United Microelectronics Corporation (NEW)

Welcome, everyone, to UMC's 2023 first quarter earnings conference call. All lines have been placed on mute to prevent background noise. And after the presentation, there will be a question and answer session. Please follow the instructions given at the time if you would like to ask a question. And for your information, this conference call is now being broadcast live over the Internet. Webcast replay will be available within two hours after the conference is finished. And please visit our website, www.umc.com, under the Investor Relations, Investors, Events section. And now I would like to introduce Mr. Michael Lin, Head of Investor Relations at UMC. Mr. Lin, please begin.

Thank you and welcome to UMC's conference call for the first quarter of 2023. 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 first quarter financial result, followed by our President's key message to address UMC's focus and second quarter 2023 guidance. Once our President and CFO complete their remarks, there will be a Q&A session. UMC's quarterly financial reports are available at our website, www.umc.com. under the investor's 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 filings with the SEC and the ROC security authorities. During this conference, you may view our financial presentation material, which is being broadcast live through the Internet. Now, I would like to introduce UMC's CFO, Mr. Chi-Dong Liu, to discuss UMC's first quarter 2023 financial result.

Thank you, Michael. I would like to go through the first quarter of 2023 investor conference presentation material, which can be downloaded or viewed in real time from our website. Starting on page four, the first quarter of 2023, consolidated revenue was $54.2 billion, with gross margin at 35.5%. The net income attributed to the stockholder of the parent was $16.2 billion NTD, and earnings per ordinary shares were $1.31 NT. Wafer shipments in this quarter come at 1,826,000 AH equivalent wafers, which was a decline of 17.5% quarter over quarter, which also fall in the better end of our previous guidance of 17 to 19% decline for the first quarter. Utilization rate in first quarter is as we guided, around 70%. For page 5, the sequential comparison, revenue declined 20.1% to $54.2 billion. Other than the 17.5% wafer shipment decline, there's also a negative impact of 3% plus impact from the forex. due to NT dollar appreciation. Gross margin rate was 35.5%, which is a 34% decline to 19.2 billion NT. Operating expenses was lower than the level of Q4 last year at 5.78 billion. This is typical First quarter seasonal factor, so we do expect this number to increase in the second quarter of 2023. Non-operating income total reached $4.64 billion, which is quite a significant improvement from the fourth quarter of last year, mainly due to the recovery in the stock market which is we mark to market for our holdings in those portfolios. And net income is $15.38 billion, and net income attributable to the shareholders of the parent is $16.1, with a net income margin of 29.9 percent. EPS is 1.31 for the first quarter of 2023. On a year-over-year comparison on page six, revenue declined 14.5%, and net income declined by 18.3%. So the first quarter of 2022 was 1.61 in EPS, and this quarter is mentioned 1.31 for the first quarter of 2023. So on page seven, cash remained nearly unchanged, around $171 billion NT. Due to the continuous CAPEX, we have seen our total asset increase to $549.6 billion NT. On page 8, our blended ASPE for each wafer equivalent has inched up in Q1-23. For page 9, Our geographic breakdown for revenue, Asia show bigger decline from 54 percent in the previous quarter to 50 percent in the first quarter. And every other region has increased sequentially. And for page 10, IDM has shown a stronger growth in the first quarter. Now the percentage of revenue reached 23 percent, when fabulous represents about 77 percent of our total revenue. In terms of segment breakdown on page 11, there's quite a meaningful growth in the other segment, which is mainly driven by the auto segment. When computer and consumer and also communication or showing some decline in percentage of revenue. On page 12, our revenue for 14 nanometer technology and below represent around 41% of our total revenue, although 28 and 22 nanometers still somewhat remain unchanged at around 26%. And 40 nanometers show about 2 percent decline, from 17 to 15 percent. On page 13, Q1 2023 was the lowest point in terms of available capacity, mainly due to the annual maintenance schedule for selected sites. Quarter two, you will go back to the normal, and also on top of that will be P6, our Thailand FAB expansion will start to kick in, and we can see the capacity increase for FAB 12A. So, overall, we will see a low single-digit increase in our available capacity from quarter to 2023. On page 14, our annual budget for CAPEX remain unchanged. around $3 billion, and it's going to be a little bit front-end loaded in the first half. And 90 percent will be related to 12-inch extension, and 10 percent is related to 8-inch capacity. So the above is the summary of UMC results for first quarter of 2023. 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, Jason Wong.

