United Microelectronics Corporation (NEW)

Welcome everyone to UMC's 2021 second quarter earnings conference call. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question and answer session. Please follow the instructions given at that time if you would like to ask the question. For your information, this conference call is now being broadcast live over the internet. Webcast replay will be available within an hour after the conference has finished. please visit our website, www.umc.com, under the Investor Relations, Investors Events section. And now I would like to introduce Mr. Michael Lin, Head of Investor Relations at UMC. And Mr. Lin, please begin.

Thank you and welcome to the UMC's conference call for the second quarter of 2021. I am joined by Mr. Jason Wong, the President of UMC, and Mr. Chi-Tung Liu, the CFO of UNC. In a moment, we will hear our CFO present the second quarter financial results, followed by our President's key message to address UNC's focus and the third quarter 2021 guidance. Once our President and the CFO complete their remarks, there will be a Q&A session. UNC's quarterly financial reports are available at our website, www.unc.com. under the investor's financial section. During this conference, we may make forward-looking statements based on management's current expectations and beliefs. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially including the risks that may be beyond the company's control. For this risk, Please refer to UMC's filing with the SEC in the U.S. and the ROC security authorities. Now, I would like to introduce UMC's CFO, Mr. Chi-Jung Liu, to discuss UMC's second quarter 2021 financial result.

Thank you, Michael. I would like to go through the 2Q21 Investor Conference presentation material, which can be downloaded from our website. Starting on page 3, the second quarter of 2021 Consolidated revenue was over the $50 billion mark to reach $50.91 billion, with the gross margin at 31.3%. The net income attributable to the stock quarter of the parent was $11.94 billion, and the earnings per ordinary shares were $98.20. Our utilization rate in this quarter remained at 100% plus for the second quarter, and the The wafer shipment in Q2 of 2021 was 2.4 million in wafer equivalent. Please turn to page four. Our quarterly revenue in second quarter reached $50.9 billion, up 8.1%, helped both by the higher wafer shipment as well as the increased ASP. Profit margin as a result increased to 31.3% or 15.9 billion NT dollars. And overall net income attributable to the shareholder of the parent is 23.5% or 11.9 billion NT. EPS in Q2 2021 was 0.98 NT dollars. On page five, for the first six months of the year, year-over-year comparison, revenue grew by 13.1%, mainly driven by higher volume as well as better product mix and also higher ASP. However, it was somewhat dampened by the increased $20 exchange rate against U.S. dollars. Gross profit margin reached 29% for the first half of 2021 to $28.4 billion. And overall net income reached $22.3 billion or 22.8% margins. And EPS for the first six months of the year is $1.8320. For our balance sheet, our cash on hand is about $124 billion NT, including about $20 billion will be distributed to shareholders as cash dividends in mid-August. And total equity reached $240 billion. And net asset dollar value per share is around $19.3 billion. On page 8, revenue breakdown by locations, Asia increased, sorry, on page 8. Yeah, page 8. Revenue breakdown, Asia remained at 63%, and Japan increased to about 7%, and the rest two regions, remain somewhat unchanged. I'm sorry, on page seven, therefore I can skip the page earlier, ASE in quarter two increased by close to 5%. So back to page nine, IDM represents 16% of the total revenue, and Fabulous is the rest of 84%. On page 10, Our communication segment is 47%. Consumer is around 26%. So on page 11, our overall revenue below 40 nanometer is around 38%. And 28 nanometer, since it's running at 100% capacity utilization rate, is around 20%, similar to that of last quarter. And capacity, total capacity table show some incremental increase, mainly for 12a as well as 12x. And going forward, for third quarter, there will still be some type of capacity increase for selected . So for page 13, our for 2021, The budget remained unchanged around 2.3 billion US dollars. So the above is a summary of UMC's results for Q2 2021. More details are available in the report, which has been posted on our website. I will now turn the call over to President of UMC, Mr. Jason Wong.

