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

Good afternoon, ladies and gentlemen. Thank you for joining us on Q3 2024 earnings call. I'm Leah Peng, the spokesperson of GlobalWafers, and our Chairperson, Doris Hsu, is with us today. Here's how today's call will unfold. Doris will start with the executive comments, followed by my brief introduction covering our perspective on the semiconductor industry, our Q3 '24 performance and addressing questions we have received from investors recently. The session will conclude with an open Q&A, during which Doris will provide answers. A quick reminder, please keep your audio on mute. [Operator Instructions] Before we begin, I would like to remind you that today's discussion may contain forward-looking statements. Please be aware that these statements are subject to various risks and uncertainties, which could cause actual results to differ materially from our expectations. Please refer to the safe harbor notice in our presentation. Now without further delay, I would like to pass the floor to our Chairperson for the executive comments. Doris, please.

Thank you, Leah, and good afternoon, ladies and gentlemen. Thank you very much for joining GlobalWafers Earnings Call of Q3 2024. Leah Peng, GWC's spokesperson, will guide us through the presentation and FAQ received recently, and I will address the questions raised in the meeting today. First of all, let me share some comments of our overall financial results and update current operation status. In the third quarter of 2024, our revenue reached TWD 18.9 billion, marking a 3.6% increase Q-o-Q. For the first 3 quarters of 2024, our revenue totaled TWD 46.3 billion, reflecting a 14.1% decline Y-o-Y. Both -- 3 quarters this year and the third quarter this year, both of these 2 achieved the third highest figure for the same period for GlobalWafers. The revenue decrease of 2024 versus 2023 is mainly due to the continued impact of sluggish demand in the semiconductor wafer market, particularly in the automotive and industrial sectors as well as softer-than-expected demand in China market. While customers have been gradually reabsorbing inventory, the pace has been slower than anticipated, making the overall market less optimistic than our initial expectations at the beginning of the year. However, GlobalWafers has already passed the Q1 2024 trough and has been growing for 2 consecutive quarters, Q2 and Q3, with Q4 expected to continue this upward trend. As inventory levels normalize by year-end, we anticipate a market recovery in 2025, driven by improving semiconductor demand and new customer capacity coming online. Okay. Let's take a look at the gross margin. Our gross margin -- gross profit margin stood at 30% for Q3 and 32.2% for the first 3 quarters. The 2.3% Q-o-Q gross margin decrease can be attributed to several factors, including -- the first one is that increase in electricity costs across countries due to summer weather. And number two is the rise in depreciation. Number three is silicon carbide decline in both volume and price. And number four reason is the variation in the product mix. Okay. And operating profit-wise, in Q3, the operating profit margin stood at 20.2% and the cumulative total for the first 3 quarters reached 22.8%. Net profit for Q3 2024, GlobalWafers achieved a net profit margin of 18.6%, bringing the net profit for the first 3 quarters of the year to 20.2%. EPS, earnings per share, for the third quarter came in at TWD 6.18 per share, contributing to a cumulative EPS of TWD 20.19 per share for the first 3 quarters of the year. Okay. Another very important index, which we always update to all shareholders is the prepayment amount. As of the end of September 2024, our prepayment totaled TWD 33.1 billion or USD 1.05 billion compared to the previous quarter -- end of previous quarter, our prepayment balance decreased by 6% or TWD 1.8 billion. This reduction can be attributed to 2 key factors. The first factor is customers honored their contracts and continued to receive wafers as agreed. So prepayments were refunded to customers when the contractual obligations were fulfilled. And the second factor is that the unfavorable foreign exchange rate in Q3, which appreciated a lot within one quarter, approximately 2.47% in Q3 appreciation, negatively impacted our prepayment figures when we're converting it to NT dollar. So these are 2 key reasons why our prepayment was around 6% lower than end of Q2. Okay. And next, I would like to share some outlook on microeconomics -- macroeconomics in semiconductor industry. Global growth for -- global economy -- global growth for 2024 and 2025 remains stable at around 3.2%. But future economic prospects remain uncertain due to a current landscape of financial market volatility and geopolitical fragmentation, presenting both risks and also opportunities. We are also cautiously monitoring the impact of China's recent physical stimulus, outlined by the standing committee of the National People Congress, [Foreign Language], which we anticipate will yield a clear result after the meeting concludes on November 8. And additionally, we are closely watching the U.S. presidential election as well. Semiconductor, I think semiconductor industry in general is improving. Strong demand is anticipated in advanced sectors such as AI, high-performance computing, data centers and personal computing. Despite uncertain global economic conditions dampening consumer confidence, new product launches in smartphones and PC sectors will also generate solid demand for SOC and peripheral ICs. Traditional sectors such as consumers are showing mild improvement, while automotive and industrial electronics are still suffering from very weak demand right now. And let me update a little bit about the industry inventory level and also CapEx trends. Our -- while customers' inventory absorption has improved, actually many of our customer's inventories is improving, meaning getting lower and lower quarter-by-quarter, but the pace remains slower than expected. A gradual recovery is projected by 2025, driven by rising demand for AI and also some advanced processing, which are boosting fab utilization and also prompting a gradual ramp-up in customers' fabs. GlobalWafers is well positioned to capitalize on this trend