Q2 2021 United Microelectronics Corp Earnings Call
After the conference is finished please visit our website at www Dot UMC to come on to the Investor Relations investors events section and now I would like to introduce Mr. Michael Lin head of Investor Relations at UMC and Mr. Leanne. Please begin.
Thank you and welcome.
Come to the Umc's conference call for the second quarter of 'twenty.
On the 1 I'm sure.
Joined by Mr. Jason Wang the person of UMC.
Do you see that flow of UMC.
In a moment.
To hear our CFO present, the second quarter financial results followed by all passengers.
Message to address Umc's focus on the third quarter 2021guidance.
Once all our president and CFO complete their remarks, there will be a Q&A session.
Umc's quarterly financial reports are available at our.
Travolta without currency Dot com.
The other investors.
Chief Financial section.
During this conference.
We may make forward looking statements based on Benjamin its 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.
Switching the risks that may be beyond the company's control.
All these risks please refer to UMC is fighting with the SEC in the U S and the hours the security authorities.
Now I would like to introduce UMC CFO, Mr. Chu doing due to discuss UMC is TSA second quarter 'twenty to 'twenty.
And credential results.
Thank you Michael from electric.
<unk>.
Investor Conference presentation material, which can be downloaded from our website starting on page 3 the second quarter 2021 consolidated revenue was over 50 billion Mark to reach 59.
Last time period.
Gross margin at 31, 3%.
Net income attributable to the stockholder of the parent was 11.94 billion and earnings per ordinary shares or 98.
Dollars.
And our utilization rate in this quarter I remain 100% plus.
For the second quarter.
Uh huh.
Wafer shipment in Q2 of 2021 was $12.4 4 million.
Wafer equivalent.
Please turn to page 4 our quarterly revenue in the second quarter average 50.
<unk> 9 billion up 8.1%.
Postpaid the higher wafer shipment.
Increased.
Gross profit much as a result increased to 71.3 per cent of 50, 15.9 billion NT dollars.
And Oh.
Net income attributable to the shareholder on the parent is 23.5 per cent.
11.9 billion NT EPS in Q2.2021.
598 NT dollar.
On page 5 for the first 6 months.
Okay.
Year over year comparison revenue grew by 13, 1%, mainly driven by higher volume as well.
But our product mix and also a higher ASP.
However, it was somewhat.
A simple.
The increase NT dollar exchange rate against U S dollars.
Gross profit margin reached 29 per cent for the first half of 2021 to a 10 day 84 billion.
And overall net income rich total $22.3 billion or.
On a tiny.
22.8 per cent.
Our margins.
EPS for the first 6 months after year 1.8, III NT dollars.
Our balance sheet, our cash on hand, and it's about 100 and tiny for families and team including about.
And $3 billion will be distributed to shareholders a cash dividend.
<unk> August.
Yeah.
Total equity reached 240 billion and debt.
Net.
Net asset value.
Value per share is around 19.3.
$20.
Now on page 8 our revenue breakdown by locations.
Increase.
Increase Oh, sorry on page.
Okay.
Okay.
Yeah P J.
Uh huh.
Revenue breakdown shall remain fixed.
3%.
Japan increase to about 7% and the rest of 2 regions.
Somewhat unchanged.
Oh, sorry on pitch.
And that's why I can skip.
So page earlier actually in quarter, 2 increased by close to 5%.
So back to page 9 IDM represents 15% of the total revenue and Fabulous to see rest of 84 per se.
On page <unk>.
10.
Upcoming near cash and settlement.
47%.
Also nice around 26%.
On page 11 overall.
Revenue below.
40 nanometer is around 38% and.
Army because it seems to be strong at 100% capacity utilization rate is around tiny per cent similar to that on a lot closer.
And capacity following capacity table show Oh, some incremental increase.
Mainly for 12.
Uh huh.
Cap ex.
And going forward for third quarter, there will still be some.
Debottleneck type of capacity increase for selected Uh huh.
So 4 page 13 on Capex for 2021, the budget remains unchanged.
Sure on 2.3.
Salience in U S dollars.
So.
It's a summary of Umc's result for Q2.2021 more details are available in the report which has been posted on our website.
I will now turn the call over to the President.
You wouldn't see Mr. Jason Wang.
Thank you too low.
EBIT everyone.
Here I would like to upgrade our second quarter operating result of UMC gross.
On demand fueled by <unk> adoption and digital transformation underpinned our strong performance in the second quarter.
Our manufacturing facility.
He says 100% utilization, while overall wafer shipment rose 3% quarter on quarter to 2.44 median age equivalents.
Revenue from 28 nanometer technology continuing to grow sequentially.
By application and hopefully into <unk> smartphones.
Once they join and digital TV.
During the quarter, we continue our product optimization and cost reduction efforts lifting our gross margin.