Thank you, Qigong. Good evening, everyone. Here I would like to update the second quarter operating result of UMC. Strong demand fueled by 5G adoption and visual transformation underpinned our strong performance in the second quarter. Our manufacturing facility is this 100% utilization while overall wave assurance rose 3% quarter over quarter to 2.44 million 8-inch equivalents. Revenue from 28 nanometer technology continue to grow sequentially. built by applications incorporated into 4G, 5G smartphones, solid state drive, and digital TV. During the quarter, we continue our product optimization and cost reduction efforts, lifting our gross margin. We expect the strength of structural demand to sustain and support the continuous improvement of our blended ASP. As a result, the company's gross profit in the first half of 2021 surged 54.5% year-over-year to NT 28.4 billion. Looking ahead, we anticipate demand to stay robust in the third quarter, driven by megatrends such as 5G and EV. Supply tightness is expected to continue across 8-inch and 12-inch facilities. We foresee margin momentum to continue into the third quarter, supported by further product mix optimization, cost reduction efforts, and productivity enhancements. In addition, we expect the adoption rate of our 22 nanometer technologies will continue to gain traction, reflected by a pickup in customer's 22 product tables in connectivity and display applications. We will also focus on further strengthening our leadership position in a number of specialty technologies, such as OLED display drivers, RFSOI, and image applications. Moreover, we continue to take important steps to enhance our corporate governance and lead sustainability efforts in our industry. Earlier this month, five independent directors were newly elected to our company's board of directors, representing more than 50% of the board seats, and including two female directors. The company also announced its pledge to reach net zero carbon emissions by 2050, as well as our commitment to work alongside our partners to reduce carbon intensiveness and rise renewable energy usage in our supply chain. UMC is dedicated to enhance our corporate governance, as well as addressing climate change to build a sustainable environment. Now let's move on to third quarter 2021 guidance. Our weight assurance will increase by 1% to 2%. ASD in U.S. dollar will increase by approximately 6%. Gross profit margin will be in the mid 30% range. Capacity utilization rate will be at 100%. Our 2021 cash base capex will be budgeted at U.S. $2.3 billion. That concludes my comments. Thank you all for your attention. Now we are ready for questions.

Thank you, President Wong. And ladies and gentlemen, we will now begin our question and answer session. If you have a question for any of today's speakers, please press 01 on your telephone keypad and you will enter the queue. After you are announced, please ask your question. If you find that your question has been answered before it is your turn to speak, please press 02 to cancel the question. Thank you. The first question is coming from Randy Abrams, Credit Suisse. Go ahead, please.

Okay, yes. Thank you. Congratulations on the continued improvement. First question I want to ask on your strategy for mature 12-inch and 8-inch. Last quarter, when you announced the expansion, it looked more tied to 28 and 40. So I'm curious if you have plans or available capacity to add for expansion The more mature nodes are also on 8-inch.

Well, the last time we announced the P6 is also centered with the 28-millimeter capacity with the option to upgrade to 22 in the future. In terms of the other nodes, in addition to 28, we mainly focus on the limited flow space expansion, so it's rather limited, 40 to 50. In general, our strategy in the CAPEX is we remain our disciplined CAPEX philosophy, and from 2017, we always try to drive our sustainable structural profitability based on this principle. So we have to align with our customer and as well as the market and giving our relevance in the marketplace before we're making that decision. At this point, we're more focused on a 20-day technology at this time. In general, the 12-inch maternal and 8-inch maternal are facing ROI challenges in capacity extension investment. And we are looking for opportunity to work with our customers to overcome those challenges if possible. In the meantime, we'll continue to enhance our productivity improvement and strengthen our value proposition to enhance a customer's stickiness within those nodes. That's sort of how we address this.

Okay. And I guess in talking about two overcome challenges, is it your view it's just not the economics, like the return to invest on more mature 12-inch and just not many opportunities to find 8-inch space? Is that more the issue or just more the view market demand, more of your opportunities 28 and 40, so that's where you'll put the investment?

You're right. It's more of an economics and a full space available. For any greenfield capacity expansion for the mature node, you are competing with a fully, most likely you're going to be competing with a fully depreciated capacity. Unless the demand is significantly important to the customer, the economic space of sand, it will be very difficult to have a justified ROI. However, if the customer, you know, willing to face those challenges together with us, we definitely will explore those opportunities.

Okay, great. That's helpful. Hey, Jay, second question on pricing. It's getting another good.

Excuse me? Hello?

Oh, hello. Hi.

Yes. Randy, we are breaking up.

You're live? Yes.

Yeah, can I repeat your question?