Jason Wong Thank you, Qidong. Good evening, everyone. Here, I would like to share UMC's first quarter results. In the first quarter of 2023, our business was impacted by sluggish wafer demand as the customer continued to digest elevated inventory levels. In line with the guidance previously provided, wafer shipment fell 17.5 percent quarter over quarter. and utilization rate dropped to 70%, while average selling prices stayed firm during the quarter. Feathering in a less favorable foreign exchange rate, revenue in the first quarter fell 20.1% quarter over quarter. Despite lower utilization, gross margin remained firm at 35.5%, reflecting improved structural probability and optimized product mix. Although demand weakened across major end markets, our automotive and industrial segments posed growth during the quarter. Automotive sales, in particular, accounted for 17% of overall first quarter revenue. While this partially reflects decline in other segments, we expect automotive to remain a significant revenue contributor and key growth driver for UMC going forward. but the IC content in-car continued to increase driven by electrification and autonomous driving. Entering the second quarter of 2023, we expect customers' inventory correction to linger, giving the softness in overall end-market demand. As a result, our wafer shipment will be flat this quarter. Meanwhile, the company continues to implement strict cost control measures to ensure our probability remains intact. through near-term security. Going forward, we believe our strategy of focusing on the development of a differentiated solution across numerous larger and specialty technology platforms, such as E-Hy-V, RFSOI, BCD, will help us secure future business and expand our presence in the IC industry. While positioning for the future business growth, UMC is also committed to maintain a high dividend payout ratio. In Q1, the Board of Directors proposed to distribute a cash dividend of approximately NT$3.60 per share, subject to shareholders' approval. Now let's move on to the second quarter 2023 guidance. Our wafer shipment will remain flat. ASP in U.S. dollar will remain flat. Gross profit margin will be in the mid-30% range. Capacity utilization rate will be in the low 70% range. Our 2023 cash-based CapEx will be budgeted at US $3 billion. That concludes my comments. Thank you all for your attention. Now we are ready for questions.

Thank you, President Wang. And ladies and gentlemen, we will now begin our question and answer session. If you have a question for any of today's speakers, please press star 1 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 Star 2 to cancel the question. Thank you. Now, please press Star 1 to ask the question. Thank you. And our first question is coming from Randy Abrams, Credit Suisse. Go ahead, please, Randy.

Randy Abrams, Credit Suisse, Okay, yes, thank you. I wanted to ask the first question. It looks like on your guidance, second quarter, is stabilizing. Could you actually give an initial view into second half, how you see where you cite the slow demand and it's keeping the inventory digestion a bit slower? Do you expect those factors to spill into second half? So if you could give an initial view on second half. And in that context, if you have an update to, I think last quarter you had foundry down mid-single digits and your own TAM down low teens. But if you have an update on that four-year view, factoring how you're seeing the second half at this stage.

Sure, Randy. Looking into the second half, while we foresee the firmness in 22 and 28 nanometer demand, we have not yet seen sign of a strong recovery in the end market yet. Okay. And given the weaker-than-anticipated end-market environment, we have seen the pace of inventory digestion moving slower than expected. So, we have not seen any sign of a strong recovery for the second half yet. For the outlook, the 2023, we estimate a semi-forecast will further decline from low single-digit to a mid-single-digit year-over-year. for the foundry, and we anticipate it will work than previous quarter estimate of a mean single-digit. Now we're changing to a decline of a high single-digit year-over-year. Okay.

And do you have your – do you have an estimate for – I think I have that your CAM last quarter was low teens. I don't know if you have an update on – because I think that excludes the advanced products that you don't address.

Right. I mean, given the UMC's end market witness, we still hope to minimize the UMC exposure to be in line with our addressable note while preserving structural probability. With the worse outlook than we predicted from last quarter, we do think that number will actually probably enlarge a bit.

Okay. For the applications, the relative strength was the auto and probably alongside the IDM. Do you see that remaining strong area continuing into second half, or is it also, like how do you see the inventory build up after that strength, and how do you see the sustainability of shipments to that channel?

Well, first of all, like I said, we haven't seen any strong recovery, and 07 will remain flat. from Q2. For the automotive, the replenishment in automotive segment may have peaked in Q1 2023 after the strong growth in the past two quarters. Longer term, we expect automotive business will continue to grow on an annual basis.

Okay. Implying has peaked, is that implying the business has peaked? Because there is content growth, so the restocking replenishment peaked. But do you think that's also kind of a comment on that segment at least for the near term may have also peaked?

Yes, yes. Okay. If we look at the auto outlooks, while we anticipate automotive business will continue in a strong momentum and outpace the CAGR for the worldwide automotive semi-industry projections, And as a goal, we'll probably reach your meetings as a percentage of the revenue for this year. Okay. So we still think this is going to be a growth driver for us. But if you look at the near-term replenishment momentum, you probably peak in the Q1.

