United Microelectronics Corporation (NEW)

Welcome everyone to UMC's 2021 fourth 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. And for your information, this conference call is now being broadcast live over the internet. Webcast replay will be available within two hours after the conference is finished. Please visit our website www.umc.com under the investor relations investors events section. Now I would like to introduce Mr. Michael Lin, head of investor relations at UMC. Mr. Lin, please begin.

Thank you and welcome to the UMC conference call for the fourth quarter of 2021. I'm joined by Mr. Jason Wang, the president of UMC. and Mr. Chi-Dung Du, the CFO of UMC. In a moment, we will hear our CFO present the fourth quarter financial result, followed by our President's key message to address UMC's focus and the first quarter 2022 guidance. Once our President and the CFO complete their remarks, there will be a Q&A session. UMC's quarterly financial reports are available at our website, www.umc.com. under the Investors' Financial Success 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 Azure Resolve to differ materially including the risk 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-Dong Liu, to discuss UMC's fourth quarter 2021 financial results.

Thank you, Michael. I would like to go through the 4Q21 investor conference presentation material, which can be downloaded from our website. Starting on page 3, the fourth quarter of 2021, conserved revenue was $59.1 billion, $90 billion. with a gross margin at 39.1%. The net income attributable to the stockholder of the parent was $15.95 billion, and earnings for ordinary shares were $1.370. Capacity utilization rate remained at 100% plus. Please turn to page 4 on this Q4 comprehensive income statement. Operating revenue grew sequentially 5.7% to 59.1 billion. Gross margin as we reported at 39.1% improved 12.5% to 23.1 billion. We controlled the operating expenses and the percentage of the revenue declined a little bit to 11.5% to 6.82 billion. With a non-operating income of $558, our net income attributable to shareholder of the parent was $15.949 billion, or an EPS of 1.3 in Q4. For the whole year on the page 5, 2021 revenue grew by 20.5% year over year. in NT dollar terms to 213 billion NT. In U.S. dollar terms, the growth rate was higher, around 26-27%, given the stronger NT dollar appreciation against U.S. dollars. Worst profit margin was 33.8%, or $72 billion, in the year of 2021. And the overall net non-operating income is a little bit over $10 billion, grow by 70% year over year, mainly due to the stronger stock market performance and most of the financial assets we hold are evaluated according to the stock market performance. Income tax expenses also grow significantly to $6.7 billion. mainly due to a lower base in 2020 and also longer profitability in 2021. So for the full year, the EPS is 4.57, grew up by 91.1% in net income terms. So on page six, cash continued to pile up to $132.6 billion. by the end of 2021. And total equity also grew to 281.2 billion NT by the end of 2021. Page seven, the ASP trend continued to inch up. In the Q4 of last year, we saw ASP grow by more than 3%. In terms of revenue breakdown, for page eight, Asia still remains our largest portion of revenue contribution with 66% in Q4, and North America is 21%. For the full year on page 9, the ratio didn't change much compared to the quarterly numbers. So for page 10, both quotes are identical that IDM contribute around 14% of the total revenue. And for the full year, we see a 3% percentage point increase for IDM revenue to 15% in 2021 versus 12% in 2020. So on page 12, communication also remained around 46% of the pie. And for the full year, on page 13, we see computer segment grow by 3 percentage point to 17%. And consumer also grows 3 percentage point to 27%, compared to the year of 2020. And for Q4 of 21, by technology breakdown on page 14, for 22, 28 nanometer, account for about 20% of our total revenue, with 38% of the revenue coming from 49 or below in Q4. And for the full year on page 15, we see a pretty meaningful increase in 2022-2028 revenue from 14% in the previous year to 20% in 2021, which also helped our blended On page 16, continue to see some mild capacity expansion. Although Q1, there will be some maintenance, annual maintenance. So most of the increase is scattered among different FABs, which shows in this table on page 16. For page 17, so far, currently our 2022 CAPEX is budgeted around $3 billion. And for year 2021, the actual spending was about $1.8 billion. And the above is a summary of UMC's results for Q4 2021. More details are available in the report, which has been posted on our website. I would now turn the call over to President of UMC, Mr. Jason Wong.

