United Microelectronics Corp

TWSE:2303

Earnings Call Transcript 2022-Q2

[Operator]

Welcome everyone to UMC's 2022 Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent background noise. After the presentation, there would 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. Mr. Lin, please begin.

[Michael Lin, Head of Investor Relations]

Thank you, and welcome to UMC's conference call for the second quarter of 2022. 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 second quarter financial results, followed by our President's key message to address UMC's focus and third quarter 2022 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/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 a more detailed discussion 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. Qi Dong Liu to discuss UMC's second quarter 2022 financial results.

[Qi Dong Liu, Chief Financial Officer]

Thank you, Michael. I would like to go through the 2Q '22 investor conference presentation material, which can be downloaded or viewed in real time from our website. Starting on Page 3, the snapshot of our operating results. Our utilization rate in quarter two was still over 100% plus and revenue reached NT$72 billion, I think believe this is record high and EPS is 1.74 for the second quarter compared to 1.61 in the previous quarter and also 0.98 in the second quarter of last year. Next page please.

So our quarter-over-quarter comparison, revenue grow 13.6% to NT$72 billion, gross margin increased to 46.5% from 43.4% in the previous quarter, and operating income is NT$28.1 billion or 39.1 percentage points. Net operating income is a loss of NT$2.58 billion mainly due to the weakness in the capital market and UMC's investment portfolio was to market and that's the majority of the NT$2.5 billion loss in the second quarter of 2022 and net income reached NT$21.5 billion or the equivalent of EPS 1.74 in quarter two of 2022. Next page, please.

For the cumulative performance for the first six months of the year, revenue reached NT$135.4 billion which is an increase of 38.2% year-over-year and this is in the NT dollar currency. Gross profit is NT$50.9 billion or 45% gross margin rate and operating income reached over NT$50.4 billion and operating margin of 37.3%. And for the EPS of the first half of the year is 3.35 compared to 1.83 in the same period of 2021.

Cash before our dividend payout was NT$183.7 billion by the end of June this year, and total equity for the company is around NT$283.2 billion. For our 13.8% revenue growth in the third quarter -- sorry in the second quarter, three factors, both the ASP and wafer shipment input as well as the NT dollar depreciation all contribute to our revenue growth in the second quarter. And the fact that it's roughly one-third of the growth rate. So that reflects in our ASP growth in the second quarter of 2022.

In terms of revenue breakdown, the ratio remained similar between quarter two and quarter one. IDM increased slightly in second quarter to 14% and the segment breakdown again remain similar to Q1 and we see some minus decrease in computer, in absolute dollar term, all segments still grow in second quarter of 2022. We have new capacity available in [indiscernible] in the second quarter, that help our 2022 revenue percentage to grow to 22% in the second quarter compared to 20% in Q1 of this year and the rest of the geometry breakdown doesn't change too much.

As I mentioned in quarter two, our team has more meaningful capacity growth, which is 10K new capacity came online in the beginning of quarter two, but for quarter three overall capacity compared to quarter two, there's only very minor increase in terms of ordering capacity. And for CapEx well this year on cash basis, it remains around NT$3.6 billion with majority goes to capacity related expansion for 12 inch. So the above is a summary of UMC's results for quarter two, 2022. 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, Jason Wang.

[Jason Wang, President]

Thank you, Qi Dong. Good evening, everyone. Here I would like to share UMC's second quarter highlights. In Q2, we delivered result in line with guidance, thanks to continuous strong demand for UMC's differentiated process across our end-markets. Overall wafer shipments rose 4.3% from the previous quarter, while higher average selling price and a favorable foreign exchange rate, the second quarter gross margin to 46.5%. Revenue from our 22/28 nanometer portfolio increased 29% sequentially driven by the additional capacity at Fab 12A P5 that came online during the second quarter.

We are confident in the long-term growth prospects of our 22/28 nanometer business, which now represents 22% of UMC's overall wafer revenue and has demonstrated solid traction for OLED display drivers, image processor, Wi-Fi and automotive applications. As structural trends drive semiconductor content increase in end devices from smartphones to automobiles, it is our conviction that 28 millimeter it is a long lasting that will be important for many existing and emerging applications for years to come.

