United Microelectronics Corporation (NEW)

Welcome, everyone, to UMC's 2022 third 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 is finished. please visit our website, www.umc.com, or to 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 UMC's conference call for the third quarter of 2022. I am joined by Mr. Jason Wang, the President of UMC, and Mr. Chi-Dong Liu, the CFO of UMC. In a moment, we will hear our CFO present the third quarter financial results, followed by our President's key message to address UMC's focus and fourth quarter 2022 guidance. Once our President and CFO complete their remarks, there will be a Q&A section. UMC's quality financial reports are available at our website, www.umc.com, under the Investors Financial section. During this conference, we may make forward-looking statements based on management's current expectations and beliefs. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially, including the risks that may be beyond the company's control. For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filing 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. Chi-Dong Liu, to discuss UMC's third quarter 2022 financial result. Thank you, Michael.

I would like to go through the 3Q 2022 investor conference presentation material, which can be downloaded or viewed in real time from our website. Starting on page 4, The third quarter of 2022, on Saturday, revenue was $75.39 billion NT, with gross margin at $47.3. Net income attributable to the stockholder of the parent was $27 billion NT, and the earnings per ordinary shares were $2.19 NT. Utilization rate in the third quarter remained at 100% plus, and Overall, and also pretty much in line with our previous quarter's guidance. Next page, please. So, for the third quarter, revenue grew by 4.6 percent, sequentially, to $75.39 billion. Gross margin rate of 47 percent, or in absolute dollar terms, is $35.66 billion. And operating income margin reached 40% compared to 39.1% in the previous quarter. And net income attributable to the shareholder of the parent was 26.99 billion NT or equivalent of EPS 2.19. This is meaningful growth compared to 1.74 EPS in the previous quarter. For the first three quarters, the cumulative revenue grew by 37 percent, thanks to the help from shipment increase, as well as ASP enhancement and also the NT dollar depreciation. All three factors play important roles. And for the gross margin rate for the first three quarters was around 45.8 percent, or $96.6 billion. Operating income surpassed $80 billion NT for the first three quarters, which is 38.3% operating income margin rate compared to 22.1% in the same period of 2021. For the net income for the shareholder of the parent is 68.131, or 32.3%. And that's a 71 percent year-over-year growth. And EBS for the first three quarters reached 5.54 NT dollars per share. So, we pay out $3 per share cash dividend back in the early part of third quarter. And after that, the post-dividend cash on hand is about 180 billion NT. And our total equity today is about $315 billion for the end of third quarter of this year. And as I mentioned earlier, AC remains firm in line with our previous quarter's guidance, continues to stay at the current level in the third quarter of 2022. In terms of revenue breakdown, we see some decline. The percentage of revenue for our Asian market from 65 percent in the previous quarter to 62 percent in third quarter of 22. And for the other regions, we see a minor increase. IDM continued to outperform Fabulous in recent quarter, especially in the third quarter. And right now, IDM stands for about 17 percent. of our total revenue. In terms of segment breakdown, it's not much change except computer now is in same percentage of revenue as our other revenue, which is mainly composed of auto and industrial. In terms of geometry breakdown, for 22 titanium nanometer reach 25% for the first time, and that's mainly due to the newly increased capacity from our P5 facility in Thailand. And 65% is about 18%, and 90 nanometer is about 8%. Capacity in Q4 will only slightly increase, mainly coming from He Jian, the Suzhou 8-inch wafer fab. And every other fab will remain about similar. We have revised our four-year cash-based CAPEX from the previously $3.6 billion now to $3 billion U.S. dollars for year 2022, and we can elaborate more details for this downward revision for our annual CAPEX budget. And the above is a summary of UMC's results for third quarter of 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, Qigong. Good evening, everyone. Here I would like to share UMC's third quarter highlights. In Q3, our results benefited from product mix optimization and a more favorable change rate, while fab capacity remained fully utilized. Despite softening demand in consumer and market, strength in certain wireless communication areas drove further expansion in our 2228 nanometer business, which accounted for 25% of overall third-quarter revenue and waived the average selling price. We believe our industry-leading position in OLED OLED display driver IC will continue to drive growth for our 2228 nanometer technologies. amid growing adoption of OLED panels in smartphones and other end devices. We also saw sustained momentum in our automotive business during the quarter, and we intend to pursue more collaboration opportunities with existing and potential automotive customers. Moving into the fourth quarter, we expect to face headwinds amid demand weakness impacted by factors including the inflationary empowerment and Ukraine war. While UMC will not be immune to the inventory correction affecting the industry, we will work closely with our customers as they adjust elevator inventories to align with the current market conditions. At the same time, we will continue to deliver differentiated technology processes to enable customers' product pipelines. We have revised the company's 2022 capital expenditures down to U.S. $3 billion. Our capacity expansion in Tainan and Singapore are still progressing as planned in order to meet long-term supply commitments. Despite near-term turbulence, the structural story of an increase in silicon, content driven by the rise of 5G, AIoT, and EV remains intact. With our comprehensive technology offering focused on manufacturing excellence and resilient financial structure, UMC will further increase our exposure to strong growth markets and consolidate our specialty technology leadership. Now, let's move on to the fourth quarter 2022 guidance. Our wave assurance was decreased by approximately 10%. ASP in US dollar will remain flat. Gross profit margin will be in the low 40% range. Capacity utilization rate will be at 90%. Our 2022 cash-based CapEx will be revised to U.S. $3 billion. That concludes my comments. Thank you all for your attention. Now we are ready for questions.

