[Foreign language]. Welcome to Nanya Technology's 2023 second quarter earnings conference call. All lines are in a listen-only mode. The conference will be held only in English for investors around the world. Today's conference will be approximately 60 minutes, Nanya Technology's President, Dr. Pei-Ing Lee, will summarize our operations in the second quarter of 2023, followed by our guidance for the next quarter and key messages. Nanya Technology's Executive Vice President, Dr. Lin-Chin Su; Vice President, Mr. Joseph Wu; and Financial Executive, Mr. Philip Jao, will join us as we open our Q&A session. Today's presentation materials are available for download at Nanya Technology's website at www.nanya.com. We would like to remind everyone that today's discussions may contain forward-looking statements that are subject to significant risks and uncertainties, which could cause the actual results to differ materially from those contained in the forward-looking statements. Please refer to the safe harbor notice that appears in our presentation material. I would like to turn the call over to Nanya Technology's President, Dr. Pei-Ing Lee, for the summary of operations and current quarter guidance. Dr. Lee, please begin. Ladies and gentlemen, welcome to Nanya Technology Q2 Investor Conference. I'm Pei-Ing Lee. My report today will be first, Q2 revenue and result. T hen followed by CapEx and bit shipment, followed by market outlook, and conclude with business review and outlook. For Q2 financial results summary, on Q2, we have net sale of TWD 7.027 billion, versus Q1 TWD 6.425 billion, an improvement of 9.4%. Gross profit at TWD -788 million, at - 11.2%, which is slightly more than Q1 at TWD -554 million. For operating income, TWD -3.185 billion at percentage of - 45.3%, versus Q1 at TWD -2.885 billion, at almost also - 45%. EBITDA at TWD 663 million, and non-operating income at TWD 1.264 billion, and income tax benefit at TWD 1.15 billion, and which comes to net income of TWD -771 million at a net margin of - 11%. For earning per share comes to TWD -0.25 per share. Book value per share, TWD 55.72 per share. Oops! For Q2 versus Q1 result comparison, net sale is improved by 9.4%. The reason for that is that we have bit shipment of increase by mid-teens, while ASP decreased by mid-single digits, and exchange rate, relatively flat. For gross profit, this is including the idle cost and inventory write-off, gross profit at TWD -788 million, and the gross loss is around increased by TWD 234 million due to ASP decrease. Operating expense, which is at TWD 2.396 billion, very similar to Q1's TWD 2.331 billion. Operating income, we have a net loss of TWD -3.185 billion, versus last quarter's TWD 2.885 billion. Both at the number of around -45%. With operating loss increased by TWD 300 million, mostly due to ASP decrease by mid-single digit. The net income comes to TWD -771 million versus last quarter TWD -1.685 billion. It's a decrease of net loss by TWD 914 million. The reasoning behind it is that, first, we have operating loss of increasing TWD 300 million, and exchange rate is favorable by TWD 258 million. With a big help from income tax, favorable of TWD 722 million. For the operating expense, SG&A expense comes to TWD 602 million, which is in the normal range. For R&D expense, also comes to TWD 1.795 billion, which is in the normal range as well. For cash flow situation, beginning balance for Q2 is TWD 65 billion, and the end of the quarter, the balance is at TWD 59.651 billion. The reasoning for the drop in cash flow is cash from operating activity is TWD -3.737 billion, mostly due to operating loss. Capital expenditure at TWD -2.808 billion, with other financial activities, TWD +1.194 billion, mostly due to exchange rate change on cash and cash equivalent. For first half of 2023, beginning balance at NTD 73.593 billion. T he end of the first half, NTD 59.651 billion, with the cash from operating activity, NTD -5.946 billion, and CapEx at NTD -8.625 billion, with financial activity, NTD +629 million. For CapEx and bit shipment, on the left-hand side, the chart indicated that we plan to spend NTD 15 billion for 2023. Up to now, for first half, we already spent NTD 8.6 billion. For 2023 CapEx plan is around 20% lower than last year, with the wafer equipment CapEx, approximately 50% of what we plan to spend for the year. For bit shipment, we are targeting bit shipment of down 10% by this year. We see in Q2, quarter-to-quarter increase by mid-teens. Okay, in bit shipment, which is good news. We also plan to have production output control remain dynamically reduced by up to 20%. For market outlook, we have seen DRAM market demand decline sequentially since Q2 last year. We're seeing it's been bottoming up in second quarter this year. We are expecting marginal or moderate demand rebound in second half this year, and which is going to be depend on the recovery strength in China domestic market and also U.S. enterprise clouds