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spk10: Welcome everyone to UMC's 2024 first 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 the time if you would like to ask the question. For your information, this conference call is now being broadcast live over the internet. Webcast replay will be available within two hours after the conference is finished. please visit our website, www.umc.com, under the Investor Relations, Investors, Events section. And now I would like to introduce Mr. Michael Ling, Head of Investor Relations at UMC. Mr. Ling, please begin.
spk04: Thank you, and welcome to UMC's conference call for the first quarter of 2024. I'm joined by Mr. Jason Wong, President of UMC. and Mr. Chi-Dung Liu, 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 2024 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.usc.com under the Investors Financial section. During this conference, we may make forward-looking statements based on management's current expectations and beliefs. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially, including the risk that may be beyond the company's control. For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filing with the SEC and the ROC security authorities. During this conference, you may view our financial presentation material, which is being broadcast live through the internet. Now, I would like to introduce UMC's CFO, Mr. Chi-Dong Liu. to discuss UMC's first quarter 2024 financial result.
spk01: Thank you, Michael. I'd like to go through the first quarter of 2024 investor conference presentation material, which can be downloaded or viewed in real time from our website. Starting on page four, the first quarter of 2024, consolidated revenue was $54.63 billion, with gross margin at 30.9%. The net income attributable to the stockholder of the parent was 10.46 billion NT, and the earnings per ordinary shares were 0.84 NT dollars. Utilization rate in first quarter of 24 was 65%, similar to 66% in Q4 of last year. However, the shipment has increased by about 4.5%. On page five, for the sequential financial comparison, revenue declined slightly to 54.6 percent, sorry, 54.6 billion NT dollars. Gross margin was down 5.1 percent to 30.9 percentage point, or 16.899 billion NT. The operating expenses normally in first quarter is a seasonal low point. Therefore, we can see the operating expenses was down 13.4% to 5.7 billion NT in Q124. And our other operating income mainly is subsidies from government decline quite a bit to 513 million NT in Q1. This is largely coming from our shaman operation. Their government subsidies recognition is in line with their depreciation curve, which has come down significantly in 2024. And overall net income attributable to the shareholder of the parent was $10.4 billion in Q1 versus $13.1 billion in Q4 of last year. EPS was 0.84 for the first quarter. On page six, the year-over-year comparison, revenue also stayed similar range, almost slight increase of 0.8 percent. Gross margin, however, declined from 35.5 percentage point to 30.9 percentage point in Q1, mainly due to increasing costs, such as depreciation expenses. And for the non-operating income, there's also a big difference, mainly due to our portfolio holdings, investment holdings. This is the mark-to-mark again. only about $1 billion in Q1 versus $4.6 billion in the same period of last year. On page seven, our cash is now about $119 billion NT, and our total equity is $378 billion NT. Most of the increase is in the PP&E, property plan and equipment, which right now stand at On page 8, there's a one-time annual adjustment in our ASP in Q1 of 2024, which are also the main reason offset the 4 to 5 percent increase in weight for shipment in Q1. So, the magnitude is quite similar to that in first quarter ASP. On page 9, The original breakdown of our revenue stayed relatively similar quarter over quarter. Europe declined 3 percent from 11 percent in Q4 last year to 8 percent in first quarter this year. On the next page, page 10, there's also a big change in the IDM composition versus fabulous revenue. So, this quarter is 18 percent versus 82 percent, while last quarter was 22 percent versus 78 percent. On page 11, the application breakdown remained relatively stable. On page 12, we see a seasonal downward adjustment in some of our customers, which lead to a small decrease in our 2022-2028 revenue percentage point. of 33 percent, and the rest of the technology geometries are relatively stable. On page 13, our capacity breakdown in 12-inch equivalent capacity, most of the increase is coming from 12A in our Tainan Z, which is our P6 expansion. and there will be some spotty areas of efficiency improvement for some of our other FABs. Total 12-inch equivalent capacity is 1.2 million in Q1 this year. Our CAPEX for after first quarter remain unchanged, still stay around 3.3 billion cash-based CAPEX for 2024. Majority of that will be attributed to 12-inch capacity expansion. So the above is a summary of UMC results for Q1 2024. 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. Jason Wong Thank you, Qigong.
