United Microelectronics Q2 2023 Earnings Call Transcript

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Provided by Quartr
July 26, 2023

There are 12 speakers on the call.

Operator

Welcome everyone to UMC's 2023 Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question and answer session. Please follow the instructions given at that time if you would like to ask a question. For your information, this conference call is now being broadcasted live over the Internet.

Operator

Webcast replay will be available within an hour after the conference is finished. Please visit our website, www.umc.com, under the Investor Relations, Investors, Events section. Now I would like to introduce Mr. Michael Lin, Head of Investor Relations at UMC. Mr.

Operator

Lin, please begin.

Speaker 1

Thank you, and welcome to UMC's conference call for the Q2 of 2023. I'm joined by Mr. Jason Wang, the President of UMC and Mr. Chidong Liu, the CFO of UMC. In a moment, we will hear our CFO present the 2nd quarter financial results 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 and A section.

Speaker 1

UNC's quarterly financial reports are available at our website, www.unc.com, under the Investors Financial section. During this conference, we may make forward looking statements based on management's current expectations and beliefs. These forward looking statements are subject to a number of risks and uncertainties That could cause actual results to differ materially, including the risks that may be beyond the company's control. For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the SEC and 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.

Speaker 1

Chitung Liu to discuss UMC's Q2 2023 financial results.

Speaker 2

Thank you, Michael. I'd like to go through the 2Q, Q3 investor conference presentation material, which can be downloaded or viewed in real time from our website. Starting on Page 4, the Q2 of 2023. Consolidated revenue was RMB56.3 billion With the gross margin at around 36%. The net income attributable to the stockholder of the parent was NT15.6 billion And earnings per ordinary shares were NT1.27.

Speaker 2

In the Q2 Of 2023, the utilization rate was 71%, slightly up from 70% in the previous quarter. On Page 5 is quarterly sequential comparison income statement. Revenue grew 3 point 8% quarter over quarter to RMB56.3 billion, mainly due to better product mix lead to a higher ASP. Gross margin rate at 36% is also slightly better than that of quarter 1 and reached NT20.25 billion. We have been controlling our operating expenses amid of the current semiconductor downturn.

Speaker 2

So the current operating expenses in quarter 2 remained flattish at RMB5.7 billion compared to RMB5.78 in Q1 2023. Operating income reached RMB15.6 billion 27.8 percent operating profit margins. Net non operating income in the Q2 reached RMB2.8 billion, mainly coming from expenses, Interest gains as well as some investment income from our affiliate companies. After income tax of NT2.588 billion, our net income attributable to the shareholder of the parent It's around RMB15.6 billion or 27.8 percentage point. EPS was $1.27 in the second quarter.

Speaker 2

On Page 6 It's the 1st 6 months comparison. Revenue declined 18.4% TWD110.5 billion and gross margin rate was around 35.7 percent For NT 39.4 billion, net income in the first half of twenty twenty three Was RMB32.2 billion and net income rate was 29.2%. EPS in the first half of twenty twenty three was $2.58 per share. So on Page 7 is our balance sheet at the end of June 30. Cash on hand is around KRW 163 1,000,000,000 and total equity for the company It's RMB326.9 billion.

Speaker 2

On Page 8, as we mentioned, the blended ASP Benefit from a better product mix. In a way, it's also a lower utilization rate in 8 inches wafer capacity. So ASP in the Q2 hedge up a couple of percentage points compared to the previous quarter. On Page 9, revenue rebounded for our Asian customers in the second quarter And now reached about 56% of the total pie compared to 60% in the Q1. North America declined from 31% in Q1 to 27% in Q2.

Speaker 2

Page 10, IDN declined slightly to 21% And service account for 79% of the total revenue in the Q2 of 2023. On Page 11, the revenue breakdown by application didn't change much. Communication remained the same, computer remained the same. Consumer increased by 2 percentage point To 26%. On Page 12, due to our newly ramped capacity becoming available In our Phase VI in China, our 20 to 20 nanometer revenue Continue to rise, now it's around 29% of the total revenue.

Speaker 2

14 nanometer is about 12% declined by 3 3 percentage points from the previous quarter. On Page settings, our capacity quarterly capacity breakdown, we will continue to see some minor increase coming out of our 12A, our P6 expansion in Q3. So the last page of my presentation is Foundry capital expenditure plan for 2023 for the time being still remain at 3,000,000,000 U. S. Dollars for the 2023 budget.

