Q2 2023 United Microelectronics Corp Earnings Call

July 26, 2023

Now I would like to introduce Mr. Michael Lin head of Investor Relations at UMC. Mr. Lien. Please begin.

Michael Lin: Thank you and welcome to UMC's Q2 2023 Conference Call. I'm joined by Mr. Jason Wang, the President of UMC, and Mr. Chih-tung Liu, the CFO of UMC. In a moment, we will hear our CFO present the Q2 financial result, followed by our president's key message to address UMC's focus and Q3 2023 guidance. Once our president and CFO complete their remarks, there will be a Q&A session. UMC's quarterly financial reports are available at our website www.umc.com under the Investors Financial section. During this conference, we may make forward-looking statements based on management's current expectations and belief. 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.

Thank you and welcome to Umc's conference call for the second quarter of 2023.

I'm joined by Mr. Jason Wang the president of UMC.

Is that you don't do the CFO of UMC.

In a moment, we will hear our CFO present, the second quarter financial results, followed by our President's key message to address Umc's focus in third quarter of 2023 guidance.

Lifestyle, President and CFO complete their remarks, there will be a Q&A session.

Umc's quarterly financial reports are available at our website tripled W. Dot UNC dot 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.

Putting the risk that may be beyond the company's control.

Michael Lin: For a more detailed description of this risk and uncertainties, please refer to our recent and subsequent filings with the SEC and the RC 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. Chih-tung Liu, to discuss UMC's Q2 2023 financial results.

For more detailed description of these risks.

Certainties, please refer to our recent and subsequent filings with the SEC and the hours.

<unk> Securities authorities.

During this conference you May view, our financial presentation materials, which is being broadcast live through the internet.

Now.

I would like to introduce Umc's CFO , Mr. Qi Dong due to discuss Umc's second quarter <unk> financial results. Thank.

Chih-tung Liu: Thank you, Michael. I'd like to go through the Q2 2023 investor conference presentation material, which can be downloaded or viewed in real time from our website. Starting on page 4, Q2 2023 consolidated revenue was NT 56.3 billion, with a gross margin at around 36%. The net income attributable to the stockholder of the parent was NT 15.6 billion, and earnings per ordinary shares were 1.27 NT dollar. In Q2 2023, the utilization rate was 71%, slightly up from 70% in the previous quarter. On page 5 is a quarterly sequential comparison, income statement. Revenue grew 3.8% quarter over quarter to NT 56.3 billion, mainly due to better product mix led to a higher ASP.

Chi-tung Liu: Thank you, Michael. I'd like to go through the Q2 2023 investor conference presentation material, which can be downloaded or viewed in real time from our website. Starting on page 4, Q2 2023 consolidated revenue was NT 56.3 billion, with a gross margin at around 36%. The net income attributable to the stockholder of the parent was NT 15.6 billion, and earnings per ordinary shares were 1.27 NT dollar. In Q2 2023, the utilization rate was 71%, slightly up from 70% in the previous quarter. On page 5 is a quarterly sequential comparison, income statement. Revenue grew 3.8% quarter over quarter to NT 56.3 billion, mainly due to better product mix led to a higher ASP.

Thank you Michael I'd like to go through the.

Q2, or three Investor conference presentation material, which can be downloaded off.

In real time from our website.

For the second quarter of 2023.

Oliver <unk> revenue was $56 3 billion guarantee which.

Our gross margin.

Around 36%.

Net income attributable to the stockholder of the parent was $15 6 billion guarantee.

For ordinary shares or $1 27.

Got it.

In the second quarter of 2023 utilization rate was 71%.

Slightly up from 70% in the previous quarter.

Hedge funds.

Okay.

Quarterly sequential comparison income statement.

Revenue growth three 8% quarter over quarter to $56 three period.

Mainly due to <unk>.

Better product mix.

Hi, Pete.

Chih-tung Liu: Gross margin rate at 36% is also slightly better than that of Q1 and reached TWD 20.25 billion. We have been controlling our operating expenses amid the current semiconductor downturn. The current operating expenses in Q2 remain flattish at TWD 5.7 billion, compared to 5.78 in the Q1 2023. Operating income reached TWD 15.6 billion or 27.8% operating profit margins. Net non-operating income in Q2 reached TWD 2.8 billion, mainly coming from expenses, interest, gains, as well as some investment income from our affiliate companies.

Chi-tung Liu: Gross margin rate at 36% is also slightly better than that of Q1 and reached TWD 20.25 billion. We have been controlling our operating expenses amid the current semiconductor downturn. The current operating expenses in Q2 remain flattish at TWD 5.7 billion, compared to 5.78 in the Q1 2023. Operating income reached TWD 15.6 billion or 27.8% operating profit margins. Net non-operating income in Q2 reached TWD 2.8 billion, mainly coming from expenses, interest, gains, as well as some investment income from our affiliate companies.

Gross margin rate of 36% is also slightly better than quarter.

Quarter one.

And reached <unk> 5 billion.

We have been controlling our operating expenses amidst of the prevalent and semiconductor downturn.

The current operating expenses in quarter two.

Flattish.

At $5 7 billion compared to $5 78 in Q1 2023.

Operating income reached $15 6 billion or 27, 8% gross margin.

Seven 8%.

Profit margins.

Net non operating income in the second quarter reached $2 8 billion, mainly coming from expenses.

Interest.

Yes.

Some investment.

Income from our affiliate companies.

Chih-tung Liu: After income tax of NT 2.58 billion, our net income attributable to the shareholder of the parent is around NT 15.6 billion or 27.8 percentage point. EPS was 1.27 in Q2. On page six is the H1 comparison. Revenue declined 18.4% to NT 110.5 billion. The gross margin rate was around 35.7% or NT 39.4 billion. Net income in H1 2023 was NT 32.2 billion, and the net income rate was 29.2%. EPS in H1 2023 was 2.58 NT dollars per share. On page seven is our balance sheet at the end of 30 June 2023.

Chi-tung Liu: After income tax of NT 2.58 billion, our net income attributable to the shareholder of the parent is around NT 15.6 billion or 27.8 percentage point. EPS was 1.27 in Q2. On page six is the H1 comparison. Revenue declined 18.4% to NT 110.5 billion. The gross margin rate was around 35.7% or NT 39.4 billion. Net income in H1 2023 was NT 32.2 billion, and the net income rate was 29.2%. EPS in H1 2023 was 2.58 NT dollars per share. On page seven is our balance sheet at the end of 30 June 2023.

After income tax of $2 five 8 billion 19, our net income attributable to the shareholder of the pattern is around $15 6 billion.

27, 8%.

Vintage point.

EPS was $1 207.

Second quarter.

Page six.

Six months.

Comparisons.

Revenue declined 18, 4% to $110 5 billion NT.

And gross margin rate around 75, 7% or 39 4 billion.

Net income in the first half of 2023.

$32 2 billion.

Net income rate plus 29, 2%.

In the first half of 2023, plus two 5% in 'twenty.

$90 per shares.

So on page seven.

As our balance sheet at the end of June 3rd to use cash on hand is around 153 billion and team.

Chih-tung Liu: Cash on hand is around NT 163 billion, and total equity for the company is NT 326.9 billion. On page eight, as we mentioned, the blended ASP benefit from a better product mix in a way is also a lower utilization rate in eight-inch wafer capacity. ASP in Q2 edged up a couple percentage points compared to the previous quarter. On page nine, revenue rebounded for our Asian customers in Q2 and now reach about 56% of the total pie, compared to 60% in Q1. North America declined from 31% in Q1 to 27% in Q2.

Chi-tung Liu: Cash on hand is around NT 163 billion, and total equity for the company is NT 326.9 billion. On page eight, as we mentioned, the blended ASP benefit from a better product mix in a way is also a lower utilization rate in eight-inch wafer capacity. ASP in Q2 edged up a couple percentage points compared to the previous quarter. On page nine, revenue rebounded for our Asian customers in Q2 and now reach about 56% of the total pie, compared to 60% in Q1. North America declined from 31% in Q1 to 27% in Q2.

Total equity for the company.

$300000.

Period.

We mentioned the blended ASP.

Benefit from better product mix in a way, it's also a lower utilization rate.

Each wafer capacity.

So ASP in the second quarter, a drop a couple of percentage points compared to the previous quarter.

On page nine.

Our revenue rebounded for our Asian customers in the second quarter.

<unk> ratio about 56% of the total pie compared to 50% in the first quarter.

North America declined from 71% in Q1, 2007% in Q.

You too.

Chih-tung Liu: On page ten, IDM declines slightly to 21%, and fabless account for 79% of the total revenue in Q2 2023. On page eleven, revenue breakdown by application didn't change much. Communication remained the same. Computer remained the same. Consumer increased by 2 percentage points to 26%. On page twelve, due to our newly ramp capacity becoming available in our P6 in Tainan fab, our 22/20 nanometer revenue continued to rise. Now it's around 29% of the total revenue. Fourteen nanometer is about 12%, declined by 3 percentage points from the previous quarter. On page thirteen is our capacity, quarterly capacity breakdown. We will continue to see some minor increase coming out of our 12A, our P6 expansion in Q3.

Chi-tung Liu: On page ten, IDM declines slightly to 21%, and fabless account for 79% of the total revenue in Q2 2023. On page eleven, revenue breakdown by application didn't change much. Communication remained the same. Computer remained the same. Consumer increased by 2 percentage points to 26%. On page twelve, due to our newly ramp capacity becoming available in our P6 in Tainan fab, our 22/20 nanometer revenue continued to rise. Now it's around 29% of the total revenue. Fourteen nanometer is about 12%, declined by 3 percentage points from the previous quarter. On page thirteen is our capacity, quarterly capacity breakdown. We will continue to see some minor increase coming out of our 12A, our P6 expansion in Q3.

Page 10.

<unk> declined slightly to 21%.

Accounting for 79% of the total revenue in the second quarter of 'twenty three.

On page 11.

Revenue breakdown by application didn't change much.

Communication and remain the same compared to remain the same.

Consumer increased by two percentage points.

Percent.

On page 12.

Due to our newly ramped capacity becoming available.

<unk> in Tainan.

Fab two.

90% to 10 nanometer revenue continued to rise.

Around 29% of the total revenue.