spk08: Good evening, everyone. Here I would like to share UMC's first quarter results. In the first quarter, our wafer sharements increased 4.5 percent quarter over quarter as we saw a pickup in the computer segment. Despite a slight drop in the utilization rate to 65 percent, we were able to maintain relative healthy margins due to a continuous cost control and operational efficiency effort. Contribution from our specialty business increased to 57% of total revenue, driven by demand for power management ICs, RFSOI chips, and silicon interposers for AI servers. During the quarter, our teams continued to make good progress on key pipeline projects, both customized solutions for customers as well as new technology platforms to serve high-growth segments, within the 5G, AIoT, and automotive markets. This includes embedded high voltage, embedded non-volatile memory, RFSOI, and 3D IC solutions. In line with our policy to provide a stable and predictable dividends to our shareholders, UMC's board of directors recently approved a shareholder cash distribution of approximately $83 per share. which will be a higher payout ratio than the previous years. This is subject to approval by shareholders at the annual general meeting in May. Looking ahead to the second quarter, we expect to see an increase in wafer shipments as the inventory situation in the computing, consumer, and communication segment improves to a healthier level. As for the automotive, industrial segments, demand remains mute, but the pace of inventory digestion has been slower than anticipated. While we still expect some lingering impact on macro uncertainties and cost headwinds in the near term, UMC will continue to invest in technology, capacity, and people to ensure UMC is ready to capture the next phase of growth driven by 5G and AI innovations. Let's move on to the second quarter 2024 guidance. Our weight assurance will increase by low single-digit percentage. ASP in U.S. dollars will remain firm. Growth margins will be approximately 30%. Capacity utilization rate will be in the mid-60% range. Our 2024 cash-based capex will be budgeted at U.S. $3.3 billion. That concludes my comments. Thank you all for your attention. Now we are ready for questions.
spk10: Thank you, President Wong. 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. Now please press star key and number 1 if you would like to ask the question. Thank you. First question we'll have Randy Abrams, UBS. Go ahead, please.
spk11: Okay, yes. Thank you, and good evening. The first question I wanted to ask on the 28 nanometer where you mentioned it seasonally dipped in first quarter. Could you talk about the outlook, like if you see that recovering And how do you see the P6 as you bring up the rest of that capacity? How do you see application to build that capacity or keep it loaded?
spk08: Well, I mean, for Q1, the 22 and 28, we saw a decline. And because we experiencing the smartphone seasonality, which will lead to a lighter 28 and 28 loading. We do expect to pick up the 28-millimeter wafer shipment in Q2 2024. The 28 loading will remain at a relatively healthy level based on current projection, and which is supported by product in OLED drivers, larger technologies such as ISP, Wi-Fi, and SOC process applications. After the Q1 2024, we will see higher wafer shipments and driven by the demand from both communication and consumer samples.
spk11: Okay. And the blended pricing is firm overall, but you do have the mixed shift coming back to 28. Could you talk about the like-for-like pricing environment if you see next few quarters negotiation? Would there be any like-for-like pressure, or do you expect it would be like first quarter each year? would be the time the bigger negotiation happens.
spk08: Well, I mean, that's the typical practice. And as we mentioned in January call, the ASP will remain firm after the one-off pricing refresh in Q1. And we are still expecting that. The company's pricing strategy has remained consistent, which is based on our value proposition. And at this time, we still expect the pricing will remain firm in the second half of 2024. However, we do believe that, you know, in terms of the like-to-like pricing adjustment and so on, we believe the focus should be elevating our customers' product competitiveness and to help them win more market share. So while our pricing strategy remains consistent and aligned with our value proposition, But it also includes to stay competitive and resilient against the market dynamics. So then we'll continue monitoring the market dynamics.
spk11: Okay. So it sounds like broadly firm, but some flexibility were needed if it's a competitive situation. That's correct, yes. To revisit the CapEx, I think you mentioned last quarter, majority of it was either residual for P6 or infrastructure. So a lot of the equipment spend is still to come. But I think you were planning it to start up sometime around Q2 of next year. So is there a way to think about how much capacity in the first phase? And have you made that decision to bring up like a first phase like if you have the amount or how much you might need to outlay and I would think it would be mostly in 2025.
spk08: Are you referring to P6 or P3?
spk11: Sorry, the Singapore. Actually, I was referring to because you're doing the construction of Singapore. So how much you plan to bring up in Singapore in next year?
spk08: Yeah, so well, first of all, you're right and last quarter we did mention that you know, among the 2024 CapEx number, around 60% of the 2024 CapEx will be spent on the 12i P3 infrastructure, as well as some minimum tools and equipment. So we are spending on the P3, but mainly for the infrastructure. And given the current market dynamics and the customer alignment, we are projecting the 12i P3 production rent will actually start in January 2026 now. And the P3 will run by with high volume starting from the second half of 2026.
spk11: Okay, does that imply like off the big capex this year, would you still, it sounds like most of the equipment then would push maybe some next year, some actually in 2026. we should think, I mean, is there a rough way to think about it? Because it would affect, like depreciation has been rising, but that could maybe level it out with that push out.