by focusing its CapEx on advanced and specialty products. It's worth noting that our long-term outlook for a semi-conductor market remains very robust, with substantial growth anticipated in the coming years fueled by innovations and the AI boom. The question is not whether the industry will reach this milestone, but rather when it will occur. Though there might be some short-term fluctuations, but underlying mega trends continue to drive growth, creating sustained opportunities in the semiconductor sector. Our recent customers' conversations revealed that the same positive long-term outlook, primarily fueled by advancements in AI also align well with our view of a strong, secular growth trajectory. Here, I would like to also elaborate on the compound semiconductor. As I explained at the very beginning of my executive comments, silicon carbide was one of the key reasons of our weak Q3 revenue or the very weak -- revenue versus 2023. I think in the beginning in Q4 2023, silicon carbide market encountered challenges from a certain slowdown in the EV market in China and a slower-than-expected recovery in the industry sector, resulting in elevated inventory levels. Rapid expansion in silicon carbide production has led to oversupply and extremely critical price competition right now, potentially driving industry consolidation as early as 2025 for the silicon carbide device industry to remain viable companies will need to focus on optimizing operations, improving production yields and also accelerating the shift from 6-inch to 8-inch thin silicon carbide wafer. It has to be thin or ultrathin silicon carbide wafers. At GlobalWafers, we focus on differentiating our offerings and maintaining financial stability to navigate market challenges. Our entry into silicon carbide market emphasizes high-quality, competitively priced products, supported by a robust financial foundation that make us a reliable partner for our customers. With a resilient global supply chain and flexible production capabilities, we can adapt to the shift from 6-inch to ultrathin 8-inch silicon carbide wafer to meet future demand. We prioritize superior product quality and performance alongside sustainability through our ESG initiative. As one of the leading silicon carbide manufacturers outside China, we leverage our industry-leading profitability to deliver high-quality, cost-competitive products. That's our strategy, and that's how we are going to differentiate our product, our silicon carbide product. Next, I would like to update you on our expansion status and also share some very exciting news about our expansion in the U.S. Our GWA Texas operation -- Texas, Sherman, GWA construction is on track, with customer sampling expected by end of 2024 and production scheduled to begin by end of Q1 2025. That's our current status and also our Q1 goal. Subsequent to the PMT, preliminary memorandum of terms, finalized in July, the chip office -- chip program office, CPO, is currently conducting due diligence on both GWA, our Texas operation, and our Missouri operation for SOI. The CPO has indicated that the incentive grant payments were made in the tranches as project milestones are achieved, such as collision of the construction phases and also some other milestones. So in addition to CHIPS Act, which we announced a couple of months ago, we are about to receive USD 400 million from CHIPS Act fund. In addition to this, I'm very happy, I'm thrilled to share that the U.S. government has recently just approved the AMIC, Advanced Manufacturing Investment Credit, which will greatly benefit our U.S. expansion projects. This -- the U.S. government has recently, just a couple of weeks ago, just -- has recently approved the advanced manufacturing investment credit as part of the CHIPS Act, which offers a 25% tax credit. Our U.S. expansion projects, both Texas and Missouri, operations are both eligible for this significant incentive. The final rule makes clear that semiconductor wafer manufacturers, including ingot and wafering -- and wafter manufacturing are eligible for this 25% credit. And that qualify expenses, including construction and process tools. We understand that the companies may apply for the credit when they file their annual income tax returns in the year that the eligible property is put in service. So when combined with the $400 million direct fund grant from CHIPS Act, which represents around 10% of the total combined MEMC and GWA investment, the total federal government subsidy of GlobalWafers' current U.S. investment is approximately 35% or USD 1 billion. These significant subsidies are central to our efforts to achieve significant growth in the U.S. market as our customers also expand production in the U.S. over the next decade. This financial support enhances our flexibility, reduce debt levels and also increase our return on investment. Additionally, it improved cash flow, allowing for better resource allocation and improve profitability by reducing depreciation expenses. In parallel, our Italian -- Italy expansion is focused on scaling up 12-inch wafer production, supported by funding from IPCEI, Important Project of Common European Interest, initiative, which covers around 25% of our capital expenditures, approximately EUR 103 million or around USD 110 million. This funding supports materials, utilities and labor costs for developing and producing advanced products. The pilot line is set to start up in early 2025 -- Q1 2025. So in conclusion, our strategic expansion aligns seamlessly with the future trend toward advanced node technology. The expense associated with capacity upgrades are short term. And with the support of various government award programs, we will enhance our growth potential and also complement the local supply chain. One key strength lies in differentiations that our global presence and proximity to build -- to blue chip customers enable us for -- to facilitate collaboration development of next-generation products, while also reducing our carbon footprint. This positions GlobalWafers as the preferred partner for our customers in the semiconductor industry. Okay. I think the above are my comments. I will stop here. And Leah, please share more on the industry outlook and the financial performance of our shareholders. Thank you.

