United Microelectronics Corporation (NEW)

Welcome everyone to UMC's 2023 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 an hour after the conference has finished. Please visit our website www.umc.com under the Investor Relations Investors Event section. And now I would like to introduce Mr. Michael Ling, Head of Investor Relations at UMC. Mr. Ling, please begin.

Thank you and welcome to UMC's conference call for the third quarter of 2023. I am joined by Mr. Jason Wong, President of UMC. and Mr. Chidong Liu, CFO of UMC. In a moment, we will hear our CFO present the third quarter financial result, followed by our President's key message to address UMC's focus on fourth quarter 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 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 in maturity, including the risk that may be beyond the company's control. For a more detailed description of this risk 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 UNC's third quarter 2023 financial result.

Thank you, Michael. I'd like to go through the third quarter 2023 investor conference presentation material, which can be downloaded or viewed in real time from our website. Starting on page four, the third quarter of 2023, consolidated revenue was $57.1 billion NT, with gross margin at 35.9%. Net income attributable to the shareholder of the parent was $16 billion NT dollars. And the earnings per ordinary shares were $1.29 NT dollars, which is slightly better than the previous quarter of 1.27. And our shipment in the third quarter declined sequentially about 2 percent. And capacity utilization rate in the third quarter was 67 percent. H5 is the income statement for the third quarter. And revenue grow 1.4% sequentially to 57 billion NT due to better mix and also better blended ASP as well as helped by the favorable exchange rate. Gross margin remains somewhat similar to the previous quarter. at 35.9 percent, or $20.4 billion. Operating income reached about $15.96 billion, which is equivalent to 1.29 EPS in the third quarter of 2023. On page six is the first nine-month performance Because of the downturn of the cycle, we witnessed around 20.5% year-over-year decline in our top line, which was $167.5 billion. Gross margin rate dropped from 45.8% in the previous year to the first three-quarters of the year of 2023 of 35.8%. And EPS, for the first three quarters of the year, reached $3.87 per share. On page seven, the cash on hand is still around 140 billion NT, with the total asset is more than 547 billion NT. On page eight, Our blended ASP, as I mentioned earlier, due to the better mix and also the difference in between 12-inch and 8-inch wafer capacity utilization rate, our blended ASP in the third quarter continued to edge up in the third quarter of 2023. For revenue breakdown on page 9, Asia remained the biggest segment of the pie, around 58%. which grow about two percentage points from the previous quarter. And Europe and North America remain unchanged when Japan declined by about two percentage points in terms of revenue breakdown. IDM versus F-Fabulous on page 10 remain unchanged quarter over quarter. On page 11, we see a small increase in communication which is 46 percent in the third quarter. And consumer dropped from 26 percent in the second quarter to 23 percent in the third quarter of 2023. On page 12, along with our increased capacity coming out of P6 in 22 and 28 nanometers, our revenue also grew accordingly, now reached 32 percent in the third quarter of 2023. For total revenue for 49-meter and below in the third quarter reached 45 percent, which compared to 41 percent in the previous quarter. For capacity breakdown on a quarterly basis on page 13, as P6 continued to have new capacity come on stream, we see about more than 1 percent capacity increase in the third quarter. And the following quarter, in Q4, we expect to see more than 2 percent sequential capacity growth, also mainly due to the capacity increase in our Thailand P6 facility. Last page of my presentation is on Foundry CapEx, which currently running on track. And its budget remains unchanged, around $3 billion for year 2023. So the above is the summary of UMC results for third 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, Mr. Jason Wong.