Speaker 2

So the above is a summary of UMC results for Q2 of

Speaker 3

Thank you, Chitung. Good evening, everyone. Here, I would like to share UMC's 2nd quarter results. For the Q2, we reported results in line with guidance with wafer shipment remaining flat on the previous quarter and utilization rate of 71%. 2nd quarter revenue grew 3.8% quarter over quarter, Mainly due to improved product mix within our 12 inches portfolio.

Speaker 3

Revenue from 22, 28 nanometer Products continue to increase sequentially, representing 29% of the 2nd quarter sales, While contribution from Specialty Technology reached 59%. By segments, We saw short term demand recovery in the consumer space for Wi Fi, digital TV and display driver ICs, While demand for computer related product also moderately rebounded from the previous quarter. We are pleased to share that we have completed the transaction to acquire remaining share in USC XM, Our 12 inches fab in Xiamen, China. As one of the UMC's 4 12 inches fabs in geographically diverse locations, USC XM will continue to provide high quality fabrication service to customer and increase its contribution to UMC's financial performance as a wholly owned subsidiary now. Looking into the 3rd quarter, Wafer demand outlook is uncertain, giving prolonged inventory correction in the supply chain.

Speaker 3

While we saw spot of a limited recovery In the 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 the second half, 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 demand from customers. Now Let's move on to Q3 2023 guidance. Our wafer shipments were declined by approximately 3% to 4%.

Speaker 3

ASP in U. S. Dollars will increase by 2%. Pricing costs will erode Gross margin by low single digit percentage point. Capacity utilization rate will be in the mid-sixty percent range.

Speaker 3

Our 2023 cash based CapEx will be budgeted at US3 $1,000,000 That concludes My comments, thank you all for your attention. And now we are ready for questions.

Operator

Thank you, President And our first question is coming from Randy Abrams, Credit Suisse. Go ahead please.

Speaker 4

Yes. Thank you. Yes, 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 second half. And then if you could split down by application, how you're seeing the auto industrial?

Speaker 4

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?

Speaker 3

Well, I mean, Randy, on a higher level, given the overall software end market demand, while the post lockdown, The recovery in China hasn't been slower than expected and weakened macro conditions, Well, our customer are cautiously managing their inventory and we expect the situation will likely lingering into Q4. So mainly is inventory concerns. So about inventory, while the end market demand has Worse than compared to a quarter ago across a segment in smartphones, PC and server, The inventory will be slower slowly work off now. The pace of the digestion is slower than we previously expected. Other, at the Auto and Industrial segment, the demand of a year over year projection At this time, we our projection shows remains unchanged from the previous quarter.

Speaker 3

However, the inventory level has picked up Picked up in Q2 for those 2 segments now. So therefore, we kind of cautiously observe the demand and supply situation now and to Determine when the semicircle will start to improve or come back.

Speaker 4

Yes. That's helpful. So to clarify, it sounds like you said the pace of inventory digestion because of weaker demand In smartphone, PC and server? That's I just want to clarify, that's what you were trying to say, like weaker demand, that's keeping the inventory correction longer.

Speaker 3

That's right. In the segment of a smartphone, PC and service space, yes.

Speaker 4

In for 28 nanometer, I think that No, it 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%, 95%, if that's Still tracking. And do you see the P6 continuing to get filled up as it comes in?

Speaker 3

First of all, for the P6 expansion, we expect our 28 ramp trajectory still on track at this point. And we remain confident about the R-twenty two and twenty eight Melometer, it will be a low and lasting node or driving by many applications across the 5 Automotive and IoT. And we have been focused on 20 2, 20 8 offering, including many of the leading specialty and Technologies along with our manufacturing quality and capacity offering now. So I think the 28% and the 22% right now remains resilient. And it's our projection now that 28 nanometer loading will remain 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.

Speaker 4

For the expansion on track, I think the plan was 4 ks end of this year. And then the rest of the 27.5 ks, would that what is the Timing, would that be available through next year? Any slowdown to move in that capacity?

