Welcome, everyone, to UMC's 2021 Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent background noise. After the presentation there will be a question-and-answer session. Please follow the instructions given at the time if you would like to ask a question.

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.

And Mr. Lin, please begin..

Thank you and welcome to the UMC's conference call for the fourth quarter of 2021. I am joined by Mr. Jason Wang, the President of UMC; and Mr. Qi Dong Liu, the CFO of UMC. In a moment, we will hear our CFO present the fourth quarter financial results, followed by our President's key message to address UMC's focus and the first quarter 2022 guidance.

Once our President and the CFO complete their remarks, there will be a Q&A session. UMC's quarterly financial reports are available at our website at www.umc.com under the Investors/Financials section. During this conference, we may make forward-looking statements based on management's current expectations and beliefs.

These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially, including the risks that may be beyond the company's control. For these risks, please refer to UMC's filings with the SEC in the US and the ROC security authorities. Now I would like to introduce UMC's CFO, Mr.

Qi Dong Liu, to discuss UMC's fourth quarter 2021 financial result..

Thank you, Michael. I would like to go through the 4Q '21 investor conference presentation material, which can be downloaded from our website. Starting on page three, the fourth quarter of 2021. Consolidated revenue was NT$59.1 billion, with a gross margin at 39.1%.

The net income attributable to the stockholder of the parent was NT$15.95 billion and earnings per ordinary shares were NT$1.3. Capacity utilization rate remained at 100% plus. Please turn to page four on this Q4 comprehensive income statement. Operating revenue grew sequentially 5.7% to NT$59.1 billion.

Gross margin, as we reported, at 39.1% improved 12.5% to NT$23.1 billion. We controlled the operating expenses, and the percentage of the revenue declined a little bit to 11.5% to NT$6.82 billion.

With a non-operating income of NT$558 million, our net income attributable to shareholders of the parent was 50 - NT$15.949 billion or an EPS of NT$1.3 in Q4. For the whole year, on the page five, 2021 revenue grew by 20.5% year-over-year in NT dollar terms to NT$213 billion.

In US dollar terms, the growth rate was higher, around 26%, 27%, given the stronger NT dollar appreciation against US dollars. Gross profit margin was 33.8% or NT$72 billion in the year of 2021.

And the overall net non-operating income is a little bit over NT$10 billion, grew by 70% year-over-year mainly due to the stronger stock market performance and most of the financial asset we hold are evaluated according to the stock market performance.

Income tax expenses also grew significantly to NT$6.7 billion mainly due to a lower base in 2020 and also a stronger profitability in 2021. So for the full year, the EPS is NT$4.57, grow by 91.1% in net income terms.

So on page six, cash continued to pay up to NT$132.6 billion by the end of 2021, and total equity also grow to NT$281.2 billion by the end of 2021. Page seven. The ASP trend continue to inch up. In Q4 of last year, we saw EPS - ASP grow by more than 3%.

In terms of revenue breakdown, for page eight, Asia still remain our largest portion of earning - revenue contribution with 66% in Q4 and North America is 21%. And for the full year on page nine, the ratio didn't change much compared to the quarterly numbers. So for page 10, fourth quarter identical that IDM contribute around 14% of the total revenue.

And for the full year, we see a 3% - percentage point increase for IDM revenue to 15% in 2021 versus 12% in 2020. So on page 12, communication also remain around 46% of the pie. And for the full year, on page 13, we see computer segment grow by 3 percentage point to 17%, and consumer also grow 3 percentage point to 27% compared to the year of 2020.

And for Q4 of '21 by technology breakdown on page 14, for 22/28-nanometer, that account for about 20% of our total revenue, with 38% of the revenue coming from 40-nano and below in Q4.

And for the full year, on page 15, we see a pretty meaningful increase in 22/28 revenue from 14% in the previous year to 20% in 2021, which also helped our blended ASP. On page 16, we continued to see some mild capacity expansion, although Q1, there will be some maintenance and new maintenance.

So most of the increase is scattered among different fabs, which shows in this table on page 16. For page 17, so far, our - currently, our 2022 CapEx is budget around $3 billion. And for year 2021, the actual spending was about US$1.8 billion. And the above is a summary of UMC's result for Q4 2021.

More details are available in the report, which has been posted on our website. I will now turn the call over to President of UMC, Mr. Jason Wang..

Thank you, Qi Dong. Good evening, everyone. Here, I would like to update the fourth quarter operating result of UMC. In the fourth quarter, strong demand continued to drive full loading across our fabs, while overall wafer shipments grew 1.7% quarter-over-quarter to 2.55 million 8-inch equivalents.

