Welcome to Semiconductor Manufacturing International Corporation's Q1 2022 webcast conference call. Today's call will be simultaneously streamed through the internet and teleconference. Please be advised that if you join the meeting by phone, your dial-ins are in listen only mode. However, after the conclusions of the management's presentation, we will have a question and answer session. At this time, you will receive instructions on how to participate. Without further ado, I would like to introduce Ms. Guo Guangli, Vice President, Board Secretary, and Joint Company Secretary to speak.
Greetings. Welcome to SMIC's Q1 2022 webcast conference call. Attending today's call are Dr. Gao Yonggang, Chairman, Dr. Zhao Haijun, Co-Chief Executive Officer, and Dr. Liang Mengsong, Co-Chief Executive Officer. Let me remind you that today's presentation includes forward-looking statements that do not guarantee future performances, but represent our estimates and are subject to risks and uncertainties. Please refer to the forward-looking statements in our earnings announcement. Please note that today's earnings statement is presented in accordance with international financial reporting standards, IFRS, and all currency figures are in U.S. dollars unless otherwise stated. First of all, we invite Dr. Gao Yonggang to speak. Greetings to all. In the H1 of 2022, events such as the epidemic and local conflicts occurring overseas have brought uncertainties to the development of the global IC industry.
While the demand for consumer electronics is soft, the demand for growth in new energy vehicles, display panels, and industrial sectors has led to a short-term intensification of the structural shortage of semiconductor manufacturing capacity. Thanks to the company's planning and deployment to address the shortage in the market, in the past six months, the company has carried out early capacity allocation optimization and adjustment, and orderly promoted capacity construction. This year, the cities where some of the company's fabs are located have experienced the epidemic at different times. Facing this challenge, the company went full force to implement various preventative and control measures. On one side, guard against the epidemic to build a safety barrier for employees, ensure production, and make every effort to assure customer demand.
On the other side, the company has not forgotten to fulfill its social responsibility and donated RMB 10 million to support Shanghai's epidemic prevention and anti-epidemic work. With the efforts and dedication of all employees, the company maintained solid momentum in the Q1 , and revenue is expected to continue to grow in the Q2 . Based on the company's growth expectation in the H1 of the year, and with the gradual release of capacity. If there is no significant material adverse change in external conditions, it is expected that our annual revenue growth rate this year will be better than the foundry industry average, and the company's growth margin will be better than expected at the beginning of the year. Thank you.
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Thank you, Dr. Gao. Next, I will introduce the company's financial status. First, I will report our unaudited financial results for the Q1 , followed by our guidance for the Q2 . Unless otherwise stated, the following financial data is presented in accordance with IFRS.
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Both revenue and gross margin for the Q1 maintained growth. Revenue was $1,842 million, up 16.6% sequentially and 66.9% year-over-year. Gross margin was 40.7%, up 5.7 percentage points sequentially and 18 percentage points year-over-year. Profit from operations was $536 million, up 27.6% sequentially and 330% year-over-year. Profit attributable to the company and non-controlling interests were $447 million and $122 million, respectively.
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Moving to the balance sheet. At the end of the Q1 , the company had total assets of RMB 37.5 billion, of which total cash on hand was RMB 17.3 billion. Total liabilities were RMB 11.1 billion, of which total interest bearing debt was RMB 6.7 billion. Total equity was RMB 26.3 billion. Total debt to equity was 25.4%, and net debt to equity was -40.2%.
[Foreign language] In terms of cash flow, in the Q1 , we generated $1,593 million cash from operating activities. Net cash used in investing activities was $4,266 million. Net cash from financing activities was $188 million.
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For the Q2 2022, our guidance is as follows, Revenue is expected to grow 1%-3% sequentially, and gross margin is expected to be in the range of 37%-39%. Non-IFRS operating expenses are expected to increase sequentially, while profit attributable to non-controlling interests are expected to decrease quarter-over-quarter.
