Welcome everyone to UMC's 2024 Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question-and-answer session. Please follow the instructions given at that time if you would like to ask a question.

For your information, this conference call is now being broadcasted live over the Internet. 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. 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 second quarter of 2024. I'm joined by Mr. Jason Wang, President of UMC; and Mr. Chi-Tung Liu, the CFO of UMC. In a moment, you will hear our CFO present the second quarter financial results, followed by our President's key message to address UMC's focus and third quarter 2024 guidance.

Once our President and CFO complete their remarks, there will be a Q&A session. UMC's quarterly financial reports are available at our website www.umc.com under the Investors Financial section. During this conference, we may make forward-looking statements based on management's current expectations and 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 second quarter 2024 financial results..

Thank you, Michael. I would like to go through the 2Q24 investor conference presentation material, which can be downloaded or viewed in real time from our website. Starting on Page 4, the second quarter of 2024, consolidated revenue was NT$56.8 billion, with a gross margin at 35.2%.

The net income attributable to the stockholder of the parent was NT$13.8 billion, and earnings per ordinary share were NT$1.1120. In the second quarter, our wafer shipment increased 2.5%, quarter-over-quarter, to NT$831,000, 12-inch wafer equivalent in the second quarter.

Utilization rate in the second quarter was 58%, compared to 65% in the previous quarter. Revenue grew by 4%, quarter-over-quarter, to NT$56.8 billion. Other than the 2.5% Q-o-Q wafer shipment increase, the other was helped by the weaker NT dollar exchange rate. In the gross margin, as we mentioned earlier, was 35.2%, or nearly NT$20 billion.

With the help, minor help from the non-operating income, the total net income reached NT$13.77 billion, and the net income attributable to the shareholder of the parent was NT$13.78 billion, or NT$1.11 EPS in the second quarter.

For the first half of 2024, our revenue was almost flat, compared to the same period of last year, which was NT$111 billion for the first six months of the year. Gross margin was around 33.1%, or NT$36.8 billion. And net income margin is around 21.8%, or NT$24.2 billion. EPS in the first half was NT$1.95 per share.

Our cash level is around NT$121 billion, and our total equity at the end of the second quarter of 2024 was NT$356 billion. ASP remained flat in Q2 of 2024. In terms of revenue breakdown, Asia gained about 1% of the revenue distribution to 64%, when North America stayed unchanged at 25%.

IDM declined notably from 18% in the previous quarter to 13% in Q2 2024. Communication also declined from 48% in the previous quarter to 39% in quarter two. Consumer and computer both grow by single digit percentage respectively.

20 to 29 revenue continue to be around 33% and 40-nanometer declined from 14% in the previous quarter to 12% in this quarter. Capacity at the 12A continue to increase and in the third quarter of 2024, our 12A capacity will reach 400 above 1000 12-inch equivalent wafers in the third quarter.

Currently, the estimate for 2024 CapEx remain unchanged around $3.3 billion. The above is a summary of UMC results for Q2 2024. 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 second quarter results. In the second quarter, wafer shipment increased 2.6% quarter-over-quarter and fab utilization rate improved to 68% as we saw notable demand momentum in the consumer segment.

Contribution from our 20 to 28 nanometer business rose sequentially on healthy demand of Wi-Fi and digital TV applications. Together with a favorable exchange rate and improved product mix, second quarter growth margin was better than what we previously guided to.

During the quarter, we announced the technology updates, including a 3D IC solution to stack RFSOI wafers, which is the first of its kind in the industry, and a 22-nanometer embedded high voltage platform, currently the most advanced display driver foundry solution in the market.

They reflect UMC's commitment to building on our leadership across a number of specialty technologies that are crucial for the development of AI, 5G, and automotive. Looking to the third quarter, we expect to see end market dynamics improve further, particularly in the communication and computing segment, which will drive higher fab utilization.

Our 20 to 28 nanometer business remains a promising growth driver with a number of take-offs taking place in the second half for applications including display drivers, connectivity, and networking.

At the same time, we do expect to face some margin pressure going into the second half, due to pick-up in depreciation expense related to capacity expansion, as well as higher utility rates.