Thank you, President Wang. 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. I wanted to ask the first question just about the outlook. You're guiding a somewhat mild or moderate correction in fourth quarter. Could you discuss if it's still largely these consumer areas like PC, Android, and the digital TV, or is that extending now if you're seeing any broadening out to auto-industrial networking areas? or also the IDMs, which look like they're a good quarter and third quarter?

Okay. For the Q4, the auto and industrial segment remains stable for now. While the inventory level is still healthy for the auto and industrial segment in Q4, we have observed that PC and smartphone are still undergoing a prolonged inventory correction. compared to the previous quarter's estimate, which indicates there's no tangible sign of a recovery in the near term. We do foresee that downward trend for the consumer segment will continue to linger into first half 2023 due to a slow inventory digestion. And it's our belief the bottom of this down cycle will mainly determine when the end system market starts to resume its momentum And at this point, the visibility is still low. But in the Q4, we are able to mitigate our 8-inch FAB loading to remain 100% in Q3 after swapping some allocation from notebook, TV, smartphone to auto and IoT. However, the lighter 8-inch utilization will happen in Q4, and mainly because impacted by the deteriorating markets. condition in a smartphone and PC because of the inventory correction.

Randy? I'm here. Sorry, they removed me from the queue. Sorry, no, I'm back in. Okay, yeah, no, I wanted to ask my second question. Actually, taking that into consideration, is there a rough way to think, given what you were saying on consumer and could see a little bit of broadening where you see utilization trending toward first half. And I'm curious, at this stage, 2023 now, I think originally you were thinking a growth industry and UMC would grow. If you have an initial view for 2023 industry and then UMC outlook?

Sure. Well, I mean, we, you know, after a quarter from last quarter, given the rising micro uncertainties, and ongoing inventory correction, like I say, in the PC and the smartphone space, and as well as the high inflationary cost pressure. And we do foresee the semi and foundry industry will decline in 2023 now. But that's off a very high base of 2022. And for UMC, the, you know, we You know, while the visibility in 2023 is low, we still expect our 12A P6 will come on stream by mid-2023. And with our ASP outlook expected to remain firm, you know, as a management goal is to grow in line or outperform with UMC's addressable market. I kind of want to emphasize that it's within our addressable area. Yes.

Okay, just to understand, so do you expect your addressable market, just trying to understand that, versus the industry down, do you think your addressable market is growing next year?

I think given the current condition, it will be very challenging to see that up. I think it will probably decline in 2023. And I think we should be able to give you much more clarity for another quarter, probably in January.

Okay. No, that's helpful. And if I could ask on the two parts on the CapEx, one is that if there was a timing, the 3.6 coming to $3 billion, as it was tracking a bit behind through the year, were you pushing out certain projects? And if there's a view, then would that be additive or a view on next year? And the other part of the question, just on that P6, is that still, it had LTAs tied to it. Are those LTAs still covered or are you seeing customers trying to reschedule or some change where some of that capacity in this environment may not be utilized?