Okay. Yeah, because it sounds like it was 17%. So 15, I guess that implies a bit lower percent of sales. Yes. Okay, so the last area I wanted to ask, just the 28 nanometer, it looks like declined a bit more than corporate average in first quarter, so a little bit over the 20%. Could you discuss the view just on that node? Because I think in the remarks you mentioned, it seems like it'll be relatively tighter. So how do you see 28 relatively faring and If I could ask you just competitive landscape for, like you've done very well on the high voltage and the OLED drivers, how you see from like your Taiwan and China rivals competition there?

Let me see. There's a few different.

Two parts.

Yeah, sorry, two parts.

First of all, we don't think the 20-year decline rate is higher than corporate average. It's probably in line. So maybe we can provide you with a detailed calculation later on. But our outlook for 28 nanometer, actually, is one of the better segments. Maybe Jason will comment further on that.

Jason Wong- Yeah, for the 28 loading, well, first of all, like Qidong said, we probably can provide you more detail on that later. But on our view, the loading will gradually improve over the next few months and will soon exceed about 90 percent for the loading. And the 28 nanometers application includes the OLED driver, DTV, Wi-Fi 6 and 6E. And we actually foresee a furnace in 22 and 28 demands, which will be fulfilled with additional capacity come online as well. So we actually feel fairly confident about that. You also mentioned about the the competitive landscape as well, right?

Yeah, that was more on the OLED driver part, if your Taiwan and China rivals are making inroads there.

Well, I mean, for the 20A, in general, we actually remain very confident with our 20A and 22 business. You talk about the OLED particularly, and for our For our OA drivers, we believe we, you know, deliver much more superior power consumption performance and area advantage compared to any industry peers. And so our leading position of 22 and 28 technology will be reflected in our market share in that driver space. And this will actually continue.

Okay, great. No, thanks. Good to see that area holding up well. Okay, thanks a lot.

Sure.

Thank you. And next question is from Brett Simpson, Arute Research. Go ahead, please.

Yeah, thanks very much. I wanted to ask about your recent extended LTA with Infineon. I think you announced this back in March. It was 40 nanometer. It looks quite a sizable agreement. Can you maybe talk more about this agreement and when it maybe starts to ramp up and how should we think about the size of this deal? Thank you.

Well, I mean, we typically don't comment specific on customers, but they are part of our auto market focus, and we will continue working with a key automotive semi-supplier like Infineon, and through the JDP and capacity expansion. This recently announced a long-term agreement with the customer on the 49-meter non-volatile memory MCU is serving the auto market, and we actually have, we are actually very excited for such an engagement, and we're looking forward to the growth of that. The LTA specifically, LTA is actually a tool. It's also become more of a common practice in the slamming industry now. because the industry is starting to recognize this semiconductor supply is essential. So to plan and future mutual growth, the strategic customer are willing to do this long-term agreement with us to secure the capacity. So for this particular relationship, it covers such arrangement. Yeah.

Can you maybe just confirm how your LTA pipeline looks? I think you've talked about $18 billion previously. Can you give us an update on what that number looks like today?

Well, they're still in a similar range. They didn't have much changes. Most of our LTA agreements remain intact. We see a slight increase, but we also see some adjustments, so they still stay in a relatively same range.

Okay. And I just had a two-part question on China, if you don't mind. One, can you give us an update on the China JV? I think you've signaled your intent to buy out the remaining ownership. Have you got approval from this, from the Chinese government? Is that still on track? And then the second part of the question is, we saw the U.S. government introduce a new National Defense Act late last year, which... is likely to trigger U.S. and maybe also European fabless companies moving away from using Chinese foundries. Are you seeing any benefit from this, or are you anticipating any boost from migrations perhaps to use UMC? Thank you.

For the first question regarding UAC buyback, we have retained all the necessary approval already. And we are going through the previously agreed contract. So I think it's moving along smoothly. So we do expect to close the deal in a short range of time. So it should be happening this year.

For your second question about the current geopolitical dynamics, the First of all, we think all this dynamic is affecting the customer's supply chain resilience planning. All customers need to look into this and start evaluating their supply chain resilience. And UMC is definitely part of that consideration. And while we have a very diversified capacity, you know, between China, Taiwan, Singapore, and Japan, that does give us a much better option to work with our customer. And in that context, we do see actually two ways. One is we've seen some customer is moving product, you know, to other location outside of China. But at the same time, we also see some of the customer asking the gift, you know, to to take advantage of the China gap that creates. So we're giving our diversified basis now across Asia and with the comprehensive technology offering, net-net, our product mix will be balanced between all of that.