For the full year, revenue in 2021 rose by more than 20% year-over-year and operating income reached a record high driven by a surge in our 28-nanometer business. The 75% year-over-year revenue increase from 28-nanometer technologies strengthened our overall wafer ASP and reflects the robust chip demand related to 5G, AIoT and automotive megatrends.

It also substantially contributed to the improvement in the company's financial structure. Our healthy 28-nanometer product pipeline will further diversify our product portfolio and customer base and enable UMC to capture additional market share.

Looking ahead into Q1 2022, we anticipate the demand across all nodes in UMC's addressable market will continue to outpace supply. Our growth in the long term is supported by industry's megatrends, which will be catapulted by structural changes occurring in the industry.

We will continue to deepen cooperation with customers with our differentiated specialty technologies, manufacturing excellence and capacity expansion closely linked to the demand of our partners.

At the same time, we will keep pushing for cost reduction and meticulously manage our CapEx in order to deliver sustainable and healthy return for our shareholders. Next, I would like to take a few minutes to share our view on the industry outlook and where we see UMC's position in the industry going forward. UMC has enjoyed a banner year in 2021.

Over the past 3 years, the company has performed and achieved our business goals, thanks to the positive market dynamics and strong partnerships we have developed with our customers.

We believe the current semiconductor market mega trends, namely the continuous penetration of 5G phones, the acceleration of EV adoption and the fast pollination of IoT devices, will continue to drive higher demand for silicon content.

That, in turn, will lead to a growing demand for foundry capacity and technology not only at the bleeding edge nodes but also for UMC focused markets in the foreseeable future. We have been working closely with our customers, aligning our technology solution to capture those mega trend driven opportunities.

We are well prepared ahead of competition across many platforms. The demand-supply imbalance we have experienced over the past 2 years may find some relief as the new capacity will come online. Yet, it has made clear the need for structural and dramatic transformation in the foundry value chain towards closer cooperation and mutual risk mitigation.

Many of our customers recognize the importance of the closer collaboration and have responded by participating in our accelerated capacity expansion partnerships and reach a multi-years long-term supply agreement with us. The LTA provides a long-term capacity assurance to our partners and loading protection to UMC in return.

In addition, we are also working with end system companies and automakers to enhance visibility and transparency in the supply chain with the aim of addressing uneven supply in the industry and long-term undersupply challenges. LTAs are more than a protection mechanism for UMC.

They are endorsement from our customers and points to UMC's strengthened position among our foundry peers. In the past few years, we have also significantly enhanced the company's structural profitability, giving us the necessary resilience to weather through the market fluctuations.

We envision UMC will continue the growth momentum achieved over the past 2 years based on our comprehensive technology offering, foundry position and customer relationships. Our goal is to make UMC a US$10 billion company by 2024 with ROE over 20%. Last but not least, I would like to highlight our focus on ESG.

While ESG is at the forefront of many corporate agendas today, corporate social responsibilities have been UMC's top priority over the decade. Over the years, sustainability has become deeply embedded in our culture and become part of our corporate DNA.

In June last year, UMC publicly committed to reach net zero emission by 2050, the first semiconductor foundry to do so. In the 2021 DJSI, we were ranked the first in the semiconductor sector, an important recognition for our ongoing commitment to the environment, our communities and our shareholders.

We sincerely invite you to visit our website, where you can download our annual corporate sustainability report. Now let's move on to the first quarter 2022 guidance. Our wafer shipments will remain flat. ASP in US dollar will increase by 5%. Gross profit margin will be approximately 40%. Capacity utilization rate will be at 100%.

Our 2022 cash based CapEx will be budgeted at US$3 billion. That concludes my comments. Thank you all for your attention. And now we are ready for question..

Yes, thank you. President, Wang. Our first question is coming from Randy Abrams, Credit Suisse. Go ahead, please..

Okay, yes. Thank you. And congratulations on the good result. I wanted to ask the first couple of questions on the CapEx.

For the 3 billion budget, I want to clarify, is most of the spending tied to the Phase 6 project? Or do you have any other additional projects? And should we view this spending with that Phase 6 as a high base? Or is it your view we may have a follow on expansion to maintain this higher level of spending?.

Well, I mean, the $3 billion CapEx, part of that was a $500 million CapEx budget that roll over from our 2021. And the other is - includes our maximization of the 12A P6 and 12X P1 that we have announced. The 12X P1 capacity will increase 5k per month, and the P6 will increase another 5k per month.

The - for the 12A P6 capacity after the 5k per month, it will reach 32,5k per month for our P6, which is higher than what - our previous announcement. The - after we added 5k per month capacity at each site, we believe we can actually continue serving the strong customer demand.

And we'll continue to enhance our economic scale on each site and maximize the production efficiency. So that's pretty much what that $3 billion include. And overall, based on that, the overall 2022 capacity will increase about 6% year-over-year..