Thank you, Doris. Next outlook on semiconductor industry. Let's move to Page 9, global semiconductor market. There is no doubt that the megatrends will sustain consistent growth in the semiconductor industry. Initially, market research projected that the semiconductor market will reach USD 1 trillion by 2030. But the forecast has now been raised to USD 1.3 trillion. This aligns with our view that technological advancements, driven by powerful megatrends, mainly AI, will continue to propel the industry forward. While short-term volatility may cause turbulence, the long-term upward trend is certain. For GlobalWafers, we consider that shipments of 300-millimeter silicon wafers are expected to remain flat in 2024, but will further expand by double digit in 2025. This can be attributed to several factors; increased manufacturing capacity, rising utilization rates as production processes become more efficient and a gradual recovery in demand as customers actively work to reduce their inventories. On Page 10, it shows that the global semiconductor industry is actively expanding production capacity to support the proliferation of AI as well as a diverse range of disruptive technologies and emerging applications. With improved utilization and ramp-up in downstream sector, along with comparatively modest expansion in upstream wafer production, the projected utilization of 300-millimeter wafer production capacity is expected to be in the low to mid-90s percentage range during 2025 and 2026. And near-full saturation is anticipated by 2027, which we consider a very healthy situation, as it leaves room for R&D experiment and innovation. GlobalWafers' expansion in Europe, Asia and the U.S. are strategically aligned with this future fab investment, positioning the company to effectively meet customer demand and capture market momentum. On Page 11, in recent quarters, global semiconductor revenue has shown an encouraging upward trend, so recovery remains uneven across segment. Upstream, silicon wafer shipments are also beginning to recover, but with 1 or 2 quarters late. For silicon wafer shipments, customer revenue started increasing 2023, but not all increase was due to volume, but rather some attribution from higher ASPs from recent high-value products. Nevertheless, inventory reabsorption speed is still much slower than our expectation. As shown in the chart on the right, these statistics reflect GlobalWafers' worldwide customer data as of Q2 '24. While global customer revenues rebounded in Q3 '24, the modest decrease in average DOI, days of inventory, suggests that the need for continued inventory absorption, which has been milder than our original expectation, especially in the industrial and automotive sectors. It is also essential to distinguish inventory levels by node type, which means advanced and legacy. Advanced nodes are experiencing shortages actually, whereas legacy nodes face high inventory pressure. We anticipate this imbalance may ease as AI functionality is integrated into peripheral devices with potential support from effective economic stimulus measures or a rebound in the automotive sector, both of which are expected to drive the demand for semiconductors. On Page 12, these are GlobalWafers' available customer financial results as of Q2 2024. Since not all customers have announced their latest Q3 results, we are sharing performance data categorized by market and the region as of Q2 2024. Utilization rates vary across different technological nodes, with advanced nodes experiencing shortage, while our legacy technologies face excess capacity. We have absorbed growth in the memory, foundry and MPU segments, so the results in analog, IC and the power segments remain mixed, highlighting uneven recovery across sectors. Taiwan, Korea have shown growth, but the recovery signs remain absent in Europe and Japan. Please Turn to Page 14 for our Q3 financial performance. With Doris' clear explanation in the executive comments, here, I would like to further elaborate the change of the ROE and ROA figures. First, ROE in Q3 '24, our ROE dropped to 12.8% from 35% in Q3 2023, marking a Y-o-Y decline of 22 percentage points. This decline is mainly due to lower revenue, which affected our net income. Additionally, the capital injections from our GDR transaction in Q2 increased our average shareholder equity. The GDR has raised USD 689 million. That is about TWD 22 billion. This is crucial for GlobalWafers' future