Speaker 3

For the P6, the trajectory is still on track. So there is no slowdown. And they are mainly mutually committed by both the customer and us. And given the current projection, We our focus shows that 28 loading will remain at a healthy level.

Speaker 4

The implication then 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? So with the excess capacity, how do you net pricing environment Mitch, we're now at 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?

Speaker 3

We definitely see the pricing pressure. The but the blended ASV actually is more of a reflect of our loading between the 12 inches and 8 inches as well. So if we start off this your question with the ASP and it's our belief When the end demand remains weak, the pricing does not help to stimulate the demand. 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 customer during the good time and the bad time to uphold their competitiveness and relevance in their respective market to secure their market share.

Speaker 3

In addition, our value added technology manufacturing quality and capacity alignment We'll support our customers, their competitive as well in their market position. So in the pricing space, we respect the market dynamics and the pressure, And we will closely working with our customer on that. The in terms of the blended ASP, they are LTA for the P6 on the 28 and there is non LTA protected 28 and there are also 8 inches outlook. So if we blend it together right now in Q3, the ASP is Projected, it's going to 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.

Speaker 4

Great. Thanks a lot, Jason.

Operator

Next question is from Brett Simpson from Arete. Go ahead please.

Speaker 5

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 contract 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 is obviously coming down quite significantly from where it was a year ago or so. So Any update there would be very helpful.

Speaker 5

Thank you.

Speaker 3

Sure. I mean, LTA is a mechanism to support Both customer and us for longer term perspective, because we want to make sure the customer want to make sure their supply resilience And we want to make sure our investments also somewhat protected with such a commitment. So LTA is a mechanism of that relationship. During the downturn cycle, we both have to look at the revisit situation. And but under the framework of we still have strong confidence in our long term projections.

Speaker 3

So there are some modulation or adjustment to be made during given the LTA relationship. So they are resolving in some Of the resolution of the current LTA agreement, so that result in some of the Financial penalty related matter, but at this point, it's still in a smaller fashion. The I think we both know customer and us still have confidence in what have we aligned to do in terms of longer term. So we respect the market dynamics and we will work with our customer in terms of dealing with those challenges. But again, the LTA is something that we both respect and there is incoming to it.

Speaker 5

Okay. Maybe just switching gears a little bit on the Gross margin situation. And the guide obviously, gross margin is coming off a little bit from Resilient 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 gross margins are dropping in Q3. Do you think it might the weakness in gross margin might extend into maybe early next year?

Speaker 5

Any thoughts in terms of depreciation as well, because it seems to be creeping up a little bit? Thank you.

Speaker 3

Well, I mean, that's a Multiple level of the consideration. 1 is the current market Pricing pressure. The other is the rising recent rising costs. For Q3, The rising costs in electricity hike, raw material, labor will impact our profitability, And we will continue to focus on our action to mitigate those rising cost headwinds. We have implemented aggressive Cost reduction activity to control the power consumption, productivity manage the material costs and usage and streamline our process flow and labor management via smart manufacturing measures.

Speaker 3

We're also focused on technology improvements such as the continuous improvement process, CIP, optimize our fab productivity and quality to help mitigate those headwinds. So we will try to maintain our structural probability level at a healthy level. But given the market current dynamic, we will probably giving will be more appropriate or prudent to giving this Margin guidance, 1 quarter at a time. And once we're over the down cycle, and then we probably can share a bit of a longer time perspective.

Speaker 2

Yes. For the depreciation numbers for the 2023, we're still looking for a little bit over 5% year over year decline. And for 2024, the increase will be more meaningful, but we again, we're offering the numbers How can we approach to the year end?

Speaker 5

Great. Thanks very much.

Operator

Next question, Charlie Chan of Morgan Stanley. Go ahead please.

Speaker 6

Good evening, Jason and Qi Long. Thanks for the updates. So my First question is actually about your 14 nanometer strategy Progress. Because one of your defense service partner just mentioned that There will be 14 nanometer AI ASIC demand and production could be in 2 years. So I'm just wondering that Whether coming is already prepared for the 40 nanometer demand and any More details about the capacity expansion, production timing, etcetera, would be much appreciated.

Speaker 6

Thanks.

Speaker 3

Sure. It's our goal is always to fully exploit the DoD capability. And as we know, the DoD capability can sustain to the FinFET technology. And having successfully entering the mass Production of our 22 nanometer business now. And 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.