Mr. Thank you, Jidong. Good evening, everyone. Here, I would like to share UMC's third quarter results. During the third quarter, despite a 2.3 percent decrease in wafer shipments, quarterly revenue and gross margin remain firm quarter over quarter, which is primarily attributed to the demand strength in computing and communication segments, continuous product mix enhancement, as well as the favorable currency movement. From end market perspective, strength in computing application were propelled by LCD controllers, Wi-Fi, codec, and touch IC controllers, while shipments in communication segments increased due to demand for RF front-end IC and networking chips. Looking back at 2023, although foundry industry experienced a significant decline in market demand, UMC maintained solid structural profitability supported by furnace in blended ASP due to continuous product mix optimization efforts and the increased contribution from specialty technologies. As UMC continues to introduce new specialty technology to solidify our differentiation, we will strengthen the competitiveness of our customers and enhance their respective market position. For the fourth quarter, with the recent rush order from PC and smartphones, we expect demand has gradually stabilized. However, customers still employ a cautious and conservative approach in maintaining a lean inventory level, while automotive business conditions appear challenging. For 2024, we anticipate the production rent of our 12A P6 bag will further enhance revenue contribution from 22 and 28 nanometers. continuing the robust business traction for UMC. In addition, through our technology leadership, we will ramp up our offering of 22 nanometer derivative products, which will further our specialty technology product pipeline. Now, let's move on the fourth quarter 2023 guidance. Our wafer shipment will decline by approximately 5%. ASP in US dollar will remain flat. Growth margin will be in the low 30% range. Capacity utilization rate will be in the low 60% range. Our 2023 cash base cap tax will be budgeted at US $3 billion. That concludes my comments. Thank you all for your attention. And 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 from Sunny Lane UBS. Go ahead, please.

Good afternoon. Thank you for taking my questions. So my first question is on growth margin. Q3 growth margin was actually better than guidance. But even with that, Q4 growth margin is going to drop towards low 30%. And so what's the key factors affecting growth margin into Q4?

Well, first of all, for Q4, gross margin guidance will be at a low 30% range, mainly due to a decline in utilization rate. As we expected, there will be probably a 5% decline in shipment.

Got it. Then on the overall pricing environment, are you seeing any differences, i.e., intensifying competition because of the slower demand recovery for the coming few quarters?

Well, I mean, we're very much aware of the market situation, and we respect the function market and pricing trend. We're aware of the market dynamic and competitive landscape, so we will close monitoring the market and align with our customer on pricing position to ensure our customer's competitiveness. And along with securing their market share, that will be our objective. UMC maintain our pricing strategy In addition, we do believe our value-added technology, manufacturing quality, and capacity alignment has supported our customers to enhance their market position. However, we observe the 8-inch market landscape has intensified, like you said, so we may have to adjust some pricing for some market segment to align with the market dynamics. For the 12-inch business, we will remember our pricing position, which will reflect our value.

Got it. Thank you very much. That's very clear. So my second question is on 20 nanometer. UMC has built up a fairly strong presence in some of the products, like OLED driver, Wi-Fi, ISP, et cetera. But I believe some of your competitors are also trying to ramp up capacities and capabilities, especially for OLED driver and Wi-Fi. And so going forward, looking into next two or three years, How should we think about the overall component landscape for 28 nanometers? And what are some of the new product opportunities that you will look to ramp in the coming few years?

Well, I mean, there's a couple questions. One is our current 28 nanometer outlook, right? For the 22 and the 28 nanometer loading, we have remained resilient amid near-term market volatility. Well, thanks to our customers' stickiness, our diversified product portfolio and technology differentiation. And we will continue to expand our 22 and 28 nanometer market share with applications like OLED, driver, ISP, Wi-Fi, SOC processors while we are working with the leading companies. to bring up more applications on 22 and 28 nanometer platforms. As far as the competition, you know, we do believe, you know, there's always a competition there, and we will try to compete with that, particularly in the 28 high voltage space you mentioned. Well, we believe, first of all, we believe the late market will continue to grow. And we will continue to maintain our leadership technology position and the market share position, even though we are collaborating with multiple leading customers in those key markets.

Got it. Thank you very much.

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

Yes, hi. When you guide for 4Q with a shipment to decline 5% Q on Q, is there any segment specifically that we can attribute this to? And what I mean in particular is, you know, you mentioned better demand from computer and communication in 3Q. Is it still the case in 4Q or... what is changing into 4Q that you could talk about. Thank you.