We expect the strength of structural demand to sustain and support the continuous improvement of our blended ASP.
As a result, the company's.
Gross profit in the first half of 2021 surged 54, 5% year over year to $28.4 billion.
Looking ahead, we anticipate demand to stay robust in the third quarter, driven by Mega trends, such as the <unk> and EV.
Supply.
<unk> is expected to continue across 8.8 inch and 12 inch facilities.
We foresee margin momentum to continue into the third quarter.
Supported by further product mix optimization cost reduction efforts and productivity enhancements.
In addition, we expect the adoption.
On rate of our 22 nanometer technologies will continue to gain traction.
Reflected by a pickup in customers 22 product tape outs in connectivity and display applications.
We will also focus on further strengthening our leadership position in a number of specialty technologies such.
She is on OLED display driver RF, Soi and imager applications.
Moreover, we continued to take important steps to enhance our corporate governance and sustainability efforts in our industry.
Earlier this month by independent directors were newly elected.
From our company's board of directors.
Representing more than 50% more seats and including 2 female directors.
Company also announced his pledge to reach net zero carbon emissions by 2050, plus wells are our commitments to work alongside our partners.
To reduce carbon intensiveness and rice renewable energy usage in our supply chain.
UMC is dedicated to enhance our corporate governance as well as addressing climate change to build a sustainable environment.
No that's the move on to third quarter 2021 guidance.
Our wafer shipments will increase by 1% to 2%.
ASP in U S dollar will increase by approximately 6%.
Gross profit margin will be in the mid 30% range.
Capacity utilization rate will be 100%.
Our 2021 cash.
Base Capex will be budgeted at USD, 2.3 billion.
That concludes my comments. Thank you all for your attention now we are ready for questions.
Thank you President <unk> and ladies and gentlemen, we will now begin the question and answer session. If you have a question for any of todays speakers. Please press.
Zero 1 on your telephone keypad and you were in total Q. After you on announced please ask your question.
You find that your question has there been any sort of before day, there's still turn to speak. Please present zero 2 to cancel the question. Thank you.
The first question is.
Coming from Randy Abrams Credit Suisse go ahead. Please.
Okay, Yes. Thank you congratulations on the continued improvement.
First question I wanted to ask on your strategy for mature 12 inch and 8 inch.
Last quarter, when you announced the expansion it looked more tied to $28.40.
<unk>.
So I'm curious if you have plans.
Or available capacity to add 4 from more mature node for Russia on 8 inch.
Well.
We announced the <unk> 6 is old center, there was the 28 nanometer.
On your email meter capacity with the option to upgrade to <unk> to the future okay.
We are in terms of the the other nodes in addition to the 28.
We mainly focus on zone.
Uh huh.
Limited growth space expansion so.
It's rather limited at.
45.
<unk>.
In general.
Our strategy in India.
Capex is we remain disciplined.
Disciplined capex.
<unk>.
Philosophy.
And.
Sure.
17, we always tried to drive a sustainable structural profitability based on disciplined Capex principal.
We have to align with our customer and sales to the market and giving our relevance in the marketplace before.
Before we making that decision at this point.
We will focus on our <unk> technology at this time.
For the year in general the 12 inch mature node.
Inge.
Ah facing on ROI challenges in capacity expansion investments.
We are looking for opportunity to work with our customer to overcome this.
Challenges if possible in the meantime, we will continue to enhance our productivity improvement and strengthen our value proposition to enhance our customer stickiness wheezing those notes.
Sort of on how we address this.
Okay, and I guess in talking to overcome challenges is it your view.
It's just not the economics like the return to invest on more mature 12 inch and just not many opportunities to find 8 inch space is that more of the issue or just more of the view market demand more of your opportunities 28, and 40, So thats, where you put the investment.
You're right.
Is it more.
On the economics and the floor space available.
Any greenfield.
Capacity expansion.
For the mature know youre competing with a fully most likely you're going to be competing with them fully depreciated capacity.
I'll, let the debt.
Men.
Significantly important to the customer.
Economics.
Economic basis than it will be very difficult to have a justified on ROI.
However, even if the customer right.
2 phases challenge together with us with that free will explore those opportunities.
Great No that's helpful.
The second question on pricing, if it's getting another good.
This gives me Hello.
Oh, Hello, Hi.
Yeah.
You are breaking up.
<unk>.
Yeah can you repeat your.
Question, Okay, yes, okay, sorry, I was cut off for a second okay. Yes. The second question on what a task if you could discuss your view on pricing from the higher base, where its up nicely in the third quarter do you expect it would continuously grow in fourth quarter and if you have an initial view on 'twenty to 'twenty.
2 the pricing if if you've said anything or even for the new phase.
The phase 5 expansion, if if youll get higher price and.
And then do you have a target like where gross margin factoring the price fingers, saying.