Thank you, Jidong. Good evening, everyone. Here, I would like to update the fourth quarter operating result of UMC. In the fourth quarter, strong demand continued to drive forwarding across our FABs. While overall waste assurance grew 1.7% quarter-over-quarter to 2.55 million eight-inch equivalents, for the fourth year, Revenue in 2021 rose by more than 20% year-over-year, and operating income reached a record high, driven by a surge in our 28-nm business. The 75% year-over-year revenue increase from 28-nm technologies strengthened our overall wafer ASP and reflect the robust shift demand related to 5G, ALIT, and automotive megatrends. It also substantially contributed to the improvement in the company's financial structure. Our healthy 28 nanometer product pipeline will further diversify our product portfolio and customer base and enable UMC to capture additional market share. Looking ahead into Q1 2022, we anticipate the demand across all nodes in UMC's addressable market will continue to outpace supply. Our growth in the long term is supported by industry's megatrends, which will be captivated by structural changes occurring in the industry. We will continue to deepen cooperation with customers with our differentiated specialty technologies, manufacturing excellence, and capacity expansion, closely linked to the demand of our partners. At the same time, we will keep pushing for cost reduction and meticulously managing our capex in order to deliver a sustainable and healthy return for our shareholders. Next, I would like to take a few minutes to share our view on the industry outlook and where we see UMC's position in the industry going forward. UMC has enjoyed a banner year in 2021. Over the past three years, the company has performed and achieved our business goals. thanks to the positive market dynamics and strong partnership we have developed with our customers. We believe the current semiconductor market megatrends, namely the continuous penetration of 5G phones, the acceleration of EV adoption, and the fast proliferation of IoT devices, will continue to drive higher demand for silicon content. That, in turn, will lead to a growing demand for 5G capacity and technology, not only at the bleeding-edge nodes, but also for UMC-focused markets in the foreseeable future. We have been working closely with our customers, aligning our technology solution to capture those megatrend-driven opportunities. We are well prepared ahead of a competition across many platforms. The demand and supply imbalance we have experienced over the past two years may find some relief as a new capacity will come online, yet it has made clear the need for structural and dramatic transformation in a boundary value chain towards closer cooperation and mature mutual risk mitigation. Many of our customers recognize the importance of the closer cooperation and have responded by participating in our accelerated capacity expansion partnerships and reached a multi-year long-term supply agreement with us. The LTA provides a long-term capacity assurance to our partners and loading protection to UMC in return. In addition, we are also working with end-system companies and automakers to enhance visibility and transparency in the supply chain, with the aim of addressing uneven supply in the industry and long-term under-supply challenges. LTAs are more than a protection mechanism for UMC. They are endorsements on our customers. and points to UMC's strengthened position among our foundry peers. In the past few years, we have also significantly enhanced the company's structural profitability, giving us the necessary resilience to weather through the market fluctuations. We envision UMC will continue the growth momentum achieved over the past two years based on our comprehensive technology offering foundry position and customer relationships, Our goal is to make UMC a US $10 billion company by 2024 with ROE over 20%. Last but not least, I would like to highlight our focus on ESG. While ESG is at the forefront of many corporate agendas today, corporate social responsibilities have been UMC's top priority over a decade. Over the years, sustainability has become deeply embedded in our culture. and become part of our corporate DNA. In June last year, UMC publicly committed to reach net zero emissions by 2050, the first semiconductor foundry to do so. In the 2021 DJSI, we were ranked first in the semiconductor sector, an important recognition for our ongoing commitment to the environment, our communities, and our shareholders. We sincerely invite you to visit our website where you can download our annual corporate sustainability reports. Now, let's move on to the first quarter 2022 guidance. Our wave assurance will remain flat. ASP in US dollar will increase by 5%. Growth profit margin will be approximately 40%. Capacity utilization rate will be at 100%. 2022 cash-based CapEx will be budgeted at the US $3 billion. That concludes my comments. Thank you all for your attention, and now we are ready for questions.

Yes, 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. Now please press 01 to ask the question. Thank you. Our first question is coming from Randy Abrams, Credit Suisse. Go ahead, please.

Randy Abrams Okay, yes, thank you, and congratulations on a good result. I wanted to ask the first couple questions on the CapEx. For the $3 billion budget, I want to clarify, is most of the spending tied to the Phase 6 project, or do you have any other additional projects? And should we view this spending with that Phase 6 as a high base, or is it your view we may have a fall-on expansion to maintain this higher level of spending?

Well, I mean, the $3 billion CapEx, part of that was the $500 million CapEx budget that rolled over from our 2021. And the other includes our maximization of the 12A P6 and 12X P1 that we have announced. The 12X P1 capacity will increase to 5K per month, and the P6 will increase another 5K per month. For the 12A P6 capacity, after the 5K per month, we'll reach 32.5K per month for our P6, which is higher than some of our previous announced. After we added 5K per month capacity at each side, we believe we can actually continue serving the strong customer demands. and we'll continue to enhance our economic skill on each side and maximize the production efficiency. So that's pretty much what that $3 billion is in coup. And overall, based on that, the overall 2022 capacity will increase about 6% year over year. Okay.