Sure. For the Q4 outlooks, and currently we see the PC and the Chinese smartphone segment will remain in line with the Q3. However, for the automotive market, given that the customers have been accumulating backlogs from early last year to 2020, probably Q1 this year, we expect higher than expected inventory buildup already. As a result, our auto business is projected to decline in Q4. But four years of automotive contribution will still count for meetings as a percentage of our wafer revenues.

Thank you. I don't think you report your revenue exposure to the industrial segment, but Do you see similar trend in industrial?

It's similar, but it's actually better than automotive right now. Both automotive and industry is covered under the others, but the major decline is coming mostly from automotive space.

Thank you. Maybe for Qitong, any updated view on... depreciation this year compared to last year? Still declining a little bit.

Yeah, in terms of absolute depreciation expenses, this year, 2023, is likely to be the bottom of recent years. We probably will witness the lowest point in terms of absolute depreciation expenses in 2023. Going to 2024, because of our P6 expansion in Thailand, coupled with the share of construction in Singapore, the overall depreciation will start to rebound. And the increased rate in 2024 will be more than double digit, which will provide a more precise number, precise range in the next quarter's conference call.

I understand what you're saying, but my mechanical model, very mechanical projection with percentage of PP&E, tells me next year depreciation could go up 25%. Does that sound vaguely possible?

Again, this year we will see 5% to 10% decline first. So it's a really recent low. in terms of annual numbers. But next year, 2024, yeah, your number is in the ballpark.

Thank you.

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

Yeah, hi. Thanks for taking my questions. First of all, could you talk a little bit about all this capacity that's been announced? and coming online in so many places, but especially in China, we start to hear a lot from your customers also about pretty aggressive price codes from Chinese foundries and some of your customers starting to consider some of those capacity as well. So my question is like a little bit longer term. How do you think about pricing, given that the foundry industry has seen a pretty nice price increase through the last two, three years, the pandemic years especially. And what kind of price premium can UMC maintain in like 28, 40, 65 nanometer kind of nodes? Who are some of the more aggressive competitors that are coming up? And also, could you kind of refresh our memory on what is your current LTA coverage, given that you have some of the new capacity that has come online with pretty high LPA coverage?

Well, okay, yeah, sure. Well, I mean, the competition is always going to be there. As you said, there's many new capacity announced, particularly coming out from China. And from UMC, we have always tried to maintain our competitiveness through a few areas. One is the continuous technology innovation. Second is diversify the production side with a sizable capacity offering, which has actually become, you know, increasingly important. Third is the manufacturing excellence. You know, we all know both cycle time quality as well as the yield is so important to customers and for them to be competitive. And the fourth is the, you know, with the broader customer base and the product portfolio. Compiling differentiation, we believe we can continue to provide a reliable and dependable path to secure future growth for our customers. So that's, you know, pretty much on a higher level. Your question relates to, in terms of the pricing, you know, like I mentioned earlier, we respect the market dynamics, and we will stay competitive in supporting our customers to be be competitive. And right now, the, you know, we have discussed and continue aligning with our customer, usually on an annual basis as a one-off pricing alignment. And we'll continue with that practice and with, you know, with the understanding of the market outlook. And for that, and there will be a different pricing position in terms of different technology nodes. like you said, for 20A. And, you know, we are remaining resilient and amid the near-term market volatility as well as the forward-looking product pipeline. And so we feel rather comfortable about the confidence about our 20A nanometers. For the mature 12-inch outlook, we will transition into more specialty technology for our mature 12-inch nodes. and where we foresee promising new opportunities, which coming into notebook and tablet space, such as RFSOI, non-volatile memory, and high voltage. And we anticipate a 55 and a 40 nanometer will be a mainstream for RFSOI and MCU for a broader range of the market, including the wireless, automotive, and industrial application. So again, we will stay competitive. and then we will align with the market dynamics and to support our customers in terms of their commercial needs.

Got it. Thank you. Could you also refresh your memory on roughly what is your LTA coverage now? I think it used to be about 30% to 40%, but it looks like that's gone up given the new capacity that's coming.

Thank you. You're talking about NTA or LTA?