Where the potential gross margin could move toward.
Well, we typically don't.
Don't provide any guidance beyond the quarter. So we definitely will address the Q4.
Guidance doing that he was he was really coming from.
But in general the.
I'll believe the pricing for structural demand is here to stay.
And I also believe our customers thought recognizing that you wouldn't see value in a war on.
Contribution.
We do expect the strength of constructive demand momentum was sustained beyond the Q4.2021.
Okay, and just 1 last follow up looking out to 2023 since you announced your expansion like a number of foundries are also seeing that need and adding capacity do.
Do you see by 'twenty 3.
Contracting in to fix it but do you view by 'twenty, 3 but change on that kind of structural at least from maybe cyclical.
More supply and at that point kind of price. It goes back to the normal kind of some erosion or how do you see it.
Looking out 2 years so some of these.
Fabs come on come on line.
Well again, I mean, we were not here to do.
D.
Uh huh.
About this you know.
Natural industry, but in general our green, our new Greenfield Fabs will take more than 2 years to build.
Just like I said, you know we're not looking.
Now the Kansas.
China's situations get relief on through 'twenty 3.
However, based on the industry research.
Semiconductor market growth rate will accelerate.
Away from 'twenty to 'twenty, 2.2025, driven by the <unk> digital digital trends.
On 1 nation H P C E D in Iot.
And so we do believe these are up cycle will continue for a period.
Of course, you know, we can never guarantee 100 per se that loading.
Older time.
From the financial perspective, we have too many.
It's competitive.
To ensure the healthy gross margin.
So that allow UMC to weather the storm during the downturn.
From that standpoint.
No. We we have to address the fundamental okay and in order to address that.
Maintain such a healthier.
Gross margin per se.
Yeah.
While we do it from the reason.
Cycle, we'd take the opportunity to optimize our product portfolio and hands on.
Technology competitiveness and with along with our manufacturing capability and we believe those efforts and strengthen our relationship with <unk>.
Customer and and UMC, some occupancy instrument pet CT on decision.
I'm not here to predict whether we can approach.
This is P continuously, but I do think that by enhancing our capabilities, we'd be able to book.
Compensate.
The market volatility.
On or even potential capacity oversupply situations.
Hi, Randy.
Randy I think we lost you again thank.
Thank you.
Thank you.
And the next question is coming from Brett Simpson Arete Research go ahead. Please.
Yes, thanks, very much I wanted to ask about some of the long term agreements youre signing.
And.
What sort of commitment wafer commitment guarantees are being negotiated and how enforceable.
These agreements are particularly if we see industry conditions start to normalize after this unusual period of supply challenges.
Anything you can share with us around the.
Enforceability of any any sort of wafer commitments at your customers on making here a long time.
Thank you.
On the we reported last quarter. The agreement has a long term protection mechanism.
And shortly are our newly expanded capacity will be maintained.
At a healthy level.
On the such mechanism in who's the mutual obligation from a customer that was on our IR site.
And so by fulfilling those obligations, we believe that the.
The loading can be sustained at a healthy level.
I'll start.
The detail on the mechanism I'm not elaborate to share on them on.
On the call, but I you know.
But we have we have.
We ought to have a very.
Serious and and a comprehensive discussion with our customer and we do believe such such a mechanism.
Second as an E.
There's added adequately adopted.
And so even if we have a sudden change.
In industry conditions, you feel quite confident that your customer obligations will be they will they will continue to commit to those obligations basically if there's oversupply situation in the industry.
And that we see.
Right.
And then in the years to come.
Yes.
We will be well protected from a financials.
Potential potential financial implication yet.
Great Great and just 1 follow up on on dividend.
Now that you are delivering.
So on the cash flow healthy healthy margin improvements in margins can you talk a bit about the vision around dividends and how it how to think about returns to shareholders.
We haven't set a formal policy from UMC is that our payout ratio you look to 2.2.
Targets in terms of your.
If you your dividend policy any thoughts there around as you as you continue to sustain this type of margin structure, how the dividends might.
Evolve going forward. Thank you.
Yes, we do have a dividend policy, we will pay our distributable earnings in cash now let them.
So that's on.
Policy of course for the recent years, we are much higher in terms of payout ratio, but.
I think going forward, we're looking to disappear on a state.
Stable and.
Hopefully increasing cash dividend along with value improve EPS.
Right.
Maybe just 1 final question in terms of your your implied Q. The Q3 guide implies your wafer pricing is up high teens year on year.
Does the current Asp's fully fully reflect your long term agreements that are in place.
So the long term agreement won't kick in until 2023, if you are referring to the.
Project I think our RFP.
ASP increase is mainly driven sorry.
Optimization in quarter, 2 and there will be some price increase.
Product.
Optimization and continue into quarter 3 so.
The long term contract for pieces.
Effective 2023.