And for the timing, to clarify, for the 32.5K, when is the timing when that would be available for, like, wafer shipments?

The 5K amount will be commenced in Q2 2024.

Oh, 2024. Okay. So that's later.

Okay.

And for the 10 billion goal, is it the view with these projects you have the capacity or do you have, like, if you could go through, do you have additional space between the China, Singapore, Taiwan, to do additional kind of phase, or do you need to expand further, go to greenfield?

Well, that's actually a pretty good question. Let me answer it this way. Our global expansion strategy will continue – first, our global expansion strategy will continue to follow the stringent ROI-driven criteria we have been following. But at the same time, it will take us into consideration of future market outlook and customer demands. We, UMC, we have a very diversified regional production site, like you know. And so we do have the flexibility to assess the future expansion site and to meet those customer requirements. The question about the 12X, the China FAB, currently, we have FAB buildings constructed at both Japan 12M and the Xiamen 12X. However, both specify or still require additional CapEx to build clean room before install tools and equipment. And in addition to that, I think we, you know, UMC has a luxury to evaluate different expansion options as well beyond the current P5 and P6 in Taiwan. And we will discuss our expansion plan accordingly, but we will evaluate all options right now.

And one last maybe for Qigong on the depreciation for, if you could give a view this year and initial feedback based on this plan direction for next year?

So I think the key is really we want to keep this percentage of revenue under control. So we will continue to do that and 2022 depreciation actually will decline year over year by approximately 5% or less. and followed by a flat to small increase in 2023, which is dependent on the cash-based CapEx this year and also next year, because currently the equipment delivery time is being prolonged.

Okay. Hey, for the delivery, the first 27.5K, has that pushed out at all, or is that second half, 2023, 2023? for the, you mentioned the 5K would be in 2024, but when would the big capacity be available?

Both P5 and P6, you know, just let me get back to P5 as well. For the P5 and P6, production ramp schedule is still on track. The P5, the 10K per month capacity will come online by Q2 2022, is upcoming quarters, you know, in Q2. For the P6, we have encountered some equipment delivery delay. At the same time, we are working with the suppliers right now, along with the internal engineering efforts, and we will be shortening the two installation schedules and so on. So right now, we still keep the schedule on track. And the end goal is to ensure capacity commitment to our P6 customers. Okay. And I think that is the Q2 2023. Okay.

Q2.

Okay.

And then just one last question. I'll get back to the QV. With some of the costs rising on labor, how should we take the view on OPEX now if more increase or you mentioned some about continuing on the cost reduction effort. So how would that trend and also some of the the subsidy if that would maintain a similar level?

For OPEX, as I mentioned, yes, we are seeing the trend for labor costs increase. This is really a function of improved profitability. So our goal still remains the same. We hope OPEX will grow, but as a percentage of revenue, it will continue to be under control even trend down a little bit.

Okay, even trend down, meaning in absolute dollars.

No, no, I mean percentage of revenue.

Oh, I thought percent of revenue. Okay, I understand. Okay, thanks a lot for the incremental color. Appreciate it.

Thank you. Next question, Zihong China Renaissance. Go ahead, please.

Hi, good day, gentlemen. Two questions from my side. The first one, just want to tap your brain on the FinFET market. Does the company have any plan to go back to the FinFET market or be happy to just stay at 22 and 28?

Well, I mean, we never abandoned the 14 FinFETs. Our plans always keeping the 14 FinFETs under the R&D activities. And we have delivered the 14 technology, and we are engaging with a number of customers for the 14 ThinkFact. We do not have any plan to go beyond 14. And we do see that there will be very high challenges for us to start addressing the ThinkFact beyond the 14. So we will stop at 14 at this point.

I see. Great. And the other question, given the fact that we are making huge progress on gross margin expansion and for this quarter we are guiding for something around 40% for gross margin, what would be the steady state gross margin for the company going forward?

Well, first, I mean, I will start out with this. We do see an increase of the capex, and by the same time, we will manage and control depreciation through disciplined capex approach to maintain the gross margin based on our financial affordability, and then focus on EBITDA margin expansion we'll invest into the future. So, you know, that's the principle that we follow with.

