Welcome, everyone, to UMC's 2023 First Quarter Earnings Conference Call. [Operator Instructions]. And for your information, this conference call is now being broadcasted live over the Internet. Webcast replay will be available within 2 hours after the conference is finished.

And please visit our website, www.umc.com, under the Investor Relations, Investors, Events section. And 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 2023. I'm joined by Mr. Jason Wang, the 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 patents key message to address UMC's focus and second quarter 2023 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 2023 financial results..

Thank you, Michael. I would like to go through the first quarter 2023 investor conference presentation material, which can be downloaded or view in real time from our website. Starting on Page 4, the first quarter of 2023. Consolidated revenue was TWD 54.2 billion, with gross margin at 35.5%.

The net income attributed to the stockholder of the parent was TWD 16.2 billion, and earnings per ordinary shares were 1.31. Wafer shipments in this quarter come at 126,000 equivalent wafers which was a decline of 17.5% quarter-over-quarter, which also fall in the better end of our previous guidance of 17% to 19% decline for the first quarter.

Utilization in first quarter is as we guided around 70%. For Page 5, the sequential comparison, revenue declined 20.1% and to TWD 54.2 billion. Other than the 17.5% wafer shipment decline, there's also a negative impact of 3% plus impact from the ForEx due to NT dollar appreciation.

Gross margin rate was 35.5%, which is a 34% decline to TWD 19.2 billion. Operating expenses was lower than the level of Q4 last year at TWD 5.78 billion. This is a typical first quarter seasonal factor. So we do expect this number to increase in the second quarter of 2023.

Nonoperating income total reached TWD 4.64 billion, which is quite a significant improvement from the fourth quarter of last year. mainly due to the recovery in the stock market for our portfolio. And net income is TWD 15.38 billion and net income attributable to the shareholders of the parent is with a net income margin of 29.9%.

EPS is 1.31 for the first quarter of 2023. On a year-over-year comparison on Page 6, revenue declined 14.5% and net income declined by 18.3%. So the first quarter of 2022 was 1.61 in EPS, and this quarter is as mentioned, 1.31 for the first quarter of 2023. So on Page 7, cash remained nearly unchanged around TWD 171 billion.

Due to the continuous CapEx, we can -- we have seen our total assets increased to TWD 549.6 billion. On Page 8, our blended ASP for wafer equivalent has inched up in Q1 '23. For Page 9, our geographic breakdown.

For revenue, Asia showed a bigger decline from 54% in the previous quarter to 50% in the first quarter and every other region has increased sequentially. And for Page 10, IDM has shown a stronger growth in the first quarter. Now the percentage of revenue reached 23% when tablets represent about 77% of our total revenue.

In terms of segment breakdown on Page 11, this quite meaningful mainly driven by when computer and consumer and also communication are all showing some decline in percentage of revenue.

On Page 12, our revenue for 14-nanometer technology and below represent around 41% of our total revenue, although 28 and 22 nanometers still on 26%, so about 2% decline from 17% to 15%. Q1 2023 was the lowest point in terms of available capacity, mainly due to the annual maintenance schedule for selected sites.

Quarter 2, you will go back to the normal. And also on top of that, will be P6, our Tainan fab expansion will start to kick in, and we can see the capacity increase for fab 12A. So overall, we will see a low single-digit increase in our available capacity from quarter 2 2023. On Page 14, our annual budget for CapEx remain unchanged.

-- around $3 billion. And it's going to be a little bit front-end loaded in the first half and 90% will be related to 12-inch expansion and 10% is more related to 8-inch capacity. So the above is a summary of UMC results for first quarter of 2023. More details are available in the report, which has been posted on our website.

I will now turn the call over to President of UMC, Mr. Jason Wang..

Thank you, Chi-Tung. Good evening, everyone. Here, I would like to share UMC's first quarter results. In the first quarter of 2023, our business was impacted by sluggish wafer demand as the customer continue to digest elevated inventory levels.

In line with the guidance previously provided, wafer shipments fell 17.5% quarter-over-quarter and utilization rate dropped to 70%, while average selling prices stayed firm during the quarter. Better in a less favorable foreign exchange rate, revenue in the first quarter fell 20.1% quarter-over-quarter.