spk08: Right. I mean, we are. We certainly are managing that. We are projecting CapEx will peak out this year and will not impact the company cash dividend policy first. I believe that people care about that. As we have stated in the past, Our CapEx strategy continues to remain disciplined and ROI-driven, and also along with our affordability. So that means we are managing that. But the CapEx will be picked out this year, the 2024.
spk11: Yeah, and I did see you have the $3 dividend that you confirmed. Actually, the last question, it ties to the AI, like a lot of the attention goes to the high end, like the GPU, the ASICs, but you did put in your remarks kind of reminder on the, you have the silicon interposer, but could you kind of outline where you still have opportunity, like since that seems like the strongest, still the strongest momentum driver, like where UMC can participate, like silicon interposer or other components into AI or HPC?
spk08: I mean, we certainly would like to explore more, but Not yet. Well, at this point, while the recent focus of AI chips has been on the most advanced computational chips to run the AI module, and the chips require handling data transmission and the power management are also equally important. And so UMC's focus is on those two areas, the data transmission as well as the power management. Specifically, the AI server will need a high-speed IoT. chips and memory controllers to handle the data transmission and the power management IC for every computing and memory unit to optimize the power consumption. Similarly, you know, technology offering from 55 nanometers, 12 nanometers, specialty technology, non-volatile memory, 3D IC, they are all well suited for the edge AI applications such as wearable, smart home, et cetera. In that, our solution will offer to enable those edge AI devices to achieve the optimal balance among cost performance, form factor, power efficiency, and we'll continue to work closely with the customers to bring those innovative edge AI solutions to the market. Well, I mean, like I thought at the beginning, while we are still in the early stage of the portfoliating the edge AI, we are recognizing the growth potential of the AI markets And we are ready to capture those emerging opportunities. And based on the, even we are early, but based on the current projection, we are expecting UMC's addressable market within the overall AI semiconductor market will be around 10 to 20%. Okay.
spk11: So you capture 10 to 20% of the AI, Tim, like with your portfolio? Okay.
spk08: Randy, actually, that's more addressable. I hope I can... Addressable.
spk11: I should say not capture. Yeah. Your solutions can target, and then it's a share of that. That makes sense. And to clarify, too, on the silicon interposer, do you plan to expand from the 6,000? I think that was the last guidance you gave, 6,000, if you would add further capacity to that.
spk08: Yes. That's the current 2.5D interposers. Let me maybe elaborate a little bit more on our 3D IC space. In addition to the interposer, our 3D IC offering includes the wafer-to-wafer hybrid bonding active interposer with TSV and the 2M PAPD interposer with DTC. And so the interposer is the one of the offering in which that's where the market is today. But, you know, we are cautiously monitoring the expansion of the current interfocal capacity and continuing to focus on the expanding on the rest of the solutions. Those solutions end to provide a cost-effective performance efficiency alternative for semiconductor devices through a vertical stack of silicon wafers, or DICE, which will give a small form factor, enhance the bandwidth and lower power consumption for various applications including the Edge AI and the data center and communications. So we are cautious about the current solution of interposer expansion. We want to end for the future expansion for the interposer with DTC and other interposer with TSV and as well the wafer-to-wafer hybrid bonding.
spk11: Okay, great. Thanks a lot, Jason, for the call.
spk10: Thank you, Randy. Thank you. Next one, Goku Harihalan. JP Morgan, go ahead, please.
spk02: Yeah, hi. Thanks for taking my question. My first question, Jason, I think last call you mentioned that your growth rate expectation for Foundry is about high single budget and expect UMC to kind of grow at a similar pace or strive to grow at a similar pace. Is that still your expectation right now or has anything changed given the slowest automotive, industrial recovery, has anything changed on the numbers?
spk08: Hi, Google. I mean, yes, you remember well, and let me give you a bit of update. There are some changes. One, the sound area did not change. For instance, we still project the semi-industry will grow in a mere single digit. That did not change. For the foundry, you will grow at a low team year over year. And that didn't change. However, majority of the 2024 growth in the boundary will be driven by the AI servers. We actually continue to monitor that. I think the biggest momentum is coming out from the AI servers. And therefore, the growth for the UMC addressable market now remains flattish for 2024. However, you're right. Our intention is still to expect to outperform our addressable market. But I think the current addressable market projection for us is a for 2024.
spk02: Understood. That is quite clear. The second question is on some of the specialty projects that you have on RFSOI that you called out and also the high voltage driver ICs on OLED. Could you talk a little bit about your market presence, especially in RFSOI, how big this is? Because it seems like you're starting to gain some market share from the current market leader on some of these platforms. So could you talk a little bit about these specialty platforms, especially RFSOI and all the driver IT?