Okay. Thanks very much.
Yeah.
And next we'll have Charlie Chan from Morgan.
Wonderful questions go ahead please.
Thanks for taking my question good afternoon, gentlemen, and.
Congratulations for a greater yourselves. So I also really wanted to follow ups on the question about the pricing.
So just a hypothetical question right.
From standard there is a.
Kind of a cycle downturn, how confident that are.
Managing Ken can maintain the current bill with a price and I'm not talking about the P. C ex I'm talking about on.
And then P..6.
<unk> a company think debt price can sustain in a downturn.
I mean, we aren't giving guidance.
'twenty 1.
We don't think there.
Any inflection point.
Downcycle, yes so.
EBIT for hypothetical question.
Going into let's say 'twenty 'twenty 3 'twenty 4.
Michael.
Downcycle.
We just have to executing on our plan.
Earlier to rent Randy's question.
Lots of activity associated with that.
Yeah.
So.
I don't really think this is the right on to predict predict whether this is going to be a down cycle or not but we are definitely prepared.
To dealing with those situations to our.
Technology offering to our manufacturing capability as well based on the selected.
Market that more associated with the structural demand and we believe those from TD active.
Activity will help us with our vulnerability.
Change.
I think that's how we address that issue.
And.
So again, I'm, just saying that we're not.
Karen.
There's always upcycle, yeah, but keeping what we have seen in our recent upcycle, we already took the opportunity to optimize our final portfolio.
Along with enhancing our technology.
<unk> competitiveness to align with our customer so we are seeing a good.
We can be on that from.
Okay. Thanks, Yeah. So when you from your Uh Huh.
With her price no matter if it was this year or 2 then Tony to.
Do you pretty compare.
Oh referred to you even disappears, especially on.
The so called.
Property at TSMC.
So my question is actually do you see for example at the 28 nanometer 40 nanometer.
See any technology GAAP for quality, but from a difference versus at TSMC, and where you can price on par or even higher.
In this case, let's see thanks.
Well, we do believe we are competitively in those technology nodes.
No.
We are continually driving our technology offering.
Hence those area.
In particularly on the.
Hi.
He Arthur from Hawaii.
Other than TCP.
And by the fresh area with continued strength in our offering in the technology areas.
I think where we.
We are reasonable competitive in those space Nokia are aware in the leading position on.
So yeah.
As far as for the price.
Yes.
We do believe that customers are recognizing that.
Flexing on the ASC does reflect in some of our technology.
Technology, offering and competitiveness and we've seen that market price industry market is a good reference and we will continue benchmark those and we think we are.
The GAAP.
And into a comfortable level, yes.
Thanks, and then centered on housekeeping question I mean.
I'm not sure what what's the progress of your Oh, China.
Xiaomi in fab right because I previously there were some.
Is it there is some difficulty for.
China import.
On the semi equipment for example.
AP tools on the play matures, how do you do think debt would.
In fact, our capacity expansion plan on.
China for 10 nanometer.
And Oh, Oh so.
The question to cheat on you said it all.
You know from from phone here on your your gross margin.
Is there on the meat 30 per cent, whereas companies a long time financial Corp.
On gross margin.
Alright. Thanks.
So from a talent and.
Ours I'm interpreting terrific, we actually have already reached their full scale.
Plenty of phase 5 K per month based on our design capacity so.
We're pretty much where we reached while we intend to pursue.
Margin chairman himself on revenue.
And for Jim question on debt.
All of our CEO, our president will come out on debt.
Thanks.
For the <unk>.
Well the gross margin on our gross margin, although it will be mainly.
On derivative from our program.
On efficiency as well as the ASC trend.
UMC as a company will continue to work on the product mix optimization.
Such that earlier.
And continuing efforts on cost reduction efforts and operating efficiency in order to strengthen our structural gross margin. So we do have.
Production.
Expectation that continue to improve on debt.
Okay. That's great. Thank you.
And next question Rolling She Citigroup go ahead. Please.
Hi, good afternoon. Thanks for taking my question no you're on.
Thank you and now it's the biggest no revenue I would like to know how 'bout debt Oh does the 20 nanometer is a contribute to the upside to your total on profit and also for your 45 now meet the net.
Revenue actually continues declining from a free to last.
And on the empathy Oh idle capacity for 45 nanometer or are you on converts at least 45 nanometer capacity from 10 nanometer how does thanks. That's my first question.
Yes.
No, it's not actually a 40 loaded.
Yeah.
And the mix of it.
Wafer out.
Quarters.
We'll see some variables in the mix of that technology node.
At this time there is no vacancy in the fab in fact, all know running over 100%.
On the.
The question about.
On a different D a.
<unk> expense.
Expansion going.
Going forward for the to the gross margin and our unique 'twenty, a logic and specialty technology offering.
