Welcome, everyone, to UMC's 2024 First Quarter Earnings Conference Call. [Operator Instructions]. For your information, this conference call is now being broadcasted live over the Internet. Webcast replay will be available within two hours after the conference is finished. Please visit our website, www.umc.com, under the Investor Relations, Investors Events section. Now I would like to introduce Mr. Michael Lin, Head of Investor Relations at UMC. Mr. Lin, please begin.

Thank you, and welcome to UMC's conference call for the first quarter of 2024. I am joined by Mr. Jason Wang, President of UMC; and Mr. Chi-Tung Liu, the CFO of UMC. In a moment, we will hear our CFO present the first quarter financial results, followed by our President's key message to address UMC's focus and the second quarter 2024 guidance. Once our President and CFO complete their remarks, there will be a Q&A section. UMC's quarterly financial reports are available at our website, www.umc.com, under the Investors Financial section. During this conference, we may make forward-looking statements based on management's current expectations and beliefs. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially, including the risk that may be beyond the company's control. For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the SEC and the ROC security authorities. During this conference, you may view our financial presentation material, which is being broadcast live through the Internet. Now, I would like to introduce UMC's CFO, Mr. Chi-Tung Liu, to discuss UMC's first quarter 2024 financial results.

Thank you, Michael. I would like to go through the first quarter 24 investor conference presentation material, which can be downloaded or viewed in real-time from our website. Starting on Page 4. The first quarter of 2024, consolidated revenue was NT$54.63 billion with gross margin at 30.9%. Net income attributable to the stockholder of the parent was NT$10.46 billion. Earnings ordinary shares were NT$0.84. Utilization rate in first quarter of 2024 was 65%, similar to 66% in Q4 of last year. However, the shipment has increased by about 4.5% sequentially. On Page 5, for the sequential financial comparison, revenue declined slightly to NT$54.6 billion. Gross margin was down 5.1%, to 30.9 percentage point, or NT$16.899 billion. The operating expenses normally in first quarter is seasonal low point. Therefore, we can see the operating expenses was down 13.4% to NT$5.7 billion in Q1 of 2024. Our other operating income mainly is subsidies from governments, declined quite a bit to NT$513 million in Q1. This is largely coming from our shipment operation. Their government subsidies recognition is in line with their depreciation curve, which has come down significantly in 2024. And overall, net income attributable to the shareholder of the parent was NT$10.4 billion in Q1 versus NT$13.1 billion in Q4 of last year. EPS was NT$0.84 for first quarter. On Page 6, the year-over-year comparison, revenue also stayed similar range, almost slight increase of 0.8%. And gross margin, however, declined from 35.5 percentage point to 30.9 percentage point in Q1, many due to increasing cost, such as depreciation expenses. And for the non-operating income, there's also a big difference, many due to our portfolio holdings, investment holdings. This is the mark-to-mark again. It's only about $1 billion in Q1 versus $4.6 billion in the same period of last year. On Page…

Thank you, Chi-Tung. Good evening, everyone. Here I would like to share UMC's first quarter results. In the first quarter, our wafer shipments increased to 4.5% quarter-over-quarter, as we saw a pickup in the computer segment. Despite a slight drop in the utilization rate to 65%, we were able to maintain relative healthy margins due to a continuous cost control and operational efficiency effort. Contribution from our specialty business increased to 57% of total revenue, driven by demand for power management ICs, RFSOI chips, and silicon interposers for AI servers. During the quarter, our team continued to make good progress on key pipeline projects, both customized solutions for customers as well as new technology platforms to serve high-growth segments within the 5G, AIoT, and automotive markets. This includes embedded high-voltage, embedded non-volatile memory, RFSOI, and 3D IC solutions. In line with our policy to provide a stable and predictable dividend to our shareholders, UMC's Board of Directors recently approved a shareholder cash distribution of approximately NT$3 per share, which will be a higher payout ratio than the previous years. This is subject to approval by shareholders at an Annual General Meeting in May. Looking ahead to the second quarter, we expect to see an increase in wafer shipments as the inventory situation in the computing, consumer, and communication segment improves to a healthier level. As for the automotive industrial segment, demand remains muted, as the pace of inventory digestion has been slower than anticipated. While we still expect some lingering impact on macro uncertainties and cost headwinds in the near term, UMC will continue to invest in technology, capacity, and people to ensure UMC is ready to capture the next phase of growth driven by 5G and AI innovations. Now, let's move on to the second quarter 2024 guidance. Our wafer shipments will increase by low single-digit percentage. ASP in US dollars will remain firm. Growth margins will be approximately 30%. Capacity utilization rate will be in the mid 60% range. Our 2024 cash-based CapEx will be budgeted at a US $3.3 billion. That concludes my comments. Thank you all for your attention. Now we are ready for questions.