Okay. Thank you.

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

Yeah, thank you for taking my question. The first question is regarding to your ASP. Can you help me to understand that your first quarter, the 28 and 49 meters, the revenue contribution is lower, but your ASP is one notch up? And also, when you got it for second quarter, which is 80 flat-ish, But you do increase your, you know, 28 nanometer capacity in the second quarter, which supposedly the blended base ASP should go up. So can you help me to understand the ASP trend, especially when we have a lot of noise that, you know, someone's cutting the price or you try to offer a lot of, like, price discount to your customer, but you didn't show up on your results?

Well, I mean, like you said, the blended ASP is a result of the product mix. And so, you know, any mix change will probably affect the result of the blended ASP. And as of now, given our current projected product mix and the node mix, we believe our blended ASP will be firm quarter over quarter. It will probably be flat. As far as the pricing strategy, our pricing strategy is to closely work with our customers to uphold their competitiveness and relevance in their respective market space and secure their market share. Based on that strategy, our Q2 ASV outlook will remain firm. In our consideration in pricing, it's not just based on the pricing only. You also have to base on the value proposition, supply chain relevance, and so the EO technology offering, so on. So all that is part of the ASP consideration, the pricing consideration. And with all that included, our current ASP will remain firm.

I see. But that means that it's a like-to-like basis or a company average behind the ASP for the second quarter.

Well, I mean, first of all, for the second quarter, the newly added 12A P6 capacity is quite minimal. It actually cannot change the equation for Q2 ASP yet. It's still in a very small volume.

I see. I understand. Okay, then I want to switch gears a little bit for 8-inch. I'm actually pretty surprised to see around like 5% capacity expansion for your 8-inch. And, you know, I believe 8-inch, the capacity extension is one of the, is at the lower end or even lower than your corporate with your capacity expansion. So what kind of like product or what kind of new product we are looking at to do to, you know, build up the age capacity throughout the year or, you know, can we expect some like, you know, a new product in age?

Well, I mean, the capacity result now is actually came from some of the effort we have spent in the past. It's actually coming out two portions of that. One is the We have done some of the maintenance on the previous court, I mean, in Q1. And so once the, those will probably affect the Q1 output. And so the change, the in Q2, without the maintenance, the number actually gone up. Secondly is, you know, we continue with our string line process and the productivity improvement. So that will also reflect. And those efforts, you know, is accumulated from the, in the past. and it just, you know, started kicking in the Q2. It does not represent the overall demand. For the 8-inch outlook, we have, first of all, like, you know, in overall 2023 outlooks, we have not seen any sign of 8-inch recovery in the foreseeable future. We're definitely not immune from the market down cycle for the 8-inch, so we are impacted by that. We have observed the 8-inch business recovery will primarily depend on incentives given that competitive landscape in certain market segments, which are highly sensitive in pricing. So in short term, our pricing policy will remain firm while UMC will continue to differentiate the solution and maintaining our customers' competitiveness to secure it. or protect their market share. And the longer term, we will continue working straight to optimize our product mix and the customer portfolios. So they are some tactics near term, but in the longer term, we still focus on the product mix improvement.

Yes, I understand. Thank you.

Sure. Thank you. Next question, Sonny Lin, UBS. Go ahead, please.

Good afternoon. Thank you for taking my questions. So my first question is on 28 nanometer. Just want to quickly confirm, earlier did you mention that the utilization rate would be able to improve toward 90% or higher by end of the year?

Well, yes, yes.

Got it. And so I wonder, for your P6 expansions, could you remind us your latest schedule for capacity expansion by end of this year? What's the current LTA coverage for this expansion?

Well, the P6 start ramping. The starting point is the Q3 this year in a small volume, and we'll reach 12K by end of the year, the December time frame. And all our piece is covered by the customer's commitment, and all those commitment and business momentum is on track.

I see. And I think before, you did tell us that for the new expansions, given the higher cost, and so the pricing will also be higher. And so should we assume for your broadband ESP, as P6 starts to ramp into later this year, would that be going up?

Well, I mean, we will provide our ASP guidance, the outlook, one quarter at a time, given the current market dynamics. So I will prefer probably provide that information one quarter at a time.

Sure. No problem. And so... Second question also on China, but it's about the competition. And I think recently a couple of equipment makers like ASML, a lot of research mentioned very meaningful pickup for China orders. And so I wonder if you would be concerned at all about the increasing China competition for mature foundry?