Going into the third quarter, we expect our business to remain firm. While accruing demand for smartphones, PCs and consumer electronics may pose some short-term fluctuations, we are actively working with customers to adjust their product mix. Coming off a Supercycle over the past two years, the semiconductor industry is now in a period of inventory correction. We believe UMC's comprehensive portfolio for differentiated leading specialty technologies and strong partnerships with leading customers will help us navigate the cyclical micro environment.

Now let's move on to third quarter 2022 guidance. Our wafer shipments will remain flat, ASP in U.S. dollars will remain flat. Gross profit margin will be in a mid 40% range. Capacity utilization rate will be a 100%. Our 2022 cash base CapEx will be budgeted at a $3.6 billion.

That concludes my comments. Thank you all for your attention. Now we are ready for questions.

[Operator]

Thank you, President Wang. Ladies and gentlemen, we will now begin our question-and-answer session. [Operator Instructions]. Thank you. And our first question is coming from Randy Abrams, Credit Suisse. Go ahead please.

[Randy Abrams, Credit Suisse]

Yes. Thank you. And good result. I wanted to ask a question just something on your outlook. Where you mentioned the inventory correction starting in some of the applications. Could you give a view of how you're looking now on just steepness, or type of correction you're seeing if you expect a period of underutilization. And the PSMC was giving a framework we expected through surpass, but if there's a feel for inventory, how long it may take. So just wanted to get a perspective how you're doing the next few quarters?

[Qi Dong Liu, Chief Financial Officer]

Okay. Already we have observed that customers are confident in general that we are aware that inventory level is in a relative high in certain segments. However, it will be hard to predict how long it will take to digest the same inventory under the macroeconomy uncertainty. So, we will closely monitor the current situation and respond to the changes in customer forecasts accordingly. The -- while we start -- while we observe the softening demand in a smartphone, notebook and consumer section, the other industry segments the networking, industrial auto we actually has a more of a stable demand.

So again, they have the observation about inventory concerns. And but we have for -- our Q3 loading will be for and for the Q3, we will continue monitoring the market outlook and I'll be report that in the next quarter conference call.

[Randy Abrams, Credit Suisse]

Okay. And question on third quarter further shipments flat. I know Qi Dong mentioned not much capacity coming online. Is it that you're constrained shipping more or because of the inventory correction? It's already limited ability to get some seasonal or some increase. And then I'm curious your view on the pricing environment. There's been the market talk about startups and discounts. But how you're seeing outlook for pricing?

[Qi Dong Liu, Chief Financial Officer]

Well, our pricing will remain firm. And while the -- we believe we'd be able to maintain the healthy loading for the years mainly because the steady demand from the auto industrial and server and market network segments. For Q3 the stable demand in those area allow us to mostly compensate the softness of the computer and consumer segment. So we at this current point our pricing remains front.

[Randy Abrams, Credit Suisse]

Okay, and it sounds like you mentioned through the end of the year you expect healthy loading. And I'm curious on your view on 28, two parts to it. You talked about existing and new applications, if you could give a flavor the new applications for next wave. And if you could also give an update on the next phase, the phase 6 timing to bring that up if that's about 28 and given the environment you still see that fully committed?

[Qi Dong Liu, Chief Financial Officer]

Well, first we believe that 28 and 22 will be a long lasting note and supported by very diversified base of a product portfolio. In the next few years. We expect the 28 and 22 demand will to remain robust driven by application like Wi-Fi 6, 6E, networking in the GPON area and OLED driver applications. Yes.

[Randy Abrams, Credit Suisse]

Okay, and maybe an update on the next phase timing that you would have the capacity available, and how you're seeing that committed whether the LTAs that you still have that laptop with LTAs?

[Qi Dong Liu, Chief Financial Officer]

Yes. I mean, we do expect that P6 ramp started on June 23 meet next year. And right now we thanks to our staffs effort by the way the times that you're stretching out, but thanks to our efforts to minimize the two delivery impacts. Our current revenue was remain at the June 23, next year, June mid next year.