Thank you, President Wong. [Operator Instructions] First question we'll have Randy Abrams, UBS. Go ahead, please.

Okay, yes. Thank you and good evening. The first question I wanted to ask on the 28 nanometer where you mentioned it seasonally dipped in first quarter. Could you talk about the outlook? Like if you see that recovering and how do you see the P6 as you bring up the rest of that capacity? How do you see application to build that capacity or keep it loaded?

Well, I mean, for Q1, the 22 and 28, we saw a decline -- the experiencing of smartphone seasonality which would lead to a lighter 28 and 28 loading. We do expect to pick up the 28 nanometer wafer shipment in Q2 2024. Our 28 loading will remain at a relatively healthy level based on current projection and which is supported by product in all eight drivers, logic technology such as ISP, Wi-Fi, and SOC process application. After the Q1 2024, we will see higher wafer shipment and driven by the demand from both communication and consumer.

Okay. And the blended pricing is firm overall, but you do have the mix shift coming back to 28. Could you talk about the like-for-like pricing environment if you see next few quarter’s negotiation? Would there be any like-for-like pressure or do you expect it would be like first quarter each year would be the time the bigger negotiation happens?

Well, I mean, that's the typical practice. As we mentioned in January call, the ASP will remain firm after a one-off pricing refresh [ph] in Q1 and we are still expecting that. The company's pricing strategy has remained consistent, which is based on our value proposition. And at this time, we still expect the pricing will remain firm in the second half of 2024, however, we do believe this, the like-to-like pricing adjustment and so on. We believe the focus should be elevating our customers products competitiveness and to help them win more market share. So while our pricing strategy is remain consistent and aligned with our value proposition, but it also includes to stay competitive and resilience against the market dynamics. So then we’ll continue monitoring the market dynamics.

Okay. So something broadly firm, but some flexibility where needed. If it's, yes, like if it's a competitive situation.

Yes, that's correct.

Okay. And to revisit the CapEx, I think you mentioned last quarter, majority of it was either residual for P6 or infrastructure. So a lot of the equipment spend is still to come. But I think you were planning it to start up sometime around Q2 of next year. So is there a way to think about how much capacity in the first phase? And have you made that decision to bring up like a first phase? Like if you have an amount or how much you might need to outlay? And I would think it would be mostly in 2025.

Are you referring to P6 or P3?

Oh, sorry. It's Singapore. Actually, I was referring to, because you're doing the construction of Singapore, so how much you plan to bring up in Singapore next year?

Yes, so, well, first of all, you're right. And last quarter, we did mention, among the 2024 CapEx number around 60% of the 2024 CapEx will be spend from the 12i P3 infrastructure, and as well some minimum [Indiscernible], so they are, we are spending on the P3, but mainly for the infrastructure. And given the current market dynamics and the customer alignment, we are projecting the 12i P3 production range will actually start in January 2026 now. And the P3 will ramp up with high volume starting from the second half of 2026.

Okay, does that imply like off the big CapEx this year, would you still, it sounds like most of the equipment that would push maybe some next year, some actually in 2026, so we should think, I mean, is there a rough way to think about it? Because it would affect, like depreciation has been rising, but that could maybe level it out with that push out.

Right, I mean, we are, we certainly are managing that. We are projecting the CapEx will peak out this year, and will not impact the company cash dividend policy first. I believe that you don’t care about that, as we have stated in the past. Our CapEx strategy continues to remain disciplined and ROI-driven, and also along with our affordability, so that means we are managing that. But the CapEx will be peaked out at this year in 2024.

Yes, and I did see you have the $3 dividend that you confirmed. Actually, the last question, it ties to the AI, like a lot of the attention goes to the high-end, like the GPU, the A6, but you did put in your remarks, kind of reminded on the, you have the Silicon interposer, but could you kind of outline where you still have opportunity, like since that seems like the strongest, still the strongest momentum driver, like where UMC can participate, like Silicon interposer or other components into AI or HPC?