So if I may add on to that, our comprehensive technology portfolio and global leading customer base coupled with the well-balanced age and 12-inch diversified offering, we think we actually are currently having higher than most of the competitors in terms of EBITDA margins. And UMZ beta margin, we think there are still room for further enhancement due to mixed improvement by specialty technology, expansion of 28 nanometer scale, and also some cost reduction effort, also productivity improvement and potential ASP increase. But accounting margin, especially gross margin, may vary along with the moving depreciation expenses which derive from the investment for the future. So, again, we will manage our growth margin through discipline, capex, and balance with our financial affordability. And our growth margin, which translates to absolute dollar dividend payout, will be in line or higher than UMC's long-term foundry growth.

Mm-hmm. I see. Okay, thanks. Maybe a last question from my side. For the net other operating income, is it still fair to assume a quarterly runway around $1 billion plus or minus for this year?

No, no. I mean, this is very difficult to predict. And again, this is highly correlated to the share price performance of our... Oh, no, no.

I need the operating... Are they not operating income, not the non-operating income? The net, are they?

So that's mostly related to the subsidy from our Shaman operation. It still will be 85%, 90% there for 2022.

Okay. And how long would that last? Would that go into 2023 and beyond?

It's mostly on a six-year scheme. So I think they will last into 2023 and may decline in 2024.

Okay. All right. Okay. Fair enough. Okay. Thank you very much. Congratulations.

Thank you. And next question, Bruce Liu, Goldman Sachs. Go ahead, please.

Hi. Thank you for taking my question. I mean... A question is, what's your expected fund rate growth rate for 2022? You know, TSMC is guiding for 15% to 20%. But your, you know, $10 billion revenue guidance suggested, like, you know, 10% compound growth for the next two, three years. If TSMC is guiding for, like, 15%, 20%, which means that if either you are losing market share in 2022 or onward, or you're expecting, like, flat-ish growth in the coming two years, So, you know, is there something I missed?

No. I mean, we have a long-term goal to bring the company over $10 billion by 2024. But for 2022, despite a lower contribution in wafer demand associated with the work from home and home learning, we still expect structural demand such as 5G, EV, and IoT will remain strong. So we estimate the foundry industry growth in 2022 will be around 20%. And at the same time, the UMC is projected to grow in line or higher than the foundry industry for 2022.

I see. Okay. Then you can easily achieve a target by 2023.

Well, $10 billion is not really a numerical target. It's really a goal. So we want UMC to become a $10 billion plus company.

Of course. I mean, you know, for me, you know, it's a, it's a, you know, I think it's the easier target for, you know, even in 2003. So that's why I was a bit confused.

Okay.

So the next question is regarding today.

Go ahead. Sorry. Go ahead. Okay. Sorry about that.

So the next question is more about the profitability. Your first quarter AST extended by 5% blended basis. which is supposed to be like you know wafer uh higher wafer price and better product mix and you distribute this depreciation in 2022 expanded only by five percent so theoretically you should see more um uh gross margin impact because of this uh asp uh high asp so you know why the gross margin only increased by one percent well it's approximately 40 percent and also um for

The 2022, as we discussed, there's some structural change in labor costs, also associated with improved capabilities. And for raw material costs, also there will be some kind of structural change, in our view, just like the structural change takes place in the foundry industry. So for 2022, we anticipate some raw material increase along the rest of the year.

You mean the non-depreciating costs increase a lot, which offset the benefits from the higher waste price. Is that right?

Yeah. Basically, we project the labor and raw material costs are increasing. And we believe this is not only just the inflation, right? I mean, because the demand outpaces supply, and we see this happening throughout the supply chain. But the labor cost increase is more structural, yeah.

I see. I understand. Do you expect to, you know, further increase your wafer price to offset the impact? Because if the raw material costs continue to go up throughout the year?

Well, I mean, the demand Our ASP strategy is not exploiting short-term optimistic profit, right? I mean, so it should reflect our value and market price, which is delivered to our customer. At the same time, we want to strengthen our relationship with the customer in the long-term basis and mutually growing with our customer. And for that, our ASP will reflect the market value and And we will cooperate with our customers in coping the rising input costs and inflation if needed. So we'll continue monitoring that.

But structurally, if the raw material cost is increasing, then because your value provided to a customer remains unchanged, you should be able to pass the incremental cost to your customers, right?

At the same time, we want to make sure that the customer can achieve their growth as well. We're closely working with them on that.

Understand. Thank you. I'll go back to the queue.

Thank you. Thank you. Next question, Roland Shi, Citigroup. Go ahead, please.

Hi. Good afternoon. My first question is for your $500 million CAPEX push out from last year to this year. You said that was due to the extended equipment lead time. So how about this $3 billion CAPEX plan this year? Will you worry about this extended equipment lead time to continue impact the equipment delivery and also continue impact your CAPEX spending this year?