LTA, sorry, LTA.

The LTA has been state fairly flat. It's about 25 to 30 percent coverage. And the, you know, we've been reporting many times in the past, you know, the LTA still is a mechanism to support both customer and UMC on the longer term perspective. particularly given the recent market dynamics. And we both are examining our current LTA quality as well as the status on the LTAs. And because our customers continue to want to make sure their supply resilience and align with our, you know, interests of protecting our investment. So, many LTAs being reviewed and we, you know, we actually believe those LTA has mutual commitment to them. So the 25% and 30% remain fairly resilient at this time.

Okay. One follow-up on the LTAs. Are you seeing any price downward negotiations on any of the LTAs, given that you mentioned that you're seeing some of the reviews on the LTAs right now?

Well, during the downtrend cycle, we definitely work with our customer and and look at the market situation and giving a change in the demand of supply dynamics. And we, between the UMC and our customer, remain confident in the long-term objective, but in the short-term, you know, we do have some tactics and flexibility to make the customer and UMC collective to navigate through this market fluctuation. So, yes, there are some flexibility in terms of that. with the long-term contractual obligation commitments that they are still intact.

Understood. Thank you. One last question from me. How do you think about capacity expansion, given the downturn seems to be lasting a little bit longer than expected, and you're running at 60% utilization, except during the year? Do you have any thinking about pushing out some capacity expansion further? especially for some of the new capacity for the board. Importantly, though, because depreciation burden is also rising quite a bit going into next year.

Absolutely. For the P6, you know, we already in the process of ramping up. So it's harder to making adjustment on those. So we anticipate our 12A P6 monthly capacity will still reach to 12K per month by end of 2023. And you will reach its design capacity of 31.5K per month by September 2024. And that's still there. And for the P3 Singapore, we have deployed a clean room construction. So the clean room will still be ready by the first half of 2024. But however, we expect the P3 capacity rent starting time at April 24th. 2025 without change, and because we have alignment with some of the customer already. However, the rent profile will be moderated based on the market dynamics, which that has some adjustment to the rent profile.

I understand. That's what it is. Thank you very much. Thank you.

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

Hi, thank you for taking my question. I want to ask you about the outlook for 2024. I mean, based on my, you know, mechanical mathematics, you seem to be very comfortable for your PCEX expansion with LTA remit on track. So which PCEX will give you 30,000 units per month capacity for next year? each wafer should be $3,000 to $3,500. If you multiply that, you can easily get like 15% plus revenue growth. In addition, you should have some inventory restocking for that. So that can easily give you like 15% plus revenue growth for $294. So if that sounds right, I mean, at least you can get the revenue growth from your LPA contribution from P6, right?

I mean, yeah, I mean, of course, the revenue growth for the 2024 will come, is a composition between the volume and the ASP. So for the 2024, our early view for the next year, we will expect our loading and wave of shipment will increase year over year. And so that's it. However, the, you know, we have to look at, you know, quarterly outlook, you know, by quarterly, given we're saying the current customers are more cautious and conservative. So we will provide quarterly outlook on, you know, on quarterly basis. And so the, you know, so in terms of actual, you know, what will be the growth for the next year, we probably will probably give you a bit of a more clarity in the upcoming calls.

But at least for the LTA pricing and environment is for sure, right?

I mean, yes. I mean, LTA right now is still intact. And so, for that portion, it is. But there's still some base that have to align with the market dynamic. And also, on the same time, we did talk about, for the LTA, there are some flexibility in terms of adjustment. But the longer-term perspective on LTA did not change. But the short-term LTA, it has some flexibility that we are trying to align with our customer with. they also will come for the next year's projection.

I see. I understand, because the reason is that LTA alone is 1 by 15% plus for the world, unless you have a lot of pushout or additional ASD erosion. Otherwise, that should be the base case, though.

Well, theoretically, that's the correct assumption, but you have to look at the mix, right?