Yes, I mean, we certainly will like to express [ph] more, but not yet. Well, at this point, while the recent focus of AI chips has been on the most advanced computational chips to run the AI model, and the chips will require handling data transmission, and the power management are also equally important. And so UMC's focus is on those two areas. The data transmission has slowed the power management. Specifically, the AI server will need a high-speed IO chip and memory controller to handle the data transmission and the the power management IC for every computing and memory unit to optimize the power consumption. Similarly, technology offering from 55 nanometers, 12 nanometers, specialty technology, non-biotype memory, 3D IC, they are all well suited for the edge AI applications, such as wearable, smartphone, etc. So in that our solution will offer to enable those edge AI devices to achieve the optimal balance among comp performance, form factor, power efficiency, and we'll continue to work closely with the customers, bring those innovative edge AI solution to the market. Well, I mean, like I thought at the beginning, while we are still in the early stage of a port foliating the edge AI, we are recognizing the growth potential of the AI market, and we are ready to capture those emerging opportunities, and based on the, even we are early, but based on the current projection, we are expecting UMC's addressable market within the overall AI semiconductor market will be around 10% to 20%.

Okay, so you have captured 10% to 20% of the AI, TAM, with your portfolio, okay.

I'm sorry, Randy, actually, that's the most attractable. I hope I can….

I should say not capture, yes. You can, your solutions can target, and then it's a share event, that makes sense. And to clarify, too, on the silicon interposer, do you plan to expand from the 6,000? I think that was the last guidance you gave, 6,000, if you would add further capacity to that.

Yes, that's the current 2.5D, interposers. Let me maybe elaborate a little bit more on our 3D IC space. Being efficient to the interposer, our 3D IC offering includes the wafer to wafer hybrid bounding active interposer with TSV and the 2M-HAPT [ph] interposer with DTC. And so the interposer is the one of the offering, which that's where the market is today. But we are cautious in monitoring the expansion of the current interposer capacity and continuing to focus on the expanding on the rest of the solution. Those solutions end to provide a cost effective performance efficiency alternative for some cannot be devised through a vertical stack of a silicon wafer or dice, which delivers small-form factor enhance the bandwidth and lower power consumption for various applications, including the edge AI and the data center and communications. So we are cautious about the current solution with interposer expansion. We want to end for the future expansion for the interposer with DTC and other interposer with TSV and as well the wafer to wafer hybrid bounding.

Okay, great. Thanks a lot Jason for the call.

Thank you, Randy.

Next one, Gokul Hariharan, JPMorgan. Go ahead please.

Yes, hi. Thanks for taking my question. My first question, Jason, I think last call you mentioned that you've appropriate expectation for boundaries about high single digit and expect your MC to kind of grow at a similar pace or strive to go at a similar pace. Is that still your expectation right now or has anything changed given the slow world automotive industry or recovery? Has anything changed on the numbers?

Hi, Gokul. I mean, yes, you remember well and let me give you a bit of update. There are some changes. One, some area we did not change. For instance, we still project the semi-industry will grow in a mid-single digit, that did not change. For the boundary, you will grow at a low ting year-over-year and that didn't change. However, majority of the 2024 growth in the boundary will be driven by the AI servers. We actually continue to monitor that. I think the biggest momentum is coming out from the AI servers and therefore the growth for the UMC addressable market now remain flattish for 2024. However, you're right. Our intention is still to expect to outperform our addressable market by seeing the current addressable market projection for us is flattish for 2024.

Understood. That is quite clear. Second question is on some of the specialty projects that you have on RFSOI that you called out and also the high voltage driver ICs on OLED. Could you talk a little bit about your market presence, especially in RFSOI, how big this is because it seems like you're starting to gain some market share from the current market leader on some of these platforms. Could you talk a little bit about the specialty platforms, especially RFSOI and OLED driver ICs?

Sure. First of all, we continue to address all specialty technology, not just limited at RFSOI. However, we are seeing a good momentum for RFSOI market penetration. We are seeing a significant market share gain in this space. However, I don't have a specific number to share with you right now. I may be able to update you next time. The wealth for the non-volatile memory and we also gain some traction on that while we have a maintaining our market position on the embedded high voltage [ph].

