United Microelectronics Corporation (NEW)

Welcome everyone to UMC's 2022 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 two hours after the conference has 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. And Mr. Lin, please begin.

Thank you and welcome to UMC's conference call for the second quarter of 2022. I'm joined by Mr. Jason Wong, the President of UMC, and Mr. Chi-Dong Liu, the CFO of UMC. In a moment, we will hear our CFO present the second quarter financial result, followed by our President's key message to address UMC's focus on third quarter 2022 guidance. Once our President and CFO complete their remarks, there will be a Q&A section. 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 such a result 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 CFO, Mr. Chidung Liu, to discuss UMC's second quarter 2022 financial results.

Thank you, Michael. I would like to go through the 2022 investor conference presentation material. which can be downloaded or viewed in real time from our website. Starting on page three, the snapshot of our operating results summary. Our utilization rate in quarter two was still over 100 percent plus, and revenue reached $72 billion. I think, I believe this is record high. And the EPS is 1.74 for the second quarter. compared to 1.61 in the previous quarter and also 0.98 in the same quarter of last year. Next page, please. So on a quarter-over-quarter comparison, revenue grew 13.6% to $72 billion NT. Gross margin rate increased to 46.5% from 43.4% in the previous quarter. and operating income is $28.1 billion, or 39.1 percentage point. Net non-operating income is a loss of $2.58 billion, mainly due to the weakness in the capital market, and UMC's investment portfolio was marked to market, and that's a majority of the $2.5 billion loss in the second quarter. of 2022, and net income reached $21.5 billion, or the equivalent of EPS 1.74 in Q2 of 2022. For the cumulative performance for the first six months of the year, revenue reached $135.4 billion, which is an increase of 38.2%. year-over-year, and this is in the anti-dollar currency. Gross profit is $60.9 billion, or 45% gross margin rate, and operating income reached over $50.4 billion, and an operating margin of 37.3%. And for the EPS of the first half of the year, it's 3.35%. compared to 1.83 in the same period of 2021. Cash before our dividend payout was 183.7 billion by the end of June this year, and total equity for the company is around 283.2 billion. For our 13.8 percent revenue growth in the third quarter, or in the second quarter, three factors, both the ASP and wafer shipment, as well as the NT dollar depreciation, all contribute to our revenue growth in the second quarter. And the factor is roughly one-third of the growth rate each, so that reflects in our ASP growth in the second quarter of 2022. In terms of revenue breakdown, the ratio remains similar between quarter two and quarter one. IDM increased slightly in second quarter to 14 percent. And the segment breakdown, again, remains similar to And we see some minor decrease in computer, but in absolute dollar term, all segments still grow in second quarter of 2022. We have new capacity available in 28 in the second quarter. That helped our 28-22 revenue percentage to grow to 22%. in the second quarter compared to 20 percent in Q1 of this year. And the rest of the geometry breakdown doesn't change too much. As I mentioned, in quarter two, our 12A has a more meaningful capacity growth, which is 10K new capacity came online in the beginning of quarter two. But for quarter three overall capacity compared to quarter two, there's only very minor increase in terms of quarterly capacity. And for capacity of this year on cash basis, it remained around $3.6 billion, which majority goes to capacity-related expansion for 12-inch. So the above is a summary of UMC's result for Quarter 2, 2022. 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, Chidong. Good evening, everyone. Here I would like to share UMC's second quarter highlights. In Q2, we delivered a result in line with guidance. Thanks to continuous strong demand for UMC's differentiated process across our end market, overall wafer shipments rose 4.3% from the previous quarter, while higher average selling price and a favorable foreign exchange rate led the second quarter growth margin to 46.5%. Revenue from our 2228 nanometer portfolio increased 29% sequentially. driven by the additional capacity at 512A P5 that came online during the second quarter. We are confident in the long-term growth prospects of our 2228 nanometer business, which now represents 22% of UMC's overall wafer revenue and has demonstrated solid traction for OLED display drivers, image processor, Wi-Fi, and automotive applications. A structural trend drives semiconductor content increase in end devices, from smartphones to automobiles. It is our conviction at 28nm, it is a long-lasting note that will be important for many existing and emerging applications for years to come. Going into the third quarter, we expect our business to remain firm. While cooling demand for smartphones, PCs, and consumer electronics may pose some short-term fluctuations, we are actively working with customers to adjust their product mix. Coming off a super cycle over the past two years, the semiconductor industry is now in a period of inventory correction. We believe UMC's comprehensive portfolio for differentiated leading specialty technologies and strong partnerships with leading customers will help us navigate the cyclical microenvironment. Now let's move on to third quarter 2022 guidance. Our wave assurance will remain flat. ASP in U.S. dollar will remain flat. Gross profit margin will be in the mid-40% range. Capacity utilization rate will be at 100%. Our 2022 cash-based capex will be budgeted at U.S. $3.6 billion. That concludes my comments. Thank you all for your attention. Now we are ready for questions.