market, and also global economic recovery. For the second point, for the outlook, second quarter this year, we see signs of inventory reduction in some DRAM supplier, but not all. All supplier have adjusted capacity and CapEx, and improvement on supply-demand balance is expected in fourth quarter this year, which is subject to the strengths in DDR4 destocking and DDR5 transition, as well as overall demand recovery. The lingering impact by geopolitical conflicts, including European War, including trade restriction between U.S. and China, may continue. From the supply side, the DRAM supplier continue to adjust capacity and product mix. Overall supply decrease yearly is expected in 2023. For DRAM CapEx cut, we expect it significantly in 2023, which may extend into 2024. From demand point of view, for server market, AI related servers is favorable for demand. However, enterprise IT spending remain conservative. U.S. enterprise cloud center is key to server market recovery. For mobile market, new smartphone in second half introduce higher DRAM content, which is good news. However, sales momentum of China smartphone would be the key factor for recovery. PC market, inventory gradually return to normal level, and second half shipment is expected to be better than first half this year. For consumer market, demand for TV, IP camera, networking, industrial, and automotive application are all relatively healthy and resulting in potential recovery for respective consumer devices. Business review and outlook for finance point of view, Q2, we experienced net loss of TWD 771 million, with EPS of -0.25 per share. From operating side, our second generation, 10nm-class lead product and third generation 10nm-class test product is piloting on schedule. Our production is dynamically reduced by up to 20%. Nanya have received top 5% ranking in corporate governance evaluation among TWSE-listed companies. For market outlook, DRAM supply-demand balance is expected to improve in fourth quarter 2023, along with inventory normalization and demand recovery. That's my report for you, now we'll open up for question and answer. Yes. Thank you, Dr. Lee. Before we begin the Q&A session, I would like to remind everyone to limit your questions to two at a time to allow all participants an opportunity to ask questions. We will begin taking questions from dial-ins first. F or webcast participants, please message your questions with your name and company name to Nanya operator in the chat box. Now, for dial-in participants, please press star key and number one on your keypad if you would like to ask questions. To cancel your questions, please press star key and number two. As a reminder, it is greatly appreciated that you turn off the speakerphone mode of your device to prevent possible echo effect. We thank you for your cooperation. Now, for dial-in participants, please press star key and one if you would like to ask questions. Thank you. The first one to ask question, JJ Park. Go ahead, please. Okay. Dr. Lee, thank you for taking my question. I have two question. The first one is regarding the market outlook. I just looking at the, your market outlook back in April when you report the current result. You expected the marginal DRAM market recovery in the second half. B ut now you're looking at the Q4 recovery. Is there any major change in terms of the supply-demand dynamic or inventory destruction cycle compared to the Q1 this year and then as of now? The second question is, can you elaborate your inventory situation, and why do you believe the industry developing in the second quarter? Thank you. It's your question about market recovery. I think in general, market is bottoming up in the second quarter, okay, this year already, okay? You're seeing that we are improving marginally in our shipment, okay? Likely this may be seen in the industry throughout, okay? However, the decline since Q2 last year is substantial. Okay, for the full quarter continued decline is substantial. The recovery in Q2 is helpful, is very helpful. B ut we still need to see the momentum of recovery more for the industry, okay? In terms of the pricing momentum, there are some product portfolio seeing pricing bottoming up or even recovery slightly. T here are some product portfolio slightly, still slightly declining. In Q3, likely is a mixed situation, okay? Hopefully in Q4, the situation will be more upturn in compared to Q3. That's the reason that I indicated, maybe Q4 is more of the balanced situation, more balanced than Q3. It's a good indicator that we already seeing marginally shipment improvement. In terms of your question about inventory issue, each company has different inventory situation. You may already see that some company already reported their quarterly financial result. T here are maybe some good news on the marginal improvement, inventory situation. Inventory could also be related to a different product portfolio, okay? Look closely to what product inventory may be