growth. The funding will enable us to strengthen our financial position and support our TWD 100 billion CapEx plan, which focus entirely on advanced and specialty wafers, allowing us to capitalize on the industry's recovery. The next is ROA. In Q3 '24, our ROA decreased to 5.4% from the previous 12.7% in Q3 '23. This is reflecting a Y-o-Y decline of 7.3 percent points. The trend is primarily due to declining revenue, which also negatively impacted our net income. And the increase in the fixed asset related to our CapEx also contributed to higher average total assets. This investment is also a positive step towards our sustainable growth. Let's move on to the balance sheet on Page 19. In Q3 2024, our cash amounted to TWD 41.7 billion, with an additional TWD 26 billion in deposits and restricted cash, classified under other assets, bringing the total cash-related assets to TWD 68 billion. To maintain a strong financial structure in the ongoing capital expenditures, in Q3, a portion of our deposit was used to repay the bank loans. Additionally, in August, we've shared all the fruits of our growth with shareholders with the cash dividend, which amounted to TWD 53 billion. Also, I would like to elaborate our inventory value. Our inventory levels also increased in preparation for the year-end maintenance schedules across our facilities. Now I would like to address both the questions we have received from investors recently and those we anticipate will be raised. The first is the supply and demand. With customers expected to ramp up in 2025 and most of your expansion is becoming available that year, are there any concerns about potential oversupply? What are your thoughts on the supply and demand situation for 12-inch wafer next year? Our answer is that it is important to note that compared to downstream expansion, the expansion in the wafer manufacturing remains relatively modest. Compared to 2022, additional 300-millimeter capacity has been added, and we anticipate that utilization will rise across the board. When evaluating capacity, it is crucial to understand that it is not evenly distributed across different technology nodes. Advanced nodes often faced capacity shortages while legacy technologies may see excess capacity. And now demand is predominantly focused on advanced and specialty nodes, with additional capacities more required. Global semiconductor fab capacity actually is projected to grow by 6% to 7% CAGR annually through 2027. With the current supply, as well as the downstream customers continue to ramp up their capacity, and advanced packaging architectures further drive wafer demand. We think the supply and demand dynamic is healthy. The second is regarding our LTA. Could you please provide the insights on the LTA coverage in the coming years and how you are planning to address the low coverage products, such as small diameters and mature node wafers and maintained profit level? GlobalWafers' LTA coverage span all strategic semiconductor segments, including automotive, power, logic and microprocessors, memory sensors and communications, medical health and renewable energy. This positions GlobalWafers as a key player in the semiconductor material supply chain. During this weak market, the customers actually are less interested in engaging in LTA with minimum price commitment, especially on the small diameter product. We believe that this activity will pick up as we proceed through 2025 and will vary by product types, where GlobalWafers offers the most comprehensive product and diameter portfolio. In terms of recovery speed, we anticipate that the 12-inch LTA will rebound faster than other diameters, especially when factoring our ability to provide a local supply low-carbon options, which offer key differentiation. For 8-inch and below products, a slow recovery is likely to happen. Our product uniqueness, such as SOI for silicon photonics applications may drive demand in the segment over time. The next is about silicon photonics. What opportunity that GlobalWafers have in the field of silicon photonics? Silicon photonics technology transmit signals through photons, offering faster speed and less heat generation compared to traditional corporate-based electronic transmission. This gives it a distinctive advantage in data centers and the high performance computing field. SOI wafers are critical in silicon photonics, with insulating layer effectively limiting live signal transmission within the silicon