14 nanometer is about 12% decline.

Shape.

<unk> point.

From the previous quarter.

On page 13.

Capacity quarterly capacity breakdown, we will continue to see some minor increase coming out of a trough a RFP extension.

Q Q.

Q3.

Chih-tung Liu: The last page of my presentation is our foundry capital expenditure plan for 2023. For the time being, it still remain at $3 billion for the 2023 budget. The above is a summary of UMC results for Q2 2023. More details are available in the report, which has been posted on our website. I will now turn the call over to President of UMC, Mr. Jason Wang.

Chi-tung Liu: The last page of my presentation is our foundry capital expenditure plan for 2023. For the time being, it still remain at $3 billion for the 2023 budget. The above is a summary of UMC results for Q2 2023. More details are available in the report, which has been posted on our website. I will now turn the call over to President of UMC, Mr. Jason Wang.

The last page of my presentation.

<unk>.

Capital expenditure plan for 2023.

For the time being still remain that.

Third period.

U S dollars for 2020 budget.

So the above is a summary of UMC results for second quarter of 2023.

More details are available in the report which has been posted on our website.

Ill now turn the call over to president of UMC.

It seems to just anymore.

Jason Wang: Thank you, Chih-tung Liu. Good evening, everyone. Here, I would like to share UMC's Q2 results. For Q2, we reported results in line with guidance. With wafer shipment remaining flat from the previous quarter and utilization rate of 71%, Q2 revenue grew 3.8% quarter over quarter, mainly due to improved product mix within our 12-inch portfolio. Revenue from 22, 28 nanometer products continued to increase sequentially, representing 29% of the Q2 sales, while contribution from specialty technology reached 59%. By segments, we saw strong demand recovery in the consumer space for Wi-Fi, digital TV, and display driver ICs, while demand for computer-related products also moderately rebounded from the previous quarter. We are pleased to share that we have completed the transaction to acquire remaining shares in USC XM, our 12-inch fab in Xiamen, China.

Thank you Tito.

<unk> everyone.

I would like to share Umc's second quarter results.

For the second quarter, we reported results in line with guidance.

Weaker wafer shipment remaining flat from the previous quarter and utilization rate of 71%.

First quarter revenue grew three 8% quarter over quarter.

Mainly due to improved product mix within our 12 inch portfolio.

Revenue was down 22, 28 nanometer product continue to increase sequentially.

Presenting 29% of its second quarter sales.

<unk> contribution from specialty technology reached 59%.

By segment we.

So short term demand recovery in the consumer space for Wi Fi digital TV and display driver Ics.

While demand for computer related products both of them.

Moderating rebounded from the previous quarter.

We are pleased to share that we have completed the transaction to acquire remaining U S. E X in our 12 inch fab in Xiamen China.

Jason Wang: As one of UMC's four 12-inch fabs in geographically diverse locations, USC XM will continue to provide high-quality fabrication service to customers and increase its contribution to UMC's financial performance as a wholly owned subsidiary now. Looking into Q3, wafer demand outlook is uncertain, given prolonged inventory correction in the supply chain. While we saw spots of a limited recovery in Q2, overall end market sentiment remains weak, and we expect customers to continue stringent inventory management in the near term. Despite a weaker than expected environment going into H2, we believe our 22, 28 nanometer business will remain resilient due to our strong position in leading edge specialty technologies such as embedded High-Voltage. In addition, we are gearing up to offer a necessary silicon interposer technology and capacity to fulfill emerging AI market demands from customers.

As one of the Umc's for 12 inch fab in geographically diverse locations.

<unk> will continue to provide high quality fabrication service to customer and increase its contribution to Europe CS financial performance. That's a wholly owned subsidiary now.

Looking into the third quarter wafer.

Wafer demand.

These uncertainties, giving for longer inventory correction in the supply.

IGN.

While we still have a limited recovery in the second quarter.

Overall and market sentiment.

Mints week, and we expect customers to continue stringent inventory management in the near term.

Despite a weaker than expected environment going into the second half.

We believe our 22 28 nanometer business will remain resilient due to our strong precision leading edge and specialty technologies, such as embedded high voltage.

In addition, we are gearing up to offer a necessary sort of tighten the process technology and capacity to fulfill emerging AI market.

Among customers.

Jason Wang: Now, let's move on to Q3 2023 guidance. Our wafer shipments will decline by approximately 3% to 4%. ASP in US dollar will increase by 2%. Rising costs will erode gross margin by low single-digit percentage point. Capacity utilization rate will be in the mid-60% range. Our 2023 cash-based CapEx will be budgeted at $3 billion. That concludes my comments. Thank you all for your attention. Now we are ready for question.

Now, let's move on to third quarter of 2023 guidance.

Our wafer shipments will decline by approximately 3% to 4%.

ASP in U S dollars increased by 2%.

Rising costs.

Zero gross margin by low single digit percentage point.

<unk> utilization rate will be in the mid 60% range.

Our 2023 cash based Capex will be budgeted at USD 3 billion.

Viacom crude.

Comments. Thank you all for your attention and now we are ready for questions.

Operator: Thank you, President Wang. 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 one 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, now please press star two to cancel the question. Thank you. Now, please press star one to ask the question. Thank you. Our first question is coming from Randy Abrams, Credit Suisse. Go ahead, please.

Thank you President <unk> and ladies and gentlemen, we will now begin our question and answer session. If you have a question for any of todays speakers. Please press star one on your telephone keypad and you went into the queue.

After you are announced please ask your question.

If you find that your question has been answered it before it is your turn to speak.

Please press star two to cancel the question. Thank you.

Please spreads star one to ask the question. Thank you.

First question is coming from Randy Abrams Credit Suisse. Go ahead. Please yes. Thank you I wanted cast my first question about the shipment outlook and.

Randy Abrams: Yes, thank you. Yeah, I wanted to ask my first question about the shipment outlook, and I want to see if you expect at this stage for the decline to persist throughout H2. If you could split down by application, how you're seeing the auto industrial, and then for the areas that started to pick up, Wi-Fi, TV, driver IC, and PC, how do you see that pickup sustaining? Or do you see those starting to correct now?

If you expect at this stage for the decline to persist throughout second half.

And then if you could split down by application, how youre seeing the auto industrial.

And then for the areas that started to pick up Wifi TV driver IC in PC, how do you see.

That pickup sustaining or do you see those starting to correct now.

Jason Wang: Well, I mean, Randy, on a higher level, given the overall softer end market demand, while the post-lockdown, the recovery in China has been slower than expected and weakened macro conditions, where our customer are cautiously managing their inventory, and we expect the situation will likely lingering into Q4. Mainly is inventory concerns. About inventory, while the end market demand has worsened compared to a quarter ago across the segment in smartphones, PC and server, the inventory will slowly work off now. The pace of digestion is slower than we previously expected. At the auto and industrial segment, the demand of a year-over-year projection, at this time, our projection shows remains unchanged from the previous quarter. However, the inventory level has picked up in Q2 for those two segment now.

Well I mean, Randy on a higher level.

Given the overall sulfur and market demand.

The post lockdown the recovery in China hasn't been.

It's been slower than expected and we can Michael.

Macro conditions.

All customer cautiously managing their inventory and we expect the situation would likely.

Lingering into Q4.

So mainly is inventory concerns.

Inventory.

Where all the end market demand has.

<unk> compared to a quarter ago across a settlement in smartphones PC and server.

The inventory will be slower solely with golf now.

The pace of a digestion is slower than <unk>.

Previously expected.

Our industrial segment.

The year over year projection at this time.

We are projecting shelves remains unchanged.

On the previous quarter.

However, the inventory level has it picked up tick up in Q2 for those two seven now.

Jason Wang: Therefore, we will kind of cautiously observe the demand and supply situation now and to determine when the semi cycle will start to improve or come back. Yeah.

Jason Wang: Therefore, we will kind of cautiously observe the demand and supply situation now and to determine when the semi cycle will start to improve or come back.

So therefore, we kind of cautious.

Demand supply situation now and to determine when the semi cycle work will start to come improve will come back.

Randy Abrams: Yeah, no, that's helpful. To clarify, it sounds like you said the pace of inventory digestion because of weaker demand in smartphone, PC, and server. I just wanna clarify, that's what you were trying to say? Like weaker demand, that's keeping the inventory correction longer.

Yes that is.

Helpful.

To clarify it sounds like you said the pace.

Of the inventory digestion because of weaker demand in smartphone PC and server.

Wanted to clarify that is what you were trying to say like weaker demand that's keeping the inventory correction longer that's right in a sense.

Jason Wang: That's right. In the segment of a smartphone, PC, and server space, yes.

One of our smartphone PC and server space yet.

Randy Abrams: For 28-nanometer, I think that node has been a bright spot, and the ASP guidance seems to imply that's continuing. Could you update on your plan or your goal, I think, to get utilization back up to 90 to 95%, if that's still tracking? Do you see the P6 continuing to get filled up as it comes in?

For 28 nanometer I think that node has been a bright spot in the ASP guidance seems to imply that.

Thats continuing could could you update on your.

Planner.

<unk> goal I think to get utilization back up to 90% to 95% if thats still tracking.

And do you see the.

P six continuing to get filled up as it comes in.

Jason Wang: Well, first of all, for the P6 expansion, we expect our 28 ramp trajectory is still on track at this point. We remain confident about our 22- and 28-nm as it will be a low-cost and long-lasting node, driven by many applications across the 5G, automotive, and IoT. We have been focused on 22, 28 offerings, including many of the leading specialty and larger technologies, along with our manufacturing quality and capacity offering now. I think the 28 and the 22 right now remains resilient.

Well first of all.

For the six expansion, we expect our 2008 ramp trajectory.

At this point.

And we really meant.

Confidence about.

R 22 and 2008.

And that will be to you.

We'll be at lowering that thing no.

While driving by many applications across the.

Automotive and Iot and.

And we have been focused.

<unk> to 'twenty offering, including many of their meeting specialty and larger technologies, along with our manufacturing quality and capacity offering now so I think India.

A 22 right now.

Remains resilient.

Randy Abrams: Okay.

Jason Wang: It's our projection now that the 28 nanometer loading will remain at relatively healthy level and mainly supported by the OLED driver, like I mentioned, for the specialty technology and other larger technology like ISP, Wi-Fi, and SOI processors.