spk08: Sure. I mean, first of all, we continue to address all specialty technology, not just limited at RFSOI. However, we see a good momentum from our RFSOI market penetration. We are seeing a, you know, significant market share gain in the space. However, I don't have a specific number to share with you right now. In the, I may be able to update you next time. The, well, for the nonvolatile memory and the, we also gain some traction on that. While we have a maintaining our market position on the embedded high voltage.
spk02: Understood. One more question I had is on the, as we are kind of moving towards spending primarily for the FAB 2 LI P3, are there any capex offsets that we will potentially get for the Singapore FAB, or is it mostly the prepayment from customers And the government incentives are mostly on tax breaks and other kind of profit-driven subsidies.
spk08: Maybe Google, if you can repeat that question again.
spk02: Yeah, so I'm asking for Singapore FAB. Do we get any capital offsets, like CapEx offsets, that offset our CapEx? Or is it mostly going to be like tax breaks and other... kind of subsidies which kick in once you start production?
spk01: Yeah, we cannot go into detail, but there are government incentives issued by the Singapore government, including both test break as well as the subsidies on capital expenditures. And the overall package is equal or better than our previous investments. the P1P2, because of the more advanced technology investment we have in Singapore. So we are very grateful for the strong support from the Singapore government, and the enlarged hub in our Singapore operation actually will enable us to receive even more benefit out of these greater economic scales.
spk02: Thank you, Dong. So the 5 billion spend that we had projected earlier, that is more like a gross capex number, we should assume?
spk01: Yes, roughly for P3. Roughly.
spk02: Okay, understood. And one more question I had is on 8-inch. Given 8-inch seems to be still pretty sluggish. Are there any plans on flexibility for the 8-inch capacity? Is there any plans to potentially convert 8-inch to other areas, compound semiconductors, silicon carbide, or any of those areas?
spk08: Well, first of all, we are continue anticipate pressures from the 12-inch material that has impact 8-inch supply chain. So we definitely need to address that. While certain of the mainstream applications will remain 8-inch nodes, we also try to expand in the technology, offering two silicon carbide, gamma nitride, but they're still in a very early stage. Most of the silicon carbide today is at a 6-inch, and we are more focused on an 8-inch migration, and we can update more progress once that becomes mature.
spk02: Okay. Thank you. Thanks, gentlemen. Thank you.
spk10: Thank you. Next one, Bradley, Bank of America. Go ahead, please.
spk07: Thank you, Benjamin, for taking my question. So I have two questions. One is on the silicon interposer or the advanced packaging. We have learned that the management is cautious or less, well, active in expanding this this part of the capacity. So we are on track to hit around 6K per month and no further expansion. Should we assume that? And then a follow-up on that is that we know that we are expanding the other, well, wafer-to-wafer technology and other 3D solutions. So when should we expect this part of business to, well, take off? Thank you.
spk08: So first question is the intervals. Yes, we will maintain that 6K capacity, and we continue seeing that at a stable run rate for 2024. And for the others, some of the RFSOI applications are already starting to use the wafer-to-wafer hybrid bonding solution, so they were ready for production in 2024 as well. And so we gradually introduced some of the advanced die-to-die and the wafer-to-wafer stacking solutions and gradually increased that capacity as well.
spk07: Got it. Thank you very much. Glad to hear that. And then my second question will be on the, well, our node migration. We have learned good business on that 22 and 28 nanometer with the OLED driver IC and some products migrating to 22 and 28 from 40. And we would like to learn the outlook of 40 and the, well, utilization outlook and what products can we expect to help fill the 40 nanometer capacity gap.
spk08: I'm talking about 40 or 14? 40. For the mature 12-inch, the utilization rate for both 40 and 65 will remain flat-ish for the second half of 2024. And, of course, this still highly depends on the pace of the overall market recovery, and we closely monitor that. The same time, There are applications still coming into the 40 nanometers, such as the RFSOI and as well as the non-volatile memory. There are some new applications that will come in adopting the 40 nanometers.
spk07: Got it. Thank you very much. Actually, I also wanted to ask about 1414. So despite the limited capacity currently, there is still emerging business opportunities in the market. Does the firm plan to allocate more resources for the expansion on this 14?
spk08: Our current focus on the ThinkFact is on the 12 nanometer cooperation with the U.S. partners. which the program is kickoff at beginning of this year. And the focus is try to, you know, making good project on the code development, which is on track. And we also seeing a high level interest and we see numerous increase. At this moment, we are working with our customer to accelerate the ramp schedule for the 12 nanometers. So, yes, I mean, the focus will be shipping to the 12 nanometer instead of 14.
spk10: Thank you very much, Jason.
spk08: Thank you.
spk10: Thank you. Next one, Bruce Liu, Goldman Sachs. Go ahead, please.