Hence the customers' competitiveness as a result.
As India the customer.
On our 28 capacity is in great demand.
This comparison as it will allow us to enjoy a healthier.
EBITDA margin.
On a longer term.
In the longer term debt.
The 28 nanometer capacity expansion won't play.
It is too low.
Drive our gross margin expansion.
On this so even though you are 3 Q gross margin guidance mid 30 percentage point at the end on May also have a big contribution from turnkey and on me 2.
Yes.
Yes.
Yes, the U S T E P.
3.
Our guidance the agencies, we expect to grow 6 from same quarter over quarter, primarily driven by price.
Price adjustment.
In our Q2, the ASC inquiries.
Mainly driving by both the price of Jetson on the.
So on the left.
The application.
12 inch mature sites and that's worth 8 inch.
And also coupled with the product mix improvement, which means a higher 20 a shipment.
For Q3.
Yeah.
That's the easy growth, primarily driven by the price adjustment level at 12 and 8 inch nodes.
Understood. Okay, Yeah, but I think on my question on actually said for the gross margin for 20 nanometer how does eat the concert to your gross margin in the queue.
You have mentioned that.
No.
It would be in that market.
Hi, there.
I mean, no it's mainly because of higher asps.
And the all the dynamics are there.
Parameters on a very dynamic quarter over quarters.
We cannot give you a straightforward answer.
Oh I see.
Just on just mentioned for the longer term time here for sure will be.
Be a catalyst in driving our margin expansion.
Thanks.
I looked at your annual report I think at least on your contract with King with you in May So I would like to understand well they have any impact on your P&L or on your balance.
She found free 2 O on war after Lisa on contracted day in May.
So for the country has been currently Oh Oh.
So there's no any progress at all on these quinoa related.
Activity.
So no financial impact as well right okay.
Okay. Thank you and also are you know now you have been load.
Every node on your capacity at more than 100 per se utilization.
Hi, Brad on your in the.
Past several quarters every quarter, you still manage to increase.
Increase the capacity I, a several percentage point on capacity Debottlenecking. So just want to know.
How long can.
Can you still a bottleneck you have a capacity going forward and.
Oh, well either be suspect us a sustainable for you to increase or at least a 2% to 3% all event on several percent did you play off the wafer shipment increased every quarter.
From a price a deep bottlenecking, even though you a note on very high utilization.
Well.
And.
And the price.
Ongoing efforts that will continue and for the capacity.
Capacity expansion.
Trying to.
Our 2021.
Net income.
About 3% Yeah mhm.
Yeah.
The 2022, we expect to increase by another 6% year over year. So that's that's going to be a new extension and an older Debottlenecking and proud people implement will be ongoing basis.
Okay. Okay. Thank you yeah. That's all my questions. Thank you.
Next question coming from the home from China Renaissance go ahead. Please.
Oh, Hi, good evening, gentlemen, and from Christopher's question regarding piece ex initially used packaging their quantity in 'twenty, 2 and Ano I just wonder if the capacity would be upgradable to add 14 nano often in fact.
On the answers yet.
Yes, yes.
Both notes our flexible manufacturing for 14.
Okay, great and how easy would that be a 4 day upgrades and how much would it cost roughly on a per case basis.
Well on the number is you know.
Hi, Julie.
We're ready to quote that number because.
I'd say on a number.
There's still some uncertainty with the numbers.
But becoming too on 28.
The bulk to the 14 finfet or in a high percentage of range. So we do believe that is.
B.
Right now for potential upgrades.
Hum.
We're not there yet.
The reserve this specific number at a later time.
Great Yeah.
And regarding their finfet.
The company's latest thoughts on that part of business.
But again I didn't get on them.
What's the company's strategy for the Finfet going forward.
Well I mean, when we developed the technology.
The actual what we see.
Years back.
We'd be Nazis, the technology day, all of them on the 14th.
And the reason I mentioned earlier it means the 40 end of 'twenty 2.
High percentage of coming to conversion ratio.
And also on the 14th does provide some technology advancement in terms of power on the savings. So we believe that's the right technology to.
So at this point the 14th is being fully developed.
However, we are aligning with our customer and <unk>.
<unk>.
Triggering the Capex decision given the current market outlook.
They remain to be strong.
Strong note.
These 2 parallel types on our resource.
At this time, so the options there.
Is still subject to our.
Well I said, the capex policies, though.
We will continue.
Guided by debt and.
At the right time at the right price and the right volume.
We'll make that decision. So the 14 is is it an auction process.
Okay, Great and my second question just regarding the profitability of your like Japan, Fab and how does it comparable from the group average right now.
Yeah.
So based on the integration.
Oh yeah.
On a dollar Japanese fab.
The cost reduction activity on part of that productivity and pulse on it.
That's a very efficient operation.
