United Microelectronics Corporation (NEW)

Welcome everyone to UMC's 2022 Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question and answer session. Please follow the instructions given at that time if you would like to ask a question. For your information, this conference call is now being broadcast live over the Internet. Webcast replay will be available within an hour after the conference is finished. Please visit our website www.umc.com under the Investor Relations Investor Events session. I would like to introduce Mr. Michael Lin, Head of Investor Relations at UMC. Mr. Lin, you may begin.

Thank you and welcome to UMC Conference Call for the fourth quarter of 2022. I am 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 fourth quarter financial result, followed by our President's key message to address UMC's focus on first quarter of 2023 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 Investors' Financials 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 filings with the SEC and the ROC security authorities. During this conference, you may view our financial presentation materials, which is being broadcast live through the internet. Now, I would like to introduce UMC's CFO, Mr. Chitundu, to discuss UMC's fourth quarter 2022 financial result.

Thank you, and Happy New Year to everyone. Thank you for joining our call. I would like to go through the 4Q22 Investor Conference presentation material, which can be downloaded or viewed. in real time from our website. Starting on page four, the fourth quarter of 2022, consolidated revenue was $67.84 billion, with gross margin rate at 42.9%. Net income attributable to the stockholder of the parent was $19 billion, and earnings per ordinary shares were $1.54 NT dollars. Utilization rate came down to 90% in 4Q from 100% in the previous quarter. And on page 5, this is the quarterly result. Revenue declined by 10% sequentially to $67.8 billion. Gross margin rate was 42.9% or 29.1 billion NT. We kept the operating expenses at nearly the same level quarter over quarter, which is around 6.79 billion. And total operating income declined by roughly 20% to 23.6 billion. And net income attributable to the shareholder of the parent is $19 billion, or 1.54 EPS, in the full Q of 22. Our next page is the full year result of 2022. Total revenue grew by 31% to $278.7 billion. And operating income it's more than doubled to $104 billion. And the growth rate was 101% year over year. And EPS grew to 7.09 in 2022 compared to 4.57 in the previous years. So on page seven, our cash on hand, currently stands at $173.8 billion, $20. With our total equity now is over $10 billion U.S. dollar mark to $335.4 billion, $20. And ASB on page eight. in Q4 continued to edge up slightly in the fourth quarter of 2022. On page nine, for revenue breakdown, the change was the most significant in the North American market, which represent about 30% of our total revenue compared to 23% in the previous quarter. Asia probably showed the biggest decline, from 62% of revenue to 54%. On page 10, that's the four-year breakdown, and the change is less significant compared to the quarterly result. Asia represents 61% of the total pie, and U.S., compare, represent about 24 percent in the full year of 2022. On page 11, the quarterly breakdown of IDM versus FABLIS stand at 19 percent IDM and 81 percent FABLIS. For full year on the next page, it remain almost unchanged, with IDM represent about 15 percent for the full year revenue. For page 13, communication computer and consumer didn't change much on quarterly sequential comparison, with communication still remained the biggest of 45% of the total revenue. Other segments, which include auto, has continued to grow at a faster pace compared to the rest of the segment. It's now 18% of our total revenue. For the full year, communication remained around 45% when consumer is about 26%. On page 15, the quarterly technologies breakdown. Now we can see 22, 28 nanometer represent 28% of the biggest pie of the chart for the Q4 revenue. 40 nanometer is about 17%. The legacy 8-inch or 0.25 and above declined the most in the 4Q22. For the full year, 22, 28 nanometer represent about 24%, also the biggest pie of the chart for the full year of 2022. On page 17, the quarterly capacity breakdown, we have some annual maintenance in Taiwan and also China for Q1 23. So there's some minor decline in available capacity, which will gradually back to normal in Q2 of 2023. And there will be also some new capacity come on stream in the third quarter for our P5 and P6 in Thailand. So, next page is our current full-year cash-based budget for CAPEX. Right now it's about $3 billion, with 90 percent of the $3 billion contribute to around all the 12-inch related expansion. So, the above is the summary of UMC's results for Q4 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, Chido. Good evening, everyone. Here, I would like to share UMC's fourth quarter and 2022 highlights. In the fourth quarter, due to a significant slowdown across most of our end markets and inventory correction in the semiconductor industry, our waste assurance fell 14.8% quarter-over-quarters, while overall FAB utilization rate dropped to 90%. Average selling price increased slightly during the quarter as a result of our ongoing product mix optimization efforts, moderating the decline in revenue. For the fourth four-year 2022, UMC's revenue hit the record high of NT$279 billion, while operating income exceeds NT 100 billion. Growth margin reached 45%, driven by a more favorable foreign exchange rate, expanding 22, 28 nanometer portfolio, and newly added capacity. We have taken advantage of the industry upturn over the past two years to enhance our differentiation in specialty technology offering, improve profitability, and deepen relationship with our key customers. Revenue from 2228 nanometer technology increased more than 56% year-over-year, driven by our industry-leading 28 nanometer process for OLED display drivers and image signal sensors processors. Our automotive segment also delivered impressive growth in 2022, increasing 82% year-over-year to account for approximately 9% of the total sales now. We expect this segment will continue to be a key growth catalyst in 2023 and beyond. Driven by the long-term trend of vehicle electrification and automation, UMC is well-positioned to serve the market with our comprehensive portfolio of auto-grade process technologies and facilities certified according to the rigorous quality standards. While we continue to build strong partnership with the world-class automotive leaders, Given the soft global economic outlook for 2023, we expect the current challenging environment to persist through the first quarter of the customer's days of inventory are still higher than normal, while order visibility remains low. To manage this period of weakness, the company is implementing strict cost control measures and deferring certain capital expenditures where possible. In the longer term, We remain positive that UMC's differentiated specialty technology leadership, geographically diversified capacity offering, and quality and operational excellence will enable the company to capture demand, fueled by continued digital transformation across industries, and be the boundary of choice for leading customers. Now let's move on to the first quarter 2023 guidance. Our wafer shipment will decline by a high 10% range. AST in U.S. dollars will remain flat. Please note that we expect a 3% to 4% adverse impact on foreign exchange on revenue. World's profit margin will be in the mid-30% range. Capacity utilization rate will be at approximately 70%. Our 2023 cash-based CapEx will be budgeted at a U.S. $3 billion. That concludes my comments. Thank you all for your attention. Now we are ready for questions.