Understood. One more question I had is on the IPL [ph] kind of moving towards spending primarily for the Fab12i P3. Are there any CapEx offsets that we will potentially get for the Singapore Fab or is it mostly the prepayment from customers and the government incentives are mostly on tax breaks and other kind of profit-driven subsidy?

Maybe, Gokul, if you can repeat that question.

Yes, so I was asking for Singapore Fab, do we get any capital offsets like CapEx offsets that offset our CapEx or is it mostly going to be tax breaks and other kind of subsidies which kick in once you start production?

Yes we cannot go into detail, but there are government incentives issued by the Singapore government including both test breaks as well as the subsidies on capital expenditures. The overall package is equal or better than our previous investment, the P1P2, because of the more advanced technology investment we have in Singapore. So we are very grateful for the strong support from the Singapore government. And the enlarged hub in our Singapore operation actually will enable us to receive even more benefit out of this greater economic scale.

Thank you, Doug. So the 5 billion spent that we had projected earlier that is more like a gross CapEx number we should assume?

Yes, roughly for P3.

Okay, understood. And one more question I had is on 8-inch, given 8-inch seems to be still pretty sluggish. Are there any plans on flexibility for the 8-inch capacity? Is there any plans to potentially convert 8-inch to other areas, compound semiconductors or silicon carbide or any of those areas?

Well, first of all, we are continuing to anticipate pressures from some of the 12-inch material that has impacted 8-inch supply chain. So we definitely need to address that. While certain mainstream applications will remain 8-inch, we also try to by expanding the technology of silicon carbide, gallium nitride, but they are still in a very early stage. Most of the silicon carbide today is at 6-inch. We are more focused on the 8-inch micro. And we can update more progress once that becomes more mature.

Okay, thank you. Thanks, gentlemen. Thank you.

Thank you. Next one Brett Wing [ph] Bank of America. Go ahead, please.

Thank you management for taking my question. I have two questions. One is on the silicon interposer or the advanced packaging. We have learned that the management is cautious or less active in expanding this part of the capacity. So we are on track to hit around 6K per month and no further expansion. Should we assume that? And then a follow-up on that is that we know that we are expanding the other wafer-to-wafer technology and other 3D solutions. So when should we expect this part of business to take off? Thank you.

So first question is the interposer. Yes, we will maintain that 6K capacity and we continue saying that we’re at a stable run rate for 2024 and for the others some of the RFSOI applications, or we’ll be starting to use the wafer-to-wafer hyperbounding solutions, so they were ready for production in 2024 as well and so will gradually introduce some of the [Indiscernible] wafer-to-wafer stacking solutions and gradually increase that capacity as well.

Got it. Thank you very much. Glad to hear that. And then my second question will be on our node migration. We have learned good business on the 22 and 28 nanometer with the older driver IC and some products migrating to 22 and 28 from 40. And we would like to learn the outlook of 40 and the well utilization outlook. And what products can we expect to help fill the 40 nanometer capacity gap?

40 or 14?

40.

For the mature 12-inch the utilization rate for both 40 and 65 will remain flattish for the second half of 2024. And of course this still highly depends on the pace of the overall market recovery and we closely monitor that. At the same time there are applications still coming into the 40 nanometer such as the RFSOI and as well the non-volatile memory they are some of the new applications will come in adopting the 40 nanometer.

Got it. Thank you very much. Actually, I also wanted to add about 14, 14. So despite the limited capacity currently, there is still emerging business opportunities in the market. Does the firm plan to allocate more resources for the expansion on this 14?

Our current focus on that is on 12 nanometer corporation with the U.S. ponders [ph] which the program is to kick off at the beginning of this year. And the focus is trying to making good product on the core development and which is on track and we're also seeing a high-level of interest. And we see the numbers increase. At this moment, we are working with our customer to accelerate the RAM schedule for the 12 nanometer. Yes, I mean, the focus will be shifting to the 12 nanometer instead of 14.

Got it. Thank you very much Jason.

Thank you.

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

Hi, thank you for taking my question. I want to ask about the Jason, your view about the [Indiscernible] right? If you look at your guidance, you're guiding for a flat to slide out for the total revenue which is a sequential growth for your quarter revenues, like most like it's flat, it just slides out every quarter for the next coming quarters. And your margin somehow flat for 30% if there is no more ASP erosion. So, which is -- there is no recovery at all, for the industry. So it seems to me that this inventory correction cycle is a lot longer than expected. So when do you see the inventory correction will the restocked demand will start to kick in and provide some minimal help for your business?