I mean, we always have faced fierce competition. You know, the foundry business is a capital intensive. So, you know, some of the capital investment in terms of putting capacity in, it's not the only factor for a foundry to success. It is easier to enter a foundry space and putting a tool in. However, it requires a lot more to become a successful foundry player. And we believe that UMC is well positioned as a foundry player with our comprehensive and competitive offering.

Got it. Sorry, maybe one last question on pricing. As of now, despite the easing supply constraint, I think everyone was surprised that the material foundry pricing has been holding up better than feared. So I wonder, what do you think you and your peers are doing differently in the current down cycle versus before? And do you think these changes will be sustainable going forward?

Well, I mean, I don't know how to comment on peers, but in terms of our pricing strategy, I kind of mentioned earlier, is to closely work with our customers to uphold their competitiveness and in their respective market to protect their market share. So we will work with our customers to strengthen that. However, in order to be competitive, it's not just the pricing. You also have to look at your technology, your EO improvement, your capacity support. And in that matter, how to strengthen our customers' competitiveness is more of a holistic view. And we strive to do that with our customers, and we definitely will. working with them, you know, and to make sure that, you know, we gave them the best support that we can. Meanwhile, also sharing our view about our pricing consideration in terms how to provide them with the value proposition.

Got it. Thank you very much.

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

Thank you. Hi, Jason. Good afternoon. I just want to clarify. Did you say that your addressable market forecast is now down high? Is that right?

Well, I mean, Charlie, to be honest with you, we're actually tracking this market outlook. And just like we mentioned earlier, Quarter over quarter, we actually see that it's further declining. So the market is being very dynamic right now. The 2023 will be a challenging year. We continue collecting the market data and try to tracking as close as we can. We just see the market is actually going to be much slower than we anticipated. The recovery is going to be much slower than we anticipated. And so we more focus on now is to minimize our exposure and hopefully we're going to be in line with our addressable market note. And we do know it's going to get worse than last quarter, but I can't really give you a clear guidance on how much is that yet.

Okay. Okay. But you said that you hope to grow in line with the addressable market. That's something you want to ensure.

I'm probably not going to use the word growth, but I will try to be in the addressable market.

Okay, decline of the addressable market. Just kidding. In that case, I'm still confident that the first half... That would be trough of your FAP utilization, or you think that third quarter could be the trough?

Well, I mean, for the Q1, we have observed that revenue is consolidating at the bottom now. So we do not expect the business environment to get worse for UMC. However, we have not seen the sign of a strong recovery in the next few months. I think that's sort of the visibility that we have today.

Yeah, the time horizon is just the next few months. So anything beyond that is unclear for now.

Thanks, Jason. Yeah, in terms of the market, so first of all, any bright side or green shoots, We noticed that there are some restocking for PC, TV semis. Are you seeing any similar trends like that?

We see some short-term momentum. For Q2, the computer segment will remain flat, the consumer will remain flat, communication will remain flat, as well as automotive remains flat. compared to the Q1, communication, consumer computing is all declining, right? So, we see some of the very light and the momentum on those segments, but at the same time, we see the automotive since peak in the Q1. So, we haven't really seen a strong recovery, but we see some abandoning, but Again, this is giving our current visibility. The visibility for second half is still big.

Okay. Thanks. I'm not sure if the company has any exposure to AI or generative AI type of products. If you do, can you share some trends there? We...

We have not, even there is, it's not going to be any significance, so I'm probably not in the best position to comment on that, yeah.

Okay, okay, that's fair enough. And that's the pricing strategy, right? So let me try a kind of different way. So you said that you work together to help your customers to protect your market share. But unfortunately, if the lower price is the only way to prevent them to losing market share to their competitors, would you support them in terms of weather pricing? I know technology development capacity support kind of an ongoing process, right? Pricing support could be more immediate. So what would you say about that? that situation. Customers really need your pricing support.

Well, you asked it differently. So the simple way to put it is we always will hear our customers' voice and we will work with them closely to find ways to protect their market position. And The, you know, the, our, another way to look at this is we actually, it's more of a balance act, and we look at the overall blended mix, and we look at overall the portfolio, and our also, you know, try to maintaining our profitable stability, so the, hopefully to gear up with the goal of the blended ASP with the Flanish direction. So I think there is a lot of dynamics, a lot of discussion that we need to have with our customer, and we will work with them closely.

Yeah. Yeah, and just in general, right, not only specific to your company, which process notes or type of process that you see colonization, meaning pricing depreciation could be pricing could be the only differentiation.

Which is segments?

Yeah, for example, 0.13 micron driver IC.

I think the most obvious one is the 8-inch business. In an 8-inch business, there are certain segments that are more sensitive to the pricing. And there are certain market segments within the age are sensitive to the pricing.