And then is our projection now the 28 nanometer loading will remain relatively healthy level and.

Mainly supported by the lead driver like I've mentioned over 40 years specialty technology.

In other larger technology like ISP Wi Fi.

<unk> processor.

Randy Abrams: For the expansion on track, I think the plan was 12,000 end of this year, and then the rest of the 27,500, what is the timing? Would that be available through next year? Any slowdown to move in that capacity?

For the expansion on track I think the plan was 12 K end of this year and then the rest of the 27 five K with that what is the timing would that be available through next year.

Any slowdown to move in that is that capacity.

Jason Wang: No. For the P6, the trajectory is still on track. There is no slowdown. They are mainly mutually committed by both the customer and us. Given the current projection, you know, our forecast shows the 28 loading will remain at a healthy level.

No for the PC.

The tragic.

Tragically still on track.

No.

There is no slowdown and there.

There are many mutually committed by the customer.

And given the current projection.

We our forecast shows the 28 loading will remain at healthy levels.

Randy Abrams: The implication, if you could blend, you have that capacity with LTA on top, I guess, supporting ASP, how do you net out, the utilization looks like now back to mid-60s. With the excess capacity, how do you net pricing environment, mature node versus the new capacity coming on? If the trend for you to manage to stable or do you expect a bit more price pressure just with the prolonged inventory correction?

Okay.

The implication then if you could blend.

You have that capacity with <unk>.

LTA on top I guess supporting ESP, how do you net out.

Utilization looks like now back to mid sixties.

With the excess capacity heading in that pricing environment.

Mitch we're node versus the new capacity coming on.

The trend for you to manage to stable or where do you expect a bit a bit more price pressure just with a prolonged inventory correction.

Jason Wang: We definitely see the pricing pressures. The blended ASP actually is more a reflection of our loading between the 12-inch and 8-inch as well. If we start off by answering your question with the ASP, and it's our belief that when the end demand remains weak, the pricing does not help to stimulate the demand. We respect the overall foundry market dynamics and the pricing pressure. While UMC will remain our pricing strategy of maintaining our pricing strategy, we do work with our customer during the good time and the bad time to uphold their competitiveness, and relevance in their respective market to secure their market share.

Without what you see there.

Pricing pressures.

Our.

The.

The blended ASP.

Sure.

Our loading between the 12 inch as well so.

If we.

Startup. This your question raise the ASP.

And it's our belief.

When the end demand remains weak.

<unk> does not help to stimulate the demand.

We are respecting India, we are respecting the overall foundry market dynamics and the pricing pressure.

While the UMC will remain our pricing strategy.

Maintaining our pricing strategy.

But we do work with our customers during the good times and at that time.

To uphold their competitiveness and relevance in their respective market to secure their market share.

Jason Wang: In addition, our value-added technology, manufacturing quality, and capacity alignment will support our customers, their competitiveness as well in their market position. In the pricing space, we respect the market dynamics and the pressure, but we will work closely with our customer on that. In terms of the blended ASP, they are LTA for the P6 on the 28 and, you know, and there is non-LTA protected 28 and they're also eight-inch outlooks. If we blend it together right now in Q3, the ASP is, you know, projected it's gonna be about low single-digit increase. In the forward-looking, we have to give a quarter at a time because that was subject to a different product mix.

In addition, our value added technology and manufacturing quality and capacity alignment.

So for our customers.

Their capacity competitiveness as will their market position. So in the pricing space we are expect.

Market dynamics and the pressure.

And we will closely working with our customers.

The.

In terms of the blended ASP.

Our LTA for the <unk> six on the 28.

<unk>.

And there is non LTA protected.

And they also eight inch.

Outlook.

Blended together right now in Q3.

The <unk> team.

Projected it's going to be about low singles.

Increase India and the forward looking we have to give a quarter at a time because that was subject to a different product mix.

Randy Abrams: Great. Thanks a lot, Jason.

Great. Thanks, a lot Jason.

Jason Wang: Sure.

Operator: Thank you. Next question is from Brett Simpson from Arete Research. Go ahead, please.

Thank you.

Next question is from Brett Simpson from everything go ahead. Please.

Brett Simpson: Yes, thanks very much. I wanted to just come back to LTAs and maybe if you can discuss whether customers are generally sticking to these LTAs. And if not, can you maybe just talk about how you're resolving contracts with customers? Are you collecting penalty payments in recent quarters? Could you maybe quantify that? Any thoughts in terms of how you're managing through these LTAs, given it's a sizable amount and your utilization's obviously, you know, coming down quite significantly from where it was a year ago or so. Any update there would be very helpful. Thank you.

Yes, thanks, very much I wanted to just come back to <unk>.

Maybe if you can discuss whether customers are generally sticking to these <unk>.

And if not can you maybe just talk about how you're reserving contracts with customers are you collecting penalty payments and.

Recent quarters could you maybe quantify that and any thoughts in terms of how you are managing through.

These LTA is given it's a sizable amount and utilizations obviously.

Coming down quite significantly from where it was a year ago or so so.

Any update there would be very helpful. Thank you.

Jason Wang: Sure. I mean, LTA is a mechanism to support both customer and us for longer term perspective, because we wanna make sure the, you know, the customer wanna make sure they are supply resilient, and we wanna make sure our investments are also somewhat protected with such a commitment. So LTA is a mechanism of that relationship. During the downturn cycle, you know, we both have to look at this, revisit the situation, but under the framework of, you know, we still have strong confidence in our long-term projections. So there are some modulation or adjustments to be made during, you know, given the LTA relationship, so they are resulting in some of the resolution of current LTA agreement. So that results in some of the financial impact, you know, penalty related matter.

Sure.

<unk> is a mechanism.

To support both customer and us.

For a longer term perspective.

Because we want to make sure.

The customer wanted to make sure. If there was some quite resilient and we want to make sure that our investments are somewhat protected with such a commitment.

So LTE is the mechanism of that relationship.

India the downturn cycle.

We both have to look at the to revisit the situation.

But under the framework, we still have strong confidence in our long term projections. So they opt out modulation adjustment to be made doing giving the LTA relationship. So they are resulting in some.

Resolution of the current LTA agreement, so that result in <unk>.

The.

<unk> Financial Inc.

Penalty.

Jason Wang: At this point, it's still in a smaller fashion. You know, I think we both, you know, customer and us still have confidence in what have we like aligned to do in terms of longer term. You know, we respect the market dynamics, and we will work with our customer in terms of dealing with those challenges. Again, the LTA is something that we both respect and seriously commit to it.

We didn't have it but at this point it's too.

Smaller fashion.

I think we both customer us to have confidence in what we'd like to do in terms of the longer term.

So we.

We respect the market dynamics, and we will work with our customers.

Dealing with those challenges.

Again, the LTE is something that we.

With both respect.

Seriously coming into it.

Brett Simpson: Okay. Maybe just switching gears a little bit on the gross margin situation and the guide, obviously, gross margin's coming off a little bit from what we were observing the level in Q2. Where do you see the trough in gross margins for UMC as we go through this downturn? Do you think it will be the gross margin will trough in Q3? Do you think it might. The weakness in gross margin might extend into maybe early next year? Any thoughts in terms of depreciation as well? Because it seems to be creeping up a little bit. Thank you.

Okay.

Maybe just switching gears a little bit on the gross margin situation.

Situation.

It is the guide obviously gross margin is coming off a little bit from from what we read.

The resilient level in Q2.

Where do you see the trough in gross margins for UMC.

We go through this this downturn do you think it will be interesting.

The gross margin with dropping in Q3 do you think it might the weakness this morning by extending into next year any thoughts in terms of depreciation as well because it seems to be picking up a little bit. Thank you.

Jason Wang: Well, I mean, that's a multiple level of the consideration. One is the current market pricing pressure. The other is the recent rising costs. For Q3, the rising cost in electricity hike, raw material, labor, will impact our profitability and we will continue to focus on, you know, our action to mitigate those rising cost headwinds. We have implemented aggressive cost reduction activity to control the power consumption, productivity, manage the material cost and usage, and streamline our process flow and labor management via smart manufacturing measures. We'll also focus on technology improvements such as continuous improvement process, CIP, optimize our fab productivity and quality to help mitigate those headwinds. You know, we will try to maintain our structural profitability level at a healthy level.

Well I mean.

That's a moated.

Multiple level up.

Consideration one is the.

The current market pricing pressure.

Is the rising recent rising costs.

For Q3, the rising costs in electricity hike raw material labor.

We'll empower profitability.

And we will continue to focus on.

Action to mitigate the rising cost headwinds.

We have implemented aggressive cost reduction activity to control the power consumption.

TBD.

<unk> managed the material cost and usage.

And streamline our process flow and labeled labor management views Mommy.

Manufacturing measures.

We will also focus on technology improvements such as the continuous improvement process CIP optimize our fab productivity and quality to help mitigate those headwinds so.

We tried.

Tried to maintain our structural profitability level at a healthy level.

Jason Wang: Given the market current dynamic, you know, we'll be more appropriate or prudent to giving this margin guidance one quarter at a time. Once we're over the down cycle, then we probably can share a bit of a longer time perspective.

But given the market current dynamic.

Probably giving will be more appropriate put into getting this margin.

Margin guidance, one quarter at a time and once we over the down cycle and then we will probably can can share a bit of a longer time perspective.

Chih-tung Liu: Yeah. For the depreciation numbers for 2023, we're still looking for a little bit over 5% year over year decline. For 2024, the increase will be more meaningful. We'll again offer the numbers when we approach the year end.

Chi-tung Liu: Yeah. For the depreciation numbers for 2023, we're still looking for a little bit over 5% year over year decline. For 2024, the increase will be more meaningful. We'll again offer the numbers when we approach the year end.

Yes for the depreciation numbers for the 2023, we're still looking for ILUVIEN over 5% year over year decline.

For 2024, the increase will be.

More meaningful.

Again, we're offering the numbers.

And we approach it took a year.

Brett Simpson: Great. Thanks very much.

Great. Thanks very much.

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

Thank you.

Next question Charlie Chan of Morgan Stanley Go ahead. Please.