And the oldest P6 ramp is adjusted by the LTA arrangement. And we still believe the LTA is a true mechanism. Because he presents the mutual commitment for both customer and UMC to secure our future growth.

[Randy Abrams, Credit Suisse]

Okay. And just one last, if you could give an early framework, the spending for next year, where it's probably partly that and then partly Singapore. And if you, I guess just looking at the macro uncertainty in the downturn, like how firm do you see schedules like would you consider push outs or delays? If the macro looks sharper in the slowdown?

[Qi Dong Liu, Chief Financial Officer]

Well, I mean CapEx, we maintain competency industries mega trends for long-term growth. And our CapEx decision was based on market and customers endorsement. The together with a discipline, the ROI driven CapEx strategy we have adopt few years ago, and with a building affordability, and the capacity expansion in 12A P6 and the current 12i P3 compensation. And our competitive differentiation especially technology solution will actually help to deliver the growth for both UMC and our partners in the long run.

So given the capacity expansion plan is more of a longer term strategy. Therefore, near term cyclical headwinds now will not impair our long-term plan at this moment.

[Randy Abrams, Credit Suisse]

Okay, great. That's helpful. Thanks a lot.

[Qi Dong Liu, Chief Financial Officer]

Thanks.

[Operator]

Thank you. And next we'll have Brett Simpson of Arete Research for questions. Go ahead, please.

[Brett Simpson, Arete Research]

Yes, thanks very much. Jason, I wanted to just talk a bit about CapEx. Looking at the first half of this year, you spent a little less than $700 million. And you've maintained your spending plan this year $3.6 billion. So it implies quite a big uplift in spending in the second half. Is that still, just given the environment we're in with WFE tools, having some challenges to deliver on time. And also some of the macro concerns that you laid out? How do you feel about that CapEx budget actually being spent on the second half?

And then I wanted to just also follow-up on consumer. Your sales in the second quarter were up 14% sequentially in consumer. And I'd love to understand what's behind that increase and how you see the consumer outlook specifically for the second half of the year? Thank you.

[Jason Wang, President]

Yes, for CapEx spending according to the current schedule, you will be rather second half of this. So we still keep our $3.6 billion numbers. Of course, this is a rolling basis, but I believe the end result won't be too different from the $3.6 billion budget numbers.

[Brett Simpson, Arete Research]

So going to your question about the current segment outlooks. We didn't maintain a healthy loading for both Q2 and we foresee that we will maintain healthy loading for this year and because with a steady demand from auto industrial server and networking segment I mentioned earlier. However, we do see some the other segments as a more of a weaker segment in the communication, consumer and computer area. While they can be offset by the strongest segments that maintain the full loading, the second time we actually see the consumer actually still grow sequentially 12% quarter-over-quarter mainly from the power devices, Wi-Fi, Digital TV, set-top box, and LCD controller as well as the MCU. So, there are many application that remain strong in the sub segments of the consumer. So, we think they are stronger, and they are weaker substandard. So, at this point in the Q2, the consumer remains very healthy, we do see this will change a little bit going into the second half.

For the Q3, we probably see a more of a decline percentage in the consumer as well as computing. But it is compensated by the outflow in communication, I touched earlier.

[Brett Simpson, Arete Research]

Okay, that's helpful. And maybe one last question. There's been a lot of talk in the industry about costs going up, we see inflation in wages, we see inflation in materials, even WFE tools are getting more expensive, and just looking to understand like, how do you see this impacting your business? And more specifically, can you pass on rising costs to your customers? Do you expect to increase wafer prices further from here and how do you think about the pressures on costs relative to typically, the industry cuts pricing when utilization comes down, how do you see that balance between cost inflation and the need to pass on that cost to customers versus falling utilization as we go through this inventory correction that you laid out?