Speaker 3

So from the technology development, we are Actually progressing. However, on the capacity side, we still need to align with our customer for the capacity expansion and subject to our ROI justification principle and which we have adopted for years now. So one that's more clear and we will update accordingly.

Speaker 2

Yes, just to add on to that, we do have 14 capacity already for years. So we have been producing some 14 nanometer Crypto coin related product a few years back. So I think what Jason was referring to is more Massive capacity expansion going forward. So currently, we already have some 40 nanometer capacity already.

Speaker 6

Okay. Thanks for that. Yes. My next question is about your gross margin erosion in Q3. I know that mentioned about the Cars increase from electricity or raw material, but I'm wondering maybe this question is to Qitong.

Speaker 6

Do you consider the any dollars depreciation? I think I would think there's a kind of a tailwind to your Gross margin Q3. And also I wanted to know what was the That kind of impact on the pricing erosion. So can you give us some more details about number 1 is the Currency depreciation and secondly, the pricing pressure.

Speaker 2

For our guidance, we didn't factor in the Currency fluctuation as a factor. So there won't be included in the A couple of percentage erosions in our Q3 margin guidance, which is not included. Okay. Yes. As for ASP, our blended ASP guidance is up by 2 percentage point.

Speaker 2

Of course, like to like may vary according to different notes. And we also got some kind of Mathematical help due to the lower 8 inches wafer capacity utilization rate. So again, it's already reflected into our gross margin guidance.

Speaker 6

Okay. So, Qitong, can you remind us So every 1% difference of the any dollars depreciation, what does it mean to your gross margin benefits.

Speaker 2

It's about 0.4% at this point.

Speaker 6

Okay. Okay, thanks. Yes. And next is more focused on this pricing flexibility. So I think your peers more or less they already mentioned some heavy pricing pressure in AIM that I can understand.

Speaker 6

And I think you should be appreciated by customers that you want to support them to maintain their market position. But my concern is that more about the 20 nanometer, your pricing strategy, because I mentioned that your 20 nanometer utilization is still healthy. You still have those AMOLED ISP demand. So I'm wondering for 20 nanometer, are you also being flexible about the pricing because we I keep hearing some of your customers talking about 20 nanometer, you may have some compromise as well.

Speaker 3

Well, I mean, our pricing position understands to all nodes, although the different node has a different circumstance or situation, but our position remains the same. We're maintaining our pricing strategy, but We do work with our customer, whether on a no to no basis or the holistic level And giving a good time or bad time, I mean, the angle is try to help them and support them to be competitive and secure their market share. So it does not separate it by different technology nodes.

Speaker 6

Okay. So it is not just limited to the Age, is that right?

Speaker 3

No. I mean, is it in general principle our pricing position and strategy?

Speaker 6

Okay. Thanks, Jason. So in that case, can you give us a sense How much of your business is taking these kind of flexible pricing? You think more than half of your knows your business being flexible about pricing in second half? I

Speaker 3

mean, it's hard to quantify that. And but given The weaker end demand, I don't think any pricing does changes will actually Similarly, the end demand is mainly about the within the pie modulation between different players. So and we definitely look at that closely and working with our customer closely as well and to support and make sure that we secure the share for both of us. And so it From the percentage or quantitative point of view, it's hard to giving out at this point.

Speaker 6

Okay, okay. Thanks. And lastly, maybe following the Brit's Question about the trough of gross margin. I'm wondering your view about the bottom of the fab utilization. So 3rd quarter, you see a sequential decline of UTR, right?

Speaker 6

Do you think that is the bottom of the utilization for this cycle.

Speaker 2

Yes, it's difficult to predict and we won't predict that. So 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. And we're certainly happy to give the gross margin guidance for the next quarter At the end of July.

Speaker 6

Okay. Yes. So 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. So I do think the same inventory will come down and also don't forget The channel inventory or downstream inventory is pretty pleasing. So I am optimistic.

Speaker 6

But anyway, we look forward to your next update. Thank you.

Speaker 3

Well, great to hear that.

Speaker 2

Yes, we can hear that. Thanks.

Speaker 6

Okay, thanks.