Thank you, President Wong. 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. And our first question is coming from Randy Abrams, Credit Suisse. Go ahead, please.

Okay, yes, thank you, and a good result. I wanted to ask a question just on your outlook where you mentioned the inventory correction starting in some of the applications. Could you give a view how you're looking now on... just steepness or type of correction you're seeing, if you expect a period of underutilization. And TSMC was giving a framework. They expect it through first half. But if there's a feel for inventory, how long it may take. So we just wanted to get a perspective how you're viewing the next few quarters.

Well, okay. So, Randy, we have observed that customers are concerned in general. that we are aware that inventory level is in a relative high in certain segments. However, it will be hard to predict how long it will take to digest the same inventory under the macro economy uncertainty. So we will closely monitor the current situation and respond to the changes in customer forecasts accordingly. While we start, while we observe the softening demand in the smartphone, notebook, and consumer section, The other in the segment, the networking industrial auto, it actually has a more stable demand. So again, there are some observations about inventory concerns, but we have perceived our Q3 loading will be full. And for the Q3, we will continue monitoring the market outlook and probably report that in the next quarter's conference call.

Okay. A question on third quarter for the shipments flat. I know Chief had mentioned not much capacity coming online. Is it that you're constrained shipping more or because of the inventory correction, it's already limiting ability to get some seasonal or some increase? And then I'm curious to review on the pricing environment. There's been the market talk about start of some discounts, but how you're seeing outlook for pricing?

Well, our pricing will remain firm. And we believe we'll be able to maintain the healthy loading for the years. mainly because of steady demand from the auto industrial server and the network segments. For Q3, the stable demand in those areas allow us to mostly compensate the softness of the computer and consumer segments. So at this current point, our pricing remains firm.

Okay. And it sounds like you mentioned through the end of the year you expect healthy loading. And I'm curious on your view on 28. Two parts to it. You talked about existing and new applications. If you could give a flavor, the new applications are next wave. And if you could also give an update on the next phase, the phase six, timing to bring that up if that's all 28. And given the environment, you still see that fully committed.

Well, first, we believe that 28 and 22 will be a long-lasting node and supported by a very diversified base of a product portfolio. In the next few years, we expect the 28 and 22 demand to remain robust, driven by applications like Wi-Fi 6, 6E, networking in the GPON area, and OLED driver applications.

Okay. And maybe enough to run the... the next phase, timing, that you would have the capacity available, and how you're seeing that committed, whether the LTAs, that you still have that locked up with LTAs?

Yes. I mean, we do expect the P6 ramp-up started from June 23, mid-next year. And right now, thanks to our fast effort, by the way, the lead time is actually stretching out, but thanks to our fast effort to minimize the tool delivery impact, our current REM will remain at the June 23, next year, June, I mean next year. And the old P6 REM is impacted by the LTA arrangement, and we still believe the LTA is a good mechanism because it presents the mutual commitment for both customer and UMC to secure our future growth.

Okay. And just one last, if you could give an early framework, the spending for next year, where it's probably partly that and then partly Singapore. And if you, I guess just looking at the macro and certainly in the downturn, like how firm do you see schedules? Like would you consider push-outs or delays? you know, if the macro looks sharper in the slowdown?

Well, I mean, for CapEx, we maintain confidence in the industry's megatrends for long-term growth. And our CapEx decision was based on market and customer's endorsement together with a disciplined ROI-driven CapEx strategy we have adopted a few years ago and with a building affordability strategy. And the capacity expansion in 12AP6 and the current 12IP3 conversation and our competitive differential special technology solution will actually help to deliver the growth for both UMC and our partners in the long run. So given the capacity expansion plan is more of a longer-term strategy, therefore near-term cyclical headwinds now will not impact our long-term plan at this moment.

