hand, please access our website. Please understand that this earnings call contains forward-looking statements. Forward-looking terminologies such as believes, expects, may, will, should, anticipates, plans and their update or similar expressions are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future preference or events and are subject to a number of uncertainties, risk and other influences; many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based and could cause the actual results to differ materially from those anticipated by the forward-looking statements. Please refer to the Safe harbor notice in our presentation. Now I would like to hand over the call to Doris for the executive comments. Doris, please.

Thank you, Leah. Good afternoon, everyone. Thank you very much for joining GlobalWafers earnings call of Q1 2023. Leah Peng, our Spokesperson, will guide us through the presentation. I will answer the FAQ received recently followed by the question raised in the meeting today. First of all, let me share some comments about financial results, update operation status and also I'm going to make some explanation of a new deal we just announced a couple hours ago. If you have already downloaded our material, please turn to Page 3. I would like to highlight a little bit about our revenue and gross profit performance of Q1. Despite all the challenges and weakening macroeconomics, GlobalWafers has contributed a record breaking revenue in March and also in the whole Q1 2023. Our Q1 2023 revenue totaling TWD 18.6 billion with 14.2% growth Y-o-Y. This is a sequential growth for 13 quarters starting from Q1 2020. So revenue wise, it's really a great quarter for GlobalWafers. Gross profit wise: our Q1 2023 gross profit margin was 40.6%, which is 2.1% lower than Q4 last year. The erosion is mainly due to 2 factors. Firstly, a spike in power cost in several countries of our global operations and secondly, higher depreciation in Q1 2023. These 2 factors impact our gross profit by 1.2% and 0.5% respectively. Our Q1 2023 operating profit margin was 32.8%. Page 4, please. Our net profit margin was 26.9% in Q1 2023, which is 4.6% lower than last year. EPS, our Q1 EPS was TWD 11.49 per share. This is lower than 2022 Q4, which has resulted from lower Siltronic share price and less foreign exchange gains compared to the previous quarter. Prepayment, that's another very important index we're always monitoring very closely. As of end of Q1, our prepayment totaled TWD 38.5 billion or USD 1.3 billion, decreasing by 3% versus end of 2022. Per contractual obligation, customers' prepayment will be refunded if all terms are satisfied. Thus we returned partial repayment to customers in Q1. We keep signing new LTAs and receiving new prepayments with multiple customers yet the amount of new prepayment is less than the amount we've just refunded in Q1 contributing to less prepayment compared to end of 2022. Dividend payout: today in GlobalWafers Board, we also approved and we just announced the cash dividend payment plan for the second half of 2022 and resolved to distribute a cash dividend of TWD 9.5 per share for the second half 2022's cash dividend, totaled TWD 4.13 billion. Throughout the whole 2022, the annual cash dividend is TWD 16 per share. Page 5, please. Let me share some outlook on macroeconomics in semiconductor industry. In January, IMF, International Monetary Fund, raised its global GDP growth forecast by 0.2%. The first time it has raised its forecast in over a year. But only 3 months later in April, the IMF global forecast was again reduced slightly down 0.1% citing uncertainty in the world's banking system has added a new downside risk to the global economy recovery.IMF looks for bottom in 2023 and rebound in 2024; 2023 GDP growth forecast at 2.8% and 2024 at 3%. For semiconductor industry, in 2022 macroeconomic headwinds significantly increased as governments took actions to slow down inflation. One consequence is lower consumer spending and dropping mobile and PC demand has hit memory manufacturers particularly hard. The fundamental swings are prolonged into 2023. In 2023 the emergence of market drivers, including industrial electronics and automotive, will sustain the semiconductor market revenue. We expect an improved semiconductor market in the second half 2023 propelled by data center and recovery in macroeconomics. Our view of the long-term momentum of semiconductor industry remains unchanged. Semiconductor continues to be critical components and of growing importance across the economy. Though inflation and various geopolitical tensions led to uncertainty and potential disruptions, the fundamentals consistently fueled the momentum for the entire semiconductor industry. The next item I would like to share an update is this compound semiconductor. Silicon carbide is still very strong. The whole demand for silicon carbide is still very strong. The unique properties of silicon carbide make it an excellent choice especially for automotive semiconductors. As cars continue to become more electrified, silicon carbide is expected to play an increasingly important role in powering and controlling the car's electronic systems and automotive contributes the largest market segment for silicon carbide power components. According to our internal calculation, our revenue in 2023 the first 4 months January to April, GWC's revenue for silicon carbide has already been exceeding the whole year's revenue of 2022. That is a very positive sign to show our strong growth of silicon carbide. Page 6, please, the industrial. Let me show some update of automotive. With the rise of electric and autonomous vehicles, the demand for semiconductor is expected to grow exponentially. As these systems become more -- all of the EV car systems become more sophisticated and complex, the need for semiconductors with higher performance and capabilities will also increase. Additionally, we are seeing structural supports fueling the rapid adoption of EVs like government policy, company pledges and consumer behavior; and this adoption will continue throughout the next decade and drive the automotive industry moving towards a more connected electric and autonomous future. So we are very confident that automotive definitely will be a strong driver for the growth of semiconductor. Page 7, please. I would like to share another very important achievement of GlobalWafers. We just learned last week that GlobalWafers received its fifth consecutive Top 5% ranking in the 2022 Corporate Governance Evaluation in Taiwan continuing is commitment to improving our corporate governance and fulfilling ESG responsibilities. Page 8 is a new deal, I would like to introduce the background of the new deal. Please turn to Page 8. GlobalWafers Board approved to swap shares with Crystalwise today. Crystalwise is the very first manufacturer of hard and brittle material structures in Taiwan. Their focus was sapphire. It has shifted from sapphire supplier to gallium arsenide supplier and lithium tantalate, lithium niobate supplier, also known as LT and LN. These are crucial material for a SAW Filter. SAW Filter can be used in various wireless communications such as GPS and other navigation devices. We believe that this transaction with Crystalwise could enable GlobalWafers to encompass special wafers into its comprehensive product portfolio, step into gallium arsenide, LT and LN wafer markets and grasp the growing 5G and satellite market. The swap ratio is every share of Crystalwise for 0.02 newly issued shares of GlobalWafers. GlobalWafers will issue 878,000 new shares. This will increase our share capital by only 0.2%. And swap record date will be November 1, 2023 tentatively as it is pending on Crystalwise shareholder meeting as well as the authority's approval. I will provide more background info of these materials in the Q&A section later on. The above are my comments. Leah, please share more on the industry outlook and financial performance to everyone. Thank you.