Thank you. Ladies and gentlemen, we will now put forward questions. If you'd like to register for a question, please press star 1 on your telephone. Thank you. And our first question comes from Randy Abrams with Credit Suisse. Please go ahead, Randy. Thank you.

Okay, yes. Thank you. Good evening. My first question, if you could just discuss your view on the slope of this business cycle. With the high teens decline in first quarter, do you expect it to mark the low, or do you see or expect, given demand and inventory, further correction into second quarter? And then if you could give a view just on the end markets, do you see any areas getting closer to stabilization or inventory levels already getting down? And then from the stronger, like auto slash other, are you seeing any weakness start to come in?

Well, currently we are still in the midst of the inventory corrections. like I mentioned earlier. However, we did see some inventory improvement in some segments, such as the TDDI for high voltage devices in mobile space. And so we are working closely with our strategic customer to proactively address those inventory burdens in addition to the TDDI. And we expect those inventory situations will improve gradually and with high visibility second half 2023. And so we think that the inventory situation is improving, but probably not going to have, not going to become better until second half 2023. For the 2023 outlook, well, I mean, given the cyclical nature of the STEMI industry, you know, no one's immune from the end market downturns. While we were able to mitigate our loading in the second half of 2022 due to a downturn, thanks to the growth in our auto business, sustained our business momentum, and which I also touched it, you know, that surge about 82% year over year. For the first half of 2023, we do foresee a continue to soften demand in the smartphone PC consumer market. That will continue for the inventory digestion reason. And meanwhile, the inventory digestion will continue to be our first priority. Nevertheless, we expect the first half. If not, the Q1 will be the 12th.

Male Speaker 1 Okay. Yeah, so it sounds like first half is not Q1, so it's still too early to call for sure. but pretty close, it sounds like, based on what you see, if that's correct. And then I wanted to ask, your break-even utilization is much lower now. Like at 70%, you have a mid-30s gross margin still. So is that influencing, or if you could discuss your feel on pricing, given some cycles you might be close to loss-making, But how is your view on your baseline pricing and also just pressure coming from customers needing help out? If you could discuss with you how well it could continue to hold, and if you could discuss the latest on how the LTAs on the 28 new capacity are holding up.