Okay, great. No, that's helpful. Thanks a lot.

Thank you.

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

Yeah, thanks very much. Jason, I wanted to just talk a bit about CapEx. Looking at the first half of this year, you spent a little less than 700 million U.S. and you've maintained your spending plan this year at 3.6, so that implies quite a big uplift in spending in the second half. Is that still, you know, just given the environment we're in with WFE tools, you know, having some challenges to deliver on time, and also some of the macro concerns that you laid out, how do you feel about that CapEx budget actually being spent all in the second half? And then I wanted to just also follow up on consumer. Your sales in the second quarter were up 14% sequentially in consumer. And I'd love to understand what's behind that increase and how you see the consumer outlook specifically for the second half of the year. Thank you.

Yeah, for capital spending, according to the current schedule, it will be rather second half of this. So we still keep our 3.6 billion numbers. Of course, this is a rolling basis, but I believe that the end result won't be too different from the $3.6 billion budget numbers.

So going to your question about the current segment outlooks, you know, we did maintain a healthy loading for both Q2 and we foresee that we will maintain healthy loading for this year. and because with a steady demand from auto industrial server and networking segment I mentioned earlier. However, we do see some of the other segments as more of a weaker segment in the communication, consumer, and computer area. While they can be offset by the stronger segment that maintain the full loading, At the same time, we actually see the consumer actually still grow sequentially, 12%, quarter over quarter, mainly from the power devices, Wi-Fi, digital TV, set-up box, and LCD controllers, as well as MCU. So there are many applications that remain strong in the sub-segments of the consumer. So within each segment, there are stronger and there are some weaker sub-segments. So at this point in the Q2, the consumer remains very healthy. We do see this change a little bit going into the second half. So for the Q3, we probably see more of a decline percentage in the consumer as well as computing, but compensated by the auto and communication I touched earlier.

Okay, that's helpful. And maybe one last question. There's been a lot of talk in the industry about costs going up. We see inflation in wages. We see inflation in materials. Even WFE tools are getting more expensive. And I'm just looking to understand, how do you see this impacting your business? And more specifically, can you pass on rising costs to your customers? Do you expect to... increase wafer prices further from here. And how do you think about the pressures on costs relative to, you know, typically the industry cuts pricing when utilization comes down. How do you see that balance between cost inflation and the need to pass on that cost to customers versus falling utilization as we go through this inventory correction that you laid out?

Okay, so first is about the cost up, right? In light of the rising cost contribute to raw material, utility, and labor rate, we do observe that. And the companies actually will work to offset those headwinds via continuous cost reduction efforts through mix optimization, productivity improvement. So we are doing our best to continue offsetting that. But From the ASP standpoint, there's a couple layers of consideration. One is from the ASP positioning, the ASP usually, in our view, reflects our relevance in the supply chain. And while UMC continues to enhance our value proposition to our customer, not only based on the demand and supply dynamics, and we usually position it, that's how we view the ASP position. In light of the higher inflationary cost throughout the supply chain, like I said, we are not immune. So, therefore, we will cooperate with our customers to navigate this in conjunction with our internal cost reduction effort. So, yes, we will be very transparent with our customers about the cost increase, and at the same time, we will work with them closely to address that issue. Male Speaker 2 Thank you.

Thank you. Next question, Laura Chen, Citigroup. Go ahead, please.

Hi. Thank you for taking my question. I'm just wondering that if there is any update on your FinFET process development. I recall management mentioned earlier that you get the plan to further leverage your expansion in 2022 for maybe future migration for 14. So just curious, given the expansion will continue in 2022, do we have any plan for any future potential migration to FinFET?

Well, our 14 FinFET entered production a few years ago with unlimited customer. And, however, our future capacity plan will still depend on the market and consumer demand outlook. The plan remains unchanged at this point, and while we actually focus on addressing the strong demand of other nodes. So, you know, so we will continue making progress on the FingFab, but on the capacity deployment point of view, it does have a lower priority compared with the other node at this moment. Again, this has to realign back to our megatrends and also our ROI discipline, the CAPEX strategy, and they are priority and selection considerations. So we, you know, we're still putting the 14 on the roadmap, but the significant CAPEX deployment plan is not in the near term yet.