Thank you, Doris. Let me begin with the global GDP growth forecast in Page 10. According to IMF's latest forecast, global economic forecast will go from 3.4% in 2022 to 2.8% in 2023 before settling at 3% in 2024. Tentative signs in early 2023 that the world economy could achieve a soft landing with inflation coming down and the growth [ rising ]. Upsides to this global GDP forecast come from the continued stronger contribution from China. China's realization of COVID policies correcting supply chain gaps and the return of service industries will fuel a global GDP growth. Based on China's National Bureau of Statistics, China economy expanded 4.5% Y-o-Y in Q1 '23 driven in large part by consumer paving ways for a 2024 rebound. Then it is Page 11. The global semiconductor industry is poised for a decade of growth and is projected to become the USD 1 trillion industry by 2030. Underpinned by automotive; particularly EV, data storage and the wireless industries exhibit a 9% CAGR. In many ways our world is built on semiconductors as the impact of digital on lives and business has accelerated. Megatrends like remote working, the growth of AI and EV have propelled the semiconductor market. The fundamental for long-term momentums are not changed despite the current turbulence. Please allow me to further elaborate the global silicon wafer shipments in Page 12. Global silicon wafer shipments growth is expected to temper in 2023 due to challenging macroeconomics, but it's forecast to rebound in 2024. Though this research from SEMI.org was published in November of last year, the market has additional lease-out since then. However, the down in '23 and recovery in '24 is still consistent with analyst projections and we believe the forecast still is accurate and probably not too far from it. Further actions will be based on current known factors. In Page 13, according to SEMI report, 300 millimeter fab capacity will grow from 7 million wafers per month to an all-time high of 9.6 million driven by 82 new facilities and production lines, a proof that even though the expansion pace is moderating, the industry remains really focused on growing capacity to meet robust secular demand for semiconductor. Page 14 is the mapping of GlobalWafers expansion and the regional market share of global 300 millimeter fab capacity in 2026. Our expansion sites have been carefully selected to align with the major semiconductor markets around the world. The expansions are in regions that are home to some of the largest semiconductor companies. By expanding in these key locations, we are confident to be able to capitalize on the growing demand for semiconductor. For example, we are building Italy's very first 300 millimeter wafer fab and in Taiwan we already extended AP in the compound semiconductor wafer capacity. Large-sized and special wafers will increase meaningfully in GlobalWafers product portfolio targeting the advanced process for new innovations. In short, GlobalWafers has well positioned itself for future growth. Let's move on to Page 15. The automotive semiconductor market is showing continuous growth, which is inevitable as the penetration of semiconductor test locations such as higher levels of ADAS and the electrification. The higher ADAS level is, the more semiconductor it requires. This represents a semiconductor chip value of USD 500 per gasoline car growing to USD 2,000 in Level 2 or 3 PEB and the semiconductor content per vehicle will spike even higher in level for autonomous driving. Page 16 elaborates that by 2035, the battery electric vehicles will likely represent more than 65% of all new light vehicle sales across the global automotive market driving innovation and sustainable growth. Additionally, edge computing, 5G and memory in EV are adding momentum in the automotive semiconductor market. Edge computing can allow EV to process data in real time and make decisions locally. Also enables EV to reduce that amount of data that needs to be transmitted to the cloud, which helps improve network efficiency and decrease data transfer costs. And 5G networks provide faster and more reliable connectivity for EVs enabling low latency communication. Memory enables EVs to store and process larger amounts of data with fast nonvolatile storage. EV can store and access data quickly improving system response times. Overall, the combination of edge computing, 5G and the memory technologies is turning EV into a giant computer on wheels. With these technologies, EV can process and analyze data in real time, communicate with other vehicles and devices and operate as part of a larger connective system. Therefore, we believe in the consistent growing fundamentals in automotive semiconductors. Also memory is facing severe imbalance now. We strongly think EV is indispensable for all technology innovations. In Page 17, data center is growing rapidly due to the increasing demand of digital service and data storage. The domain is driven by factors such as cloud computing, Big Data and IoT digital transformation in the e-commerce. It exhibits a 5.4% CAGR through 2030. AI has the ability to analyze vast amounts of data and optimize process. This has led to increased adoption in various industries. The global AI chip market size was evaluated at USD 17 billion in 2022 and will hit around USD 227 billion by 2030 expending a CAGR of almost 30% sustained by generative AI applications like ChatGPT. In Page 19, SiC is forecast to grow with a CAGR of 31.6% in 2022 to 2027 and finally reach $6 billion. The EV hybrid vehicle market is truly the sweet spot for its IT power components. More than 70% of revenues equating to TWD 4.7 billion is expected to come from this sector. Then it is our financial highlights. In Page 21, these are our Q1 '23 financial results. Our Q1 revenue hit TWD 18.6 billion with 14% Y-o-Y, the best ever marking the 13th consecutive quarterly growth. Gross margin was 40.6% eroded by the power cost and the depreciation. Operating profit maintained at 32.8% and net profit margin at 26.9%. Our EPS totaled TWD 11.49 per share. Let's move on to the balance sheet in Page 25 and I will add more color on the key item, cash. In Q1 '23 our cash reached TWD 74 billion, which might seem much less compared to the TWD 80 billion at the end of 2022. However, if we dive into other assets, another TWD 13 billion which was earmarked for deposits held for more than 3 months and another TWD 3 billion is leases of restricted cash, which is temporarily set in bank for tax consideration that could be used when necessary. So if all these cash-related assets are included, our total cash in Q1 '23 is actually TWD 90 billion. Now I would like to give the floor to Doris for the Q&A session. Thank you. Doris, please.