Therefore, we do he said the telephone so Jonathan is that gross margin will be in line with UMC as a.
Total corporate average.
Okay, great. Okay, yeah, congratulations and thanks for answering my questions. Thank you.
Thank you.
The next question is from Nicholas Barrette Macquarie go ahead. Please.
Yes, hi.
Hi.
Clarify my property.
Okay.
The wrong thing capacity share increased by 3% on next Gen, 6% was was.
That's correct.
The capacity increase for 2021 this year is 3% that's the.
Year over year for 2021.
Properly.
On the 6% year over year as before in 2022.
Thank you. Thank you very much.
On.
It seems still running on 100% utilization does that give you a better visibility into the coming.
In quarters.
[laughter].
Our visibility for the next quarter of course.
Quite solid.
We continue to work we saw customers closely.
Rolling forecasts of so for the visibility right now of course, I think the alright, so is it better than most.
Yeah.
Most of the time, we're experiencing in the past.
Yeah.
Would you say that gives you visibility into beginning of next year.
Alright.
Well I mean the.
We do have visibility.
Because given the reason supply and demand imbalance situation.
Customers tend to have a longer term discussion with us.
So yes. The answer is yes, we do have a visibility all the way.
Now to end of 2022.
But again.
This is a dynamic.
Dynamics in there so we have to continue tracking the market.
Given the.
Current observation.
We do expect that demand will continue to outpace the supply driven by the Mega trends.
In the near term, we have not seen any signs of the inflection point yet.
Earlier, and so we don't think there's any any signal that indicates the current situation will change.
So yes, we do have some visibility and we haven't seen any signs of a change into the situation.
And Gabe.
Given the Mega trend of Sandy.
The applications from <unk>.
2 EV Iot we've seen this this is the demand is going to stay here.
Okay.
Understood.
Do you have an estimate.
Thank you on from this year will balance.
Operating expenses on DNA.
Operating expenses are.
For this year and next year is under control.
We need to maintain a steady percentage of ratio too.
Our revenue gross revenue is continuing to grow so the rate of revenue growth certainly outpacing the rate of Opex increase.
As a percentage of opex not increasing.
I'm asking because typically I mean, you know as you mentioned.
'twenty.
To tape out 10 specialty processes and at the same volume.
More capacity increase than the previous year right on those things cost money I guess.
Yes, definitely but we all have more resources elsewhere, given the stronger performance. So again, we will control.
The ratio.
As a percentage of opex to revenue instead of the absolute dollar terms.
Understood and from DNA keeping any.
Rough number okay.
Same thing I think the bigger component for it.
The increase is really the employee.
Related compensation because of the better performance bonus.
So correct.
Employee will be higher but the rest again is on the well control.
Thank you very much.
Thank you.
Next question Goku JP.
JP Morgan go ahead please.
Congrats on the good result, first question just wanted to explore a little bit on the blended pricing seems like ASP continues to actual rate roughly 3% in Q1, 5% in Q2 and 6% in Q3.
Is that a updated guidance on how much we.
We expect blended ASP to go up this year I think previously we talked about a high single digit approaching 10% last quarter.
Is that going to be higher.
And then secondly on the pricing itself given that you have visibility into next year.
You have a lot of commitments to the end of next year itself.
Could we talk a little bit about how we think about blended ASP b as we go into next year is next day is also a pretty strong price increase here because of product mix as well as some price adjustments. That's my first question.
Okay. So in 2020, 1 are talking to A&P growth will be around 10 to 13.
Yeah.
Year over year.
The pricing zone.
On product mix, including pricing adjustment you won't see the value long term partnership over the near term cyclical patches. So therefore I'll come on.
They reflect the value.
<unk> right now.
Uh huh.
Yeah on the 20th.
The only 1.
I kind of touched on earlier the pricing on those.
And then we believe is here to stay on customer recognize that so we expect the strength of a structural demand momentum was sustained beyond Q4, 'twenty 'twenty 1.
Got it.
I'm.
Just 1 more question on the Capex side, I think maybe talking about the $2.3 billion in Capex. This year, how much of our fab 2 L. A b 6 expansion does it cover a.
Given that we are also looking for around 60% capacity addition, next year do.
We expect capex to stay around these levels as we look into next year as well.
We announced the V.
The piece ex program will be somewhere in the 3 point something billion.
Contacts.
And it's estimated rent schedule.
It will be sometime.
The second quarter of 'twenty 3.
Most of those will probably happen.
We think the 2.
2022.
Yeah.
Yes.
Very well.
Minimal a portion of that.
In total.
2021 or so.
I think that will provide that will.
We will provide that guidance by end of this year 2022.
Understood.
Given maybe 1 more question.
And given that we are seeing a lot of tightness in especially in 8 inch and as Nathan you mentioned pacing on Ottawa Challenge in terms of capacity expand on expansion also could we talk a little bit about how quickly or how keen on custom most of migrate some of their 8 inch products.