Okay, got it. Thank you. And another question I have is about the specialty process. Can you give us more color about what you exactly offer in the specialty process and how big is that account for your revenue? And can it also be kind of supported for the SP, et cetera?

Well, I mean, our... Our specialty technology is representing about 50 to 55 percent of our revenue today. And it is a direction that we continue marching, and we are making some significant progress. And while we continue delivering the advanced specialty technology, For instance, in the 28 nanometers, we have delivered the first high-voltage solution, and we also continue delivering the BCD technology in 55 and RFSOI in the 55 nanometer as well. Those are all considered very advanced specialty technology in those mature technology nodes. However, they are considered advanced technology offering. So we are making... progress there and this is the current 50 to 55 percent, you know, revenue contribution to the fund of specialty is right on track while we plan it.

Okay, got it. Thank you.

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

Oh, hi, gentlemen. I have a few questions. The first one regarding the long-term agreement. Given the fact that there are some soft patches in the consumer electronic smartphone market, I'm not quite sure about the enforceability of the LTA on the existing capacity right now.

So your question is about how valid is the LTA right now?

Right, right, right. Would we be considering to relax some of the terms?

First of all, LTA is a mutual commitment from us and for both customers and UMC. So we have certain obligations as well. And the objective is to try to secure future growth for both. And both parties right now have treated this LTA agreement very seriously. And despite the recent market downtrend, we have observed that customers are bringing in pull-in orders with us to honor their contractual commitment. So, yes, we have started to recognize some of the customers' penalty due to the fail to meet the original terms. However, that's still a very minimum compared to the current size of the LTAs, yeah.

I see. Sounds great. And then for the quality guidance, we are guiding for top-down to become flat. I'm not sure if we can comment a little bit on the monthly linearity.

Yeah, we cannot comment on the monthly trend. The uncertainty has increased, but we are confident about both the capacities, as I mentioned, only grow very marginally, almost no change. but it will remain at 100% loading. So treatment-wise, it should be flat. ASP-wise, Outlook is firm, so we are also confident about ASP. The only uncontrollable part is the forex, and certainly we are building some buffer for that. So that's about the fundamental assumption for Outlook.

I see, yeah. Actually, maybe the last question from my side, regarding the other operating income line, yeah, I think that's referring to the technology licensing to a UMC Shaman, right? I just wonder how long it will last. Actually, I asked this question a few quarters back, but I just want you to provide an update.

No problem, no problem. So that may be the subsidiary from the, you know, subsidies from the local government. And money already in the pocket. And the accounting book, recognition-wise, OIE is through the tech along with the equipment depreciation schedule, which normally is six years. So it won't go away until our depreciation expenses start to fall off. So it's really the whole point for getting a subsidy for the depreciation period.

Hmm. But when would that end? Sorry? When would that end? I mean, the subsidy.

Probably another two years.

Another two years from now? Yeah. Oh, okay. All right. Okay. Thank you, Chitong.

Next question, Sunny Lane, UBS. Go ahead, please.

Hi. Thank you for taking my questions. So my first question is that I wanted to get your current view on the supply-demand outlook for trailing edge foundries. Obviously, now our outlook is pretty different from the start of the year. And then which part of the trailing edge may see more oversupply risk into 2023 and 2024 based on your current analysis?

Well, I mean, for 2020, let's start with 2022. Despite the rising uncertainty of the micro outlook, our view of the 2022 foundry industry growth of 20% plus remains unchanged. And our target is to grow in line or higher than the foundry industry. That has no change either. For Q4 2022, we will remain a healthy loading. I reported our guidance in Q3 will be fully loaded, 100% loading. And by in Q4, we still believe that we can maintain a healthy loading while the pricing will remain firm. And as a detail, we will provide an update in our next quarterly conference. Going into 2023, Given the rising micro uncertainty continues and the higher inflationary cost pressure, we foresee the foundry industry growth in 2023 will be more moderate. And for UMC in 2023, without commenting other peers, we are excited about our P6 capacity, which is backed by LTA, and will become available in mid 2023 and will be projected to increase our overall capacity by 5% year-over-year. Our ASP is also expected to remain firm. Based on the aforementioned fundamentals, our goal is to position ourselves to hopefully deliver another good year. I think the overall capacity increase, I think, will probably be affected by some of the 2D time and also the the micro environments. So those capacity expansion in 2023 will probably likely slow down, but I think if your question is about beyond 2023, we'll be probably too far out at this point.