[Jason Wang, President]

Okay, so first is about the cost. In either rising cost contribute to raw material utility and labor rate, we do observe that and the companies that we will work to offset this into the continuous cost reduction efforts through mix optimization, productivity improvement, so we are doing our best to continue offsetting that. But on the ASP standpoint, there's a couple of layers configuration, one is on the ASP positioning, we the ASP usually in our view will reflect our relevance in the supply chain. And while UMC continue to enhance our value proposition to our customer, and not only based on the demand and supply dynamics, and we usually position that's how we view the ASP position in the higher inflationary costs throughout the supply chain, we like I said we're not immune.

So therefore, we will cooperate with our customers to navigate this headwind in conjunction with our internal cost reduction efforts. So, yes, we will be very transparent with our customer about the comp increase and the same time we will work with them closely to address that issues.

[Brett Simpson, Arete Research]

Thank you.

[Jason Wang, President]

Okay.

[Operator]

Thank you. Next question, Laura Chen, Citigroup. Go ahead, please.

[Laura Chen, Citigroup]

Hi, thank you for taking my questions. I was just wondering that if there is any update on your FinFET process development, I recall management mentioned earlier that you get the plan to further leverage your expansion in 22 from maybe future migration of 14. So, just given the expansion, we are continuing in 20 and 22, but do you have any plan for any like a future potential migration to FinFET?

[Jason Wang, President]

Our FinFET, supporting FinFET entered production a few years ago with limited customer, and however our future capacity plan was depends on the market and consumer demand outlook. The plan remains unchanged at this point. And while we actually were focused on addressing the strong demand in other nodes, so we will continue making progress on the FinFET but on the capacity deployment point of view, it does have a low priority compared with the other node at this moment. Again, this has just realigned back to our megatrends and also our ROI discipline, the CapEx strategy, and there are priority and selection considerations. So we're still putting the 14 on the roadmap, but the significant capacity deployment plan is not in the near-term yet.

[Laura Chen, Citigroup]

Okay. Got it, thank you. Another question I have is about the specialty process. Can you give us more color by, what are you exactly over in the specialty process and how big is that account for your revenue and can also be kind of supported for the ASP et cetera?

[Jason Wang, President]

I mean our specialty technology is representing about 50% to 55% of our revenue today and it is a direction when I will continue marching and we are making some significant progress. And while we continue delivering the advances specialty technology for instance, in the 28 millimeters, we have delivered the first high voltage solution and we also continue delivering the BCD technology in 35 and RFSOI in the 35 millimeter as well. Those are all considered very advanced specialty technology in those mature technology nodes. However, they are considered advanced technology offering. So we are making good progress there and this is the current 50% to 55% revenue contribution from a specialty is right on track while we planned.

[Laura Chen, Citigroup]

Okay, got it. Thank you.

[Operator]

Next question, Szeho Ng of China Renaissance. Go ahead, please.

[Szeho Ng, China Renaissance]

Oh, hi, gentlemen, I have two questions. The first one regarding the long-term agreements, given the fact that there are some soft patches in the consumer electronics market. I'm not quite sure about the enforceability of the LTA on the existing capacity right now.

[Jason Wang, President]

So your question is about how bad it is the LTA right now?

[Szeho Ng, China Renaissance]

Right, right, right. Would we be considered to relax some of the terms?

[Jason Wang, President]

First of all, LTA is a major commitment. And for both customer and UMC. So we have certain obligations as well. And the objective is try to secure future growth of both and both party right now has treated this LTA agreement very seriously. And despite the recent market downturn, we have observed customers upbringing in pooling orders with us to honor their contractual commitments. So, yes, we have started to recognize some of the customers penalty due to some the failure to meet the original terms. However, that's still a very minimum compared to the current size of the LTA.

[Szeho Ng, China Renaissance]

All right, sounds great. And then as for the quality guidance, we are guiding for to be kind of flat, I'm not sure if we can comment a little bit on the monthly linearity.

[Jason Wang, President]

Yes, we cannot comment on the monthly trend. The uncertainty has increased. But we are confident about both the capacities as I mentioned only grow very marginally, almost no change, but it will remain at 100% loading. So shipment wise should be flat. ASP wise, it looks little firmly, so we also comment about ASP, the only controllable part is the ForEx. And certainly we are building some buffer for that. So that's about the fundamental assumption for our outlook.