Operator

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

Speaker 1

Thank you for taking my question. I think To

Speaker 7

be honest, we are still surprised about the CapEx remain unchanged and your ramp up schedule for the P6 We may now change. I mean, Jason seems to be you mentioned right confidence about the new customer. I think that's the case between investor and the management. Can you help us like what gave you the confidence when you have a lingering 4th quarter And your customer came for the order all the time and you believe that you can maintain very high retention rate for 28 nanometer for 2.4 To support the CapEx?

Speaker 3

I mean, first of all, the 28 nanometer serving some of the Important applications. And for the OLED driver, the current Penetration in early end market and the volume remain healthy And the ISP and the Wi Fi space, we see new application continue coming into the space. So for the 28, given the broader customer base and diverse product line And product pipeline, that gave us the confidence because the outlook remains healthy. And our that also equipped with our specialty technology leadership position us well. So I think that differentiating us with other 28 nanometer capacity out there.

Speaker 3

Right now, given the market outlook, we have been very cautiously look at it because the across all segments, The sentiment is weak, but 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

Speaker 7

time. So can we do something like Your 40 nanometer revenue dropped a lot, right? Can we convert some of the 40 to 28 or to save some CapEx? What's the schedule for the Singapore new fab? Can we slow down a bit for that even though it might not impact the CapEx this year, we can have a more conservative 10 pack outlook for next year.

Speaker 3

I mean, we definitely look at this. Right now, the for the P3, we expect it will go into volume production by mid 2025 As planned, so there's still kind of 2 years out. So we will monitor in the overall market and align with our customer for the P3 ramp. Once we have a further update, we will advise accordingly. And since most of the CapEx increased now, the P6 is pretty much done and is more associated with the P3.

Speaker 3

And I think it's less of a less of a less of a less of a affect our 2023 number, But there is a possibility that for 2024 number, we will continue to assess and update.

Speaker 7

I see. Okay. So another thing I want to switch gears to, you mentioned that you will Do some interposer business. Can you help us understand your strategy for this interposer business? What kind of type of intensity, what kind of return is going to be?

Speaker 7

Do we need to expand the capacity for that? It's not be the bottleneck to impact your other business. Can we have more color on that?

Speaker 3

Sure. For the interposer as a part of our advanced packaging space, we have been Providing interposer and wafer to wafer upside bounding technology for years. So it's not something new. As the increased demand for higher bandwidth and the reduced smaller form factor requirements, We have invested in this 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.

Speaker 3

So sort of we are only providing the interposer within the supply chain, and we're working with OSAT for the back end process. And so that's Kind of how we position ourselves within this advanced packaging space. The intervals that I mentioned earlier Accelerating is really giving the recent AI coverage. We are just gearing up to offer additional capacity as necessary to support the customers' needs. And that capacity is associated with the silicon interposer Hello.

Speaker 3

And the current capacity size is about 3,000 and it's our goal to double that capacity by next years.

Speaker 7

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?

Speaker 3

Chip on wafer means we are providing you wafer, The W, yes.

Speaker 7

Yes, yes. No, no, you are not going to provide any like bonding or chip on with bounding, de bounding, Put on, I'll say that kind of packaging method, no, just for the second quarter. Is that right?

Speaker 3

Yes. But we still do waiver to waiver bonding, hybrid bus.

Speaker 2

Yes. Hi, Andrew. Our approach is open ecosystem. So we want to leverage our partners For the downstream, and it will be a total solution, but joined by all the ecosystem players.

Speaker 7

So what kind of profitability and return profile for this business?

Speaker 3

Rather, I mean Currently, given the size of this capacity and the space, The revenue contribution is still relatively

Speaker 7

small. So how about the profitability?

Speaker 3

It's aligned with our current corporate average.

Speaker 7

Okay. So It's in line with the current corporate average in Q3, because your corporate average went down a lot.

Speaker 2

Our corporate average in quarter 2 was 36% gross margin slightly better than Q1.

Speaker 7

I see, I see. Okay. So basically, the interposer business is around that mid-thirty percent gross margin?

Speaker 3

But it will not dilute our current corporate average.

Speaker 7

I understand. Thank you.

Operator

Next question, Zihong of China Renaissance. Go ahead please.