Got it. And so the 5% capacity increase in 2023, how does that imply for your capacity increase from P6 by end of next year?

So the 5% is mainly driven by P6. So most of the 5% comes from P6.

Got it. Thank you. And then I have a second question. For your 20 nanometer, I understand you may have quite a bit of oil backlogs from the last few quarters. But at this point, have you started to see the backlog coming down given the consumer electronics weakness? And if the end market continues to slow down, would you consider maybe slowing down the expansion to some extent?

Well, first of all, we have observed some inventory correction while we maintain healthy utilization rates. For some segment, we have experiencing a decrease in the unfulfilled demands as well as the order adjustments. but not to the level that we need to reconsider the CAPEX. So for the CAPEX adjustments, we still remain confident in this long-term megatrend. And like I stated earlier, giving the capacity expansion plan is a more long-term strategy. Therefore, the near-term cyclical headwinds will not impact our long-term plan at this moment.

Got it. Thank you. That's pretty helpful. Thank you.

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

Thanks, gentlemen, and congratulations for great results. I have a couple follow-up questions. So, first of all, on the cycle debate, I understand that the company has a great specialty technology and maybe 70 percent is covered by LTA, et cetera. still, right, there's still 20%, 30% of business are exposed to the commodity markets. So that's the use of LCD drive IC as a case study. So Jason, do you see any of your customers, they violate the LTA or try to push out? And are you seeing your competitors are giving rebates, even cutting the price for some commodity products like LCD drive ICs? And then I will have some follow-up questions. Thank you.

Sure. We touched the LTA earlier. Like I said, both our customers and us treat this LTA very seriously. So I think we're working very closely to navigate through this contractual application. So at this moment, I think we've been honored with this commitment for now. despite there are some market noise and turbulence, but LTA is still intact. If it does come to a time that we need to revisit, and we definitely work closely with our customer, but as a background, our LTA discussion traction actually continues, because there is discussion in our P3 conversation So, it's in our projection, our LTA number actually is going upward, not downward, even with some of the recent headwinds from some of the segments, like you mentioned. Going back to the ASP pressures, first of all, we usually don't comment about our peers pricing strategy. Our ASP reflects our value proposition and our relevance in the supply chain, like I said. While our pricing remains firm in Q3, and we are able to navigate the market volatility via product mix adjustment and customer portfolio diversification without resorting to other measures. So, we are guided, you know, the Q3 with a firm ASP projection as well as the full loading result. projection. So, you know, we have to come to what the market is, but not at this current point, our ASP will remain firm.

Thanks for the explanation, but I guess my problem is that I understand you try to sell the value, right? But if you look at, again, the LCD drive IC, your customer's margin keeps going down, And next year, probably their margin will fall to like a pre-COVID level, right? Maybe 20%, 30%. So obviously, that is not a value, right? I mean, on your customer's margin, their margin are shrinking. So if that's the case, I really concern that customers may need to choose lower cost, you know, foundry capacity. It's not just limited to LCD drive ICs, but also PMIC or other commodity sectors. So what would be your reaction? I know this year could be fine, but next year, if there's a commodity capacity, the industry peer surprises on average 10%, 20% below yours. What would be your strategy?

Well, I mean, maybe we should take a look at this issue from a different perspective. Over the past few years, we have been continuously taking steps to significantly enhance our customer stickiness through highly differentiated and customized process solutions, referring to your specialty technology, for instance, and along with our manufacturing capability to enlarge our preferred source with a global leading customer, along with the LTA for our long-term mutual commitment across very diverse by the market segment so during this downturn uh the cyclical downturn we we will be able to minimize the business impact through one adjustment to a various market segment if there are some weaker segments and we will hopefully we'll be able to compensate it uh through a stronger segment some of the single source or uh the product, we actually work with customers through a pull-in modulation. And, you know, in some of the multiple sources, we actually do, you know, we do get Bungie shares as well. So while we're executing those, we can help our loading navigate through this cyclical period, and hopefully we can continue maintaining a very healthy loading. So they are – we have to address this fundamentally. diversify the customer portfolio and align it to a megatrend usually can help us to mitigate that to a certain extent. And I understand there are going to be challenges for some segments, but hopefully that if we think our own capability will support us to our max, but at the same time we're Our original plan is to align to the megatrend with a very diversified customer portfolio and to mitigate that approach. So it definitely is not our goal to continue on that path. So we are executing our plan set out a few years ago. And while this downturn comes, we will examine this result. And maybe if there is more development, we will update you in the next quarter.