Okay.

And for the timing - to clarify, for the 32,5k, when is the timing when that would be available for like wafer shipments?.

The 5k a month will be commenced in Q2 2024..

'24? Okay. So that's later. Okay.

And for the $10 billion goal, is it the view, with these projects, you have the capacity? Or do you - like if you think it through, do you have additional space between the China, Singapore, Taiwan to do additional kind of phase? Or do you need to expand further, go to greenfield?.

That's actually a pretty good question. The - let me answer it this way. Our global expansion strategy will continue. First, we'll - our global expansion strategy will continue to follow the stringent, ROI-driven criteria we have been follow. And - but at the same time, we will take us - into consideration our future market outlook and customer demand.

And we - the - we, UMC, we have a very diversified regional production site, like you know. And so we do have the flexibility to assess the future expansion site and to meet those customer requirements. The question about the 12X, the China fab, the - currently, we have fab buildings constructed at both Japan, 12M, and the Xiamen, the 12X.

However, both fab sites will still require additional CapEx to build cleanroom before install tools and equipment. And in addition to that, I think we - UMC has a large to evaluate different expansion option as well beyond the current P5 and P6 in Taiwan. And we will discuss our expansion plan accordingly, but we will evaluate all options right now..

One last maybe for Qi Dong on the depreciation for - if you could give a view this year and initial feedback based on this planned direction for next year?.

So I think the key is really we want to keep this percentage of revenue under control. So we will continue to do that.

And then 2022 depreciation actually will decline year-over-year by approximately 5% or less and followed by a flat to small increase in 2023, which is dependent on the cash based CapEx this year and also next year, because, currently, equipment delivery time is being prolonged..

Okay. And for the delivery, the 20 - the first 27,500, has that pushed out at all? Or is that second half 2023 for the - you mentioned the 5k would be in 2024.

But when would the big capacity be available?.

For both P5 and P6 - just let me get back to P5 as well. So for the - the P5 and P6 production ramp schedule is still on track. The P5, the 10k per month capacity, will come online by Q2 2022, these upcoming quarters in Q2. The -- for the P6, we have encountered some equipment delivery delays.

At the same time, we are working with the suppliers right now, along with the internal engineering efforts. And we will be - shorten the 2 installation schedules and so on. So right now, we still keep the schedule on track. And we -- the angle is to ensure our capacity commitment to our P6 customers..

Okay. And I think....

So that is the Q2 2023..

Okay, Q2. Okay. Yes..

Right..

And then just one last question. The - with some of the costs rising on labor, how should we take the view on OpEx now if more increase or - you mentioned something about continuing on the cost reduction effort.

So how would that trend? And also, some of the subsidy, if that would maintain a similar level?.

Now for OpEx, as I mentioned, yes, we are seeing the trend for labor cost increase. This is really a function of improved profitability. So our goals still remain the same, we hope. OpEx will grow. As a percentage of revenue, it will continue to be under control, even trend down a little bit..

Okay.

Even trend down, meaning in absolute dollars?.

No, no. I mean percentage of revenue..

Oh, as a percent of revenue. Okay, I understand. Okay, Thanks for the incremental color. Appreciate it..

Thank you. Next question, Szeho Ng, China Renaissance. Go ahead please..

Hi. Good day, gentlemen. Two question from my side. The first one, I just wanted to tap your brain on the FinFET market.

Does the company have any plan to go back to the FinFET market or be happy to just stay at the 22 and 28?.

Well, I mean, we never abandoned the 14 FinFET. The - our plan is always keeping the 14 FinFET under the R&D activities. And we have believed at 14 technology, and we are engaging with a number of our customers for the FinFET -- in 14 FinFET. We do not have any plan to go beyond 14.

And we do see that the - there will be very high challenge for us to start addressing the FinFET beyond the 14. So we will stop at 14 at this point, yes..

I see, great.

And the other question, given the fact that we are looking at huge progress on gross margin expansion, and for this quarter, we are guiding for something around 40% for gross margin, what would be the steady state gross margin for the company going forward?.

Well, first, I mean, I will start out with this. The - we do see an increase to the CapEx. And - but at the same time, we will manage and control depreciation through disciplined CapEx approach to maintain the gross margin based on our financial affordability and focus - and instead then focus on our EBITDA margin, the expansion.

We'll invest into the future. So that's the principle that we follow with..

So if I may add on to that. Our comprehensive technology portfolio and our leading customer base, coupled with the - our well-balanced 8-inch and 12-inch diversified offering, and we think we actually are currently having a higher than most of our competitors in terms of EBITDA margin.