Thank you, Leah. Let me start from several questions we received in the past several days. The first question is please share with us GlobalWafers' outlook on Q2 and second half 2023 and beyond? 2023 starting with the continuation of second half 2022's problems like inventory piling and macroeconomics headwinds and lower consumer spending, the drop in mobile and PC demand. All this issue has hit memory manufacturers particularly hard. GWC currently has 13 consecutive quarters of sequential revenue growth dating back to Q1 2020. But this stellar stream of sales performance will be tested especially in second quarter '23. Nevertheless, protection afforded by the aforementioned LTA sales strategy should yield better performance on a relative base. The future outlook in the near-term view is somewhat cloudy for now. To be very honest, the visibility is not really very good yet. We talk with all of our key partners, key customers. We think that -- we are expecting that the recovery will be starting from second half '23 or the latest is early 2024. It's more likely starting from the second half 2023, we will start seeing some recovery. But Q2 will be tested, will be challenging in Q2. Some of our customers and analysts still look for a start of another swing in second half 2023 toward improved semiconductor market propelled by data center demand, which continues strong and lifting high-end chip demand. And macro is normally showing signs of recovery as well evidenced by China's GDP growth, which grew 4.5% from January through March compared with the same months last year. So from all the evidence and many information from our customers, we think that it's more likely that second half 2023 will start seeing some recovery. Visibility is not very good yet, but we start seeing some good signs that maybe the second half this year will be recovering. That's our view for Q2 and the second half Q3. For beyond, I think almost all analysts are indicating a snap-back in 2024 and mentioning that it is time to get ready for the 17th industry upturn, which is just around the corner. That's the very first question of our outlook. And the second question is about our inventory. If you check our balance sheet, you will see that our inventory spiked from TWD 8.5 billion, which was the inventory at the end of 2022; spiked from TWD 8.5 billion to TWD 9.2 billion as of the end of Q1. This is from DOI's viewpoint, a day of inventory's viewpoint. Our end of 2022 DOI was 72 and end of Q1 '23 our DOI was 73 so just slight increase. The increase mainly results from 2 items, one is finished goods and another one is raw material. In the finished good increase, a little bit is just lower than 1 day, just slightly increased and this is mainly because we value the long-term partnership with our customers and adjust the partial shipments from end of Q1 to Q2, slightly adjusted a little bit to help our customer to get through the turbulence. That's why our finished goods increased slightly. On the other hand, we see more increase on our raw material and this is to mitigate the inflation of raw material, especially polysilicon. The raw material price increase a lot in 2022 and 2023 mainly because of inflation and super high energy cost. So that's why intentionally we purchased in advance to enjoy to control the raw material cost a little bit better than 2023's inflation and also energy cost. So these 2 are the key reason of why our DOI increased 1 day. And next question is about our expansion project -- sorry, the status of our expansion projects? Are those projects on schedule or what? As we reported to the public several times that we have 6 expansion projects in 6 countries and most of the projects are on schedule, but some delayed 1 to 2 quarters. For example the one in Europe would delay somewhere around 1 quarter to maximum 2 quarter and the U.S. expansion so far is on schedule, that's current status and Japan expansion will delay around 1 quarter, that's the current status. All the other projects basically are on schedule. And next question is about our dividend payout. GlobalWafers 2022 payout ratio is lower than previous years. Please advise your strategic thinking and how we should envision the future dividend policy? I think the arrangement is very clear and reasonable, the logic is very reasonable. It's very clear because a number of capacity expansion plans are currently underway and the pace of interest rate in so many currencies, hikes in various countries, this is accelerating. So the cost is likely to increase in the future because of the high interest rate. By strategically adjusting down our dividend payout, which is still higher than the industry average, and investing in capacity expansion, I think GlobalWafers is empowered to pursue long-term competitiveness and to feed back shareholders with fruitful operational results with business growth and sustainable dividends. That's why we think we chose to lower our dividend payout a little bit this year, but still higher than the market average. Next question is about our American expansion, the greenfield expansion in Texas in Sherman. So the question is what is GWA's current status and what's the progress on CHIP Act? First of all, let me talk a little bit about the status of the CHIP Act. Silicon wafer projects for GlobalWafers, we are in the second round of application, we are Group 2 people. Group 1 is foundries for fabs and Group 2 is for material. And we are silicon wafer material so we are in the second round of applications. And those regulations are still outstanding with an anticipated release at around end of June 2023. So we are preparing the needed material and trying to figure out all the regulations with related government departments right now. That's the status of our CHIP Act. And the status of our American GWA Sherman, Texas construction; everything is in line with the original time line. We had some difficulties on the construction material, but it's getting better now. So, so far everything is in line with the original time line. Our initial mass production for GWA, our Sherman operation, will be starting in Q1 2025. I think that should be a very good timing of we think the next semiconductor upturn. So that's our status of our Sherman, Texas operation expansion project. And next question is also for some government support. The question is that please advise how many incentives from Europe CHIP Act Novara expansion will be granted? Novara is our operation in Italy, which is working on the 300 millimeter expansion right now. Our European team are working very closely and of course negotiating very closely with European government and following up all the procedures now. We