[Szeho Ng, China Renaissance]

Yes, maybe last question from my side, regarding the other operating income line. Yes, I think that's referring to the technology and licensing to UMC right, just wonder how long it will last? Actually, I asked this question few quarters back, but I just want you to comment a bit.

[Jason Wang, President]

No problem, no problem. So that's mainly the subsidiary from the -- subsidies from the local government and money already in the pocket and the accounting book recommendation wise as OIE is through the -- tax along with the equipment depreciation schedule, which is normally six years. So it won't go away until our depreciation expenses start to fall-off. So it's really the whole point for getting subsidies for the depreciation period.

[Szeho Ng, China Renaissance]

Where will that end?

[Jason Wang, President]

Sorry.

[Szeho Ng, China Renaissance]

Where will that end, I mean that.

[Jason Wang, President]

I mean other two years.

[Szeho Ng, China Renaissance]

All right, and other two years from now?

[Jason Wang, President]

Yes.

[Szeho Ng, China Renaissance]

Okay. All right. Okay, thank you.

[Operator]

Thank you. Next question, Sunny Lin, UBS. Go ahead, please.

[Sunny Lin, UBS]

Hi, thank you for taking my questions. So, my first question is that I wanted to get your current view on the supply demand outlook for starting foundries obviously, now the outlook is pretty different from the start of the year. Again, which part of the trailing edge may see more oversupply risk into 2023 and 2024 based on your current analysis?

[Jason Wang, President]

Well I mean for 2020 -- let's start with 2022. Despite the rising uncertainty of the macro outlook, our view of 2022 foundry industry growth of 20% plus remains unchanged. And our target is to grow in line or higher than the foundry industry that has no change either. For Q2, for Q4 2022, we will remain at healthy loading, I reported our guidance in Q3 will be fully load, 100% loading. And by in Q4, we still believe that we can maintain a healthy loading while the pricing will remain firm.

And other data we will provide an update in our next quarterly conference, going into 2023, given the rising macro uncertainty continues and the higher inflationary cost pressure, we perceive the foundry industry growth in 2023 will be more moderate. For UMC in 2023 without commenting other peers, we are excited about our P6 capacity which is backed up by LTA and will become available in mid-2023 and will be projected to increase our overall capacity by 5% year-over-year.

Our ASP is also expected to remain firm based on aforementioned fundamentals, our goal is to position ourselves to hopefully deliver another good year. I think the overall capacity increased, I think were probably affected by some of the lead time and also the macro environment. So those capacity expansion in 2023 will probably likely slow down, but I think your questions about the 2022 will be probably too far at this point.

[Sunny Lin, UBS]

Got it. And so the 5% capacity increase in 2023, help us imply for your capacity increase from P6 by end of next year?

[Jason Wang, President]

The 5% is mainly driven by P6. So most of the 5% come from P6.

[Sunny Lin, UBS]

Got it, thank you. And then I have a second question, for your 20 nanometer, other than you may have quite a bit of order backlog from last few quarters. But at this point, have you started to see the backlog coming down given the consumer electronics weakness and if the end market continues to slow down, would you consider maybe slowing down the expansion to some extent?

[Jason Wang, President]

Well, first of all, we have observed some inventory correction while we maintain healthy utilization rates. For some segment, we are experiencing a decrease in the unfulfilled demands, as well as the other adjustments, but not to the level that we need to reconsider the CapEx. So for the CapEx adjustments, we still remain confident in the long-term mega trends. And like I stated earlier, given the capacity expansion phase, more long-term strategy. Therefore the near-term cyclical headwinds will not impact our long-term plan at this moment.

[Sunny Lin, UBS]

Got it, thank you. That's pretty helpful. Thank you.

[Operator]

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

[Charlie Chan, Morgan Stanley]

Thanks gentlemen, and congratulations for great results. I have a couple follow-up questions. So first of all on the cycle debate, I understand that combines has a greater specialty technology and maybe 70% is covered by LTA, et cetera. But still right, there's still 20%, 30% of business exposed to the commodity markets, so that use the LCD driver IC as a case study. So Jason, do you see any of your customers, the LTA try to push out and seeing your competitors given rebates even cutting the price for some commodity products like LCD driver ICs and then I will have some follow-up questions. Thank you.