layer. It can reduce loss and ultimately enhance the transmission efficiency. This makes SOI wafer ideal for high-speed data transmission and the low power applications. Our factory in Missouri, U.S.A., is one of the leaders in SOI technology, serving the numerous clients and with strong potential for expanded collaboration with Tier 1 customers. Currently, the factor is expanding its 12-inch SOI wafer production capacity, and it's supported by the funding from the U.S. government's chipset. We have already made partial shipments. And as production scales up in Missouri next year, market demand is expected to grow steadily. The next is about our 8-inch outlook. Could you please share the outlook of 8-inch wafers and what is our strategy in addressing the challenges of the small size wafer market? The current 8-inch utilization is actually not full; however, one of our strengths is the broadest product portfolio. It spans standard products plus niche 8-inch offerings of annealed wafer, FZ wafer and the third generation products, such as SiC. Since our most fabs producing 8-inch wafers are integrated with 12-inch production, we can easily reallocate the resources, optimizing cost structure and afford efficient operational management during lower 8-inch capacity utilization. Price competition for 8-inch wafer is intense, however, most of our 6- and 8-inch silicon wafer production lines are fully depreciated. This allow us to maintain a stable profit. Our strength lies in customers seeking collaboration with suppliers who offer high-quality, prioritized ESG initiative and help mitigate geopolitical risks, and this will make GlobalWafers an ideal partner for our customers. Next is about the spot price erosion for 12-inch products and its outlook in 2025. The spot price for 12-inch legacy product has softened in 2024. Given the time required for customers to deplete inventory of non-leading-edge wafers, the demand for 12-inch silicon wafers is expected to keep progressing at a moderate pace. Meanwhile, shipments of small diameter wafers are projected to remain slow, reflecting weak demand for their associated end products. The original LTA established by GlobalWafers during the market peak of 2021 to 2022 were designed to support the company target gross margins. The challenge is more pronounced for small diameter wafers, including SiC, where growth has been stalled by a slowdown in EV production. And next is about the power cost and carbon fee. Taiwan has raised the electricity prices in October and is also planning to implement a carbon fee in 2026. What is the impact on GlobalWafers' gross margin profit? Yes, Taiwan has -- electricity prices have increased by 14%. If the carbon fee is set at TWD 300 per ton, it will indeed affect our production cost in Taiwan. From a consolidated financial statement perspective, the impact on our gross margin is estimated to be around 0.5% to 0.7%. We will continue to actively conserve to reserve our electricity and invest in renewable energy to minimize cost on both environmental impact and financial pressures. And next is about our utilization rate. Could you please share with us the current status of the various diameters? The silicon demand growth remains concentrated in the 12-inch wafers, with an even stronger focus on advanced node. We initiated the expansion project in 2022, and several sites are already complete. The new expansion site dedicated to advanced nodes actually are fully loaded. For instance, our Taiwan fab, which expanded to produce 12-inch epi wafer, has been operating at full capacity. Similarly, our new fab in Japan, which produced the most advanced 12-inch epi wafers has held its official opening ceremony at the end of August, and it also achieved a record high shipments for consecutive months. Considering all specifications, the overall utilization rate for 12-inch wafers is over 90%. This includes the advanced and legacy nodes. As for the 8-inch wafer, the outlook for the small diameters remains challenging due to the sluggish demand across automotive and industrial field. Semiconductor device inventory have not shown significant improvement. Therefore, the utilization rate is lower than 12-inch. Fortunately, our small diameter lines are fully depreciated, so our profit maintained stable. Above is our response to the questions. Now I would like to turn it over to Doris for the Q&A session. [Operator Instructions] Thank you for your cooperation.