Charlie Chan: Good evening, Jason and Chih-tung. Thanks for the updates. My first question is actually about your 14-nanometer strategy or progress. Because one of your foundry partners just mentioned that there will be 14-nanometer AI ASIC demand and production could be in 2 years. I'm just wondering whether the company is already prepared for the 14-nanometer demand and any more details about the capacity expansion, production timing, et cetera. We'd much appreciate it. Thanks.

Hi, good evening.

And then she don't.

Thanks for the update.

My first question is about.

Sure.

14 nanometer.

Strategy or.

Progress for.

You guys run off your defense service.

Panna.

As I mentioned that.

There would be 14 nanometer AIA demand and production could be in two years. So I'm just wondering that.

Great.

<unk> is already prepared.

Prepared for the 14 nanometer.

And any.

More details here.

The capacity expansion.

Protection timing et cetera.

Much appreciate it thanks.

Jason Wang: Sure. It's our goal is always to fully exploit the DUV capability. As we know, the DUV capability can sustain to the FinFET technology. Having successfully entering the mass production of our 22 nanometer business now, while we're witnessing the steady rise in revenue contribution, we are actively progressing with development of the 12 FinFET and specialty FinFET based on the existing 14 nanometer technology now. From the technology development, we are actively progressing.

Sure.

It is our goal is always to fully exploited exploited.

<unk> capabilities.

As we know that <unk> capability.

Sustained to the Finfet technology.

Having successfully enter into mass production.

22 nanometer business now.

And well we witnessing deal.

Steady rise in revenue contribution.

We are actively progressing with development.

<unk> and specialty things that based on the existing 14 nanometer technology.

So from the technology development.

Activity progressing.

Charlie Chan: Mm.

Jason Wang: However, on the capacity side, we still need to align with our customer for the capacity expansion and subject to our ROI justification principle, which we have adopted for years now. Once that's more clear, we will update accordingly.

However on the capacity side.

Do need to align with our customer for the capacity expansion.

Subject to our ROI justification principal and which we have about four years now.

So once that's more <unk>.

Earlier, and we will update accordingly.

Chih-tung Liu: Yeah, just to add on to that, we do have 14nm capacity already for years. We have been producing some 14nm cryptocurrency related products a few years back. I think what Jason was referring to is more massive capacity expansion going forward. Currently we already have some 14nm capacity already.

Chi-tung Liu: Yeah, just to add on to that, we do have 14nm capacity already for years. We have been producing some 14nm cryptocurrency related products a few years back. I think what Jason was referring to is more massive capacity expansion going forward. Currently we already have some 14nm capacity already.

Yes, just to add to that we do have 14 capacity already four years. So we have been producing some 14 nanometer.

Crypto coin related products, a few years back so.

Our senior part Jason was referring to is more.

Massive capacity expansion going forward. So currently we already have some 14 nanometer capacity already.

Charlie Chan: Okay. Thanks for that. Yeah, my next question is about your gross margin erosion in Q3. I know that Jason mentioned about the cost increase from electricity or raw material. But I'm wondering, maybe this question is to Chih-tung. Do you consider the NT dollars depreciation? I think I would think there's a kind of tailwind to your gross margin Q3. And also I wanted to know what was the kind of impact on the pricing erosion. Can you give us some more details about, number one is the currency depreciation and secondly the pricing pressure?

Okay. Thanks.

Thanks for that.

Yes.

And you said that your gross margin erosion into accorded and no debt.

Hey, Jim mentioned about the cost increase.

From an HSA or raw material.

Maybe this question is to Tito.

Do you kind of see the the $90 depreciation I think I would say.

Dave.

Tailwind to your gross margin in third quarter.

And also I wanted to know.

It was the.

<unk> found the pricing erosion so.

Can you give us some more details about our number one if the.

Currency depreciation and secondly.

The pricing pressure.

Chih-tung Liu: Yeah. For our guidance, we didn't factor in the currency fluctuation as a factor. There won't be included in the couple percentage erosions in our Q3 margin guidance, which is not included.

Chi-tung Liu: Yeah. For our guidance, we didn't factor in the currency fluctuation as a factor. There won't be included in the couple percentage erosions in our Q3 margin guidance, which is not included.

Now for our guidance, we did it in fact being the currency fluctuation.

So factor so.

So there won't be.

Included in the.

A couple of percentage erosion seen our third quarter monitoring transits.

Which is not included.

Charlie Chan: Okay.

Chih-tung Liu: As for ASP, our blended ASP guidance is up by two percentage points. Of course, like to like, it may vary according to different nodes. We also got some kind of mathematical help due to the lower 8-inch wafer capacity utilization rate. Again, it's already reflected into our gross margin guidance.

Chi-tung Liu: As for ASP, our blended ASP guidance is up by two percentage points. Of course, like to like, it may vary according to different nodes. We also got some kind of mathematical help due to the lower 8-inch wafer capacity utilization rate. Again, it's already reflected into our gross margin guidance.

Okay, Yes.

For OSP, where our blended SP guidance is up by two percentage points point.

Of course like to like it may vary according to different note.

They also drive.

Some kind of magical help.

Due to the lower eight inch wafer capacity utilization rate.

Again, it's already reflected into our gross margin guidance.

Charlie Chan: Okay. Can you remind us, 81% difference of the New Taiwan dollar depreciation, what does it mean to your gross margin benefit?

Okay.

Thank you.

Windows.

81%.

<unk>.

NT dollar depreciation what does it mean to your.

Gross margin.

Benefit is about <unk>, 4% at this point.

Chih-tung Liu: It's about 0.4% at this point.

Chi-tung Liu: It's about 0.4% at this point.

Charlie Chan: Okay, thanks. Yeah, next is more focused on this pricing flexibility. I think that your peers, more or less, they already mentioned some heavy pricing pressure in 8-inch that I can understand. I think that it should be appreciated by customers that you want to support them to maintain their market position. My concern is more about the 20nm, your pricing strategy, because I mentioned that your 20nm utilization is still healthy. You still have those AMOLED ISP demand. I'm wondering for 20nm, are you also being flexible about the pricing? Because we keep hearing some of your customers talking about 20nm, you may have some compromise as well.

Okay.

Okay. Thanks.

Yes.

And next is.

More focus on pricing to actually.

<unk>.

I think your peers.

More or less the already mentioned.

Some heavy pricing pressure instead.

I can understand and I think you.

You should be.

Appreciate it by Kosmos Ed do you want to.

To put them to maintain their market position.

And my my comments I mean is it more about the 10 nanometer.

Your pricing strategy because I am.

<unk> mentioned that you have to.

Nanometer utilization is still healthy.

Still have those.

And while led ISP demand.

So I'm wondering for 10 nanometer are you also.

Being flexible about pricing because we.

<unk> some of your customers talking about.

Tony.

You may have some compromise Tesla.

Jason Wang: Well, I mean, our pricing position are the same to all nodes. Although the different node has a different circumstance or situation.

Well I mean, our pricing position.

Understand to all nodes.

Although the different no hazard differently.

The circumstance situation.

Charlie Chan: Mm-hmm.

Jason Wang: Our position remains the same. We're maintaining our pricing strategy, but we do work with our customer, whether on a node-to-node basis or at the holistic level, and, you know, giving a good time or bad time. I mean, the end goal is try to help them and support them to be competitive and secure their market share. It does not separate it by different technology nodes.

But our position remains the same.

We're maintaining our pricing strategy.

We do work with our customer upgraded on that node to node basis.

Sure.

The.

Holistic level.

And giving a good title at that time.

Angle is tied to help them and support them to be competitive and secure their market share. So.

That's not separated by different technology nodes.

Charlie Chan: Okay. It is not just limited to the inch. Is that right?

Okay. Okay. So it's not just the damage to the.

H you said right.

Jason Wang: No. I mean, it is in general principle our pricing position and strategy, yes.

No I mean is.

It is in general principle pricing precision and strategy yes.

Charlie Chan: Okay. Thanks, Jason. In that case, can you give us a sense, you know, how much of your business is taking this kind of flexible pricing? Do you think more than half of your nodes, your business, being flexible about pricing in H2?

Okay. Thanks, Jason so in that case.

Give us a sense.

How much of your business is.

Taking these kind of.

Our flagship oil pricing do you think more than half of your mills. Your PSA is.

Being flexible about the pricing in second half.

Jason Wang: I mean, it's hard to quantify that, but given the weaker end demand, you know, I don't think any pricing changes will actually stimulate the end demand. It's mainly about the within the pie modulation between different players. We definitely look at that, you know, closely and working with our customer closely as well, and to support and make sure that we secure the share for both of us. It's from the percentage or quantitative point of view, it's hard to give out at this point.

Okay.

To quantify that.

<unk>.

But given India.

The weaker end demand.

I don't see any pricing changes will actually.

Simulate the end demand is.

Is it mainly about the.

We think the pie modulation between different players, so and we definitely look at that.

Closely and working with our customers closely as well and to support them and make sure that we secure share for both of us.

And so.

It's.

From a percentage or a quantitative point of view is hotter dealing off at this point.

Charlie Chan: Thanks. And lastly, maybe, following up, Brett's question about the trials of gross margin. I'm wondering your view about the bottom of the fab utilization. Q3, you see a sequential decline of UTR, right? Do you think that is the problem of the utilization for this cycle?

Okay, Okay, Thanks, and lastly, and maybe.

Following.

Great question about the trough gross margin I'm wondering your view about the bought LLC.

Fab utilization so.

Third quarter, you see a sequential decline of <unk>.

Do you think that that is the <unk>.

Note that of the utilization.

Perfect.

Tycho.

Jason Wang: Well, I mean.

Chih-tung Liu: Yeah, it's difficult to predict and we won't predict that. All we can say is the current weakness, the inventory digestion, the slow pace is going to linger into Q4. I think that's all we can say for now. We're certainly happy to give the gross margin guidance for the next quarter at the end of July.

Chi-tung Liu: Yeah, it's difficult to predict and we won't predict that. All we can say is the current weakness, the inventory digestion, the slow pace is going to linger into Q4. I think that's all we can say for now. We're certainly happy to give the gross margin guidance for the next quarter at the end of July.

Well I mean, yes.

Okay.

<unk>.

So all we can say is the current weakness.

Inventory digestion slow pace is going to linger into Q4, I think thats. All we can say for now and we certainly happy to keep the.

