United Microelectronics Corporation (NEW)

Welcome everyone to UMC's 2022 first 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. And now I would like to introduce Mr. Michael Lin, Head of Investor Relations at UMC. Mr. Lin, please begin.

Thank you, and welcome to UMC's conference call for the first quarter of 2022. I am joined by Mr. Jason Wong, the President of UMC. and Mr. Chi-Dong Du, the CFO of UMC. In a moment, we will hear our CFO present the first quarter financial result, followed by our President's key message to address UMC's focus on second quarter 2022 guidance. Once our President and 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 investor 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 risk that may be beyond the company's control. For a more detailed description of these risks and uncertainties, Please refer to our recent and subsequent filings with the SEC and the ROC security authorities. During this conference, you may view our financial presentation material, which is being broadcast live through the internet. Now, I would like to introduce UMC's CFO, Mr. Chih-Tung Liu, to discuss UMC's first quarter 2022 financial result. Thank you, Michael.

I'd like to go through the Q1-22 investor conference presentation material, which can be downloaded or viewed in real time from our website. Starting on page four, the first quarter of 2022, consolidated revenue was $63.42 billion, with a gross margin at 43.4%. The net income attributable to the stockholder of the parent was $19.81 billion, And the earnings per ordinary share were 1.61 NT dollars. In terms of capacity utilization rate, it remained at 100 percent up. And for the waste achievement, it's 2.5 million A-inch equivalent in Q1 of 2022. For income statement on a quarterly sequential comparison basis, Revenue went up by 7.3%, mainly driven by a better ASB. And gross margin rate is 43.4%, compared to 39.1% in the previous quarter. And operating income, as a result, has reached 35.2% for operating income margin rate, or a number of $22.3 billion. The net income is about $20 billion, compared to $15 billion in the previous quarter, which is about 25 percent quarter-over-quarter growth. And the EPS is 1.61 NT per share. In terms of year-over-year comparison, revenue grew up by 35 percent year-over-year, and operating margins grew up by nearly two times. to 22.3 billion NT. And EPS also almost doubled compared to the same period of last year. In terms of balance sheet revenue, cash remains strong at 172 billion, and the total equity is about 300 billion NT dollars. And as I mentioned, the Q1 catalyst, one of that is the stronger or better ASP, which continue on the rise. In terms of revenue breakdown, we see a little change on a sequential basis when U.S. represents 22% of our total revenue and Asia is 64%. And IDN and cyberless ratio did not change much. Currently, IDM is about 13% of our revenue, and Fabulous is still remaining 87%. In terms of segment breakdown, communications still remain our largest segment of 45% revenue, and the others, which include auto and industrial, is about 12%. And computer and consumer are 17% and 26% respectively. And revenue from different geometry, the 14 nanometer and below revenue remains steady around 38 percent, almost identical to the previous quarter. And we continue to see some capacity increase. For quarter two of 2022, we are seeing 10,000 wafer per month additional capacity, mainly in 20 nanometers coming from our So that will lead to about 4 to 5% of capacity increase in the second quarter of 2022. After our announcement for the Singapore P3 expansion, our revenue, our CAPEX budget has now increased to 3.6 billion US dollars for 2022. The majority of, which is 90 percent of that, is 12-inch related. The above is the summary of UMC's results for Q1 2022. More details are available in the report, which has been posted on our website. I will now turn the call over to personnel of UMC, Mr. Jason Wong.