Speaker 8

Hello, gentlemen. I have two questions. Number 1, regarding the sharpening fab right now is 100% owned by the group. So would there be any strategy change in our China operation or in our dealing with local customers there?

Speaker 3

I'm sorry, again the question?

Speaker 2

The Xiamen,

Speaker 8

right. Right now the shop and fab is fully owned by us.

Speaker 2

Yes, prior to the buyback, it's actually already dominant All controlled by UMC anyway. And of course, right now it's 100% owned. So there will be no minority interest Once Xiaoming continue to make profit and it's also our goal to see if there's any synergy we can generate Between our two operations, He Jian in Suzhou and U. S. In Xiamen to see any more Synergy and also competitiveness by these 2 joint efforts.

Speaker 2

But I think right now the Domestic demand occupy even more percentage of the overall revenues.

Speaker 8

I see, I see.

Speaker 3

All right. Sorry.

Speaker 8

Please go ahead.

Speaker 3

The weather is a Our Japan facility, they are one of our 4 12 inches 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. And at the same time, the UMC's worldwide customer can also access to those local manufacturing sites to serve the local supply chain. So we think the geographical locator on those fabs actually gave us that benefit and as well as our customers to access to the local market. And I think 100% acquired or before that it was the same position that's supporting our customer.

Speaker 8

Okay, fair enough. And my second question on the gross margin. So right now, we are guiding gross margin back to maybe mid 30s level, how easy for us for sort of the company to see the gross margin back to the mid to high 40s at last year.

Speaker 3

I mean, I think we kind of touched this similar question on a few different way. I mean this current gross margin Guidance was given based on the current outlook, our product mix and the loading for the utilization projection And the ASP assumptions. And 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, I think compared to the UMC in the past, 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 financial gross margin level. And going forward, we remain the same.

Speaker 3

We're going to take the same approach And continue focus on the cost control, cost down path, productivity improvement, all the Necessary measure to against this pressure headwind. And hopefully, we can deliver much healthier, Stronger balance sheet for the company. Now since we're going through this down cycle now And it's more appropriate and prudent that we don't give out any long term projection at this time. And but once it's more ready, we'll definitely share that with you.

Speaker 8

I see. Okay. All right. Last one. I need just to update the industry outlook for the year The addressable market that we are serving.

Speaker 3

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 Meetings year over year. With the weaker macro condition, we'll need to be very Conservative as our customer continue to manage their business and inventory now, For our addressable market, I think will be higher than the mid teens. Yes.

Speaker 3

I see. The decline will be higher.

Operator

Next one, Gokul Hanehalen of JPMorgan. Go ahead please.

Speaker 9

Yes, 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 Hejin, Is there a bigger price pressure that you're seeing for your Chinese capacity? Or is it a price pressure that you're seeing across the board for the company itself.

Speaker 3

It's across the board. It is given the current Market condition and I think we're seeing a pricing pressure across the board, Not only from China factory, no.

Speaker 9

Got it. And 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 inches given they cannot really build leading edge.

Speaker 9

So, 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.

Speaker 3

Sure. Well, I mean, first of all, I mean, Without commenting about the peers, for and remain relevant in our industry. We have established several advantage in our view for many years. 1 is the comprehensive specialty technology offering 2, the competitive work of manufacturing quality 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 our position as more of a Trust the foundry partner.

Speaker 3

That's more on a higher level. And on the technical levels, We look at the major overlap area in the 8 inches We have been Improving our 8 inches customer stickiness by aligning with our customers on their product spec, Differentiate beer specialty technology including process customization, JDP, the joint development program for products such as analog, power management IC, MCU and discrete devices. And so we are confident To navigate through this current market condition as well as the competition 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.

Speaker 9

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.

Speaker 9

Is that when we should start to expect a little bit more price aggression in this industry?

Speaker 3

I mean, obviously, we all know, right? I mean, the price pressure is there. And Our comment is really about the pricing doesn't help to stimulate the end demand. So the When the end market is shrinking, the overall trends shrinking, the pricing is mainly for the tactical level of approach and which we will use. We will not ignore that.

Speaker 3

And we are like I said, we respect the overall foundry market dynamics and those pricing pressures. So we will work with our customer for those to help uphold their competitiveness and secure their market share. And from the pricing strategy level, and we remain clear about how to manage those in a several level of whether it's a strategic level or technical level or the short term or longer term structure. So we those strategy remains no change. But We will definitely use those, you know, A and D comes through more of a technical purpose.