Despite these cost challenges, we believe we will continue to demonstrate our resilience as we did during the recent market downturn and deliver on our strategy of providing differentiated technology solutions and a diversified manufacturing footprint to help our customers to strengthen their supply chain management.

Now, let's move on to the third quarter 2024 guidance. Our wafer shipments will increase by a mid single-digit percentage. ASP in U.S. dollars will remain firm. Gross margin will be in the mean 30% range. Capacity utilization rate will be approximately 70%. Our 2024 cash-based CapEx will be budgeted at $3.3 billion. That concludes my comments.

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

Yes, thank you, President Wang. And ladies and gentlemen, we will now begin our question-and-answer session. [Operator Instructions] And our first question is from Sunny Lin, UBS. Go ahead, please..

Thank you very much for taking my questions. Really glad to see improving growth margin in Q2. And so my first question is on the utilization rate outlook. You are seeing some improvement going to Q3 to about 70%. But if we look at in the past through cycle, your utilization rate were around 85% to 90%. In a bear up cycle, it could be over 90%.

And so now with the improving cycle, but still considering some oversupply issues, what would be a reasonable estimate for your utilization rate going to 2025?.

Well, I mean, I think we will focus on our 2024 first. And for 2024, we are confident on our promising Q3 wafer demand as they continue to increase. However, we foresee that UMC's customer demand forecast has started to reflect more of a seasonal pattern where the second half of 2024 wafer shipment relative to the first half.

That's supported by healthier inventory level with a consumer communication and computing segment where the demand in auto remains soft. And we expect to see the mild pickup in communication consumer in the competing segment.

However, despite the mild recovery in the ‘24, we have not seen signs of strong rebound of the customer remain prudent in managing their inventory level. So customer continues to be prudent their inventory management which that will lead likely lead to a seasonal Q4.

And then starting from Q1, 2025 when the outsourced inventory get to a healthier level, we believe that 2025 will get back to normalcy of the inventory demand outlook..

Got it. Thank you very much. Also, my second question is how should we think about the structural growth margin? There are some puts and takes. One is on pricing. A couple of your peers mentioned stabilizing dynamics from Q3.

Is that what you are expecting for the next couple of quarters? And then second, on depreciations, you have guided depreciation should increase in second half of this year. But any sense about 2025, should we still expect like 20% type of increase for your depreciation? I will assume it could be less because you are delaying the Singapore expansion.

And then the third, maybe on the cost inflation, any view on the potential impact going to 2025?.

In terms of the depreciation, this year we still estimate around 20% year-over-year increase for 2024 over 2023. As for 2025, we don't have the final numbers yet. We will report that in the next quarter earnings call. But the magnitude should be similar to that of this year.

In terms of the cost item, we are looking at higher seasonal utility cost in the third quarter. And our quarterly depreciation is likely, in terms of the increase rate, third quarter will be the highest, around 10% Q-o-Q increase. So we will continue to work diligently in terms of controlling our cost item.

Hopefully through the better efficiency and some of the automation, we will be able to offset the pressures from the increasing cost item. So one way to look at this, we will remain a solid EBITDA margin and will improve along with higher utilization rate.

And we will continue to strengthen our competitiveness and improve product mix to maintain our structural profitability..

If we go back to the ASP question, UMC's pricing in 2024 has remained consistent and well aligned to our strategy, as you can see. We expect pricing will stay competitive as we continue working with the customer to ensure their product offering remains competitive in the marketplace as well.

It's our belief that elevating our customers' product competitiveness will help customers to win more market share.

So our pricing strategy has remained consistent and aligned to the value proposition that UMC offers, which includes the stay competitive and resilience against the market dynamic, such as the capacity situation, technology solution, customer partnership and manufacturing performance.

So we were constantly managing our pricing strategy, but we remain fairly consistent with our current strategy..

Thank you. One quick follow-up on your Singapore 12-inch expansion.

Any update you could share with us in terms of the ramp-up schedule?.

For the P3, the schedule has not changed. We expect the P3 RAM will reflect in our -- one, we project the 12-P3 production will start in January 26, and the ramp-up to high volume starting from the second half of 2026..