Okay. First, given the continuous end-demand weakness in the PC, smartphone, and consumer segment, we are experiencing the prolonged inventory correction cycle. And we believe the pricing adjustment at this point will still produce very limited effect in demand creation under the circumstance. And for the UMC's pricing consideration, it's still based mainly upon the value proposition and supply chain relevance. We expect the ASP outlook to remain firm in 2023. While the ASP is not the only consideration in customer management, the yield improvement, technology offering, capacity support are also key factors in strengthening our customers' competitiveness, which we will continue supporting that. Meanwhile, we will continue working with our customers to make sure they remain competitive and relevant in their respective markets. So for the outlook of the ASP today, we will still remain firm in 2023. Now, for the 28 nanometers ASB situation, we continue with our cost reduction and productivity improvement efforts to remain competitive in light of the higher inflationary cost throughout the entire supply chain. And we will cooperate with our customers to navigate through those headwinds in conjunction with our internal cost reduction effort, but we still feel we have a pretty solid position on 20A, and if there is any cost related, and we will closely work in with our customer on that.

Okay.

And I think there's also a question about LTA.

Yes, that's right. Yeah, how the, like if you've had customers need to change negotiation, and how well most of them, I think, are tied to the new capacity, how those are holding in.

Well, I mean, while the LTA is becoming more of a common practice in our industry, I mean, for us in the semiconductor industry, because the industry is starting to recognize that semiconductor is essential to plan the future of mutual growth. Strategic customers are willing to sign LTA to secure additional capacity. Our strong customer engagement and product pipeline have also demonstrated to our, you know, to us and as well as the customer's key objectives. So, right now, we think the ASB situation is less relevant in those LTA situations. And even with some of the loading consideration, maybe some of the penalty occurred, but the penalty is not our key objective for those LTA. And at this point, it's still insignificant as a percentage already.

And if I just fit one last one on your tax rate, maybe Chi-Tung can address. I think fourth quarter looks like it went up some. So if there was a factor. And then just netting out credits going away, but also the new program, if you could give a view on that. the tax into the coming year?

Yeah, Q4 was like this one-off of our overseas subsidiaries' annual remittance policy about their profit. We took provision for this potential remittance of the overseas profit. It was mostly On paper, it's not really happening yet, but it's just a one-time tax provision at the year end.

Okay, and then maybe the forward look, is 15 still the right number?

Yeah, 15% is still the right number, yes.

Okay, good. Okay, thanks a lot.

Thank you. Our next question comes from Gokul Hariharan with JP Morgan. Please go ahead, Gokul. Thank you.

Hi, thanks. Could you talk a little bit about what you're expecting now for 2023? Any early reads in terms of the outlook? Your bigger competitor talked about foundry industry being down 3% or so this year. Just wanted to hear UMC's view. And secondly, in terms of Q1, could you talk a little bit about 28 nanometer utilizations? I think overall utilizations you did mention it'll go down to 70%. Could we talk a little bit about how 28 nanometer is holding up? Is it holding up better than the overall company utilization?

Sure. For the 2023 outlooks, The 2023 will be a dumb year for both semi and the foundry industry due to the deterioration of the global economics, ongoing inventory correction, and weakened consumer demand. So we project the semi industry is going to focus to decline by the low single digit, and while the foundry industry to shrink by me single digit. The question about the loading on the 28-millimeter in Q1. In Q1, in general, the 8-inch loading will be lighter than 12-inch . And we expect 8-inch will operate below the corporate average, while the 12-inch will be higher than the corporate average. For the 28-millimeter, It should be slightly better than the 12-inch. Even slightly better than the 12-inch, yeah.

Okay, understood. My second question is on the CapEx. The $3 billion number, given that we are running it into a downturn, could you talk a little bit about what is the primary? I think it's mostly 28 nanometer and some Singapore-related expansion, but could you give us a little bit more color on what that 3 billion capex comprises of this year and any qualitative thoughts on do you think about any adjustment in the capex given we are entering the year with utilizations at a lower level in the inventory collection?