Speaker 3

And so we're not ignoring that. We would just want to managing the price prudently.

Speaker 9

Understood. Maybe one question on 8 inches 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 inches product Getting converted into 12 inches and as a result, this overcapacity situation could last for a very long period of time.

Speaker 3

I mean for the long run, we foresee some 8 inches demand will recover post inventory correction. They will have some. There are also new applications from megatrends such as EV, plus increasing ID and Outsourcing business, which will help lift the 8 inches loading. However, like you said, we do anticipate continuous pressure from the 12 inches mature nodes that That has impacted 8 inches supply chain. So they will have some recovery and On 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.

Speaker 3

So they will have some impact as well.

Speaker 6

Okay. Thank you very much. Yes, thanks.

Operator

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

Speaker 10

Hi, good afternoon. Thank you for taking my questions. So my number one question is on Pricing for your long term agreement, especially for 28 nanometer. So as you said, given the Ongoing demand uncertainties, I wonder for your LPAs for P6 and the future Singapore expansion, Are you seeing any pressure from clients to negotiate on the contract pricing? And the second part of that question is for your Singapore fab.

Speaker 10

If you look at the cost, how much higher is it First of the T6 expansion in Taiwan, will that be reflecting to your pricing for the contract as well?

Speaker 3

So for the LTA, I answered earlier that we our customers and us, we view that Seriously. And at this point, the changing on those LTAs vary in the month, It's relatively small. And we between us and the customers, we do look at that is for more of a long term perspective, not a short term tactical mechanism. So We still feel confident about those LTA going forward. They are pricing discussed, but not associated with the LTA.

Speaker 3

Even with some of the LTA revision, that will be very in a very small portion, relative The cost increase in Singapore is definitely much higher, not just because the geographical reason, Also because the continuous inflationary cost increase, so we and that At this point, we don't see 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. So it is a balanced act and we'll continue manage that throughout this whole process.

Speaker 10

Got it. And so just to make sure that it's applied correctly, so Given the cost difference, would it be fair to assume that you could be pressing differently for your 20 nanometer capacity in Taiwan versus Singapore?

Speaker 3

For the market price they were not priced differently. The market price reflects the current market situation and it's usually not a cost based topic. If we this is more of a joint investor program and the cost is more of the factor. But if you're talking about the market price, that's not based on the cost basis.

Speaker 10

Got it. Thank you. That's very helpful. So my second question is about the structural supply versus demand for turning that foundry. If we look at your historical utilization rate through cycle, that will be between, I think, 85% to 90% So cycle, but apparently in the last 2 years, the energy capacity had increased quite a bit.

Speaker 10

And so 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?

Speaker 3

Well, I mean, From the business management point of view, we also want to help increase our utilization and help lower our fabs. So I mean, from a financial model standpoint and the company's balance sheet Healthiness level and the resilience will probably have to plan out different scenario. But as a business manager, I probably won't interrupt our team to shoot for 80% or 90% utilization as our goal. So is it From a financial simulation purpose, we have a different layer of utilization rate assumption and to examine our financial resilience. But in terms of the business objective is our goal to fully loading our fab.

Speaker 10

I see. And so I guess earlier several analysts had asked The demand question is from different angle, but just want to try one more right here. And so I understand we are still To the cycle trough, visibility is still not high. But as Charlie pointed out, the industry inventory continued to drop. And so will there be good possibility that we could potentially see a more meaningful recovery for SAVENEXURE?

Speaker 3

I mean, I certainly hope so. And I will also expect that if that's the case. So I was glad to hear what Charlie mentioned. And we will closely monitor in the market dynamics. And right now, we do see the inventory correction were lingering into Q4.

Speaker 3

We haven't seen any meaningful Demand recovery yet. Hopefully, a quarter older and we will have a Better view and better comments. But at this point, we do think this inventory

Operator

Next one is from Brad Lin, Bank of America. Go ahead please.

Speaker 11

Thank you for taking my question. So I have two questions. First one is pretty sure, it's 65 nanometer. So we saw the 65 Actually, the mix increased from 19% in 1Q to 23% in 2Q. What was the driver behind and should the strength continue into second half?