So the $3 billion is already incorporated every possible scenario we have for seed today. So it is current condition.

OK. But your CAPAS is a cash base, means you need to see all of this equipment delivered to your FAB, and then you pay to equipment vendors that you recognize the CAPAS, right?

That's right.

Yeah.

So we have four factors in. All the scenario we have seen so far, including part of the tool delays, yes.

Yeah. So, yeah, my question is, you know, how confident you are you can receive all of this equipment you already ordered from the equipment vendors? Since now with this, you know, supply issues, The equipment lead time has been very long. So do you see any risk for you to fail to get most of this equipment this year?

Well, given the latest update from our supplier, this will be considered high confidence. But however, we continue seeing sound delivery interruption in the supply chain. So if there is a further delay and we have to have a way to mitigate that to keeping our original commitment to our customer. So right now, I mean, for the $3 billion question, I think that that is already considered all the delivery schedule that we have updated on our suppliers.

Understood. Thanks. And my second question is for you, blended ASP in 4Q. So you have about maybe 4% quote-unquote blended ASP increase in 4Q. But I look at your product miss. You only have a 1% higher revenue contribution from 20 annum meter. So basically, I assume your blended ASP increase in 4Q was mainly come from this like-to-like wafer ASP increase. So how about for the first quarter? Now your blended ASP is up about 5%. So how about the percentage from this MIS improvement or the leg-to-leg improvement?

For the Q1 ASP 5% uptake, they basically reflect mostly in the pricing adjustment.

It's a pricing adjustment, yeah. So the product MIS will be pretty much the same as the 4Q, right?

That's right, yes.

OK, then for you, for this year, 2022, will you consider to further adjust the price, like Booth asked earlier?

I touched that the AST will reflect our market value and our relevance in the supply chain. And it's our projection right now. The 2022 AST dynamic will be similar to the 2021 based on the current view in the demand and supply. And our 2021 blended ASP increased by about meeting percentage.

Okay, so you said 2022, you expect the blended ASP to increase similar as 2021 versus 2020. Okay, thank you.

Thank you. And next question, Frank Lee, HSBC. Go ahead, please.

Okay, thank you. I just wanted to ask about, I guess, this idea of the semi-content growth. I think you've alluded to that previously in this call as well in the past analyst meetings. I just wanted to see, I guess, if you guys can give us a bit more color in terms of the semi-content growth potentially by node. Are we seeing semi-content growth pick up across all nodes in terms of what you see, or are there any nodes in particular where you see even more semi-content growth than you expected?

Well, we don't really have final numbers, but we are confident so-called the UMC addressable market, which is 14 and below, the mature note by many of the analysts still will show very good growth and may not be as high as the bleeding age, but good enough to let UMC to enjoy the megatrend. The simple answer is really across most of the nodes for UMC's focus, UMC's addressable market.

Okay. So I guess if we're looking for semi-content across the board, would you expect the level of semi-content growth that we've seen over the last year to continue to be at the same pace, or do you think it would start to slow down a bit? I mean, just generally... expectations of how you see the semi-content continuing in the next one or two years?

Well, I mean, the market intelligence leads us to believe that the industry, the megatrend, will actually continue to drive positive growth. And it will spread our own notes. We're just not ready at this point to discuss by no basis. Okay. Overall, we think the growth will continue because we see a number of areas have a significant silicon content increase from the 5G real estate increases. The silicon real estate increases because of more function, increase of functionality as well as automotive. You see some of the components actually increased by unit content. So there are many different areas and spread out a different note. And I think the megatrend is going to drive this industry continue to grow for quite some time.

Okay, thank you. And sorry, just my last question is just, you touched a bit about the auto market as well. Currently, auto doesn't look like it's more than 10% of your revenue, but The way we should look at autos, should we think about it as a much bigger impact relative to what the revenue occupies of the future capacity going forward? I'm just trying to get a sense of, I guess, the new capacity going forward. How should we think about the auto space as part of the overall influence on the industry capacity?

Well, from the absolute dollar standpoint, they're relatively small compared to the mobile space, the smartphone space. but they are important because they have a different characteristic. For instance, the auto component has a longer life cycle, so they have longer longevity. And so we all put into that consideration. So for some of those considerations, our auto revenue portion will actually continue to increase.

Okay. All right. Thank you.

And next we'll have Senator Lin, UBS, for questions. Go ahead, please.