I see. Thanks. So just some quick yes or no question. I appreciate your previous answers. So first of all, CapEx next year, do you think it will be flat or coming down?

We don't have the exact number yet. As you recall, there was a question about even this year's CapEx number. So it's very difficult to give you a clear pinpoint answer yet. But... We do have this P6 project coming along, which is total cost is about $5 billion to $6 billion. And for Singapore, the P3 is also another $5 billion also. So these two projects alone is around $10 billion, and it's going to spread out in this year and the following three years, something like that.

I see. Thanks, Qidong. And server chip. What kind of server chips are you making? May I know some prototype?

Again, I didn't quite get that question.

Oh, server. Yeah, because Jason, you mentioned that the server networking are kind of a strong segment that can offset the consumer weaknesses. So I'm just curious about server chips because I think they include DRAM, CPU, some high-end networking, but I just don't realize you have exposure to server segment as well.

It was the companion chips within the server segment, so it's more a sub-segment of that, yeah.

Okay. And that's the, you know, Laura asked about the 40 nanometer beam fat. That is also one of the key feedback I'm getting from the U.S. investors. They are concerned about your long-term developments. They are really happy with your execution, your strategy on the CAPEX discipline. But talking about the future, do you think about your 40 nanometer FIMFET structure is competitive from technology perspective? Because 20 nanometer UNC is very famous and poli-science, right, very competitive. FinFETs, do you think that there is going to be competitive as well? We're not talking about demand, just purely from technology perspective. Thank you.

Well, it's our belief that our solution will be very robust and competitive. And in 2018, it's actually not just polycyon, it's actually both polycyon and high K, as well as the 22 nanometers directive. For the 14 FinFETs, We also believe that we can deliver that. We just have to align with the suitable market and the customer for the CAPAC deployment. Again, I stated earlier, it's within our focus, but it's in sequence of the priorities.

Okay. Again, very good execution. Thanks for your patience and answers. Thank you.

Sure.

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

Yeah, hi. Thanks for taking my question. First of all, Jason, I think you were kind enough to talk a little bit about next year's outlook. Are you working with the assumption right now that the foundry industry will still be growing next year, or you think that we will potentially have a decline like we have had in the past down cycles when semiconductor industries go through a down cycle, foundry industry also declines. Do you think it's going to be different this time and foundry industry will still be growing next year? That's my first question. Could you give a bit more color on that?

Well, I mean, we do. And after two very strong years, in the semi-market. We call it super cycle. And given the recent turbulence and disruption from the market, and after this rising macro uncertainties, higher inflationary cost issue, we still foresee the foundry industry growth in 2023 will be more moderate, but it is going to be another growth year, but it's going to be very minimum and it's going to be more moderate

Got it. Thank you very much. How do you think about, I think different people have asked about pricing, but do you think that it's something that has fundamentally changed? Because historically, pricing goes down in a downturn. We've seen that several times. So what is giving you that confidence Is it confidence in UMC specifically, or do you think that something has changed in the industry itself that gives you the confidence? Because it seems like you're suggesting that pricing is likely to not be stable in a downturn and potentially upward biased in a normal to upturn kind of scenario. So can you understand your process on pricing generally as we get into the downturn?

Well, I mean, I can comment about the industry. And for UMC, our ASP positions, we value long-term partnership over the near-term sticker growth. So usually it's not about the demand and supply situation. We've seen the baseline of the ASP reflects, you know, what we can provide in terms of value proposition. Then how can we And how can we demonstrate that value proposition? It is through a differentiated technology offering, and your manufacturing capability, and your confidence, and you're building the confidence and trust with your partners that you are a reliable source. And so they leverage you, or they use you, or engage you as a preferred boundary source. So we have learned our lesson in the past. When you are multiple sourcing, nice to have a position, and you lost your ASP position. So we want to be relevant, and we are continuing to increase our relevance in the industry, along with our customer, and along with our capacity value to provide a long-term growth to them, and we hope they do see that value in exchange for our market ASP position. So it's bit of a contractual, but however, that is the direction that we march into.