Sure. The majority of the 2023 capex will be budgeted for new capacity expansions for the 12A-P6, and 12I, the P3 facilities, which are endorsed by the customers, will be part of that, too. A portion of the 20A, I mean, a portion of the 2023 CAPEX budget are also geared toward to a product mix upgrade, and the Remaining the budget will be reserved for the clean room, maintenance, and general budget. So, basically, it's the P6 and the P3 facility as the major portion of that. As far as the CapEx adjustment, we have a plan to dynamically adjust the CapEx plan, depends on the macro conditions and market demand. And we do have a flexibility to adjust our cap expansion and the general maintenance budget if it comes to a need.

Got it. Just wanted to follow up on the first half bottoming. As things stand right now, do you feel the inventory in the supply chain will reach a normal or a low enough level by end of Q1? Or do you think that there are several areas where it still needs another quarter of inventory clearance to kind of get over that?

I think, like I said earlier, some areas are improved and some are still high. I think by the end of the Q1, I think it will be better than the Q4. And I think by Q2, I think we expect inventory will improve significantly to more than normal level. So we're expecting the inventory will gradually improve. And the second half of 2023, we have a much, we have certain confidence that will come back.

Is that confidence driven by any specific projects that you have or you are basically thinking about overall inventory restocking in the industry happening in second half?

Actually, multiple. One is the DOI check with the customer and the other is the engagement of projects and also the in-market outlooks, the alignment that we have with the customers. So there are multiple factors. However, we are... cautiously optimistic about second half, and we just have to continue monitoring the progress of the DOI situation.

Understood. Thank you very much. I'll go back to the queue. Thank you.

Thank you.

Thank you. Our next question comes from Charlie Chan with Morgan Stanley. Please go ahead, Charlie. Thank you.

Hey, Jason, Chi-Dong, and Michael. First of all, congratulations for a very strong first quarter result and happy Chinese New Year ahead. So Jason, my first question is really about your industry assumption. I think you shared with us and also investors about your methodology to forecast the industry revenue. So when I think about the foundry industry, I feel like the revenue should be much lower than semi-consumers because there is at least one month or even more than one month chip inventory at the customer side. So that means the foundry revenue should be at least 5% or even 10% lower than your customers in 2023 because the customers need to deploy all those inventory before they reorder. So can you explain why your industry assumption is that semi-down, high single-digit, but foundry will be down only be single-digit? Can you start with that question? Thank you.

Well, I mean, it is, like you said, we do have a methodology that calculating that. It is maybe a very complicated answer. The SEMI is better right now. It's low single-digit, but the Foundry is about mid-single-digit. But even within the Foundry, there are different technology nodes. And some nodes are better than the others. And then, for instance, even we report that the Foundry industry was shrinked by mean single digits, but UMC addressable may be a little bit different. And then, if you look at the end market exposure, and every foundry will probably be different. So we do look at the multi-layers of the data, and at this point, we think the foundry will be about mean single digit decline, yeah. Same thing, low single digit decline.

Oh, I'm sorry about that. Yeah, so just a quick follow-up, right? First of all, would the UNC address low market just better or worse than the industry average? And second question is that do you consider some major foundries a whipper price hike in your foundry industry assumption? Thank you.

Oh, I mean, they are some, but not to the full extent. But going back to the question about the UMC addressable, no. Currently, we anticipate the decline will be in the low-ting percentage range.

Oh, low-ting. Yes. Okay. Got it. Okay. And, Nick, you just said that 1Q could be bottom cycle. Do you mean that you're second quarter fund utilization will slide to up? Is that a right interpretation?

I mean, we'll give you the guidance. Jason was saying first half will be the top, if not Q1. So sometime in first quarter, we hope to be the top. Hopefully, there's a chance to be Q1.

Oh, I see. I see. Now I get it. Same thing as you don't. And let me switch gears to the pricing, right? I appreciate the company's strategy that, you know, price cut doesn't translate into better demand, etc., right? But some of your competitors are cutting price. Would you, you know, foresee some market share lows in some mature notes? If you want to to be firm on your pricing. Thank you.