Jason Wong Well, thank you, Chi-Dong. Good evening, everyone. Here, I would like to share UMC's first quarter highlights. We started 2022 with a solid first quarter. As a strong wave of demand kept our FAP operating at full capacity and higher average blended pricing lift our overall revenue. While we have observed general end market tapering of cyclical demand associated with COVID-19 pandemic, UMC's business continued to be well supported by structural trend that are increasing silicon content in devices and driving new applications. Specialty technologies such as a non-volatile memory, power management, RFSOI, and OLED display drivers are necessary for applications across 5G, AIoT, and automotive megatrends. And our strategy to focus on leading the specialty technology has been successful, which now contribute more than half of our wafer revenue. An increased number of customers are recognizing the value of our customized specialty process and forming long-term partnership with UMC now. Looking ahead, we expect the positive demand outlook will remain unchanged despite some market volatility caused by the pandemic and geopolitical issues. The expansion at our FAB 12A P5 is coming online in this current quarter. which will help us meet access 28 nanometer demand that we haven't been able to fulfill. We are also actively adding capacity at our overseas basis to support our customers' long-term growth. For our Singapore site, we recently announced a new FAB to address growing 22, 28 nanometer demand, has already secured multi-year supply agreements from 2024. Meanwhile, our Japan subsidiary, USJC and Denso, have agreed to cooperate on the production of a power semiconductor at USJC's 300-millimeter fat in order to serve the growing demand in the automotive market. The cooperation demonstrates our strong commitment to supporting our customer amid constraints in the automotive value chain. As a part of the industry megatrend, The accelerating adoption of electric vehicles will serve as a growth catalyst for our automotive business. We're excited to be selected as a foundry partner for many global leading customers as we aim to expand our market share in a fast-growing automotive segment. Next, I would also like to take a few minutes to share our view on the industry's outlook and where we see UMC's position in the industry going forward. I would like to take this opportunity to reiterate that UMC's growth strategy is aligned with industry's megatrends. As a leading specialty technology provider, our customized and highly differentiated solution across 8-inch and 12-inch will minimize UMC's exposure to market seasonal fluctuations. The specialty technology will enhance customers' stickiness in prolonging our long-term business visibility. In addition, the LTAs demonstrate our customers' long-term commitment and endorsement in cooperating with UMC, giving us the confidence to expand our capacity and grow cohesively with our customers and remain resilient during the industry downturns. As for 28 nanometers, we always align with the customer on 22, 28 nanometer new capacity expansion. With the P6 ramp in 2023, The demand-supply balance will depend on the lead time of the tool and equipment delivery. In light of a recent equipment delay, supply chain disruption, the impact on prolonging 28-nm capacity coming on-screen still remains to be seen. We believe 2228 nm will be a long-lasting node, driven by applications such as Wi-Fi 6, 6E, networking and OLED driver IC. we are well-positioned to diversify the product portfolio to capture these market opportunities. Now, let's move on to the second quarter 2022 guidance. Our wave of shipment will increase by 4 to 5 percent. ASB in U.S. dollar will increase by 3 to 4 percent. Gross profit margin will be approximately 45 percent. Capacity utilization rate will be 100 percent. Our 2022 cash base, CapEx, will be budgeted at the US $3.6 billion. That concludes my comments. Thank you all for your attention. Now we are ready for questions.

Yes, thank you, President Wang. 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 a question. Thank you. And our first question is coming from Randy Abrams, Credit Suisse. Go ahead, please.

Yes, thank you. And, yeah, I wanted to ask the first question just about the environment. I wanted to see first from the China COVID lockdowns if you've seen any market impact on orders either from the factory shutdowns or consumption impact. And I'm curious within your application mix if you've seen cancellation or slowing in certain applications and then shift to other applications. And if you're still in a position of unfulfilled demand or you see some applications still with demand you need to get capacity to meet.

Okay. Well, I mean, the China lockdown certainly has some effects to the market demand. But the overall, the strong demand for auto, industrial, server, and networking segment have offset the softness in the smartphone and notebook and the PC as well as some of the market risks under the China lockdown. For the overall 2022, it still remains a challenge for us to meet the aggregate demand from our customers. So near-term, whether it is the demand or inventory fluctuation among the selected customers, has not impacted UMC demand supply imbalance situation.

Okay. And I wanted to ask on the CapEx increase. It sounds like tied to Singapore, but that's a few years out. Are you having to prepay to secure tools quite early? Given the bottlenecks, if you could give an update on timing of when you're bringing up some of the capacity, like the additional phase in Tainan next year, if that's still ramping up, and how much is ramping up middle of next year?