And the UMC EBITDA margin, we think there are still room for further enhancement due to mix improvement by specialty technology, expansion of 28-nanometer scale and also some cost reduction efforts, also productivity improvement and potential ASP increase.

But our company margin, especially gross margin, may vary along with the moving depreciation expenses, which derive from the investment for the future.

So again, we will manage our gross margin through disciplined CapEx and balanced with our financial capability and our gross margin, which translate to absolute dollar dividend payout will be in line or higher than UMC's long-term foundry growth..

I see. Okay. Thanks. Maybe last question from my side, yes.

For the net other operating income, is it still fair to assume a quarterly run rate around TW$1 billion, plus or minus, for this year?.

No, no. I mean this is very difficult to predict. And again, this is highly correlated to the share price performance of our....

Oh, no, no. I need the operating and other net operating income, not the non-operating. The net other, yes..

Oh, okay. So that's relate -- mostly relate to the subsidy from our Xiamen operation. It still will be 85%, 90% there for 2022..

Okay.

And how long would that last? Would that go into 2023 and beyond?.

It's mostly on a 6 year scheme. So I think they will last into 2023 and maybe decline in 2024..

Okay, all right. Okay, fair enough. Okay, thank you very much. And congratulations..

Thank you. The next question, Bruce Lu, Goldman Sachs. Go ahead please..

Hi. Thank you for taking my question. I mean a question is, what's your expected foundry growth rate for 2022? TSMC is guiding for 15% to 20%, but your $10 billion revenue guidance suggested like 10% compound growth for the next 2, 3 years.

If TSMC is guiding for 15%, 20%, which means that it's either you are losing market share in 2022 or onward or you're expecting like flattish growth in the coming 2 years, so is there something I missed?.

No. I mean we have a long-term goal to bring the company over $10 billion by 2024. And - but for 2022, despite a lower contribution in wafer demand associated with the work from home and home learning, we still expect structural demand such as 5G, EV and IoT will remain strong. So we estimate the foundry industry growth in 2022 will be around 20%.

At the same time, the UMC is projected to grow in line or higher than the foundry industry for 2022..

I see. Okay.

Then you can easily achieve the target by 2023?.

Well, so $10 billion is not really a numerical target. It's really a goal. So we want UMC to become a $10 billion-plus company..

Of course, I mean, for me, it's a - I think it's an easier target for -- even in 2023. So that's why I was completely confused. Okay….

Right, which will, I mean....

So the next question is regarding....

Go ahead. Sorry, go ahead..

Okay, sorry about that. So the next question is more about the profitability. Your first quarter ASP expanded by 5%, blended basis, which supposed to be like wafer -- a high wafer price and better product mix. And you - this depreciation in 2022 expanded only by 5%.

So theoretically, you should see more gross margin impact because of this ASP - higher ASP.

So why the gross margin only increased by 1%?.

It's approximately 40%. And also, for the 2022, as we discussed, there is some structural change in labor costs also associated with our improved capabilities. And for raw material costs, also there will be some kind of structure change with - in our view, that - just like the structure change take place in the foundry industry.

So for 2022, we anticipate some raw material increase along the rest of the year..

So you mean the non-depreciation cost increased a lot, which offset the impact - offset the benefit from the higher wafer price, is that right?.

Yes. I mean - yes. Basically, we project labor and raw material costs are increasing. And we believe this is not only just the inflation, right, I mean, because the demand outpaces supply. And we see this happening throughout the supply chain. But the labor cost increase is more structural, yes. ..

I see. I understand.

Do you expect to further increase your wafer price to offset the impact because - if the raw material costs continue to go up for the entire -- throughout the year?.

Well, I mean, the -- our ASP strategy is not exploiting short-term opportunistic profit, right? I mean so it should reflect our value and market price which is delivered to our customer. We - at the same time, we want to strengthen our relationship with the customer in the long-term basis and mutually growing with our customer.

And to - for that, our ASP will reflect the market value. And we will collaborate with our customer in coping the rising input costs. And inflation is needed. So we'll continue monitoring that, yes..

But structurally, if the raw material cost is increasing, then -- because your value provided to a customer remain unchanged, you should be able to pass the incremental cost to your customers, right?.

Yes. At the same time, we want to make sure that the customer can achieve their growth as well. So we're closely working with them on that, yes..

Understand. Thank you. I’ll go back to the queue..

Thank you..

Thank you. Next question, Roland Shu, Citigroup. Go ahead please..

Hi, good afternoon. My first question is for your $500 million CapEx pushed out from last year to this year. You said there was due to the extended equipment lead time.

So how about this $3 billion CapEx plan for this year? Will you worry about this extended equipment lead time to continue impact the equipment delivery and also continue impact your CapEx spending this year?.