Okay, yeah. Okay, sorry. I was cut out for a second. Okay, yeah, the second question I want to ask, if you could discuss your view on pricing from the higher base, where it's up nicely in third quarter, do you expect it would continuously grow in fourth quarter? And if you have an initial view on 2022, the pricing, if you've said anything, or even for the new phase, the phase five expansion, if you'll get higher price? And then do you have a target like where gross margin, factoring the pricing you're seeing, where the potential gross margin could move toward?

Well, we typically don't provide any guidance beyond a quarter. So we definitely will address the Q4 guidance during the Q3 conference. But in general, it's our belief the pricing for structural demand is here to stay. And I also believe our customers start recognizing the UNC value and award our contributions. So we do expect the strength of structural demand momentum will sustain beyond the Q4 2021.

Okay. And just one last follow-up. Looking out to 2023, since you announced your expansion, like a number of foundries are also seeing that need and adding capacity. Do you see by 2023, you're contracting in, to fix it, but do you view by 23 a change in that kind of structural, at least for maybe cyclical, more supply and at that point kind of price it goes back to the normal kind of summer erosion? Or how do you see it looking out two years as some of these fabs come online?

Well, again, I mean, we're not here to predict, you know, about this, you know, the nature of this industry. But in general, a new greenfield fab will take more than two years to build, right? Just like you said, you know, we're now looking at this tiniest situation to get relief until 2023. And however, based on the industry research, the worldwide semiconductor market growth rate will actually accelerate all the way from 2020 to 2025, driven by the 5G digital transformation, HPC, ED and IoT, And so we do believe this upcycle will continue for a period. Of course, we can never guarantee 100% fat loading all the time. From the financial perspective, we have to maintain an edge-in-cock competitiveness to ensure the healthy growth margin. So that allows UMC to weather the storm during the downturn. So from that standpoint, we have to address this fundamentally. And in order to address this, maintain such healthy AST or gross margin per se, what we do is from the recent up cycle, we take the opportunity to optimize our product portfolio, enhance our technology competitiveness, and along with our manufacturing capabilities, And we believe those efforts have strengthened our relationship with customers and UMC's market position to maintain the current position. So, you know, I'm not here to predict whether we can approach this ASP continuously, but I do think by enhancing our capability, we'd be able to, you know, compensate the market's volatility, yeah. or even potential capacity oversupply situation. Randy? Randy, I think we lost you again.

No, thank you.

Thank you. And the next question is coming from Brett Simpson, Eritrea Research. Go ahead, please.

Yeah, thanks very much. I wanted to ask about some of the long-term agreements you're signing and what sort of commitment, wafer commitment guarantees are being negotiated and how enforceable these agreements are, particularly if we see industry conditions start to normalize after this unusual period of supply challenges. anything you can share with us around the enforceability of any sort of wafer commitments that your customers are making here long-term? Thank you.

Well, we reported last quarter the agreement has a long-term protection mechanism to ensure our newly expanded capacity will be maintained at a healthy level. Such mechanism includes the mutual obligation from customer as well as from our side. And so by fulfilling those obligations, we believe that the loading can be suspended at a healthy level. As far as the detail of the mechanism, I'm not elaborate to share on the call, but we actually have a very serious and comprehensive discussion with our customer, and we do believe such a mechanism is adequately adopted.

And so even if we have a sudden change in industry conditions, you feel quite confident that your customer obligations will be, they will continue to commit to those obligations basically if there's a oversupply situation in the industry or something that we see in the years to come?

Yes, we believe it will be well protected from a potential financial implication.

Great, great. And just one follow-up on dividend. Now that you're delivering healthy free cash flow, healthy improvements in margins, Can you talk a bit about the vision around dividends and how to think about returns to shareholders? I mean, we haven't had a sort of formal policy from UMC, you know, is it a payout ratio you look to target in terms of your dividend policy? Any thoughts there around as you continue to sustain this type of margin structure, how the dividends might evolve going forward? Thank you.

Yeah, we do have a dividend policy, which is we will pay our distributable earnings in cash no less than 50%. So that's our policy. Of course, for the recent years, we are much higher in terms of payout ratio. But I think going forward, we're looking to distribute a stable and hopefully increasing cash dividend along with our improved EPS.

Great. And maybe just one final question. In terms of your implied, the Q3 guide implies your wafer pricing is up high teams year on year. Does the current ASPs fully reflect your long-term agreements that are in place?