Well, first, for this year, the P5 is coming on this quarter, as we mentioned earlier. For the next phase is our Tainan P6 ramp. Given the challenge in the supply chain, including component and labor shortage, we have encountered an industry-wide equipment delivery delay. We're currently working diligently with the supplier to identify some of the critical tools and to shuffle the priority and minimize the delay. Furthermore, we actually will show them internally our tool installation and qualification schedule. So the bottom line is the goal is Through those efforts, we will ensure our LTA commitment to the P6 customer in 2023 remains unchanged.

Okay. And if I could just clarify again, for the CapEx raise, what was the factor already to have that increase for the new FAB? And you mentioned securing LTA. Does that imply you still expect, even with the way some of that capacity should ramp second half next year?

Well, I mean, we're managing the P6 ramp, but we're experiencing some delays. We are aligning that with our base capacity to ensure the customer's commitment to be meet. So they are some dynamic, but we have to continue working that with both supplier and the customer.

And the increase in CAPEX budget, cash-based CAPEX for 2022, is mainly for the share of construction projects. for 12IP3 in Singapore.

Okay. And, Chih-Tung, for the overall CapEx framework, is there a rough way to think about next year and the depreciation where you've had a nice tailwind based on the new cash payment schedule? How do you see depreciation this year and roughly for next year?

This year, we mentioned the overall depreciation expenses should be down by less than 5%. year over year, similar to that of last year. However, the next year's depreciation expense is likely to rise in a more meaningful way, but we will discuss the numbers later this year. But overall, both P3 and P6 are increasing our not only absolute profit, but also the EBITDA margins. So there will be some short-term accounting depreciation impact in 2023, but it will quickly go back to a normal range.

Okay. And one final question. The LTA, I think last quarter you mentioned $18 billion. For the baseline capacity, I just wanted to inquire a little more. You mentioned in the prepared remark downturn resilience. If there were a sharp correction, just how much flexibility, like, have you given on shipments for them to push out if they don't have the demand? And then how fixed is the pricing in the downturn? Like, have you kind of secured for baseline fixed pricing? Or, yeah, if you could clarify a little more on the way to think about the LTA in a downturn scenario.

Sure. Well, I mean, in general, the background of LTA is to serve the long-term compelling benefit of both customer and UMC. So while we both partly focus on the targeted market to pursue business growth, UMC, along with our customers, share the contractual obligations set forth in the agreement. Given those obligations, both parties have considered the scenarios and factor in all the financial risks outlined in the LTA, along with the market fluctuation. So the continuous set quotes on both parties in the LTA will not be deviated, regardless of market dynamics.

Okay, won't be deviated. And it sounds like you do expect quantity and pricing then. There's some commitments on those in those obligations.

Absolutely. There is a commitment on both volume and pricing, yes.

Great.

Okay.

No, thank you. That's my question.

Thank you.

Thank you. And next we'll have Brett Simpson of Eritrean Research for questions. Go ahead, please.

Yeah, thanks very much. I wanted to just follow up on Randy's question there about LTAs. I think you mentioned $18 billion last quarter. Did UMC sign any new LTAs this quarter? And if so, where is the cumulative LTA among today? And what's the prospect for signing new LTAs throughout this year? Or is the vast majority of these deals kind of in the rear view mirror now? Thank you.

Well, LTA is a mechanism to give us the longer-term visibility and the opportunity So, yes, the LTA is a mechanism we'll continue to deploy throughout this year. And, in fact, we actually there is a multiple LTAs still under discussion currently. The, you know, we do see this LTA serve as I mentioned is a long-term for compelling benefit for both customer and ourselves. So, we'll continue to deploy that, yeah.

And did LTAs rise in the quarter? The $18 billion, did it go up?

Well, it has gone up a little bit, and they still found the ongoing one, and we expect that number will continue going up. And in fact, the Denzel announcement we just did, it actually is part of the LTA as well.

Okay, that's helpful. And maybe just as a second question, I guess we've seen a sharp increase in your gross margins over the last couple of years. And I understand LTAs give you protection around the cycle, around market changes and market conditions. But can you share with us, you're thinking about how growth margins trend through the cycle for UMC. If we look at the sort of puts and takes of the cycle, where would you expect growth margins to sort of settle in long-term for UMC, given all the dynamics we've seen of late?