So the $3 billion is already incorporated in every possible scenario we have - foresee today. So it is the current condition..

Okay.

But your CapEx that is cash based means that you need to see all of the equipment delivered to your fab and then you pay to equipment vendors, then you'll recognize the CapEx, right?.

That's right..

Yes. So....

So we had factored in all the scenario we have seen so far, including part of the tool delays, yes..

Yes. So yes, my question is then how confident you are you can receive all of this equipment you already ordered from the equipment vendors. Since there are now these like supply issues, the equipment lead times have been very long.

So do you see any risk for you to fail to get most of this equipment this year?.

Given the latest update on our supplier, and this will be considered a high confidence. And - but however, they - we continue seeing some delivery interruption in the supply chain. So if there is a further delay, then we have to have a way to mitigate that to keep our original commitment to our customer.

So right now, I mean, for the $3 billion question, I think that, that is -- already consider order delivery schedules that we have updated on our suppliers..

Understood. And my second question now is on your - for your blended ASP in 4Q. So you have about maybe 4% quarter-on-quarter blended ASP increase in 4Q. But I look at your product mix, I did not know - you only had very - only have a 1% higher revenue contribution from 28-nanometer.

So I - basically, I assume your blended ASP increase in 4Q was - mainly come from this like-to-like wafer ASP increase. So how about for the first quarter, now you guide your blended ASP to up about 5%. So how about the percentage from this mix improvement or the like-to-like improvement? Thanks..

For the Q1 ASP 5% uptick, they basically reflect mostly pricing adjustment..

It's a pricing adjustment, yes.

So the product mix will be pretty much the same as 4Q, right?.

That's right, yes..

Okay.

Then for you - for this year, 2022, will you consider to further adjust the price like Bruce asked earlier?.

I touched that the ASP will reflect our market value and our relevance in the supply chain. And it's our projection right now that there will be a - the 2022 ASP dynamic will be similar to the 2021 based on the current view in the demand and supply. And our 2021 blended ASP increased by about mid-teens percentage, yes..

Okay.

So you said that 2022, you expect the blended ASP to increase similar as 2021 versus 2020?.

Right, right. Yes..

Thank you..

Sure..

Thank you. The next question, Frank Lee, HSBC. Go ahead please..

Okay. Thank you. Just wanted to ask about, I guess, the - this idea of the semi content growth. I think you've alluded to that previously in this call as well in the past analyst meetings. I just wanted to - I guess if you guys can give us a bit more color in terms of the semi content growth potentially by node.

Are we seeing semi content growth pickup across all nodes in terms of what you see? Or are there any nodes in particular where you see even more semi content growth than we expected? Thank you..

Well....

Frank, we don't really have the final numbers, but we are confident so-called the UMC addressable market, which is 14 and below, the mature node by many of the analysts, still will show very good growth and may not be as high as the bleeding edge but good enough to let UMC to enjoy the mega trend.

So the simple answer is really across the board -- across most of the nodes for UMC focused - UMC's addressable market..

Okay. So I guess if we're looking at semi content across the board, would you expect that the level of semi content growth that we've seen over the last year to continue to be at the same pace? Or do you think it would start to slow down a bit? I mean just generally, expectations of how you see the semi content continuing in the next 1 to 2 years..

Well, I mean, the market intelligence lead us to believe that the industry -- the mega trend will actually continue to drive positive growth. And it will spread on all nodes. We're just not ready to -- at this point to discuss on by-node basis.

But the -- overall, we think the growth will continue, and -- because we see a number of area have a significant silicon content increase, from the 5G, real estate increases -- the second real estate increases because of more function -- increase of functionality. As well as automotive, you some of the components actually increased by unit count.

So they -- there are many different areas and spread out in the different nodes. And I think that the mega trend is going to drive this industry, continue grow for quite some time, yes..

Okay. Thank you. And then, sorry, just my last question is just, you touched a bit about the auto market as well. Currently, auto doesn't look like it's more than 10% of your revenue.

But the way we should look at autos, should we think about it as a much bigger impact relative to what the revenue occupies of the future capacity going forward? I'm just trying to get a sense of, I guess, the new capacity going forward.

How should we think about the auto space as part of the overall influence on the industry capacity?.

Well, from the absolute dollar standpoint, they -- they're relative small compared to the mobile space, the smartphone space. But they are important because they have a different characteristic. For instance, the auto component has a long life cycle. So they have a longer longevity. And so the - so we all put into that as a consideration.

So for that - so for some of those consideration, our auto revenue portion will actually continue to increase. ..

Thank you..

And next, we have Sunny Lin, UBS, for questions. Go ahead please..