Gross margin guidance for the next quarter.

At the end of July .

Charlie Chan: Okay. Yeah. Definitely we want to listen to your opinion, but my observation is that your customers, although their demand is slow, but they are outgrowing foundry factors. Right? I do think the same inventory will come down. Also, don't forget that the channel inventory or downstream inventory is present, so I am optimistic. Anyway, we look forward to your next update. Thank you.

Okay. Okay, yes, so definitely we want to listen to your opinion, but.

My My my observation you said your customers.

So by the outgoing.

Foundry sectors, so I do think the.

Sure.

Same inventory will come down and.

Don't forget that the.

The channel inventory or downstream inventory, you said pre producing so I'm optimistic.

Anyway, we look forward to your next update thank you great.

Jason Wang: Well, great to hear that.

Chih-tung Liu: Yeah, we're trying our best. Yeah, thanks.

Chi-tung Liu: Yeah, we're trying our best. Yeah, thanks.

Great to hear that.

Charlie Chan: Okay, thanks.

Okay. Thanks.

Operator: Thank you. Next one, Bruce Lu of Goldman Sachs. Go ahead, please.

Thank you.

Nick's one Bruce Lu of Goldman Sachs go ahead. Please.

Bruce Lu: Thank you for taking my question. I think, to be honest, we are still surprised about the CapEx remains unchanged and your ramp-up schedule for the P6 remains unchanged. I mean, Jason seems to be, you know, you mentioned like confidence about like your customers. You know, I think that's the gap between investor and the management. Can you help us like, you know, what gives you the confidence when you have a lingering Q4 and your customers cancel the order all the time and you believe that you can maintain relatively high attachment rate for 28, not only for 200.4 to support the CapEx?

Thank you for taking my question I think.

And then we are still surprised about.

Capex remain unchanged.

Hey, Joe.

We may announce yet.

I mean.

<unk> seems to be.

You may send my confidence of our valued customers.

In between.

And then can you have.

What gave you the confidence when you will have some lingering fourth quarter and approximate painful to order all the time.

We believe that you can maintain the high attachment rate for Colombia, and R&D before too long.

To support the pop ups.

Jason Wang: First of all, the 28 nanometer is serving some of the important applications.

I mean first of all the 28 nanometers, serving a solid year.

Important applications.

Bruce Lu: Mm-hmm.

Jason Wang: For the OLED driver, you know, the current penetration in the OLED end market and the volume remain healthy. In the ISP and the Wi-Fi space, we see new application continue coming into the space. For the 28, given the broader customer base and diverse the product line and product pipeline, that gave us the confidence because the outlook remains healthy. That also equipped with our specialty technology leadership position as well. I think that differentiating us with other 28 nanometer capacity out there. Right now, given the market outlook, we have been very cautiously look at it because the across the IoT segment, the sentiment is weak.

And the only driver.

Current.

Karen.

Penetration in only.

And market and.

The more the volume remained healthy.

And in the ISP and the Wi Fi space, we see new application.

Continue coming into this space.

<unk>.

The 28.

Given the broader customer base and diverse product line and the product pipeline.

That gave us confidence because.

The outlook remains healthy.

And our <unk>.

Also equipped with.

Our specialty technology leadership.

Precision of Wil.

So I think that differentiating us with other 28 nanometer capacity out there.

Right now given the market outlook.

We have been very cautiously look at it because the across the whole segment.

Sentiment is weak.

Jason Wang: what we have received and what we have validated and what we have delivered right now, that has demonstrated the current broader customer base and the product pipeline does give us that confidence that this will probably stay in a healthy level for some time.

But.

While we haven't received and while we have a validated.

And while we have delivered right now that has demonstrated the current broader customer base and the product pipeline that give us that confidence that this will probably stay in a healthy level for some time.

Bruce Lu: Can we do something like, you know, your 40nm doing your job a lot. Like, can we convert some of the 40 to 28 or, you know, to save some CapEx or, you know, or what's the schedule for the Singapore new fab, you know? Can we slow down a bit for that, even though it might not impact the CapEx for this year, but we can have a more conservative CapEx outlook for next year?

So can we assume something like.

Your 40 nanometers chocolate long like can we complete assembled <unk> or to say some capex or.

What's the schedule for the Singapore, New fab.

Can we slow down a bit for that.

Even though you might not even product capex for this year, we can have.

More conservative.

I'll look forward to next year.

Jason Wang: I mean, we definitely look at this. Right now, for the P3, we expect it will go into volume production by mid-2025 as planned. There's still kinda two years out. We will monitoring the overall market and align with our customer for the P3 ramp. Once we have a further update, we will advise accordingly. Since most of the CapEx increase, now the P6 is pretty much done and is more associated with the P3. I think it's less will affect our 2023 number, but there is a possibility that for 2024 number, we'll continue assess and update.

I mean the.

We definitely look at this.

Sure.

Right now the 43.

We expect it will go into volume production by.

<unk> 2025.

The planet, so theres still kind of.

Two years out.

So we will monitor the overall market and align with our customer for the <unk> III ramp.

Once we have referred to update we will advice accordingly.

And since most of the Capex increase now that <unk> is pretty much done and is associated with the <unk> III.

I think it's less.

Yes.

That's the way.

Our 2023 number but there is a possibility that for 2024 number will continue to assess and update.

Bruce Lu: I see. Okay. Another thing I want to switch gear to, you mentioned that you would do some interposer business. Can you help us understand your strategy for the, this interposer business? What kind of capital intensity, you know, what kind of return is gonna be, you know, do we need to expand the capacity for that? Is that be the bottleneck to impact your other business? Can we have more color on that?

Okay.

Other thing I wanted to switch gears to you mentioned that you would lose some in the poker business.

Can you help us understand your strategy for this thing to pull their business, what kind of type of independence.

Kind of.

<unk>.

Got it.

We expanded capacity for that.

Our beta platform to empower your other business can we have more color on that.

Jason Wang: Sure. For the interposer as a part of our advanced packaging space, we have been providing interposer and wafer-to-wafer oxide bonding technology for years. It's not something new. As the increased demand for higher bandwidth and the reduced smaller form factor requirement, we have invested in the space, and we will not be absent from those emerging markets. At the same time, it's our strategy for this space to work with the OSAT partner and to enable an open ecosystem. Sort of a we are only providing the interposer within the supply chain, and we're working with OSAT for the back-end process. That's kind of how we position ourself within this advanced packaging space. The interposer I mentioned earlier, accelerating, is really giving the recent AI coverage.

Sure.

For the in the poster.

Part of our advanced packaging.

Space.

We have been providing in the poser and wafer to wafer offsite.

Onsite bonding technology for years.

So it's not something new.

As the increased demand for higher bandwidth and deals are smaller form factor requirement.

We have in that space, and we will not be absent bonuses.

Some of those emerging market.

At the same time, it's our strategy.

Phase two walkways.

The wholesale partner.

To enable an open ecosystem.

We are.

Only providing the intervals.

We think the supply chain and we're working with the wholesale for the backend process.

And so that's kind of how we.

Precision ourself, we seem to.

In packaging.

The individuals that I mentioned earlier accelerating is really giving the reason AI coverage.

Jason Wang: We are just gearing up to offer additional capacity as is necessary to support the customers' needs. That capacity is associated with the silicon interposer lots. The current capacity size is about 3,000. You know, it's our goal to double that capacity by mid-next year.

We are just gearing up to offer additional capacity necessary to support the customers.

Customers.

That needs.

That capacity is associated with the account in the poster.

Hello.

And.

The current capacity size.

About <unk>.

<unk> 3000.

<unk>.

Our goal.

Double that capacity by.

The next few years.

Bruce Lu: Okay. Just to be clear that you have no plan to invest in chip on wafer or other package method, only for the interposer for this. Is that correct?

Okay, just to be clear that you have.

No plan too.

And chip on wafer or other package method.

Only 4 billion proposal.

Jason Wang: Chip on wafer means we are providing you wafer, the W. Yes.

Is that correct chip.

Jason Wang: Chip on wafer means we are providing you wafer, the W. Yes.

Chip on wafer it means we are providing a wafer.

Yes.

Bruce Lu: Yeah. No, you are not going to provide any, like, bonding or chip on you know, bonding, debonding, you know, put on substrate, that kind of packaging method. No, just for the silicon interposer. Is that right?

Yes, yes, now going to provide any like bonding our chip.

<unk> founding put an update about kind of the practice of medicine.

Just for that reason there is that right, yes, but we do do wafer to wafer bumping hybrid yes, yes.

Jason Wang: Yes. We do wafer-to-wafer bonding. Hybrid bonding. Yes.

Bruce Lu: Yeah.

Jason Wang: I see.

Bruce Lu: Our approach is.

Jason Wang: Is that-

Bruce Lu: Yeah. It's an open ecosystem. We want to leverage our partners for the downstream, and it will be a total solution, but a joint effort by all the ecosystem players. What kind of profitability and return profile for this business?

Apache open.

Open ecosystem, so we want to leverage our partners for the downstream and it will be a total solution, but the joint effort by.

OTI ecosystem players.

But what kind of profitability and return profile.

Yes.

Jason Wang: Rather, I mean, currently, given the size of this capacity and the space, the revenue contribution is still relatively small.

Well I mean currently given the size of this.

<unk> and <unk>.

Space.

The revenue contribution is still relatively small.

Bruce Lu: How about the profitability?

So how is the profitability.

Jason Wang: is aligned with our current corporate average. Yeah.

Is.

Aligned with our current corporate average.

Bruce Lu: Okay. You saw it's in line with the current corporate average in Q3. Because your corporate average went down a lot.

Okay. So you saw.

In line with our current corporate average in third quarter.

<unk> done a lot.

Chih-tung Liu: No, our corporate average in Q2 was 36% gross margin, slightly better than Q1.

Chi-tung Liu: No, our corporate average in Q2 was 36% gross margin, slightly better than Q1.

Our corporate average quarter through was 36% gross margin slightly better than Q1.

Bruce Lu: I see. Okay. Basically, the disposal business is around that mid-30% gross margin.

Hi, guys.

Okay. So basically the <unk> proposal.

Around that mid 30%.

Gross margin.

Jason Wang: It will not dilute our current corporate average. No.