Well, I really, maybe Qilong can comment on that, but if I can give you a bit of a background on this. The way we look at this growth margin in the long term is, you know, is the way that throughout those past few years we have transformed the company's resilience and it's well positioned to weather through the market fluctuation through a few things. One is the CapEx strategy via a stringent ROI-driven criteria and backed with the Customs LTA commitment. is we have continued to close cooperate with the global leading customer to optimize our client portfolio. And third is we continue to grow our specialty technology business, which contains higher differentiation and customized process solution, which that will provide a longer visibility and stickiness. The fourth, the company will have more room to grow EBITDA margins, their product mix refinements, And the last is the company's healthier financial now, the structure that includes a much improved break-even point. All this, I think, will contribute to allow UMC to weather through the semiconductor circuit quality. So that means the margin will stay at a healthy level. And that's, on a higher level, how we manage this margin going forward.

Thanks very much.

Yeah.

Thank you. Next question is from Bruce of Goldman Sachs. Go ahead, please.

Thank you for taking my question. Congratulations for the great results. I want to ask, moving into the second quarter, the gross margin is guiding for 45%, which is up from 40% last year, comparing the guidance to guidance. And even if you exclude the forex impact, you still see a major, a massive margin improvement. But the only difference between second quarter and the first quarter is the P5, which is mostly 28 nanometers. Can we assume that your 28 nanometer profitability is already higher than the corporate average?

No, I think 28 nanometer margin is... in line with our 12-inch operation. And that's from a accounting statement point of view. Of course, EBITDA margin, 2018 may have the best EBITDA margin internally. And I have to emphasize that Q1 guidance of 40% is somewhat lifted by this unexpected weaker NT. And for quarter two, we already factored in this weaker NTE scenario. And there are certain headwinds in quarter two as well, mainly coming from rising raw material costs and the increased labor costs, which are pretty much evened out by this better ASP factor in the second quarter. So 45% roughly gross margin is the best estimate we can see for now for second quarter.

Thank you. I think the next question is that, you know, the investor concept is mostly on the end demand deterioration. Jason, can you provide us that, you know, how much of your business right now is pretty much like single source table or like customized process? What is the revenue contribution from those of business, which is more difficult to move away, even when you see the down cycle?

All right. So let me put it this way. For our overall product mix, the specialty technology consider a single source and customized product. that probably representing more than 50 percent of our current revenue now. And that is continued increase. At the current quarter, we're about over 50 percent. And the LTA arrangement for the 28 nanometer particularly, the coverage is about 80 percent. Okay. And in addition to those, the non-specialty technology that's a single source, that also has a good percentage of that in there. So net-net, I would say we have about 65% will consider the single source and specialty technology. So that will probably give you some ideas. And in addition to that, also have some overlapping with the LTA coverage.

Do you have a target for two years?

I think the number will continue to increase. Our specialty technology and the customer engagement momentum remains strong and robust. I think the number will continue to rise. And while we continue that progress, we can update that on an ongoing basis.

I think I want to ask one question for the R&D expenses, which is below 5%. uh you know five percent of the revenue in first quarter already is that a new norm for the umc i think we i we discussed this like two three years ago but now it's getting to the the level of five percent is that the new norm for uh for umc moving forward uh giving the the current near-term projection uh we will stay in a similar level uh while our revenue continues to grow uh

And meanwhile, we continue developing in a different various technology in a specialty area. But, you know, I think that we're still within that whole part, yeah.

Male Speaker 1 Thank you. I'll go back to the queue.

Male Speaker 2 Thank you. Next one, Charlie Chen, Morgan Stanley. Go ahead, please.

Charlie Chen Thank you. Hi, Jason. Hi, Qi Dong. Good afternoon. My first question is about your LTA or contract with customer. Because right now, you see that some consumer or PC smartphone customer, their inventory keep going higher. Would you allow customers to trim or cut some forecast even they have some contract with you?

Well, I mean, the customer forecast changes. But the contractual obligation states, we sort of touched that earlier, the condition of death force in the LTA will not deviate regardless of the market dynamics.