I understand that. The second thing is that I try to ask a different question. If you look at your customer profile, each customer contributes a lot more than most of your peers. The communication also consumes a lot, a major portion of it. which result in a much bigger fluctuation in terms of revenue, order visibility, longevity. Do you see any possibility to see meaningful changes in terms of your customer profile and application profile in the coming year?

We continue to enhance our product mix. not only from the broader customer mix point of view, also look at from the product mix point of view. So I think that's the clear focus. However, we have to also align to our addressable market. And whether the addressable market is representing higher percentage of the communication and computing towards the consumer, and which is highly aligned with the Asia market, we may not be able to immune from that. But we definitely want to continue to increase the quality of that mix, and that will be our objective here, not typically from the geographical standpoint.

So can we foresee a narrower range for the pick and drop market moving forward? Because the market volatility is still very, very big. It's still a lot of investors don't feel comfortable.

Right. So like we said, the technology innovation, differentiation, giving the diversified capacity located in a different region, given the specialty offering, we think that will help us to defend that to a certain extent. The other approach is, you know, we are committed to continue developing the fintech technology that will actually enlarge the differentiation offering as well. And, you know, we will continue with that development. And in terms of the – and we see some of the progress on our fintech development as Having success, we're entering into the mass production of our 22-neumeter business, and we have witnessed some steady rise of the revenue from 22, and then which we can build upon our 22, low-power logic expanding into the specialty. Now, at the same time, we, based on that customer base, continue migrating to the thin fat. We think that will also help us in terms of differentiation. Yeah.

I see. Thank you.

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

Good afternoon, Jason, Qidong, and Michael. And first of all, congratulations for great results. The gross margin, you know, sustained at a very, very good level. So my first question is really... follow up on your 12 nanometer. So I do agree that it's the key approach for UNC to differentiate yourself, especially compared to China competitors. So since you mentioned that there are some kind of demand from certain customers, can you elaborate a little bit? First of all, when are you going to spend K-pads for data thin-fat capacity. And secondly, you mentioned about a low-power logic. Can you give us some hints on what kind of application or product for those 12-lambda thin-fat? Thank you.

Sure. Well, first of all, thin-fat does give you a power leakage benefit. So there is continue with the low-power benefit on the thin-fat. Our plan is to fully exploit the DUV capability, which, you know, we can continue migrating to FinFET for that reason. So we're actively progressing with the development of specialty FinFET based on the 14 FinFET that we have, and also the 12 FinFET based upon the current FinFET technology. We are currently engaging with customer on product spec, performance, criteria, you know, to fulfill their needs. And as far as for the capacity expansion, the future things that expansion consideration, all business will still subject to our ROI justification to ensure the proper return on investment. For the capacity preparation, the method that we approach, the approach that we have is we will employ a cost-effective approach using the existing 22 and 28 nanometer capacity pool to transition into the FinFET based on a high two conversion rate. So that will help us to achieve our ROI-driven criteria. And meanwhile, we will give you more update on our FinFET technology development when it's more appropriate.

Got it. Thanks, Jason. So yeah, so just roughly, since you have a great idea about the end demand event, some smart and efficient way to convert capacity from 28 nanometers for that demand. So can we get a sense when you're going to see a first contribution from 12 nanometers?

For the 12 nanometers, the process will be freezed in early 2025. So I think probably there will be time after that. So when the time comes, probably better that we give you a more precise projection, because the process will be freezed by probably Q1 2025. OK. Thanks for that.

And then coming back to more kind of short-term questions, right? So you mentioned about some rush orders, but you also said that customers want to keep the inventory buffer very, very lean. So my question is, you know, first of all, do you expect those rush orders to keep coming in the coming quarter? And compared to the traditional sustainability, do you think your first quarter revenue or fabulation will be better than historical sustainability? Thank you.

Well, I mean, we certainly hope that the Russians will come in. Well, as far as for the Q1 outlook, we will provide that in the upcoming January call. The only... From the inventory, I mean, the fundamental is we believe, you know, given the rush order coming out from the PC and the smartphone space, and we believe there's a sign that indicates this could be an early sign of an asset in the inventory correction for this segment. And, however, there are other market segments that still you know, having inventory build out that could lingering into 2024. So we just have to, you know, we have, we are optimistic, but we have to be cautious about that. The, you know, so we will continue monitoring the rush order situation as well as the DOI situation on those seven. Hopefully we can validate that the sound assignment is for sure out of the inventory correction cycle. But we do know the auto will probably linger into 2024.