Despite lower utilization, gross margin remained firm at 35.5% and reflecting improved structural profitability and optimize the product mix. Although demand weakened across major end markets, our automotive and industrial segment posted growth during the quarter. Automotive sales, in particular, accounted for 17% of overall first quarter revenue.

While this partially reflects decline in other segments, we expect automotive to remain a significant revenue contributor and growth -- key growth driver for UMC going forward as the IC content in car continue to increase driven by electrification and alternatives driving.

Entering the second quarter of 2023, we expect customers' inventory correction to linger given the softness in overall end market demand. As a result, our wafer shipment will be flat this quarter. Meanwhile, the company continues to implement strict cost control measures to ensure our profitability remains intact through near-term cyclicality.

Going forward, we believe our strategy of focusing on the development of a differentiated solution across numerous larger and specialty technology platforms such as , RFSOI, BCD will help us secure future business and expand our presence in the IC industry.

While positioning for the future business growth, UMC is also committed to maintain a high dividend payout ratio. In Q1, the Board of Directors proposed to distribute a cash dividend of approximately TWD 3.60 per share, subject to shareholders' approval. Now let's move on to the second quarter 2023 guidance. Our wafer shipment will remain flat.

ASP in U.S. dollar will remain flat. Gross profit margin will be in the mid-30% range. Capacity utilization rate will be in the low 70% range. Our 2023 cash-based CapEx will be budgeted at. That concludes my comments. Thank you all for your attention. Now we are ready for questions..

[Operator Instructions]. And our first question is coming from Randy Abrams, Crédit Suisse..

Okay. Yes. I wanted to ask the first question. It looks like on your guidance, second quarter stabilizing.

Could you actually give a view an initial view into second half? How you see the where you cite the slow demand and it's keeping the inventory digestion a bit slower? Do you expect those factors to spill into second half? So if you could give an initial view on second half.

And in that context, if you have an update to, I think last quarter, you had foundry down mid-single digits in your own TAM down low teens.

But if you have an update on that full year view factoring how you're seeing the second half at this stage?.

Sure, Randy. Looking into the second half, while we foresee the furnace in 22 and 28-nanometer demand, we have not seen -- we have not yet seen a strong recovery in the end market yet, okay? And given the weaker than anticipated end market environment, we have seen the pace of the inventory dejection moving slower than expected.

So we have not seen any sign of a strong recovery for the second half yet. For the outlook, the 2023, we estimate a semi forecast will further decline from low single digit to a mid-single digit year-over-year for the foundry. And we anticipate it well worse than previous quarter estimate of a mid-single digit.

Now we're changing to a decline of high single digit year-over-year..

Okay. And do you have your -- you have an estimate for -- I think I have at your TAM last quarter was low teens. I don't know if you have an update on -- because I think that excludes the advanced products that you don't address..

Right. I mean given the UMC's end market witness, we still hope to minimize the UMC exposure to be in line with our addressable note while preserving structural profitability. With the worse than -- the worst outlook than we predicted from last quarter, we do see that number will actually probably a larger bid yes..

Okay.

And for the applications, the relative strength was the auto and probably alongside the IDM, do you see that remaining strong area continuing into second half? Or is it also -- like how do you see the inventory build up after that strength? And how do you see the sustainability of shipments to that channel?.

Well, first of all, like I said, we haven't seen any strong recovery and all segment will remain flat from Q2. For the automotive, the replenishment in automotive segment may have picked in Q1 2023 after the strong growth in the past 2 quarters. Longer term, we expect automotive business will continue to grow on an annual basis..

Okay. Implying has peaked.

Is that implying the business has peaked because there is content growth, so the restocking replenishment peak? But do you think that's also kind of a comment on that segment, at least for the near term may have also peaked?.

Yes. Yes. Yes, for the -- if we look at the auto outlook, the -- while we anticipate our automotive business will continue in a strong momentum and outpaced the CAGR for the worldwide automotive semi industry projection.

And as a goal, we'll probably reach mid-teens as a percentage of the revenue for this year, okay? So we still think this is a -- it's going to be a growth driver for us. But if you look at the near-term replenishment momentum, it probably peaked in the Q1, yes..

Okay. Yes. It sounds like it was 17%. So 15%, I guess that implies a bit lower percent of sales. Okay. So the last thing I want to touch just the 28-nanometer, it looks like it declined a bit more than corporate average in the first quarter, so a little bit over the 20%.