Got it. Thank you very much..

Thank you, Sunny. Next one, Gokul Hariharan, JPMorgan. Go ahead, please..

Yeah, hi, thanks for taking my question. So first of all, I just wanted to get into the gross margins, which have come in slightly better than or significantly better than your original guidance in Q2. And Q3 also looks like -- you're kind of holding a mid-30s level, even with the cost increases.

So just wanted to understand what is going into this gross margin, kind of getting back from the, let's say, 30% levels to 35% levels recently, even with a lot of the cost pressures. Just wanted to understand anything specific that you're doing to kind of get the gross margins moving up.

And should we expect that as the depreciation ramp continues, we can hold this level? Or we think that this level can just kind of drop back to the early 30s levels that we had in Q4 last year and Q1 of this year?.

I mean, yeah, Chi-Tung kind of touch that little bit earlier. For the Q2 gross margin, I have to say it's mainly coming from the favorable foreign exchange rate movement that contributed to a better than guidance gross margin result.

For the Q3, while the utilization has increased a little bit, but the gross margin actually remains at the mid-30% range, it's really because in Q3 the right depreciation expense from the capacity expansion of the 12A P6 and the 12I P3, along with some seasonality utility rates. And that will be considered for our Q3 gross margin guidance.

And however, like Chi-Tung mentioned earlier, we foresee our EBITDA margin will remain firm relative to the Q2 2024..

Got it.

And Jason, on the pricing side, just looking at it, 12-inch versus 8-inch, are you seeing any noticeable differences in terms of pricing tendencies? And also for your 8-inch business, do you feel that 8-inch can ever get back to the 90%, 95% utilizations that we used to have? Or you see that this is a point in time where 8-inch eventually has to migrate to something else, and a lot of the core logic kind of business and even some of the analog power management business eventually migrates down to 12-inch, given that there's a lot of capacity coming online..

Okay. Well, I mean, on the ASP, while our ASP remains firm, from the light to light pricing will remain unchanged. And however, the blended ASP will reflect the change in product mix as well as the 8-inch and 12-inch composition. So I think that's on the ASP front. So at this point, for the second half we will remain firm on our pricing.

For the 8-inch business outlook, the 8-inch loading in Q2 actually improved a little bit because the power management IC, we mentioned in the completing application. We foresee that the Q3 will further increase a little bit, driven by the embedded non-biotype memory demand for auto server-related application.

However, like you said, can it ever get back to 95% level? We certainly hope so. However, we anticipate continuous pressure from some of the 12-inch maternal fab, like you said, and that has impacted 8-inch supply chain.

While the certain mainstream application will remain on the 8-inch node, what we currently do is we have identified a number of additional projects and opportunities with our key customers to gradually lift our 8-inch loading. So I think from a goal-wise, we are not giving up yet. I think the 95% is still our goal.

But from the timing-wise, it will probably take some time to gradually lift to that level. And so we're going to continue our efforts by doing so, and we can update you accordingly..

Okay. Thanks, Jason. Maybe one last question from me. You're the interposer for some of the AI-related 2.5D packaging products.

What percentage of the revenues are they, given that you called it out in your prepared remarks? And is there any further capacity expansion plan for you beyond, I think, the 6K that you mentioned a few quarters back?.

First of all, we have already doubled our interposer capacity to 6K as we reported previously. In response to incremental demand at the beginning of 2024, for any additional interposer capacity will be assessed based on customer alignment. So we following up our customer closely and its initial requirements for the company.

But at this point, with alignment, it's at 6K. Yeah..

And any thoughts on the revenue contribution from this business? Is it like 4%-5% of your revenue already, or is it much smaller than that?.

I don't think we have a breakdown that with me right now. But it's not a significant revenue from that. But I think your estimate is about right..

It's actually less than 4%-5%..

Okay. Thank you very much..

Thank you, Gokul. Next, we'll have Bruce Lu, Goldman Sachs. Go ahead, please..

Hi, Jason. This is Bruce. I want to ask about, regarding to the Vanguard, who has built a capacity with their customer for 12-inch in Singapore. Seems to me that they have a lot of customers who are signing up for the capacity in the future.