Okay, so for the first, the 2022 cap has cut. There are two reasons that led to the cut for the cash-based CapEx. First, it was primarily due to the equipment vendor delay. And the second is, given the current downturn, we are reprioritized on the project to respond to the current security. Meanwhile, we're still keeping our commitment to our P6 LTA customers. And the question for the Is there any changing in the LTA customer for P6? Right now, those customers are taking serious and commitment to this relationship, so commitment and partnership. So we have not seen any significant changes in their space. Some of the LTA has some impact to it, but it's more in the near term now with the P6.

Okay, I'll just clarify that, so some impact on the near-term, not P6. What's happening to the other LTAs? And then I'll get back in the queue.

Sure. I mean, we do see, while going through this market turbulence, and obviously not all our customers are immune from it, and while this inventory correction continues to worsen, and our customers are treating this LTA, while they're treating it seriously, but they are reprioritizing some of their product mix and reflect to the end markets, as well as minimize the, in order to minimize some of the obligation to avoid some of the LTA penalties. And so, but as a result, there are some LTA penalties. already happening, but it's very insignificant. And we don't want to get into specific on the LTAs, but the – at this point, all subject of business are still operating compliant to the LTA terms.

Male Speaker 1 Okay, great. No, thanks a lot. I appreciate the call, Jason. Jason Gildea Sure.

Male Speaker 1 Thank you, Randy. Next question, Goku Harihalan, JP Morgan. Go ahead, please.

Hi, thanks for taking my question. First of all, could you talk a little bit about what we are seeing? I think you did call out 8-inch as one area where there is some utilization slack. Could we talk about 28-nanometer and the rest of the 12-inch portfolio? It looks like 28-nanometer still remains pretty solid in terms of utilization. Are we seeing slack in other parts like 40, 65, etc. in Q4 and as we look into Q1? And how do we expect utilization to trend in first half? Obviously not very clear at this point, but are we looking at utilization going all the way back to like 80% or even below 80% as we have seen in the past cycles? That's my first question.

Okay, well, that actually is a big question. Let me see if I can, I got all this. First of all, you asked, we touched the eight inch and your question is about 28. If I may, I'd like to kind of go back to about the segment first, and before I get to that. In Q3, we actually see the automotive revenue grow into double digits, and the consumer grew low single digits. Communication grew low single digits, while the computing is declining about high single digits. And while we're swapping those, like I mentioned earlier, swapping between the auto industrial and the PC and smartphone I mentioned earlier, we'd be able to manage that full loading. Now going into the Q4, we see all segments are declining except automotive. So from a sequential point of view, the automotive we do see continues a double-digit growth, and while the others start seeing a declining. And I think that that happened to have impact to our 8-inch loading, because PC and smartphone is majorly impacting the 8-inch. However, the lighter 8-inch utilization in Q4 I mentioned was impacted by the continuous notebook and TV inventory correction, and our 12-inch product portfolio come with a more higher differentiation with leading specialty technology as well as some of the diversified market segment and sub-segment. And therefore, it's less vulnerable at this point compared to the 8-inch in Q4. Okay. While we see this correction lingering into first half, and we have to – we probably have to report the Q1. when the time comes. Now we know the 12-inch is actually much healthier than the 8-inch in Q4. For the 28, specifically, it's part of that. And with our resilience on 28 mainly comes from a robust demand from our target segment, such as the OLED driver and automotive space. So at this point, the 28 remains healthy. at least for Q4. And if we look at the 28 outlooks, for the long term, we do believe 28 and 22 will be a long-lasting note, driven by the application such as ISP, overlay driver IC, where this demand will continue to grow. And we believe we well-positioned it with those diversified product portfolio to capture this market opportunity. And so that's why we actually remain confident with our 20A and 22 business, mainly because they're continuously strengthening our solutions and customer profile. And I guess I answered the 20A, as well as the column between the 8-inch and 20A. I'm not sure if I captured all your questions.

Yeah, thanks, Jason. That's very clear. One part is on utilization. I think you talk about 90% utilization in Q4. Should we expect utilizations to go all the way back down to 80% or below like previous downturns or you have some offsets in first half which could kind of protect some of the utilization?

Yeah, at this point, we won't be able to answer a question like this. I mean, as we mentioned earlier, still not be able to pinpoint where is the trust. of the cycle or when is the end of the inventory correction. So we will only be able to give you guidance on a quarter-on-quarter basis.