spk03: Hi, thank you for taking my question. I want to ask about the, Jason, your view about the cycle, right? If you look at your guidance, you're guiding for, you know, a flat to slide out for the total revenue, which is a sequential growth for your quarter revenues, like most like it's flatties or slides out every quarter for the next coming quarters. And your margin is somehow flat for 30% if there is no more ASP erosion. So which is, you know, there is no recovery at all, you know, for the, for the, for the industry. So, you know, it seems to me that this inventory is the current cycle is a lot longer than expected. So when do you see the inventory correction will, you know, the restocking team will start to kick in and provide some minimal help for your business, though?
spk08: I mean, Bruce, first of all, let's talk about inventory. We have noticed the overall industry inventory level continues to improve. Specifically, we have seen inventory getting to a healthier level in the computing industry. consumer and communication market centers. However, we still observe our customer taking a more of a conservative approach in their inventory restocking behavior. In other words, we're seeing more of a rush order instead of the confident projection going forward. I think that mainly because the biggest concern is still at the overall macro outlook, which could impact the market dynamics. The other two market segments for the inventory digestion for the auto or industrial segment is still slower, like I mentioned earlier. So I think the market is prudent. The customers are prudent about the market outlook. We do see the overall industry are recovering. And so we do think the foundry industry will grow in the low-teens percentage year over year. However, most of the resources is more allocated to the AI server. So I think the AI server will be with more of a higher growth rate versus the rest of the market applications. And since we have less exposure at the AI server, so I think our projection at this point is more conservative. However, we are optimistic about the inventory
spk03: So if the AI continues to be strong for next year, you will continue to be muted? Is that the basic assumption?
spk08: I mean, well, the other thing that we do, we do foresee the auto and industrial segment, inventory situation will become more healthier by end of the year. So I think all market segment within UNC addressable will become much healthier in terms of their inventory situation starting from 25.
spk03: I see. Okay, the next question is for the events, you know, 3d IC packaging, which, you know, Jason starts to talk a bit more, I want to know the value proposition for UMC in this business, because you don't have the events, no, you don't have three or five nanometers. So which is somehow vertical integration is important. So where do you see your value? when you don't have the advanced node size for the packaging? And what's the profitability look like for this business? It's got to be the marginal quality for you.
spk08: Well, I mean, first of all, I mean, you're right. But if we look at this market specifically, some of the device is looking from the form factor standpoint, and some devices looking from the enhanced bandwidth standpoint. and lower power consumption. So if you have a horizontal view, I think from the small foam factor standpoint, some of the applications do not require most advanced technology nodes. And some of the applications will probably need a little bit better, but still not the most advanced, because they're seeking for the balance between the foam factor and the higher bandwidth and the power consumption. But if you directly referring to the very super high bandwidth and which that's a space that we are not addressing. So there's still a sizable market within the stacking, the 3D IC space for us.
spk03: So that is what you mentioned about 15 to 20% of the addressable market.
spk08: That's among the AI. Of the total. Yeah, the overall AI semiconductor market, yes. And that's part of it.
spk03: I understand. Thank you. OK. Thank you. And the profitability? Profitability for this business?
spk08: I mean, you know we're very cautious about that. And we've been running the company, improved our structural probability for a few years already. And of course, any solution we're offering and operational efficiency will always be part of the consideration. that will be a profitable operation for us, yes.
spk03: So we can consider as a margin of credit for this business?
spk08: I mean, right now I can't come up with a margin of credit, but we'll try our best to maintain our structural probability.
spk10: Okay, thank you. Thank you, Bruce. Thank you. Next one, Charlie Chun, Morgan Stanley. Go ahead, please.
spk12: Hi Jason, Qi Dong, Michael, and David. Thanks for taking my question. So first of all, Jason, great calls on the cycle and the market forecast. I think your industry peers is converging to your kind of forecast on the non-air market. And also excellent job on the pricing discipline. So well done on the margin side. So a couple questions from my side. So first of all, The CAPEX, right, does that include some spending for the U.S. partner FAP? Because you kind of mentioned that there could be some department making required for the U.S. operation.
spk08: I mean, not for the 2024 number, that's not a whole lot. So that would not change the current CAPEX projection. When we say we pick out in 2024 in terms of capex, and the 2025 will start declining, that's already including that assumption.
spk12: Oh, OK. So any capex for that bottom making should be more 2025?
spk08: Well, yeah. Most of it will happen there, yes.
spk12: OK. Yeah, and also staying on this 12 nanometer business, you said you try to accelerate customer schedule. Do you think any kind of production can be ahead of 2027?
spk08: We certainly hope so. But a cooperation like this scale naturally comes with various kind of challenges, right? We have gone through a rigorous due diligence since day one, and we have been proactive in managing those potential challenges. So, so far, the cooperation has been a positive for us, and so we want to focus on to accelerate that, but I can't give you any specific at this point, but I think we have, I think I can tell you the project is on track, and we have good confidence we're making good progress right now.