Hi. Thank you for taking my questions. Congrats on the very strong performance. My first question is for the next couple of years. Clearly, there's constructive demand drivers for trailing edge, but several foundries are expanding, and China is also accelerating the investment. So I want to get your thought on how overall supply-demand dynamics could trend next couple of years.

Earlier, we kind of touched about the demand. So our market intelligence needs to believe that the demand will continue to be strong because of those megatrends reasons. From the supply side, based on the announced capacity expansion plan, we do see the oversupply situation at 28 nm could happen beyond 2023, not before 2023. But we still also believe the oversupply situation will be mild and short-lived, given that 28 nm will be a sweet spot for many applications and expect that demand will continue to migrate to 28 nm and that 28 28 nanometer demand will continue to grow. And with our strong 28 nanometer product pipeline, we have aligned it with our technology and based on the market megatrend endorsed by the global leading customer with the multi-year LTEA commitments. Between the LTEA coverage and single source, we have approximately 80% coverage on our capacity. So we are confident that our 80%, I mean our 28 nanometer capacity expansion is well protected At the same time, we have a pretty good expectation. We have actually a high expectation on 28's growth. That gives you a bit of a demand and supply overview.

Got it. Thank you very much. That's very helpful. The 80% coverage, is that for 28 specifically or for your overall capacity?

What I mentioned is actually for the 28 nanometers.

Right. So would you be able to share with us, if we look at your total capacity across 8 and 12 inch, how many of the capacity is now covered by LTAs?

They have a very similar. So the UMC, the LTA, and the single source business, actually endorsed by our customers' commitment and confidence in our technology. This is all designed into UMC platform. That's when we discuss LTA and single source. And many of them are single source products with our differentiated technology. The total revenue contribution to now is around $18 billion, U.S. dollars, and they continue to pile up. Many of the products are related to industry megatrends. by our specialty technology know-how. And we expect those products will have a longer lifespan.

Thank you. My second question is on your growth margin. So after price adjustment, is there still a margin difference between 8-inch and 12-inch? And do you have a growth margin target for the next couple of years? I think you mentioned a target for ROE that's above 20%. So I wonder if you also have a goal for growth margin as well. Thank you.

So above 20% plus, I should give you a sense about our growth margin target, which we cannot really give you the numbers. But again, our real focus is EBITDA margin, which will continue to show further improvements. Gross margin can vary along with this depreciation curve. And this year will be down slightly. Next year will be up slightly. But a year after that, maybe increase a little bit more. But our base also increased after two years of compound growth. So we do have a goal for internal purpose. But the key is really to let our shareholder to receive the dividend in line in terms of growth rate of the dividend to be in line or better than our foundry growth.

Got it. That's very helpful. Thank you very much.

Thank you. Next question, Charlie Chan, Morgan Stanley. Go ahead, please.

Sure, thanks. Gentlemen, and again, congratulations for your great results. And I really want to consult you some kind of industry you just shared with us. So you also quote that the foundry industry is going to grow 20% year-on-year. Can you break down the shipment growth versus the ASP increase? Do you think it's similar to your company's trend, meaning the ASP increase account for maybe 15% of growth and shipment increases at 5%?

Our previous outlook based on the market data is we believe the foundry growth will be about 12% this year. And now we revised to about 20%. And largely due to a higher utilization, some of the capacity expansion, and also the ASP increase around the industry. So there are a combination of a few, and that made us believe that 20% will be the current projection.

Okay, understood. And if I may, can I ask your, based on your kind of calculation, what is the foundries of supply, capacity supply increase over the past year? I mean, 2021 and also this year. According to our calculation, it should be more than 10 percent last year, and it should be close to 10 percent in 2022. Just wanted to compare notes with your assumption.

Well, I mean, obviously we have some data internally, the intelligence. But the data may be based on a different base. So they may end up different numbers. So I don't want to mislead you. It's associated with a different base level and different end result. you're probably talking about between the 6% to 10% range, yeah.

Okay, okay. And then about your communication is more than half of your revenue, right? So can you break down into smartphone versus non-smartphone in that communication segment?

You mean within the communication segment?

Yep. How much is a smartphone?

For the wireless, we project it's going to be about 85%. For the wireless, it's probably going to be about 15%.

Oh, okay. I see. Yeah, so I think I wanted to ask this is really to allude to this kind of tech supply chain inventory debates. So, I guess, first of all, just a very, very near turn, right? Since you have exposure to smartphone as well, do you see any kind of a slowdown or inventory increase as your customers or channel for any of the segments? Not just a smartphone, but also other consumer tech, PC, et cetera. Thank you.