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This concludes the financial status. Next, let me recap the relevant matters related to the company's 2021 annual report. According to the relevant regulations of Shanghai Stock Exchange, when a listed company has made profits during the annual reporting period and its accumulated undistributed profits are positive, but no cash dividends are distributed, the company shall provide a key explanation on matters related to the cash dividend plan in the earnings webcast after the disclosure of the annual report and before the record day of the annual general meeting.
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The company's 2021 key financial metrics significantly improved as compared to that of previous year. According to China Accounting Standards, by the end of 2021, the accumulative undistributed profit was RMB 18.8 billion. In 2021, the net cash flow generated from the company's operating activities after deducting cash paid for the purchase and construction of fixed assets, intangible assets and other long term assets, resulted in a negative free cash flow of RMB 7.5 billion. The company announced its CapEx plan of 2022 to be around RMB 32 billion.
Taking into account the company's current operating situation and future development and other factors, the company plans not to distribute profits for the year of 2021, which is in line with the company's long term development needs and the long term interest of shareholders and in accordance with relevant laws and regulations, regulatory documents and the company's profit distribution policy. There are no circumstances that harms the interests of the company and its shareholders. The plan has been reviewed and approved by the Board of Directors and published in the annual report and will be submitted for approval at the annual general meeting on June 24th. We would like to thank our shareholders for their understanding and support.
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Next, I will hand the call to Dr. Zhao Haijun to comment on market operations and technology platforms.
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Hello everyone, and thank you for attending the Q1 earnings webcast. In the past few years, with the continuous upgrading of electronic products, the Internet of Everything, digitalization megatrends, cloud storage volume increase, the exponential rise in demand for automotive electronics, the rise of green energy and other industries, and so on. The overall incremental demand for end user silicon content has not been met. While the average annual growth of global IC manufacturing capacity fluctuates only within the single digits. Even though fabs have accelerated their pace of capacity construction in recent two years, the corresponding supporting capacity still cannot be built in place in a short period of time due to the tight supply chain. The shift of the industry and concerns about regionalization of the supply chain segmentation have exacerbated the capacity gap for localized production demand.
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In February this year, we also shared with you our view that as we expected after the accelerating market consumption inventory accumulation in the past six months, especially after China entered into the stage of strict epidemic control, the industry supply and demand trend has shifted from overall shortage to structural tightness. Some existing markets, such as consumer electronics and mobile phone etc., have moved into destocking stage and hopefully can be soft-landed soon. While incremental markets such as high-end IoT, electric vehicle display, green energy and industrial still lack sufficient inventory, putting forward higher and more urgent requirements for production capacity, technological innovation and customer experience services.
In order to respond to the needs of the industry supply chain, the company has launched new product process platforms, improved customer service and implemented our tactics direction by securing the existing volume and expanding their incremental volume.
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In addition to closely tracking industry dynamics, the evolution of the epidemic has tested the company's risk response capabilities. The company has taken a multi-pronged approach to ensure safety and production with one hand immediately carry out closed loop operations, implement zoning and classification, management of the premises and unclog transportation and logistics. With the other hand, administration logistics was secured and morale ready. Epidemic prevention supplies were stocked and emergency response plans and job security were prepared. The company is united and basically ensures the continuity of production and operation and the delivery of customer orders in an orderly manner.
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With the concerted efforts of all. In the Q1 , the company's revenue exceeded $1.8 billion and gross margin exceeded 40%, driven by a 13% sequential increase in ASP due to product mix optimization and price adjustment, and a 7% sequential increase in shipments. Gross margin exceeded guidance primarily due to two reasons. First, due to the epidemic, the company postponed the scheduled annual maintenance of some fabs. Second, the impact of the epidemic on the Tianjin and Shenzhen fabs was lower than expected. Revenue by region. Chinese Mainland and Hong Kong, China, North America, Europe and Asia accounted for 68, 19 and 13% respectively, with revenue growth in each region.