So I want to know what do we miss here? I mean, what's the reason why UMC didn't get this business? UMC has the legacy capacity in Singapore. UMC has the TSMC-like process. And obviously, you have the existing capacity, which doesn't really require a customer to prepay or any additional wafer price hike.

I mean, what do we miss here? I mean, any possibility we can win back the business or get the future business away from our competition?.

Well, I mean, thank you, Bruce. I think there is a few things. One is, obviously we don’t comment on our competitors. And they did not have fair reason by doing the capacity reason. We actually feel fairly comfortable with our capacity situations in terms of 12-inch mature node, which is that what you’re referring to.

Despite in the recent quarters, the 40 and 65 revenue has declined a little bit quarter-over-quarter due to the customer ongoing correction. We think the automotive industry semi, but we do expect the 40 and 65 nanometer business will grow then surely in Q3 driven by higher demand in outdoor and computing application.

Longer term, we expect growing our 40 and 65 product pipeline, based on the specialty and margin technology, such as [indiscernible] memory, RFSOI, PCD, OLED display and ISP. So our offering is very broad, and I think our solutions are competitive.

So if we come back to look at this thing fundamentally, we’ll not commenting about our competitors’ customer base. I think beside who have mentioned, we have seeing more regional mature capacity buildup driven by increasing importance of the semiconductor industry, in addition to the geopolitical tension.

It's our view that this is a change in the competitive landscape. So, there's three things that I'd like to say in order to stay competitive. And, first of all, we need to stay competitive so that we're working closely with our customers to provide competitive and comprehensive specialty technology with a continuous and no-migration path.

That's coming from our existing customer, as well as a new customer.

Secondly, we are one of a few foundries that have an economic scale and highly efficient operations across in all our fabs, whether it's in Singapore, Japan, Taiwan, or China, with a technology offering that could pose a cross-fab to serve our, according to our, a cross-fab to serve our customers' sourcing needs.

Going forward, we'll continue to invest where we have strength and differentiation through capacity expansion, at 12I Singapore, as well as our development leader cooperation with the U.S. and China to fuel our future growth. So, I don't think we're missing anything.

I think there's -- within our addressable market, we focus on our customer engagement and continue delivering our solution and make sure that we can grow with our customer together. So, in a way I won't comment that there's something that we're missing here. I think we have an adequate solution to serve our customer right, yeah..

Okay, I'm not trying to be critical, but the thing is that your customer seems the choice to choose the competition, while we believe, actually, as far as we can see, that you can have a better cost structure, you have a better process, you have, it seems to me, you have pretty much everything you need.

So, I'm just wondering that, what does the customer think.

I mean how can we prevent that?.

I mean, I agree with you. I do think we have a much complete and comprehensive solution, and I think we have a much cost-effective solution as well. And the operation is a lot more efficient and with scale as well. And so, I agree with you.

But there are multiple considerations for customer engagement, and there's reason beyond that we both look at it, and that's what we just discussed. So, I think there's a different reason behind it.

And I really can't comment about our competitor as well as our customer, but I can assure you that we'll continue to strive to improve and enhance our competitiveness. And then we'll continue maintaining and gaining our market share in those space..

Okay, so my second question is regarding to the technology requirement for the display driver IC, which is an important part for your 28 nanometers.

Do we really need to migrate to 14 or 12 nanometers, and when do we expect to see that? Is the partnership with Intel the timing is available or it's ready, it's good enough to catch up the trend?.

Well, there's a couple questions you have. Actually, the 12 nanometer cooperation is not only limited with the high voltage solution. So, if on a technology development standpoint, our technology advancement into a next generation node has never slowed down, and we are considering a disciplined ROI capacity deployment.

However, from a technology development standpoint, we will continue. For the high voltage, in fact, we already have a delivered 22 nanometer solution to help our customer migrating from 28 nanometer for high-end OLED display in the premium smartphone space.

The 22 nanometer has already entered production now, and we are expected to reach high-volume production in 2025. And we are very confident that we'll maintain high shares in this market.