have positive feedback from related government department, but so far we are still waiting for the final -- the formal documents now. So we don't have the number to share today, but so far everything went pretty well. We have good communication with European government. So that's the status of our European government support for our expansion in Italy. And next question is how is your current utilization rate for 12-inch and 6-inch? Let me update a little bit for this. Basically for 6-inch, it's not full. Starting from Q4 last year, 6-inch is not full. The situation for small diameter is still like the past 2 quarters is not full. It's around 70% roughly up and down month by month, but roughly it's about 70% for small diameter or 6-inch. And for 8-inch and 12-inch, in Q1 both 12-inch and 8-inch were still 100% loaded. But starting from Q2, we are seeing some weakness from our customers. So some of our customers are asking for more adjustment or little bit more pushout of the shipment for 8-inch and 12-inch. But so far in Q2, it's not full for Q2. 8-inch and 12-inch are still way higher than 90%, the utilization rate is still higher than 90%. That's our current status. And next question is about our silicon carbide status. Compound semiconductor for us is rather small, revenue wise is rather small. But it is our major expansion target. That's one of our most important expansion project now. I think we expect that this project will make very rapid progression over a short period of time. Just as well I explained when I made the executive summary, our silicon carbide revenue from January to April have already exceeded our total revenue of 2022. So that's a very good performance for silicon carbide revenue growth. And next question is how is our view of the raw wafer market in 2023? It seems like that all the raw wafer suppliers are expanding capacity, but foundries utilization is dropping. So is there any concern for over supply? That's the question, which is definitely a very good question. Our view is that I think in early 2000, it was around 2010. After painful lesson we learned in early 2000, semiconductor wafer makers are now more cautious than before, especially more cautious in capacity expansion than before as this involves enormous investment plus the expansion projects are more disciplined now rather than irrational. Take GlobalWafers for instance, our greenfield only kick-off after 80% of capacity is secured by LTA. Without securing over 80%, we will not kick-off any expansion at all. And just like what we indicated in the presentation, the entire world is built on semiconductor and will reach $1 trillion in 2030 with 7% to 8% CAGR every year. So the turbulence we are seeing now is a short-term issue. We are seeing foundries utilization rate is low now, which is true, but it's for short term. When the market is back to the track, the wafer supply will be still in a very reasonable level. So all the low utilization rate or it looks like kind of like oversupply concern, that's for short term. For long term, it's still very healthy and very well disciplined. Okay. And next is what's the new growth driver for coming years? What's our view of the new growth drivers for coming years? We think that the market drivers, key market driver for the coming years are of course definitely EV car, automotive. That's number one. And industrial electronics, that's number 2. Data center and servers, these are very important as well and AI and high performance computing. These are the most important drivers for the semiconductor industry in the next several years. That's our view. The last item is some quick update. I want to share a little bit more details of the new deal we just announced a couple of hours ago, our stock swap with Crystalwise in Taiwan. As I said at the very beginning that Crystalwise is the very first sapphire wafer company in Taiwan. Sapphire is very hard, but very brittle so how to process that kind of material is you need a lot of technology and CWT has this technology. But several years ago because sapphire business is very -- the market situation is very tough so CWT, Crystalwise, have already switched to gallium arsenide and lithium tantlate and lithium niobate, those products. So now 3 key products for Crystalwise is gallium arsenide, lithium niobate and lithium tantlate. That's the key products. And what's the main applications for those materials? Let me very briefly explain the applications so it will be very easy for everyone to understand why it's important. The main application for LT and LN are for SAW Filters. SAW Filter means surface acoustic wave filters. LT is for standard SAW and LN is for temperature compensated SAW. So both LT and LN can be used for thin film for piezoelectric-on-insulator POI. And these applications is of good potential especially for wireless communication applications. Gallium arsenide is for another field of application. Gallium arsenide basically can be used for 3 different categories. One is for RF, the second one is for laser diode LD, the third one is LED. For these 3 key applications. For gallium arsenide RF, if your gallium arsenide subject quality is good enough, that means that defect density is very low like HNP density, lower 500, then that wafer is good for RF application. For laser diode, if the epi density is higher -- HNP density is higher, then it can be used for red LED or micro LED. So that's the application. So the reason for GlobalWafers to swap shares, the Board, that means that acquires a merged CWT is because GlobalWafers is the total solution provider. We provide not only silicon wafer to our customers, but also some different compound material, including silicon carbide and gallium nitride and some other compound materials. So if we have not only silicon carbide and gallium nitride, but also gallium arsenide and LT and LN, I think that's good from overall product line viewpoint and that's good for our customers as well. That's why we think that it makes sense for us to add this material by swapping the shares with Crystalwise. Of course Crystalwise itself still need a lot of support from GlobalWafers to improve their overall operation performance and also to improve the sales network. Without GlobalWafers operations support and worldwide sales network support, it's very challenging, very difficult for Crystalwise to run the business on their own. That's our view. So that's why we think that it's good for our operation and we should be able to improve overall CWT's performance. That's why I want to share this information with everyone. That's all I want to share. Thank you very much. I'm open to have any questions from anyone. Thank you very much.

