United Microelectronics Corporation (NEW)

Welcome everyone to UMC's 2024 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 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 Event 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 third quarter of 2024. I'm joined by Mr. Jason Wang, President of UMC. and Mr. Chi-Dong Liu, the CFO of UMC. In a moment, we will hear our CFO present the third quarter financial results, followed by our President's key message to address UMC's focus and fourth quarter 2024 guidance. Once our President and CFO complete their remarks, there will be a Q&A section. UMC's quarterly financial reports are available at our website. www.umc.com under the Investors Financials section. During this conference, we may make forward-looking statements based on management's current expectations and beliefs. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially, including the 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 CFO, Mr. Chi-Tung Liu, to discuss UMC's third quarter 2024 financial results.

Thank you, Michael. I'd like to go through the 3Q24 investor conference presentation material, which can be downloaded or viewed in real time from our website. Starting on page four, the third quarter of 2024, consolidated revenue was $50.5 billion NT, with gross margins at 33.8%. the net income attributable to the stockholders of the parent was 14.5 billion NT, and earnings per ordinary share were 1.16 NT dollars. For the capacity utilization rate in the third quarter was 71 percent, which is slightly up from 58 percent in the previous quarter. On page five, the sequential comparison Operating revenue grew 6.5% to $60.5 billion NT. Gross margin was 33.8% compared to 35.2% in the previous quarter. Our net income in the third quarter was 14.44 billion NT. This is compared to the 13.77 billion NT dollar numbers in the previous quarter. And for EPS, it's 1.16 NT per share. On page 6, for the first three quarters of 2024, cumulative revenue grew 2.6% to 171.9 billion NT. Gross margin rate was 33.3%. The decline of 4.4% over 2.5 percentage point was mainly due to the increased depreciation happened in 2024. For the net income for the first three quarters reached $38.64 billion NT. For the net income attributable to the shareholder of the parent was $38.71, which is equivalent to $3.12 NT per share in EPS. On page seven is our balance sheet. Our cash dividend payout still remain above $100 billion NT. The number is $103.4 billion NT at the end of third quarter. The total equity for the company now reached $368.5 billion NT at the end of third quarter 2024. For Q3 2024, on page 8, the ASP numbers remain resilient, flattish. And this is compared to the previous quarter. We didn't see much change for our blended ASP. On page 9, for revenue breakdown, Asia now represents 65% of our total revenue, and Europe declined by 2 percentage points from 7% to 5%. On page 10, IDM rebound from 13 percent in the previous quarter now to 15 percent in the third quarter of 24. In terms of segment breakdown, communication also increased to 42 percent from 39 percent in the previous quarter, and the computer declined by 2 percent from 15 percent to 13 percent. On page 12, our 22, 28 nanometer revenue in both absolute dollar amount and also percentage reach a record high of 35% in the third quarter of 24. And 40 nanometer stay around 13% in the third quarter. For our capacity table on page 13, 12A in Tainan continued to increase leading-edge capacity, and that will bring up the full-year capacity increase for UMC to above 7 percent. And the last page, on page 14, we revised, update our annual CAPES budget from previously $3.3 billion to now $3 billion. This is just to reflect the update schedule, mainly for our Singapore capacity rent. So the above is a summary of UMC results for 3Q 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.