We kind of touched that a little bit earlier. You know, we do see some of the waiver demand associated with the work on home learning has been softened. On the smartphone side, we also see some softness, but the overall smartphone probably a flat-ish, except the lower end side. But we do expect the 5G smartphone, the penetrations do continue. the automotive continue, and we see a lot of activity on the IoT space too. So those will easily offset those softness. So I think at this point, we believe that demand will remain robust. If you're talking about the near term, I think for us this year, there are few challenges, such as the Omicron's case, only time for tools and equipment we talked about earlier, and also information. So for this year, we'll be focused on working closely with both upstream and downstream partners to ensure the supply, the loading, and the managing the cost issue. So I'm less concerned about the demand for the year, but I'm more focused on the overall, the other factors.

Okay, just one very quick follow-up, and I will be back to the queue. So, regarding the kind of tech-to-purchase inventory assumption, your industry peers assume that the supply chain needs to keep a very, very high inventory, probably given the logistic issue, right? But our concern is that for consumer tech, the inventory value could discount some of the products or the kind of chip components. So, in your kind of full year assumption, do you consider timing of inventory correction, or you think this year, third year, we wouldn't see a kind of inventory rebalancing for the tech supply chain?

Well, I mean, for the inventory level, in our data shows, it was still at a moderate level for the inventory level. And we do see some inventory pileup, whether it's for logistics reasons, or maybe for the high expectation outlook. There are some inventory preparation reasons, but we couldn't judge that. But on a high level, they're still within the moderate level. And so as long as our majority of our focus is on the megatrend, I think in the long term, they're still on the uptrend mode. So we still feel comfortable about it right now. However, we both know the foundry is a cyclical industry.

Indeed, indeed, yeah.

And so I think for UMC, I think we will position the weather through the cyclicality of the business. As we, for the past few years, we've been prepared for this. We are ahead of our competition, even that we have a comprehensive technology for that, that align to the mega trend like I mentioned earlier.

We are engaging with

leading customer, coupled with a well-balanced 8-inch and 12-inch diversified offering. In addition, we received customers' endorsement through the increase of LTA for the future capacity expansion arrangement. And given all the effort we have spent in the past few years, we believe the company has become more resilient in the event of micro-uncertainty if that happens. But we haven't really seen any sign that we're happening in 2022. But I think it's more important that as a company, we need to get prepared for it.

Yeah, that's fair enough. Jason, thank you very much. I think that's very, very helpful. Thank you. Thank you. Thank you.

And next question, Goku Harihalan, JP Morgan. Go ahead, please.

Hi, thanks for taking my questions. I have a couple of questions on pricing. First of all, when you engage in price negotiations with customers recently, what is the feedback you're getting from fabulous companies in terms of potential for further price hikes, especially after the very big one-off price hike that has been seen from your larger competitor, which probably hits pretty much all the fabulous companies across the board? Do you feel that there is more room for travel in terms of price increases from here on? I think Q1, obviously, you've seen a meaningful price hike, but beyond that, how much scope of price adjustment do we see?

Again, we don't take the pricing, the ASP, as a short-term optimistic tool, and so we closely working with the customer to ensure we have a mutual growth and to capture the market opportunities. So I think right now they understand our pricing adjustment for Q1 and we're going to be closely working with them. For UMC, the 2022 ASP projection for the year we project is going to be similar to our 2021 number. So that already includes all the product mix as well as the pricing adjustment that we have aligned with our customer. So far, I think we do have the customer's understanding and alignment on those. But if the market does continue the changes, we will work with our customer closely.

Got it. So I think it's probably the biggest level of price increases that we have seen in any of the past four or five up cycles. Roughly, I think if I take your mid-teen price increase blended basis in 22, you're probably 30% higher than where 2020 was. Let's say there is a downturn sometime in the future. How do you think about pricing? Do you think this pricing can hold at generally this level, or do you feel that there is going to be some level of accommodation needed, especially given the big magnitude of price increase that we have seen in the up cycle?

Well, I mean, that's very good. I mean, that's also the logic behind that we don't go out there just raising price for raising price. You know, the past couple of years, we tried to realign our ASP to the market price and also reflect our market value. I think we have done that in the past. Now that we're basically at the market price level and that this ASP reflects our market relevance, I think the customer has that understanding going forward. the market dynamics, we definitely have to cook that with that in mind. But in general, I think this will stay fairly where our market price will be.

Okay. Maybe one more question on demand and what customers are doing. I think, Jason, you mentioned There is some weakness that you're seeing in some parts of smartphone as well as some parts of work from home, Wi-Fi, et cetera. Are the customers actively reducing orders at you, or are they still tending to keep higher inventory given the supply chain risks? In demand, obviously, I think you can see that as a kind of weakening, but are you kind of seeing that translate to your orders as well, or are they still tending to keep more inventory?