Okay. Yeah, I mean, you know, we ask a lot of this, but at least to me, I mean, gross margin sustainability is most important, right? If you compromise a little bit, but your quantity, your stabilization can go up. they could be okay for a margin. So very, very last one to cheat on. I think the company has been holding margin very, very well at mid-30% gross margin. Do you think that is a sustainable trend into the second half?

You know I cannot comment on that, but we do everything we can to bring down the break-even point and also a very disciplined KPEX. All the effort is really to have a resilient structure possibility. So I think we are seeing some of the results we want over the past few years. Of course, semiconductor is extremely cyclical. So we have our effort put in, but there's also the whole big cycle, cyclical impact. All I can say is if this is the 12th possibility, certainly we have seen the improvement already, and we will continue to work on that. As for the number, the range, I cannot really give you a number. As I just mentioned, the cyclical impact is outweighing sometimes our effort. But overall, I mean, it's already an improvement from the previous down cycle.

All right. Thanks, gentlemen. Very good works.

Thank you. If I may, I think that Chi-Dong's well said. But in addition, you know, we do actually foresee challenges of business condition, like you said. And not only that, in addition, there are rising costs and unfavorable forex consideration as well. So, you know, like Chi-Dong said, we will strive to offset those headwinds the best we can with our effort on the product mix optimization, cost reduction activity, and streamline our process flow. So we will do everything we could to continue this, yeah.

Understood. Thanks, Jason.

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

Yeah, hi. Thanks for taking my questions. First of all, maybe I focus on 28 nanometer capacity expansion Your larger peers kind of stepped back on some of their 28 nanometer capacity expansion recently. And the U.M.C. clearly has demand for the 12A P-6 expansion. But any thoughts on how you think about 28 nanometer expansion over the medium term? especially as we think about the expansion in Singapore, any change in terms of plans, in terms of 20 nanometer demand supply that you see at this point in time?

First of all, with our CAPAC strategy, we try to be as disciplined as possible with the follow our ROI guidelines. And as far as for the 20A business, we remain confident of our 20A and 22 businesses mainly from our differentiated and customized technologies. In addition, our 22 and 28 manufacturing capabilities, such as yield, cycle time quality, provides a compelling value for our customer. Together, like I mentioned earlier, with a geographical diversified capacity offering, now that we can offer them in Singapore, Taiwan, and the customer's alignments, And this actually will support our long-term mutual commitments and for all across the diversified market segments. And last is not least, the 28 and 22 is a sweet spot for many applications where the demand will continue to grow. With our, you know, strong product pipeline, the overall demand and supply dynamics will not change our long-term relevance in 22 and 28.

Okay, got it. Thanks very much, Jason. So in terms of the capex, $3 billion, and it looks like you already spend about 33% or 30% of that in Q1. Could we get a little bit more granularity in terms of the $3 billion capex spend, especially for the 12-inch portion? Is it mostly going to be for... P6, or is there also some spend for Singapore coming in this year?

Mr. So, included in our calculation and assumption, of course, we dynamically adjust our KPAC needs, and sometimes we reprioritize the different projects. But for the time being, as I mentioned, it's going to be a first half heavy in terms of quarterly CAPEX spending. So, it will be lightening up in the second half of this year. So, $3 billion is our current projection.

Okay, thanks, Yitong. And what is the composition? Is it mostly for Dwell A and B6, or is that some Singapore-related spending also built into that $3 billion budget?

Largely, it reflects the 12AP6 expansion in 2024 and some quotient of 12IP3 investment.

Got it. Yeah, thank you very much. And then we can move to automotive. Jason, could you give us a little bit more detail in terms of your automotive exposure today? I think 17% of revenue is probably one of the highest among the foundry space. Is it mostly, like, by node, is it mostly 90 and 65, and by product, is it mainly MCU, or is it a little bit more broad-based into some of the IGBT and power applications? Could you give us a little bit more detail in terms of what your automotive comprises of today?

It's a combination of the 8-inch and 12-inch, and there's not much of IGBT. Mainly, it's on the BCD and MCU space.

Got it. And on the near term in automotive, so I think you did say that Q1 is likely the peak in terms of inventory replenishment. Are you seeing customers toning down the auto expectations now, or is it just that there's no big change in plans, but the momentum is just kind of peaking out in Q1?

Well, I mean, we start seeing the momentum from automotive space from second half last year. And so they start picking up a peak at the Q1. So it's been a three-quarter now. And we see some of the products are already situated at a healthy inventory level. And so that's how we see some of the slowdown on that momentum. But from year-over-year point of view, we still see a significant growth on the automotive space. And the automotive space will remain to be one of the growth drivers for us from a year-over-year standpoint.