Yeah, so that is my concern, right? Because you want the customer to keep their obligation and their inventory keeps going higher. But the problem is that those inventory cannot really sales through to the A market given the market situation.

That's not entirely correct. So if a customer is taking a position to reduce the loading, as long as they fulfill their contractual financial obligation, that is another alternative.

Yeah, but if there is any kind of... would that force customers to keep producing?

Well, there are certainly some contractual obligations financially. And it's our belief, most parties have considered those scenarios while we enter into that agreement.

Okay. Okay, thanks. And also, I kind of agree that some subsegments are still pre-regulated. like automotive, networking, cloud, as you mentioned. But I think UNC's real revenue exposure to those so-called regime segments is quite low. I don't think that's an aggregate exceed 20% of revenue. Would you agree with that?

I didn't catch the last statement again. I'm sorry.

Yeah, so those exposure to automotive networking cloud together, your revenue exposure shouldn't be more than 20% in my understanding. Is that right?

No. It's actually higher than 20%.

OK. So how high it would be?

I mean, this Well, I would say probably one-third of that is already within the automotive industrial. And there's the other area, even within the PC networking, the way that we category that, the part of that is actually belong to networking, which has a much stronger demand. Because if you go into an entry subcategory, including a PC notebook, and then you have to segregate by different applications again. And so they are on the stronger segment on the subcategory versus on the weaker one. So the exposure wasn't exactly on a very higher service level, yes.

Okay. So, yeah, so those data are very, very helpful. All those try to get a sense, you know, first of all, your current fabulization or next quarter fabulization, whether it really reflects the consumer tech inventory correction. And whether UNC has sufficient backlog from industrial to multi-factor networking to offset that weakness. And I think those are really helpful.

But lastly... Maybe I can give you another example. For instance, on the smartphone space, we're more exposed to the 5G phone in the OLED space on a high voltage versus the TDDI because we don't do much of a TDDI in the smartphone area. We do quite a bit of automotive in the TDDI display.

I see. That's a super helpful.

Even with the high voltage, there's a mix of applications within there. So the mix is quite different.

And Leslie, is there any concern that even the LTA is like a two-way, right? You have to deliver, customers need to stick with the order. For P6, right, if there is any kind of... schedule delay, would you need to pay a penalty to your customer?

Well, again, there is a mutual contractual obligation.

Right.

And so we both calculated that, and we have considered all the scenario and factor into that. So at this point, from UMC's perspective, our goal is to ensure our commitment to the meet. I see. Even with the delays, yes.

I see. I see. You want to put the customer's demand as the first priority, right? Okay, I get that. Which tool is the biggest shortage, the bottleneck for the entire production line?

That's quite a bit of detail there. Long list, but two lists. So it's hard to go into detail. Okay.

Okay, okay. Understood. Good luck. Thank you. Thanks, Jason. Thank you. Bye.

Thank you. Next question, Goku Harihalan, JP Morgan. Go ahead, please.

Hi. Good afternoon, and thanks for taking the question. First of all, on LTA, Jason or Chitong, could you remind us how much of your... 12-inch capacity and 8-inch capacity is now covered by LTA. I guess phase 5 and phase 6, P5 and P6 will probably be 100% covered, but for the existing capacity, could we have a reminder on how much is covered by LTA?

We don't break down by 12-inch and 8-inch, but obviously all the newly built capacity or the new capacity common streams As we mentioned, P6 in Tainan and P3 in Singapore are all covered by multi-year LTAs. So all the new capacity are 100%. And the new dental project is covered by LTAs. And I think the overall ratio, I think, as Jason mentioned, the overall business covered by LTAs is close to 30, 40%. Yeah, 40%.

Understood. So let me ask, I think you mentioned that you saw some demand weakness in some of the cyclical areas related to pandemic, shutdown, lockdown, etc. Could you talk a little bit about what are the customer conversations you're having in these areas? Is your backlog reducing as a result? Is there still a lot of non-supported demand for these segments that you still can't fulfill? Is that non-supported demand coming down? I just wanted to understand what are the dynamics that are happening between you and the customers given some of this end-demand weakness?