doing slightly better, and the other product may be doing slightly worse. For Nanya point of view, our inventory is well distributed into maybe more than 30 products or so. There are some area has some healthy improvement. S ome areas still inventory is an issue, okay? It's a mixed situation for Nanya as well. Thank you. You're welcome. Ladies and gentlemen, we are now in Q&A session. If you would like to ask questions, please press star key and number one on your keypad. Next one to ask questions, Haas Liu from Credit Suisse. The line is open to you now. Okay, thank you. This is Haas Liu from Credit Suisse. Hi, Pei-Ing and team, thank you for the detailed prepared remarks and taking my questions. My first question is regarding the CapEx cuts. Could you comment on what are the areas you are cutting for the CapEx this year? Is it related to the technology migration or the new construction plan in 2025? I have a follow-up. Thank you. The CapEx reduction mostly on a wafer equipment point of view. We do not intentionally delay any construction activity, okay? CapEx wise is basically delaying some of the equipment that we plan to introduce the new generation of the technology. Since the market already oversupply, looks like there is no immediate need for us to introduce more capacity into new generation of the technology. Okay, thank you. My follow-up to CapEx cut would be your opportunity in China to fill the gap with Micron now requiring license to do business in China, and I will have questions on inventory. Thank you. You're talking about building a fac in China, your question? No, no. I mean, your opportunity in China to fill the demand gap. Oh- Micron. Fill the demand gap. Yes. Okay. I think specifically, Nanya Technology do not target it for certain competitors business specifically, okay. In general speaking, we basically serve our customer as what customer need, okay? We don't specifically know that what our customer, in terms of their procurement policy, one supplier versus the other, okay? In terms of filling a gap, I think that probably in general will be true for all supplier in China. Your follow-up question is? Okay. Before going back to CapEx, I think my second question would be just about the inventory write-up. How much inventory write-up did you recognize during the quarter, and when do you expect a reversal could happen? Thank you. Nanya Technology inventory value is still higher than our inventory cost, okay? We don't have to take inventory valuation loss at this point, yeah. Okay. However, for some certain slow-moving inventory, we may want to write off for certain specific product or specific reason. That is already included in our cost, as well as some of the equipment being idle due to production cut. That cost is included in our cost as well. Okay? That's the magnitude of inventory write-offs depends on what do we need in terms of inventory situation. It's not in a big quantity, okay? It's here and there, okay? Okay, thank you. I think you mentioned, you are slowing new technology migration. Could you update your target production ramp of 10nm-class memory, and would this slow your bit cost reduction in the future? Thank you. That's a very good point. Is that, our first generation of 10 nm generation is ready. However, it's no hurry for us to input more capacity into 10 nm due to the market already quite a bit oversupply, as everybody know. Basically, we try to slow down that activity in the first generation introduction. However, we are preparing our second generation and third generation and putting in more R&D activity in second generation and third generation. Okay, thank you so much. I will be back in the queue. You're welcome. Yes. Ladies and gentlemen, we are now in Q&A session. For dialing participants, if you would like to ask questions, please press star key and number one on your keypad. Thank you. Next one to ask question is Simon Woo from Bank of America. The line is open to you now. Thank you, operator. Hi, Dr. Lee. Thank you very much. Number one question is, you know, would you provide some details for the September quarter DRAM price outlook? For the downside risk, for the Q3, right? I think for September quarter, likely will be some product portfolio have opportunity of price up. S ome product portfolio may continue to have small number marginal price decline. Okay. That's so in the Q3, September quarter, likely will be a mixed situation for different product portfolio. Depends on each suppliers their strategy and how they emphasize their market sector may be different from company to the other company. Overall speaking, Q3, likely will be an improvement to Q2. You mean the improvement of the blended ASP? Yeah, yeah. Likely ASP point of view. Yeah. Yeah. Which area you think, maybe some price upside, we can say, more consumer related or PC commodity area? Mostly some consumers, portion of consumer market. Maybe, for instance, a good opportunity for HBM, for example, to