Got it. That's very clear. One last question on depreciation, Chidong. How should we think about depreciation through this year? I think your guidance was for slightly down this year. But when do we start to see some of the new CapEx hitting the depreciation? Is it more in second half this year, or we should expect more in 2024, rather?

This year, we still expect to see a low single-digit decline compared to that of last year. And quarterly, probably Q1 or Q2 will be the lowest point. But the difference is very minimal. So it's going to be quite flat for the quarterly distribution.

Okay. Got it.

Thank you very much. Thank you. Thank you.

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

Hi, good afternoon, gentlemen. I have a quick question on your 22 and 28 nano portfolio. Roughly speaking, what's the speak between the two now from the revenue contribution standpoint, let's say from now and also three, five years down the road when we have the P-SAFE and also the Singapore FAB expansion completed?

Well, we start seeing the initial round of 22 this year. So they still representing a smaller portion of the 22 and 28 business. But we do see the 22 will be, you know, the rhino that grows very quickly starting from 2024. And so, but in terms of the ratio of the two, it was subject to a different product mix. But I do think the 22 will also be a minimal run rate for us.

I see. Got you. Say, to assume that it will be more than half, right, when we have all the capacity ramp up.

Well, I mean, our capacity can support both. So in terms of the ratio of that, we're subject to the end market. So, you know, from a capability standpoint, yes.

I see. All right. Thank you. Next question may be for Chee Tong. What should we expect for the dividend policy going forward? Should we assume it based on the payout ratio perspective or from an absolute dollar perspective?

It's more likely to be a hybrid consideration. And we did mention that it has to be over 50% of our earnings will need to be paid out in cash. That's in our stated dividend policy. But in absolute dollars terms, we will also consider that as well. So it's more like a hybrid. And consistency and stable dividend payout will be our summary for dividend policy.

Okay. All right. Fair enough. Okay. Thank you very much, gentlemen.

Thank you. Next question, Nicholas Barrett from Macquarie. Go ahead, please.

Yes, hello. Given the higher CapEx in 2022 and 2023, what kind of capacity increase do you think you have in 2023, 2024? Each year, we are budgeting around 5%, 6% also of capacity increase.

As we mentioned earlier, our TEDx number, we dynamically adjust that and we prioritize certain projects according to the market conditions. So I think 5% also is the numbers for this year and next year.

Thank you. That's all for me.

Thank you. Next question, frankly, of HSBC. Go ahead, please.

All right, thank you. Just wanted to ask a question a little bit in terms of, you know, the overall guidance that you guys have talked about and the overall tone. You know, it seems like from what you're saying, you know, units and shipments, 2Q should be basically flattish or bottoming. But overall, I guess, tone that we're seeing is that demand recovery hasn't been very clear and auto has potentially peaked. And also looking at you know, your utilization rate is actually going to go up, but your capacity is increasing, but unit shipments are flat. So just trying to get a sense of maybe, you know, the overall tone versus the guidance. Are there any company-specific issues that's enabling you guys to continue to grow more share or anything that we're missing?

Just the base capacity was lower in Q1 because of the annual maintenance. And quarter two, of course, the base went back to normal. And I'm On top of that, we have some additional capacity increase. And there's always wafer shift, wafer out, time delayed in a very minimum way. So overall, it's a flattish outlook for second quarter. And yet, we do see some bright spots, like our 28 demand is firming up. And the age outlook seems getting a little bit deteriorated. So there's a mixed factors out there on top of that, the rising raw material costs and the unfavorable foreign exchange. So it all kind of mix up and lead to our current flattish quarter two guidance. We are confident for what we have done, our company specifically, but for the Recovery or the market consensus, we just want to point out that we haven't really seen a very clear sign for a strong recovery as previously the market was hoping.

Okay, thank you. And can I just ask a follow-up on, you know, you've mentioned the auto business has peaked in Q1, but your IDM business has continued to ramp up quite nicely. Is there a mix of auto that's part of this IDM? And, you know, with auto slowing, is there a potential impact on IDMs slowing down or not growing as fast as we've seen in the last couple quarters?

I mean, the IDM includes the auto and also the non-auto businesses. So in general, we do see our IDM portion of business actually increase, not 100% coming from the auto market. Okay.

All right.

Thank you.

Thank you. And next one, Laura Chan of Citi. Go ahead, please.