Could you discuss the view just on that note because I think in the remarks you mentioned it seems like it will be relatively tighter.

So how do you see 28 relatively faring? And if I could ask you just competitive landscape for -- like you've done very well on the high voltage and the OLED drivers, how you see from like your Taiwan and China rivals competition there?.

Let me say -- there's a few different ....

Two parts -- yes, sorry, two parts..

First of all, we don't think the 28 decline rate is higher than corporate average, it's probably in line. So maybe we can provide you with a detailed calculation later on. But our outlook for 28-nanometer actually is one of the better segments. Maybe Jason will comment further on that..

Yes. For the 28 loading -- well, first of all, like Chi-Tung said, we probably can provide you more detail on that data. But in our view, the loading will gradually improve over the next few months and will soon exceed about 90% of the loadings. And the 28-nanometer application includes the OLED driver, DTV, Wi-Fi 6 and 6E.

And we actually foresee a furnace in 22 and 28 demands, which will be fulfilled with additional capacity come online as well. So we actually feel fairly confident about that.

The -- you also mentioned about the competitive landscape as well, right?.

Yes. That was more on like the OLED driver part if like your Taiwan and China rivals are making inroads there..

Well, I mean, for the 28, in general, we actually remain very confident with our 28 and 22 business. You're talking about the OLED particularly and for our OLED drivers, we believe we deliver much more superior power consumption performance area adventure compared to any industry peers.

And so our leading position of 22 and 28 technology will be reflected in our market share in that driver space. And this will actually continue. ..

Okay. Great. Good to see that area holding up well..

And next question is from Brett Simpson, Arete Research..

I wanted to ask about your recent extended LTA with Infineon. I think you announced this back in March, it was 14-nanometer. It looks quite a sizable agreement.

Can you maybe talk more about this agreement and when it maybe starts to ramp up? And how should we think about the size of this deal?.

Well, I mean, we typically don't comment specific on customers. But they are part of our auto market focus, and we will continue working with the key automotive semi supplier like Infineon and through the JDP and capacity expansion.

This recently announced a long-term agreement with the customer on the 40-nanometer nonvolatile memory MCU is serving the auto market. And we actually have -- we are actually very excited for such engagement, and we're looking forward to the growth of that.

The LTA specifically, LTA is actually a 2, it also becomes more of a common practice in the semi industry now because the industry is to recognize this -- the semiconductor supply is essential. So to plan and future mutual growth the strategic customers are waiting to do this long-term agreement with us to secure the capacity.

So for this particular relationship is covered such arrangements..

Can you maybe just confirm how your LTA pipeline looks? I think you've talked about TWD 18 billion previously.

Has that -- can you give us an update on what that number looks like today?.

Well, they're still in a similar range. They didn't have much changes. Most of our LTA agreement remain intact. We see slightly increase and -- but we also see some adjustments. So they still stay in the relatively same range..

Okay. And I just had a 2-part question on China, if you don't mind. One, can you give us an update on the China JV. I think you've signaled your intent to buy out the remaining ownership. Have you got approval from this from the Chinese government? Is that still on track? And then the second part of the question is, we saw the U.S.

government introduced a new national defense outlay last year, which is likely to trigger U.S. and maybe also European fabless companies moving away from using Chinese foundries.

Can you maybe -- are you seeing any benefit from this? Have you -- are you anticipating any boost from migrations perhaps to use UMC?.

Yes. For the first question regarding UMC buybacks, we have retained all the necessary approval already. And we are going through the previously agreed contract. So I think it's moving along smoothly. So we do expect to close the deal in short range of time. So it should be happening this year..

For your second question about the current geopolitical dynamics. The -- first of all, we think this all this dynamics affecting the customers' supply chain resilience planning. All customers need to looking into this and started evaluating their supply chain resilience. And UMC is definitely part of that consideration.

And while we have a very diversified capacity between China, Taiwan, Singapore and Japan, that does give us a much better option to work with our customer. And in that context, we do see actually 2 ways. One is we're seeing some customer is moving product to other locations outside of China.

But at the same time, and we also see some of the customers adding the gift to take advantage of the China gap that creates. So we -- given our diversified spaces now across Asia and with the comprehensive technology offering, net-net, our product mix will be balanced between all our fabs..

Next question, Bruce Lu of Goldman Sachs..