Got it. Thanks, Jidong. My second question is on pricing. I think if I go back and look at pricing, blended pricing especially, in every downturn, we see some degree of price compression. magnitude is different based on each downturn, but if you look at the last five, six downturns, we've always seen price compression on a blended basis. Now, this time around, you have been a lot more resilient in your communication about pricing to the market as well as customers. Could you talk a little bit about what is your pricing strategy as we go into the downturn, especially as you mentioned, we still don't see the trough in terms of where this inventory cycle could trough out. So is your pricing strategy going to be dependent on how utilization shapes up, or you would basically take a pricing strategy such that even if utilization is much weaker because the downturn is longer, pricing is something you would not be very variable on? Thank you.

Okay. Well, I mean, the foundry is a cyclical industry. So it's a couple layers answer to that. One is the ASP's position. Our strategy and position on ASP is the ASP will reflect both product mix and pricing adjustment. While we continue to improve our product mix, our pricing strategy is to reflect our value proposition on technology leadership and differentiation. We do value longer-term partnership over the near-term cyclical factors. we believe that pricing reflects our market value and proposition. And so we would like to continue to strengthen our relationship with the customer on a long-term basis, mutually growing with our customers. So that's our view in terms of ASP. However, if for the short term, because of security reasons, between the ASP versus loading or utilization, we do examine that. Under the recent market conditions, we believe the trade-off between the loading and price will end up with very limited benefits in demand creation because the weakness in sell-through and demand. So unless we see a significant benefit of that, I don't think there will be much change on that. And this current point for our pricing in demand creation, 2023, we expect it to be firm, but we closely monitor it, yeah, if there is a benefit to it.

Okay, that's very clear. Thank you. I'll go back to the queue. Thanks.

Sure.

Thank you. Next question, Laurie Chan of Citigroup. Go ahead, please.

Yes. Hi. Hi, good afternoon. Thank you for taking my question. My question is about the recent intensified geopolitical risk I'm just wondering what's the implication to UNC. Do you potentially see more opportunity to further gain shares at the expense of your Chinese peers, or you are actually seeing more intensified competition in your Chinese domestic market? That's my first question.

Sure. Well, with the recent U.S. export control and regulation this month, And the impact on UMC has been limited, as the restrictions mainly target more advanced nodes that are not part of the UMC's addressable market. We are in close communication with the suppliers and customers as they navigate the new rules announced earlier this month. Our current focus is focused on compliance, as we believe that compliance is one of our key business principles. And we will continue to monitor the development of the U.S. export control policies closely and take risk management measures as necessary or even evaluate if there's any opportunity. But at this time, I think it's still premature, and we're closely monitoring the progress.

Okay, thank you. So you haven't really seen any movement in terms of the client's order flow because of this event, right?

Well, I mean, there certainly are talks, but I don't think they're at a stage of a movement yet, no.

Okay, great. Thank you. And also, my second question is about the IDM outsourcing trends. You also mentioned that the auto demand is still quite strong, at least for this quarter. But we know that, like Texas Instruments just reported this morning, they also see some weakness happening aside from the auto application. Since those IDMs, they also build up their own capacity. So I'm just wondering what's your view on those IDMs also in trend. Is that sustainable? In particular, we see a lot of uncertainty ahead into next year.

Well, first of all, the key word is adjust. You mentioned that the U.S. customer has just announced their view in terms of the market. And, you know, obviously it's just happening. But in our view, the outdoor and industrial segment remains stable for now. That reflects in our Q3s because they'll be able to offset some of the weakness in other segments. And while we're going into the the end of the year, as well as Q1, we remain cautious. And we were definitely working closely with our customer in terms of the outlook. Meanwhile, for the auto industry, for the longer-term perspective, it's our target segment and our focus. And we will continue expanding our auto business from both IDN customer and the fabulous customer through both technology innovation and capacity expansion alignments. because IDN customers tend to have their own capacity plan, so it's important that we put in the capacity expansion alignment as a part of our ongoing discussion with them.

Okay, great. Thank you. That's very clear.

Thank you. Next question is Tony Lin of UBS. Go ahead, please.

Hi, thank you for taking my questions. My first question is on 20 nanometer. I understand your expansions are all based on the steady long-term demand outlook, but I wonder what kind of factors could potentially trigger you to reconsider the extension timing and scale? And perhaps because of LTAs, do you still have some possibilities in terms of the adjustment? Thank you.