I mean, Bruce, first of all let's talk about inventory. We have noticed the overall industry inventory level continue to improve. Specifically, we have seen inventory getting to a healthier level in the computing, consumer and commutation markets. However, we still observe our customer taking a more of a conservative approach in their inventory restocking behavior. In other words, we're seeing more of a rush order instead the [Indiscernible] projection going forward. I think that mainly because the biggest concern is still at overall macro outlook, which could impact the market dynamics. The other two market segments for the inventory diversion for the industrial segment is still slower like I mentioned earlier. So, I think the market is prudent. The customers are prudent about the market outlook. We do see the overall industry are recovering. And so, we do think the foundry industry will grow in the low teens percentage a year-over-year. However, most of the resources is more allocated to the AI server. So I think the AI server will be with more of a higher growth rate versus the rest of the market application. And since we have less exposure at the AI server, so I think our projection at this point is more conservative. However, we are optimistic about the inventory situation too.

So, you expect AI continue to be strong for next year you will continue to be muted? Is that the base assumption?

Well, the other thing is we do foresee the auto and industrial segment. Inventory situation will become more healthier by the end of the year. So, I think all market segments within UMC addressable will become much healthier in terms of their inventory situation starting from 2025.

I see. Okay. The next question is for the advanced 3D IC packaging which Jason started to talk a bit more. I want to know the value proposition for UMC in this business because you don't have the advanced node. You don't have the three or five nanometers, which is somehow vertical integration is important. So where do you see your value when you don't have the advanced node dies for the packaging? And what's the profitability look like for this business? It's got to be the margin of credit [ph] for you.

Well, I mean first of all I mean, you're right. But if we look at this market specifically, the sounder device is looking from a phone factor standpoint. And sound device is looking from the enhanced bandwidth standpoint and lower power consumption. So if you have a horizontal view, I think from the small phone factor standpoint, some of the applications do not require most advanced technology nodes. And sounder applications will probably need a little bit better but still not the most advanced because they're seeking for the balance between the phone factor and the higher bandwidth and the power consumption. And if you're directly referring to the very super high bandwidth, that's a space that we have not addressed. So there's still a sizable market within the 3D IC space.

So that is what you mentioned about 15% to 20% of the addressable market.

That's among the AI.

Of the total.

Yes, the overall AI semiconductor market. And that's part of it.

I understand. Okay, thank you. And the profitability? Profitability for this business?

I mean, we're very cautious about that. And we've been running the company, improved our structural probability for a few years already. And of course, any solution we're offering and operational efficiency, we're always part of the consideration. That will be a profitable operation for us.

So we can consider as a marginal equivalent for this business?

Right now, I can't comment on the marginal equivalent. But we'll try our best to maintain our structural profitability. I can't really say.

Okay, thank you.

Thank you, Bruce.

Thank you. Next one, Charlie Chan, Morgan Stanley. Go ahead, please.

Hi, Jason, Chi-Tung, Michael and David thanks for taking my question. So first of all Jason, great calls on the cycle and the market forecast. I think your industry peers is converging to your forecast on the non-AI market. And also excellent job on the pricing, displaying so well done on the margin side. So a couple of questions from my side. So first of all, the CapEx right? Does that include some spending for the U.S. partner Fab? Because you kind of mentioned that there could be some bottlenecking required for the U.S. operation.

I mean, for the 2024 number, that's not a whole lot. That will not change, the current CapEx projection. When we say we pick out in 2024 in terms of CapEx and the 2025 was declining that's already including that assumption.

Okay, so any CapEx for that de-bottlenecking should be more 2025?

Well, yes most of it will happen there, yes.

Okay. And yes, also staying on this 12 nanometer business, right? You said you try to accelerate customer schedule. Do you think any kind of production can be ahead of 2027?

We certainly hope so. But cooperation like this scale naturally comes with serious kind of challenges, right. So we have gone through a rigorous due diligence since day one, and we have been proactive in managing those potential challenges. But so far, the collaboration has been a positive for us. And so we want to focus on to accelerate that. But I can't give you any specifics at this point. But I think I can tell you the project is on track, and we have good confidence that we’re making good progress right now.

Got you. So in terms of the customer's feedback or demand compared to maybe three months ago or six months ago, do you see more commitment from your customers or partners? So I remember the Intel Fab capacity is 50K to 60K, right? Are you confident that you can feel that capacity?