Wafer revenue by application, smartphones, smart home, consumer electronics and other categories accounted for 29%, 14%, 23% and 34% respectively, with revenue growth of 10%-30% for each category. While smartphones and consumer electronics accounting for a decline, and our smartphone and other category accounting for an increase in line with the company's judgment on market demand and capacity allocation deployment.
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In the Q2 , the company expects revenue to increase 1%-3% sequentially and gross margin to be in the range of 37%-39% due to the deferral of annual maintenance at some fabs into the current quarter, and the short-term impact of the epidemic on utilization at the Shanghai fabs. Gross margin is expected to be down sequentially also due to the gradual reflected impacts of increase in depreciation of new capacity and higher cost of raw materials and labor. The current impact of epidemic on the production of the Shanghai fabs will be remedied gradually through subsequent accelerating of production and output growth of other fabs.
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This year's CapEx and expansion of capacity is progressing as planned. The company added 28,000 eight-inch equivalent wafers monthly capacity in the Q1 . It is expected that by the end of this year, the capacity increment this year will exceed that of last year.
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Since the Q1 the company starts to disclose the revenue contribution of 8-inch and 12-inch respectively. 8-inch covers the processes from 0.35 micron to 90 nano, while 12-inch covers the processes from 90 nano to FinFET. This kind of disclosure is more in line with the company's operation flexibility and business features, with same fab running multiple nodes and applications.
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All in all. The hit from the epidemic and the local war in Europe has been mitigated correspondingly without much impact on the company. The impact on the long logistics supply chain has disturbed the existing business lines, and the structural shortage has become intensified. Overall, customer demand remains strong and the company's capacity is expected to remain tight throughout this year. The company will continue strategy of seeking progress in a stable manner, keeping its feet on the ground and walking the talk to fulfill its promises to customers. Finally, we would like to thank all employees, customers, suppliers, investors, and community for their trust and support.
Thank you all. Thank you, Dr. Zhao. Next is our Q&A session. Questions will be answered by Dr. Gao and Dr. Zhao. Chinese questions will be answered in Chinese. English questions will be answered in English.
Please limit your questions to two per person. I would now like to open up the call for Q&A. Operator, please assist.
Thank you. At this time, if you'd like to ask question, please press star one. First question comes from the line of Randy Abrams from Credit Suisse. Please go ahead.
Yes, thank you. Good job managing through the COVID-19 so far. The first question I wanted to ask on the 1%-3% growth, how much you view sales impacted by the COVID-19 disruptions? For the gross margins, how much impact from the maintenance you discussed? As we look at H2 , as you come out of that, should we expect the sequential growth to ramp a bit faster?
Hi, Randy, and thank you for the first questions. Talking about the numbers for revenue growth only show up to 1%-3% in the Q2 , and we said that because the postponement of the APM. Usually for this kind of APM, it happens two-three days, but the disruption of manufacturing can be up to five-six days. Right away you can calculate 5-6 days divided by 92 days in the Q2 . More or less, that's the impact for the production. For the gross margin from this kind of pandemic, we haven't got the detailed numbers, but we do see some delays or some disruption and wafer start during these kind of pandemic timings.
Until today, we are still in the process of this kind of defending pandemics. Haven't finished yet, so we can't give exact number, but we already put enough and buffer there for this kind of forecast.
A follow-up on that, question. The five-six days, do you make that up? Or like, should we see Q3 , you would have a normal quarter, plus you can make some up? Then could you give an update how capacity would sequentially ramp up in the coming quarters since you've been-
Okay, I'll give you that. Yes, I'll come to that, Randy. Usually for this kind of APMs and preventive maintenance and this kind of pandemic interruptions and the time's gone, just gone. We do not have any canceling of customer orders. That means we will use the future days, future months and to expedite the manufacturing to recover this kind of a pure gaps. Basically we have additional capacity added on to the existing capacity. Just now we mentioned that for the Q4 , we have 28,000 per month type of addition of capacity normalized. We believe that we will have a similar capacity add on in the Q2 . By doing that, by making that, we will have additional capacity to recover the capacities we lost in the Q1 .