Well, I mean, like I said, for the longer term, we do believe this 28 or 22 and 22 will be a long-lasting note. And so we actually feel comfortable with our perspective on this. And the reason market dynamics does not change our long-term view and our long-term relevance in this with the customers. And we will continue to pursue this, and as we believe, it's a sweet spot for many applications, and while this demand will continue to grow. And we are confident with our solution offering, and our 20A business can be maintained at a healthy level in 2023 and beyond. For the LTA, I kind of touched that earlier already for the P6, but maybe I can give a bit of an overview on the LTA in general. The LTA may not be able to mitigate or shuffle because of the market volatility. But with LTA, the customer will typically reprioritize their product mix, even reallocating their multiple-sourcing product to UMC to fulfill their obligations. And we actually do believe this LTA helps. And at this current downturn cycle, we're not just looking at the P6 or 28th LTA. We're actually taking this opportunity to re-examine our LTA selection criteria to make sure that we align with the megatrend and other growing markets as we believe the LTA contract could help to mitigate downturn cycle and demonstrate the mutual commitment from both customer and UFC. And so that's kind of a, I'd like to share that with you instead of going to so-called P6 LTA situation. Yeah.

Got it. Thank you. That's very helpful. So a quick follow-up on your P6 expansion. I think in July, you expected 2023 capacity increase for the total company could be about 5%. Now with lower KPAC for this year, I wonder what's your latest guidance for next year's capacity increase?

Well, at this point, the number is slightly below 5%, so it's still very close to 5%. and the initial rent was still started from mid-2023, but you will reach to 12K a month by end of 2023. So the rent profile got changed a little bit.

Got it. So 12K per month by end of 2023, maybe approaching full scale by late 2024?

Well, I mean, for 2024, we still have to that's still in progress right now. We react to the current market downturn and start adjusting our 2022 spending, which reflects the 2023 rent. And at the same time, we were looking to 2023 CapEx as well. But at this point, it's kind of too early to report the 2023 CapEx as well as the end profile, yeah.

Got it. Thank you, Jason. My second question is to follow up on LTAs And so one part is that if a customer has LTA at both existing capacities and also your new capacities, would there be a case that they trim the production at existing capacities but remain committed to the new supply? Then in that case, how would you mitigate the impact on your existing capacities?

Well, I mean, our commitment to the LTA customers in tech, despite the rent profile change on a new capacity, but our commitment to it is still there. So we have to manage the base capacity to support them, just make sure that we fulfill our obligations. And at the same time, we'll continue to align with all customers with their outlook to make sure that we don't cause any surprises for both LTA customer as well as a non-LTA customer.

Also, there's a pricing difference between the existing capacity and newly built capacity, even though they're both LTA or the pricing are different.

That's right. And so the other part of my LTA question is that I think in recent weeks, San Francisco started to talk about allowing customers to extend the duration of the LTAs. Would that be a practice that you also consider? Thank you very much.

Well, I mean, we always entertain customers' requests, but in principle, we have to treat those LTAs contract seriously, and so we will provide certain flexibility, but not to the extent you mentioned about it. So at this point, as I mentioned, the customer is still supporting us with trying to reprioritize their product mix, reallocating some of their multiple source product to UMC if they are unable to fulfill the 100% obligation, and then we will comply to the LTA terms.

Got it. Thank you so much.

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

Hi, Jason. Thank you for taking my question. I think you just mentioned that your pricing remains firm and you do the exercise to examine the utilization and the ASPs or erosion, which means that given the current 90% utilization rate, you have no plan to change your pricing. or you know for the first quarter next year most likely it's going further south and you have no plan to change your pricing assumption as well so can you tell us what is a special or help us to go through the exam you did and make sure we have the right understanding if we are more negative or more positive for the outlook for 2023 I mean right now from the end market standpoint our

our view on 2023 is the market will decline. So it will be a challenging year. But from the ASP standpoint, I think there's a limited trade-off between the loading and pricing. So, and mainly because the weakness in the sell-through, the end market. If there's no elasticity of the ASP and with the volume, and so the benefit will be, it's hard to catch. catcher, so that's why we think the first criteria is we have to understand the end market's momentum. And then we will talk about the market share consideration, so on and so forth. So, there are different conditions and criteria to examine. But at this point, we're kind of, you know, we're finding difficulty even we pass the first layers. you know, because we haven't seen any benefit out of that. And we do believe our pricing reflects our relevance with the entire supply chain. And so we just have to continue to look at the longer-term perspective and make sure that we position ourselves to capture the opportunity, not just look at the short-term tactics. But if the short-term tactics doesn't help, I mean, it's an option we're going to take, but not at this current point.