I mean, we never specific talk about capacity size. In terms of the capacity arrangements is very typical. We have to work with our customer and align with them based on their forecast and then we can deploy that. So there is no specific capacity number at this point. Secondly, we are seeing more interest because we announced this early this year, obviously that customers want to know more about it. And so we see a lot of interest. And I think we're making some good traction. But first thing first, we have to demonstrate that ourselves. So [Indiscernible] is we just focus on execution today and giving the project execution standpoint, we don't foresee any major risks.

Okay, yes. So, yes I heard that your progress also get on the nerves of your industry peers. For example, at least a key customer Novatek, right? I'm not sure whether there's some dynamic that you exceed Novatek's goals, because Novatek in the future, probably they would more depends on TSMC and TSMC also want to bundle with this customer tighter. So I'm not sure if there's already some counter move from your major competitor in 12 nanometers.

I mean, first of all we do not comment any specific customer, we never do. And from the competition standpoint, we will look at this in a way of a building a strong relationship with our customers. It can only forge upon a fundamental strength of technology leadership, manufacturer's capability, excellent capacity offering. And so you have to win by that you don't win by relationship. Oh, having a relationship is always good, but that's not we focus on. And we will continue strengthening our competitive advantage in supporting our customer and winning their business and building that relationship.

Got you. Yes, so we wish you a success. So may I switch gears to some near term or financial questions?

Sure, absolutely.

Thank you. So on a gross margin side, I’m wondering how you model the kind of electricity cost impact to your gross margin and also is it depreciation still growing like 20% here for 2024?

Yes, depreciation should grow around 20% or a little bit less maybe given the current new schedule for Singapore P3. And the utility impact is actually after the older cost together, blended together, it's actually rather minimum. And our goal is always try to offset that through our operating efficiency and also the benefit from the larger economy of scale. So current forecast is a small impact to our operating to our gross margin.

Okay, so it sounds like you don't intend to pass through this kind of minimal additional cost to your customers. Do I interpret this comment right?

I mean, the cost and the pricing to us is actually two different thing. From ASP standpoint, I mean, our pricing strategy like I said is consistent based on our value proposition. And then we have to align with that, that includes the competitive resilience, right? But from the cost, we always want to try the aggressive cost reduction effort, to compensate or offset some of the headwinds to maintain our probability. So we -- it's not a cost plus business model for us.

I see. So in the Q&A with Bruce, I think to hear you, you kind of admit that second half margin can be also at a similar level. Did I hear you right?

I mean we typically giving guidance quarter-over-quarter. But at this point we more look at a market outlook. The ASV projection will stay firm. But we do found the headwinds. Like you said, the 2D cost increase, inflationary cost increase, depreciation cost increase. There are some headwinds that we have to deal with. So we will continue aggressively spend an effort to improve our cost structure. But then so the goal will be at least, continue to improve our structure profitability from that standpoint. I mean, I have to say currently, we have been navigating the industry dynamics even with the utilization rate below 70%. Right? I mean so I think we have demonstrated that for the past periods. And now we're dealing with the headwinds depreciation or all those inflationary cost pressures. And I think we will continue to do so. And so despite those challenges, we will have a relentless effort to overcome those challenges.

I see. The last one from me. So on an end market trend, one observation. So I fully respect and you have been right. I found a cycle recovery in market forecast. But recently we've seen through here that smartphone supply chain can be [Indiscernible]. One of your major customers will report this Friday, I guess. So we are seeing inventory de-stocking. Some tough situation for kind of smartphone still. You seem to say the inventory is healthy. So can I know how you're going to reconcile those data points?

I mean, I kind of touched that. So first, we are cautiously optimistic about the rest of the year. If I put it this way, at this moment we will see the Q1 2024 could be the bottom. And the biggest uncertainty is the overall macro outlook that could impact end market dynamics. So because the visibility, insufficient visibility at this point, giving the customer is, practice, rush-order practice approach. So we feel optimistic about it, but we need to be cautious about it. If the end market does not recover as we expected, and we could have a challenging second half, but however, at this point we have not seen that. So we really hope that if the market continues by adjusting the inventory, gradually improving the end market demand, gradually improving, we actually foresee the Q1 2024 will be a bottom for the year.

I see. Thank you, gentlemen. Awesome discussion on the pricing, [Indiscernible] and also the 12 nanometer strategy. Thank you.