Yes. Okay. Thanks. So we have received some questions. Let me answer the question. Okay. The first question is how does AMIC affect the effective tax rate for GlobalWafers U.S. operations and the overall global wafer group? Can you talk about the impact on other financial items such as depreciation and OpEx? Yes, that's a very important topic. First of all, AMIC, the fund we will receive from AMIC that will be a direct cash fund. So it's not the tax credit cash fund. That we will -- that definitely will be a -- that will offset our depreciation. That's how we're doing. So the impact, the improvement of our gross margin will be mainly definitely, of course, is GWA because we receive -- if we receive the money for GWA, then we'll -- that amount -- that fund we receive from treasury department will be used to offset the GWA's gross margin. And also for -- likewise, for Missouri operation, that will improve Missouri's gross margin a lot as well. So the way we work on this is that we -- before we receive the fund, we just do the depreciation every month as usual. And when we receive the funding starting from that specific month, we will offset the gross margin and the depreciation of that specific site. So starting from the month we'll receive the fund, you will see lower depreciation. That means a higher gross margin. That's how we act. And for the others or for GlobalWafers as a whole, of course, the improvement will be definitely much smaller because it's mainly for GWA. And GWA and Missouri are just 2 of our 18 fabs. So it will improve, but the percentage is not as high as what we will see from GWA. That's -- I hope that I make it clear. And that the improvement will be basically from -- for depreciation, not for OpEx. But the fund we will receive from Europe, Italy, will be EUR 103 million, that will be different. The accounting treatment will be a little bit different. The improvement will be from the profit before tax instead of gross margin improvement because of the nature of the fund is a little bit different. Okay. Okay. Another question is that your Siltronic plans to gradually discontinue the production of polished and epi wafers with small diameters by 2025, please share if there are opportunities for global wafers to gain market share in the 6-inch wafer business. What is the current progress revenue exposure? That's also a very important and very good question for us. Yes, we know that Siltronic has already announced, and actually, some other peer companies, they don't really make the announcement, but we know very well that they are slowing down or not very aggressive for a small diameter new business, new technology. For GWC, because of our commitment to customer, we honor our commitments, so we will keep working, keep supplying small diameter, and that's why many of -- especially many of the customers are for automotive, most of them are for automotive. Many customers, they just switch. Either give us more share or just qualify our wafers and transfer the whole allocation to GlobalWafers. That's what we are doing, and we have already seen some customers adjusting their allocation and also evaluating our new samples, so that's good for us, and that we will continue this policy. Okay. And the next question is -- another question is about 6-inch segment. The strategy in addressing this nascent market. 6-inch market -- 6-inch demand is really -- actually it's really low now. Many power devices and also -- especially some automotive devices are still using 6-inch, so our strategy is that we keep 6-inch. In order to supply our customer, we keep the production for our customers. But of course, we have to raise their price to -- because the cost, the energy costs and labor costs are different, much higher than before. So we have to adjust our price a little bit to cover our production cost. But depreciation wise, because our small diameter depreciation is very, very low. Basically, it is fully depreciated. So our cost is much more competitive than others. So I think our policy is we keep 6-inch, but adjust the price based on the latest cost structure and make it a win-win deal with our customer together. Okay.