Male Speaker 2 So, can we assume that even the capacity is going down to 80 percent or even 75 percent, the pricing strategy will remain unchanged?

Male Speaker 1 Well, I mean, I think it's not gauged by the utilization. It's gauged by if the pricing will trigger the higher utilization results.

I see. I understand. Okay. The second thing is that I think that for your 28 nanometers, the revenue is much more resilient than your other nodes, given your product and customer's choice or new strategy or better execution. However, your driver IC revenue exposure is still high. Your consumer product exposure is still high, which creates a lot of fluctuation for your business. So what's your plan and strategy to change that? And, you know, how can we, how or when we can see some improvement like, you know, your other node can be as resilient as 28?

Well, I mean, it's our goal to continue with the customer and product portfolio enhancement activities. And we're still in the middle of the process that And, you know, one is we have to continue to deliver our technology innovation in order to target the market so we can improve the portfolios. And we will diversify our customer and market segment. So this effort is continuous. We have been doing that for the past few years, a couple years, and we see some fruit of that. But we're not there yet. I think we're still in the process of continuing with the product and the portfolio enhancement, and we will continue to do that. And by doing that, we believe we will continue to help with that. At the end of the day, it's hard to immune from the entire market long-term, but with a better product mix and with a more compelling solution, to our customer, we do think we can be resilient or even better than the industry's performance.

Well, can you elaborate a bit more? Because for 28, it somehow has a bit more differentiated stuff for like, you know, RF or other stuff or OLED. But it's not easy for investors to visualize the like 8-inch What can you do for the differentiated 8-inch business, or what can you do for your 65 or 90 nanometers? Can you elaborate a little bit more?

For 8-inch, for instance, on the 8-inch, there are structural demands coming from EV power management, even for the migration of a DDR5 power management, and joint development program with IDN to support their growth. in their respective market segment. So there are still some structural demand in some of the areas. And we're going to continue to pursue those target market space. And for the mature legacy 12-inch, for instance, 55, 40, the MCU, the memory just come into a 40 now. And with automotive markets, And by expanding our capacity into the non-volatile memory, we think that will actually help the resilience as well. And so there are certain market segments that we believe they have the structural demand going forward. And so we define that as so-called a targeted market. And so the goal is you have to deliver your solution, compounding solution, you know, and meeting the customer demand. as well as the capacity support, and hopefully you can be less vulnerable. I don't know if we are resilient enough, but I think our goal is try to be less vulnerable, yes.

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

Hello, gentlemen. Two questions from my side. First one regarding the revenue breakdown, right? I believe for the artist category, 14% in Q3, I think the majority is related to automotive. Is it a fair assumption?

That's a correct assumption, yes.

Okay, all right. And maybe down to, let's say, three, five years from now, is it fair to assume that percentage would double? Is it a realistic assumption?

Well, I mean, the... Like Bruce just asked earlier, it's our target to reach greater than 40% by 2025 with that revenue that can come from the megatrend. That includes the automotive.

I see. All right. Okay. Second one maybe for Chi Tong. Regarding the recent approval for us to buy back the remaining 30% of UFC Shaman, So when would that transaction be closed and would there be any, how should we envision regarding the P&L implications on the company?

Yeah, USC or the UMC chairman is already making profits. And as you can tell from our financial report, there's a minority interest, a positive profit. Actually, that's for the 30%-ish outside shareholder of USC. Once we complete 100%, then we will be able to save per se for this minority interest. And our goal, the mandate is to allow UMC to complete the transaction. We see a window of three years. But we certainly intend to do so in a faster expedite manner.

Okay. So that means within three years, but we haven't decided exact timing, right?

Yeah, three years is the window of the timing, but we won't wait for three years.

Oh, I see, I see. But would that happen next year, realistically?

There's still some technical issues, and we won't be able to tell you the exact date yet, but our intention is to work hard on this execution of this bypass.

I see, got you. And once the transaction is completed, would there be a one-off P&L impact?

No, there won't be any one-off impact. We don't need to post this minority interest to the outside shareholders.

Anyway, a small number, right? I know the minority interest to the group. Okay. All right. Okay. Thank you, gentlemen.

Thank you.