Got it. Thank you very much. And my next two questions for Qidong is if that's okay. So it seems like you have a ballpark depreciation increase for next year. And Jason, you know, shared some confidence about the pricing trend, especially for 12-inch. So I'm wondering whether full-year 2024, you can maintain gross margin at above 30%? Because based on the third quarter trend and the fourth quarter guidance, I feel like that is kind of achievable target. But I really want to get some comments or confirmation from management.

Yeah, we cannot commit on the numbers, but we do foresee headwinds from micro-uncertainty, such as utility, the green power associated carbon costs, and increasing depreciation in 2024. So we will strive our best to maintain our profitability structure. So we will continue with our cost reduction efforts. hopefully can offset the impact from those headwinds I just mentioned. The income number still will be on a quarterly basis, and we will provide that next quarter.

And Charlie, if I may add, our perspective now is that amid the inventory correction cycle, we have dramatically improve our structural probability compared to the pre-pandemic period. And have strengthened by the stable ASP cost reduction, you know, conducting many cost reduction activities and continuous product mix optimization and the increasing contribution from specialty technology. And all this activity will work off to offset headwinds such as rising cost and depreciation. we do expect when the demand returns, our probability will also return to a healthier level. We can't really guide you a number right now, but we also understand and, you know, humble enough to understand that we will foresee some of the cost increase happening and we will continue to manage that cautiously as we have done in these few years.

Got it. And Jason, sorry, I... I come up with a follow-up question to your previous 12 nanometer comment. So I am a little bit surprised that you plan to convert some 28 and the 22 nanometer for the fume sets. Is that because you have some concern for your long-term 28 nanometer demand or Why don't you try to buy new equipment for the fintech capacity extension?

I mean, clearly, I mean, we have, for the past few years, we have driven, we do have an ROI-driven principle that we have obeyed by. The converting of 2228 nanometer capacity is a wonderful possibility. That's the only possibility. So we will look at overall ROI and also the company's financials and to determine what would be the best approach.

Okay, so I don't need to interpret that as kind of a some concerns about the 20 nanometer overcapacity on the winter.

Right, like I said, the earlier, once this is more clear, we will report that at the appropriate time.

Okay, thanks. And sorry, the last question to Qidong is really about, sorry, actually two questions. So first of all, for your third quarter gross margin, how much of that is coming from the currency depreciation help? And second, small question is about the China government subsidy contribution to your OPEX. And would that totally go away in 2024? Thanks.

So every one percentage point change in currency, it will cost around 0.4% percentage point change in our gross margin. So that answer your first question. And secondly, for the subsidy for our shaman fab, that number goes along with our depreciation curve for our shaman facility, which has come to an end of, majority of that has come to an end by end of this year. So going forward, we will still have some more portion of subsidy coming in, but it will not go back to the previous level.

So may we know a rough difference between this year and the next year in terms of the total amount of the subsidy from China government? Just a rough idea.

On average, it will be starting slowly to decline. from the third quarter level, which is a little bit over 500 million NT.

OK. So 500 million NT dollars in third quarter, and we'll gradually phase out to like 100 million US dollars by the end of next year, the quarter?

It will gradually decline, but we will continue to apply for merit-based incentives not only in China, but in many other production sites as well. So there will still be some, yeah.

Okay, okay. Thank you very much.

Thank you. Next one, Zhihong, China Renaissance. Go ahead, please.

Hi, gentlemen. My first question regarding silicon interposer. For the capacity we put in, will it be dedicated for interposer production only, or will it be fungible between interposer and silicon vapor fabrication?