spk12: Gotcha. So in terms of the customer's feedback or demand compared to maybe three months ago or six months ago, do you see more commitment from your customers or partners? So I remember the Intel FAB capacity is at 50K to 60K, right? Are you confident that you can fill that capacity?
spk08: I mean, we never specifically talk about capacity size. In terms of the capacity arrangement, it's very typical. We have to work with our customer and align with them based on their forecast, and then we can deploy that. So there's no specific capacity number at this point. Secondly, we are seeing more interest because we announced this early this year, obviously, that customers want to know more about it. And so we see a lot of interest. And I think we're making some good traction. But first things first, we have to demonstrate that ourselves. So all hands on deck is we just focus on execution today. And giving the... given the project execution standpoint, uh, we, we don't foresee any major risks. No.
spk12: Yeah. Okay. Yeah. So, yeah. So, so, um, I, I heard that, uh, your progress also, uh, get on nerve of your, uh, industry peer, uh, you know, for example, at this, uh, uh, key customer Nova tech, right. I'm not sure, uh, whether, uh, there's some dynamic that, uh, you exceed the Novartek supports. Because Novartek, in the future, probably they will more depend on TSMC. And TSMC also want to bundle with this customer tighter. So I'm not sure if there's already some counter move from your major competitor in 12 nanometers.
spk08: I mean, first of all, we do not comment any specific customer. Never do. And from the competition standpoint, we more look at this in a way of building a strong relationship with our customers. It can only forge upon a fundamental strength in technology leadership, manufacturing, capability excellence, the capacity offering. And so you have to win by that. You don't win by relationship. Having a good relationship is always good, but that's not what we focus on. And we will continue to strengthen our competitive advantage in supporting our customer and winning their business and building that relationship.
spk12: Got you. Yeah, so wish you success. So may I switch gears to some near-term or financial questions?
spk06: Sure, absolutely.
spk12: Thank you. On the gross margin side, I'm wondering how you model the electricity cost impact to your gross margin and also is it depreciation still growing like 20% year-on-year for 2024?
spk01: Depreciation should grow around 20% or a little bit less maybe given the current new schedule for Singapore P3. And the utility impact is actually after the older cost together, blended together, it's actually rather minimum. And our goal is always try to offset that through our operating efficiencies and also the benefit from the larger economy of scale. The current forecast is a small impact to our operating, to our gross margin.
spk12: Okay. So it sounds like you don't intend to pass through this kind of minimal additional cost to your customers. Do I interpret this comment right?
spk08: I mean, the cost and the pricing to us is actually two different things. From an ASP standpoint, I mean, our pricing strategy, like I said, is consistent based on our value proposition. And then we have to align with that that includes the competitive resilience, right? But from a cost, we always want to try the aggressive cost reduction efforts. to compensate or offset down the headwinds and to maintain our structural probability. So it's not a cost plus business model for us.
spk12: I see. So in the Q&A with Bruce, I seem to hear you kind of admit that second half margin can be also at a similar level. Did I hear it right?
spk08: I mean, we typically giving guidance, you know, quarter over quarter. But at this point, we more look at the market outlook. The ASV projection will stay firm. But we do keep down the headwinds. Like you said, the utility costs increase, inflationary costs increase, depreciation costs increase. And so there are some headwinds that we have to deal with. So we will continue aggressively, you know, spend the effort to improve our cost structure. And so the goal will be at least, you know, that's, you know, continue to improve our structure possibility from that standpoint. I mean, I have to say, currently we have been navigating the industry dynamics even with the utilization rate below 70%, right? I mean, so... So I think we have demonstrated that for the past, you know, a period. And now we're dealing with the headwinds in depreciation, all those inflationary cost pressures, and I think we'll continue to do so. And so despite those challenges, we will have relentless effort to overcome those challenges.
spk12: I see. So last one from me. So on the end market trend, one observation, so I fully respect and you have been right about the cycle recovery market forecast, right? But recently we've seen through here that smartphone supply chain continues to see all the cuts. One of your major customers will report this Friday, I guess. So We are seeing inventory destocking, some tough situation for China smartphones still. You seem to say the inventory is healthy. So can I know how you're going to reconcile those data points?
spk08: I mean, I kind of touched that. So first, we are cautiously optimistic about the the rest of the year. If I put it this way, at this moment, we foresee the Q1 2024 could be the button. And the biggest uncertainty is the overall macro outlook that could impact end market dynamics. So because the visibility, insufficient visibility at this point, giving the customer is, you know, practice, a rush order practice, So we feel optimistic about it, but we need to be cautious about it. If the end market does not recover as we expected, then we could have a challenging second half. But however, at this point, we have not seen that. So we really hope that if the market continues digesting the inventory, gradually improving, the air market demand gradually improving, we actually foresee the Q124 will be a button for the year.