Now, UMC is the only technology provider on the 22, which offer more competitive side area and unmatched power saving around 30%, and so the UMC's 22 high-voltage platform extends battery life and offers superior visual experience, so we also provide sizable capacity offering in 22.

And that has aimed to all our fab, like I said earlier, this will actually strengthen our customer supply chain. We see it beyond 22, into your question about the FinFab. Our engineering development team are working on further expanding our high-voltage platform portfolio to the FinFab in anticipating the AI smartphone.

Now, is there a benefit to the FinFab? We certainly think so, and at this point, I think the 22 is the best in the class right now, and the 14 is under development. I mean, the FinFab is under development.

Now, if we decide a high voltage on a 12 nanometer, the 12 nanometer program, we can serve many different applications, and after our announcement of the cooperation, we have received numerous inquiries from various industry-leading players.

And according to the earlier evaluation feedback from those customers, our 12 nanometers performance will be very competitive in the industry to serve different applications, so it's not only limited at the high-voltage space..

A very quick follow-up.

Do you expect the discrete driver IC to adopt FinFab in 2026?.

2026? I think that's a bit early. I think the 22 will probably still remain as the mainstream..

I see. Thank you..

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

Thanks. Jason, Chi-Tung. Good afternoon, and congrats for a very good result, both margin and revenue suppressed to the upside, especially I think most of your peers commented that outside of AI, the cycle recovery remains to be very slow, so a very, very good execution.

And I still want to follow a little bit on the gross margin question, so maybe first to Chi-Tung, because according to my calculation, the NT dollars depreciation may be 3 percent points over the past quarter, so contribution to gross margin could be 1% points, but you were saying that 2Q gross margin beats mainly coming from the FX, so do we miss anything on that comment?.

Roughly every 1% of NT dollar depreciation will lead to about 0.4% of the margin increase, so 3% Forex movement translate into about 1.2, 1.3 percentage points for quarter two.

And of course there's some minor items including the utility increase, our previous forecast was slightly higher than the actual adjustment rate, but I think again Forex is still the main factor for the 35.2% gross margin versus our guidance of 30%-ish gross margin..

Okay, okay, thanks. Yeah, that's clear.

So maybe next question to Jason, I mean we heard you about you can be flexible on pricing, you want customers to stay competitive, so I was assuming that probably there would be some ASP erosion, but in return you can get some business opportunity, but it turns out that your pricing is firm, but your revenue still grows nicely in the quarter.

So again, what did we miss? Are we too conservative on end demand, or what are we missing? Thank you..

Well, I mean, first of all, like you said, like for like pricing remains unchanged, but the blended ASP reflected change of product mix, between 8 and 12-inch as well mainly because that's aligned to the end market. We do see some assessment test, assessing the inventory correction cycle.

So some of the restocking, demand actually coming back, while we actually stay away from commodity market segment, so I think, we’ve try to manage it as, try to balance this portfolio as well as the product mix diligently. I think that's more of a result.

In addition to that, I also believe, you have to say fundamentally competitive is my offering that differentiate us from technology solutions. We're going to continue to advance that and continue to expanding our specialty technology space and hopefully that we can continue maintaining that.

Now, if it comes down to if we do need to elevating our customer for their product to be competitor in their market space and helping them to win more market share, we certainly will address that. And our angle is we try to creating a win-win scenario to benefit both sides in the long run..

I see. Thank you. Yeah, and maybe on that interposer side because my understanding is that the end customer is probably migrating to the next generation AI GPU and the interposer design may change. So I'm a little bit concerned whether you stand about whether you can maintain the interposer capacity.

I'm concerned that interposer basis may go away, maybe one or two years.

Is that a fair concern?.

Sure. Absolutely. I mean, just like any other technology, the product will continue migrating into the next generation. But at the same time, like any other capacity on different technology nodes, there also another product pipeline is coming into that. So the product pipeline management is a key.

We continue engaging a new product coming into the existing capacity and while some of the existing product may migrating to the next generation. However, our 3D IC roadmap, in addition to interposer that which will engage in the pipeline, we're also developing the wafer to wafer hyper bonding, which that we have announced in the past quarter.