Speaker 11

That's the first question.

Speaker 6

Thank

Speaker 3

you. Well, I mean, our 12 inches loading is still above our covered average. And we don't commenting about the loading by note. And the I can share with you the 60 byte loading in Q2 is increases mainly coming out from the automotive statements.

Speaker 11

Got it. Thank you very much. And then my second question is on the advanced packaging. We would like to learn UMC's strategy and development of advanced packaging, we have learned from Faraday's earnings call yesterday. This collaboration with UMC on best packaging on multiple angles and we also understand interposer and wafer to wafer bounding on the current focus of the firm.

Speaker 11

How fast do you expect it to grow? And do we have any incremental CapEx plan on it? And also, what are the upcoming offers on top of those that can help UMC capture the upside from the advanced packaging? Thank you.

Speaker 3

I do think the because The higher bandwidth and reduce the form factor, the that's 2 major driver for this advanced packaging needs, but they are for different applications. Usually the higher bandwidth is more for the AI processors and the form factor is for From the integration wafer to wafer integration level to help in the form factor. So there's a different application. So It's important that UMC is not absent from those applications. We do see that market demand increasing And we think there's going to be multiple application coming in.

Speaker 3

So we want to make sure that we have the technology to serving those markets. And so that's why we have been developing this and providing this Interposer and wafer to wafer bonding technology for years now. The strategy also about the ecosystem, we're working We're working with all set partners for the back end process and we're also working with a design service company And about the integration, the weather level design, so they are considered as a part of the ecosystem. Right now, we've seen this in the early stage of the production ramp. Technology has been there for years, but the volume production is really just happened with the recent AI momentum, but that's more on the Data side, the high bandwidth data side.

Speaker 3

For the form factor side, I think there's other pipeline coming in, in the in next year or so. So we haven't really see a meaningful or high volume production yet. The CapEx spending on those space is already planted in our budget. That's not changing our overall CapEx number. It's embedded in that number already.

Speaker 3

So we think this is not to the level that we need to revise our CapEx to support this.

Speaker 11

Got it. Thank you very much. Just one very quick follow-up is on the so called open ecosystem and then obviously we are seeing a closed system which Currently dominates the market. So could you please provide some insights into the optimal collaboration model? Additionally, what may be the preferences of the clients in this regard?

Speaker 11

Thank you.

Speaker 3

I think the concept is We it's important to provide what you are relevant with. And Advanced Packaging, In our view, it's considered a silicon wafer level integration technology and that's where we're going to be focused For the back end, because the back end substrates, there will be Partners in that ecosystem providing that. The back end packaging technology also have a partner provide that service. We don't have much of a value there. So that's why we stick with the wafer level and silicon level integration focus.

Speaker 3

So and so That's how we position ourselves and ensure that we will be in It's bendable position because the wafer level integration has to be done in a way with a fabrication fab. But others, you don't have to. So that's why we actually pick the space that we have more relevant.

Speaker 11

Got it. Thank you very much for the color.

Operator

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

Operator

Thank you.

Speaker 1

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.usc.com. Have a good day.

Operator

Thank you. Ladies and gentlemen, that concludes our conference for 2Q 'twenty three. 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.

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Key Takeaways

  • Q2 financial results: Consolidated revenue was RMB56.3 billion with a 36% gross margin and 71% fab utilization, driving NT$15.6 billion in net income (EPS NT$1.27).
  • Q3 guidance: Wafer shipments are expected to decline 3–4%, ASP to rise ~2%, gross margin to erode by low single digits, and utilization to fall into the mid-60% range.
  • Demand outlook remains weak: Although consumer (Wi-Fi, digital TV, display-driver ICs) and PC markets showed modest sequential recovery, customers continue stringent inventory cuts and the downturn is likely to extend into Q4.
  • 28 nm specialty node resilience: 22/28 nm products accounted for 29% of Q2 sales, with P6 capacity expansion in China on track and plans to deploy silicon interposer technology to address emerging AI demand.
  • Xiamen fab acquisition: UMC completed the buy-out of its Xiamen 12-inch facility, now a wholly-owned subsidiary, enhancing geographic diversification and capacity control.
AI Generated. May Contain Errors.
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