Ladies and gentlemen, the floor is now open for live questions. [Operator Instructions] The first one, Donnie from Nomura. Donnie, please.

Can you hear me?

Yes.

I just have 2 short questions. So first one is gross margin. Last quarter, I think there has been explanation on some of the one-time effects on the gross margin. But this quarter, it looks like operational-wise, the gross margin has been affected by multiple reasons. And now it's like 30% level. So what kind of structural gross margin range you would be expecting going forward, considering all of the factors mentioned in this quarter? Because now gross margin seems like lower than the previous down cycle already. So just wondering whether there is any reasonable range in terms of gross margin going forward. And secondly is the dividend policy. Wondering if you could kindly Update some of the future dividend policy to investors.

Okay. Thank you, Donnie. The first question is really a very important one, but a very tough one for us. I think we didn't expect energy cost increase, for example, in Taiwan, another energy cost -- energy price increase -- electricity price increase. So there are -- as I said at the very beginning of my executive comment, there are several reasons for this gross margin decrease in Q3. Energy cost is one of the key reasons. And also, I think -- of course, low revenue is another one as well. If our revenue could be much higher, at least same as last year, I think the overall cost will be -- gross margin will be better. But because of the utilization is still not high enough, so we still have unused capacity and high depreciation, that's definitely a very important factor. And I don't think that this is going to be changed. I think in the next several quarters, we will still -- we will keep seeing more and more new capacity coming online. So we will see more new depreciation, there's some increase. So in general -- and also product mix that's another reason. For example, we -- some silicon carbide used to be a very good one, but now the problem is it's a little bit different. That high revenue items, the price and demand -- volume and price both are decreasing now. So those are the reasons why our gross margins will be lower. But I think that for long run -- I think, as I said earlier, that our Q4 revenue will be similar to what we said that Q4 revenue will be higher than Q2, Q3, continuously grow. And I think that 2025 will be -- in general, it will be -- we hope that it can be back to 2023, which was our all-time high. So I think the 2025 will be -- revenue-wise, will be higher than this year. So when -- of course, depreciation cost will be much higher than this year as well. So in short, I just want to make it very clear that current situation is that we put all the negative thing together, lower revenue and higher depreciation and higher energy costs and also freight is so much high, it's another all-time high as well, the freight, especially from Asia to U.S. or to Europe, that's very high as well. So Q3 a lot of bad things happening in the same quarter. Q2, there was only one issue, the cybersecurity. And temperature-wise, Q2 temperature, electricity consumption is way lower than Q3. So Q3 is much tougher. So in summary, in short, I think our gross margin right now should be the worst, that should be the bottom. Because revenue increased, I think overall performance will be getting better, although our depreciation will increase as well. There are some further improvements we're expecting. One is that revenue increase will keep increasing. Maybe the recovery is not as sharp as what we were expecting. It is mild, but it's increasing. So higher revenue, that's one positive thing, and we will start seeing some revenue from our new capacity. Like Leah also mentioned that our Japan operation have already their all-time high shipment, 300-meter all-time high shipment as well. So we will start seeing more and more revenue from new capacity. And although depreciation increased, but we will have more revenue. So number one positive thing is that revenue increased. And the second is that, as I said, we will have USD 1 billion plus EUR 103 million government fund received in the next several years. It's not one shot, it will be several years. But every year, you'll receive some money, and that will be a minus -- an offset of the depreciation. So that will be a good help to us. So our goal is to start seeing some improvement starting from 2025 because of the revenue increase. That's the first question. And your second question is about dividend policy. I think we highlight -- we explained this one last time as well, that our dividend -- because company policy is not lower than 50% of our overall EPS or distributable profit earnings, so 50% is our company policy. I know that in the past, we used to pay 60%, 70%, 80% high payout. But I think in the next several years, we will just follow this, keep it somewhere around 50% to 55% as our payout rate. That's our current plan. But, of course, things may change if the revenue increase as our expectation, I think 2025, '26, '27, next 3 years, we would be getting better and better every year. So if the revenue increase is our expectation, and also, we received a fund and all the -- if all our financial performance is better, maybe we will be -- we will pay out a little bit better. But in general, I think the next 3 years will be the most challenging time for us. We need to grow, and we need to repay our debt ratio a little bit. So I think the dividend payout will be -- basically will be somewhere 50%, 55%. That's the guidance. That's current status, it's not subject to the Board and AGM approval, of course.

Understood. Just one quick follow-up. So could you elaborate more on what our -- how much sales exposure -- how much sales we have from silicon carbide? What kind of percentage right now? And for gross margin, are you expecting it will start to pick up from fourth quarter this year or it would be more likely in 2025?

I think -- well, it's hard to say. But I would say that starting from 2025, we will see -- start seeing some recovery. In silicon carbide, I remember that I shared with the shareholders that our silicon carbide Y-o-Y growth last year was 10x versus year 2022. This year, our expectation -- our target was to reach another 3x growth this year. But actually, we didn't make it because the market price dropped significantly, lower than our current material costs, so we adjusted our product mix, changed our strategy and also changed our sales and pricing policy. So this year, it will be much lower. But I apologize, I cannot disclose the percentage of our silicon carbide. The percentage of our revenue from silicon carbide this year is small. It's not that big, but it was very -- profit-wise, was significant, was important for us.

Thank you, Donnie. And last question from Sunny Lin. Sunny, please accept our new invitation. Thank you.

Doris, Leah, could you hear me?

Yes.