have a price rebound earlier. Maybe even some of the DDR5 market has a good chance of earlier rebound than the others. Yeah. H ow about the PC area? I mean, the, yeah, DDR4 PC. PC area, likely, month by month wise, DDR5 are likely to rebound earlier than DDR4. Mm-hmm. Still DDR4 or legacy is showing the downside with sort of their price. Yeah, this is all depends on also inventory, quantity in the big suppliers. Okay? Yeah. So- Overall, the most important application for Nanya is a consumer electronic, consumer related, low-density commodity DRAM. Net net, you think, kind of the stable pricing momentum for this legacy, low-density DRAM for consumer applications, or you could see the some upside? The consumer potentially will be more stable than the, than in general DDR4. Yeah. Okay, okay. How about your utilization ratio? The weekly DRAM makers already alluded, mentioned maybe 25% or 30% a lower wafer input versus the full capacity. Any rough idea you are- Uh. ... waiting for that integration? Yeah. Nanya market size is relatively small, okay? Mm-hmm. The capacity, reduction-wise, our impact to the market is also relatively small. Yeah. However, we are doing, up to 20% of production cut. Mm. Mostly to manage our inventory situation. Mm. Also mostly to meet our customer demand purpose. Mm-hmm. 20% cut, since when, and then roughly by when, how many quarters? For example, from Q1 this year, or when did you start the production cut, and then how long gonna? Yeah, we've been starting that on Q1. As I said, we're doing it dynamically up to 20%. Since Q1, you mean the beginning, or? Since Q1. Since Q1. Yeah. Since Q1, 20%. Yeah. Currently, you're also around the 20% lower. Up to 20%, up to 20% dynamically. Sometime maybe 10%, sometime maybe 20%. I see. Yeah. In the range of maybe 10%-20%, so. Yeah, by time, may be different. I see. Okay, maybe I'll get back to you if I questions. Yeah. Okay. Thank you. Yeah. Thank you, Dr. Lee. Yeah. Yes, ladies and gentlemen, we're still in Q&A session. If you would like to ask questions, please press star key and number one on your keypad. The next line is open to JJ Park from JP Morgan. Go ahead, please. Okay, thank you for giving another opportunity to ask a question. I know that Nanya Tech is now participating in the HBM. T he space, yeah, it's about, but people are so excited with the HBM opportunity. Given your long experience in the data market, do you think that this could be the structural trend, the game changer for the data market, or this just remain as the niche product and then benefit the selected players in the market? Thank you. JJ, I didn't quite understand your question. Your question is regarding to chip pack of USA or what? Which one you are asking about? The high bandwidth memory, HBM. Oh, HBM, I see. Yeah. Okay. Okay. Yeah. Okay. That's an interesting question. I s that... HBM actually is a very good product and is a bright spot for AI-related server business, okay? The cloud computation specifically also. Okay. However, when we talk about HBM application and AI-related server business, m ostly related to NPU-related calculation, okay? However, the server market, including both CPU-related and NPU-related server market. At this point, CPU-related server market is still far outnumber of NPU-related server business in the cloud computation. Good thing is that we're seeing HBM and NPU-related business is helping out in terms of DRAM consumption. Okay? It's a good news, okay? However, percentage-wise, it's still small, okay? With all big three supplier are very focused on this area, likely it's not going to be a sweet spot for Nanya. Nanya is only small percentage of market share. However, for the long term, are we going to totally miss the market if HBM become more and more in terms of market share? Well, that's that's some activity that Nanya probably had to evaluate for long-term, for long-term reason. For now, that's still relatively small market, and with all three big supplier are very focused on. Okay. Thank you. Thank you, Dr. Lee. You're welcome, JJ. Next one to ask question, Haas Liu from Credit Suisse. Line is open to you now. Okay, thank you for taking my question again. You mentioned you will keep 20% output cut. Could you comment on your expectation for bit shipment outlook in Q3 and full year guidance? Thank you. Our Q3 will remain the same policy of up to 20% dynamic cut. Okay. I mean, your bit shipment outlook for Q3 and also full year. A dditional... Shipment. Oh, bit shipment outlook. Shipment outlook for Q3 likely, at this point, we expecting some improvement over Q2. Can we expect that the magnitude of the improvement will be similar to, or will it be better or be worse? Thanks. It likely will be better. Okay, in terms of percentage-wise, at this point, we're still working very hard for it. Of course, it's going to be a key focus item for Nanya. But I still don't have a specific number for you, due to that the as I say, that there are several