So the way we view this is the 3D IC solution offers the advantage including a form factor reduction, higher bandwidth and lower power consumptions. So not only on interposer, we also are expanding our offering in that front. We are the first foundry that with the wafer to wafer bonding solution for the RFSOI that are production ready today.

And our second RFSOI wafer solution is able to achieve an impressive 45% form factor reduction.

And even beyond the form factor reduction, our high bandwidth hybrid bonding solution can also cover memory and AC with our qualified IP foundations that will make our offering well positioned to address the increasing needs of the inference engine of the various edge AI applications in the future.

At the moment, we are working closely with AI focused customer on tailored solution to meet their specific needs and in a various combination of our hybrid funding technologies.

In summary, we are confident that the interposer hybrid funding has a great potential and we are committed to continue to invest in R&D to ensure we can serve our customers the best we can..

Understood. Thank you. And last one, I'm not sure if I missed it, but about your 12 nanometer partnership with Intel. One is that I wanted to know about the progress and maybe whether the timing can be ahead.

And as you also see that Intel is changing their foundry business leadership, do you think that will change or service your ownership with Intel?.

I mean, first, the 12 nanometer cooperation with Intel has been on track for mass production in 2027. And that project is very much on track and progressing well. And from a schedule wise, right now, we are working diligently with our partner and as well as the key customers to further accelerate the schedule.

Overall, we are cautiously optimistic about the progress and we'll update accordingly. So I actually feel very good about the current progress. Now the in terms of leadership question and the project itself is, I consider progressing well and I think the leadership will continue to view that as a sand.

So I think the objective of this cooperation has not changed. The goal remains the same. And our current focus is to deliver a very competitive solution for the mass production in the 12 nanometer, so this cooperation..

Thank you, Jason. So very, very last one because I'm still a little bit surprised by to the upside by your third quarter revenue guidance, right. Because you're one of your major customer Media Tech, their second quarter inventory days actually went up to 72 days, 1Q was 66 days.

So first of all inventory days have started to go up again and they are guiding their second quarter revenue to be flat, right. So I'm just wondering why you can outgrow the market especially customers inventory data go out again. So, sorry for keep coming back to this inventory or cycle question..

I mean, first of all, I mean, we see a continuous inventory improvement across all segments. And some of the customer may have seen a little bit of hiring up and basically all customers have improved their inventory level and we have seen that. And we expect to see the inventory will reach relatively healthy by end of this year.

And so that's also we guided that the customer was still cautious of -- have a cautious approach to their inventory management based on the current market outlook. However, for the automotive segment, the end market demand outlook for the automotive still remains very soft compared to other segments.

And the inventory level has improved, but the basic inventory is still above the seasonal level. So I think the beside the auto, the rest of the market segment, it will probably start experiencing some of the seasonality patterns.

So I feel from an inventory correction point, we should have already exited for those communication consumer and computing..

So in that case, do you change your industry assumption this time for ex memory and also foundry?.

All addressable market outlook?.

Yes, yes, yes.

Did you do you realize update this time?.

Last time we talked about our UMC addressable market will remain flattish and our outlook has not changed. And our projection still shows the UMC addressable market will remain flattish in 2024. And our goal is we expect to outperform our addressable market in 2024.

As a sound our customer have adapt our solution and ramping and gaining market share for the second half..

I see. Thank you. It's super helpful. Thanks guys..

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

Thank you very much for taking my questions. I also have a follow-up questions in terms of the end demand. As Jason, you mentioned that you see the relatively strong order for computing and also communication. But some of your competitors, they mentioned that they just kind of rush order.

So I'm wondering that is the order visibility can be sustainable into Q4 from your perspective?.

Well, I hope if I mislead you, I'm sorry about that, but Laura. What I said is we expect to see a mild pickup in Communication, Consumer and Computing segment. And despite the -- however, despite a mild recovery in Q3, we have not seen the sign of a strong rebound as the customer remain prudent on managing their inventory level.

So I think on the some of the market segments such as communication consumer and computing area, I think we are in the process of accessing the inventory correction cycle by end of this year. And while the automotive will probably exiting by Q1 next year. And while we're exiting this and I think the customers remain prudent.