[Jason Wang, President]

Sure. We touched the LTA earlier. Like I said, both our customers and us treat this LTA very seriously. So I think we're working very closely to navigate through the contractual obligations. So, at this moment, I think we are being honored as these commitments for now and despite there are some market noise and turbulence, but LTA is still intact, if it does come to a time that we need to revisit, and we definitely work closely with our customer, but as a background, our LTA discussion traction just continue, because there is no compensation discussing our P3 conversation. So it is in our projection our LTA number actually is going upward, not downward even with the recent headwinds on some of these segments, like you mentioned.

Going back to the ASP question, the first of all, we usually don't comment about our peers pricing strategy, our ASP reflects our value proposition and our relevance in the supply chain like I said, while our pricing remains firm in Q3, and we are able to navigate the market volatility via product mix adjustments and customer portfolio diversification without resorting to other measures. So, we are guided on the Q3 with a front ASP projection of towards the full loading result projection. So we have to come to what the market is, but not at this current point -- our ASP will remain front.

[Charlie Chan, Morgan Stanley]

Thanks for the explanation. But I guess my problem is that I understand you try to sell the value right that if we look at again the LCH of IC, your customers margin keep going down and next year probably their margin will fall to like a pre-COVID level, right maybe 20%, 30%. So, obviously, that is not a value, right. I mean, on your customers margin, the margin are shrinking. So, instead of a case I reconsent that customers may need to choose lower cost foundry capacity is not doesn't need to be LCD drive actually. But also PMIC or other commodity factor. So what will be your reaction. I know this year it could be fine. But next year, if the commodity capacity their industry peers that prices on average 10%, 20% below yours. What would be U.S. rate actually?

[Qi Dong Liu, Chief Financial Officer]

Well, I mean, maybe we should take a look at this issue from a different perspective. Over the past few years, we have been continuously taking step to significantly enhance our customer stickiness. So highly differentiated and customized process solutions referring to your specialty technology for instance. And along with our manufacturing capability to enlarge our prefers with a global leading customer along with the LTA for our long-term mutual commitment across very diverse by the market segment.

So during this downturn, the cyclical downturn we will be able to minimize the business impact through one adjustment to a various market segments. If there are some weaker segments, and we hopefully we'll be able to compensate it to a stronger segment, some of the single source or product we actually owe with customers to a fully modulation. And things found in multiple sourcing, we actually do know, we do get boundary share as well.

So while we executing those, we can help our loading maybe so to cyclical set period. And hopefully, we can continue maintaining a very healthy loading. So they have to, we have to address this, fundamentally. With the diversify the customer portfolio, and aligning to a mega trend usually can help us to mitigate that to some extent. And I understand that there going to be challenges for some segments, but hopefully, that there are even within our own capability will support us to our max.

But the same time we, our original plan is to align to the mega trend with a very diversified customer portfolio and to mitigate that approach. So it's definitely it's not our goal to continue on that path. So we are executing our plan set out a few years ago. And while this -- while this downturn come, and we will examine this result, and maybe if there's a more development, we'll update you in the next quarter.

[Charlie Chan, Morgan Stanley]

I see. Thanks. So just some quick yes or no question. I appreciate your previous answers. So first of all CapEx next year, do you think it will be flat or coming down?

[Jason Wang, President]

No, we don't have the exact number. As you recall, there was a question about even this year's CapEx number. So it's very difficult to give you a clear pinpoint answer yet. But we do have this P6 project coming along, which is total cost is about 5 billion to 6 billion. And for Singapore, the P3 is also another 5 billion also. So these two budget alone is around 10 billion, and it's going to spread out in this year and the following three years, something like that.

[Charlie Chan, Morgan Stanley]

I see. Sounds too good. And server chip, what kind of server chips are you making man or some prototype?