It will not dilute our current corporate average.

Bruce Lu: I see. Understand. Thank you.

Hi, thank.

Thank you.

Operator: Thank you. Next question, Zhihong of China Ren-Renaissance. Go ahead, please.

Thank you.

<unk> the home <unk> of China Renaissance go ahead. Please.

Szeho Ng: Hello, gentlemen. I have two questions. Number one, regarding the Xiamen fab. Right now is 100 percent owned by the group. So would there be any strategy change in our China operation or in our dealing with local customers there?

Hello, gentlemen, I have two questions and number one regarding the shopping right now is 100% on their fighter Grill. So would there be any strategy change in our China operation.

I'd like to get into your local customer.

Jason Wang: I'm sorry. Again, the question?

Oh, I'm, sorry, again, the question, China, Australia Sherman.

Chih-tung Liu: China strategy.

Chi-tung Liu: China strategy.

Szeho Ng: Of the Xiamen. Right.

Jason Wang: Well, I mean.

Yes.

Szeho Ng: Right now, the Xiamen fab is fully owned by us.

Right now the Sherman Fab is fully owned by us.

Jason Wang: Right.

Chih-tung Liu: Yeah. Yeah. Prior to the buyback, it's actually already dominant.

Chi-tung Liu: Yeah. Yeah. Prior to the buyback, it's actually already dominant.

Prior to the buyback it's actually already determined then I'll come talk by UMC January .

Jason Wang: Yeah.

Chih-tung Liu: or controlled by UMC anyway. Of course, right now it's 100% owned, so there will be no minority interest once Xiamen continue to make profit. It's also our goal to see if there's any synergy we can generate between our two operations, HeJian in Suzhou and USCXM in Xiamen, to see any more synergy and also competitiveness by these two joining efforts. I think right now the domestic demand occupy even more percentage of the overall revenues.

Chi-tung Liu: or controlled by UMC anyway. Of course, right now it's 100% owned, so there will be no minority interest once Xiamen continue to make profit. It's also our goal to see if there's any synergy we can generate between our two operations, HeJian in Suzhou and USCXM in Xiamen, to see any more synergy and also competitiveness by these two joining efforts. I think right now the domestic demand occupy even more percentage of the overall revenues.

Of course, right now, it's 100% owned so there won't be no minority interest.

<unk> continued to make profit.

It's also I'll go to see if there's any synergy region generally.

Continuing our two operations in Fujairah.

Youre seeing chairman to see anymore.

Synergy and also competitiveness.

By this two adjoining effort.

I think right now the.

Domestic demand.

Health care pie, even more percentage of overall revenues.

Szeho Ng: Mm-hmm. I see. All right. Yeah. My-

Okay Alright.

Alright.

Jason Wang: Sorry. I will add.

Right Alright.

Szeho Ng: Please go ahead. Ask.

Jason Wang: Whether it's a Xiamen facility or our Japan facility, they are one of our four 12-inch fab under the UMC Group's global capacity scale. With each one of their unique manufacturing location, China, Japan, that will actually position us to support our broader worldwide customer base, and with UMC's overall comprehensive technology offering. At the same time, UMC's worldwide customer can also access to those local manufacturing sites to serve the local supply chain. We think the geographic location on those fabs actually gave us that benefit, and as well as our customer to access to the local market.

Please go ahead.

The weather is the Sherman facility or.

Our Japan facility.

They are one of the.

For 12 inch fat under the UMC.

Global capacity scale.

With each one of the unique unique manufacturing location.

China, Japan.

Yeah.

<unk>.

Position us to support our broader worldwide customer base and with Umc's overall comprehensive technology offering.

And the same time, the Umc's will like customer care assets to those local manufacturing side too so the local supply chain.

So we think that geographically.

Located on those that actually gave us benefit and as well as our customer assets to the local market.

Szeho Ng: I see.

Jason Wang: whether it's the 100% acquisition or before that, it was the same position that's supporting our global customer.

And alright.

Percent before that work the same position.

<unk> arc rolling customer.

Szeho Ng: Mm-hmm. Okay. Fair enough. My second question on the gross margin. Right now we are guiding gross margin back to maybe mid-thirties level. How easy for us, for some of the company to see the gross margin back to the mid to high forties last year?

Okay.

Okay Fair enough and my second question on the gross margin. So right now we are guiding gross margin back to maybe meet.

<unk> Snapple, how do you see for us for some of the company to see the gross margin back to Jay.

At mid to high 40, <unk> and last year.

Jason Wang: I mean, I think we kinda touched this similar question on a few different ways.

I mean.

I think we kind of touched a similar question on a few different ways.

Szeho Ng: Mm-hmm.

Jason Wang: I mean, this current gross margin guidance was given based on the current outlook, our product mix, the loading, the utilization projection, and the ASP assumptions. Given the rising cost, there are lots of factors that will affect the long-term gross margin projections. One way to look at this is if we look back, you know, I think compared to the UMC in the past, you know, if we look at a similar loading situation as well as the cost structure, I think we are much more resilient now in terms of our-

I mean, the current gross margin guidance.

Even based on the current outlook.

Product mix and the loading utilization projections.

ASP assumptions.

And given the rising cost.

Yes.

Lots of factors that will affect the long term gross margin projections.

One way to look at this is if we look back.

I think compared to UMC in the past.

If we look at a similar loading situation.

Our cost structure I think we are much more resilient.

Szeho Ng: Mm-hmm.

Jason Wang: Financial gross margin level. Going forward remains the same. We're gonna take the same approach and continue focus on the cost control, cost down paths, you know, productivity improvement, all the necessary measure to against this pressure headwind. Hopefully we can deliver a much healthier, stronger balance sheet for the company. Now, since we're going through this down cycle now, and you know, it's more appropriate and prudent that we don't give out any long-term projection at this time, and but once

Gross margin level and going forward remains the same we're going to take the same approach and continue to focus on.

The cost control.

Control cost down as productivity improvement all of the necessary measures to against that.

Pressure headwind.

And hopefully we can deliver a much healthier.

Stronger balance sheet for the company.

No.

Since a week going through this down cycle now and.

<unk>.

<unk> proven that we don't give out any long term projection at this time.

Szeho Ng: Mm-hmm.

Jason Wang: We're more ready, then we'll definitely share that with you.

More ready.

We'll share that with you.

Szeho Ng: I see. Okay. All right. Last one. Any chance to update the industry outlook for the year? For the addressable market that we are serving?

Alright.

And antitrust two updates the industry outlook for the year Okay.

The addressable market that you're serving.

Jason Wang: Sure. Well, the semi outlook, we expect the 2023 semiconductor market, exclude the memory, will decline by mid single digit year-over-year. For the foundry, we now expect the industry will decline by mid-teens year-over-year. With the weaker macro condition, we'll need to be very conservative as our customers continue to manage their business and inventory now. For our addressable market, I think will be higher than the meetings, yes.

Sure.

The <unk>.

These semi outlook.

We expect the 2023.

The semiconductor market.

Excluding the memory.

<unk> declined by mid single digit yielding year.

For the foundries.

We now expect the industry will decline by mid teens year over year.

We see a weaker macro conditions.

We'll need to.

I'll be very conservative.

That's our customer continue to manage it.

Business.

And inventory now.

Our addressable market I assume it will be higher than that yes.

Szeho Ng: I see.

Jason Wang: The decline will be higher.

The decline will be higher.

Szeho Ng: I see.

Jason Wang: Yes.

Okay.

Szeho Ng: All right. Okay, fair enough. Okay, thank you, gentlemen. As usual.

Alright, Okay fair enough okay. Thank you gentlemen.

Operator: Thank you. Next one, Gokul Hariharan of JP Morgan. Go ahead, please.

Thank you Nick.

Makes one goku hunting haul line of Jpmorgan go ahead. Please.

Gokul Hariharan: Yeah. Hi, thanks for taking my questions. My first question, I just wanted to ask a little bit more on the pricing strategy and what you're seeing from price pressure. Are we starting to see more price pressure coming through for your China facilities, given we hear about a lot of foundry price pressure in China, given that UMC has significant capacity in Xiamen and HeJian? Is there a bigger price pressures you're seeing for your Chinese capacity, or is it a price pressure that you're seeing across the board for the company itself?

Yeah, Hi, Thanks for taking my questions. My first question I, just wanted to ask more on the pricing.

Strategy and what are you seeing from price pressure.

Are we starting to see more price pressure coming through for your China beef, we wouldn't be here.

About a lot of foreign be price pressure in China, given that UMC has significant capacity in China in June .

Jim.

Is that because I appreciate that you are seeing for your Chinese capacity.

Or is it vice versa that youre seeing across the board for the company itself.

Jason Wang: It's across the board. I think we're seeing a pricing pressure across the board, not only from China factories, no.

It's across the board.

Given the current.

Market condition and.

I think we see a pricing pressure across the board.

Not only from China factory.

Gokul Hariharan: Got it. We do hear that many of your existing clients are considering using some of the Chinese foundries, at least for a portion of their future products. How do you see the China capacity build? Because that seems to be the one area where there doesn't seem to be any pause in capacity build out. Still seems to be pretty aggressive among all the Chinese foundries for primarily mature 12-inch, given they cannot really build leading edge. Jason, how do you expect this to kind of interact with the, like, price discipline that has existed in the non-China part of the market, including you guys and some of your peers over the next couple of years?

Got it and we do hear that many of your existing clients.

Contributing using some of the Chinese foundries at least for a portion of that.

Our future.

Products.

Do you see the attendant capacity build because that seems to be the one area that doesn't seem to be any pause in capacity build out.

<unk> seems to be pretty aggressive among all the Chinese foundry floor, primarily mature 12 inch given they cannot really build leading edge. So excuse me.

How do you expect this to kind of interact.

Yes.

The.

Price discipline that has existed in the non China up onto the market, including you guys and some of your peers over the next couple of years.

Jason Wang: Sure. Well, I mean, first of all, without commenting about the peers, for UMC to stay competitive and remain relevant in our industry, we have established several advantage in our view for many years. One is the comprehensive specialty technology offering. Two, the competitive workforce of manufacturing quality and our geographically diversified manufacturing site. In addition, our strong commitment bringing this company to, you know, to improve our customer relationship and ESG commitment, we believe will further enhance our position as more of a trusted foundry partner. That's more on a higher level. On a tactical level, we look at the major overlap area in the 8-inch.