2 more on mature 12 inch technologies and also given everything is tight how feasible is it oh for them to do that over the next let's say 6 to 12 months.
Well just like you mentioned that the Oh no tie.
On a cross.
8 inch to 12 inch.
In migration.
The migration the purpose on migration is 2.2 assets to additional capacity in 12 inch.
That will be very challenging.
The net.
Natural pace of the migration will continue.
I see.
Different application those activity is ongoing.
For capacity reasons.
I assume this is going to be where the challenging at this time, because the old no oh.
A very very tight right now.
Yeah.
Understood.
Just last 1 when you talk about the 6% capacity increase next year.
Is that also largely in 28 and 22 or are you thinking a little bit more on 40, 50, if I ex cetera.
Great.
Yeah.
20.
'twenty 2.
Mainly is due led by more than 20 per cent year over year growth in our 2.
28 millimeters.
Okay.
There will be some increase in the 8 inch.
No it means the.
The low 0.8.
So some of the upgrades.
Okay.
And so it's probably a combination dose on them.
No.
Got it thank you and congrats on the good results.
<unk>.
Next question Bruce Goldman Sachs go ahead. Please.
Okay. Thank you for taking my question.
Congrats on a great result, and I'm actually very impressive.
Net improvement, especially by more than half of the board of directors are independent directors.
It's important for the long term shareholders. So I noticed that for the last 2 quarters news announcement, you addressed a lot of adjusted automotive can you tell us what is the.
The revenue exposure to automotive right now and what Youre targeting in 2 to 3 years, what are the key application and process know for the automotive customer do they carry higher or lower than corporate average margins.
On our.
Our revenue.
Contribution from automotive.
Is rather small.
It's still below 10% Mark.
And.
On the demand recovery issue with balance.
And of a 2020 for automotive so we are putting some resource to support that in parallel to support that.
From here.
Over the year standpoint, we increase the absolute number probably buy.
Close to 20%.
In the auto segment.
So we are putting some clarity on.
And resource to support that that urgent need.
So as far as the customers.
Martin go we don't comment on specific customer or segment margins and whether on a corporate level.
<unk>.
Yes.
I think in general.
They are reasonable.
Result, ASC level.
Yes.
Okay. So can I ask on different worry about do we can we expect the automotive revenue to be more than 10 per cent in a year or 2 and what are the key application. We think that all the same.
For your customers.
I think from on the.
Patient standpoint.
Outputting more resource to the automotive space.
So we are expecting the automotive space growth.
So.
I don't have a number to Florida here.
We can provide that ongoing basis, but just to add on that we mentioned on television.
And driver.
All our citrus on contract going forward.
So we would like to take a broader view that our auto industry should eventually improve.
So that's a driver as well so that percentage is certainly east is likely to continue.
Continue to increase.
Okay. Thank you so net 1 yeah.
I always like to ask you on the expenses I mean, if you look at your R&D expenses in the first half is already like $6.5 per se, which is down from about 89% last couple of quarters. So basically what is the long term target right. Now I mean, you know Vanguard R&D expense is about 54555 per cent of the sales is that.
The reason I'm on a reasonable target for your on the expenses.
We think kind of on.
<unk> expenses.
Alright.
We want to allocate more resources.
Through our R&D effort in order to differentiate.
Our ourself, especially on the spec.
On the technology and also the future technology related 2.5 G and AP and AR.
Again, the absolute dollars will continue to growth, but certainly the percentage of revenue.
Will it be well control.
I see okay. Thank you.
Can you say ex pocket.
Profitability I remember laughing with management was talking about which is roughly <unk>.
30, plus percent gross margin for the PC, but if we fast forward to 2022 or 2 on something to this gross margin will be lower than the corporate average in a meaningful way.
That sounds right.
Oh.
We expect the piece ex we'll have a better cash margin.
Higher EBITDA margin than the 12 per inch.
Corporate average.
We.
We adopted <unk> 6 because we believe.
This is a win win collaboration model.
It's not only secure long term capacity for customer.
<unk>.
And the pricing will also enable UMC to grow organically and to meet our long term profitability.
Given our.
Our corporate average gross margins on rice the initial piece ex.
Gross margin will be in catch up on like you said, however over time the pizza for gross margin were essentially a hands on.
Average.
I understand your co pays average gross margin improvement is much faster than we think so thats why for years on this program.
[laughter]. Thank you.
Sure. Thank you.
Next question is from Nicholas.
So Florida to be UBS go ahead. Please.
Hi, good evening Susy <unk> from <unk>.
Yes studying for suddenly.
2 quick questions first going back to <unk>.
He's very well you could quantify perhaps force how much of your expected capacity.
Google a P.
6 which I think is 27.20 8-K wafers per month.