[Qi Dong Liu, Chief Financial Officer]

Again, I didn't quite get that question.

[Charlie Chan, Morgan Stanley]

Oh server. Yes, because Jason you mentioned that the server, they're working are kind of sound segment they can upset the consumer weakness. So I'm just curious about server chips, because I think they include DRAM CPU, some high end networking. But I just don't realize you have exposure to server segment as well?

[Jason Wang, President]

So it was the companionship, within the service sector. So it's more subsegment of that.

[Charlie Chan, Morgan Stanley]

Okay, and that's the lower asset about the 40 nanometer impact. That is also one of the key feedback I'm getting from the U.S. investors. They are concerned about your long-term development. They're very happy with your execution, your strategy on the CapEx display, but talking about the future. Do you think about your 40 nanometer has been passed structure is competitive from a county perspective? Because 28 nanometer UMC is very famous probably sign out, right, very competitive pin set. Do you think there is going to be competitive as well. We're not talking about the -- purely from a technology perspective? Thank you.

[Jason Wang, President]

Well, it is our belief that our solution will be very robust and competitive. And in 28 that should now just qualify and its actually both probably found in the high Ks as well as the 22 nanometers directive. For the 14 things that we also believe that we can believe at that. And the -- we just have to align with the suitable market and the customer and for the CapEx deployment. Again, I stated earlier is within our focus in sequence of a paragraph.

[Charlie Chan, Morgan Stanley]

Okay, thanks. Again very good execution. Thanks for your patience and interest. Thank you.

[Jason Wang, President]

Sure.

[Operator]

Thank you. Next question, Gokul Hariharan, JPMorgan. Go ahead please.

[Gokul Hariharan, JPMorgan]

Yes, hi, thanks for taking my question. First of all Jason I think you were kind enough to talk a little bit about next year's outlook. Are you working with the assumption right now that foundry industry will still be growing next year? Are you think that we will potentially have a decline like we have had in the past down cycles and semiconductor industries go through a down cycle. Foundry industry also declines. Do you think it's going to be different this time and the foundry industry will still be growing next year? That's my first question. Can you give a bit more color on that.

[Jason Wang, President]

Well, I mean, we do. And after a two very strong years, in a semi market, we call it super cycle. And the -- we end giving the reason turbulence and disruptions on the market. And after this rising macro uncertainties, higher inflationary costs issue, we still foresee the boundary industry growth in 25 and 3 will be more moderate, but it is going to be another growth here, but it's going to be a very minimum and it's going to be a more moderate.

[Gokul Hariharan, JPMorgan]

Got it. Thank you very much. How you think about -- I think different people have asked about pricing, but do you think there is something that has fundamentally changed, because historically pricing goes down in down turn. We've seen that several times. So what is giving you that confidence if it's confidence and UMC specifically or you think that something has changed in the industry itself that you see the confidence, because it feels like you're suggesting that pricing is likely to largely be stable in a downturn and potentially upward biased in a normal to upturn kind of scenario? So you could have understand your thought process on pricing generally, as we get into the down turn?

[Jason Wang, President]

Well, I mean, I can comment about the industry. And, well, you see, our ASP positions, we value long-term partnership over the near term cyclical. So it is not about the demand and supply situation, within the baseline of the ASP reflects, what we can provide in terms of value proposition. We -- then how can we, how can we demonstrate that value proposition is to a differentiated technology offering and your manufacturing capability. And you're confident and you building the confidence and trust with your product, that you are a reliable source. And so they beverage you as or they use you or engage you as a preferred foundry source.

So, we have done our lesson in the past, when you are multiple sourcing knights to have a position, and you lost your ASP position. So we want to be relevant. And we'll continue to improve increase our relevance in the industry, along with our customer, and along with our capacity value to provide long-term growth to them. And we hope they do see that value in exchange for our market for ASP position. So it's a bit of a contextual. But however, that is the direction that we marching too.