Well, in general, we remain challenged for us to meet the aggregated demands from our customers. So we're still severely undersupplied. to our customer. But mainly, if you break it down by different segments, the PC notebook and the smartphone area has shown some of the softness, while the automotive and industrial server networking is still escalating with the shortage. So I think the At this point, unfilled demand remains at a fairly high level to us, okay, for us. And the conversation with some of the customers is we are diligently mitigating or modulating some of the soft area, hopefully that, you know, giving the higher inventory or the softer demand, if we can modulate those capacities, support those on the severe shortage segment. So that is the ongoing process and efforts on that.

Okay, understood. The last question is on your 2Q wafer price increase. I think you talk about roughly 3% to 4% increase in wafer ASP on US dollar basis. Is that primarily coming from your increased 20 nanometer mix, or are you still seeing wafer price increases to customers given the unfulfilled demand?

It has both. It results of both pricing increase as well as the better product mix.

Okay. Okay. Thank you very much. One last question is this Denso JV on IGBT. Congratulations on that. Could you talk a little bit about what kind of capacity of UMC Japan would you be allocating for that? Is there any details in terms of the plans for this?

Sure. Under the program, UMC, we, through USJC, will provide 12-inch IGBT manufacturing service to Denso. The program is while the Denso will bear the cap for the tools, and USJC will build the cat-hack for clean room and facilities. And the production ramp for Denso will start in 2023, and the target capacity ramp will reach 10K per month by 2025. Male Speaker 2.

Understood. Okay. Thank you very much. Thanks.

Male Speaker 3.

Sure. Thank you. Male Speaker 4. Thank you. Next question, Sonny Lin of UBS. Go ahead, please.

Hi, Jason. Thank you for taking my questions. Congrats on the steady performance. My first question is also to follow up on LTA. So does your LTA engagement sort of limit your possibility to push out the capacity expansion if customers continue to pursue the demand?

It's a contractual obligation, including the timing. So we are managing the equipment delay. So we are doing our best effort to fulfill our contractual obligation not to impact our commitment to all the LTA customers. So the timing is fixed.

Got it. And so maybe a broader question or a higher-level question is, On the January earnings call, you shared your thoughts on the supply-demand outlook for overall trailing year foundry for next couple of years. Now, after a quarter, lots of changes on the demand and also on the supply side. So I wonder if you could share with us your lighter thoughts on the supply-demand outlook.

Well, I mean, for 2022, I think we remember Our view on 2022 remains solid. In Q1, I think we gave, we revised up. The foundry industry growth will be about 20% and plus. That view has remained unchanged. And UMC's target to grow in line or higher than that foundry industry, I think that also firm. For 2023, if we looking to the outlook, we remain cautiously optimistic on the market demands. The overall megatrend that UMC is focused on, I think that will continue to grow. But given the current market situation, now we are more cautiously optimistic on that. Over the past few years, through the proactive market positioning and closely working with our you know, the overall global leading customers with our ROI-driven CapEx. And I think all this effort will help us to enhance our position financially, and we'll continue to enhance the company profit, even with this market dynamic. So at this point, for the 25 and 3, we are culturally optimistic about it. Yeah.

Understood. That's very helpful. So any expectation on the industry-wide supply demand going to 2023 and 2024?

Well, I mean, you know, we touched that earlier as well. Given the challenge in the supply chain, including all the shortage, whether from component or laborers, there will be some equipment delays. And I think some of the announced capacity may not come online on time. But, you know, so I think right now, instead of commenting about the overall market in 2023 in terms of supply and demand, we feel comfortable about our situation. And given what I just mentioned earlier, given what we have changed in this few years, along with our target market, the market megatrend, along with the customer, alignment and we feel comfortable about our 2023 regardless of the supply dynamics.

Got it. Thank you very much. My another question is on pricing. I think on January, well in January you got it that for 2022 pricing to go up by about 18% on a blended basis. But if based on second quarter guidance that may imply a limited upside into second half, would that be a fair assumption?

Well, we guided that. And based on the margin and ASP expansion in both Q1 and Q2, we're promising approaching our annual target right now.