[Operator Instructions] So we have the first questions is in terms of Crystalwise. Can you give us more details in terms of its market size or the current product mix of Crystalwise and how fast do we expect to turn the business around?

Okay. The market size of LT/LN, it used to be good because as I said that SAW Filter is very important device for 5G cellphone or wireless devices. But you know that starting from 2022, worldwide cellphone business is extremely bad in the world. So the whole market is very bad right now, including for LT/LN. But it will be back. It will be back when the cellphone business is good and 5G or 6G and satellite and other wireless communication increase. I think it will be a good business. If we check this CAGR from 2020 to 2028, SAW Filters market CAGR is around 2.7%. Thus the market is still pretty small. In 2020 the global SAW Filter market is just around USD 7 billion. In 2028, the forecast for worldwide SAW Filter market will be around USD 9 billion. That's the market size. For LT/LN the CAGR maybe a little bit big, but basically it's close to around 2% to 3%. That's the status. Of course if you see the 5G subscription, that increased a lot as well. For 5G, you will need more LT/LN and that's for LT/LN. But for gallium arsenide because you can use for LED, LD and RF materials; so gallium arsenide will keep increasing a lot. Even for power amplifier, you use Gallium arsenide as well, depends on how good the quality is. So we think that the market is okay, but I think it will take us a couple years to turn around Crystalwise. Some R&D resource will be needed, some operation management and operation efficiency improvement, a lot of actions will be needed. And what's more important is that we have to be able to approach more Tier 1 customers to introduce the LT, LN and gallium arsenide products to our customers. So I think it will take a couple of years to really turn around the company.