Hi. Thank you for taking my questions. Congrats on the very strong performance. My first question is for next couple of years. Clearly, there's constructive demand drivers for turning edge. But several foundries are expanding and China is also accelerating the investment.

So I wanted to get your thought on how overall supply-demand dynamics could trend next couple of years?.

We - earlier, we kind of touched about the demand. So it's -- our market intelligence lead us to believe that the demand will continue to be strong because of those mega trends reason. On the supply side, based on the announced capacity expansion plan, we do see the oversupply situation at 28-nanometer to happen beyond 2023, not before 2023.

But we still also believe the oversupply situation will be mild and show that - given the 28-nanometer will be a sweet spot for many applications, then expect the demand will continue to migrate to 28-nanometers and that 28-nanometer demand will continue to grow.

And with our strong 28-nanometer product pipeline, we have aligned it with our technology and - based on the market mega trend and those by the global leading customer with the multiyear LTA commitments. Between the LTA coverage and single source, we have approximately 80% coverage capacity.

So we are confident that our 80% - I mean, our 28-nanometer capacity expansion is well protected. But at the same time, we have a pretty good expectation on the -- no, we have actually a high expectation on 28's growth. But that's give you a bit of a demand and supply overview, yes..

All right. That's very helpful.

So the 80% coverage, is that for 28 specifically or for your overall capacity?.

It's for -- what I mentioned is actually for the 28 nanometers, yes. ..

Right.

So would you be able to share with us, if we look at your total capacity across 8-and 12-inch, how many of the capacity is now covered by LTAs?.

They have a very similar - I mean, so the UMC, the LTA and the single source business are actually endorsed by our customers' commitment and confidence in our technology. It's all designed into UMC platform. That's when we discussed LTA and single source. And many of them are single-source products with our differentiated technology.

The total revenue contribution to now is around USD 18 billion, and they continue to pie up. Many of the product are - relate to industry mega trends, fulfilled by our specialty technology know-how. And we expect those product will have a longer lifespan..

Got it. Thank you. My second question is on your gross margin. So after price adjustment, is there still a margin difference between 8-inch and 12-inch? And do you have a gross margin target for next couple of years? I think you mentioned a target for ROE that's above 20%. So I wonder if you also have a goal for gross margin as well? Thank you..

So above - 20%-plus ROE should give you a sense about our gross margin target, which we cannot really give you the numbers. But again, we - our real focus is EBITDA margin, which will continue to show further improvement. Gross margin can vary along with this depreciation curve. And this year, it will be down slightly.

Next year, it will be up slightly but a year after that maybe increase a little bit more. Now our base will also increase after 2 years of compound growth. So we do have a goal for internal purpose.

But the key is really to let our shareholder to receive the dividends in line - in terms of growth rate of the dividend to be in line or better than our foundry growth..

Got it. That’s very helpful. Thank you very much..

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

Sure, thanks, gentlemen. And again, congratulations for your great results. And I really want to consult you some kind of industry assumption you just shared with us. So you also quote that the foundry industry is going to grow 20% year-on-year.

Can you break down the shipment grows versus the ASP increase? Do you think the - is it similar to your company's trend, meaning the ASP increase account for maybe 15% of growth and shipment increases 5%?.

Well, I mean, the - our previous outlook based on the market data is we believe the foundry growth will be about 12% this year. And now we revised to about 20% and largely due to a higher utilization, some of the capacity expansion and also the ASP increase around the industry.

So they're a combination, in our view, and that led us to believe that 20% will be the current projection..

Okay, understood. And if I may, can I ask your -- based on your kind of calculation, what is the foundry - the supply capacity, supply increase over the last year, I mean, 2021, and also this year? According to our calculation, it should be more than 10% last year and should be close to 10% in 2022. Just want to compare notes with your assumption..

Well, I mean, the - we - obviously, we have a - some data internally, the intelligence. But the data may base on a different base. So - and different numbers. So it's - I don't want to mislead you. It's associated with a different base level and different end result. So I think we - you're probably talking about between the 6% to 10% range, yes..

Okay. Okay.

And then about - your communication is more than half of your revenue, right? So can you break down into smartphone versus non-smartphone in that communications segment?.

You mean within the communications segment?.

Yes.

How much is the smartphone?.

Oh, for the wireless, we project it's going to be about 85%. And for the wire, wire is probably going to be about 15%..

Oh, okay. I see. Yeah. So I think I wanted to ask this. It's really to allude to this kind of tech supply chain inventory debate. So I guess first, I suppose it's just very, very near term, right, since you have a exposure to smartphone as well.

Do you see any kind of a slowdown or inventory increase at your customers or channel for any of the segments, not just smartphone but also other consumer tech, PC, et cetera? Thank you..