spk12: I see. Thank you, gentlemen. Awesome discussion on the pricing between and also the 12 nanometer strategy. Thank you.
spk08: Given that you have complimented me twice, I have to say thank you.
spk10: Thank you. Thank you. Next one, Jason Jones, CLSA. Go ahead, please. Thank you for taking my questions.
spk06: I wonder if you can give us more details in terms of the demand in second half. I mean, can you give us outlook or more details for 28 nanometers or 40 to 90 nanometers or 8-inch? For the...
spk08: Well, I mean, let's talk about the Q2 since we're in the current quarter. And the Q2 outlook, if we look at the by application, we expect the waiver demand in consumer and computing segment will grow while the automotive industrial segment will remain soft as they're still digesting the inventory. So they're still in the mixed bag for the Q2, but overall shipment, I think, will grow for the over-quarters sequentially. If you break it down to technology nodes, the 28 and 22 will gradually improve. And for the mature nodes, the 12-inch, 40, and 65 will stay flattish, while the 8-inch will stay flat. radish as well. And so that will be the current projection for us.
spk06: Okay, thank you. So can we expect that there will be normal seasonality demand in Q3? And how can we expect whether your Utah children rate can reach maybe around 70% in this traditional hot season? Can we expect that kind of seasonality or demand in Q3?
spk08: Well, I mean, at this time, the market is still lack of sufficient visibility, like I said, for the second half. I try to give you an example. We have observed rush orders from customers as they continue to managing their business prudently. And for auto and industrial, they have a slower inventory digestion. So by end of the year, I think auto and the industrial will be at a much healthier position. So given the mix of that, it's hard to tell you if the Q3 will recover to a 70% utilization rate. see the sound market segment has a healthy inventory, so they have the demand more directly linked to the end market needs. And this is the auto and the industrial still have to digest their existing inventory on hand. So if the macro situation is healthier, if the macro is recovered, which we expect, on the computer, consumer, and the communication segment, the demand will redirect to us to improve the loading situation. So there's so many different variables right now, and given the insufficient visibility, I can't give you anything specific, but we definitely feel optimistic about it because the inventory situation is improving in many of the market segments already. We just have to continue monitoring the progress, and we will keep you updated quarter by quarter.
spk06: Great. Thank you. So my last question is in terms of 28 nanometers or 22, because on the demand side, actually, we found some of the clients are migrating from 2228 to maybe thin-fet process nodes, including SSD controller or Wi-Fi 7s. And on the supply side, we found that your competitor in China is planning to enter into mass production for 28 high-voltage process nodes. So the demand is moving into the thin-fat process node. And on the supply side, we know that UNC had kept good positions in 28 nanometers. But on the supply side, we found that there's new players are planning to enter into the high-voltage process market. How do you look at or how do you plan to keep your market shares or keep your technology leadership in high voltage or in those kind of niche markets or your products to maintain your market shares?
spk08: Fundamentally, the answer to that is we need to stay competitive. We, you know, in the past and even currently right now, at this moment, we work closely with customers, strategic customers, to build specialty technologies, differentiation, and lasting value for them to enhance our product portfolio as well as our customers' product portfolio and with a diversified capacity. So we want to do that to offer our customer with a competitive solution. And so I think that's the answer to that. The competition is everywhere. And the key answer to that is we have to stay competitive. And we definitely strive to do that.
spk06: OK, thank you. I have no more questions.
spk10: Back to Q. Thank you. Next one, Laura Chen, Citi. Go ahead, please.
spk05: Hi, good afternoon. Thank you, gentlemen, for taking my question. I think my question is also kind of a follow-up on the CapEx outlook and also the depreciation. Since, Jason, you mentioned that the CapEx will pick out in this year, I'm just wondering that looking forward, how should we look at the depreciation cost trend into next year? How would that impact our gross margins?
spk01: The depreciation impact will be a kind of delay factor. So if the cap is peaked in 2024, I think the depreciation expense probably will be peaked two or three years later. So the trend will still be on a minor upward trend all the way to 2026.
spk05: So the magnitude of the depreciation cost increase for the following few years You expect that will be more like a steady increase where there will be gradually like a scale up because still in the past two years we see the CapEx increase.
spk01: Given our RI-driven-based CapEx and we are managing our overall depreciation expenses as a percentage of overall revenue, so I do expect the increased magnitude should be under control and also acceptable by the investor community.
spk05: Okay, thank you. And also for the AI opportunities, I understand that, Jason, you mentioned that will be 10%, 20% addressable market. And where are we now? And do we expect there will be a secular growth for the following two, three years?