The long-term agreement won't kick in until 2023 if you are referring to the P6 project. I think our... Our ASP increase is mainly driven by product mix optimization in quarter two. And there will be some price increase as well as product optimization continue into quarter three. So the long-term contract for pieces won't be effective until 2023.

Okay, thanks very much.

And next we'll have Charlie Chan of Morgan Stanley for questions. Go ahead, please.

Thanks for taking my question. Good afternoon, gentlemen, and congratulations for great results. So I also really want to follow up some question about the pricing. So just a hypothetical question, right? If there is a kind of a cycle downturn, how confident that management uh can can maintain the current wafer price i'm not talking about the p6 i'm talking about other than p6 whether a company think that price can sustain in a down cycle well i mean we we are giving guidance for 2021 so we don't think there's any inflation point of the down cycle yet so

hypothetical question of going into let's say 2023, 2024, for whatever reason, there is a so-called down cycle. We just have to execute in our plan. Like I mentioned earlier to Randy's question, there's lots of activity associated with that. So I don't really think this is the right time to predict whether this is going to be a down cycle or not, but we are definitely prepared to dealing with those situations through our technology offering, through our manufacturing capability, as well as based on the selected market that is more associated with the structural demand. And we believe those activities will help us with our vulnerability in terms of demand change. I think that's how we address that issue. And of course, again, I'm saying that we can't really guarantee there's always an upcycle. But given what we have seen in the recent upcycle, we already took those opportunities to optimize our product portfolio and along with, you know, enhancing our technology competitiveness to align with our customers. So we are seeing a good progress on that front.

Okay, thanks. Yeah, so when you form your wafer price, no matter if it's this year or 2022, do you really compare or refer to your industry peers, especially the so-called industry leader TSMC? So my question is actually, do you see, for example, at the 20 nanometer or 40 nanometer, do you see any technology gap or quality performance difference versus a TSNC? And whether you can price on par or even higher than TSNC?

Thanks. Well, we do believe we are competitive in those technology nodes, process nodes. In fact, we are continuing driving our technology offerings to enhance those area. In particularly, Hy-Vee, the RFSOI, the BCD, and Betafresh area will continue strengthen our offering in the technology area. So I think we are reasonable competitive in those space, not if we're in the leading position. So as far as for the price ASV goes, we do believe the customer start recognizing that and start reflecting, the ASC does reflecting some of our technology offering and competitiveness. And we think the market price, industry market price is a good reference and we'll continue benchmark those. And we think we are bridging the gap and into a comfortable level, yes.

Thanks. And then some housekeeping question, right? I mean... I'm not sure what was the progress of your China , right? Because previously there were some changes about there is some difficulty for China to import some equipment. For example, AP tool from materials. Do you think that would affect your capacity expansion plan in China for 20 nanometer? And also, the question to Qi Dong is about, you know, from here, right, your gross margin is around, you know, mid-30%. What is the company's long-term financial goal in terms of gross margin, open margin, and ROE? Thanks.

So for 12X in Xiamen, our Xiamen 12-inch replica, we actually have already reached the full scale of 26.5K per month based on our design capacity. So pretty much we reached what we intended to expand for Shamifab already. And for our GM question, the GM outlook, our CEO, our president will comment on that.

Thanks. For the growth margin outlook, our growth margin outlook will be mainly derived from our production efficiency as well as the ASP trend. UMC as a company will continue to work on the product mix optimization. I kind of touched that earlier. And continue efforts on cost reduction efforts and operation efficiency in order to strengthen our structural growth margin. So we do have expectations that continue to improve on that.

Okay, that's great.

Thank you. And next question, Roland Hsu, Citigroup. Go ahead, please.

Hi, good afternoon. Thanks for taking my question. Now your 28 nanometer is the biggest no in revenue. We'd like to know how about the 28 nanometer is a contribute to the upside to your total profit. And also for your 45 nanometer, the revenue actually continued declining from 3Q last year. And is there any empty or idle capacity for 45 nanometer? Or are you convert this 45 nanometer capacity to 28 nanometer or others? Thanks, that's my first question.

All our nodes are actually fully loaded. And they're giving a different mix of the weather out in different quarters. You will see some variables in the mix of the technology nodes. By this time, there's no vacancy in the FAB. In fact, all nodes are running over 100%. The question about the 20A expansion going forward to the growth margin, and our unique 20A logic and specialty technology offering will enhance the customer's competitiveness as a result I think the customer's reliance on our 28 capacity is in great demand. This competitiveness will allow us to enjoy a healthier EBITDA margin in the longer term. In the longer term, we actually expect the 28 nanometer capacity expansion will play as a catalyst to further drive our gross margin expansion.