Well, I mean, the silicon interposer is a part of the capacity. For the dedicated 2 on the silicon interposer cannot be converted back to the other use. But there are common 2 that can be used. So I don't know if that qualifies as a fungibility. So from a dedicated 2 standpoint, no, it's not. But that's interesting. That's a relatively small portion, yes.

Right. Got you. Got you. The other question regarding the automotive inventory adjustment, you mentioned that Q4 we start to see some adjustment, but how long would this last in your opinion?

I mean, they started adjust after the Q2 this year, and so we have facing the automotive inventory, I mean, demand adjustment happening starting from Q3 already. And we do believe this will probably lingering into 2024.

For 2024, the entire year or the first half next year?

Well, I mean, it is also subject to the end market consumptions, right? We hope the correction will be ended in the first part or, you know, first half. but they're also subject to the end market and macro environments. So we'll continue monitoring that. Right now, for sure, there's inventory built up for automotive space, and we do believe that we're lingering into 2024. In terms of whether they will be depleted by early or mid or later, we will continue to update that on a quarterly basis. And it's our hope that they can deplete as early as possible, yeah.

I see, I see. Based on the initial selling, do you think the adjustment will be more severe in Q1 compared with Q4, I mean, for the automotive vertical?

Well, I mean, we already see quite a bit of adjustment in Q3 already, and we continue to adjust in Q4. And we do believe that will linger into Q1. In terms of magnitude, again, we're subject to the macro you know, situation. So we just have to see it. We also kind of updated earlier saying because giving the customer current behavior, you know, this behavior is more of a cautious and conservative, so the visibility is much shorter. And so we'll probably better that if we give you more precise, you know, view. on a quarterly basis. Right now, our view is that inventory will linger into 2024.

I see. All right. Fair enough. Thank you very much. Thank you. Next question, Brett Lin of Bank of America. Go ahead, please.

Thank you for taking my question. Hi, Jason Chidong. Congrats on the strong third quarter results. And I have two questions. So basically one on the generative AI and another is on the wafer-to-wafer technology of UMC. So firstly, have the firm seen business opportunity also rising from the end-device AI application? And if any, what are the key specs of those chips and what time do we expect it to take off? Thank you.

I mean, sure. Of course. In the portal, for sure, but before that, Your question about AI, AI is a megatrend, and he has rapidly emerged, as we see. And there will be a strong demand on related chips from various functionality, such as the sensing, MTU connectivity. And so, that's within our addressable market. And so, UNC is proactively preparing those solutions for this market. and that includes the interposer solution as one. And we hope that, you know, having those solutions prepared, we can enable our customers to capture those market share in the AI applications. So many of the products that we're engaging today, we do see there's a high possibility they will start adding the AI function into it. And so we just have to align with the product specification, make sure we can enable and support them with that. As far as the near-term, you know, very specifically on the interposures, we're already in interposer production. Currently, UMC interposer capacity plan will be doubled to reach 6K per month by Q1 2024. At this point, any additional capacity for interposer expansion will depend on customer demand outlook as well. Meanwhile, we are continuing developing the active interposer, which supports the DTC, the deep trench capacitor, and for the active interposer and so on. So the roadmap is also aligning with the customer for the future growth in the interposer space.

Got it. So for the interposer expansion, We believe it definitely depends on, very much depends on the client demand. So compared to our last earnings call, do we see the demand is getting stronger or it's just, well, flattish in terms of visibility?

We already increased double to 6K. And beyond that 6K, we have not have any alignment for increase that beyond the 6K. Right now the focus is more on the pipeline of continuity for the interposer solution. So in terms of technology development, that's already aligned for the next generation. But in terms of capacity, no, there's no number beyond the 6K yet. Once there's any number increase, we can also report that.

Got it. Thank you very much. So the second question is on the wafer-to-wafer technology. So we have learned UNC has been investing in this technology for many years. And what time do we expect the contribution to rise? And what are the key applications that we expect to adopt this kind of technology? Thank you.