Got it. So no further update on the four-year pricing guidance? Should we anticipate a bit of upside into second half?

No, we'll probably do that on an ongoing basis, on a quarterly basis.

Got it. Thank you very much.

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

Hi, gentlemen. I have two questions. The first one, In future, we are going to have three FABs running the 28 nano classes. Just wonder how we are going to allocate the capacity. Would that be based on customer, or based on technology platform, or based on the region or country the products are being shipped?

There are multiple considerations, and it's not a simple answer to that. not only from a customer alignment standpoint, you also have to think about each site's economic skills. So you don't want to run the product too fragmented in each site. So we're carefully examining our capacity profile as well as the customer demand and to align that. And so it is quite dynamic, complicated, but sophisticated as well. So I actually don't have a simple answer to that, but I can show you it's a very sophisticated process.

I see. I see. Good. So can we assume that basically the three steps can basically support one another? That means the capacity can be fungible.

Ideally, they are fungible. But again, the higher flexibility of fungibility, that will actually increase the cost of operating it. So you have to seeking a good balance of that. And while you mitigate the demand risk and you have to also achieving a better financial result. So it is about that.

Okay, fair enough. Second question. Equipment delay I think is pretty much well known in the market. But would you consider, let's say, the mature node photomath and other area of concern that may limit the final wave output?

Well, I mean, yes. I mean, the answer is yes. It's actually a lot more than that. So, you know, we're constantly working on productivity improvements from both base capacity as well as the new capacity. and accelerating the ramp up. So they are multiple efforts and activities. And meanwhile, we're working with the two suppliers to shuffle in the pilot and some of the different critical tools to minimize that as well. So it is, you know, quite a bit of effort there. Yeah.

I see. All right. Okay. Okay. Good work. Thank you very much.

Thank you.

Thank you. Next question, Nicholas Barrett. Macquarie, go ahead, please.

Yes, hi. Good afternoon, Nancy. Could you give us an idea or a range of capacity increase by end of 2022, end of 2023? So what I mean is I understand there is equipment delivery uncertainty I understand there is matching with customer capacity schedule but if we think about you know P6 and P3 let's say that in both those fab you're going to add 30k wafer in each right so two times 30k right so when do you think reasonably the time frame when we those 30K in production? You've mentioned previously for P6, beginning of revenue in 2Q23, so is it still the case? And then for P3, what could it be? Thank you.

Well, I mean, we kind of touched that for that, you know, a lot of effort to address that RENBAR schedule for the 2023 P6. Yes. And the original plan is try to have the initial production in Q2, 2023. And toward to end of the year, we can reach to the full capacity. And so that profile is still under alignment with the supplier. And our goal, based on those assumptions and the support that we have aligned with our customer, is also under-evaluated. we continue moving to that same direction. However, I think the priority at this point is to ensure our customers' commitment first.

For 2022 capacity increase, it's rather firm. We are talking about 6% year-over-year increase, which increased by 8% in 12-inch and 4% in 8-inch. And our 28-nanometer capacity increase in 2022 will increase about 20% year over year. So because the P5 additional 10,000 wafer is coming online as we speak, so this is a more firm answer for this year.

Understood. Thank you very much. Last, second and last for me is I understand that product mix can be difficult to So, you know what you said, PC, notebooks, smartphone, witness, I guess it's what everybody is saying. I also guess that, you know, it really depends on customer specific, client specific. But when you look at your 20% revenue growth, 20 plus percent revenue growth, I'm sure you have a smartphone PC model that could indicate some downside to that 20%. What do you think is the range?

So can you, if I can recap your question, your question is, given our current forecast, what do we see about the decrease of the PC demand?

What I mean is you said that you feel pretty confident to have 20 plus percent of the renewables this year, right? And then you said a smartphone demand is weak because you make more 5G OLED and 4G TVDI will impact for you actually I guess you mean it's not that big in as much as OLED and 5G volumes are growing. So I understand that. Nevertheless, I suspect there is some disconnect between a lot of the semiconductor expectations and very poor consumer spending data or macroeconomic data that most of us are seeing in terms of you know, COVID lockdown in China, inflation in Europe and the US and so forth, which are reaching, you know, especially the consumer inflation in some parts of the world is extremely high. So do you have a range around this 20% revenue growth?