The first question is regarding to your ASP. Can you help me to understand that your first quarter the 20 and 40-nanometer revenue contributions lower, but your ASP is 1 notch up.

And also, when you guided for second quarter, which is flattish, but you did increase your 28-nanometer capacity in the second quarter, which is supposed to be the blended base ASP should go up.

So can you help me to understand the ASP trend, especially when we have a lot of work but someone is cutting the price or you try to offer a lot of like as discounts to your customers, but you didn't show up on your results.

Well, I mean, like you said, the blended ASP is a result of the product mix and -- so any mix change will probably affecting the result of the blended ASP. And as of now, given our current projected product mix and not mix we believe our blended ASP will be burn quarter-over-quarter. It will probably be flat.

Now as far as the pricing strategy, our pricing strategy is to closely working with our customers to uphold their competitiveness and relevance in their respective market space and secure their market share. And based on that strategy, our Q2 ASP outlook will remain first.

The -- in our consideration in pricing, it's not just based on the pricing only, you also have based on the value proposition, supply chain relevance and so the EO technology offering and so on. So all that is part of the ASP consideration, the pricing consideration. And with all that included, our current ASP outlook will remain firm..

I see.

But does means that is a like-to-like basis or company average branded ASP for second quarter?.

Well, I mean, first of all, for the second quarter, the newly at 12A P6 capacity is quite minimal. We actually cannot change the equation for yet. It's still in a very small volume..

I see. Understand. Okay. Then I want to switch gear a little bit for 8-inch. I'm actually pretty surprised to see around like 5% capacity expansion for your 8-inch. And I believe 8-inch capacity [indiscernible] is one of the -- is at the lower end or even lower than your corporate with capacity expansion.

So what kind of like product or what kind of new products we are looking at to do to is of the 8-inch capacity tension throughout the year? Or can we expect some like new product in 8-inch?.

Well, I mean, the capacity result now is actually came from some of the effort we have spent in the past. It's actually coming 2 portion of that. One is the we have done some of the maintenance on the previous -- I mean, in Q1.

And so once the -- those will probably affect the Q1 output and so in Q2 without the maintenance, the number has actually gone up. Secondly is we continue with our streamlining process and the productivity improvement. So that will also reflect. And those efforts is accumulated from in the past and it just started kicking in Q2.

It does not representing the overall demand. For the 8-inch outlook, the -- we have, first of all, in overall 2023 outlook, we have not seen any sign of 8-inch recovery in the foreseeable future. We definitely not immune from the market down cycle for the 8-inch. So we are impacted by that.

We have observed the 8-inch business recovery will primarily depend on incentives, given that the competitive landscape in certain market segments, which are highly sensitive on pricing.

So in short term, our pricing policy will remain firm, while UMC will continue to differentiat the solution and maintaining our customers' competitiveness to secure or protect their market share. And longer term, we'll continue working straight to optimize our product mix and the customer portfolio. So they are some projects near term.

But in the longer term, we still focus on the product mix improvement..

Next question, Sunny Lin, UBS..

So my first question is 28-nanometer.

I just wanted to quickly confirm, earlier, did you mention that the utilization will be able to improve to 90% or higher by end of this year?.

Yes, yes..

Got it.

And so I wonder for your P6 expansions, could you remind us your later schedule for capacity expansion by end of this year? What's the current LTA coverage for this expansion?.

Well, the P6 start ramping, the starting point is the Q3 this year and in a small volume, and we'll reach 12,000 by end of the year, the December time frame. And all RPs covered by the customers' commitment and all those commitment and business momentum is on track..

I see. And I think before you did tell us that for new expansions given the higher cost. And so the pricing will also be higher.

And so should we assume for your broader ASP as P6 start to ramp into late this year? Would that be going up?.

Well, I mean, we will provide our ASP guidance, the outlook 1 quarter at a time, given the current market dynamics. So I will prefer probably provide that information 1 quarter at a time..

Sure. No problem. And so second question on -- also on China, but it's about the competition. And I think recently, a couple of equipment makers like ASML, [indiscernible] Research mentioned very meaningful pickup for China orders.

And so I wonder if you would be concerned at all about the increasing China competition for mature foundry?.

I mean we always face fierce competition. The foundry business it is capital intensive. So some of the capital investment in terms of putting capacity in, it's not the only better for foundry to success. It is easier to enter the foundry space and putting it to end. However, it requires a lot more to become a successful foundry players.