It will eventually be covered by a tas.
Secondly, going back to specialty practices.
Could you maybe give us more color eating as to which ones you see better traction of customers right.
For.
Low power on embedded memory M skews high voltage with Gis etcetera. Thank you.
Uh huh.
On the application.
On the year.
The overall growth.
Although demand perspective.
Yeah.
Obviously application the cash.
Really.
Transformation.
And of course that we mentioned about E D.
The digital transformation on the island.
And for.
For the <unk> transformation.
Associated with the high voltage.
Yeah.
Momentum.
That includes the OLED driver and.
You also have ISP Wifi 6.
Arthur switch.
So those will be probably.
The <unk> has a stronger momentum at this point.
Sure.
We see on the followed by the MCU and the power management.
Great. Thank you and how about we are ready to take question for music space.
4 pieces.
Can you repeat your question.
Sure.
Sure. So when you talked about a customer signing and Tas for basics.
Approximate Tim do you want to look ahead and when you would reach 27.28000 wafers per month in D C capacity.
Much about do you think is likely to be covered by a chase. Thank you.
On.
The old <unk>.
It's covered by the contract.
Great. Thank you very much.
Okay.
And then a question Julie Tsai UBS go ahead. Please.
Do you have now on.
Per limb.
Alright. Thank you I would just like to ask the management to give us.
Maybe on long term low gross margin targets. It is just because Steve recent quarters. Your gross margin has been improving quite fast in a very rapid pace and perhaps give us a.
Your line a guideline of a long term target.
On this margin improvement.
Well, we I can.
On a touch that question Sue ASB trends.
Yeah. The question I always come back to the.
Gross margin.
Our gross margin.
The book.
It's mainly driven by those factors I mentioned.
You know from product production.
Production efficiency is T M.
And you know and product mix optimization.
Reduction so on and so forth.
It is.
We believe those will give us.
No.
Benefits expense.
Structural gross margin.
We do.
No.
We do expect the gross margin.
Yeah.
You know probably continue improve I will say I am not I don't think were ready.
Year to giving any gross margin guidance on.
Gross margin.
The outlook for the quarter.
Yeah.
So in a way we should view that.
The per.
Possible upside.
Chris you'll be there or the.
The recent quarter's margin is not sustainable.
We certainly believe.
On the oldest relative demand all the easiest environment.
Year to state.
Uh huh.
The near term.
We.
We haven't seen any reflection point that this will change in a different direction.
On the right direction is still marching to improve our gross margin.
Yes.
Got it also.
Thank you and then also a follow up how do you run utilization will be up more than 100%.
It's actually 100%, you're just 100 per cent pluses, meaning he's really full.
Yeah.
Alright.
Okay. Thank you congrats for a good ways out.
Thank you.
Ladies and gentlemen, we're taking the last 1.
Last question is from Randy Abrams Credit Suisse. Go ahead. Please okay. Yeah. Thanks for squeezing me on it too.
2 final questions depreciation Chi Tung could you give an update.
The trend for the next 1 to 2 years now.
Now on the new Capex plan, how we should factor that in.
I think for this year I'm not sure we are talking about.
And from 5 below around 5% on that decline.
Decline.
Overall depreciation expenses.
And for 2023 dips.
It depends on the equivalent on how we brought on line and right now on the lead times.
It's actually a quite long.
It's a little difficult to predict that depreciation expenses from 2023, however, again.
We will control it through a percentage of revenue Oh benchmark.
Percentage wise, we hope it will be a steady decline.
On a rate but.
Absolute dollar time it depends on day.
Capacity come on stream.
Okay and the other 1 I wanted to ask the other income a bump back up to 1.6 billion.
Was there a factor for that lift and then looking forward does that cash is there a certain period that continues is that still tied to the shaman.
And how how would that continue out into the future.
Alright, just a once a year.
It's subsidies related to draw syndicated loans.
And I think that that would be the last time for vs. A second quarter going forward I think are wrong.
10 billion.
For quarter.
Wherever your normal flow.
Each quarter at least for free.
Yes.
Okay, I'm, sorry, say that again it was on 1 billion 1.
1 billion per quarter 1 billion per quarter.
Okay.
Yeah, Okay, great. Okay. That's all my questions. Thanks, a lot.
Thank you and we thank you for all your questions that concludes today's Q&A session I'll turn things over to UMC head of IR for closing remarks.
Thank you for attending this conference today.
Your question is always if you have any additional follow on questions. Please.
Please feel free to contact.
At UMC.
At UMC Dot com.
Good day thank.
Thank you.
Thank you and ladies and gentlemen that concludes your conference for second quarter 2021. Thank you for your participation in Umc's conference there will be a webcast replay within an hour. Please visit www UMC to come on to.
On the investors events section you may now disconnect Goodbye.
Yeah.
Okay.