Good evening, everyone. Here, I would like to share UMC's third quarter results. In the third quarter, we delivered results that were in line with the guidance. In particular, Weber-Sherman grew more than expected, increasing 7.8% sequentially due to a strong demand for 22 and 28 nanometer products. Our strategy is to develop specialty technology solutions that deliver best-in-class performance, and I am pleased to report that revenue in absolute dollar derived from our specialty portfolio is the record high in the third quarter, accounting for 53.1% of total sales. In our industry, technology is fundamental. We continue to invest significantly in technology development every year to ensure we are ready to support customers' next-generation product features with more advanced solutions. For instance, Our 22 nanometer display driver solution was the first to be made available to the market and offers unparalleled performance. And we foresee strong payback momentum in the upcoming months. With regards to Q4 outlook, we are seeing demand stabilizing across end markets and a clear downward trend in inventory levels. Looking ahead, we have a number of exciting technologies and collaboration projects in the pipeline as we continue to align closely with our customers' product roadmap. In addition, as we hear consistently from customers, UMC's diversified manufacturing footprint is also very important in supporting their long-term strategies. Our new fab extension in Singapore is nearly in completion, while our collaboration with Intel remains on track. This project will further enhance our value proposition to customers and strengthen our position in the foundry industry. Now let's move on to fourth quarter 2024 guidance. Our wafer sharemen will remain flat. ASP in U.S. dollars will remain flat. NT dollar appreciation may lead to a decline in our reported Q4 NT dollar revenue. Gross margin will be close to 30%. Capacity utilization rate will be in the high 60% range. Our 2024 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 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. Thank you. Now please press star 1 on your keypad if you would like to ask the question. Thank you. And our first question will be coming from Sonia Ling of UBS. Go ahead, please.

Thank you very much. So my first question is on Q4. So recall back in July, Jason, you mentioned there could be some seasonal slowdown into Q4. But now it seems like you are able to hold out the revenue for Q4. It's a bit better than expected. What's driving the upside at this point in the interview on 2025?

Well, for Q4, we expect, we foresee the trend in computing segment will be slightly better quarter over quarter than we originally expected.

and, however, will be offset by mild decline in communication and consumer statements. Net-net, I think there will be more of a flat quarter from a ship-off point of view. For 2025 market outlook, although the global economic shows sign of a recovery and inventory level is improving, however, the forecast from our customers at this moment remains conservative. For 2025 early preview, we do expect to see an increase in our weight assurance as well.

Got it. Thank you, Jason. So follow-up on pricing. Lately, there's lots of noises and debates, but just wonder from your perspective, are you seeing stabilization or are you seeing another round of competitions into year-end or 2025? Yes. In Q1 this year, the company did offer a one-time reset for blended ASP that dropped about 4% to provide some customer support. And so any initial expectations based on your current negotiation with the clients, should we expect some blended ASP erosion into early 2025 as well?

Well, on the ASP for the Q4 2024 ASP, our pricing will remain flat as we guide it. In terms of pricing situation, our UMC's pricing resilience has been well demonstrated during the demand supply imbalance that reflect our ability to navigate the challenge that arise from the capacity over supply. In our view, you know, throughout the 2024, there are capacity oversupply situation in which we're maintaining our pricing resilience. And we do believe our pricing resilience will persist, keeping our efforts on our technology value proposition and including our dominant position in high-end smartphone display leadership, some of the smartphone RF front-end modules. And while we continue doing a product mix optimization and with our diversify the manufacturing footprint, so we believe our pricing will persist and the resilience will persist.

If we're going to a 2025 pricing, we do foresee pricing of the world resembling, resemble a similar pattern to 2024. We're beginning of 2025, pricing adjustment will be, again, another one-off which reflects our alignment with the customer to cope with the market dynamics and get market shares. The pricing scheme is within our discipline of financial guidance and will not change our overall pricing position in these biddings. If there's another reset, would the magnitude be similar with Q1 this year? I mean, we will provide that guidance in an upcoming call, but there will be a one-off test. Got it. No problem. Another question on ghost margin. Q4 revenue is guided to be flat.

ASP is also flat. But you anticipate growth margin to fall to 30% from 34% Q3. What's the reason behind? And looking ahead, if based on a 30% or higher utilization rate, what would be the reasonable growth margin range that we should expect?

So for the Q4 margin, lower guidance is largely due to a lower investment addition rate, the high 60 versus 71% in Q3. Also, the NT dollar is a headwind because of 32.29 was the average Forex we used in the previous quarter. And this quarter, I think, at least in the beginning, even shoot up to nearly 31.5 per US dollars. And also, the higher depreciation arise from capacity expansion. This factor is going to impact us for relatively few quarters. I mean, we probably won't see the depreciation impact go away until a few quarters later. But most importantly, the gross margin, if we use EBITDA margin, actually the number are very similar quarter over quarter.

Got it. Thank you very much. That's all I have.