Yes. Even for your 3Q growth margin guidance, mid 30 percentage point, I think that they also have a big contribution from 20 annum meter, right?

Yes, the ASP in Q3 guidance, the ASP is expected to grow 6% quarter over quarter, primarily driven by price adjustment. In our Q2, the ASP increase is mini driving by both the price adjustment on the select application in 12 inch in a mature size and also of eight inch and also coupled with the product mix improvement which means the higher 28 shipment. For Q3, our expected AC growth primary driven by the price adjustment of the 12 and eight inch note.

Understood, okay. Yeah, but I think that my question actually is for the gross margin for 28 nanometer. How does it contribute to your gross margin in 3Q?

So, Roland, we have mentioned that 28 has no doubt the highest EBITDA margin compared to the other main nodes, mainly because of higher ASP. And all the parameters are dynamic quarter over quarters. So we cannot give you straightforward answers, but as Jason just mentioned, for the longer term, 20-year for sure will be a catalyst in driving our margin extension.

Understood. Thanks. I looked at your annual report. It lists your contract with Jinhua was due in May. So I would like to understand, were there any impact on your P&L or on your balance sheet from 3Q or on-wall after this contract has been due in May?

So for the contract, it has been currently on hold. Okay, so there's no any progress at all for this Jinhua-related activities.

So no financial impact as well, right? No. Okay. Okay, thank you. And also, you know, now you have been load every node or your capacity at more than 100% utilization. However, I think in the past several quarters, every quarter you still managed to increase the capacity by several percentage points by capacity debottlementing. So just want to know how long can you still your capacity going forward, and will it be sustainable for you to increase these, you know, two to three percent or even several percent of the wafer shipment increase every quarter, you know, from capacity bottle making, even though you are load at a very high utilization?

Well, the and the is ongoing efforts that will continue. And for the capacity expansion, if you're referring to the overall result here, our 2021 actually increased about 3%. And for the 2022, we expect to increase by another 6% year-over-year. So that's gonna be a new expansion. and all the debodomating and the productivity improvement will be an ongoing basis.

Okay. Okay. Thank you. That's all my questions. Thank you.

Next question coming from the China Renaissance. Go ahead, please.

Oh, hi. Good evening, gentlemen. First question regarding P6. Initially, it's targeting the 28 and 22 nano. I just wonder if the capacity would be upgradable to 40 nano or 3-in-1?

The answer is yes. Those nodes are flexible to manufacture for 14, yes.

Okay, great. And how easy would that be for the upgrade? And how much would it cost roughly on a per-day basis?

Well, the number is, you know, actually, I don't think we're ready to quote that number because I think the number is still, there's still some uncertainty with the numbers. But the common two on 28, the both two, the 14 things that are in a high percentage range. So we do believe that is the right note for potential upgrade. And the since we're not there yet, whether we serve this specific number at a later time, yeah.

Okay, great, yeah, no worries. And regarding the FinFET, what's the company's latest thoughts on that part of business?

Again, I didn't get that number.

What's the company's strategy for the FinFET going forward?

Oh, I mean, when we developed the technology, Actually, when we seized the capacity extension on the 14 a few years back, but we did not seize the technology development on the 14, the reason I mentioned earlier means the 14 and the 28 still have a high percentage of common-to-conversion ratio. And also, the 14 does provide some technology advancement in terms of power and savings. So we believe that's the right technology to continue to develop the So at this point, the 14 is being fully developed. However, we are aligning with our customer to triggering the CapEx decision. Given the current market outlook, the 20A remains to be a strong note. So we prioritize our resource on the 20A at this time. So the option is there, but it's still subject to our, you know, what I said, the CapEx policies. So we'll continue guided by that at the right time, at the right place, and the right volume. We will make that decision. So defaulting is an option for us.

Okay, great. And my second question is regarding the profitability of your Japan FAB. How does it compare with the group average right now?

So based on the integration effort at 12M, which is our Japanese TAP, the cost reduction activity and productivity improvement has led to a very efficient operation enhancement. Therefore, we do expect the 12M, the Japanese TAP gross margin, will be in line with UMC's 12-inch corporate average. Okay.