Male Speaker 1 I mean, our objective is clear. We will support our customers and to make sure they remain competitive and also with their respective market shares. Now, for UMC to consider the ASC business loading trade-off, the way we see it is there is a considerable progress was made in pricing reposition for UNC. And the cost reduction, the productivity improvement in the past two years actually help us with that. We intend to preserve the win-win structural probability between the foundry and customers. And under the recent market condition in our product portfolio, we believe the tradeoff between the loading and the price will end up with limited benefit in demand creation because the weakness of the PC and the smartphone and consumer sales group. However, we will continue to work with our customers to make sure they secure their market share in their respective market.

Okay, so could you be nimble on pricing if customers come back to say, hey, is a you know, demand if you cut price. So, yeah, I'm just wondering how firm are you on the pricing?

I mean, we've been in terms of our guidance right now for 2023. And we also, you know, in the process, I mean, it's our intent to preserve that structural probability and, you know, protecting the pricing position. in terms of ASV management, and we'll continue to manage that with our customer coaching.

Okay, thanks. And my last question is probably for Jidong. So based on both discussion, assumptions, et cetera, can you give us a kind of, you know, like full-year gross margin guidance, and do you have like a minimal gross margin targets based on your depreciation assumption, pricing assumption, et cetera. Thank you.

Yeah, we don't have, we don't give out the four-year gross margin outlook, but we do have the depreciation assumption for 2023, which right now after the cut in CapEx will be a low single-digit decline compared to year 2022. Mm-hmm. Mm-hmm.

So does that mean, okay, okay. Does that mean that first half is also the bottom of the gross margin?

Overall, as Jason just mentioned, from Vincent's standpoint of view, we hope the 12th will be first half. Sometime in first half of this year is now the first quarter. So margin should reflect to the business momentum, but maybe one or two quarter differences. There could be some time left on how you reflect the cost versus the revenue improvement. But overall, we certainly hope the trough will be sunshine in first half.

I see, I see. So Jason, I come up with one question. I think that some investors are concerned about one of your IDM customers because they also have some challenges about their own FAB utilization, right? So they may receive back some 40 nanometer or 70 nanometer or 22 nanometer project back to their own FAB in 2024. How do you address that concern? I think that the end product should be like a smartphone ISP or AMOLED driver IC. Thank you.

Well, I mean, there's always a cyclical nature of this industry, right? So we're no stranger to that. So we have to just deal with all business circumstances. The way we see it is we believe the product mix optimization is a continued pursuit. for UMC to enhance the long-term fundamentals. And we'll continue our business development, follow the megatrend, not just limited to one customer, but diversify the market focus as well as the customer base. And continue to strengthen our specialty technology offering, quality operations, so that we can continue to be the best foundry for those products to be produced in UMC. And now we do believe and we have a strong engagement product pipeline to support that long-term fundamentals. So any short-term volatility, we will continue to work with the customer to make sure that we both remain very competitive and relevant to this market.

But you should have to make a decision about your 17 nanometer capacity, right? So do you have any... visibility right now for 17 nanometer capacity expansion?

Yeah, I mean, that's more of a question about the technology migration, right? So, in our view, the technology migration will continue. And once we have aligned with our customer, then we also will put adequate capacity to support that migration. And at this point, you know, I mean, I'm not commenting about the customer specific or product detail, but If the question is about a 17 nanometer for the driver and the ISP, we expect the next mainstream note for that is after 28 nanometer will be 22 nanometer. The 22 nanometer is a mature technology and with the manufacturing facilities already proven. And we believe the 22 and 28 is a long-lasting note. The 17 nanometer solution is will be a sub-statement of the total OLED driver and ISP solution. And before 2024, the volume production for 70 nanometers will be very minimal. And right now, we've seen that 28 nanometers is still the most competitive offering in the marketplace. And when considering the overall factors, performance, cost, capacity availability, and the system acceptance, So our company, the 22 nanometer solution, have already been adopted by the leading partners with their design. And so therefore, our competence with the 22 nanometer will continue to have a business sustainability well into the next wave. And from a technology migration point of view, we are also working with our customer and partners to find a future roadmap and we will not be absent from that market anyway.

I see. Okay. Thanks for your patience and all the answers, gentlemen. Thank you.

And Happy New Year to you, too.

Oh, thank you. Thanks, Jason. See you soon.

Thank you. And our next question comes from Sihong with China Renaissance. Please go ahead, Sihong. Thank you.