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

Hi, gentlemen. Thanks for taking my question. It's still a very good result. I mean, the market challenging. So my first question is about your 14 nanometer. So Jason, maybe kind of a long-term question about how much of the 28 nanometer demand today or will start to transfer to 40 nanometer demand year coming three to five years. And I think I asked this before, whether UNC has any advantage for the 40 nanometer thin fat. That's my first question. Thank you.

So the question is about 14, right? Yeah, 14. Well, we... Currently, we are investing in growing our 28, 22 technologies, like you said, along with the capacity expansion, because we believe we expect the increase of market potential with increase in customer adoption. The four things that, from technology standpoint, we have entered for a few years ago, but on the capacity expansion plan, our current approach is still aligned to the existing 28 nanometer customer with their product transition. And so we'll probably gradually address that, but at this time, we still focus on the 28 and 22 expansion. Expansion, yeah.

Got it, yeah. So because it is also linked to that geopolitical risk issue, right, because now China's fabrication for 14 nanometer thin-fats is restricted, right? So as a company CEO, do you think you should accelerate a little bit your 14 nanometer in preparation for potential demand from China customers if they need a 14 nanometer thin-fat foundry service three to five years later?

Believe me, the 14 is on very top of the list. We do have, we do pay attention to the 14, and it's an important topic for us. We're not going to abandon the 14. So, but we are examining a few things. One is from the priority standpoint and the timing of that. The, right now, from the, you know, we founded by several boundaries. For instance, on these RIAs, driven policies, we want to make sure when we extend the opportunity for us to invest and where will we invest first. So at this point, we're putting the 28 ahead of the 14, but that doesn't change. So if it does come up to because the market dynamic changes, 14 becomes much more attractive than 28, yes, the parity will shift.

Okay, that makes sense. A couple of very quick questions. Do you see similar trends that TSN is saying that your customers' inventory are declining this quarter? Or do you think that inventory continues to go up at your customers?

Well, from the PC and the smartphone space, like we reported earlier, we see the digestion actually is slower than we expected from our previous estimated. So we don't see that pile up, but we see a very slow digestion. Because the inventory build-out can be controlled by new wafer stocks. But for the easiest inventory to be depleted, that requires a sell-through. So I think the challenge that we have seen is we is the end-market sell-through situation. And we just have to closely watch that. If the sell-through government... I think that the timing of that will probably accelerate. But that remains to be seen at this point. Because the overall microeconomic environment.

Okay. Thanks, Jason. A message geared to a financial question to Qidong. The first question is, is that your test has cut. May I know which nodes you're cutting the demand and, you know, anything related to your Singapore new flat projects?

No, mainly, as Jason just mentioned, there are two reasons. First of all, it's the P6 equipment delivery. The toll delivery lead time got prolonged. So it's a delay for our P6 tie-in and ramp-up profile, whether we are trying our commitment to our old LTE APC customers. And for the current cycle, of course, we are getting more nimble and cautious, and we reprioritize several projects, and that's part of the contribution to this $3 billion cut. I mean, $3.6 to $3 billion CAPEX revision. Okay.

Yeah, so may I know any specific notes that you kind of train the CAPEX as spending?

He says it's primarily 28 nanometers, so the rent profile got prolonged, so the impact will be mainly on 28 nanometers.

Okay, okay, that's fine. So do you know, may I also ask about some key assumption for gross margin? So for this year, you already provide the first quarter guidance, right? So I think, I believe you can comment on the full year base. So on the full year base, in terms of the gross margin impact, how much of that comes from the so-called the cost inflation and how much benefit coming from the NT dollars depreciation and also your kind of equipment depreciation trend. Thank you.

Every 1% of NT dollar depreciation may contribute about 0.4% of absolute gross margin point. And for Q4, we are guiding for low 40% gross margins. That will be mainly coming from a lower, 10% lower gross margins. And in terms of depreciation for 2023, we are seeing about 5%, 6% increase for overall depreciation.

Excuse me, you mean 2022 or 2023? 2023, about 5% increase for absolute depreciation.

Okay. For 2022, we are talking about a minus. a decline of 5% to 6% of depreciation expenses.

I see. I see. Yeah, so actually, that's kind of a basis for next year assumption. So for next year, do you see any kind of inflated cost besides the kind of depreciation? Because your industry peer seems to suggest that there are kind of inflated costs. made of chemicals, wedges. I'm wondering how that is going to impact your next year gross margin. Thank you.

If we set aside the utilities, which we pay higher summer utility price, which is about to over in October, the general inflation cost increase, we are probably talking about low single digit, maybe 1% or 2%. But It varies, depends on which component you are talking about. And we are working with our customer closely, try to cope with this issue.