Okay, great. Okay, yeah, congratulations, and thanks for answering my questions.

Thank you. Thank you. The next question is from Nicholas Barrett, Bakari. Go ahead, please.

Yes, hi. Could I clarify, if I heard properly, Mr. Wang's incapacity this year increased by 3% and next year 6%? Was this correct?

The capacity increase for 2021 this year is 3%. That's the year-over-year for 2021. The 6% year-over-year is in 2022.

The 6% in 2022. Thank you. Thank you very much. Since you're running at 100% utilization, does that give you better visibility into the coming quarters?

visibility for the next quarter of course it's quite solid and we continue to work with our customers closely about their rolling forecast so for the visibility right now of course I think it's better than most of the time we experienced in the past would you say that gives you visibility into beginning of next year

Well, I mean, we do have visibility because given the recent supply and demand imbalance situation, customers tend to have a longer term discussion with us. So yes, the answer is yes, we do have a visibility all the way from now to end of 2022, but again, you know, this is a dynamic, market dynamics in there, so we have to continue tracking the market. Given the current observation, we do expect that demand will continue to outpace the supply driven by the megatrend. So in the near term, we have not seen any sign of an infraction point yet, as I said earlier, and so we don't think there's anything any signal that indicates the current situation will change. So yes, we do have some visibility and we haven't seen any sign of a change in the situation. And given the megatrend of some of the applications from 5G to EV, IoT, we think this is, the demand is gonna stay here, yeah.

Okay, understood. Do you have an estimate for 2021 for this year about operating expenses and DNA?

Operating expenses for this year and next year is under control. I think our goal is really to maintain a steady percentage of ratio to overall revenue and of course revenue is continuing to grow so the rate of revenue growth Certainly, it's outpacing the rate of OPEX increase.

The percentage of OPEX not increasing. I'm asking because typically, as you mentioned, 22 tape outs and specialty processes, and at the same time, a bit more capacity increase than in the previous years. All those things cost a bit of money, I guess.

Definitely, but we all have more resources as well, given the stronger performance. So again, we will control the ratio, the percentage of OPEX to revenue, instead of the absolute dollar terms.

Understood. And for DNA, Chih-Tung, any rough number?

Same thing. I think the biggest component for expense increase is really the employee's related compensation because of the better performance, the bonus to our employee will be higher. But the rest, again, is under well control.

Good. Thank you very much.

Thank you.

Next question. JP Morgan. Go ahead, please.

Yeah, good result. First question, just wanted to explore a little bit on the blended pricing. Seems like ASP continues to accelerate, roughly 3% in Q1, 5% in Q2, and 6% in Q3. Is there an updated guidance on how much we expect blended ASP to go up this year? I think previously we talked about high single-digit approaching 10% last quarter. Is that going to be higher? And secondly, on the pricing itself, given that you have visibility into next year and you have a lot of commitments to the end of next year itself, could we talk a little bit about how we think about blended ASP as we go into next year? Is next year also a pretty strong price increase here because of product mix as well as some price adjustments? That's my first question.

Okay. So in 2021, our target ASP growth will be around 10% to 13%. year over year. The pricing also includes our product mix improvement, pricing adjustment. UMC does value long-term partnership over near-term cyclical fetches. So therefore our current ASP list mainly reflects the value of our position right now. In terms beyond 2021, I kind of touched that earlier. The pricing of the structured demand we believe is here to stay. Our customer does recognize that. So we expect the strength of the structural demand momentum will sustain beyond Q4, 2021.

Got it. Just one more question on the CapEx side. I think we talk about the 2.3 billion CapEx this year. How much of our FAB128 P6 expansion does it cover? Given that we are also looking for around 6% capacity addition next year, do we expect CAPEX to stay around these levels as we look into next year as well?

We announced the P6 program will be somewhere in the $3.7 billion CAPEX and the estimated rent schedule will be sometime in the second quarter of 23. So most of those will probably happen within the 2022. There's a very minimum portion of that is within the 2021 number. So I think that we'll provide that guidance by end of this year for 2022.

Understood. Maybe one more question. Given that we are seeing a lot of tightness, especially in 8-inch, and as Jason, you mentioned, facing an ROI challenge in terms of capacity expansion also, could we talk a little bit about how quickly or how keen are customers to migrate some of their 8-inch products to more mature 12-inch technologies? And also given everything is tied, how feasible is it for them to do that over the next, let's say, six to 12 months?