Oh, hi. Gentlemen, I have two questions on 28.9.0. Given the fact that we are still building up 28nm capacity in multiple locations in Taiwan, China, and maybe later on in Singapore, right, so will we be offering a comprehensive portfolio of technologies in each of the FAB locations, or will we be more selective in offering the technology platforms?

Well, I mean, the product mix on different sites is, you know, is very dynamic. We're aligning to the outlooks, and the idea is we want to create as much as the flexibility, but without the sacrifice, the scale. So, you know, many of that is ongoing discussion. So I don't have a specific or fixed mix for you as a reference, but the focus The message is, I mean, the update is that, you know, we have an option to dynamically adjust that subject to the outlook and alignment with the customer.

Yeah, more importantly, if I may, we actually offer more choices for customers in terms of the production sites. So if customer place 22, 28 nanometers orders to UMC, they have an option. to be produced either in Taiwan, China, Singapore. So we are one of the very few factories that can offer multiple size choices amidst the current geopolitical tensions.

Yes, sounds great. And the second one, on the 28nano, how easy are we upgrading the capacity to the next generation, like the 14nano FinFET?

I mean, there's an option to do so, and nothing's easy. And, you know, the next major way, it will probably be upgrading from migrating the 28 nanometer to a 22 nanometer. And after that, there will be a 14. So there will probably be a couple of layers before we, another step before we get into the think back. But they are a good percentage of the two that actually can convert between those nodes. So I think we are in a good position to cover all the way to 14, even the two mix.

I see. All right. Okay. Thank you very much. Happy New Year.

Happy New Year to you, too.

Thank you. And our next question comes from Sunny Lin with UBS. Please go ahead, Sunny. Thank you.

Thank you for taking my question. So my first question is on geopolitical involvement. So I wonder if in recent quarters have you started to see some new order opportunities from clients evaluating the supply chain diversification? And if yes, what kind of products are we seeing more imminent upside? That's my first question. Thank you.

Well, I mean, we do see trends like that, and we believe we are in position to be benefited from that trend. Even the current inventory correction, we expect the progress in engagement and payback will be more obvious perhaps beyond 2023. You know, we will whether or not comment on specific the product or customer on this, but we are aware of this geopolitical supply chain concern for many of the customer. It's a potential implication from our global customers. And some of them are already in discussion with us to fulfill their sorting plan. And probably not a good idea at this point to giving anything specific.

No problem. Just to quickly follow up, I understand some of the engagements are still in early stage, but anyway... we could try to quantify the upside for coming years?

Quantified, it's still too early right now because given the current inventory correction, I think many of this is under the discussion in terms of volume and the product and also the process. And so I think it's still kind of early again. I think many of this will probably take a year to see them realize it. So I think we can probably, once we have a clear visibility, we will be able to update you on that.

Got it. Thank you. My second question is real quick on capacity increase. So based on your current KPEX target, what kind of capacity increase you target to increase for this year? and specifically on P6 for 28 nanometers. And for your Singapore expansion for 28, are you still targeting for late 2024? Thank you.

For 2023, capacity will increase by 4.9% year-over-year, and mainly for the 12A P6 program. The 12A P6 framework will start out by mid-2023, and it will reach about 12K a month by Q4 23. The P3, the Singapore P3 rent is targeted to the first half of 2025. Got it.

Thank you so much.

Thank you.

Thank you. And our next question comes from Laura Chen with Citigroup. Please go ahead, Laura. Thank you.

Hello. Hi. Thank you. Good afternoon and Happy New Year. Thank you for taking my question. My question is also on the 20 nanometer. While we see the demand is still quite resilient, even we see a lot of inventory correction, but we know that many of them still are PC or smartphone related. So just wondering, do you think that resilience will continue even during the first half of inventory correction at the client side? If that case, how would that impact the overall gross margin? As we know that 28 nanometer probably also one of the key catalysts to drive a better pricing and also better product mix. That's my first question. Thank you.