We kind of touched that a little bit earlier. We do see some of the wafer demand associated with the work from home and home learning as the softness. And the -- on the smartphone side, we also see the -- some softness, but the overall smartphone probably are flattish, kind of the lower end side.

But we do expect the 5G smartphone, the penetration, will still continue. The automotive will continue. And we see a lots of activity on IoT space, too. So those will easily offset the softness. So I think at this point, we believe the demand will remain robust.

If we talk about the near term, I think that for us this year, there are a few challenges, such as Omicron's case, only for tools and equipment we talked about earlier and also innovation, right? So for this year, we'll be focused on working closely with our -- both upstream and downstream partners to ensure the supply, the loading and the managing the cost issue.

So I'm less concerned about the demand for the year, but I'm more focused on the overall, the other factors, yes..

Okay. Just one very quick follow-up, and I will be back to the queue.

So regarding the kind of tech supply chain-inventory assumption, your -- in terms of peers, that the supply chain needs to keep a very, very high inventory probably given the logistics issue, right? But our concern is that for consumer tech, the inventory value could discount, I mean, the products or the kind of chip components.

So in your kind of full year assumption, do you consider timing of inventory correction? Or you think this year - through the year, we wouldn't see a kind of inventory rebalancing for the tech supply chain?.

Well, I mean, the - for the inventory level, right, we -- our data shows it was still at a moderate level for -- the inventory level. And we do see some inventory pile up, whether it's for logistics reason or for the high expectation outlook. There are some inventory preparation reasons, but we couldn't judge that.

But we think on a high level, they're still within the moderate level. And so as long as we - or majority, our focus is on the mega trends. I think it is on a - they're still on an uptrend mode. So we actually have - we still feel comfortable about it right now. However, we both know that foundry is a cyclical industry..

Indeed. Indeed, yes..

And so I think for UMC, I think we're well positioned to weather through the cyclicality of the business. As we -- for the past few years, we've been prepared for this. We are ahead of our competition. Even now, we have a comprehensive technology portfolio that align to the mega trend.

Like I mentioned earlier, we engage with all leading customer, coupled it with a well-balanced 8-inch and 12-inch diversified offering. Well, in addition, we did receive customers' endorsement through the increase of LTA for the future capacity expansion arrangement.

And all the effort we have spent in this past few years, we believe the company has become more resilient in the event of micro uncertainty if that happens. But we haven't really seen any signs they were happening in 2022. But I think that it's more important that as a company, we need to get prepared for it, yes..

Thank you very much. I think that’s very, very helpful. Thank you..

Thank you..

Thank you. Your next question, Gokul Hariharan, JPMorgan. Go ahead please..

Hi. Thanks for taking my questions. I have a couple of questions on pricing.

First of all, when you engaged in price negotiations with customers recently, what is the feedback you're getting from fabless companies in terms of potential for further price hikes, especially after the very big one-off price hike that has been seen from your larger competitor, which probably hits pretty much all the fabless companies across the board? Do you feel that there is more room to travel in terms of price increases from here on? I mean, Q1, obviously, you've seen a meaningful price hike.

But beyond that, how much scope of price adjustment do we see?.

Well, again, we don't take the pricing, the ASP as a short-term opportunistic tool. And so we are closely working with the customer to ensure we have a mutual growth and to capture the market opportunities. So I think right now, they understand our pricing adjustment for Q1, and we're going to be closely working with them.

The -- for UMC, the 2022 ASP projection for the year, we project it's going to be similar to our 2021 number. So that already includes all the product mix as well the pricing adjustment that we have aligned with our customers. So far, I think that -- I think we do have the customers' understanding and alignment on those.

But if the market does continue, that changes and we will work with our customer closely..

Got it. So I think it's probably the biggest level of price increases that we have seen in any of the past 4 or 5 cycles. Roughly, I think if I take your mid-teens price increase, blended basis, in '22, you're probably 30% higher than where 2020 was. Let's say there is a downturn sometime in the future.

How do you think about pricing? Do you think this pricing can hold at generally this level? Or do you feel that there is going to be some level of accommodation needed, especially given the big magnitude of price increases you have seen in the up cycle?.

Well, I mean, that's very good. I mean that's also the logic behind, that we don't go out there just raising price for raising price. The -- for the past couple of years, we tried to realign our ASP to the market price and also reflect our market value. And so I think we have done that in the past.

And now that we -- we're basically at the market price level and that this ASP reflects our market relevance, and so I think the customer has that understanding going forward. The market dynamics, we definitely have to cook that with that in mind. But in general, I think this will stay fairly at what our market price will be, yes..

Okay. Maybe one more question on demand and what customers are doing. I think, Jason, you mentioned there is some weakness that you're seeing in some parts of smartphone as well as some parts of work from home, WiFi, et cetera.