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

Hi. My first question, Jason, just wanted to get your view on your customer behavior and inventory levels. I think you mentioned that inventory is kind of coming down across the supply chain. Let's say next six months, do you feel like there is some prospects from your customers to kind of get into a bit of a restocking cycle? Do we feel like we can get back to like a 75%, 80% kind of utilization in the near to medium term, or is that still going to take some time given the inventory behavior from the customers seems like very, very cautious?

Sure, Gogo. Well, first, for the inventory outlook, from the application's perspective, overall performance Overall inventory level within communication, consumer, and computing have returned to relative normal level after several quarters of digestion now.

So we've built inventory for those applications since getting back to the normal level. For the automotive industrial settlement, they will require more time.

and probably until end of the Q2 2025, and to digest the inventory and return back to norm. After the inventory level return to norm, we do expect the demand pattern will follow the market seasonality.

Now, for the question, let's say, will there be a restocking and going back to higher utilization, It's our belief that the foundry industry is experiencing an oversupply situation due to the supply chain resilience considerations. We can see the current utilization rate probably will be the bottom for the UMC and hopefully will rebound back to the average healthy level. to maybe between 80% plus, and giving our continuous effort on technology differentiation. That was subject to the market's behavior, to the customer behavior, and our technology differentiations. And meanwhile, we're constantly focused on our technology differentiation, and with the hope that market will recover.

Got it. Thank you. And just a question on 8-inch. Feels like a lot of these issues are a lot more in play in 8-inch in terms of pricing as well as lower utilization. Is there anything strategic that UMC is considering? Are we at a point in the cycle of 8-inch that it is probably better to reduce the effective capacity that you have for 8-inch on a medium to long-term basis. Are we kind of at the point where there is enough capacity or enough products shifting from 8 to 12-inch that 8-inch doesn't really make much sense to have this much capacity?

Well, you're absolutely correct. And Anything is possible, but at this moment, we do not have any plan to reduce our 8-inch capacity. We do believe the overall market demand for 8-inch will remain steady, but we do see opportunities to get market share to differentiate technology solutions.

So we still have some expectation with our 8-inch recovery. Our current 8-inch loading is under recovery, and we expect the 8-inch loading will gradually improve, driven by the effort in strengthening our solution in VCD and high-voltage platforms. And after this few quarters, giving the positive feedback from our customer, we foresee the gradual improvement in 8-inch is very possible. Yes.

Okay. And maybe last question is on your partnership with Intel. Given there's a lot of noise about Intel cutting CapEx and having, considering restructuring, considering pin-off or kind of at least separation of business, et cetera, a lot of noise out there. Anything that you're observing in terms of your partnership on 12 nanometer with them? Any changes in the timeline? Are you still looking at the 2027 timeline? Is there a chance for any pull-in of the timeline, given that we're almost like a year or at least like six to eight months into that partnership?

Sure. Well, those are all good questions. Let me see. One is on our current partner situation, I can tell you that the current 12 nanometer cooperation is progressing well. Our customer partners are very positive on the potential of 12 nanometer distance opportunity. And the project's on track. Early engagement with the key customer have shown strong interest to put in our 2027 production schedule. According to the early evaluation feedback from the key customers, our 12 nanometer performance will be very competitive in industry.

Right now, we're working diligently with both our partners and key customers to further accelerate the schedule as required. And overall, we're cautiously optimistic about that progress, and we'll update you accordingly.

I can tell you the next milestone right now is the key milestone right now we're looking at is the keys.

The new product table will take place in 2026 from the key customers. Thank you very much. Thank you. Thank you. Next one, Laura Chan, Citi.

Go ahead, please.

Thank you very much for taking my question. My question is also about Intel's cooperation. Can you give us more details or any color of what kind of the applications that could be? And also, how should we, like, share the profits or the capacity we have reserved for that 2026 or 2027 worth in-fit process?

Well, first of all, for the application, it's mainly focused on communication and consumer product. And beyond that, there could be many other product type lines from the directive that we continue working closely with our customer. As far as the capacity

And the profit sharing, I mean, we are not liberal to, you know, update you the profit sharing again. However, from a capacity standpoint, we believe there is a sufficient capacity, you know, to expand.