Okay. So to summarize, next year, in terms of cost of goods, so I guess still some inflation in terms of variable cost, and you're... Equipment depreciation will go up by 5% to 6%. But on the currency side, on the year-on-year basis, I guess probably at least 6% $80 depreciated, depreciation year-on-year. So that's going to offset those cost increases. Is that how you budget for next year cost of goods sold?

We don't do it that way. We do it from a button-up way. But I think that's your model build-up. So I think most of the parameters I already shared with you.

Okay. Okay. Thank you. Thanks, gentlemen.

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

Hi. I had a quick follow-up question. So given that we still have Singapore FAB coming up, how should we think about CapEx direction next year? I know it's too early to give absolute guidance, but are we still thinking in the same range of $3 billion kind of spending, or do we see that the spending could come down next year given a bit of a downturn?

First of all, you're right. It is too early to disclose the 2023 spending. CapEx number. The four-year 2023 CapEx, the cash-based CapEx budget will be updated to you in January, the month of January. But it's very subject to the market outlooks. We're closely monitoring it, and then we'll report that next time.

Male Speaker 1 Okay, but any directional comments? Is it going to be flat, down, up?

It's really difficult right now, but we are keeping our commitment to our LTA customers for P6 as well as P3 in Singapore. So the ballpark schedule won't change, but equipment tool delay is something out of our control, and we are working closely with our customers in order to keep our commitment.

Got it. And one small follow-up on 14 nanometer FinFET. Do any of your LTA commitments for the future fabs include 14 nanometer capacity as well that you need to ramp up or there is nothing that covers 14 nanometer in your future LTAs?

The current LTA covers no technology, no migration options. But with the with the current visibility that migration is from 28 to 22. But the option is embedded with the LTA program, yes.

Okay. Thank you very much. Thanks.

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

Okay, yeah, thank you. Just a couple of clarifications. One for the fourth quarter, following up on Charlie's question, the low 40s, if you net the utilization decline with the currency benefit, it seems to get to only a couple points, like about a two-point sequential. So are there other swing factors, like the utilization falling further into first quarter, or... or is it just a bit of conservatism baked in? I'm just trying to understand the moving parts.

Yeah, I think low 40s are still with a range, and we are 47% in the third quarter fueled by the magnitude of anti-dollar depreciation. So it also depends on how you assume the currency movement in Q4 versus U.S. dollars. But you mentioned the Q1 loading is certainly another factor as well.

It's a factor. Okay. Hey, which currency are you assuming right now for the one?

We don't assume. We are taking the numbers out of Bloomberg.

Okay, I understand. Okay. Hey, and then a follow-up on this payout with the high earnings this year but heading into slowdowns. What's the way to think about it? You had $3 last year, but earnings went up a lot, or $3 paid this year. How should we think about the payout level or payout ratio off of this year's earnings?

We certainly commit to pay at least 50% of our earnings in cash to our shareholders. We also want to have a steady and hopefully high level of dividend. I think that's where the basic assumptions for cash dividend payout.

Okay. And the final question I have is just two parts. I just wanted to clarify the pushout was tool-related. We only have about 12,000 end of year. Is that pushout any bit demand-related or it's completely a tool pushout? And then the second part for Singapore, where you're keeping that on track, factoring the geopolitical, are you seeing rising customer interest for the non-Taiwan side or to actually move ahead with Singapore a bit more aggressively?

Well, for the first question, the larger portion of that push-out is because the equipment vendor delayed. And there are some associated with the demand reason, but larger portion is because the 2D late. The Singapore's interest, yes, they are interested in Singapore from various customers. You know, they are sort of benefit to it in addition to the geographic, you know, the regional risk because they are other factors in their So, I won't say that's 100 percent because of the geographical reason, geopolitical reason, but we definitely see some of the interest arise, yes.

Male Speaker 1 Okay. And that capacity is 2025, is when we'd see that capacity?

Male Speaker 2 Yeah, late 2024, but mostly because of the two delays now, it's about early 2025. Male Speaker 1 Okay, great.

Okay, thanks a lot. That's my question. Thank you.

Thank you. 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, everyone, 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 IR at usc.com. Have a good day.

Thank you. And ladies and gentlemen, that concludes our conference for third 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 Events section. You may now disconnect. Goodbye.