Given that you have complemented me twice, I have to say. Thank you.

Next one, Jason Jones [ph] CLSA. Go ahead, please.

Thank you for taking my questions. One, if you can give us more details in terms of demand in second half. I mean, can you give us outlook or more details for 28 nanometers or 40 to 90 nanometers or 8 inch?

Well, I mean, let's talk about the Q2 since we're in the current quarter. And the Q2 outlook, if we look at the application, we expect the wafer demand in consumer and computer development will grow while the automotive industrial segment will remain soft, they are still digesting the inventory. So they're still in the mixed bag for Q2, but overall shipment I think will grow for all the quarters sequentially. If you break it down to a technology notes, the 28 and 22 will gradually improve. And for the mature notes there are 12 inch, 40 and 65 will stay flattish. And while the eight inch will stay flattish as well. And so that will be the current projection for us.

Okay, thank you. So can we expect that there will be normal seasonality demand in Q3? And how can we expect whether your utilization rate can reach maybe around 70% in this traditional house season? Can we expect that kind of seasonality or demand in Q3?

Well, I mean, at this time, the market still lack of a sufficient visibility, like I said, for the second half. I try to give you an example there. We have observed rush order from customers as they continue to managing their business prudently. And for auto and industrial, they have a slower inventory digestion. So we think by end of the year, I think auto and the industrial will be at a much healthier position. So giving the mix of that, it's hard to tell you if the Q3 will recover to a 70% utilization rate. We certainly see some of the market segment has a healthy inventory, so they have the demand will more directly link to the end market needs. And this is the auto and the industrial still have to digest their existing inventory on hand. So if the macro situation is healthier, if a macro is recovered, which we expect on the computer, consumer and the communication segment, the demand will redirect to us, improve the loading situation. So there's so many different variables right now and giving the insufficient visibility, I can't give you anything specific, but we definitely feel optimistic about it because the inventory situation is improved in many of the market segment already. We just have to continue monitoring the progress and we will keep you updated quarter by quarter.

Great, thank you. So my last question is in terms of 28 nanometer or 22, because on the demand side, actually we found some of the clients are migrating from 22, 28 to maybe FinFET process nodes, including SSD controller or Wi-Fi 7. And on the supply side, we found that your competitor in China is planning to international mass reductions for 28 high voltage process node. So demand is moving into the FinFET process node. And on the supply side, we know that UMC had kept good positions in 28 nanometers. But on the supply side we found that there's new players are planning to enter the high voltage process market. How do you look at or how do you plan to keep your market shares or keep your technology leadership in high voltage, or in those kind of niche markets or your products, or to maintain your market shares?

I think fundamentally, the answer to that is we need to stay competitive. We, in the past and even currently, right now at this moment, we work closely with customer, strategic customers to build specialty technologies, differentiation and lasting value for them to enhance their, our product portfolio, as well as our customers product portfolio and with a diversified capacity. And so that we want to do that to offer our customer with a competitive solution. And so I think that's the answer to that. The competition is everywhere, and the key answer to that is we have to stay competitive, and we definitely strive to do that.

Okay. Thank you. I have no more questions. Back to queue.

Thank you. Next one. Laura Chen, Citi. Go ahead, please.

Hi. Good afternoon. Thank you, gentlemen, for taking my question. I think my question is also kind of a follow up on the CapEx outlook and also the depreciation. Since Jason, you mentioned that the CapEx will pick out in this year. I'm just wondering that looking forward, how should we look at the depreciation cost trend into next year, how would that impact our gross margin?

The depreciation impact will be kind of delayed factor. So if the CapEx is peaked in 2024, I think the depreciation expense probably will be peaked two or three years later. So the trend will still be on a minor upward trend all the way to 2026.

Yes. So the magnitude of the depreciation cost increase for the following few years, you expect that will be more like a steady increase where there will be gradually scale up. Because still in the past two years we see the depreciation cost, CapEx increase.

Given our ROI driven base CapEx, and we are managing our overall depreciation expenses as a percentage of overall revenue. So I do expect the increased magnitude should be under control and also acceptable by the investor community.

Okay, thank you. And also for the AI opportunities. I understand that Jason, you mentioned that will be 10%, 20% addressable market. And where are we now and do we expect there will be a secular growth for the following two, three years?