And we just have to align with our customer and along with our partner to gradually put that expansion plan together. Once we have a creative picture on the initial number, then we'll share with you.

It's really based upon the customer adoption rate rather than constrained by the capacity.

Okay, thank you. And also, my second question is also about gross margin outlook. Straight to mention that industry-wise, we see the oversupply situation. And also, on the other hand, we have some ongoing expansion. So, I'm just wondering that do we have any idea about what kind of structure, growth, margin we are looking for in the longer term?

Well, I mean, first of all, we are continuing to invest toward to the future in developing new solutions in larger advanced specialty technologies. Therefore, we anticipate a rising depreciation burden during the rainbow phase of the capacity expansion. Qidong actually touched it earlier. Secondly, given the rising cost of goods in utility, renewable energy, and carbon tax, which our industry is experiencing, we have to continue to deploy aggressive cost management to offset those happening costs. and we'll constantly manage the projection of those impacts. You know, so given that, we still project that we feel we are confident that UMC will maintain a solid structural probability in the long term. And maybe post the 2025, once the depreciation numbers, you know, get to the level we expected, we'll get back to the, you know, between low 30 to low 40 range, which we believe that will be a healthy level of long-term gross margin target for us.

So, can you kind of assume that given our current iteration rate is only at about 60, 70 percent range and we saw the inventory digestion almost done? And structurally, we will see that 30% kind of at the relatively top level in the longer term.

I think there are many factors.

So it's very difficult for us to commit the absolute numbers. So what Jason just mentioned is there are several headwinds. coming, and we also work diligently to assess the impact. So overall, we do believe our structural possibility should be intact. And especially for year 2025 and 2026, we will focus more on our EBITDA margin, which really has no major reason will be deferred materially compared to the previous sound cycle.

Okay. Very clear. Thank you.

Thank you. Next one, Charlie Chun, Morgan Stanley. Go ahead, please. Hello. My first question is also regarding the pricing. I wanted to have a step back to compare your current status versus maybe two years ago. Two years ago, I remember when you

comment about your prolamics, right?

You said 70% is not commodity, and some of those are kind of single source, right? So customers wouldn't care about your pricing. But I remember a couple quarters ago, you said that makes... come down a little bit to, like, 15%, maybe half of your business. Yeah, but now I'm confused, right, because supposedly those commodity businesses should already go away, given the competition.

So you're exposure to those single source or differentiated product should be even higher than before.

In that case, why do you still need to do, like, a one-time pricing adjustment at the beginning of next year? That's my first question. Sure. I mean, you're right.

From a product mix standpoint, Given there is an oversupply situation in the industry, we also have to closely work with our customers to compete in their marketplace. The pricing discussion is more associated with closely working with our customers to gain market shares, not only associated with our stickiness with our customers. Based on the current utilization rate, It represents a very limited exposure to the product, price-sensitive from our perspective to our customer. So from a stickiness point of view, the comment remains intact. However, to continue to support our customers to be competitive in their marketplace, we do need to consider that.

Okay, I see. Thank you. It's very helpful. And then, did you observe that major fund retestancies also be more flexible on a mature notes pricing? Is that one of the reasons that you also want to adjust your price early next year?

Well, I mean, we don't comment on specific company or our peers. But in general, we need to get closer with the market price. If that's representing the range of the market price, then we have to respond.

So in a way, we are working with our customers. We are actually closely with our customers together to cook with the market dynamics. And, you know, the bottom line is we both need to be competitive. And from our side, we need to provide a competitive and differentiated technology solution and at the same time, you know, become virtually competitive as well and to gain our market share, yes, and with our customers, yes. I see. Thank you. And regarding the appreciative process, I'm wondering, can you comment a little bit about your high-end smartphone dispatch driver IT market share? I remember the third quarter revenue or utilization was pretty good. This is probably one of the reasons. So when I look at your first quarter UTR's decline, is that also because your market share is giving back to your competitor for this specific power line? Well, a few things, right? I mean, one is our utilization guidance has to reduce, mainly because our