And we believe that UMC is well positioned as a foundry player with our comprehensive and competitive offering..

Got it. Sorry, maybe one last question on pricing. As of now, despite the easing supply constraint. I think everyone was surprised that the mature foundry pricing has been holding up [indiscernible].

So I wonder what do you think you and your peers are doing differently in the current down cycle versus before? And do you think these changes will be sustainable going forward?.

Well, I mean, I don't know how to comment on our peers. But in terms of our pricing strategy, I kind of mentioned earlier, is to closely working with our customers to uphold their competitiveness and in their respective markets to protect their market share. So we are working with our customers to strengthen that.

However, the -- in order to be competitive, it's not just pricing. You also have to look at your technology, your improvement, your capacity support. And net-net, to how to strengthen our customers competitively is a more of a holistic view.

And we will strive to do that with our customer, and we definitely will working with them and to make sure that we gave them the best support that we can. Meanwhile, also showing our view about our pricing consideration in terms of how to provide them with the value proposition..

Next question, Charlie Chan of Morgan Stanley..

Just want to clarify. Did you say that your addressable market forecast is now down high teens.

Is that right?.

Well, I mean I think, Charlie, to be honest with you, we're actually tracking this market outlook. And just like we mentioned earlier, quarter-over-quarter, we actually see that is further declining. So the market is being very dynamic right now. The 2023 will be a challenging year.

We continue collecting the market data, and we -- and try to tracking as close as we can. We just see the market actually is going to be much slower than we anticipated, that recovery is going to be much slower than we anticipated.

And so we more focus on now is to minimize our exposure and hopefully, we're going to be in line with our addressable market notes. And we do know it's going to get worse than last quarter, but I can't really give you a clear guidance on how much is that yet..

Okay.

But you said that you hope to grow in line with the addressable market, that's something you want to ensure?.

Let's probably not going to use the word of growth, but we try to be [indiscernible] addressable market..

Okay. [indiscernible] addressable market, just kidding. Yes.

So I guess a is still confident that the first half will be trough of your fab utilization? Or you think that the quarter could be the trough?.

Well, I mean, for the Q1, we have observed that revenue is consolidating at the bottom now. So we do not expect the business environment to get worse for However, we have not seen a sign of a strong recovery in the next few months. I think that's sort of the visibility that we have today..

Yes, the time horizon is just the next few months. So anything beyond that, it's unclear for now..

Got it. Yes, in terms of the end markets, so first of all, any bright side or green shoes.

We note said there are some kind of recycling for PC, TV, that you're seeing any similar trends back that?.

Mean we see some short-term momentum. So for Q2, the computer segment will remain flat the consumer will remain flat, communication will remain flat and as well as automotive remained flat. So compared to the Q1, communication consumer computing is all declining, right? So we see some of the very light and momentum on those segments.

But at the same time, we see the automotive since peak in the Q1. So it's -- we haven't really seen a strong recovery, but we see some bottoming. But again, this is given our current visibility. And our the visibility for second half is still baked, yes..

Okay. And I'm not sure if the company has any exposure to AI or generative AI type of products.

If you do, can you share some of the trends there?.

We have not. Even there is, it's not going to be any significance. So I'm probably not in the best position to comment that, yes..

Okay. Okay. That's fair enough. And lastly, the pricing strategy, right? So let me try kind of a different way. So you said that you worked to get to help your customers to protect your market share. But unfortunately, if the lower price is the only way to prevent them to lose market share to their competitors.

Would you support them in terms of wafer pricing? I know technology development, capacity support is kind of an ongoing process, right? Pricing support could be more immediate. So what would you say about that situation? Customers really need your pricing support..

Well, you asked it differently. So the simple way to put it is we always will hear what our customers base. And we will work with them closely and to find a way to protect their market positions.

And the -- another way to look at this is we actually -- it's more of a balance that and we look at the overall blended mix and we look at overall the portfolio and are also try to maintaining our profitable stability. So the -- hopefully, to gear up with the goal of a blended ASP with a flattish direction.

So I think there is a lot of dynamics, a lot of discussion that we need to have with our customer, and we will work with them closely..

Yes. Yes.

And just in general, right, not only specific to your company, which process nodes or type of process that you see commoditization, meaning pricing depreciation could be -- pricing would be the only differentiation?.

Which segments ....