Got it. So maybe one more question on that front. I think you are definitely telling us that you're going to be a lot more disciplined this time around than the past. Obviously, we can't expect that from every company. So let's say the downturn is a little bit more intense than what we expect today and pricing starts to come under pressure for certain nodes. Would you and he stay away from pricing reaction and you're willing to take some utilization slack? Is that how you think about planning for this down cycle or that's still up for debate?

Well, I mean, the market is dynamic and our operation will have a principle, but we're not going to be naive. And, you know, as a management, we will stay paranoid about the market uncertainty. So we will react to the market changes, and we will continue monitoring the market situation and respond to it and giving the market dynamics. So we will definitely do that accordingly. We kind of talked about the resilience, about how can we help to continue maintaining healthy loading, but at the same time, We do look at this capex adjustment issue, and if it's needed. At this point, we maintain our confidence in the megatrend long-term growth, since this is a long-term strategy, and at this moment, there's no adjustment. It has not impacted our long-term plan, so there's no adjustment at this moment. If you're referring to other cost-control efforts, I can assure you we have been relentlessly pursuing a cost reduction activity and elevating our line productivity and production efficiency. And, again, you know, all those measures will be in place. We will continue monitoring the current market situation and respond to that, you know, diligently and accordingly, yeah.

Male Speaker 1 Okay. That's very clear. Thank you very much, Jason. Jason Gildea Sure. Thanks.

Thank you. And next question, Frank Lee of HSBC. Go ahead, please. Frank, we can't hear you. Sorry, can you let me in?

Sorry. Yes, thank you. Okay, sorry. I just wanted to clarify my first question on your overall utilization, because you just got, I think, for utilization to remain full through 3Q at 100%. But I guess when you look at some of your competitors who have a very high exposure to 8-inch foundry, their utilization rates have started to come off, mainly because of driver IC being weaker. But I think UMC still has about 40% of your capacity tied to 8-inch. So... Are we seeing 100% utilization even on 8-inch as well? And if so, can you give us a bit of color, like what applications or products that you've been able to fill that with?

Sure. Our 8-inch loading remains 100% in Q3. After we're swapping some of the allocation from notebook, TV, smartphone, to auto and IoT space. Some of our 8-inch FAB utilization in Q4 may be impacted by the change in customer product mix, given the available capacity capability that we have. Nonetheless, we do expect 8-inch loading will be maintained at a healthy level.

Okay, great. I guess my second question is, Autos, industrials, especially autos, has been talked about as a major demand driver for foundry going forward, which wasn't so obvious in past cycles. So as we look into the auto space, as you look at class expansion in the industry, is auto the main driver that we should be looking at, especially on the mature side? And if we see any slowdown or potential weakness in autos, Is that a trigger that could lead to maybe a more cautious view on CapEx spend going forward?

Well, any dynamic from the marketplace will be alert and aware and act accordingly. So, I mean, it's not limited with auto, but like you said, if auto is the segment that actually helps compensating some of the weaker segments today, obviously we pay more attention to it. But auto is not only the strong segment that we're seeing right now for us. We're also seeing some of the industrial and IoT space that help us mostly compensate for our Q3 loading. And we're working with customers closely monitoring their inventory level as well as the macro environment for the outlook. you know, at this moment, the Q3 will remain healthy, I mean, fully loaded. For Q4, we, you know, we project we will have a healthy loading while we, you know, like I mentioned, the pricing will remain firm for Q4. But we will provide an update for the Q4 in the next quarter conference because at this point, you know, some of the turbulence and disruption is continued, right? So we just have to be about it, yeah.

Okay, great.

Thank you so much. Thank you. And ladies and gentlemen, we thank you very much 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 iratumc.com. Have a good day. Thank you.

Thank you, Mr. Lin. Ladies and gentlemen, that concludes our conference for second quarter 2022. 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 event section. You may now disconnect. Goodbye.