[Gokul Hariharan, JPMorgan]

Got it. And maybe one more question on that front. I think you were definitely telling us that you're going to be a lot more disciplined this time around than the past. Obviously, we can't expect that from every company. So let's say the downturn as well but more intense than what we expected the pricing starts to come under pressure for certain loans. Would you honestly stay away from pricing reaction if you're willing to take from utilization flag? Is that how you think about planning for the down cycle or that still up for debate?

[Jason Wang, President]

Well, I mean, the market is dynamic and operation will have a principal, but we will -- we not going to be naive and as a management we'll stay paranoid about the market uncertainty. So, we will react to the market changes and we will continue monitoring the market situation and we sound to it. And given the market dynamics, so we will definitely do that accordingly. If you -- we kind of touch other resilience, about how can we help to continue maintaining healthy loading.

But at the same time, we do look at this cap tax adjustment issue, and it is needed. At this point we maintain our cover that doesn't in a mega trend long-term growth, since this is a long-term strategy. And at this moment, there's a no adjustment has not impact our long-term plan. So there's no adjustment this moment, if you're referring to other cost control efforts, I can assure you, I -- we have been relentlessly pursuing a cost reduction activity and elevating our line productivity and heads us production efficiency. And, again the oldest measure will be in place. We will continue monitoring the current market situation in response to that diligently and accordingly. Yes.

[Gokul Hariharan, JPMorgan]

Okay. That's very clear. Thanks very much, Jason.

[Jason Wang, President]

Sure. Thanks.

[Operator]

Thank you. And next question, Frank Lee of HSBC. Go ahead, please. Frank we can't hear you?

[Frank Lee, HSBC]

Hi, can you guys hear me? I'm sorry.

[Operator]

Yes, thank you.

[Frank Lee, HSBC]

Okay, so, yes, just wanted to clarify my first question on your overall utilization, because you just got I think for utilizations remain for 3Q and 100%. But additionally, we look at some of your competitors who have a very high exposure to 8 inch foundry, their utilization rates are starting to come off mainly because of driver IC being weaker. But I think [indiscernible] has about 40% of your capacities tied to 8 inch. So are we still -- are we seeing 100% utilization even on 8 inch as well. And if so, can you give us a bit of color on what applications or products that you've been able to share that with?

[Qi Dong Liu, Chief Financial Officer]

Sure. Our 8 inch loading remains 100% in Q3. Absolutely swapping some of that allocations on notebook, TV, smartphones, to auto and IoT space. Some of our 8 inch fab utilization in Q4 may be impacted by the change in customer product mix. Given the available capacity, capability that we have. Nonetheless, we do expect 8 inch loading will be maintained at a healthy level.

[Frank Lee, HSBC]

Okay, great. I guess my second question is, autos, industrials, especially autos has been talked about as a major demand driver for foundry going forward, which been looking so obvious in past cycles. So as we look into the auto space, as you look at class expansion, the industry is auto the main driver that we should be looking at, especially on the mature side, and if we see any slowdown or potential weakness in autos, is that a trigger that could lead to maybe a more cautious view on CapEx spend going forward?

[Qi Dong Liu, Chief Financial Officer]

Well, any dynamics on the marketplace will be alert and aware and act accordingly. So I mean, it's not limited with outdoor but like you said, if outdoor is the segment that actually help compensating the some of the weaker segment today, obviously, we pay more attention to it. But auto is not only the strong segment that we're seeing right now for us. We also think from the industrial and IoT space that help us mostly compensated for our Q3 loading. And we're working with customers closely monitoring their inventory level as well as the micro and macro environment and for the outlook.

And at this moment, the QC will remain healthy, I mean fully loaded. For Q4, we project we will have a healthy loading. While we like I mentioned, the pricing will remain firm for Q4, but we will provide an update for the Q4 in the next quarter conference. Because at this point, the some of the turbulence and disruption is continue, right. So we just have to be cautious about it, yes.

[Frank Lee, HSBC]

Okay, great. Thank you so much.

[Operator]

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

[Michael Lin, Head of Investor Relations]

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 [e-mail]. Have a good day. Thank you.

[Operator]

Thank you Mr. Lin. And ladies and gentlemen, that concludes our conference for second quarter 2022. 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 event section. You may now disconnect. Goodbye.