factors out there, we still don't know how well it's going to be. The factor is that is it going to be a significant improvement in China domestic market? Is it going to be significant improvement in cloud IT expense? A global economic recovery, all those factors. Also another factor is also inventory digestion. Particular DDR4 inventory digestion is one of the key observation. DDR5 transition is another key observation. All those factors combined will determine how much momentum of this fisherman improvement. Therefore, I don't have very specific number for you. Still, the market is quite dynamic. Not to mention that lingering impact may continue by the geopolitical issue around the world. Okay, thank you so much. I will be back in the queue. Next one to ask questions, Simon Woo from Bank of America. The line is open to you now. Okay, thanks, operator. Dr. Lee, very quickly, so in the, your second quarter total shipment, what was the DDR5 percentage out of a total volume in second quarter? Thank you. So far, DDR5 is very minimum. Any target by the end of this year or? One, one of the issue is that our first DDR5 product is in 8Gb DDR5, which is the market demand is not very good, okay, of course. We are working on 16Gb DDR5, and which is currently on schedule, and we targeted by mid-next year, we will have some product to the market. This is for PC, right? This could be for PC, could be for, also for server, okay? We're also working on the low power DDR, which will be for mobile and automotive as well. That will come slightly later than that. Yeah. As your DDR5 for PC server and then mobile, it will be available meaningfully from the mid next year. Yes. Yes. Okay, very clear, sir. Lastly, would you update over the channel inventory situation? Some people are saying already normalized, led by China OEMs. Some people are saying China OEMs are purchasing more and more memory chips from maybe in Nanya or Korean guys because of the, you know, the Micron restriction. Any view on the maybe PC server, mobile DRAM chip inventories held by OEMs, and also some impact of the China government restriction on the Micron? Thank you. I think, the issue is actually related to all other supplier other than Micron, okay. Nanya is more concentrated on consumer market. Yeah, we're seeing some here and there, okay, some changes, okay. We serve our customer, as I say, not specifically to replace certain supplier, but instead, we serve the customer based on customer demand, for us to help them in terms of their production need. Okay, sure, sir. How about the overall the channel inventories? Do you feel it's almost a normal level, or still one or two months higher than normal level for those PC and mobile server OEM customers or the markets? I think PC side, as I indicated, worldwide PC is inventory level is low, and likely, from now on, will be improvement, okay, worldwide. Yes. Chinese domestic demand, as well as Chinese phone maker business is very key to the recovery of mobile business. Okay? That, we think, is bottoming up, is now at a very low point. likely cannot be worse than today, likely. Okay? From now on, could be some improvement. Okay. That's, we hope. Okay? In terms of server business-wise, okay, there are some indicators that the server market in China is stabilizing. Yeah. Yeah. You are saying PC area inventory very low that means PC product or PC DRAM chip, is that? Oh, I mean PC product. Okay? This is the hub, yeah. PC DRAM- Yeah. PC DRAM-wise, you got DDR4 and DDR5. Okay? Yeah. That's basically, the issue is in the supplier side, not in the- Uh. ... not in the market side. Market inventory is okay. It's the supplier side is what need to be- Mm. ... taken care of. Yeah, that's very clear. Net-net, we can say, OEM in China or ex-China, they are holding, currently holding the memory inventory not so high, PC, mobile, even the server area, you think? From what we see, the customer side inventory is not a big issue. Okay? What need to be careful is on the supplier side inventory. Yeah. Yeah, yeah. Okay, all clear. Yeah, maybe, please correct me if my understanding is wrong, but basically the memory is held by PC OEM reasonable level? Yeah. No need to worry too much. Yeah. That you think almost a similar situation among the mobile OEMs, right? Even in the smartphone area. Yeah, that likely is bottoming up and it's recovering likely. Mm-hmm. Okay? What need to be pay more attention- Uh. ... is the supplier side's inventory situation. Yeah. Same thing for the server area, you think? I think so. Yeah. Yeah. Okay, all clear. This is very helpful, sir. We really appreciate, Dr. Lee. Thank you. You're welcome. If you would like to ask questions, please press star key and number one. Thank you. For dialing participants, if you would like to ask questions, please press star key and number one. Thank you. We had Vincent Mao from Pro Capital who had asked about yearly depreciation. Our monthly depreciation is around TWD 40 million, and