Oh, well, first of all, we didn't really say 20. We were talking about capacity increase and coupled with meeting AC growth. So, yeah, of course, that according to calculation, should be about 20 percent. And as our president just mentioned, we still cannot fulfill our aggregate demand. There are still areas showing very strong demand for our capacity. But we're being able to fulfill any of the fluctuations for now.

Male Speaker 1 Okay. Qidong, thank you very much.

Thanks.

Male Speaker 2 Thank you. Next question, friendly of HSBC. Go ahead, please.

Okay, great. Thank you. Sorry, I just wanted to follow up on, I guess, that 20%, implied 20% growth. I think one of your Foundry competitors had already talked about, you know, similar type of growth for them this year, or they're going to exceed that. But they've kept the overall industry growth of Foundry relatively unchanged. And given their market share, and given you're also sort of maintaining your forecast for the full year to be relatively unchanged, does that imply... There is more share gain that you're expecting this year, relatively speaking, because unless the overall industry growth actually is going to expect an increase. I know you guys never gave an explicit industry growth, but just trying to understand, I guess, the numbers that we're seeing right now. And is there more implied share gains that you expect this year?

Well, you're right, and given what we have implied is that our target is to grow in line or higher than the factory industry, so that means, yes, it is a share gain, yes, that is aligned to our target.

Okay, all right, thank you for that. And then I guess the other thing, the second question I have is, I think you had mentioned in the past that 28-nano node potentially could be a little softer into next year. In the past, previous analyst meetings. Is that still a view that is being shared right now by management, or is there any change to it?

Well, I think our past message was that we believe that 20A will be a sweet spot for many applications, as well as some of the new products which will migrate to 20A. So we do believe 20A demand will continue to grow. And our strong 20A product pipeline, we have aligned with our technology with the industry's mega trend and along with the endorsement from the global leading customer on the lta you know we we have confidence that our 28 nanometer capacity expansion are well protected and so we you know it i think we actually feel pretty comfortable with that yeah

Okay, so it's more of a, sorry, just a thought. The protection is more company-specific on 28 because of your product mix and in terms of your agreements.

So that's the relative comfort you have. Yeah, as well as the focus of the market that we are addressing. We believe both are linked to the megatrend, yes.

Okay, great. Thank you.

Sure.

Thank you. And ladies and gentlemen, we're running out of time, so we're taking the last question. And the last question would be Patrick Chang of CLSA. Go ahead, please, Patrick.

Hi, thank you for taking my question. Can you talk a bit about this Denso partnership? Aside from the fact that they are based in Japan and 12-inch is what you have in Japan, what are the key differences of producing this IGBT on 12-inch instead of 8-inch? What are the benefits and challenges there? That's number one. And number two, can you talk about the first quarter non-op component? What is the main contributor to the 1Q non-op? These are my two questions. Thank you.

Sure. For the first question, yes, the program that we have with Denso is under the 12-inch IGBT. And it's our belief, you know, giving our diligence shows moving into a a 12-inch serving multiple purpose and benefits. One is performance and cost, as well as the supply. The 12-inch does giving out the alternative solution to current supply constraint in the IGVD space. And as we expect, the auto market will continue to grow, and we think this will serve that and will be beneficial to both Denso and UMC. On the other hand is the specialty technology is what UMC is focused. And we do believe there will be more specialty technology required to fulfill the automotive application. And this stencil cooperation is more of a highlight to our ongoing effort in providing the support to the automotive market with our specialty technology. So, maybe Xi Dong can help with your second question.

Xi Dong Wang Yeah, in terms of in Q1, about $900 million is forest gains, and $500 million is market value gains from our investment, and it's also $300 million interest expenses. That's the bulk of non-op in Q1.

Thank you very much. Thank you. And ladies and gentlemen, we thank you for all your questions. That concludes today's Q&A session. And 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 IR at UMC.com. Have a good day.

Thank you. And ladies and gentlemen, that concludes our conference for 1Q22. We 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.