And I think right now the phenomenon is more showing, we are going back to the traditional seasonal pattern on the annually, the seasonal pattern that aligns to the market outlook..

Okay. Thank you. That's very clear. And also I noted that for our IDMs, that's fine, the revenue declined quite substantially since the peak in Q4 last year.

Can we assume that is mainly because of the automotive related or also we are seeing the same trend that for the consumer computing part that gradually improved, while automotive, industrial, how far the IDMs that could still relatively muted for the next few months?.

Well, first of all, you're right. Our so our IDM customer were also impacted by the global semiconductor downturn across not only communication automotive, across the consumer, communication, computer and automotive segment.

And some of the IDMs and their customer have a pile up inventory, which result in a decline in wafer demand at their foundry supplier. So I think that 2024 is a year with a complication of inventory correction as well as end market soft.

However, we anticipate the inventory level will improve and so although at a slower pace again and so longer term, we once the inventory corrections over and on the longer term we foresee IDM will continue to rely on foundry partner and their contribution will gradually recover..

Okay. Also a follow-up on that because we see some of the IDM our clients like Texas Instruments, they think they're also aggressively expanding their internal capacity.

But once their demand getting stabilizing, are we still assuming that they will continue to do like outsourcing before or they will tend to insource more internally on your perspective?.

I think after the COVID, after the capacity constraint, there's many different companies that look at their supply chain resilience question. So having internal capacity is one of the solution to address that supply chain resilience question, a concern they have. And from the foundry partner standpoint, I think that remains very important.

I think that will be considered one of the entire supply chain ecosystem. And I think the IDM will continue rely on the foundry partners to an extent. However, they will probably balance that a little bit to ensure their supply chain resilience is improved..

Okay. Thank you. And also, hopefully you can give me more understanding about the PDIC business model. We know that a lot of advanced packaging or wafer base done by on the wafer foundry side. But since we are also expanding the PDICs, the hyper bonding type of design.

Can you elaborate more on how is that business model going with the OSAT and also our competitors or potentially customers? Thank you..

It's in our view, the semiconductor foundry OSAT ecosystem remains very important. So I think that's our view. So the 3D IC roadmap that we have that require us to working closely with our ecosystem partners and not only on the OSAT also as well as the memory or ASIC on the qualified IP supplier as well.

So I think the landscape will require us to expanding our ecosystem and to strengthen our partnership with our back end partner as well. So I think this in our view, this still consider us an ecosystem to serve our customers..

Okay. Thank you..

Thank you, Laura. Next we'll have Brad Lin, Bank of America. Go ahead please..

Thank you for taking my questions. So my first question is I want to follow-up on the interposer capacity thing as we recognize some potential downside eyeing on the well potential well, [Indiscernible] adoption in the future.

So we explained that we are well, UMC is developing the wafer to wafer hybrid bonding, Does that mean that this inter poster capacity can be fungible and then apply to this kind of 3D IC in the future?.

No, they are different offering and the interposer capacity will continue serving as the interposer needs. And while we have a continued roadmap for the interposer going to the next generation as well. And so that technology advancement is not going to stop. And at the same time, we'll see more interest coming for the interposer thing.

And I think that we actually engage different application of the continued pipeline for this in the future. 3D IC wafer to wafer, hyper bonding is extension of our advanced packaging offering.

So we'll continue expanding that and we think from our addressable -- for our addressable market the wafer to wafer hybrid bonding will provide us the expansion of the addressable market and I think we are well fitted with our solutions..

Got it. And so we see we are pretty good potential there on the HAI from this wafer to wafer technology.

So, what time does UMC expect this contribution to rise and which are the -- well, maybe potential key clients?.

In the near term, we already announced for the RFSOI stacking, it's already ready for production. So on the RF front end, that's already started to production. And from being related to future AI exposure, I think we kind of touched that last quarter as well. The AI expense on the cloud to edge, I think it will still take some time.

But it's our belief, the new use cases will inevitably emerge along with the value chain. Right now, we only see in the growing number from existing AI, PC, notebook or smartphone that requires Silicon content to handle this case.