Yes, hi. Thank you for taking my question. Good afternoon, gentlemen. Just a very quick follow-up also on the IDM business, as we see quite solid momentum in Q1. So just wondering in what kind of technology node and also application, you just kind of sort of talk about the automotive exposure in the IDM space, but just wondering that what's your other visibilities of the IDM outsourcing in the second half, or also like what's the percentage of the IDM business in like consumer and communication application? Thanks.

Well, I mean, in addition to the outdoor segments in the IDM space, which is provide some growth for the quarter, We also continue seeing our momentum in the 22, I mean, sorry, the 28 and the high voltage space as well as the larger ISP area, which is associated with the mobile space.

Okay. But at the same time, you are also saying that the overall demand recovery seems to be quite remote into the second half. But the IDM business specifically is DOC, the solid order visibility at the moment.

Am I correct? We do see that space is actually very stable for us, yes.

Okay, clear. Very clear. Thank you.

Thank you. Next one, Richie of Daiwa. Go ahead, please.

Hi, Jason and Shidong. Good evening. There's one question from me regarding your 28 nanometer. Could you guys give a more comment about your percentage revenue contribution ramp up into second half? Would that be possible exceeding 30% in second half?

The base is actually unpredictable either. But we are seeing the... 20-year utilization rate is going to exceed 90 percent in second half. But it's difficult to give you a pinpoint percentage of revenue, given that we are not 100 percent sure about our revenue base yet for the second half. But certainly, it will improve gradually.

Yeah, fair enough. That's pretty helpful about this over 90% utilization rate for second half. And just a quick follow-up regarding your pricing. Do you expect any price elasticity to kick in in second half? Because the reason why I'm asking is because I recently talked to some of your key customers, and they... they told me they believe that in second half, if the demand recover and they are able to give you guys more volume, then you will probably be happy to give some price discount to these guys with a volume increase. So, what do you think?

I mean, we'd be happy to discuss that when that happens. Right now, the activity of the demand is still not clear to us. And you know, if we start seeing a strong sign of a recovery, and then we definitely will be looking into that. Again, you know, we have many different considerations for the pricing, right? So I have said multiple times earlier already, and we definitely will work with them closely to make sure that, you know, we well communicate an oath all considerations being explored, and hopefully we can reach the mutual benefits.

Okay, great. Yeah, thank you so much. Yeah, that's all I have. Thank you.

Thank you. Thank you. And ladies and gentlemen, we are running out of time, and we're going to take the last question. And the last one is Bruce Liu, Goldman Sachs. Go ahead, please.

Thank you for giving me the second chance. I want to ask about your FAP capacity expansion plan. I think you are one of the only ones who doesn't really cut the cap for this year. Do you consider to renegotiate the LTA with your customer for a further delay for your 28 because the capacity expansion Or the oversupply situation, the NDMA is definitely not as good as a couple of years, under two years ago. And do you have any customer, you know, trying to push out the schedule by a quarter or two or anything like that?

Well, I mean, when we observed the weakness of the market change from last year, end of last year, many discussions already took place. And we have realigned with the customer. We have re-examined the demands, outlooks. And some of the conversations have already been discussed, and we have already realigned it. Currently, to plan the mutual growth going forward, and we continue tracking those engagement, and we continue reviewing them on a regular basis. At this point, our P6 RAM is still on track. If there is any changes, we will update you. But there is no change at this point.

If there is no change, which means that your CapEx will remain at an elevated level even for 2024?

Well, I mean, for now, like we said, our CapEx $3 billion has not changed. But we always have a contingency plan in place to adjust the CapEx if needed. Changing our CapEx will depend on the macro condition, industrial megatrend, and customer long-term business alignment. And like I said, alignment started end of last year on a continued basis. If there is any changes, then we have to kick in the contingency plans. But at this point, I mean, at this quarter, our Archivex budget still remains the same.

Okay, one last one is what you've done. The government subsidy is down about 30% in the first quarter. Is that a new level in the coming quarters, and when is the subsidy going to end?

The majority of the subsidy is linked to the depreciation schedule of $12,000. X in Xiamen. And the depreciation for Xiamen has nearly come to an end. So that also reflects. So basically, we got money first in our pocket. And the recognition will go along with the depreciation schedule. And the depreciation now is coming to an end. So the number will gradually come down.

So we have to model like, you know, gradually come down in coming quarters.

Yes. It is coming down along with declining depreciation expenses for 12X. So on one hand, the depreciation expenses will come down. On the other hand, the subsidy we recognize on book will also decline. I see.

I understand. Thank you.

Thank you. And ladies and gentlemen, we thank you for all your questions. That concludes today's Q&A session. And I'll turn it 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 iloc.umc.com. Have a good day.

Thank you. And ladies and gentlemen, that concludes our conference for first quarter 2023. 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.