The first product by using the hybrid bank will be in the RF front-end module. and that's already the development is already underway and so we you know we do believe that will provide many benefits so uh we have some expectation on that so but the the program is under development and the product application will be for the artist front end um got it thank you and then it what um may i know the uh potential margin profile for this kind of the uh product I mean, as we said, we continue to enhance our product portfolio and the product mix. And, you know, for those specialty technology, it will continue helping us to achieve that target. So, from the mix standpoint, it will be beneficial.

Got it. Thank you very much. That's a very clear. Thank you.

Thank you. Ladies and gentlemen, we're running out of time, so we're taking the last one. And the last question, Goku Harihalan, JP Morgan. Go ahead, please.

Hi. I just have one question. Given this comment about the depreciation increase next year, could you talk a little bit about what are our medium-term gross margin targets? Do we expect to still remain within the 35% to 40% kind of gross margin range? And especially, I think we're also thinking about potentially developing some sunset nodes, especially the 12 nanometer nodes in 2025 and beyond, which are likely to be a little bit more expensive. Just wanted to understand, what is the rough cost margin kind of range that management is comfortable operating in over the next couple of years?

Yeah, of course. Thank you for the question. When Charlie asked about our margin and the outlooks, I kind of added a comment about it's our belief that our structure probability is become much resilient and healthier. And so it's also our belief once the loadings return and the probability will also return to a healthier level. When we talk about healthier level, you know, we believe it's going to be in the high 30, 40 percent range for in a very high loading situation. So we, you know, we continue marching to that direction, and we have confidence that we, that's, you know, fairly achievable. But given the past few years, we've just gone through the super cycle, and now we're going through the down cycle, and we want to test that situation, and hopefully that we can report to you more clearly in a later date. But, you know, while we have a mapping model and model it, we think we have a roadmap to achieve that. And in turn, when can we achieve that? We'll give you that test, and then we'll report that, you know, on the tiny bit.

Yeah. As for cloud FinFET capacity buildup, as Jason mentioned, it has to be ROI justified. So we will do it. with the precondition that it won't damage to our overall corporate average structure margin. So, we mentioned that it could be coming from some of the convergence of 22-28 capacity, which will result in a better margin compared to Greenfield FinFab capacity. But we are also working on other solution, too. It will be a few years out in terms of massive FinFET capacity, so we still will have a few more options coming in the pipeline. Thank you.

We will definitely keep that discipline. As you can see, for the past few years, we have been keeping that discipline.

Definitely. Thank you. One last question is on the 18-inch side. It seems like in this downturn, 18-inch is facing a lot more pressure. Many staple products on 18-inch have already migrated to measure 12-inch, whether it's 65, 55 nanometer, or even 40 nanometer. So how do you see the 8-inch evolution in the next couple of years? Do you feel that 8-inch, at least some of the capacity will start becoming a little bit obsolete in the industry, given many applications, especially high-volume applications that are migrating to mature 12-inch this time around?

Sure. I mean, the reason 8-inch loading has declined as a result of a demand softness across communication, consumer, and computing segments We still believe that 8-inch is the mainstream note for PMIC, high voltage application. So we expect that 8-inch loading will improve when the market rebound. Meanwhile, we do see some intensified competition in the 8-inch landscape, like you said, such as a 12-inch supplier participating in the 8-inch business. Even with, you know, some of the questions earlier, the Chinese local manufacturer fulfilled the demands and, you know, for the domestic demands, and the pricing pressure as well. So, UMZ will continue to strengthen our technology competitiveness, enhance our product and customer performance to adjust, and also adjust our pricing strategy to address the eight-inch competition. Now, as far as the loading recovery, In the short term, I think the pricing will mitigate some of the 8-inch business when the demand recovers. For the longer term, well, given the time and the resource required to enhance the fundamental position for the competitive solution, where the pricing is not only alternative, and we probably have to do with all above-mentioned effort and focus, and however, we do expect 8-inch loading and product composition will improve to a healthier level. And for the recovery mode, we'll probably undertake for at least 12 months, yeah.

Understood. Thank you. Thank you very much.

Sure. Thank you. 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 ir.umc.com. Have a good day.

Thank you. Ladies and gentlemen, that concludes our conference for 3Q23. 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.