that number is throughout this year. That number likely gradually improve to around TWD 30 million by the end of 2025. The end of 2025, and then continue to improve beyond that. Our monthly depreciation currently is around, still around 40 million U.S. NT dollars. Sorry, $40 million. Sorry, $40 million. We now have a second question from Richard Shao from Fubon Securities, and his question is: How is the progress of Nanya's DDR5 development, and what type of packaging are included? Our first development, as I indicated, is the 8 Gb DDR5. We are working on 16 Gb DDR5 as we speak, and we targeted to have 16 Gb DDR5 to the market by middle of next year. Packaging-wise, this will be mostly the standard flip chip type of package. Now we have the third question from Stanley, from SinoPac Securities. The question is: Will the plan for Fab 5A slow down due to lower demand? If the initial capacity plan is to be 15K wafer per month, how large is the scale needed to break even? The Fab 5A construction is not being slowed down. Right now, there may be some very marginal delay due to construction issue, labor, the material and, you know, all the construction-related issue, marginal delay. We don't intentionally slow down our Fab 5A construction. Okay. Initial capacity plans still up to discuss, okay? Depends on market situation, okay. As a result, that the scale need to be break even is that it will depends on are we introducing more of the second generation or third generation. Okay. That break even point will be slightly different, okay? Our second generation and third generation right now is on schedule, okay? Second generation is almost near production ready, and third generation test product is under pilot. The fourth question, also from Stanley, SinoPac Securities, and the question is: As 1A nm is on small scale production, how is the progress of 1B? I think I answered that, okay, on 1B. 1A is small scale production, we don't try to introduce more scale due to the market, is in oversupply situation. There's no need for more capacity output, okay? 1B progress is doing as we planned it, very, it's doing well. For initial stage, what product spec will it be applied to? This is specifically to for current fab, we will apply 1B for sure, and 1C, maybe some, also some mix. For Fab 5A, likely also started with these two and then gradually migrate it to 1D or even 1E in the future. How is the verification progress? As I indicated, that 1B is doing good. It's almost ready for production, and the 1C is now in test product piloting. Number five question, also from Stanley, SinoPac Securities. The question is to share about the schedule 1C development. I just commented on that, Stanley, okay? The test product is on piloting. Stanley, is the sixth question on number six. Okay. How much would the second quarter idle cost and inventory write-off be? This number is I would say, if we don't take the idle cost or inventory write-off, our gross margin likely will be very small, okay? Negative. Not as big as - 11%, will be much smaller than - 11%. Stanley, you have a number seven question. Would you advise the outlook for Q3 shipment? Actually, I commented on that in the JJ Park and the Simon's question. We are expecting Q3 shipment to be improved from Q2. Improved. However, to what extent of the improvement, I did not specifically mention in that, because there are still quite a bit of market uncertainty out there we have to continue to observe. That's including inventory digestion, including DDR5 transition, and also include global economic recovery, and also include the negative impact by geopolitical issue. Are they going to be lingering, and how much worse is it lingering, or is it getting better or not? Daniel from Orion Investment. Outlook on inventory pricing trend. The inventory likely will be improved quarter-by-quarter, okay? Q3 likely will be better than Q2, and Q4 likely better than Q3. Price trend we expect to be bottoming up, okay, in Q2 and Q3 range, and likely will be some price recovery in Q4, okay? Overall speaking, inventory as well, improvement quarter-by-quarter. By saying that, it's because we've seen demand is marginally improved, but also we've seen the supplier has taken action on production and CapEx, okay? It will depends on the degree on those action, as well as the strength of recovery, market recovery, to determine what the size of recovery and momentum of recovery. Okay. Okay. This is a number nine question. Already answered, right? Okay. Yes. Thank you, Dr. Lee, and thank you, ladies and gentlemen. That concludes our conference call today. Please be advised that the replay of the conference will be accessible within three hours from now which will be available through Nanya Technology's website at www.nanya.com. We hope you will join us again next quarter. We thank you for your participation, and have a wonderful day. You may disconnect now. Thank you, and goodbye. Thank you for joining, and goodbye.