More or less, we promise to customers that, and we do not have any canceling of the wafer orders, and we will make up the shipments in the coming days. By the simple calculation, you'll ask that whether or not removing this kind of APM effect after the finish of this pandemic firefighting on the revenues and gross margin. More or less when you compare the Q1 and Q2 gross margin and, you come to the point that without this kind of APM, without this kind of pandemic fighting, how much we can recover. We do factor in additional factors that one is additional capacity with a higher depreciation ratio. For the existing capacity and they already have certain part of machines already out of the depreciation period.
The add-on capacity got a higher depreciation ratio. The second factor, even though small, but it still factor in, is the additional price rising for the materials. For the Q2 , more or less, we still have a lot of wafers started in the last quarter, last year, and we also have a lot of materials, the parts, they are stocked last year, so they have a lower price. But the our refurbishing materials, they come in, they have a higher price. Normalized, this year, the incoming materials, consumable materials, they have a 10% higher price than that of last year. So when we factor in this kind of factors, and then we can come to the revenue growth and gross margin recovery.
Okay. If I could ask one more just on the customer momentum, because you mentioned tight through the year. We've noticed they have been growing quickly on revenue, but also have been building up inventory as well. What's your take on the inventory levels and feedback from customers if they wanna keep the levels where they are or start to deplete inventory, and could that be a headwind?
Yeah, Randy. Just now, if you notice the numbers we shared with everyone, and the mobile phone ICs already lower down to 29% only. This mobile phone, smartphone type of things used to account for 50%, 40% something of a foundry revenue. To SMIC, it's already lower than 30%. That means we already adjusted capacity to this area a lot. Basically, we should say for smartphones, consumer products, PCs and internet, this kind of area, they drop like a rock very seriously. Some customer hold on to five months type of inventory on the supply chain to the mobile phones. For this kind of area, the oversupply is very serious, and they are happening very quickly.
Currently, at the meeting time of today, I really believe they are, they already happened in a very serious situation and, of the high inventory. This kind of customer more or less, they already stopped the wafer ordering. They already stopped the shipments of the wafers. Even for this kind of mobile phones, consumers, PCs area, there are still some parts are still in a very big shortage, like the power managements, like the AMOLED drivers, and like analog related, and also the others IC parts for the industrial and the new energies, like MCUs, like Wi-Fi 6, like the, power managements. They are still in a huge shortage. Just now we say that at this moment, we already found, already saw a certain area in a very big, oversupply.
Some of the customers are holding more than five months type of inventory. In the other area, the parts are still in a very big shortage. We should say that the power managements, analog, MCUs, for the industry, for the electric cars, for the green energies, they are still in a very big shortage. For the Wi-Fi 6, for the IoT, they are still in a relatively short type of supply. Another thing I'd like to share with you is the market difference. If the customers only serve Chinese markets, they possibly already in the over inventory stage. If the customer handles a lot on the recovering markets of United States and the European and the other overseas markets, they possibly in a very good situation.
We really see very quick recovery of the American markets, European markets, overseas markets. We are seeing on the static and over-inventory stage of Chinese markets. Randy, that's my answer.
Okay, great.
Okay.
Okay, thank you. Appreciate the color. Bye-bye.
Sure. Thanks.
Thank you for the questions. I'll move on to the next questions from Zhihong from China Renaissance. Please go ahead.
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[Foreign language] Next question comes from the line of Leping Huang from Huatai. Please go ahead.
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m-hmm.
[Foreign language]Thank you for the questions。
Next question comes from the line of Andrew Lu from Sinolink Securities. Please go ahead.
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[Foreign language] Now I'd like to hand the call back to Ms. Guo Guangli for closing remarks.
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Thank you for participating in today's conference call. Thank you for your trust and support.
[Foreign language] This concludes SMIC's Q1 webcast conference call. We thank you for joining us today. You may disconnect.