Well, just like you mentioned, all nodes are tied across from 8-inch to 12-inch. So the purpose of migration is to access to additional capacity in 12-inch that will be very challenging. The natural pace of the migration will continue. I think on different application, those activity is ongoing. But for capacity reason, I think this is gonna be rather challenging at this time. Because all nodes are very, very tight right now, yeah.

Understood. Just last one, when you talk about the 6% capacity increase next year, is that also largely in 28 and 22, or are you thinking a little bit more on 40, 55, et cetera, also?

The breakdown of the 22, mainly is still left by more than 20% year-over-year growth in our 28-millimeter, okay? There will be some increase in the 8-inch advanced node, which means below 0.18 to some of the upgrades. And so this is probably a combination of those other main nodes.

Got it. Thank you, and congrats on the good result.

Thank you. Next question, Bruce Gomez X. Go ahead, please.

Okay, thank you for taking my question. I'll congratulate the great result, and I'm actually very impressed about your ESG improvement, especially that more than half of the board directors are independent directors, which is important for the long-term shareholders. So I noticed that for the last two quarters news announcement, you addressed automotive. Can you tell us what is the revenue exposure to automotive right now and what's your target in two to three years? What are the key application and the process note for the automotive customer? Do they carry higher or lower than corporate average margins?

Well, our revenues, contribution from automotive is rather small. It's still below 10% mark. And there are the demand recovery issue from end of 2020 for automotive. So we are putting some resource to support that and priority to support that. And from year over year standpoint, we increased the absolute number probably by goes to 20% in the auto segment. We are putting some priority and resource to support that urgent need. As far as the customer's margin goes, we don't comment on specific customer or segment margin and whether on a corporate level. I think in general, they, you know, they, they, you know, they, they are reasonable, uh, you know, uh, in a reasonable ASP level.

Okay. So can I ask in a different way that do we, can we expect the automotive revenue to be more than 10% in a year or two? And what are the key application within that auto thing for your customers?

I think from the application standpoint, we are putting more resources to the automotive space. So we are expecting the automotive space will grow. And I don't have a number to quote here, and we can provide that on an ongoing basis.

But just to add on that, we mentioned EV is an important driver for our silicon content going forward. We would like to take a broader view that auto industry should eventually include the EV as a driver as well. So that percentage certainly is likely to continue to increase.

Okay, thank you. So next one, you know, I always like to ask for your R&D expenses. I mean, you know, if you look at your R&D expenses in the first half, it's already like 6.5%, which is down from like 8% to 9% in the last couple of quarters. So basically what is the long-term target right now? I mean, you know, Vanguard's R&D expenses is about 5.5% of the sales. Is that a reasonable target for your R&D expenses?

We think the current R&D expenses is about right. I think certainly we want to allocate more resources to our R&D effort in order to differentiate ourselves, especially on the specialty technology and also the future technology related to 5G and EV. And again, the absolute dollars will continue to grow, but certainly the percentage of revenue will be well-controlled.

I should. Okay, thank you. Lastly, for the P6 profitability, I remember last time when management was talking about which is like roughly 30-plus percent of gross margin for the P6. But if we fast forward to 2022 or 2023, this gross margin will be lower than the corporate average in a meaningful way. So does that sound right?

Well, we expect the P6 will have a better cash margin. means higher EBITDA margin than the 12-inch corporate average. And we adopted P6 because we believe this is a win-win cooperation model that not only secures long-term capacity for customers, the predetermined pricing will also enable UMC to grow organically and to meet our long-term profitability. Well, given our corporate average growth margins on rice, the initial P6 growth margin will be in catch-up mode, like you said. However, over time, the P6 growth margin will eventually enhance our corporate average.

I understand. Your corporate average growth margin improvement is much faster than we think, so that's why it creates some discrepancy.

Okay. Thank you. No more.

Thank you. Sure. Thank you. Next question is from Nicholas Goodwood, VUBS. Go ahead, please.