spk08: Well, I mean, Laura, the... Like I said, we're still in the early stage of the activation of the Edge AI. Most of the focus today is running the computation chips for the AI modules today. So we have a very small exposure there. But we do expect the Edge AI will start coming in. And there are some of the projects that we have in discussion with customers They all have a very high expectation. The market was taking off soon, but I don't have any specific today. We do project those applications or those features will be used in the Edge AI in the next few years, and that will probably representing at a 10% to 20%. It could be even higher, but at this point, we project about 10% to 20% of the AI to the company.
spk05: Okay. Thank you very much.
spk10: Thank you, Laura.
spk05: Thank you.
spk10: Ladies and gentlemen, we are taking the last one. The last question, Tim Shaw's Melander, rapper Atlantic. Go ahead, please.
spk00: Hi. Thank you very much for taking my questions. I just had two, if I could sneak them in, please. The first one was on the advanced packaging and chip integration. You talked about hybrid bonding moving into greater volume in 2024. Just wondering if you could share a few more details about the end application and if that's the partnership that you had press released with ASE, Faraday, and Cadence. Is that the application? And then I had a quick follow-up, please.
spk08: Well, first, for the wafer-to-wafer hyperbonding solution today, the application for the RF front-end module and the – it's not completely – correlated with the ecosystem press release. But to address your part of the question about the ecosystem conversation, for the ecosystem, we are not talking about one specific solution. We're talking about the UMC overall 3D IC solution is leveraging the entire ecosystem to support that. We do not do turnkey solution, means the end-to-end solution. We're only providing wafer-to-wafer hybrid bonding or the interposer and solution while we have all the ecosystem partners to support the customer to provide the total solution. So that's not only limited with the hybrid bonding mode.
spk00: Okay, but for that hybrid bonding, are you actually doing that wafer-to-wafer bond yourself in a UMC facility, or is that being outsourced or shared with some partners?
spk08: It's in-house, yes.
spk00: Okay, and maybe just, if I can, one sort of much, much bigger picture long-term question. The last year or so has seen significant capacity expansion in more mature nodes among China-based chip makers across a whole range of products. Just as you look out three, five years, how does that sort of influence the sort of strategic landscape and the amount of competition that you see or that you expect UMC to face? Thank you.
spk08: Well, I mean, we kind of touched that earlier. There's a couple of things that we see that, you know, driving the landscape changes. One is we do see more capacity buildup expanding for, you know, for geopolitical reasons and or for the, you know, for the reason the semiconductor industry has become so important. So people want to build up more capacity regionally. And so there are multiple reasons that drives the overall capacity buildup. And the fundamentally, I mean, we believe we need to stay competitive. So we're working closely with our customer to build differentiations and to provide values, you know, to enhance our product portfolio. And the end goal is we will strive to minimize some of the commodities exposure in some of the selected markets if those capacities build up. and it could affect the market, the end market, with some of the commoditized products. And so we need to continue to differentiate ourselves to minimize the exposure with that. If we look at the build-up situation, if they are driven by the geopolitical tension, that would, in our view, impose not only the constraints, but it also presents some of the opportunities are the customers seeking alternatives to support their sourcing objectives. And for UMC, we are well-positioned because our geographically diversified manufacturing sites, which allow us to work with the customers and navigate this geopolitical concurrence. We are only the few foundries that have fabs across Singapore, Japan, Taiwan, and China, and back with a comprehensive technology portfolio, not single node, not limited technology offering, but very comprehensive technology portfolio. And that could be bridging between FAB, which actually is very beneficial to some of the customers if they want to have a FAB flexibility, the cross-FAB flexibility. And each of our sites is equipped with a sizable capacity that can serve numerous market segments. And each of our regional manufacturing sites also being well-established with a still and complete ecosystem. And we can run very highly efficient local operations. And if you look at ourselves, you look at longer term, besides our strong manufacturing footprint in Asia, now we also extend our capacity offering into Arizona through the cooperation with the U.S. partner in 12 nanometers. That's another testament that we're expanding our technology offering as well. And so this will continue to further our competitiveness and to strengthen our customer supply chain resilience. So I think we can bring value to customers, and that's how you compete. I think we are positioning ourselves to continue to improve our market relevance, our market position, and hopefully the customer will see that. and they recognize the value, then we'll stay competitive and to differentiate ourselves. I hope that gives you a bit of context in terms of bigger picture.
spk10: And thank you. Ladies and gentlemen, we thank you for all your questions. That concludes today's Q&A session. We now turn things over to UMC Head of IR for closing remarks. Thank you.
spk04: Thank you for attending UMC conference call 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 nice day.
spk10: Thank you. Ladies and gentlemen, that concludes our conference for first quarter 2024. You may now disconnect. Thank you and goodbye.
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