Now we have a question comes from Bruce Lu.

Doris, can you hear me?

Yes, I can hear you. This is Doris.

Okay. So I got a question about your longer-term margin. I remember that you did mention that in your own assessment that for the 3 years, the gross margin should be within a comfort zone at this moment given the new LTA you signed. But we do foresee a higher inflation cost from you guys I mean for the polysilicon, for the electricity costs or the labor cost. Are we still comfortable about our margin trend onwards I mean still factoring all those costs or can we factor -- can we pass that kind of incremental costs to your customer for the newly LTA you signed recently?

For new LTAs, maybe you will be able to -- let me put it this way. First of all, electricity cost increase to that level, that was not what we expected. Last year energy costs increased by around 1%. So I still remember that in our earnings call, I said that was manageable. But you know what, this year it increased further. For example Japan, electricity costs this year was even higher than last year. In Italy, our energy cost in Italy is over 300% higher than last year starting from '23 is still higher than 2022, that was totally beyond our expectation. In Taiwan also, our electricity cost increased starting from April. So this electricity cost increase -- the impact from electricity cost increase is around 1.2%. We have some depreciation cost increases or depreciation increase that hurt our gross margin around 0.5%. So I don't think that -- for now, I don't think that we will be able to because right now the demand is still somewhat slow. So it's not easy to pass on this additional cost to our customer for now. But when we negotiate the new LTA with customers, we definitely will include inflation cost and all the new cost. For new LTAs, we will definitely include all those factors into consideration. But at the same time we are taking a lot of action, taking a lot of measures trying to reduce our power consumption per wafer. So that's what we're doing and we review this every month to see how much we are improving and matter of fact we are really improving a lot. We have already worked out some special action to improve our power consumption. So that's our current status. I think we will be still pretty stable. Our gross margin would be -- so far I would say that will be still quite okay.

I see. So the low-40s should be a comfort zone for you guys. Is that the reason?

Yes.

Okay, good. The second thing is that can you -- earlier you just mentioned that you have some delay for the capacity expansion. Can you give us an update about what kind of capacity you will expand in the coming 2, 3 years after factoring in all the recent delay?