Hi, good evening. This is Nick Godoy from UBS, standing for Sunilin. Two quick questions. First, going back to LTAs, is there a way you could quantify perhaps for us how much of the expected capacity for P6, which I think is 27, 28K wafers per month, will eventually be covered by LTAs? And secondly, going back to specialty processes, Could you maybe give us more color as to which one you see the better traction of customers right now between low power, embedded memory, MCUs, high voltage, CIS, et cetera? Thank you.

Well, the application strength from the overall global demand perspective, and we've seen the application strength The catalyst is really more of a 5G transformation. And of course, we mentioned about EV and as well as the digital transformation on the IoT devices. And for the 5G transformation associated with the high voltage device has probably the strongest momentum. That includes the OLED driver. The 5G also have ISD, Wi-Fi 6, RFS switch. So those will probably have the strongest momentum at this point due to the 5G megatrend. And followed by the MCU and the power management.

Great, thank you. And how about the LTE question for P6, please?

For P6? Can you repeat your question?

Sure. So when you talked about customers signing LTAs for P6, approximately when you look ahead and when you will reach 27,000, 28,000 workers per month in P6 capacity, how much of that do you think is likely to be covered by LTAs? Thank you.

The old P6 program is covered by the contract, yes.

Great. Thank you very much.

And next question, Julie Cai, UBS. Go ahead, please. Julie, you are now on the line.

Hi, thank you. I would just like to ask the management to give us maybe a long-term gross margin target. It is just because the recent quarters, your gross margin has been improving quite fast in a very rapid pace. and perhaps give us a guideline of a long-term target on this margin improvement?

Well, I kind of touched that question through an ASB trend, but the question always came back to the gross margin. Our margin outlook is mainly driven by all those factors I mentioned, you know, from production efficiency, ASP, and, you know, and product mix optimization, you know, cost reduction, so on and so forth. So, you know, we believe, you know, those will give us this, you know, a benefit to strengthen our structural gross margin. So we do, you know, we do expect this gross margin, the, you know, probably continue to improve, I would say. But I'm not, I don't think we're ready here to giving any gross margin guidance or any gross margin, you know, the outlook for our target yet.

So in a way, we should view that the possible upside could still be there or the recent quarter's margin is not sustainable?

Oh, we certainly believe all the structure demand, all the existing volume is here to stay. So I don't think there's a, you know, in the near term, we haven't seen any reflection point that this will change in a different direction. I think from the direction is we're still marching to improve our growth margin, yes.

Got it. Also, thank you. And then also a follow-up, how do you run utilization rate at more than 100%?

Well, it's actually 100%. Just 100% plus is meaning it's really full. Okay.

All right. Okay, thank you. Congrats for a good result.

Thank you. Ladies and gentlemen, we're taking the last one, and the last question is from Randy Abrams, Credit Suisse. Go ahead, please.

Okay, thanks for squeezing me. Two final questions. Depreciation, Chitang, could you give an update, the trend for the next one to two years, now on the new CapEx plan, how we would factor that in?

I think for this year and next year, we are talking about around 5% or less decline for overall depreciation expenses. And for 2023, it really depends on the equipment we brought online. And right now, the lead time is actually quite long. So it's a little bit difficult to predict the depreciation expenses for 2023. However, again, we will control it through a percentage of revenue benchmark. And percentage-wise, we hope it will be a steady to decline rate. But the absolute dollar term depends on the new capacity come on stream.

Okay. And the other one I want to touch, the other income bump back up to $1.6 billion. Was there a factor for that lift? And then looking forward, is there a certain period that continues? Is that still tied to the shaman, and how would that continue out into the future?

Just once a year, there's extra subsidies related to our syndicate loans, and I think that will be the last time for this second quarter. Going forward, I think around $10 billion per quarter will be a norm for each quarter, at least for a few years.

Okay, I'm sorry, say that again.

One billion per quarter. One billion per quarter. Yeah, per quarter. Okay.

Okay, great.

Okay, now that's all my questions. Thanks a lot. Thank you, and we thank you for all your questions. That concludes today's Q&A session. I'll turn things over to UMC Head of IR for closing remarks.

Thank you for attending this conference today. We appreciate your questions. As always, if you have any additional follow-up questions, please feel free to contact UMC at iraumc.com. Have a good day. Thank you.

Thank you. And ladies and gentlemen, that concludes our conference for second quarter 2021. Thank you for your participation in UMC's conference. There will be a webcast replay within an hour. Please visit www.umc.com under the Investors Events section. You may now disconnect. Goodbye.