Yes, for [indiscernible], 0.13 micron, [indiscernible], yes..

I think the most obvious one is the 8-inch business. In the 8-inch business, there are certain segments that are more sensitive to the pricing. And there are certain market segments within the 8-inch are sensitive to the pricing..

Okay. Yes, I mean, we ask less of this. But is it to me? I mean, gross margin sustainability is most important, if you compromise a little bit about your quantity, right, your stabilization can go up that could be okay for margin. So very, very last one to Chi-Tung. I think company has been holding margin very, very well. at mid-30% gross margin.

Do you think that is a sustainable trend into second half?.

I cannot comment on that, but we do everything we can to bring down the breakeven point and also a very disciplined CapEx. All the effort is really to have Brazilian structure profitability. So I think we are seeing some of the results we work over the past few years. Of course, semiconductor is extremely cyclical.

So we have our effort put in, but there's also the whole big cycle, cyclical impact. So all I can say is if this is a trough profitability, certainly, we have seen the improvement already, and we will continue to work on that.

As for the number, the range, I cannot really give you a number, as I just mentioned, the cyclical impact is this hard weighting sometimes our effort. But overall, I mean, it's already an improvement from the previous down cycle..

If I may, I think that Chi-Tung has well set. But in addition, we do actually foresee challenge in the business condition, like you said. And not only that, in addition, they are rising costs and unfavorable ForEx consideration as well.

So we -- like Chi-Tung said, we will strive to offset those headwinds as best we can with our effort on the product mix optimization, cost reduction activity and streamlining our process flow. So we will do everything we could to continue this yes..

Next question, Gokul Hariharan, JPMorgan..

First of all, maybe I focus on 28-nanometer capacity expansion your larger peers kind of step back on some of their 28-nanometer capacity expansion recently, and the UMC currently has demand for the 12A P6 expansion.

But any thoughts on how you think about 28-nanometer expansion over the medium term, especially as we think about the expansion in Singapore any change in terms of plans, in terms of 28-nanometer demand supply that you see at this point in time?.

First of all, with our CapEx strategy, we try to be as disciplined as possible with the follow our ROI guidelines. And as far as for the 28 business, we remain confident of our 28 and 22 business, mainly from our differentiated and customized technologies.

In addition, our 22 and 28 manufacturing capabilities such as EO, cycle time quality provides a compelling value for our customers. together, like I mentioned earlier, with the geographical diversified capacity offering now that we can offer them in Singapore or Taiwan and the customer and the customer's alignment.

And this actually will support our long-term mutual commitments and for all across diversified market segments. And last is not least the 28 and 22 is a sweet spot for many applications where the demand will continue to grow with our strong product pipeline, the overall demand and supply dynamics will not change our long-term relevance in 22 and 28..

Okay. Got it. So in terms of the CapEx of TWD 3 billion, and it looks like you've already spent about 33% or 30% of that in Q1.

Could we get a little bit more granularity in terms of the TWD 3 billion CapEx spend, especially for the 12-inch portion? Is it mostly going to be for P6? Or is there also some spend for Singapore coming in this year?.

All included in our calculation and assumption, of course, we dynamically adjust our CapEx need and sometimes we reprioritize the different projects. But for the time being, as I mentioned, it's going to be first half heavy in terms of our quarterly CapEx spending. So it will be locking up in the second half of this year.

So TWD 3 billion is our current projection. ..

Okay.

And what is the composition? Is it mostly for 12A P6? Or is there some Singapore-related spending also built into that TWD 3 billion budget?.

Largely reflect the 12A P6 expansion in 2024 and some portion to 12I P3 investments..

Got it. And maybe if I move to automotive, Jason, could you give us a little bit more detail in terms of your automotive exposure today? I think 17% of revenue is probably one of the highest among the foundry space.

Is it mostly -- like by node, is it mostly 90 and 65 and by product, is it mainly MCU? Or is it a little bit more broad-based into some of the and power applications? Could you give us a little bit more detail in terms of what your automotive comprises of today?.

It's a combination of 8-inch and 12-inch and the -- there's not much of IGBT, mainly is on the BCD and the MCU space..

Got it. And on the near term in automotive, so I think you did say that Q1 is likely to peak in terms of inventory replenishment.

Are you seeing customers tuning down the auto expectations now? Or is it just that there will be change in plans, but the momentum is just kind of peaking out in Q1?.