Are these customers actively reducing orders with you? Or they're still tending to keep higher inventory given the supply chain risk? End demand, obviously, I think you can see that as kind of weakening.

But are you kind of seeing that translate to your orders as well? Or are they still tending to keep more inventory?.

Well, right now, we continue experiencing customers' escalations so -- on a daily basis. So I actually have -- like I mentioned earlier, we do see some of the inventory increase on some components, but there are uneven supply situation. And the escalation situation is -- actually remains. It didn't change much.

And we have been closely communicating with all the customer, whether it's auto or the communication or consumer customer. And we have been very transparent and provide a very high visibility for them to understand it. And so if there is a challenge, we will continue to alleviate the shortage situation. But we're still under that mode.

I think we have not seen a sign or signal that we have gone into an inventory - over-inventory situation, yeah..

Got it. Thank you very much. Thank you..

Sure..

Next question, Randy Abrams, Credit Suisse. Go ahead please..

Yes. Thanks for the follow up. I wanted to ask just a follow-up on the LTA then. If you could discuss the - in an inventory correction, the protection.

Is it quantity based where they can defer the quantity? And then is the element also -- any degree of pricing or prepayment involved, like if you could just update the structure of these LTA you've set up..

Well, they - well, the way I would say is well protected for both customer and us. They - we have provided the capacity assurance while we -- while the LTA provides a loading protection in UMC in return. The -- such loading protection includes the volume and the ASP. And so....

Deposit..

Yes, and deposit. But I probably won't be able to go into detail with that, yes, because we do have a confidential clause with our customers, yes..

Okay. And then the other question I wanted to ask, on 28, if you could go through how you see that. Is that -- the way we think about it, it's still about 20% year-on-year the next couple of years because now you have the overall company growing at that pace. Like if you could give an update how you see 28 growing.

And back to your view of, say, oversupply 2 years from now in that node, is the plan by that time we go back to upgrading to FinFET where we upgrade? Or is it your view slow down capacity just knowing we might get to that oversupply situation? So beyond these current phases, making the plan to start slowing down, factoring what other players are doing..

Sure. So for the 2022, the 28-nanometer capacity will grow an additional 20% year-over-year, okay? And beyond the 2022, the - we still have a very high confidence that 28 will be sweet spot, okay, and for many application. So I think the demand will continue. The growth will continue.

And based on our alignment with the customer and the endorsement based on LTA, I think those 28 capacities will protect - as a potential risk mitigation for the 28 to migrate into 14, that option is always there. There's a high commonality percentage of the two that actually we'd be able to convert to 14.

And so I think that option will always be there, yes..

And just the last follow-up on the application. Has there been broadening? You've talked in the past things like the OLED driver WiFi 6, ISP.

When you mentioned the additional surge of business, are there any new promising application sort of sweet spots?.

Well, we're starting the exploration of the 28 non-volatile memory that is starting to get into a discussion. And the ISP will also be in 28 nanometers, which is for the sensor controller. And those - it's all going to be a very strong application, yes..

All great. Thank you very much..

Sure..

Ladies and gentlemen, we are taking the last question, which is from Bruce Lu, Goldman Sachs. Go ahead please..

Thank you for taking my follow up. I have two questions. The first one is your 2021 CapEx ended up with $1.8 billion, which is like $500 million shortfall from the previous guidance. But you just mentioned that maybe some of the tools is pushed out to 2022. So -- which means that your $3 billion CapEx initiative include those $500 million pushout.

Is that the right understanding?.

Yes. Yes..

So - which means originally, we were expecting $3 billion CapEx, but effectively, it's $2.5 billion.

Is that the right understanding from my side?.

That's based upon the current payment schedule. But still, this number is not really -- if you compare it to our larger competitor, it's actually a smaller number to maneuver. So, I mean, this number is -- dynamically adjusts according to our payment schedule. And this $3 billion is based upon our visibility right now..

I see. Understand.

The second thing is that when everyone is expecting like expanding 28-nanometer capacity industry-wide, which means that for other legacy 12-inch like 40 nanometers, which is like no one is expanding those type of capacity and which we also see some of the big shortage of it, do you have any plan to increase the 40 nanometers or other nodal capacity?.

If there is, we will definitely report accordingly. We definitely see that as well. We are seeing the shortage across the -- all nodes. And so if there is any plan on that, we will definitely report that..

Understand. Thank you. .

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

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

Thank you. Ladies and gentlemen, that concludes our conference for 4Q '21. Thank you for your participation in UMC's conference. There will be a webcast replay within 2 hours. Please visit www.umc.com under the Investors/Events section. You may now disconnect. Good-bye. .