Sure. And first, Happy New Year to you, too. And for the 28 nanometer loading, I mean, and... We remain confident with our 28 and 22 nanometer systems, given that it's a long-lasting node driven by many applications, such as ISP, Wi-Fi 6, OLED driver. So we expect this 28, 22 nanometer will be partially impacted by the inventory correction in communication statements. During the first half of 2023, and we do anticipate a good rebound in our 20A and 22 nanometer business starting from second half of 2023. So we, given the current visibility, we have some confidence that it will come back in the second half of 2023. For the ASP, we're going to do our part. I mean, we will continue to do our cost reduction, productivity improvements, effort to make sure that our customer can remain competitive. And we will cooperate with our customers in the case of the headwind, the market headwind, the cost headwind, and in conjunction with our cost effort, and we want to make sure that they will stay competitive and with respect to their market share position as well.

Okay, thank you. That's very clear. And also on the IDM business, we know that through the last year, the growth are quite solid and quite substantial. I'm just wondering on what note we see the most growth and also what kind of the application. And given, again, the cyclical downturn across the board, do you think that the IDM outsourcing will continue, particularly in some like MC or automotive-related industries?

Well, I mean, yes. I mean, particularly for the 12-inch and the, you know, across all different technology, you know, from 28, 22, to the extent of the 55 and the 40 automotive space, we do see there is a opportunity for us to engage. It's also aligned to our megatrend and that we have been talking about it. We believe our addressable market will continue to grow, okay, and given our upcoming capacity planning, the 28 and 22 will actually continue enhancing our position in that context. And we are excited to many of the new opportunity that brings to us to increase our relevance on those applications. You know, we touched that already, the ISP, the Wi-Fi, OLED, as well as the automotive. And we, you know, because, you know, not just the idea, which is what we focus to align with the industry megatrends.

Okay, great. Because one of the IDM customers probably also sees some weakness in the automotive or the industrial. So I'm just wondering, since some of the IDM also ramping up their own 12-inch capacity, so whether that will slightly impact our short-term business? you know, like the megatrend in the longer term is still quite solid. So just wondering, will you also see that kind of MCU or automotive business to come down after maybe later in second half or later in first half into second half?

Not really. I mean, it's not... Well, I mean, given the alignment that we have with our customer and with closely working with them, the capacity growth, even within the IDN, is actually incorporated to our sourcing, you know, strategy with us. So we are part of their sourcing strategy. And so I do not – we do not expect, you know, the – ideas, you know, the in-house capacity expansion will become a threat to us. And I think giving our long-term, you know, giving our long-term alignment with the customer, and while the customer also recognizes the semiconductor supply chain is essential now, and I think they've been sharing the data with us in a much better way, and it's more transparent, you know, So, no, I mean, at this point, we don't anticipate any impact on that.

Okay, great. Really appreciate it. Thank you. Yeah, and have a nice Chinese New Year ahead. Thank you.

You too. Thank you.

Thank you. And have a nice Chinese New Year ahead. Thank you.

Thank you. Our next question comes from Bruce Lu with Goldman Sachs.

Please go ahead.

Thank you.

Hello. Hello. Come on. Hello. This is Bruce. Can you hear me?

Yes. Hi, Bruce.

Okay. Happy New Year. Happy New Year to you. I think I still need to go back to the pricing. I mean, I'm surprised that to talk about a four-year pricing will be firm. I want to know the, you know, basic assumption for this pricing. This is assuming, like, healthy recovery in the second half. Does that take into consideration that your new FAB will be LTA protected, will be, like, you know, price premium versus market price? Or you're talking about, like, you know, life-to-life basis, the pricing remain firm for the full year?

Well, I mean, the... The pricing has a mix, right? I mean, the way I have to look at it is there's a mix of pricing, and our ASP basically reflects the product mix as well as the pricing adjustment, okay? And so for the blended ASP guidance that we're taking into account, there's a short-term variation of a 12-inch product mix and also the adjustment and also the new P6 ramp. So there are multiple factors that we have blended together. So what we provided to you is more of a blended ASP guidance. So you're right. So it's not like to like, yes.

Okay, so what about the like-to-like based pricing for the, well, let's say for the second half of this year? If you take all those figures.

Yeah, we want to comment on that. This kind of information, first of all, is very difficult to predict. Secondly, we can only give you a blended ASP guidance, as we always have. So the like-to-like overall conceptually, we can talk about it on a quarterly basis.

I see. I understand that. I understand that. So the second thing, I have a quick question for the IMD expenses for the whole year. You know, your competitor was talking about a big jump in terms of IMD for 2003. What about operating expenses for UMC for the whole year?