Sure.

I mean first of all I mean without commenting about.

The peers.

For UMC.

Stay competitive and remain relevant in our industry.

We have established several advantage in our view.

For many years.

One.

The comprehensive specialty technology offerings.

Two the competitive cost of manufacturing quantity.

And our geographically diversified manufacturing site.

In addition, our strong commitment.

Bringing this company to improve our customer relationship and ESG commitment.

We believe will further enhance all position us more of a truck the foundry partner.

That's more on a higher level.

On a tactical level.

We look at the major overlap area in the eight inch we.

Jason Wang: We have been improving our eight-inch customer stickiness by aligning with our customers on their product spec, differentiate via specialty technology, including process customization, JDP, the joint development program for products such as analog, power management, IC, MCU, and discrete devices. We are confident to navigate through this current market condition as well as the competition landscapes. I think there's many areas that we need to do, but we do believe that we have several advantage in many areas, and we definitely have deployed those initiatives and hopefully we can navigate through this.

We have been.

Improving our eight inch customer stickiness.

Aligning with our customers.

Their product spec differentiated views specialty technology, including process customization.

J D P to joint development program for.

For products, such a analog power management, IC MCU and discrete devices.

And so we have confidence to navigate through this current market.

Condition as well as the competition landscapes.

I think there's many areas that we need to do but we do believe that we have several advantages in.

Many area.

We definitely have deploy those initiatives and hopefully we can navigate through this.

Gokul Hariharan: Okay. Thanks, Jason. Maybe one other question. I think you have consistently mentioned over the last few quarters that cutting price or offering price discount in a downturn doesn't really work. Now as we think about potentially going into next year, emerging from the downturn, do you think that's when we start to see a little bit more price aggression, given a lot of your peers as well as you would be running at lower utilization? Is that when we should start to expect a little bit more price aggression in this industry?

Okay. Thanks, Jason maybe.

Maybe one other question I think.

Have consistently mentioned over the last few quarters that.

Cutting price or offering price discount in a downturn it doesn't really work.

Now as we think about potentially.

Going into next year are emerging from the downturn do you think that's when you start to see a little bit more price degradation given a lot of.

Youll feel it's as little as you would be running at lower utilization is that when we should start to expect a little bit more price degradation.

The industry.

Jason Wang: I mean, obviously we all know, right? I mean, the price pressure is there. You know, our comment is really about the pricing doesn't help to simulate the end demand. When the end market is shrinking, the overall demand shrinking, the pricing is, you know, mainly for the tactical level of approach and which we will use. We will not ignore that. We are, you know, like I said, we respect the overall foundry market dynamics and those pricing pressures. We will work with our customer, you know, for those, to help, you know, uphold their competitiveness and secure their market share.

Yes.

I mean, obviously, we all know right I mean.

The price pressure is there.

And.

Our comments really about.

The pricing doesn't help system stimulate end demand.

So when the end market shrinking the overall.

Thank you.

The pricing is.

Mainly for the technical level.

<unk> approach.

Which we will use.

We would not ignore that and we are.

I said, we respect the overall foundry market dynamics and pricing pressures. So we will won't be as our customer.

Yes.

For those.

<unk> health.

Uphold their competitiveness.

And secured their market share.

Jason Wang: From the pricing strategy level, and we remain clear about how to manage those, you know, seeing in several levels of, you know, whether it's a strategic level or tactical level or the short term or longer term structure. Those strategies remain no change, but we will definitely use those, you know, if it comes to more of a tactical purpose. We're not ignoring that. We would just want to manage the pricing prudently. Yeah.

On the pricing strategy level, and we remain clear.

About how to manage those.

Yes.

Several level of whether it is a strategic level for tactical level or the short term or longer term structure. So we dose strategy remains no change, but we will definitely use those E comm too technical.

Technical purpose.

And so we're not ignoring that we would just wyman managing the pricing prudently.

Gokul Hariharan: Understood. Maybe one question on 8-inch. It's been kind of seeing very low utilization across the industry. Do you feel that that's going to turn around sometime soon? Or there is a situation in the market where more and more 8-inch product is getting converted into 12-inch, and as a result, this overcapacity situation could last for a very long period of time.

Understood.

Maybe one question on <unk>, it's been.

Kind of being very low utilization across the industry.

Do you feel that.

That's going to turn around sometime soon.

Situation in the market.

More and more eight inch product thats getting converted into 12 inch and Thats in the road.

Overcapacity situation could last for a very long period of time.

Jason Wang: Well, I mean, for the long run, we foresee some 8-inch demand will recover post inventory correction. They will have some. There are also new applications from megatrends such as EV, plus increasing IDM outsourcing business, which will help lift the 8-inch loading. However, like you said, we do anticipate continuous pressure from some of the 12-inch mature nodes that has impact the 8-inch supply chain. So they will have some recovery and from the overall market once the post inventory correction and as well as the new application ramp. But I think what you mentioned about it also happened there. So they will have some impact as well.

Well I mean for the long run.

We foresee some eight inch demand will recover pulp inventory correction.

We'll have some.

They are also new applications from Mega trends, such as EV plus.

Plus increasing IDM outsourcing business with you.

Will help lift the eight inch loading. However, like you said, we do anticipate continued pressure from some of the 12 inch mature nodes that that has impacted <unk>.

Hi chip.

<unk> will have some recovery and.

Following from the overall market once that inventory correction.

As well as the new application win but I think what you.

What you mentioned about also happened there so that will have some pilots.

Gokul Hariharan: Okay. Thank you very much. Yeah, thanks.

Okay. Thank you very much thanks.

Operator: Next one, Sunny Lin of UBS. Go ahead, please.

Okay.

Once on the lean of UBS go ahead. Please.

Sunny Lin: Hi. Good afternoon. Thank you for taking my questions. My number one question is on pricing for your long-term agreement, especially for 20 nanometer. As you said, given the ongoing demand uncertainties, I wonder for your LTAs for P6 and the future Singapore expansion, are you seeing any pressure from clients to renegotiate on the contract pricing? The second part of that question is for your Singapore fab. If you look at the cost, how much higher is it versus P6 ex-expansion in Taiwan? And will that be reflecting to your pricing for your contract fab?

Hi, good afternoon, and thank you for taking my questions. So my number one question is on pricing.

Well talk to you next question is why.

28 nanometer.

So I think that given that I'm going to now San please.

<unk> for you.

For PC.

Future Singapore expansion.

Are you seeing any pressure from clients to negotiate the contract pricing.

And the second part of that question.

Thank you for that.

When you look at the cost how much higher is it perfect.

<unk> expansion in Taiwan.

Happy with that.

I think to your pricing for the country as well.

Jason Wang: For the LTA, I answered earlier that our customers and us, we view that seriously. At this point, the changes on those LTAs are very minimal, relatively small. Between us and the customers, we do look at that as for more of a long-term perspective, not a short-term tactical mechanism. We still feel confident about those LTAs going forward. They are pricing adjustments but not associated with the LTA. Even with some of the LTA revision, that will be very in a very small portion, relatively small. The cost increase in Singapore is definitely much higher, not just because the geographical reason, also because of the continuous inflationary cost increase.

So will the LTA.

I enter earlier.

Our customers.

So we view that.

Seriously.

And at this point.

The changing under the LTA is very minimal.

It's relatively small.

And we.

Between us and the customers, we do look at that.

More of a long term perspective, not a short term tactical mechanism.

So.

We still feel confident about the LTE going forward.

They are pricing discussed it but not associated with LTE.

Even with some of the LTE revision that will be.

A very small portion.

Relatively small.

Alright.

The cost increase in Singapore definitely much higher.

Not just because of the rapidly reason also because the.

Companions inflationary cost increase so we.

Jason Wang: We, you know, and that at this point, we don't foresee that will stop anytime soon. We have to mitigate those headwinds and continue working with our customers, to mitigate those and at the same time be transparent about the cost increase, and to deal with that issue together. At the same time, we have to be realistic about the market price. It is a balanced act and we'll continue manage that throughout this whole process.

And that.

At this point, we don't see we don't foresee that will stop anytime soon.

Have to mitigate those headwinds and continue working with our customers.

To mitigate those and the same time be transparent about the cost increase.

And to deal with that.

Issue to get.

Alright.

The same time, we have to be realistic about the market.

So it is a balance at and.

We will continue manage that throughout this whole process.

Sunny Lin: Got it. Just to make sure that I interpret correctly. Given the cost difference, will it be fair to assume that you could be pricing differently for your 20nm capacity in Taiwan versus Singapore?

Got it.

And so.

Just to make sure that.

Mike Correct me, so given that cost upfront.

Be fair to assume that you could be passing differently.

So you had 28 nanometer capacity in Taiwan, Singapore.

Jason Wang: For the market price, they will not price differently. The market price reflects the current market situation and it's usually not a cost-based topic. This is more of a joint investor program and the cost is more of the factor. If you're talking about the market price, that's not based on the cost basis. Yeah.

So the.

The for the market price they would not price differently.

The market price reflects the current market situation.

<unk>.

It's usually not a cost base.

Topic.

This is more of a joining investor program and the cost is more up to that.

Sure.

If you're talking about the market prices.

Not based on a cost basis.

Sunny Lin: Got it. Thank you. That's very helpful. My second question is about the structural supply versus demand for a trailing net foundry. If we look at your historical utilization rate full cycle, that will be between, I think, 85% to 90%, full cycle. But apparently in the last 2 years, the industry capacity had increased quite a bit. Just want to get your thoughts on how we should think about the full cycle utilization rate for you, maybe for next 2 to 3 years.

Got it. Thank you that's very helpful. So.

My second question.

Just about the structural supply versus demand.

Net foundry.

If we look at us historically utilization range through cycle.

That would be between I think 80% to 90%.

So cycle.

But.

In our last two USD unless you capacity has increased quite a bit.

And so.

Just wanted to get your thoughts on how we should think about that.

So if I call utilization for you maybe.

Maybe for next.

Yes.