Well, I mean Laura, like I said, we still in the early stage of the, of the edge AI. Most of the focus today is running the computation chips for the AI modules today. So we have a very small exposure there. But we do expect the edge AI will start coming in. And there are some projects that we have in discussion with customers. They all have a very high expectation the market will taking out soon. But I don't have any specific to say. We do project those application or those features will be used in the edge AI in the next few years and that will probably representing at 10% to 20%. It could be even higher. But at this point we project about 10% to 20% of the AI.

Okay, thank you. Very clear.

Thank you, Laura.

Ladies and gentlemen, we are taking the last one, the last question. Timm Schulze-Melander, Redburn Atlantic. Go ahead, please.

Hi, thank you very much for taking my questions. I just had two, if I could sneak them in, please. The first one was on the advanced packaging and chip integration. You talked about hybrid bonding moving into grace of volume in 2024. Just wondering if you could share a few more details about the end application and if that's the partnership that you had press released with ASE, Faraday and Cadence. Is that the application? And then I had a quick follow up, please.

Well, first for the wafer-to-wafer hyper bounding solution today, the applications for the RF front end module is not completely correlated with the ecosystem press release. But to address your part of the question about the ecosystem conversation for the ecosystem, we are not talking about one specific solution, we are talking about the UMC overall 3D IC solution is leveraging the entire ecosystems to support that. We do not do turnkey solution means the end-to-end solution. We're only providing wafer-to-wafer hybrid bonding or the interposer end solution, while we have all the ecosystem partners to support the customer to provide the total solution. So that's not only limited with the high hybrid bonding.

Okay, but for that hybrid bonding, are you actually doing that wafer-to-wafer bond yourself in a UMC facility or is that being outsourced or shared with, with some partners?

It's in house, yes.

Okay. And maybe just if I can, one sort of much, much bigger picture long-term question. The last year or so has seen significant capacity expansion in more mature nodes among China based chip makers across a whole range of products. Just as you look out three, five years. How does that sort of influence the sort of strategic landscape and the amount of competition that you see or that you expect UMC to face? Thank you.

Well, I mean we kind of touched that earlier. It's a couple of things that we see that's driving the landscape changes. One is we do see more capacity buildup expanding for geo-political reasons or for the reason the semiconductor industry has become so important. So people want to build up more capacity regionally. And so there are multiple reasons that drives the, the overall capacity buildup. And fundamentally, I mean we believe we need to stay competitive. So we're working closely with our customer to build differentiations and to provide values to enhance our product portfolio. And the angle is we will strive to minimize the some of the commodities exposure in some of the selected market if those capacity build up. And it could have affected the market, the end market with some of the commoditized products. And so we need to continue differentiate ourselves to minimize the exposure with that. If we look at this build up situation, if they are driven by the geopolitical tension that would in our view it impose not only this constraint, but it also presents some of the opportunity as a customer seeking alternative to support their sourcing objective. And for UMC, we are well positioned because our geographically diversified manufacturing sites, which allow us to work with the customers in navigate this geopolitical concurrence. We are only the few foundry that have fabs across Singapore, Japan, Taiwan and China and back with a comprehensive technology portfolio, not single, no, not limited technology offering, but very comprehensive technology portfolio. And that could be bridging between fab, which actually is very beneficial to some the customer if they want to have, they want to have a fab flexibility, the cross fab flexibility. And each of our sites is equipped with a sizable capacity that can serve numerous market segments. And each our regional manufacturer site also being well established with a scale and complete ecosystem. And we can run very highly efficient local operations. And if you look at our, you look at longer-term, beside our strong manufacturing footprint in Asia now we also extend our capacity offering into Arizona. We saw the cooperation with the U.S. partner in 12 nanometer. That's another testament that we're expanding our technology offering as well. And so this will continue to further our competitiveness and to strengthen our customers supply chain resilience. So I think we can bring value to customer and that's how you compete. I think we are positioning ourselves to continue improve our market relevance, our market position, and hopefully the customer will see that and they recognize the value. Then we'll stay competitive and to differentiate ourselves. I hope that give you a bit of context into in the bigger picture.

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

Thank you for attending UMC conference call today. We appreciate your questions. As always, if you have any additional follow up questions, please feel free to contact umc@irmc.com Have a nice day.

Thank you, ladies and gentlemen that concludes our conference for first quarter 2024. 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 investor’s event section. You may now disconnect. Thank you and good bye.