Yeah, we intend to somehow keep the absolute numbers. in terms of operating expenses. Of course, the employee-related compensation will be affected by the four-year profit-sharing program. And other than that, such as R&D and some other projects, the expenses will be somewhat flattish. On top of that, because of the short-term volatility, we are implementing a pretty stringent cost control for other areas, but not on the R&D program.

Okay. Lastly is that, you know, you have a lot of FAB in different regions. Do you consider to, like, price in the different, you know, with the different pricing, with different geographical location? You know, TSMC was talking about, like, you know, flexibility in terms of different, multiple location has a value, which means they want to sell those kind of ads. Do you consider to do that kind of pricing strategy as well?

Well, I mean, like you say earlier, the P6 and P3, the 12A and the 12I, you know, definitely have a different pricing scheme. And Because the production ramp for the P6 and P3 will indeed incur some higher depreciation costs for us. So for us, the new field's capacity is under the LTA base and with the building the wafer price. Even though our customers do recognize our value, as well as the belief our total solution is competitive for both of us to capture the market growth, And they agreed to that. And those FAP investments are also based on such alignment and so to drive our CAPEX and ROI decision. And so, yes, from those new fuel capacity, there are different pricing schemes. But not for the rest of them.

So only for the newly added capacity other than Taiwan? with a different pricing strategy. Okay, I understand.

Even in Taiwan, because the P6 is in Tainan.

Yeah, yeah, yeah. Okay, that's all for me. Thank you.

Thank you, Bruce.

Thank you. And our last question today comes from Goko Hariharan of J.P. Morgan. Please go ahead, Goko. Thank you.

Yeah, thanks for taking my follow-up question. First of all, Could you talk a little bit about timeline for your 17 nanometer FinFET and what kind of demand you're getting from customers? Is this happening in the next couple of years itself or is it something that will happen beyond the next couple of years you focus on 22 nanometer migration? And lastly, also wanted to check whether the 17 nanometer is something that you have committed to customers as part of some of your LTA arrangements, whether it is for FAB 12 AP6 or for the Singapore new FAB that is coming up?

I mean, first of all, it's our understanding that before 2024, the volume production for 17 nanometer will be very minimum, if any, because the 17 nanometer production is still under the export territory stage. And the current discussion that we have is many social is the tradeoff between the power consumption, transistor performance, cost, and the capacity plant. So it's still in a very early stage even to predict, you know, when it will start production.

Okay. And is it covered in any of your LTAs or that will be separate agreements that you sign even when you decide to go ahead with it?

No, it's not covered under the current RTA, no.

Okay, understood. Just one quick question, Jason, on your overall view on 28 nanometer industry demand, because we are now hearing TSMC also building a lot of 28 nanometer capacity in Japan, Nanjing, as well as potentially considering Europe. You guys are considering Taiwan as well as Singapore. There's a lot of announcements from some of your competitors as well. When we look at all this together, it looks like 20 nanometer capacity will be 50 to 60% higher than any of the prior nodes in terms of install capacity. Do you agree with that? And do you think that the demand is that big that we could kind of fulfill all this capacity, especially as we are also heading into a bit of a downturn?

Well, I mean, we talked about Don't look at this from the physicality point of view. We look at it from a long-term standpoint. We remain very confident in the 20 and 22. And, you know, I can't really comment. I won't be able to comment on our competitors' situation, but we are confident with our own business, mainly from our highly differentiated and customized technology solution. And together with what Chido mentioned earlier, we have a geographical diversified capacity offering. And, you know, with the current customer alignment and mutually committed to some of the new capacity built, and we've seen the 28 and 22 is a sweet spot for many of our customers and their application, and which we believe those demands continue to grow. With the strong... product pipeline in 20A, this short-term market turbulence will not change our long-term view and the relevance on the 20A and 22, and based on the alignment we have with our customers.

Okay, that's very clear. Thank you, and happy Chinese New Year as well.

Yeah, same to you. Thank you.

Thank you. That concludes today's Q&A session. I will turn things over to UMC Head of Relations 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 at ir.umc.com. Have a good day. Thank you.

Thank you, ladies and gentlemen. That concludes our conference for Quarter 22. 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.