Well, right now, we continue experiencing a customer's escalation on a daily basis. So I actually have, like I mentioned earlier, we do see some of the inventory increase on some components, but there are uneven supply situations. And the escalation situation actually remains. It didn't change much. And we have been closely communicated with all the customers, whether it's auto or the communication or consumer customer. And we have been very transparent and provide a very high visibility for them to understand it. And so if there is a challenge, it will completely alleviate the shortage situation. But we're still under that mode. I assume we have none. see a sign or signal that we have gone into an inventory over inventory situation.

Got it. Thank you very much. Thank you.

Sure.

Next question, Randy Abrams, Credit Suisse. Go ahead, please.

Yes, thanks for the follow-up. Yeah, I wanted to ask, just to follow up on the LTA, then, if you could discuss the, in an inventory correction, the protection, is it quantity-based where they can defer the quantity? And then is the element also any degree of pricing or prepayment involved? Like if you could just update the structure of these LTAs you've set up?

Well, the way I would say is there's a well protector for both customer and us. We have provided the capacity assurance while we well, the LTA provides a loading protection in UMC in return. Such loading protection includes the volume and the ASP and, you know, so... Deposit. Yeah, and deposit. But I probably won't be able to go into detail with that. Yeah, because we do have a confidential cost with our customers, yeah.

Okay. And then the other question I wanted to ask on 28, if you could go through how you see that, is that the way we think about it, it's still about 20% year-on-year the next couple years, because now you have the overall company growing at that pace. Like, if you could give an update how you see 28 growing. And back to your view of, say, oversupply two years from now in that node, is the plan by that time we go back to – upgrading to FinFET where we upgrade or or is it your view slow down capacity just knowing we might get to that oversupply situation so beyond these current phases making the plan to start slowing down factoring what other players are doing sure so so for the 2022 the 28 nanometer capacity will grow additional 20 percent year over year okay and beyond beyond the uh the 2022

you know, we still have a very high confidence that 20A will be a sweet spot, okay, and for many applications. So I think the demand will continue, the growth will continue. And, you know, based on our alignment with the customer and the endorsement based on LTA, I think those 20A capacities well protected. As a potential risk mitigation for the 20A to migrating to 14, that option's always there. There's a high commonality percentage of the two that actually be able to convert to 14, and so I think that option will always be there, yeah.

And just the last follow-up on the application, has there been broadening? You've talked in the past, things like the OLED driver, Wi-Fi 6, ISP. When you mentioned the additional surge of business, Are there any new promising applications for this sweet spot?

Well, we're starting the exploration of the 28 nanometer memory that's starting to get into a discussion. And the ISP will also be in 28 nanometers, which is for the sensor controller. And those are all going to be very strong applications, yeah.

All right, great. Thank you very much. Sure.

Ladies and gentlemen, we are taking the last question, which is from Bruce Lu, Goldman Sachs. Go ahead, please.

Thank you for taking my follow-up. Two questions. The first one is your 2021 capex end up with 1.8 billion, which is like 500 million shortfall from the previous guidance. But you just mentioned that maybe some of the tools push out to 2022, which means that your $3 billion capex CapEx industry includes those of 500 million push out. Is that the right understanding?

Yes.

Yes. So, which means originally we were expecting $3 billion CapEx, but effectively it's 2.5 billion. Is that the right understanding from my side?

That's based upon the current payment schedule. But still, this number is not really, if you compare it to a larger competitor, it's actually a smaller number. So, I mean, this number is dynamically adjusted according to our payment schedule. And this $3 billion is based upon our visibility right now.

I see. I understand. The second thing is that, you know, when everyone is expecting like expanding 28 nanometer capacity, industry-wise, which means that for other legacy 12-inch, like 40 nanometers, which is like no one is expanding those capacity, and which we also see some of the big shortage of it. Do you have any plan to increase the 40 nanometers or other nodes or capacity?

If there is, we will definitely report accordingly. We definitely see that as well. We have seen the shortage across the old nodes. And so if there is any plan on that, we'll definitely report that.

I understand that. Thank you.

Thank you. And ladies and gentlemen, 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 iratumc.com. Have a good day and happy Chinese New Year.

Thank you, ladies and gentlemen. That concludes our conference for 4Q21. Thank you for your participation in UMC's conference. There will be a webcast replay within two hours. Please visit www.umc.com. under the Investors Events section. You may now disconnect. Goodbye.