Jason Wang: Well, I mean, from the business, you know, management point of view, we also want to increase our utilization and help load our fabs. I mean, from the financial model standpoint, the company's balance sheet healthiness level, and the resilience, we will probably have to plan out different scenario. As a business manager, I probably won't instruct our teams to shoot for 80% or 90% utilization as our goal. From a financial simulation purpose, we have a different layer of the utilization rate assumption and to examine our financial resilience. In terms of the business objective is our goal to fully load our fab.

Well I mean.

On the business management point of view, we also wanted to help increase our utilization that helped at all in our Fabs.

So I mean.

Yes.

On a financial model standpoint, and the company's balance sheet healthiness level and the resilience, we will probably have to play out different scenario, but as a business manager.

Probably won't our team to shoot for 80 or 90% utilization of our gold toe.

Is it from.

The financial simulation purpose, we have a different layer of the utilization rate assumption until exam, our financial resilience.

But in terms of the business objective is I'll go through fully loading all of that.

Sunny Lin: I see. I guess earlier several analysts had asked the demand questions from different angle. I just want to try one more angle here. I understand we are still in the cycle trough. Visibility is still not high. As Charlie pointed out, the industry inventory continued to drop. There will be good possibility that we could potentially see a more meaningful recovery from second half next year?

I see.

Hey, guys.

Several analyst had asked.

My question is on for Sarah Engel.

Just wanted tie one my watch here.

And so I understand we are still through the cycle trough.

Visibility is still not high.

But as Tony pointed out, especially inventory continued to drop.

So.

We will be well.

I believe that we could potentially see a more meaningful recovery.

Final question for NYCHA.

Jason Wang: I mean, I certainly hope so. I will also expect that if that's the case. I was glad to hear what Charlie mentioned. We will closely monitor the market dynamics. Right now, we do see the inventory correction is lingering into Q4. We haven't seen any meaningful demand recovery yet. Hopefully, you know, another quarter and we will have a better view and better comments. At this point, we do think this inventory situation will linger into Q4.

I mean I saw the wholesale and.

We will also expect that if that's the case.

No.

Glad to hear it.

Charlie mentioned.

So we will closely monitor the market dynamics.

And right now we do see the the inventory correction were lingering into Q4, we haven't seen any meaningful.

Recovery yet.

Hopefully quarter older and we will have a better view and better.

That has a comment.

At this point, reducing their inventory.

Inventory situation were lingering into the queue.

Sunny Lin: Got it. Thank you very much.

Got it thank you very much.

Jason Wang: Sure.

Operator: Thank you. Next one is from Brad Lin, Bank of America. Go ahead, please.

Thank you.

Next one is Rob Rattling Bank of America go ahead. Please.

Brad Lin: Thank you for taking my question. I have two questions. First one is pretty short. It's on 65 nanometer. We saw the 65, actually the mix increased from 19% in Q1 to 23% in Q2. What was the driver behind, and should the strength continue into H2? That's the first question. Thank you.

Thank you for taking my question, so I have two questions.

First of all I am pretty sure its Alex.

65 nanometer. So we see we saw the SEC Fi actually.

The mix increased far with 19% in Q2, 23% and <unk> all of us that driver behind should this trend continue into second half.

The first question. Thank you.

Jason Wang: Well, I mean, our 12-inch loading in is still above our cover average, and we don't comment about the loading by nodes. But I can share with you the 65 loading in Q2 is increases mainly coming out from the automotive segments.

I mean.

Our 12 inch loading.

Above all cover average and we.

Don commenting about the loading by no.

And.

Yes.

I can share with you the 60 by loading.

In Q2.

Increases in many coming out on the automotive.

Seven.

Brad Lin: Got it. Thank you very much. My second question is on the advanced packaging. We would like to learn UMC strategy and development in advanced packaging. We have learned from Faraday's earnings call yesterday, its collaboration with UMC on advanced packaging on multiple angles, and we also understand interposer and wafer-to-wafer bonding on the current focus of the firm. How fast do you expect it to grow, and do we have any incremental CapEx plan on it? What are the upcoming offers on top of those that can help UMC capture the upside from the advanced packaging? Thank you.

Got it. Thank you very much and then my second question is that would be the best packaging, we would like to add there.

UMC strategy and Dave I mean, the best packaging, we have their final for today's earnings call yesterday.

This collaboration with UMC on the best packaging multiple Ngos and we also on the stat into postpaid and wafer to wafer pounding on the current focus off that far how fast do you expect it to grow and do we have any incremental capex on that and also the upcoming offered on top of dose that can help out.

How 'bout UNC captured the upside from the best packaging. Thank you.

Jason Wang: Well, I do think the higher bandwidth and reduce the form factor, that two major driver for this advanced packaging needs. But they're for different applications. Usually the higher bandwidth is more for the AI processors and the form factor is for some of the integration wafer to wafer integration level to help in the form factor. There's a different application. It's important that UMC is not absent from those applications. We do see that market demands increasing, and we think there's gonna be multiple application coming in. We wanna make sure that we have the technology to serving those markets.

I do see India because.

The higher bandwidth and reduce the form factor.

The two major drivers for this.

<unk>.

But for different applications.

Usually the higher bandwidth more for the AI processors.

The form factor is for some of the integration wafer to wafer integration level tools.

In the form factor.

So there is a different application.

So it's important that UMC is not absolute.

Applications, we do see that market demand is increasing and we've seen that it's going to be multiple application coming in.

So we want to make sure that we have the technology to serving those markets.

Jason Wang: That's why we have been developed this and providing this interposer and wafer-to-wafer bonding technology for years now. The strategy also about the ecosystem. We're working closely with OSAT partners for the back-end process. We also working with the design service company and about the integration, the wafer-level design. They are considered as a part of the ecosystem. We think this is in the early stage of the production ramp. Technology's been there for years, but the volume production is really happened with the recent AI momentum. That's more on the AI, the data side, the high bandwidth data side.

So that's why we.

We have we have been devalued.

In providing this in the polls and the wafer to wafer bonding technology for years now.

The strategy also bundle with the ecosystem.

We're working closely and working with all set.

Honors for the backend process.

We also are working with the design service company.

And about <unk>.

Integration.

The wafer level decline.

So.

They are considered a part of the ecosystem.

Right now we think this.

In the early stage of the.

Production ramp.

Technology has been there for years, but the volume.

<unk> is really just.

Happen at least the reason.

AIA.

Momentum.

But that's.

That's more on the.

Yes.

Sure.

The data side.

And we stayed on site.

Jason Wang: For the form factor side, I think there's other pipeline coming in in next year or so. We haven't really seen a meaningful or high volume production yet. The CapEx spending on those space is already planned in our budget. That's not changing our overall CapEx number. It's embedded in that number already. We think it's not to the level that we need to revise our CapEx to support this.

<unk> for the.

That aside I think theres other pipeline coming in.

Thanks <unk>.

So we haven't really see meaningful high volume production yet.

Sure.

The capex spending those space is already planning.

In our budget.

<unk>.

That's not changing our overall.

Capex number.

Embedded in that in that number already so we've seen this not to the level that we need to revise our capex to support this.

Brad Lin: Got it. Thank you very much. Just one very quick follow-up is on the so-called open ecosystem. Then obviously we are seeing a closed system which currently dominates the market. Could you please provide some insight into the optimal collaboration model? Additionally, what may be the preferences of the clients in this regard? Thank you.

Got it. Thank you very much just one very quick follow obvious R&D So code.

Ecosystem and obviously, we are seeing a close system, which currently dominates the market. So could you. Please provide some insights.

Into the optimal collaboration model. Additionally, maybe the preferences of the clients in this regard thank you.

Jason Wang: I think the concept is it's important to provide what you are relevant with. Advanced packaging, you know, in our view, is considered a silicon wafer-level integration technology, and that's where we're gonna be focused on. For the back-end, because the back-end substrates, there will be a partner in that ecosystem providing that. The back-end packaging technology also have a partner provide that service. We don't add much of a value there. That's why we stick with the, you know, wafer level and silicon level integration focus. That's how we position ourself and ensure that we will be an indispensable position because the wafer level integration has to be done in a wafer fabrication fab. But others, you don't have to.

I think the concept.

It's important to provide you a relevant ways.

And <unk>.

Event packaging.

In our view, it's come see the silicon wafer level integration technology, and that's where we are going to be focused on.

For the backend because.

<unk> substrate.

There will be.

Partners in that ecosystem, providing that.

Backend packaging technology also have upon to provide that service, we don't have much about adding there.

So that's why we stick with the <unk>.

The level and silicon level integration focus.

And below.

That's how we position ourselves.

Ensure that we will be in English.

Yes, Ben.

<unk> position because.

Because the way the level of integration.

Done in a wafer wafer fabrication fab.

But others you don't have to so.

Jason Wang: That's why we actually, you know, pick the space that we are more relevant.

That's why we had to pick the space that we are more relevant.

Brad Lin: Got it. Thank you very much for the color.

Got it thank you very much for the color.

Jason Wang: Sure.

Operator: Thank you. Ladies and gentlemen, thank you for all your questions. That concludes today's Q&A session, and I'll turn it over to UMC Head of IR for closing remarks. Thank you.

Thank you.

And ladies and gentlemen, thank you for all your questions that concludes today's Q&A session.

I'll turn it over to UMC head of IR for closing remarks. Thank you.

Jason Wang: Thank you for attending this conference today. We appreciate your questions. As always, if you have any additional follow-up questions, please feel free to contact UMC at ir.umc.com. Have a good day.

Michael Lin: Thank you for attending this conference today. We appreciate your questions. As always, if you have any additional follow-up questions, please feel free to contact UMC at ir.umc.com. Have a good day.

Thank you for attending this conference today.

I appreciate your questions and as always if you have any additional follow up questions. Please feel free to contact UMC.

Scott USA Dot com have a good day.

Operator: Thank you. Ladies and gentlemen, that concludes our conference for Q2 2023. Thank you for your participation in UMC's conference. There will be a webcast replay within 2 hours. Please visit www.umc.com under the Investors Events section. You may now disconnect. Goodbye.

Thank you, ladies and gentlemen that concludes our conference for <unk> 23. Thank you for your participation in Umc's conference there will be a webcast replay within two hours. Please visit www UMC com under the investors events section.

You may now disconnect Goodbye.

Yeah.

Q2 2023 United Microelectronics Corp Earnings Call

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