So I just want to follow up on gross margin, I think especially into 2025. To me, I think the major variable is your U.S. expansion. I think especially for first half of next year, last time you mentioned that the subsidy could come maybe a few quarters afterwards, maybe into end of the year. And so I think at this point, maybe it's very important to set reasonable gross margin expectations for first half of next year. And so I think, number one, roughly, how much depreciation are we going to recognize into 2025 versus 2024? How many U.S. capacity are we expecting to ramp? And then based on the current customer engagement, what kind of utilization rate and also margin should we expect going to 2025?

Yes. We do -- internally, we have the data. But we are not -- it's -- I think, according to company policy, we're not going to disclose so much detail. Internally, we of course have everything. But that's definitely a very good question. And so internally we track very detailed. And there are still some uncertain -- because the market's visibility is still not really that good yet, so we have several versions what if the revenue is like this way, if the revenue is like that, so we have several versions we're working with our customers. According to company policy, we don't really offer any outlook to the market. So, Sunny, I apologize that it's confidential, so I cannot disclose that much detail.

No problem. And so I think for your current capacities, maybe it's fair to assume gross margin should bottom up into 2025 as utilization rate gets better. But for your new capacity in the U.S., could you maybe share -- with like over 30% subsidy, but then there is still new depreciation versus your current capacity with very low depreciation, should we assume, as you start to ramp U.S. capacity, that will still weigh on your like corporate gross margin in the next few years?

Yes. At least the next 2, 3 years. I mean, when it is fully loaded, I think it will be okay. But before it's fully loaded, U.S. gross margin will be still little bit lower than -- will be lower than the group's overall gross margin. But there are several positive factors of our overseas fab. First of all, as I said earlier that energy cost is our second largest cost from our overall production cost. It accounts for around -- right now, it accounts for around 8% to 9% of our total -- it's not our total cost, it's revenue based. So it's about 8% to 9%. But in the -- in Texas, our Texas unit cost, electricity cost, is just around lower than 1/3 of Taiwan electricity cost. So that means that my good calculation is that if the energy costs reduce that -- definitely that will make U.S. operations gross margin a little bit better than Asia if the depreciation's identity is same. But of course, Asia fab, now the depreciation cost is much lower than new fab. So new fab -- I think new fab will gain some benefit from lower electricity cost, but higher depreciation costs. But another benefit, another advantage of U.S. operations is that because U.S. customers -- we ship -- most of our wafers will be shipped to U.S. customers, and the transportation cost will be much lower than from Asia shipped all the way to U.S. I just received a report from our Japan operations that the freight from Japan to Europe now for 300-millimeter wafer used to be around JPY 300 per wafer, the freight per 300-millimeter wafer. But now starting from this month it's JPY 550, so suddenly almost double. And for U.S., it's much higher than these numbers. So -- but if we ship from our Texas fab to American customer, I think the freight will be very helpful as well. And you know that USD 5 or USD 6, that means -- because of ASP, actually, it's not a small number for us, so -- and that's why I think that we should be able to bottom out gross margin-wise next year. As long as we have loading, that's the most critical thing. As long as that we have better loading, I think that we should be able to have a much better gross margin next year.

Maybe if I could squeeze in one last question. I just want to know more about your expansion strategy and pace in the U.S. I think on one hand, it's important for you to get to economy of scale, i.e., to get to the $4 billion CapEx for capacities. But I think on the other hand, if we look at the key expansion in the U.S., only TSMC's fab in Arizona is expanding according to the plan. Intel, Samsung, they are all pushing out the capacity ramp-up. And so for you, how should we think about the ramp-up pace for you to get to the full scale?

By end of 2025, we should be able -- as long as the qualification result is smooth, I think we will be able to reach full utilization by end of 2025 or first half '26, it depends on the market demand and also the qualification status.

But that's from a utilization point of view, but how about for capacity point of view to get to the $4 billion investment scale?

$4 billion, okay, so that's -- we're not going to bill $4 billion now, that's Phase II, Phase I plus Phase II. So we're working on Phase I only.

Ladies and gentlemen, we would like to express our sincere appreciation to all of you for your valuable participation today. The earnings call concludes now. Thank you, and have a wonderful evening.

Thank you very much. Thank you. Have a good day. Thank you.