But furthermore, the real opportunity that we believe lies beyond the existing edge device, which is in the new emergent application under the AI megatrends such as the ADAS, autonomous driving, robotics, Industrial 4.0, future breakthroughs, which will drive significant increase of silicon content accordingly.

And those the technology solution that we offer would definitely be beneficial to that. And I think the offering that we have not only on interposer 3D IC, wafer to wafer also for the other low power BCD number that will also very well suited to meeting those demands in those AI related market..

Got it, got it. So that actually quite related to the second question that I want to try to ask here is that well, for the utilization rate, yeah, even though we see pretty well good recovery in the second half of the year with more than 70% of the UTR, but we are eyeing on the future.

We are definitely not, I mean, the company is definitely not satisfied with only this level.

So we totally believe that well, UMC already well foresee some of the long term drivers to kind of potentially leave the UTR meaningfully back to a sustained 80% or 90% in the future? So I think you also mentioned that some of new device or application might be the ones like robots.

So would you please share with us your visibility on that and also how would that bring you in the well, mid to long run? Thank you..

Well, first of all, we're very, very optimistic about the future semiconductor market. The AI is going to be a very big driver. And however, I think so not some of the new use cases will still have -- we have to see them to come. And I think this is still a bit early right now. However, we have very, very high expectation in the longer term.

Meanwhile, while we ascertain the inventory correction cycle between end of this year to early next year, I think the market will go back to normalcy. So that means that we're very much is subject to the end market demand.

And so I think for the next year, we have to wait and see how the end market demand goes, because there's still macroeconomics inflation concerns. And at this point maybe too early to say how much of a utilization improvement utilization rate improvement we will expect. However, going longer term, I have no doubt the utilization rate will increase.

While we don't have the clear projection on when. So our focus now is we want to continue to sustain our strong financial performance like what we did in the down cycle and as a result of our company resilience.

This is manifesting patient of our continuous effort in developing a competitive specialty technology offering as well as optimizing our customer base and product portfolio. I hope that the current performance shows that.

Going forward, we will continue to focus on specialty technology development and our ROI driven capacity expansion to capture the market upturn once they come.

On the specialty technology development, our industrial leading offers, which will broaden our addressable market and enhance our customers' competitiveness like what we have recently announced. And the customers are currently migrating their 28 nanometer products to our 22 nanometer technology. Customer will also adopting our 12 nanometer thin fab.

For high voltage product, we expect the 40 28 high voltage customer will adopting a 22 high. Emerging memory application will transition to 28 and 22. We are very confident about the 28 and 22 for the longer term. We also expect to see more interest in the 55-40 mature area such as RFSOI.

And while we talk about all those from the future capacity expansion plan with our geographically diverse manufacturing footprint, we'll strive for growth through our P3 expansion in Singapore, 12 nanometer partnership in U.S. I think we're well positioned for the capture, the future growth of semiconductor needs.

And the utilization rate will increase. And meanwhile, I think we just have to wait and navigate through this cycle. And I think that's how I feel about the utilization rate projection..

Got it. Thank you very much.

And maybe one last question will be on the -- well, so given the product design lead time, we believe definitely limited visibility into next year, but we believe we are totally engaging with the clients on the potential design or specialty technology adoption or the new node technology that are used in the next year and then well, do we have a confidence -- do we have a good confidence level that ASP will remain well resilient at least in terms of the spend ASP wise?.

I mean, from a pricing strategy point, I mean, we on a higher level, like I said, we believe we have to elevate our customers' competitiveness, right.

And by doing so, that's you have to provide your value proposition, including the technology offering, including the partnership and added with a scale capacity support so on and so forth and the manufacturing performance. So the certainly that will help with the ASP, but the bottom line is we want to stay competitive and we will.

And I think that's been all along our pricing position as well strategy for the past year and as well as going forward..

Got it. Thank you very much..

Thank you, Brad. And Brett was our last question for today's conference. We thank you for all your questions. This 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..

Thank you. And ladies and gentlemen, that concludes our conference for second quarter 2024. Thank you for your participation in UMC's conference. There will be a webcast replay within two hours. Please visit www.umc.com under the Investors Events section. You may now disconnect. Thank you and goodbye..