Well, I mean, we start seeing the momentum from automotive space and second half last year. And so they start picking up a pat the Q1. So it's been 3 quarters now, and we see some of the product they already get situated at a healthy inventory level. And so that's why we see some of the slowdown on that momentum.

But from year-over-year, point of view, but we still see a significant growth on the automotive space. And the automotive space will remain to be one of the growth driver for us from a year-over-year standpoint..

Got it. That's very clear. Maybe one last question on depreciation, Chi-Tung.

How should we think about depreciation through this year? I think your guidance was for slightly down this year? But when do we start to see some of the new CapEx hitting the depreciation? Is it more in second half this year? Or we should expect more in 2024 rather?.

In this year, we still expect to see a low single-digit decline compared to that of last year. And quarterly probably Q1 will -- or Q2 will be the lowest point. And -- but the difference is very minimal. So it's going to be quite flat for the quarterly distribution..

Next question, Szeho Ng of China Renaissance..

I have a quick question on your 22 and 28 nano portfolio.

Roughly speaking, what's the split between the 2 now from the revenue contribution standpoint as from now and also 3, 5 years start open have the peak sales and also the Singapore fab expansion completed?.

Well, we start seeing the initial ramp of 22 this year. So they're still representing a smaller portion of the 22 and 28 business. But we do see the 22 will be -- right now, that grows very quickly starting from 2024 and so -- but in terms of the ratio of the 2, it was subject to a different product mix.

So -- but I do think the 22 will also be a minimal run rate for us..

I see. Got you.

To assume that you will be more than half, right, where we have order capacity ramp up?.

Well, I mean, our capacity can support both. So in terms of the ratio that was subject to the end markets. So from a capability standpoint, yes..

I see. All right. And next question maybe for Chi-Tung.

What should we expect for the dividend policy going forward? Should we assume it based on the payout ratio perspective or from an absolute dollar perspective?.

So I'm more likely to be a hybrid consideration. And we did mention that it has to be over 50% of our earnings will need to be paid out in cash. That's in our stated dividend policy. But in absolute dollar terms, we will also consider that as well.

So it's more like a hybrid and consistency and stable dividend payout will be our summary for dividend policy..

Okay. All right. Fair enough..

Next question, Niklas Baratte from Macquarie..

Yes, given the higher CapEx in 2022 and 2023, what kind of capacity increase do you think you have in 2023, 2024?.

Yes. Each year, we are budgeting around 5%, 6% also of capacity increase. But as we mentioned earlier, our CapEx number, we dynamically adjust that and reprioritize certain projects. So according to the market conditions. So I think 5% also is the numbers for the next -- this year and next year..

Next question, Frank Lee of HSBC..

Just wanted to ask a question a little bit in terms of the overall guidance that you guys have talked about and the overall tone. It seems like from what you're seeing units and shipments, 2Q should be basically flattish or bottoming.

But overall, I guess, tone that we're seeing is that demand recovery has been very clear and auto has potentially peaked. And also looking at your utilization rate is actually going to go up, but your capacity is increasing, but unit shipments are flat. So just trying to get a sense of maybe the overall turn versus the guidance.

Are there any company-specific issues that -- then we need guys to continue to grow more share or anything that we're missing?.

Just base capacity was lower in Q1 because of the new maintenance. And quarter 2, of course, the base went back to normal. And on top of that, we have some additional capacity increase. And there's always a wafer ship, wafer out time delayed in a very minimum way. So overall, it's a flattish outlook for second quarter.

And yet, we do see some bright spots like our 28 demand is firming up. And the 8-inch outlook seems getting a little bit deteriorated. So there's a mix factors out there on top of the rising raw material costs and the unfavorable following. So all kind of mix up and lead to our current flattish quarter 2 guidance.

We are confident for what we have done our company specifically, but for the recovery of the market consensus, we just want to point out that we haven't really seen a very clear signs for a strong recovery as previously, the market was hoping..

Okay. And can I just ask a follow-up on -- you've mentioned the auto business has peaked in Q1, but your IDM business has continued to ramp up quite nicely.

Is there a mix of auto that's part of this IDM? And with auto slowing, is there a potential impact on IDMs be slowing down or not growing as fast as we've seen in the last couple of quarters?.

I mean the IDM includes the auto and also the non-auto business. So in general, we do see our IDM portion of the business actually increased, not 100% coming from the auto market..