We have never disclosed what's the specific numbers. For example 300 millimeter, how many wafers you increase. That's our company internal policy that we don't disclose the specific numbers how many wafer is increasing. And the reason that I think it's very hard to explain how many wafers we increase is because that if you produce the wafers for most advanced products, the output volume can be -- even same capacity, the output volume can be 30% lower. So it's very hard for us to put it that way. So I just want to say that all of our expansion project, everything on schedule and so far some time line delay is just about 1 or 2 quarters in some area, but some sites are already completed or some area basically we're still in line with the original time schedule.

Now we have a question from Donnie Teng.

Donnie, I cannot hear you.

Sorry. Can you hear me now?

Yes.

So I have 2 questions. First one is due to TSMC or other customers have mentioned about the inventory correction time period will be pushed out little bit more maybe by 1 or 2 quarters. So just wondering if you have any idea on how the semi wafer inventory level in the supply chain would be? When exactly the inventory will pickup if considering all your customers' latest outlook?

Okay. Inventory, most of our customers' inventory is improving. That means it's very hard to say that it is already to the healthy level. No, that's not the case. But the inventory is reabsorbing so it's coming down. It's slower than our expectation, but the inventory is slowing down. For now inventory is not the key concern for us except memory. For memory, inventory is still a very important concept. But for the other cases, it's more a demand status and visibility. These 2 are the issue. So for some of our customers, their inventory is basically okay, okay, acceptable, but the problem is that they don't really see strong demand recovery yet, haven't seen that yet. So demand is more an issue than inventory level for quite some of our customers and the second one is visibility is still not very good for now. So inventory-wise and also for your question then how about silicon wafer inventory at our customers side usually. Because our customers, they don't really break out the inventory level to what is raw material or in silicon wafer and how much is finished goods. So we don't really know that how much is. Especially for most of the customers, we don't really know how many inventory in wafers they have. By their financial report, it's not very clear for us. But of course when we visit them, we know. We visit each customer and try to figure out how much inventory they have. So yes, it's improving now.

Understood. A follow-up. So do you have any view on the third quarter sales trend would be if customers' inventory digestion, as you said, may be better into the second half or the next year? I'm not sure whether our sales production will be prolonged into the third quarter according to the occurrences of bid.

I think it's very likely that our Q3 revenue will be higher than Q2. Q2 is challenging for now. It looks like that -- we're still working with customers now. We're not 100% loaded, we are not fully loaded now. We think that Q3 -- second half should be better than Q2. Q1 as already announced was a good quarter. Q2 a bit lower than Q1 and we think that Q3, Q4 should be improved, it should be better than Q2. But the problem is how much better? We don't know how much better. Maybe slightly better, Q4 maybe would be recovering picking up better than -- much better than Q2. We don't know the percentage yet. But we think that the trend is that second half should be better than Q2. That's our view.

Understood. And my second question is regarding to maybe some potential export controls in the future because material now seems like not yet center of the overall sanctions by different governments. But recently there was a news mention about German government considering to add more export restriction to China regarding to your material. Wondering if you could kindly give us some color on how is your view on the potential sanction risk for the semi wafer industry in the future. And due to semi wafer has been already -- like wasn't on agreement before so I'm not sure what type of semi wafers have been already under this kind of restriction for the export to China at this time point and how the things will go into the future?

Yes. First of all, to answer your question. Germany, I think that we notice that German government, they have some -- they're considering some actions, but so far we don't have the detail to talk without too much detailed information. So it's hard for us to judge how much that will affect. But for silicon wafer, based on current practice right now for silicon wafer, I think Unverified List -- UVL, the Unverified List. That special customer account -- that one affects more than the broad range. Of course we have to follow 2 things. One is that what specific products we're not allowed to ship to? That we will follow such as if it's less products or much more advanced process for memory, then we will not supply wafers those customers. That's 1 rule. Another one is UVL, we have to follow those customers, we cannot ship wafer to those customers. So for now UVL, that impact to us is more than the application, the process and strength. So, so far we -- but fortunately, we are not supplying a lot to those customers, but we work very closely on this. For example for UVL, YMTC is one the company newly listed on the UVL. We don't have much business with that specific company. So, so far our impact is still okay. But we monitor this very closely. We don't know how German government is going to set the constraint yet so it's hard to comment for now.

Okay. Thank you, Doris. It looks like we have run out of time. So this concludes our Q&A section. Thank you very much for your time and participation on this call. Thank you, Doris and Leah. We'll see you next time. Thank you.

Thank you, everyone. Thank you. Have a good day. Thank you.

Thank you. Bye bye.