And next one, Laura Chen of Citi..

Just a very quick follow-up, also on the IDM business as we see quite solid momentum in Q1. So just wondering what kind of technology node and also application. You just kind of sort of talk about the automotive exposure in the IDM space.

But just wondering that what's your order visibilities of the IDM outsourcing in the second half? Or also like what's the percentage of the IDM business in like consumer and communication application?.

Well, I mean, in addition to the outdoor segment in the IDM space, which is provide some growth for the quarter. And we also continue seeing the -- our momentum in the 22 -- I mean, sorry, the 28 and the high-voltage space. as well as the larger in ISP area so the -- which is associated with the mobile space, yes..

Okay. But at the same time, you are also saying that the overall demand recovery seems to be quite remote into the second half.

But on the IDM business specifically is the solid order visibility at the moment, am I correct?.

We do see that space is actually fairly stable for us, yes..

Next one, Rick Hsu of Daiwa..

Just one question from me regarding your 28-nanometer.

Could you guys give us more color about your percentage of revenue contribution ramp up into the second half? Would that be possible exceeding 30% in the second half?.

The base is actually predictable either. So -- but we are saying the utilization rate is going to see 90% in second half. But it's difficult to give you a pinpoint percentage of revenue given that we are not 100% sure about our revenue base yet for the second half. But certainly, it will improve gradually..

Yes, that's pretty helpful about this over 90% utilization rate for second half. And just a quick follow-up regarding your pricing. Do you expect any price elasticity to kick in, in the second half? Because the reason why I'm asking is because I recently talked to some of your key customers.

And they told me they believe that in the second half, if the demand recover and they are able to give you guys more volumes than you'll probably be happy to give some price discount to these guys with the volume increase, so -- or what you think?.

I mean, we'd be happy to discuss that when that happens. Right now, the elasticity of the demand is still not clear to us. And if we start seeing a strong sign of recovery, and then we definitely were looking into that.

Again, the -- we have many different consideration for the pricing, right? So I have say multiple times earlier already, and we will -- we definitely will work with them closely to make sure that we well communicated and all consideration being explored, and hopefully, we can reach the mutual benefits..

And ladies and gentlemen, we are running out of time, and we're going to take the last question. And the last one is Bruce Lu, Goldman Sachs..

Thank you to giving the second. I want to ask about like the capacity expansion plan. I think you are one of the -- only one who doesn't really kind of CapEx for this year.

I mean, do you consider to renegotiate the LTL with your customers for a further delay for your 28 because the capacity expansion all the oversupply situation, [indiscernible] definitely not as good as a couple of years under 2 years ago? And do you have any customers trying to push out the schedule by a quarter or 2 or anything like that?.

Well, I mean when we observe the weakness of the market change from last year, end of last year, many discussions already took place. And we have realigned with the customer, we have reset the demand outlook. And the -- some of the conversations have already been discussed, and we have already realigned it.

Currently to plan the mutual growth going forward, and we continue tracking those engagement, and we continue to review them on a regular basis. At this point, our P6 ramp still on track. If there is any changes, we will update you, but there's no change at this point..

It needs no change, which means that your CapEx will remain at elevated levels even for 2024?.

Well, I mean, for now, like we said, our CapEx TWD 3 billion has not changed, but we always have a contingency plan in place to adjust the CapEx if needed. Changing our CapEx will depend on the macro conditions, industry will make a trend and customer long-term business alignment.

And like I said, alignment started end of last year on a continued basis, if there is any changes, and then we have to kick in the contingency plan. But at this point, I mean, we -- at this quarter and our CapEx budgets to remain the same..

Yes. One last one is for Chi-Tung. The government also is down well like 30% in first quarter.

Is that a new level in coming quarters? And when is the subsidy going to end?.

A majority of the subsidy linked to the depreciation schedule of our 12X in Xiamen, and the depreciation for Xiamen has nearly come to a net. So that also reflects. So basically, we got money first in our pocket. And the recognition will go along with the depreciation schedule. And the depreciation now is coming to an end.

So the number will gradually to come down..

So we have a model like gradually come down coming to orders?.

Yes. It's coming down along with declining depreciation expenses for our 12X. So on one hand, the depreciation expenses will come down. On the other hand, the subsidy we recognize on book will also decline..

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

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

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